PPP Experience and Implications of Shandong Luzhu Group - Introduction to the Case on Private Capital Participating in a PPP Demonstration Project of

2016-06-21

I. Introduction to Private Partner

Shandong Luzhu Group Co., Ltd. (hereinafter referred to as “the Group”) is the selected private  partner of "engineering of water diversion of Dawen River in Ningyang County", a PPP demonstration project of the Ministry of Finance.

The Group, established in 2011 and with total assets of RMB1 billion, is a modern enterprise group integrating cement, electricity generation, concrete, logistics, self-thermal insulation wall materials, dry-mixed mortar, mining, real estate development, new metallic materials and manufacture of precision machinery.

II. Experience regarding Private Capital's Involvement

Since 2014, the Group has been actively studying PPP policies and engaging professional consultants in respect of engineering consulting, laws and so on to provide supports, in a bid to further widen investment channels, improve competitiveness and reasonably allocation resources. After becoming the selected private partner of the aforesaid project through competition, the Group and Ningyang State-owned Assets Management Bureau jointly established Shandong Luxin Water Affairs Development Co., Ltd., which has been implementing the construction and operation of the project, has opened channels for access to infrastructure and public service fields, and has made breakthroughs in realizing enterprise transformation and upgrade and sustainable development.

Firstly, investment scope has been expanded. The investment under the PPP mode in a public infrastructure construction project vigorously supported by the state has lengthened the business chain of the Group, realized the integration of investment, construction and operation, and expanded a new profit making mode. The Group has supported the project company by virtue of its own advantages, and made advance payments for construction materials worth about RMB300 million, which has guaranteed the engineering progress and largely reduced risks.

Secondly, enterprise credit rating has been upgraded. The "golden signboard" of cooperation with government has increased the credit line of banks for the Group, upgraded the credit rating, and enhanced corporate recognition, which play an active role in financing. Fund supports of financial institutions have laid a solid foundation for the rapid construction of the project.

Thirdly, long-term stable earnings have been obtained. Profit points of the engineering of water diversion of Dawen River of Ningyang County primarily include revenues from water plant, lease of facilities and irrigation, and cash flows are relatively stable. It is expected that annual business revenue will reach RMB210 million, and the return on total investment will be around 8%.

III. Implications for Private Partner

(1) The PPP mode should be promoted as per policies. A series of policies promulgated by the state guide the PPP from perspectives of policies and actual operations, and are basic institutional norms that should be observed for the PPP mode.

(2) "Contract concept" should be insisted on for the PPP mode all the time. In view of a large investment scale and a long recovery period of the project, the performance spirits of the government and private partners are vital, and sincere cooperation is the premise and guarantee of the smooth implementation of the project. During the project construction, the Government of Ningyang County not only strictly followed the contract idea of market economy, handled affairs as per the contract entered into, but also helped the Group solve difficulties in the process of construction and financing, setting the mind of the Group at ease; with the great supports and help of the government, the Group, without any external disturbance, dedicated to the design, construction and operation of the project, saving human, material and financial resources.

(3) Importance should be attached to benefit sharing and risk taking for the PPP mode. In determining the contribution percentage thereof, the Government of Ningyang County, in consideration of factors such as a high degree of public welfare and the degree of stability of earnings of the project, proposed the contribution percentage of 40%. It only held shares but did not control shares, which conformed to regulations of the PPP mode, eliminated worries of the Group, fully reflected the importance attached by the government to risk taking and made the Group feel the sincerity of the government.

(Contributed by: Shandong Luzhu Group Co., Ltd.)


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Source: CPPPC
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