ON THE RECONSTRUCTION OF THE SPECIFIC LEGISLATION OF THE PPP IN CHINA

Liao Zhenzhong & Gao Jinkang

TABLE OF CONTENTS

I. INTRODUCTION

II. THE THEORETICAL BASIS OF THE SPECIFIC LEGISLATION FOR THE                                  PPP: OVERCOMING THE DISADVANTAGES OF INCOMPLETE CONTRACTS

III. THE SAME ORIGIN OF THE SPECIFIC LEGISLATION FOR THE PPP: SHAPING THE            INSTITUTIONAL ENVIRONMENT

A. The Significance of External Institutional Environment to the PPP

B. Shaping the External Institutional Environment by the PPP Specific Legislation

IV.  INVESTIGATION ON DIFFERENT BRANCHES OF SPECIFIC LEGISLATIONS FOR THE        PPP: INSTITUTIONAL CHOICE AND EFFECTS

A. Shaping the Different Branch of the PPP’s Legality through Specific Legislation

B. The Different Branch for Improving the PPP Credibility through Specific Legislation

C. The Different Branch for Optimizing the Implementing Capacity of the PPP through      Specific Legislation

V. LOCALIZING CONSTRUCTION OF THE SPECIFIC LEGISLATION FOR THE PPP IN              CHINA: REVIEW AND OPTIMIZATION

A. Review of China’s PPP Native Institutional Environment

B. The Approach to Optimizing China’s PPP Specific Legislation

VI. CONCLUSION

The PPP mode has inherent disadvantages of insufficient incentives for the quality of public stuff, overflow of opportunism and high operating costs. The orderly development of PPP in a country needs specific legislation to create a suitable external institutional environment for it. The specific legislation of PPP in all countries focuses on legitimacy, trust and execution to create a PPP friendly environment for PPP, which form the common ground for the legislation of PPP. However, the native features of different countries will lead to obvious differences in the choice of systems and the corresponding effects. Improper generalization of PPP caused by local financing, public-private trust destroyed by lack of credit of grass-root governments and institutional conflicts caused by games between institutions of public rights are three major obstacles to the orderly development of PPP in China. To reconstruct the specific  legislation of PPP according to native features, China should overcome the shortcomings of the short-term utilitarianism and the technology transplanting doctrine, follow the three main approaches of prioritizing public interest, building public-private trust relationships and coordinating the distribution and operation of public rights.

I. INTRODUCTION

The Public-Private Partnership (PPP) is an important achievement of the global new public governance movement in the past two decades. In addition to relieving government debts, the PPP can effectively improve the efficiency of public goods supply, encourage innovation and stimulate collaborative governance between governments and the market. Since 2014, the PPP in China has experienced a period of rapid development. The number of projects and the amount of investment has increased sharply to be No.1 in the world in just four years. However, there are also some problems such as the generalization of projects in cooperation, insufficient participation of private capital, and conflicting policies from different government departments for relevant measures. Therefore, the central government adjusted the idea of ‘encouraging the development of PPP’ to ‘promoting PPP in a standardized and orderly way’ before 2018, so as to build a long-term mechanism for social capital to participate in infrastructure and public services in China. In this background, it is of great practical significance to study how to bring the PPP under the rule of law and ensure its orderly advancement.

In this background, the PPP legislation has become a hot academic topic in recent years. Since the term PPP was not formally put forward in the early laws or policies, the relevant research mainly focused on government franchising and most of the researchers were scholars of administrative law and economic law. Following the launch of the national top-level design for the PPP in 2014, the relevant research mainly presents two characteristics: firstly, scholars began to study specific legal issues in terms of the PPP model, and relevant literature involving the protection of public interests in PPP, the nature of the PPP agreement, the nature of PPP franchise, the coordination between public and private interests in the PPP, the settlement of PPP disputes, the positioning of the government in the PPP, the relief of the plight for the PPP long-term contracts through legislation, etc. Secondly, the experience of international PPP legislation is introduced through comparative methods, such as France, the UK, and the comparative analysis between Germany and the US. The achievements of the above research provide necessary theoretical support for PPP legislation in China, and are significant for practical operation. They also expand the horizon of existing legal research and are praised for their special value. Generally speaking, there are two characteristics in the former research. One is to focus on a single legal issue involved in PPP from the perspective of law. The other is to accelerate the legislative process of PPP in China by introducing the mature experience of developed countries.

In addition to reviewing the relevant theoretical research, we need to reflect on the two major problems in the development of PPP in China, i.e. the short-term utilitarianism and the technology transplantation. On one hand, the government often abuses policy tools to promote PPP for being addicted to short-term goals of absorbing funds and alleviating government debts, but it lacks a deep understanding of the inherent disadvantages of this model, and the legislation of PPP lacks systematicness. It can be judged from historical experience that the government can easily turn to deny the PPP once problems arise. Short-term utilitarianism has resulted in sharp ups and downs in the development of PPP in China, which is extremely unstable. In the 1990s and 2003, the rise of social capital in the field of public services both fell into a slump in a very short period, and the relevant policies were either abolished or left unused, which resulted in the failure of China in finding the best legal positioning of PPP. In the constant reflection and responses from the old system, China’s attempt to transplant the PPP has always been lingering in an unstable state of either good or bad. On the other hand, the relevant departments are fascinated to transplant the institutional texts of other countries and regard PPP as a simple summary of a series of technical operating rules, but ignore the differences between the institutional backgrounds behind the rules of other countries and the native conditions of China, which caused the failure of legal transplantation. These transplanted provisions cannot meet the native needs in practice and are in conflict with the present legal framework, and even cause contradictions in the following legislation.

