Chengdu is the capital of Sichuan Province, in the central area of the Peoples Republic of China
Question:
Chengdu is the capital of Sichuan Province, in the central area of the People's Republic of China (PRC). In Chengdu 7 million inhabit the nine districts in the main urban area, and an additional 7 million dwell in the surrounding region under the administrative level of Chengdu. Chengdu is one of the most important economic, transportation and communication centers in Western China. The PRC's state council has designated Chengdu as the country's western center of logistics, commerce, finance, science and technology, as well as a hub of transportation and communication. It is also an important base for manufacturing and agriculture.
Chengdu's infrastructure, facilities and public services match its importance: it has modern transport infrastructure (including intercity high-speed rail), hospitals and many universities. The city's rapid growth, however, has created needs that are not fully covered by these infrastructures. In particular, waste water treatment and water distribution.
Even though Chengdu has a significant annual budget for public works investment, the city cannot finance on its own all the projects that need to be undertaken. In this context, the use of PPPs can somewhat alleviate the lack of public services on critical sectors.
- WATER INFRASTRUCTURE
Water infrastructure in China
Over the past decades, the People's Republic of China (PRC) experienced a rapid growth in its urban population which led to a significant increase in the demand for water supply and other urban services.
Water resources were ineffectively managed, mainly because of:
- Ditch irrigation systems
- Outdated technology
- Lack of awareness or willingness of the industrial sector to recycle
The government identified shortage of treated water in several cities. About 60 of them were in a critical situation and could worsen due to urban population estimated growth. The Government did not have the resources to finance the large investment requirements, estimated at CNY60 billion, to immediately meet the country's increased demand for water.
Water infrastructure in Chengdu
In Chengdu, the company responsible for the supply and distribution of water is the state-owned enterprise Chengdu Municipal Waterworks General Company (CMWGC). The Chengdu Construction and Engineering General Company (CCEGC) give technical support on the provision of infrastructures.
The economy of Chengdu developed rapidly and water consumption increased sharply with an available water supply at that time of only 980,000 m3 daily. The forecasted water demand for 2021 was 1,46 million m3 daily. The quality of treated water did not meet international standards.
In order to expand its water supply capacity and be equipped to meet the demands for a growing economy, the Chengdu Municipal Government (CMG) estimated that the city needed to provide an additional 400,000 m3 of treated water daily.
The plan for the improvement of the Chengdu water supply system included:
- Two water intake points of 400,000 m3/day each
- A transmission pipeline of 27 kilometers
- A water treatment plant of 400,000 m3/day
- An urban water distribution network of 79 kilometers
- A reservoir of 60,000 m3
The required investment for the intake and treatment installation surpassed USD 100 million and the city of Chengdu is not prepared to undertake such an investment.
- PROJECT'S FINANCING SOURCES
Even though this project is very important, the city cannot afford to allocate public budget or increase public debt for its development. Fortunately, due to the project´s social characteristics, two international financial institutions (IFIs) have shown interest: the Asian Development Bank (ADB) and European Investment Bank (EIB). Both banks are ready to act as project lenders providing around 50% of the needed funds in market conditions, with an interest rate reflecting the country and project risks at the time of financial closing. As a condition to its participation in the project, the ADB demands to have an active part as project supervisor and as financial intermediary.
- TYPICAL PPP SCHEME IN CHINA
- The government grants a concession for the development and management of a certain infrastructure to a private sector entity, a bidding consortium, or a project company
PPPs in China are usually structured as Build-Operate-Transfer (BOT) contracts. Under this scheme:
- The concessionaire finances, designs and constructs the infrastructure, and operates it for a fixed period of time (generally 10 to 30 years) to pay off the capital debt and receive a reasonable rate of return from the operating revenue.
- Finally, the concessionaire transfers the infrastructure to the government free of charge or at an agreed upon price at the end of the concession period.
According to Chinese law, concessionaires can be Domestic Companies, Joint Ventures between Chinese and foreign-owned companies, or Wholly Foreign-owned Companies. However, foreign ownership and management of water and power distribution networks is not allowed, so the success of a water plant BOT project will depend on the existence of local companies with sufficient experience.
In the past, many Chinese BOT projects attracted foreign investment. Most of the projects have been successful in transferring construction risk to the private sector (no time or cost overruns during this phase):
1) How can the project be a PPP?
2) Identify stakeholders and their roles?
3) Propose risk allocation?
A Survey of Mathematics with Applications
ISBN: 978-0134112107
10th edition
Authors: Allen R. Angel, Christine D. Abbott, Dennis Runde