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[Original Research] Discussion on Investment & Financing Modes of Private Capital in the “Belt & Roa

Date: 2017-06-20
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The “Belt and Road Initiative” is a remarkable opportunity to realize industrial structure optimization, industrial transformation and upgrading, and transformation from comparative advantages into competitive advantages. As the basis of “B&R” is infrastructure connectivity, and especially a large part of “Continental Silk Road” is within less developed areas, financial support is necessary to weak infrastructure. Going out of capital is the precondition of going out of production capacity. For project progress and inter-regional cooperation, a steady stream of funding shall be ensured by well-running investment & financing institutions and mechanisms. To implement the “B&R”, our country provides financial support mainly through Silk Road Fund, Asian Infrastructure Investment Bank and the BRICS New Development Bank. However, the implementation of “B&R” cannot be solely dependent on government funds, so we must endeavor to make innovations in development paths and expand financial cooperation field.

First, though China works as the strategic initiator, it is impossible to ensure effective operation of the whole strategy with financial support of only one country. Then, if this strategy becomes a governmental behavior, it will definitely increase external doubts and bring more resistance. Compared with profit projects, infrastructure investment has a longer payback period and larger risks and requires great investment of fixed assets. Moreover, as government investments are always used to non-profit or partial-profit products and facilities, they are less sensitive to profitability, so social capital is required to ensure project profitability. In view of what mentioned above, we must propel financial innovation, accelerate reform of financial services and drive rational involvement and effective utilization of private capital. We can ensure the capital chain meeting needs of large-scale infrastructures by means of leveraging private funds through Public-Private Partnerships (PPP). The government shall act more like a “leader” who gathers strengths from all parties and ensures effective operation of the strategy through sovereign credit and platform.

For private capital, involving in development finance and contributing to the “B&R” is undoubtedly a creative opportunity for development. In recent years, Chinese private capital has achieved rapid development and become a vital part of the total investment of the society. However, private capital is mainly invested in manufacturing, commercial logistics and real estate industry, its involvement in infrastructure construction, energy development and other fields is not worth of mention. In the current integration process of regional economic cooperation, national development funds still occupy a big part of the total investment and this is largely because of restricted channels of investing private capital into specific fields. Fortunately, based on policy support, social financing needs and private capital investment enthusiasm, there is a huge room to expand channels of investing private capital into the “B&R”.

Main modes of private capital investment in the “B&R”

(I) PPP

For a PPP project, financing arrangement is made mainly based on project’s prospective earnings, assets and intensity of government support, and the size of loan and financing cost and the design of financing structure are directly related to cash flow and asset value of this project. PPP mode is relatively flexible without a fixed pattern. During the infrastructure construction of countries alongside the “B&R”, Chinese government capital, such as Silk Road Fund or other government guidance funds of similar nature, can play a leading role to guide domestic private capital to go out towards the world. Signing joint venture agreement with excellent private enterprises which boast abundant financial resources, state-of-the-art technologies and strong operation and management ability, participating in establishment of the project company, negotiating with the government where the project is located and signing concession agreement with them will make this project more attractive to social capital and be helpful to improve the competitiveness of Chinese private capital in the overseas market.

(II) BOT

BOT refers to Build-Operate-Transfer. For a BOT project, the government or authority of the country where this project is located will, based on a concession agreement, grant concession of the project to a project company funded by social funds, and this project company can design, finance, construct and operate within such concession and then transfer this project to the government for free upon termination of concession agreement. Compared with PPP, BOT is a form of financing more traditional, and they are different in operation procedures. In a BOT project, the project company funded by social funds participates in the project at bidding stage and is fully responsible for performance of BOT agreement. As the main body to bear project risks, the project company forms a consortium together with relevant units (including contractor, operator, etc.), establishes an organization limited by shares to take over project design, consultation, supply of materials, construction and other matters as the general contractor, and collects service fees from users within concession period after completion of project to recoup its investment, repay its debts and make profits. At last, it transfers the project to the government. During establishment of the project company, the form of combining government guidance funds and domestic social capital can be adopted. The government fund can recruit a private partner in domestic China after finding an excellent project, or the private capital can invite relevant governmental fund organizations after finding an excellent project. Then, both parties can work together to establish a project company based on joint venture agreement so as to participate in overseas project investment and distribute profits according to such agreement.

(III) Cross-border platform cooperation

It is particularly stressed in the Vision and Proposed Actions Outlined on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road that we shall make full use of Hong Kong, Macao and Taiwan in the “B&R” construction. Considering the advantage of Hong Kong’s strategic position, Chinese government can utilize resources and experiences of Hong Kong to build cross-boundary and cross-border “alliances” and facilitate further “going out” of domestic enterprises. With respect to some key countries, industries and projects of the “B&R”, it is feasible to build one or more “alliances” in Hong Kong, which are composed of relevant governmental departments, semi-governmental institutions, banks, funds, commerce chambers and other agencies of mainland China, Hong Kong and Macao, and function as a strategic online investment platform accessible to relevant private enterprises in mainland China, Hong Kong and Macao. During specific operation, the participator can set up a special overseas investment fund or investment agency in Hong Kong for specific country, industry or project. By doing so, it can dilute the country color by the “image of Hong Kong” and help to address some problems such as unfamiliarity with international market rules, differences in languages and culture faced by domestic Chinese enterprises during “going out”.

Suggestions on promoting private capital’s involvement in the “B&R”

It is natural to gain reasonable profits for a private capital which participates in the “B&R”. In fact, the “B&R” plan can achieve endogenous and sustainable development provided that there are always attractive business opportunities. The key is to ensure reasonable return on investment and create favorable conditions attracting private capital through institutional reforms, later operations and services. For example, we can develop equity and venture capital funds, encourage private capital to set up industrial investment fund and the government can also give support by subscribing fund units. Moreover, we shall support equity and bond financing of construction projects in major fields.

China can, together with reform of mixed ownership, take initiative to establish and develop equity investment fund, Renminbi international investment fund and government guidance fund for the “B&R”, in which private capital takes the main part. Though infrastructure has great social benefits, it is featured by large investment, long period of return and low return rate. Due to its public nature, the government is doomed to take more responsibility in infrastructure construction. Even if social capital is to be introduced, the government will have to provide sufficient subsidies to raise the rate of return to an attractive level. In addition, infrastructure investment will result in heavy debt burdens in a short term at least, which shall be also borne by the government. If the government fails to bear such responsibilities and hopes the public to bear, it will greatly delay the implementation of the “B&R” plan. Meanwhile, during participation in the “B&R” construction, Chinese social capital will inevitably have to face the problem of asymmetric information. Especially for some inexperienced small and medium-sized private enterprises, the cost to investigate investment environment and estimate risks will be extremely high. Therefore, our government needs to build a more effective financial security guarantee mechanism to prevent various financial risks caused by fluctuant factors and asymmetric information and to maintain a good environment for investment and financing.


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