China’s PPP legislation must jump out of the trap of the short-term utilitarianism and the technology transplantation. Legislators should realize that the PPP is a national strategy to realize the transformation of public goods supply from government monopoly to public-private cooperation. We do not only need the legal system to help overcome the inherent disadvantages of PPP, but also need to minimize the implementation costs of the legal system itself, i.e. ‘we should fully study the purpose of establishing and applying the PPP mechanism, deduce the best means to achieve the goal, and avoid falling into meaningless arguments that have nothing to do with the established goal.’ Accordingly, the analyzing pattern of this paper follows the order from the basic theory to the international investigation and then to the native construction, establishes a systematic analysis framework of specific legislation for the PPP from multiple perspectives of economics, sociology, law and other disciplines, and tries to explain the native characteristics of the PPP and the corresponding influences on legislation. The author believes that the analysis of PPP legislation needs to be divided into two levels from top to bottom, which are the same origin and the different branch: the former is based on the inherent disadvantages of PPP itself, which leads to the intervention of legal system and thus forms the shared root of global PPP legislation. China’s legislation should always adhere to this universal rule, so as to overcome the unstableness of the short-term utilitarianism. The latter is based on the judgment that ‘the adaptation of law to native conditions is far more important than the origin of the law itself’, analyzes the reasons for different branches of PPP legislation in various countries, and finds the possibilities and emphases of relevant legal transplantation according to the speciality of the native institutional environment in China, so as to overcome the rigidness and disorder of the technology transplantation doctrine.

The second part of this paper analyzes the essence of the incomplete contracts of the PPP and their inherent disadvantages with reference to the research of economics. The third part points out that the inherent disadvantages of the PPP determine that its orderly development needs the support of special external institutional environment. For this reason, specific legislation for the PPP needs to establish a PPP friendly environment from the three aspects of legitimacy, trust and implementation, so as to illustrate the same origin of global PPP legislation. The fourth part analyzes the different branches phenomenon of specific legislations for the PPP in different countries, i.e. different national conditions lead to the differences in choice of institution and the corresponding effects. The fifth part reviews the specialties of institutional environment for PPP in China, and then puts forward some suggestions on the localizing specific legislation of the PPP. The sixth part is a summary of the paper.

II. THE THEORETICAL BASIS OF THE SPECIFIC LEGISLATION FOR THE PPP: OVERCOMING THE DISADVANTAGES OF INCOMPLETE CONTRACTS

Research of economics shows that although the PPP are functional in relieving government debts and improving the efficiency of public goods supply, its nature of incomplete contracts leads to the inherent disadvantages of insufficient incentives for the quality of public stuff, the spread of opportunism and high operating costs. These factors mainly account for the failure of a considerable number of PPP projects in reality. Therefore, if the existing institutional environment of a country cannot be changed, the PPP needs the intervention of the legal system to overcome these disadvantages.

As a compound concept, ‘the PPP can be defined as a diversified arrangement between the government and private sectors.’  Therefore, it is very difficult to conceptualize it precisely. ‘Defining PPP is like trying to nail puddings into the wall.’ However, almost all economists agree that the PPP is inherently an incomplete contract: first, no matter how hard the two parties work, the existence of limited rationality makes the PPP contract itself full of uncertainty; second, the long-term contract which lasts for more than ten years determines the inevitable occurrence of a large number of revisions and renegotiations in the process of fulfilling the contract, which leads to the possibilities of opportunism from both parties; third, in addition to prices, other contract criteria are often ambiguous, which will lead to the absence of supervision on the quality of public stuff in the process of fulfilling the contract; fourth, PPP contracts are typical of too many professional terms and complex structures, which makes it difficult for the judiciary to verify and judge the contract terms afterwards. Therefore, it is useless to even write down all the content in the contract.

Firstly, quality incentives for public stuff are insufficient, which is called Quality-Shading hypothesis in economics, i.e., if the legal system does not intervene, the PPP will inevitably sacrifice the quality of public services for reducing costs. The reasons are as follows. In the first place, the government is confronted with the conflict of dual agent roles of both the tax collector and the public service supervisor. Since the tax payers are much more in number and stronger in politics than the direct beneficiaries of PPP services, the government will prefer the former in terms of saving costs and ensuring service quality, and then neglect the supervision on the quality of PPP. In the second place, the limited rationality and the low transparency of PPP make the pre-event description of the service quality in the contracts and the supervision on the process just unreliable and flexible constraints. Moreover, the profit pursuing nature of capital inevitably triggers the effort substitution problem, i.e., social capital must be excessively concentrated on costs and result in insufficient marginal efforts to improve quality. At last, the constraints of contract terms over social capital depend on the latter’s expectations towards the project. Since the violation of contract terms in quality from social capital is often accompanied by the deterioration of the project condition, social capital at this time is very likely to completely give up the project, which will lead to the failure of implementing the terms of restrictions and punishments in the PPP contract.

Secondly, the opportunism spreads. The involved parties of the PPP have the motivation and opportunities to take self-benefiting actions in the process of fulfilling the contract, which lasts for decades. On one hand, due to the existence of scale economy and natural monopoly, social investment may take advantage of its preemptive monopoly advantages and information status brought by its franchise to seek non-competitive benefits; on the other hand, once the sunk costs of private investment is formed, the government may arbitrarily change the rules of the game, thereby collecting excess economic rent from private partners. Some scholars have studied PPP projects in Latin America and found that when the government finds rent-seeking opportunities, it does everything possible to threaten social capital, including legislation, administrative orders, supervisory and regulatory decisions, lawyer’s letters, judicial decisions, government bulletins, anti-corruption investigation letters and public opinion tools. In addition, the third party of the project such as lawyers, advisory bodies and financial agencies also has intentional opportunistic behavior of trying to complicate PPP projects and profit from them.

