Innovate Model, Strengthen Guarantee

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1 Innovate Model, Strengthen Guarantee Improve Standardization -Development of Cooperation Between Government and Social Capital for Guizhou Province Expressway Guizhou Provincial Transportation Department Aug.2018

2 Content Basic Information about Guizhou Transport Innovation and Practice of PPP model of Guizhou Expressway Key Methods to Execute PPP model Key Points to Guizhou Expressway PPP model Inspiration from Practicing PPP model

3 1. Basic Information about Guizhou Transport

4 Basic Information about Guizhou Transport Guizhou covers an area of 176,000 square kilometers, includes 88 counties (city, district, and special district. The province had a per manent population of 35.8 million(37.8% of minority nationalities).

5 Basic Information about Guizhou Transport By the end of 2017 Railway Highway Airline Water Transport 3550km railway operated in Guizhou. (1214 km of high-speed railway) Total mileage is km and road network density is km per hundred square kilometer. Expansion project of Longdongbao International Airport Phase two is available. One Hub and 16 Branches civil transport airport layout is being formed. The international routes of Guiyang aviation port and Zunyi temporary port has been increased to 23. Entire course of Wujiang is navigable with the total length of 3,664 kilometers inland waterway.

6 2. Innovation and Practice of PPP model of Guizhou Expressway

7 Representative Project-2007 year BOT+EPC Invested by China Communication Construction Company Guiyang-Duyun Expressway (80km,7.5 billion RMB) Completed and available in 2011

8 Innovation and Practice of PPP model New sample of Guizhou PPP model that can be duplicated, referred and popularized China Communication Construction Company China Railway Group Limited China Railway Construction Corporation Limited China State Construction Company China Metallurgical Group Corporation Sichuan Road & Bridge(group) Co.,ltd

9 Cooperation model BOT+EPC+ Gov.Subsidy BOT+EPC Coopera tion model Equity+EPC+ Subsidy during operation phase TOT

construction, procurement and investors will be tendered together.

10 Innovation and Practice of PPP model (1) BOT+EPC model Selfsustai ning Funded by investor s BOT Projec t Operated by investor s By adopting an integrated public bidding method, design, construction, procurement and investors will be tendered together. Clarify the rights and obligations of investors in the construction, operation and transfer of a certain period of time by signing concession agreement.

Advantages 1. Integrated public bidding method is in line with the principle of streamlining the project's preliminary work; 2. Conducive to the SPV to control project cost through whole process.

11 Advantages 1. Integrated public bidding method is in line with the principle of streamlining the project's preliminary work; 2. Conducive to the SPV to control project cost through whole process. On the premise of meeting the safety and function requirement, the SPV optimizes the design and construction scheme to maximize the economic and durability of the project, and also saves the social cost; 3. Besides the charge income during the operation period, the investment profit will also include obtaining the whole industry profits such as design, construction and equipment, etc., achieving the maximization of the investment return; 4. Reduce government obligation.

12 Innovation and Practice of PPP model (2) Advantage of BOT+EPC+Gov. Subsidy model 1. There are 14 projects (921km in total) that received government subsidy. The proportion of the subsidies is about 15% of the total investment, the total amount is 20.9 billion RMB. It not only realized the magnifying effect of government investment in 1:5, and also has directly reduced the government debt by 83.3 billion RMB, giving full play to the guidance and leverage of financial funds. 2. Effectively improve the economic benefits of the project, enhance the ability to resist risks, make some projects with relatively poor returns competitive, and attract social capital to participate in project construction. Gov. Sub sidy increase investors confidence, make up for the insufficient project revenue, enhance the ability to resist risks allowance rate is decided by competitive tender not used as project capital

Innovation and Practice of PPP model (3) Equity+BOT+EPC model Based on the project rate of return determined by bidding, the government gives a certain subsidy when the project operating income

13 Innovation and Practice of PPP model (3) Equity+BOT+EPC model Based on the project rate of return determined by bidding, the government gives a certain subsidy when the project operating income cannot reach the expected project return. However, the abnormal return belongs to the government. Responsible for project financing, construction, operation, transfer and other issues, the two sides enjoy the corresponding rights and interests in accordance with the proportions of their capital contribution.

financial expenditure, which is beneficial to the implementation of local government financing, but also reducing the initial loss of the project. 2.

14 Advantages 1. Change from supplementary construction to supplementary operation. In principle, considering the subsidy period within 10 years after the completion of the project, it reduces the pressure of centralized financing of government subsidy funds and smoothes the financial expenditure, which is beneficial to the implementation of local government financing, but also reducing the initial loss of the project. 2. It reflects the partnership between the government and enterprises in terms of risk sharing and profit sharing. For the enterprise, guaranteed, no windfall profit, the enterprise can no longer obtain windfall profit, while guaranteeing to compensate relevant loss in the early days of expressway operation by the government subsidies, enhance the confidence of enterprises in investment. Abnormal return part is returned to the government, which fully reflects the fairness.

