The financing model for the main section of the Hong Kong-Zhuhai-Macao Bridge went through extended discussions on various funding options. (EDMOND TANG / CHINA DAILY)
HONG KONG – The creation of the Guangdong-Hong Kong-Macao Greater Bay Area’s development blueprint — which calls for construction of a rapid intercity transportation network comprising high-speed rail, intercity rail links and high-grade freeways — means that a lot more transportation infrastructure projects are expected soon.
And because these infrastructure projects are too large in scale to rely solely on local governments, private enterprises will gain many opportunities to participate in the Bay Area construction.
The specifics of financing these projects with both government and private funding still need to be ironed out, but the region’s recent history has shown that funding options can be obtained that meet projects’ needs while conforming to the regulatory structures of various governments.
As a modern city cluster development plan, some more innovative financing solutions should be introduced in the Bay Area
Wallace Yu Ka-hung, Head of the multi-asset group, China Investment Corp
For example, the financing model for the main section of the Hong Kong-Zhuhai-Macao Bridge (HZMB) went through extended discussions on various funding options, including private investment with government subsidies, build-operate-transfer (BOT), asset-backed securitization, and public-private partnerships (PPPs).
The price tag of the mega bridge project was about 120 billion yuan (US$17.4 billion). Of that amount, the cost for the main bridge was 48 billion yuan, according to the HZMB Authority.
It was finally confirmed that the Hong Kong, Macao and Guangdong province governments together would pay a certain amount of the capital base, and the rest would be financed by consortium loans.
The three governments shared 42.5 percent, or 20.4 billion yuan, of the cost for the main bridge in different amounts, in accordance with an assessment of their respective prospective economic benefits from the projects. The rest of the 48 billion yuan was funded by a consortium, with Bank of China as the lead bank to provide loans, said Su Yi, the HZMB Authority’s former finance department manager.
Before that agreement, experts considered BOT the most suitable financing model for the HZMB. Under a BOT contract, a government usually grants a concession to a private company to finance, build and operate a project. The company could operate the project for a period of time — usually 20 to 30 years — with the goal of recouping its investment. It will then transfer control of the project to the government.
The suggestion to use BOT was first made by Hong Kong officials, as the city has used this type of financing model for many years, with Hong Kong’s Cross-Harbour Tunnel being one example. Outside Hong Kong, BOT financing has been adopted for many large-scale cross-border infrastructure projects in other developed countries and districts, such as the Channel Tunnel, which connects the United Kingdom and France.
Su believed the adoption of BOT could make up the funding shortage, while the interests could improve construction efficiency and productivity.
However, the mainland currently lacks complete supporting legal services for that kind of financing. If there is a dispute, identifying responsibility could be troublesome. Also, more discussion would have been needed among different parties over social or private capital, which likely would have delayed construction.
Most importantly, the BOT model would have forced the governments to surrender their rights of ownership and operation at the beginning, Su said. Because the HZMB is a critical part of a national development plan, it was believed that the governments should retain more control.
As a result, the BOT model was dropped as an option for the HZMB.
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But Su still expects private capital to play a bigger role in Bay Area projects in the future, as its governments are planning to invest vigorously in infrastructure this year.
Guangdong Governor Ma Xingrui announced at the beginning of this year that the province planned to accelerate the construction of key projects, with a total annual investment of 650 billion yuan.
According to Guangdong Provincial Railway Construction Investment Group, 47.62 billion yuan will be put into railway construction.
Shenzhen, Guangzhou, Dongguan and Foshan are all busy building new metro lines, said Ada Li, a senior analyst at Moody’s Investor Service.
Investment from these four cities has reached about 300 billion yuan, accounting for nearly half of the province’s total investment in infrastructure.
Li sees intercity subway projects as a focus for the Bay Area. Normally, these infrastructure projects have high use, which could easily attract private capital.
Wallace Yu Ka-hung, head of the multi-asset group at Beijing-based sovereign wealth fund China Investment Corp, believes private capital could flow into the Bay Area via PPP financing.
“As a modern city cluster development plan, some more innovative financing solutions should be introduced in the Bay Area,” Yu said.
A relationship manager at HSBC’s commercial banking unit said that in a broad sense, the BOT model is a sort of PPP financing, as it also has the participation of both government and private companies.
Under a BOT basis, private partners are not engaged until tenders are invited. However, PPP financing allows a private company to take part in the project’s preparatory work, such as a design and feasibility study, which helps lower the risk of the private company’s investment, Yu said.
“But for the time being, the roles of the public and private sectors are not that equal in PPP projects. That’s what private capital is concerned about,” he added.
Currently, mainland lenders have a neutral or negative view of PPP financing due to the long duration of the project, the overreliance on government guarantees, and, most importantly, the unpredictable returns, Li said.
Especially with subway projects, it is hard to make ends meet with just ticket fares, as regular financing in component maintenance and system updating is needed all the time.
There is one exception to this rule. Hong Kong’s subway earns a profit every year, leveraging its “rail plus property” business model. Normally, the city’s sole rail operator, MTR Corp, buys a land plot from the SAR government, and then sells the land at a higher price after the railway is built.
MTR reported a net profit of HK$16.01 billion (US$2.04 billion) in 2018. Profits from station commercial activities, property rental and property developments contributed over 70 percent of the total.
Li believes that although the mainland cannot copy the business model completely due to limited land-development rights, similar regional planning can be considered.
Shenzhen Metro Line 4 was handed over to MTR in 2010 under a BOT basis. The rail planning was optimized by taking into account resources — such as bus, green fields and public places — adjacent to stations and depots.
It can be used for reference for the other PPP projects in the Bay Area in the future. Private capital could join the planning of the area with the public side before construction.
They can enjoy the Bay Area’s demographic dividend with a population of over 70 million, which is an important factor for public projects, Li added.
The Finance Ministry issued a new guideline to support PPP investments in March, showing an attitude of support and clarifying the boundary between healthy projects and toxic ones which increase local governments’ hidden debt.
“There’s no doubt that it is a trend that the legal service will be clearer and PPP financing will become more standard,” Li said.
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