Thirdly, the operation costs are high. To begin with, in order to overcome opportunism and ensure the project quality, all parties of the contract will be forced to pay high transaction costs (time and money) in contracting and bidding, project consultation and process (quality) monitoring; and then, since the specific legislation of PPP is a typical cross-sectional legislation, it is necessary to overcome the silos effects formed by different government departments according to their own behavioral logic. Finally, due to the existence of path dependence, the specific legislation for PPP can have an impact on the current legal framework, which will lead to the obstruction and consumption of the legal system. 

III. THE SAME ORIGIN OF THE SPECIFIC LEGISLATION FOR THE PPP: SHAPING THE INSTITUTIONAL ENVIRONMENT

 

Due to the objective existence of inherent disadvantages of the PPP, the prerequisite for a country to develop the PPP is that its objective institutional environment can restrain and overcome the disadvantages caused by incomplete contracts. The birth of PPP in the UK is, in a sense, a historical accident due to the nature of the country’s institution. For those countries or regions whose inherent institutional environment is insufficient to support the PPP, the involvement of compulsory constraints from the legal system is necessary. Therefore, the foundation of the specific legislation for the same origin of the PPP lies in the fact that no matter in which country, the specific legislation aims at restraining and overcoming the inherent disadvantages of the PPP model by shaping the legitimacy, trust and implementation of the external institutional environment.

A. The Significance of External Institutional Environment to the PPP

In view of the objective existence of inherent disadvantages of the PPP, whether a country’s PPP can be developed successfully depends on whether its institutional environment can overcome the inherent disadvantages of the PPP. Otherwise, ‘if the relevant institutional environment is not in place, the PPP will become a correct answer appearing at the wrong time.’ In order to describe the institutional environment which is capable of overcoming the disadvantages of PPP, the academic circles have created the term Enabling Ambient Environment (EAE). ‘This concept contains three core elements: legitimacy, trust and implementing capacity. Its purpose is to define the institutional environment of PPP and provide quantitative indicators for cross-regional research on the PPP’. According to this system, before developing the PPP, the host country needs to answer the following questions: is the domestic institutional environment sufficient enough to guarantee the legitimacy of PPP projects, so as to overcome insufficiency in quality supervision? Is it possible to enhance the trust between the public and the private so as to reduce opportunism? Can the implementing capacity of the government and the law be guaranteed in operating the PPP so as to reduce operation costs?

It is worth pointing out that the EAE of PPP is not entirely dependent on the law. The creation of PPP in the UK is not supported by statute law, and the highest-level document is only the Treasury Ministry’s policy guide. One explanation is that the PPP was born in Britain because the institutional environment of the country has produced a large number of accidental results in favor of PPP factors in history. ‘In the UK, PPP is not a prerequisite for change, but a natural result of change.’ Firstly and foremost, neo-liberalism during Thatcher’s reign gave the PPP macro-sense legitimacy while the UK government controlled PPP at about 10-15 percent  of total public expenditure. Such prevention of improper expansion gave the PPP micro-sense legitimacy. Secondly, the tradition of the UK’s judicial system in protecting franchise contracts is beneficial for curbing government opportunism. ‘Franchise contracts, as long as they can get support from local courts, can provide confrontation against government opportunism to some degree.’ Thirdly, the common law system enables ‘the government to sign private contracts in accordance with the law governing commercial contracts.’ It avoids the restriction of administrative law on the PPP in the background of the dualization of the private and the public in Europe, as well as the conflict between the PPP rules and the previous statute law. Finally, there has been a history of privatization-nationalization wheel for centuries in the country’s public services, which has made the government and the public familiar with the entry of social capital into infrastructure. The emergence of think tanks such as the UK Partners and the UK Local PPP Centers has also enhanced the government’s ability to implement PPP projects.

B. Shaping the External Institutional Environment by the PPP Specific Legislation

Specific institutional environment can effectively overcome the inherent disadvantages of PPP, but most countries cannot be as lucky as the UK, which has obtained a suitable institutional environment through accidental evolution of history. As a system with compulsory constraints, the law can make up for the deficiencies of the existing institutional environment of a country and play an important role in driving and guaranteeing the development of the PPP, which is the fundamental reason for the rise of the global specific legislation for the PPP after the millennium. It is precise because the global PPP specific legislation aims at shaping the EAE; its basic framework shows a considerable degree of same origin. That is to say, the basic frameworks of PPP specific legislation are all constructed from three aspects: legitimacy (application scope, pre-demonstration, competitive access, information disclosure), trust (social capital investment guarantees, resolution mechanism for diversified disputes) and implementing capacity (the establishment of PPP implementing and promoting agencies, reduction of conflicts between PPP and prior laws). The model or recommended legislative texts of the PPP by international organizations such as the United Nations Commission on International Trade Law (UNCITRAL), the  Organization for Economic Cooperation and Development (OECD), the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank (EIB) all basically follow this framework in structure.

Firstly, the PPP transfers public goods traditionally provided by the government to social capital, and requires the public to pay consideration or the government to purchase, which inevitably leads to the contradiction between the profit-seeking nature of social capital and the public nature of public services. Therefore, the law must ensure the maximization of public interests in operating the PPP, which is summarized as ‘putting people first’ by the United Nations. In other words, ‘all PPPs must meet the growth of certain public interests within a certain limit in order to achieve legality (legitimacy).’ Therefore, almost all countries that adopt the PPP mention public interests in legislation or policies. Article 8 of the Public-Private Partnership Act of Slovenia which adopts the statutory law system stipulates that ‘this Act is formulated to ensure transparency, competitiveness, non-discrimination and fairness in the specific process of the PPP, with the principle of maximizing the public interests.’ Paragraph 5 of article 2 of the National Public Private Partnership Guidelines of Australia which adopts the common law system stipulates that ‘the government must give priority to the public interests in weighing the PPP investment and bidding decisions.’

