Improving China s PPP Fund System with Reference of Japan s. Experience

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1 Improving China s PPP Fund System with Reference of Japan s Experience HU Bin, XING Yan National Institute of Finance & Development (NIFD) Abstract: Over recent years, China has created a large number of PPP funds. Yet due to the absence of a national PPP fund system, lack of coordination led to a waste of financial resources and inefficiency. We believe that as part of its national strategy, China must create a national-level PPP fund system to enhance coordination and efficiency. In this respect, Japan s national-level PPP fund system offers valuable experience to draw upon. On the basis of conducting a site survey on Japan s PPP fund institutions, this report identifies major problems confronting China s PPP funds and elaborates their organizational framework and major functions. Finally, it suggests that China should adopt a national strategy on PPP funds and create a national PPP fund system. I. Problems of China s PPP Fund System In China, the development of PPP (public-private partnership) funds can be traced back to a decade ago. In his the government work reports over the recent three years, Premier LI Keqiang noted that size of PPP funds should be multiplied. Yet due to incomplete top-level design and lack of overall consideration, China s PPP funds experienced wild growth at various localities. In this context, PPP funds encountered various problems such as regional imbalance, lack of investment diversification and substandard operational model: (1) Regional development of PPP funds is uneven. Currently, the size of PPP funds in China s eastern region accounts for over 60% of national total. Development of PPP funds is overheated in regions like Shanghai, Shandong and Jiangsu. With the exception of a few provinces (such as Xinjiang), the size of PPP funds is too small in central and western regions. On the whole, regions with inadequate infrastructure and backward industrial development are not adequately supported by PPP funds. (2) Investment lacks diversification. While infrastructure accounts for about 50% of investments by China s PPP funds, investments are falling short in public welfare, science and education, culture and health, as well as tourism. PPP funds are yet to extend greater support to China s national strategies including mass innovation and mass entrepreneurship, internationalization and Made in China (3) Operational model is not standardized. China s PPP funds feature a strong attribute of financial innovation in such areas as fundraising and fund creation. 1

2 However, the PPP funds of various regions are not coordinated and a standardized model of fund operation is yet to be created. Consequently, institutional management, product distribution and financial regulation are not transparent and the performance of funds is hard to evaluate. All these problems are related to the lack of overall coordination for PPP funds. Creation of a national PPP fund system and coordination of local development will greatly enhance efficiency. In this area, China may draw upon the experience of Japan s practice. II. Japan s Experience of PPP Funds As the policy vehicle and financial strategy of Abenomics over the past three years, Japan s PPP fund system is under great expectation for rejuvenating Japan s economy. It consists of 11 subsidiaries (see attached figure) and is regulated by eight cabinets with investment and financing functions in various areas. (1) Innovation Network Corporation of Japan (INCJ) Established on July 17, 2009, INCJ is under the administration of the Ministry of Economy, Trade and Industry (METI) and intended to promote the corporate value and innovation of Japanese enterprises. Objectives of fund investment are to achieve government planning and the mid-and long-term return of the institution. By promoting open innovation through the inputs of finance, technology and managerial expertise, INCJ contributes to the M&A, restructuring and upgrade of enterprises in such areas as energy, IT, electronics, biotechnology and infrastructure. (2) Regional Economy Vitalization Corporation of Japan (REVIC) Based on Regional Economy Vitalization Corporation Act and re-organized in March 2013, REVIC is under the administration of the Cabinet Office, assisted by the Ministry of Economy, Trade and Industry (METI), the Ministry of Internal Affairs and Communication and the Ministry of Finance. The business scope of REVIC includes not only individual companies but industry consolidation, credit order and regional business environment improvement to revitalize Japan s stagnant economy. (3) Agriculture, Forestry and Fisheries Fund Corporation for Innovation, Value Chain and Expansion (A-FIVE) Founded on January 23, 2013 on the basis of Act on Agriculture, Forestry and Fisheries Fund Corporation for Innovation, Value Chain and Expansion, A-FIVE is under the administration of the Ministry of Agriculture, Forestry and Fisheries of Japan. Through fiscal investment and credit services, A-FIVE supports the development of The Sixth-industrialization for Agriculture and assists in the promotion of relevant products to the international market. (4) Private Finance Initiative Promotion Corporation of Japan (PFIPC) Established on October 7, 2013 with the approval of Japanese Prime Minister and on the basis of relevant laws, PFIPC is under the administration of (PFI Promotion Office). By sponsoring Private Finance initiative (PFI), PFIPC strives to leverage private investment with state capital, reduced fiscal burden and create private entrepreneurship opportunities. (5) Cool Japan Fund (CJF) 2

