An investment agreement for the public-private partnership (PPP) project of the Hangzhou-Shaoxing-Taizhou high-speed railway was inked on September 11 in Hangzhou, east China's Zhejiang Province. The project is invested by a consortium of eight privately owned enterprises led by Shanghai-based Fosun International, which owns a 51-percent stake. State-owned China Railway, Zhejiang Communications Investment Group and the local government hold the rest.

The 269-km Hangzhou-Shaoxing-Taizhou high-speed railway project is estimated to cost 44.89 billion yuan ($6.76 billion). Construction will take four years. "It would be impossible for such a huge investment to only rely on government funds. So the provincial government requires the introduction of private capital into the field of infrastructure," said Xu Xing, Deputy Director of the Zhejiang Provincial Commission of Development and Reform.

Zhejiang invests nearly 1 trillion yuan ($150.6 billion) in infrastructure each year, of which 100 billion yuan ($15.06 billion) is in transportation. Xu said Zhejiang is adopting the PPP model mainly because Zhejiang's private economy is very powerful, and if successful, the model will greatly benefit China's railway development.

Government's role

In December 2015, the National Development and Reform Commission approved eight demonstration railway projects involving private investment, one of which is the Hangzhou-Shaoxing-Taizhou high-speed railway. "We will try to establish a demonstration model for PPP in four aspects: administrative approval, investment and financing, returns, and management," said Li Xuezhong, Director of the Zhejiang Provincial Commission of Development and Reform. According to him, private investors were selected through competitive dialogues, and in the preliminary stage of the project, the government held several rounds of dialogues and conducted investigations to find out private investors' concerns and expectations about participating in such railway projects.

To ensure fair competition, the provincial government formulated guidelines on the competitive dialogues. The consortium led by Fosun International was finally selected as the winning candidate. These innovative measures demonstrated how to intensify railway investment and financing reform and attracted private investment to the sector, said Hou Wenyu, head of the Shanghai Railway Bureau, to which the Hangzhou-Shaoxing-Taizhou railway is affiliated.

Directly benefiting from the railway, the Taizhou Municipal Government is also actively facilitating the project. "For a local government, our biggest wish is to build this railway as soon as possible," said Yan Shiping, Director of the Taizhou Municipal Commission of Development and Reform. He believes after introducing private investment, the local government need only provide a small amount of funding to start an infrastructure project that needs huge investment.

The high-speed railway project has encouraged many private investors to seek opportunities in Taizhou, and the local government is determined to further open up to the private sector. "We have formulated guidelines on encouraging private investment in PPP projects, requiring the adoption of the PPP model in all qualifying infrastructure and public service projects and that private investors should hold stakes of at least 50 percent," said Yan.

"In the first few versions of [such] plans, private investors were only allowed to be minority shareholders. [Then in] June 2016, the Zhejiang Provincial Government proposed that private investors could be majority shareholders, which was a very important breakthrough," said Wen Xiaodong, chief executive officer of Shanghai Sunvision Equity Investment and Management Co. Ltd. As a PPP investment platform, Sunvision is one of the eight consortium members responsible for implementing the Hangzhou-Shaoxing-Taizhou high-speed railway.

Why have the local governments and the railway agencies decided to allow private investors to be majority shareholders? Guo Guangchang, Chairman of Fosun International, said private companies have advantages which are highly valued by government. "PPP projects will not only diversify the organizational structure and development patterns of the railway sector, but also explore a model for building public utilities with commercial methods. Private capital will make resource allocation more efficient and ultimately benefit clients and the public," said Guo.

"Returns on investment in high-speed railway projects may not be high, but for Sunvision and other professional PPP investment platforms, high-speed railways are a large investment product with long-term, stable returns. Private investors will not miss a profit and will actively participate in railway development," Wen said.

New pattern

There have been previous cases of private capital participating in railway development, but few were successful.

Chai Xianlong, division chief of rural development at the Zhejiang Development and Planning Institute, said in earlier cases, private investors merely participated by means of equity cooperation, which left them with little decision-making power and inadequate investment returns. "In the Hangzhou-Shaoxing-Taizhou high-speed railway PPP project, the government attached great importance to research on potential market risks and put forward many options for the government and private investors to jointly share risks, hence ensuring the project was attractive to private capital," said Chai.

In this case, the public-private cooperation will last 34 years: four years of construction and 30 years of operation. A project company, as an independent market entity, will be responsible for financing, construction, operation and maintenance of the railway, and will own the related assets. Once the cooperation period expires, the ownership of the railway will be transferred at no cost to the local government.

For the private investors, the return on the project will consist of operating revenue and government subsidies. "Under the framework cooperation agreement, the government will negotiate with the private investors to determine the subsidies and the financing interest rates and excess income," said Li.

The investors' main concern, meanwhile, is not profitability, but how to fulfill the mission and address potential problems, particularly, how to ensure the quality and safety of the railway.

"We hope the government and related authorities can provide more support to private companies during the reform process, and we will also learn from the experience of China Railway to control risks," Wen said.

Copyedited by Chris Surtees

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