Secondly, stable trust between the bureaucratic task-oriented organization (government) and the market profit-oriented organization (social capital) should be established for the PPP, which requires the legal system to stimulate mutual business trust relationships, provide expectations for long-term and sustained cooperation and implement penalties for the breach of contracts. Compared with common contracts, the PPP pays more attention to how the legal system actually allocates risks in the process of performance rather than just conduct litigation. Therefore, there are two ways to build the credibility of the PPP by specific legislation: one is to ensure the predictability of behavior and the reliability of commitment of all parties involved in the PPP, especially the government; the other is to provide a procedural framework for the public and private parties to renegotiate exogenous changes during the long period of contract performance in order to maintain the trust relationship between them. 

Finally, ‘the PPP requires the government to have ability of more efficient negotiation, contract management and risk analysis, thus putting forward higher requirements and responsibilities for the government and the law.’ From the perspective of convergence, all global specific legislation for PPP adopts the method of setting up PPP implementation and promotion organizations (PPP Units) to enhance government implementing capacity. The PPP implementation and promotion agency is a special government agency established in accordance with the law, which theoretically includes ‘any organization that aims to ensure the necessary capacity of the public sector to create, support and evaluate the PPP and is closely linked with other government departments with the full or partial assistance of the government.’ After the millennium, more than 30 countries in the world have legislated to establish the PPP implementation and promotion agencies. The most important functions of PPP implementation and promotion agencies are to solve silos problem of lack of coordination mechanism between government agencies and to cultivate the implementing capacity of grass-root governments for PPP projects. 

IV. INVESTIGATION ON DIFFERENT BRANCHES OF SPECIFIC LEGISLATIONS FOR THE PPP: INSTITUTIONAL CHOICE AND EFFECTS

As far as variation is concerned, the differences in traditional legal systems, political systems, ideologies, social environments and other factors of different countries will lead to the phenomenon of different branches in the specific institutional choice and final institutional effects of specific legislation. On one hand, although many countries try to transplant the experience of other countries’ PPP legislation, all of them will amend or change the points where the specific content and countries’ actual situations are in conflict, which leads to great differences in the content of various countries’ specific legislation for PPP. According to a report by a UK consulting company named LinkedIn, the content of PPP legislation in any country in the world is far from the model provisions of the UNCITRAL Model Legislative Provisions on Privately Financed Infrastructure Projects. On the other hand, empirical studies show that high-level specific legislation does not all correspond to strong PPP activity. The law has a certain role in promoting the PPP, but the development of PPP is often influenced by other institutional features besides the law of a country. In a word, ‘specific legislation for PPP is not the one-size-fit-all copy and paste; we must consider the goodness of fit between legal transplantation and the host country’s existing institutional features.’

A. Shaping the Different Branch of the PPP’s Legality through Specific Legislation

As for how to safeguard public interests and shape the legality of the PPP there are great differences in various countries’ specific legislative approaches and effects. 

The first is the application scope, in order to ensure the legality of PPP, the specific legislation first needs to confirm whether the PPP model is to be applied in the public service field. If the answer is yes, it needs to further decide whether it is necessary to exclude the PPP from some core public services provided by the government. As to the former issue, Nordic countries, based on the constitutional obligation of the government to maintain public services, have directly refused to apply the PPP in any field in legislation. Even though the application of PPP is allowed, a considerable number of national legislations emphasize that the PPP should not be applied in government core services. For example, article 2 of the Greece Law No.3389 Partnerships between the Public and Private Sectors stipulates that the PPP should not be applied in or by national defense, police, judges and criminal judicial enforcement. In addition, considering the high transaction costs of PPP, in order to prevent the waste of public funds, some countries have legislated to limit the application scale of PPP projects. For example, the UK only allows projects with more than 20 million pounds to apply the PPP model, and Portugal’s PPP specific rules in 2006 stipulate that projects with a cumulative burden of less than 10 million euros or a cumulative investment of less than 25 million euros are not allowed to apply the PPP.

The second is the pre-argument, all countries require the government to demonstrate the necessity and feasibility of applying PPP model through specific procedures before launching projects. But specifically there are three ways: first, the UK model of the Value for Money (VFM) takes economic return analysis as the core, and uses data model (Public Sector Comparator comprehensive evaluation) to determine whether to apply the PPP model or not. Commonwealth countries mostly adopt this system. The second is comprehensive evaluation of economic and other social benefits. As stipulated in article 2 of the Order No. 2004-559 of 17 June 2004 on Partnership Contracts, the economic, financial, legal and administrative motives of CP contracts must be judged through prior assessment. Such assessment should include a comparative analysis of various options, and specially pay attention to pre-tax costs, risk sharing and sustainable development. The Kosovo’s Law on PPP of 2011 also requires the government to comprehensively assess the economic, social, technological, financial, environmental and other benefits of projects in addition to economic return. Third, the US, Romania, Austria and Belgium adopt competitive bidding law to examine the necessity of PPP.

The third is competitive access, the specific legislation for PPP in all countries requires the PPP efficiency to be improved and innovation to be encouraged through competitive bidding. An important difference between countries is whether social investors are allowed to launch non-bidding proposals on their own initiative, while the government recognizes and subsidizes their early investment. This issue reflects different values of fairness and innovation in different countries’ laws: some countries worry about backroom deals and ban non-bidding proposals while other countries, out of the desire to encourage innovation, allow non-bidding proposals. The specific approaches of the latter can be divided into two categories: one is to offer technical bonus points for bidding to encourage social initiators (South Korea, Chile); the other is to offer a matching priority system for the final winning bid to social initiators (Italy). 