This model improves the funds utilization efficiency, thus relieves government expenditure and obligation pressure, as well

15 Innovation and Practice of PPP model (4) TOT model Transfer franchise right of stock project, government could return funds and reinvest in new highway projects. This model improves the funds utilization efficiency, thus relieves government expenditure and obligation pressure, as well as eases fund shortage of expressway project. Transfer franchise right of the existing projects within a certain period to obtain transfer funds to recover projects investment or to build new infrastructure projects

16 3. Key Methods to Execute PPP model

17 Key Methods to Execute PPP model Government paid high attention and assure funds are in place. Key Methods Adhere to planning, assure scientific development Enhancing collaboration between departments, assure project legality. Complete institutional systems and standardize project process

18 4. Key Points to Guizhou Expressway PPP model

19 Procurement Procedure

20 Risk Sharing Risk Category Risk Factor Undertake by Government Undertake by Social Capital Construction Risk Operational Risk Other Risks Design Risk Ö Ö Project Delay Ö Ö Construction Quality Risk Construction Cost Increase Risk Financing Risk Risk Of Land Acquisition And Demolition Cost Project Competitive Risk Operating Income (Minimum Demand) Risk Risk of Operating Cost Overrun Legal and Policy Risks Force Majeure Risk Ö Ö Ö Ö Ö Ö Ö Ö Ö Ö Ö Ö Ö

Financing Arrangements By means of project financing, the SPV, as the main body of financing, raises funds according to law through various channels, such as pledge loan of project

In the total investment of expressway projects in Guizhou Province, project capital accounts for 25% of the total investment and project financing accounts for 75%.

21 Financing Arrangements By means of project financing, the SPV, as the main body of financing, raises funds according to law through various channels, such as pledge loan of project charge right. Financiers usually are financial institutions such as commercial banks and fund companies. In the total investment of expressway projects in Guizhou Province, project capital accounts for 25% of the total investment and project financing accounts for 75%. For some PPP projects, increase the warranty obligation on social capital. If the SPV is unable to obtain other construction funds of the project in full within the prescribed time limit, social capital has the obligation to raise the corresponding construction funds as a guarantor.

22 Payment System Guizhou Guizhou Guizhou Government payment User charges Viability gap funding BOT+EPC BOT+EPC+Gov.subsidy Equity+BOT+EPC

23 Lifecycle Management Construction and operation are equally important Lifecycle Management Set up management objectives and punishment system Establish performance assessment system

24 5. Inspiration from Practicing PPP model

transportation. Guizhou insists on putting priority on traffic development and traffic leading economy in the strategic position.

25 Inspiration from Practicing 1. The application of PPP model is the concrete embodiment of Guizhou spirit. The spirit of guizhou, summarized by general secretary Xi as "unity and endeavor, innovation and hard work, and catch-up of late development", has been embodied in the development of Guizhou transportation. Guizhou insists on putting priority on traffic development and traffic leading economy in the strategic position. Guizhou studies the stage-type characteristics and the demand for traffic of economic and social development combined with its actual situation, and puts forward what it is necessary to take the road of development by means of strength. We need to choose a new model which is suitable for our actual situation and beneficial to win-win development so as to achieve the goal of "government seeks for development and enterprise seeks for profit". Finally, achieved that surpass other provinces in respect of traffic area.

26 实践启示 Inspiration from Practicing 1 Original plan: completed in An effective way to widen investment and financing channel. 2 Requires 40.8 billion RMB 1 Actual:achieved target in 2015 County to County Expressway 2 By PPP model, funded 22.4 billion RMB

Hangzhou-Ruihai Expressway spent 48 months, 3.

27 Inspiration from Practicing Eg: Shorten construction period (1)Shorten the construction period by 30%; (2)PPP model:yachihe Bridge of Guiyang-Qianxi Expressway spent 33 months; Traditional model:beipanjiang of Hangzhou-Ruihai Expressway spent 48 months, 3. An effective way to reduce expenses and enhance benefits Conducive to the integration of advantageous resources Conducive to managing all the steps Conducive to control project cost

28 Thanks!

CCCC- The Industry Leader With Attractive Valuation. JP Morgan Investors Forum, Beijing June, 2013

CCCC- The Industry Leader With Attractive Valuation JP Morgan Investors Forum, Beijing June, 2013 Agenda Company Overview Financial Highlights and Stock Performance Focus of Business Strategy Industry