3 Established on November 8, 2013 based on Act on Cool Japan Fund, Inc., CJF is under the administration of the Ministry of Economy, Trade and Industry (METI). Led by the government, CJF operate as a corporation and is intended to provide financial, consulting and management services to private enterprises in the overseas market. Meanwhile, it also promotes Japanese culture and brand image and supports culture industry including food, cartoon and tea ceremony. (6) Real Estate Sustainability & Energy-Efficiency Diffusion (Re-Seed) Founded on March 29, 2013 as a corporation, Re-Seed is under the administration of the Ministry of Land, Infrastructure and Transport and the Ministry of Environment and primarily invests in real estate sector. Operation objectives of Re- Seed fund are to promote the efficient use of limited resources and the sustainable and resource-efficient model of development, develop earthquake resistant and environmentally desirable real estate industry, and improve existing real estate environment. (7) Competitiveness Enhancement Fund Established on March 12, 2013, the Competitiveness Enhancement Fund is under the administration of the Ministry of Finance. Its executing agency is the Development Bank of Japan Inc. (DBJ). In addition to its own business, DBJ is also responsible for government-entrusted programs of industrial competitiveness and regional development. Objectives of DBJ s operation are to enhance Japan s industrial competitiveness and achieve the third arrow of Abenomics (i.e. growth strategy, including industrial competitiveness, domestic demand and overseas demand). (8) Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development (JOIN) Established on October 24, 2014 on the basis of Act on Japan Overseas Infrastructure Investment Corporation for Transport & Urban Development, JOIN is under the administration of the Ministry of Land, Infrastructure and Transport. According to Japanese government, local enterprises are faced with barriers in attempting to participate in infrastructure development including road, transport and urban development in other countries considering the long construction cycle and high policy risks. Hence, the Japanese government expects to resolve the abovementioned problems through financial support and expert assignments of JOIN. (9) Organization for Small & Medium Enterprises and Regional Innovation, Japan (SME Support) Established on July 1, 2004 under the Act on Organization for Small & Medium Enterprises and Regional Innovation, SME Support is under the administration of the Ministry of Economy, Trade and Industry (METI) and consists of government agencies, financial institutions, research institutes and industry associations. SME Support intends to provide diversified services to Japan s micro, small and mediumsized enterprises. Its business scope includes infrastructure services for information consulting, expert assignments, investment and financing and corporate development for various types of enterprises. (10) Japan Science and Technology Agency (JST) 3

4 JST was established in 2003 and JST fund was created on April 1, 2014 under the Act on JST. It is fully funded with fiscal allocations and administered by the Ministry of Education, Culture, Sports, Science and Technology (MEXT) and the Ministry of Economy, Trade and Industry (METI). Basic functions of JST are to develop the infrastructure for innovation in science and technology, formulate strategic planning for the innovation and development of science and technology, promote the application of R&D results, enhance international R&D cooperation and achieve the integration of industry, universities and research institutions. (11) PPP Innovation Fund Established on September 1, 2014, PPP Innovation Fund is under the administration of the Ministry of Education, Culture, Sports, Science and Technology (MEXT) and the Ministry of Economy, Trade and Industry (METI) with complicated systems of administration. In the second half of 2014, competent authorities established corporations at Kyoto University, Tokyo University, Osaka University and Northeastern University and received review and approval by the Ministry of Education, Culture, Sports, Science and Technology (MEXT) and the Ministry of Economy, Trade and Industry (METI). PPP Innovation Fund intends to promote innovation in science and technology, integration of industry, universities and research institutions and application of R&D results. Nevertheless, key activities such as project initiation and result assessment need to be determined by the MEXT and the METI. III. Policy Recommendations on China s Creation of a National PPP Fund System Currently, China already has a few national PPP funds (e.g.: National Fund for Technology Transfer and Commercialization). They are either recently established or under preparation and yet to form an organic system and national strategy. We suggest that China s national-level PPP fund system be created with reference to Japan s PPP fund experience. First, conduct top-level design of national PPP fund system. Complete toplevel design is essential to implementing the strategy of national-level PPP fund system. According to Japan s experience, all the 11 PPP agencies are national agencies under the vertical administration of ministries. In addition, the Ministerial Conference for PPP Funds (Ministerial Council) has been created to jointly determine overall guidelines. Under the Ministerial Council, the Steering Committee of the Ministerial Conference for PPP Funds is established with the involvement of officials from relevant ministries and experts (Executive Committee), which is the authority for the regular verification of guidelines. Second, enact special laws and regulations. Special laws and regulations must be enacted to ensure that national-level PPP funds will not deviate from policy objectives in the course of operation. Prior to the creation of PPP fund agencies, legislative authorities designed the basic acts and principles with the participation and deliberation of competent officials from the Cabinet Office, the Ministry of Economy, Trade and Industry (METI), the Ministry of Finance and Financial Service Agency. Third, determine internal functions within the fund system. Within the 4

5 national-level PPP fund system, various funds must have clear functions and distinctive characteristics to avoid business competition and repetitive investment. Spread across different areas, Japan s 11 PPP funds are defined by special laws and regulations to specialize in specific businesses and avoid overlapping functions. Fourth, ensure transparency of performance evaluation and information disclosure. Due to the long investment cycle and uncertainty of national-level PPP funds, regulatory systems must be improved to address the lack of information transparency and symmetry. This problem, if mismanaged, will be detrimental to the attraction of private capital and give rise to inefficiency, collusion, corruption and moral hazards in the course of fund operation. In this respect, PPP funds offer the following experience: (1) PPP funds must be reviewed by competent authorities of different hierarchies on a monthly, biannual and annual basis; (2) create basic indicators for monitoring fund operation; (3) conduct internal and external audits; (4) regularly evaluate KPI policy targets; (5) ensure the numerification and visualization of disclosed information. Fifth, quantify the effect of national-level PPP funds on private investment. A basic principle for the creation of a national PPP fund system is to avoid competing for profits with the private sector. In addition to leveraging their guiding effects, the potential crowding-out effect of PPP funds should also be evaluated. Figure: Organizational framework and regulatory mechanism of Japan s PPP system 5

6 Competent authority Regulatory mechanism Operating agency Ministry of Internal Affairs and Communications INCJ Cabinet Office (Financial Service Agency) METI Ministry of Finance Ministry of Agriculture, Forestry and Fisheries SME Support REVIC A-FIVE PFIPC PPP Innovation System CJF MEXT Ministry of Environment Ministry of Land, Infrastructure and Transport Re-Seed Competitiveness Enhancement Fund JOIN JST Source: Report on the Survey of Japan s PPP Funds, 6

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