The fourth is information disclosure, the PPP information disclosure is emphasized in the specific legislation for PPP in all countries, but there are three specific approaches. The first approach is to legally provide neutral and independent information for public and private entities through specialized PPP units such as the PPP Germany. The second approach is to release the PPP information through the Ministry of Finance. As an important part of the government’s commitment to public expenditure transparency, the Treasury Department releases aggregate data on projects every year. The third approach is to disclose information through the audit department. As stipulated in the Public-Private Partnerships  Transparency and Accountability Act of Canada in 2013, ‘The purpose of this Act is to ensure the independent evaluation of PPP projects and the reporting of taxpayers’ VFM, while ensuring the transparency of the use of this model and the implementation of the third party’s independent accountability.’

From the perspective of effects, a considerable number of countries, such as the Nordic countries, refuse to apply the PPP at the legal level for fear of the quality of public stuff provided by social capital. The majority of countries applying the PPP can protect public interests by law to promote the PPP. There are also some countries with specific legislation that are unable to protect public interests due to their own special reasons, which leads to stagnation of PPP development.

B. The Different Branch for Improving the PPP Credibility through Specific Legislation

In terms of enhancing the trust in all parties in PPP, the focus of specific legislation is generally on the substantive provisions of social capital protection and diversified dispute resolution procedures. However, there are still great differences in the specific practices and effects of different countries, among which the influence of traditional legal system is especially obvious.

The first one is the substantive guarantees of social capital. There are great differences between the two legal systems on how to provide a safe harbor for social capital. In the Anglo-American legal system, PPP contracts are regarded as ordinary commercial contracts, and courts are more likely to protect social investors according to performance benefits. For example, in the US, in a series of cases like the Walla Water case, Russell v. Sebastian and Detroit v. Detroit Citizens’ Street Railway Co. at the beginning of the 20th Century, the judges stressed that social capital could recover costs and obtain expected benefits from contracts. The UK and US courts often cite constitutional provisions to introduce the private property protection rules in PPP contract interpretation as a supplement to prohibit the government from violating the obligations of PPP franchise contracts. In contrast, the civil law countries generally emphasize the administrative nature of PPP contracts and the priority of the administrative rights of the government, which enables the government to terminate contracts at any time based on public interests in theory. Therefore, there are inherent deficiencies in the protection of social capital investment. Therefore, civil law countries often need to adjust their own administrative legal system to adapt to PPP. A typical example is articles 95 and 100 of the Public Procurement Act of France of 2016, which stipulates that ‘if the PPP contractor has fully fulfilled its obligations, it can claim compensation for the expected benefits.’ Some scholars argued that the ‘French PPP legislation highlights an attitude which is to force the administrative law to gradually get close to the common commercial contract law to maintain the status of the administrative law itself.’

Many countries also give special protection to PPP social investment for other reasons. For example, article 20 of the Russian Federal Law on Concession Agreements specifically stipulates the priority of compensation when the change of law is not beneficial to the franchisee, ‘in order to safeguard the property rights and interests of the franchisee on the date of signing the franchise agreement.’ The specific legislation for PPP in Greece distinctively stipulates that the government is obliged to compensate for social investment if there are historical relics or cultural relics found during the project construction and leads to the government’s failure to provide land on time.

The second is diversified dispute resolution procedures, in order to facilitate the performance renegotiation between the public and private parties, countries often set up some pre-settlement mechanisms for PPP disputes, including conciliation and expert adjudication, before litigation based on their own situations. Conciliation is to resolve the daily disputes of PPP projects through non-litigation cooperative committees or independent audit teams. For example, the Bihar State Infrastructure Development Enabling Act of India of 2006 stipulates that ‘PPP conciliation committees should be established within government institutions or local governments, which should be regarded as civil judicial pre-procedure and should mediate disputes under PPP contracts in a friendly, independent and fair manner.’ Another common pre-mechanism is Expert Adjudication composed of technical, financial and legal professionals. As the supreme court of India wrote in its judgment in Utter Pradesh Power Corp vs. NTPC: ‘the expert committee established under Part III of the Electricity Regulatory Commissions Act of 1998 is a professional body, which determines the level of electricity prices, has relevant expertise in legal, financial, commercial, economic and project management aspects, and carries out independent judgment in strict compliance with relevant procedures. The court therefore held that the relevant issues concerning the calculation of electricity charges in this case should be interpreted by the Commission on its own initiative and that (the Supreme Court) would not interfere with this interpretation.’ In addition, many countries’ legislation has recognized the nature of PPP contracts that can be arbitrated.

From the perspective of effects, specific legislation for PPP in most countries can effectively reduce the government’s rent-seeking for social capital, and promote the public and private parties to revise their relationships through renegotiation in the process of fulfilling the contract. However, the experience of South American countries also shows that in countries with political instability or unrestrained public powers, PPP specific legislation is still powerless in fighting against opportunism.

C. The Different Branch for Optimizing the Implementing Capacity of the PPP through Specific Legislation

In order to optimize the implementing capacity of PPP, countries generally set up PPP implementing and promoting agencies, but agencies in different countries are quite different in three aspects: hierarchical organizations, functioning ways and practical effects.

