Public-Private Partnerships

Analysis of the relevant policies and project model changes

Over the past few years, in accordance with the changes to China’s public-private partnership (PPP) projects-related policies, enterprises have adjusted their funding methods and integrated equity structures on PPP projects. Jane Yang from EY aims to give a brief summary on the background to PPPs, as well as typical PPP operating modes and their impact on financial statements.

PPP projects in development stage

The basic operation mode of most PPP projects is that an infrastructure construction enterprise (hereinafter referred to as ‘PPP project undertaker’) establishes a project company to accomplish the construction and operation of the entire project. Since PPP-promoting policies were issued in 2015, PPP project undertakers have generally faced a shortage of funds due to the large amount of investment required.

In order to fulfill the financing demands and the requirements of various State-owned Assets Supervision and Administration Commission (SASAC) of the State Council financial indexes, most PPP project undertakers introduce state-owned financial capital for the purpose of pursuing stable investment returns, such as trusts, bank asset management plans, and insurance. The special purpose vehicle (SPV) indirectly invests the external funds as capital into the project company. It means that the PPP project undertakers and the external funders hold shares as limited partners of the SPV, while the SPV fulfills the capital needs of PPP projects through equity investment.

PPP projects in adjustment and specification stage

From 2017 onwards, the PPP industry in China entered a stage of adjustment. The SASAC issued Document No. 192 in November 2017; the Ministry of Finance issued Document No. 23 in March 2018; and the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange jointly issued new policies in April 2018. These documents prohibited maturity mismatching and multilayer nesting, restricted equity investment and capital operations such as credit enhancement. After these policies were issued, the capacity for capital investment in PPP projects dropped significantly, resulting in a decline of the integrated shareholding structure construction modes, which was previously the first choice for project undertakers.

In 2019, the State Council has issued encouraging policies on capital-raising for standardised PPP projects. In Document No. 26, issued in November 2019, project legal entities and project investors are encouraged to issue equity financial instruments in infrastructure and other ‘strategic’ industries, raising project funds by multiple financing methods.

In response to these policies, PPP project undertakers have begun to gradually explore the use of equity-based financial instruments that meet the requirements for project capital financing, as well as to meet regulatory requirements and achieve financial control such as asset-liability ratio control and other financial performance.

The typical structure of the PPP project is that the undertaker and the external funder hold their shares as limited partners of the SPV during the adjustment and specification stage. At the level of SPVs, fund raising is carried out through fund share subscription and purchase of other equity financial instruments issued by special-purpose entities. The proportion of funds by SPV equity investments in PPP project companies has declined, and they further met the capital needs of projects by purchasing other equity financial instrument investments issued by project companies.

Financial impacts of integrated equity structure modelling at different stages

From an accounting perspective, the PPP project undertakers need to be in accordance with the definition of ‘control’ as provided in Accounting Standards for Enterprises No. 33: Consolidated Financial Statements (revised in 2014), considered with regard to the specific circumstances of the PPP project. The SPV of the PPP project and the project company can then make a judgment on whether it should be listed/consolidated. In addition, enterprises should also fully consider the following factors:

  • whether qualified third parties introduced have actual investment intention;
  • the actual operation services and risks related to PPP projects; and
  • whether the architectural design and the clause arrangement of decision-making mechanisms at all levels have reasonable setting purposes and commercial substance.

It has been observed that, during the vigorous development stage, PPP project undertakers give priority to project companies for reporting (i.e., not including them in the scope of consolidated financial statements). However, during the adjustment and standardisation stage, project companies are gradually included in the scope of consolidated financial statements, if the PPP project undertakers have control over both the SPV and the project company. Hence, it is necessary to further determine whether the capital invested by external investors can be listed as equity (minority shareholders’ equity) in consolidated financial statements, according to the principles of distinction between financial liabilities and equity instruments as set out in Accounting Standards for Business Enterprises No. 37: Presentation of Financial Instruments (revised in 2017). To apply these principles, enterprises should fully consider whether a SPV is an instrument that is obligated to deliver financial assets at the time of liquidation, for example:     –              whether there is a specific operating lifetime;

  • whether there is compulsory profit distribution and other payment obligations; and
  • whether there is an indirect obligation to pay cash or other financial assets, such as an arrangement for a quasi-perpetual interest rate jump mechanism.


To sum up, PPP projects may involve complicated accounting treatments. PPP project undertakers should fully consider the Accounting Standards for Business Enterprises No. 33: Consolidated Financial Statements (revised in 2014) and Accounting Standards for Business Enterprises No. 37: Presentation of Financial Instruments (revised in 2017) for detailed analysis when making relevant accounting judgments.

Note: This article has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, legal or other professional advice. Please refer to your advisors for specific advice. This article is the author’s personal opinion and the author reserves the right of final explanation for this article.

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