The Investment and Financing Mode of Urban Infrastructure

Time:  Nov 25.2021    |    Source:  JJTZ

A new round of urban revolution, bringing the city to intelligent innovation reform, this round of the largest urbanization process will be supported by new infrastructure. Urban infrastructure development has undoubtedly become the urban renewal and urbanization process of the “mainstay". As one of the core areas of infrastructure, intercity rail transportation also needs to break through its own bottleneck and develop a new development mode technologically. In this issue, we will briefly introduce the new investment and financing models and some classic cases of intercity rail transit and other projects in urban infrastructure.

I. ABO Model
1. ABO Model Introduction
The ABO model is an innovative model of PPP partnership, consisting of three steps: Authorize - Build - Operate. The government empowers public service projects to state-owned companies in their territories to integrate resources, provide investment, construction, operations and other services. ABO model can give full play to the operating entity for its resource integration ability, and improve the project operating efficiency. This operating model was originally applied to Beijing rail transit projects.

2. Classic Project - Beijing Metro Line 4
Beijing Metro Line 4 project, using the TOT+BOT model, is a typical project implementing the ABO model. After the Beijing Municipal Government authorized the project to Beijing Infrastructure Investment (BII), Beijing MTR Corporation (BJMTR), in which BII has a stake, signed the final concession agreement. BII divided the project into part A and part B in accordance with its authorization, and was responsible for the project’s investment, construction and operation as a whole. Part A, using TOT model, is responsible for civil engineering. The investment has on amount of 10.7 billion yuan, accounting for about 70% of the total investment. On behalf of the Beijing Municipal Government, BII’s wholly-owned subsidiary, Beijing Metro Line 4 company, raised funds for part A’s construction and property rights. Part B, using the BOT model, is responsible for mechanical and electrical equipment. The investment has an amount of 4.6 billion yuan, accounting for about 30% of the total investment, invested, constructed, operated and managed by BJMTR.

II. EPC+F Model
1. EPC+F Model Introduction
EPC+F refers to that a contractor entrusted by the owner to carry out the whole process or several phases of the contract for Engineering, Procurement, Construction, Financing services of the construction project, as previously agreed in the contract. In recent years, operational disorder and government illegal borrowing leads to the tightening of PPP project funds, and the Ministry of Finance and other central ministries have concentrated on PPP practices. The EPC+F model can solve the problem of funding for public facilities projects more effectively, and the main body of fund raising is shifted from the owner to the contractor side. This model allows the deferred payment of funds, lengthens the period of capital occupation, alleviatea the financial pressure of project owners in the short term, and thus becomes a favorable trend for the future development of China's engineering field. However, after the introduction of the Government Investment Regulations, there is a compliance problem for government investment projects to adopt the EPC+F model.

2. Classic Project - Lishui Airport Project
In the tendering phase, Lishui Airport project stated that their supporting project construction model would be the deferred EPC model (i.e. EPC+F), the main investment into the EPC includes engineering costs, other project construction fees, preparatory fees, etc., amounts to about 1.3 billion yuan. The construction period of supporting projects is 4 years, the payment period is 8 years, the proportion of deferred funds is at least 70% of the EPC investment amount, and the deferred interest rate is up to 40% of the five-year loan benchmark interest rate. In this project, although the form of tender, as it appears to be, is still an traditional general contract tender, but the project owner set a delay period through the tender announcement, makes it a way of passing the fund-raising responsibility in the construction phase to the contractor. This is definitely the EPC+F model of the project.

III. EOD Model
1. EOD Model Introduction
EOD (Ecology-Oriented Development) is an eco-led model of sustainable urban development. It is a kind of urban development model based on landscape ecology, led by the construction of ecological civilization, supported by characteristic industrial operation and comprehensive urban development, and aimed at sustainable development. The model focuses on ecological construction, attracting industry and population aggregation with ecology, applying PPP as an important investment implementation path to enhance ecology, public services, industrial construction and operational capability, to achieve ecological and economic development to promote the common promotion, and finally enhance satisfaction of the masses.

2. Classic Project - Tianjin Ji Canal whole area water system treatment, ecological restoration, environmental enhancement and industrial comprehensive development project.
This project is the first project in China applying the EOD model to the ecological and environmental management of the entire watershed. The project adopts the PPP business model, and the district government adopts the way of introducing investment builders to determine legal investment and construction subjects. The government-designated platform company establishes watershed investment company based on related laws. The overall cooperation period of the project is 20 years, capital composition includes project capital (30%) and financing (70%). At the same time, investor actively strive for special funds at all levels, increase the proportion of project capital, and strive for government bond funds to reduce financing pressure. The sources of project funds include special funds for comprehensive treatment of water systems, income from land resources, income from operating assets, government purchases of ecological services, income from multiple industries, and income from equity transfers.

IV. TOD+PPP Model
1. TOD+PPP Model Introduction
In In recent years, China has actively promoted the PPP model in the field of infrastructure and public services. However, with the rapid development of infrastructure, many local governments already feel great pressure on their financial capacity, and urgently call for a breakthrough that can support the huge infrastructure volume. Under this context, TOD (Transit-Oriented Development) model was introduced in China. TOD is a public transport-oriented planning and design approach. The combined development model of "TOD+PPP" is a kind of composite PPP, which integrates the development and utilization of urban infrastructure and urban land. It helps PPP projects to go beyond the limits of self-development and increase the value of land through urban infrastructure investment, and can solve the problem of land value-added externality through this model.

2. Classic Project-Shen Zhen
In China, Hong Kong, Shenzhen and other cities have successfully realized the PPP and TOD model integration mode of operation. Shenzhen has developed the Shenzhen rail TOD strategy by combining planning at all levels and the layout of the transportation network, considering rail construction and land development projects in an integrated manner. On one hand, the collaboration and integration of track TOD and urban layout are realized, and the sustainable development of TOD is guaranteed. On the other hand, it opens up the channel of government and market resources, effectively alleviates the shortage of funds for the construction of rail projects. In practice, in addition to rail transit projects, the TOD concept can also be introduced into transportation construction such as airports, ports and integrated transportation hubs using PPP model, which would cover a wide range of industries.

In addition to the above-mentioned investment and financing models, there are also many other new infrastructure investment and financing models, such as traditional PPP, EPC+O, trust financing, investors and EPC. These new investment and financing models under investment trend brings the financial efficiency for infrastructure projects to a much higher level, impregnating this hotbed of land supported by urban infrastructure.