Firstly, PPP implementing and promoting agencies in different countries vary greatly in organization, function and hierarchy. In terms of organization, in addition to the financial system, PPP implementing and promoting agencies may also be subordinate to other departments. For example, the Private Finance Initiative Promotion Office is directly under the Cabinet Office of Government of Japan, while the Danish PPP Implementing and Promoting Agency is subordinate to the Ministry of Economic and Business Affairs. In terms of function, France, Greece, Serbia, South Africa and other countries have authorized PPP implementing and promoting agencies to decide on projects, while other countries focus more on its advisory functions. In term of hierarchy, PPP implementing and promoting agencies can be horizontal. For example, the Irish Central PPP Unit not only includes ministers or representatives of the relevant ministries, but also establishes a PPP information dialogue platform mechanism with trade unions and chambers of commerce. It may also be vertical. For example, the Infrastructure Australia established in 2004 aims at coordinating federal and local PPP issues. These differences reflect the influence of different political organization systems in different countries on PPP implementing and promoting agencies themselves.

Secondly, the way of revising the existing law is obviously different. PPP implementing and promoting agencies help to make more special arrangements which are conducive to PPP development in tax law, securities law, company law, bidding law and other fields. These arrangements undoubtedly enhance the government’s ability to implement projects. However, since the path depends on the existing domestic law, the specific practices of different countries vary greatly. For example, article 6 of the Law Amending the French Finance Law of 2009 gives the French Ministry of Economy the right to issue project guarantees for eligible PPP projects, and the total amount of guaranteed funds can reach 10 billion euros in maximum, which can cover 80 percent of the direct or indirect financing of projects. In 2007, Italy abolished the right of pre-emption provision in the Code of Public Contracts Relating to Works, Services and Supplies Implementing Directives of Italy of 2002 to encourage the development of PPP. Chile tends to introduce foreign capital to participate in PPP, so it has developed the most successful PPP model in South America by combining its franchise law with foreign investment law.68 Generally speaking, the existing law of civil law countries has obvious restrictions on PPP specific legislation depending on path.

Finally, from the perspective of effect, the cases of France, Greece, Portugal, the UK and Italy all show that the establishment of PPP implementing and promoting agencies by specific legislation significantly promotes the development of PPP in one country. However, there are also exceptions. Serbia’s specific legislation in 2011 gave PPP implementing and promoting agencies considerable powers, but its PPP development was not satisfactory. Scholars explained that the instability of the country’s political environment led to the alienation of PPP implementing and promoting agencies into a kind of mascot (pro forma) existence.

V．LOCALIZING CONSTRUCTION OF THE SPECIFIC LEGISLATION FOR THE PPP IN CHINA: REVIEW AND OPTIMIZATION

The same origin and the different branch of international PPP specific legislation are significant for China in two aspects. Firstly, the inherent disadvantages of the PPP model determine that the basic framework of PPP specific legislation should include legitimacy, trust and enforcement, and China’s legislation is no exception. Secondly, China’s PPP specific legislation should not strictly follow the existing legislative experience of other countries, but needs to consider the compatibility between the transplanted objects and China’s reality. In this paper, we first review the problems existing in China’s PPP local institutional environment in the past 30 years, and then explore the selection and optimization of the specific system of China’s PPP specific legislation in the basic framework mentioned earlier.

A. Review of China’s PPP Native Institutional Environment

Although the term Public-Private Partnership has only become a legal and policy term in 2014, the public-private partnership of public stuff is by no means a new thing in China. The relevant history can be traced back to the 1990s when China guided foreign investment into infrastructure construction by the BOT mode. By reviewing the relevant historical process, we can find that there are three major local obstacles in China’s institutional environment, which are improper generalization of PPP caused by local financing, poor public-private trust due to lack of credibility of the grass-root governments and institutional conflicts caused by the behavioral game between public institutions.

Firstly, local financing leads to the improper generalization of PPP endangering the quality of public stuff and undermining the legitimacy of PPP. In the context of the outbreak of local debt in 2014, one of the aims of the central government’s PPP is to limit government responsibility and enhance debt transparency of local infrastructure investment through PPP, in order to replace the traditional financing platform disturbed by corporate debt and local government debt. But the PPP itself cannot solve the imbalance between local government and financial power after the tax distribution system, nor can it eliminate the local officials’ over-indebted investment under the incentive of promoting championship. Therefore, the PPP is generally regarded as a new type of government debt tool. In reality, the local government does not hesitate to promote the project through irregularities such as illegal guarantee and explicit debts in a form of equities without considering whether the project itself is suitable for the PPP model or not, which results in serious generalization and alienation of PPP, the increase of the government’s potential debts, and a real threat to the public stuff’s quality. In response, the Ministry of Finance carried out a large-scale cleanup of the PPP project database in 2018, and thousands of illegal projects were ordered to shut down. The ‘irregular phenomena appearing in the extensive implementation and rapid growth of PPP projects, especially the false acts of setting up self-benefiting financing projects in the name of PPP’, make PPP fall into the trap of a single financing tool and destroy the legitimacy foundation of PPP in China. 

Secondly, the lack of credibility of grass-root governments hinders public-private trust. Contrary to the foreign cases in English literature where social capital is repeatedly mentioned for having trapped governments, most of the cases in China are manifested in the grass-root governments’ credit failure and the total loss of social capital as a result. The fundamental reason lies in the omnipotent model of county and municipal governments in China, i.e., their comprehensive control over administrative branches, judicial organs, local state-owned enterprises, regulatory departments and even public opinion. The threat of grass-root governments’ omnipotent model to social capital is manifested in three aspects: first, it is not easy to predict and control the government’s behavior, and ‘leadership changes or performance improvements’ can lead to changes of government commitments at any time; second, the government has absolute political authority, which can easily postpone project approval, dilute the rights of social capital, or directly deny the rights of social capital through local legislative power; third, the weakness of the local judicial power compared with the administrative power results in the hollowness of social capital’s relief afterwards. The omnipotence of grass-root governments has always prevented social capital from forming an equal relationship with them. A note to this is that apart from state-owned enterprises with special trust ties to local governments, real private capital does not account for much in China’s PPP.

