Avenues for funds to enter and withdraw from PPP projects

In recent years, funds have become an increasingly important means by which investors can participate in public-private partnership (PPP) projects. An increasing number of investors are participating in the equity financing and debt financing of PPP projects through establishing contract funds, funds organized in the form of partnerships, etc. However, due to certain intrinsic characteristics of funds, how they can enter and withdraw from PPP projects are often the focus of heated debate when parties are proposing to co-operate.

Means of entry

There are usually two means by which a fund can enter a PPP project: (1) entering as an original investor in the special purpose vehicle (SPV) established for the project; or (2) entering the project via an equity acquisition or capital and share increase after the establishment of the SPV. However, since the issuance of the Measures for the Regulation of the Trading of the State-owned Assets of Enterprises (Order No. 32), as the transfer of state-owned property rights and capital increases of state-owned enterprises in principle require a public floor transaction, the second means has been used less and less in PPP projects. The aim is to avoid all the red tape involved in the process.

With respect to the first means, in practice, the term of a PPP project is at least 10 years; however, most of the major funds of a fund come from financial institutions, with the terms usually relatively short, between three to five years or so. During the term of co-operation of a PPP project, a fund will generally face the problem of successive recovery or early withdrawal of the investment principal.

Wang Jihong is a partner and Han Jiangyu is an associate of Zhong Lun Law Firm