Thirdly, the games of public institutions cause institutional conflicts. The PPP involves many public institutions, but the games between these institutions are often not rational. Horizontally, there are serious institutional conflicts in the central government’s PPP network which takes the Ministry of Finance and the National Development and Reform Commission as its core and involves more than ten ministries. The Ministry of Finance and the National Development and Reform Commission respectively established their operational guidelines, information platforms and expert databases, and emphasized their own legislative and approval powers over PPP, which not only wasted resources, but also easily caused rule conflicts; The Ministry of Finance tends to follow the UK model in which governments purchase the PPP, while the Development and Reform Commission advocates inheriting the framework of franchise law. The divergence of departmental thinking leads to difficulties in legislation; Some powerful industry giants tend to compete for the legislative discourse power of PPP in their field, which increases the policy uncertainty. However, taxation, natural resources and other functional departments’ refusal to adjust the relevant laws to give the PPP special treatment reduces the operability of the policy. From the point of view of the central and local vertical PPP network, the games between the local governments’ actual operation and the central legal provisions will also cause institutional conflicts. Since the actual initiation of PPP project in China is at the municipal and county level, taking into account the human resources of governments at that level, it is doubtful whether the PPP project can really operate in accordance with the central legal provisions in contract negotiation and performance supervision. A typical example is that during the operation of foreign capital’s BOT in 1990s, many local governments violated the central provisions and offered unreasonable super-high fixed return to foreign investors in their contracts, which led to the centralized rectification and clearance of the problem by the central government.

B. The Approach to Optimizing China’s PPP Specific Legislation

Considering the specialty of the native institutional environment, China’s PPP specific legislation needs not to be confined to the British or French fixed templates, but should be based on reasonable transplantation or independent creation of relevant institutional design. Regulations on Public-Private Partnership in Infrastructure and Public Services (Draft of Consultation Paper) (hereinafter referred to as the Consultation Paper) is being formulated. Combined with the specific content of the Consultation Paper, this section will discuss how to follow the three main approaches of maintaining public interests’ priority, building public-private trust relationships and coordinating the division of public powers to construct and optimize China’s PPP specific legislation.

1. Maintaining Public Interests’ Priority, and Comprehensively Constructing the Legitimacy of Native PPP through the Application Scope, Pre-Review, Competitive Access and Information Disclosure. — Considering the damage to the legitimacy of China’s PPP at this stage is mainly due to the improper generalization of PPP caused by local governments’ financing, and thus enlarging the failure of public stuff’s quality control, specific legislation should adhere to the absolute priority of public interests in order to build the legitimacy of PPP, which is a necessary prerequisite for the existence of PPP as a long-term system in China.

Firstly, the application boundary of PPP should be considered objectively and prudently. At present, China’s policies and regulations adopt an incentive model of positive lists for the application scope of PPP, and even enforce the PPP in the field of sewage and garbage disposal. This approach incorrectly assumes that the PPP revenue absolutely exists, and ‘there is a tendency to deify and generalize PPP’. Considering the objective existence of PPP’s inherent disadvantages, it is not advisable to promote and encourage the PPP without previous research. Specific legislation should avoid the generalization of PPP, and make two necessary institutional arrangements. On one hand, we should emphasize operation-oriented to ensure that China’s PPP focuses on the weak public service operation links of the government itself. On the other hand, we should exclude the improper application of PPP in the form of negative lists. Specifically, the PPP should be prohibited for projects involving public security and core functions of the state (defense and justice) and projects that are too small in scope (e.g., the investment less than 100 million) to cover transaction costs. However, this is not stipulated in the Consultation Paper, which should be considered as negligence.

Secondly, we should insist on building the PPP pre-review procedure with native characteristics. At present, due to the lack of basic data and the lack of grass-root governments’ capacity in China, the argument of the value for money transplanted from the UK has been severely criticized as formalism. Therefore, the Consultation Paper replaces the value for money with ‘the necessity and rationality evaluation of PPP’, which seems to have avoided and weakened the idea. The author thinks the construction of PPP pre-review procedure in China needs to take into account two aspects: first, in order to prevent the improper generalization of PPP, the PPP specific legislation must adhere to the concept of public projects cannot be outsourced without performance evaluation. Any weakening of this concept will lead to the weakening and alienation of PPP in China and thus lead to the wrong way. Therefore, it is not advisable for the Consultation Paper to weaken the value for money. Second, considering that China is still in the primary stage of urbanization, the construction of infrastructure can not only consider the economic return of individual projects, and there are indeed some places where the UK Public Sector Comparator (PSC) economic benefit testing is incompatible with China’s current national conditions. At the same time, the international understanding of PPP is also shifting from improving efficiency to achieving people-oriented sustainable development goals. Therefore, China’s specific legislation does not necessarily fix on the UK performance experience. It can take into account the practices of France, Germany and other countries, and try to set up a more extensive, scientific and diversified benefit indicators involving technical, social, environmental and other aspects besides economic benefit indicators, so as to gradually form PPP pre-demonstration procedure with native characteristics.

Thirdly, in order to encourage competition and innovation, specific legislation should allow social capital to initiate non-bidding proposals so as to encourage innovation and curb local irrational abuse of PPP. The PPP specific legislation of many countries has set non-bidding proposals as an important channel for initiating PPP, and completely stipulates the process, requirements and social capital return criteria of this model. China’s Consultation Paper and related policies only refer to non-bidding proposals in principle and are blank in its process, requirements and preliminary returns on social capital, making it a mere formality. This may be due to the fear that the advance intervention of social capital will hinder competition fairness. However, in the long run, monopoly PPP project initiation by governments is not conducive to encouraging competition and innovation, and harmful to the legitimacy of PPP. Specific legislation should gradually liberalize non-bidding proposals and give appropriate bonus points to social initiators of projects for their subsequent bids through institutional arrangements so as to strike a balance between fair bidding and innovation encouragement. 

Fourthly, strengthening the operability of PPP information disclosure, at present, China has formulated the policy of PPP information disclosure, and the Ministry of Finance has established the PPP information database. However, there are still some problems such as unclear boundary of information disclosure, single information channel and insufficient accountability basis. Specific legislation should be considered to improve in the following aspects: first, we should refine the content of information disclosure, which requires specific information disclosure during the project operation period; second, we should introduce auditing departments as an independent third-party information source in addition to the information disclosure by the Ministry of Finance; third, we should strengthen the accountability system of information disclosure, and define the legal responsibility of all parties for lack of disclosure or false information; fourth, we should distinguish the boundary between trade secrets and PPP information disclosure through concerned parties’ public hearings in accordance with the principle of paying equal attention to relevance and public interests.

2. Guaranteeing Social Capital Investment, Establishing Diversified Dispute Settlement Mechanism and Building Public-Private Trust Relationships. — In view of the path dependence of local governments’ omnipotent mode in China, in order to ensure the credibility of government actions and commitments, China’s PPP specific legislation needs to ensure the social capital investment in substance, and provide the procedural framework of continuous dialogue in procedure between the public and private during the contract performance, so as to build the public-private trust relationships.

First, we should stipulate post-event compensation mechanism of social capital in substantive law which is clear and conducive to judicial recognition and operation. Considering public interests, governments should have the right to supervise the contract performance and unilaterally terminate the contract, but it is very difficult to distinguish administrative priority rights from the government opportunistic behavior. In most cases, the protection of social investors can only follow the post-event liability rule rather than the pre-event property rule. Based on the background of strong and omnipotent China’s local governments, PPP specific legislation should consider offering social capital a comprehensive and reliable compensation mechanism to enhance its confidence in investment. 

Firstly, legislative expansion enumerates situations where compensation is needed for the infringement of PPP franchise, including changes and suspension of franchise by governments, provision of extended services beyond contracts at the request of governments, or other acts that cause incumbent burden or impair investors’ expectations (such as the increase of projects’ external competition from government). Under the aforementioned situations, social investors should be compensated to some extent. The current government compensation scope stipulated in the Consultation Paper is too small and needs to be appropriately expanded. Secondly, we should establish a PPP compensation criterion which is rigid, clear and easy to operate. When PPP projects terminate, countries generally adopt two basic calculation compensation criteria of book value and financing value, and consider supplementary payment for the third party (such as employees and partners) costs. The Consultation Paper of China only stipulates reasonable compensation and does not give specific criteria. Under the premise of judicial weakness, the ambiguity of compensation criteria is often not beneficial to investors. In 1966, the supreme court of Jamaica refused to review PPP disputes for being unable to define the vague fair return criterion in legislation. Therefore, China’s legislation needs a calculation criterion which is rigid, clear and easy to operate so as to protect social capital. Thirdly, we should have appropriate investment risk guarantees. ‘In the context of a strong government, reasonable risk allocation is especially important for protecting private interests.’ Many countries have made some risk guarantees for social capital investment. For example, the Chilean law stipulates that the government provides investors with a minimum income guarantee of no more than 70 percent of the operating and investment costs, beyond which investors bear their own risks, and when franchisees are required to make additional investment for public interests, the additional amount shall not exceed 15 percent of the initial project investment. Similar risk guarantee measures can also be considered in China’s legislation. Fourthly, article 26 of the Consultation Paper stipulates that social investors must satisfy two premises of not affecting the stability and sustainability of public service provision and government consent before transferring the equity of the project company to the outside world. However, the requirement of government consent is too rigid, which may stimulate opportunistic behavior of local governments. In view of differences of PPP projects, we should consider transferring the issue to contract or constitutional autonomy under the premise of protecting public interests, and giving social capital some freedom of choice for withdrawal. Fifthly, relevant documents have attempted to stipulate that superior financial departments can implement a settlement and deduction mechanism for the finance of dishonest subordinate governments, but ultimately failed to achieve. The next step of legislation is to fill the vacancy of punishment measures for government dishonesty.

Second, the diversified dispute settlement mechanism of PPP should be established in procedure to promote the public and private parties to coordinate conflicts of interests through renegotiation in the process of fulfilling the contract and thus maintain the public-private trust relationships. 

At present, the biggest obstacle to the establishment of China’s PPP diversified dispute settlement mechanism comes from the dispute over the nature of PPP agreements. Administrative law scholars who emphasize the factors of the PPP agreement in the public law regard it as an administrative contract, while scholars of civil and commercial law emphasize the factors in private law and regard it as an equal civil contract. Reflected in legislation, this controversy is the contradiction between the existing PPP policy and the incorporation of the franchise agreement into administrative litigation in the Administrative Litigation Law of the People’s Republic of China. The author thinks the realistic approach is to downplay the dispute in which it is believed that the public and private parties have disparate nature, divide the PPP agreement into several nexus (groups) of contracts, and determine the solution according to specific contract terms that have caused disputes. This thinking pattern not only conforms to PPP’s compound nature of public and private interests, but also keeps in line with judicial practice. 

The thinking of nexus (groups) of contracts determines that PPP dispute settlement channels should be diversified: first, we should emphasize the alternative dispute settlement mechanism. Specific legislation should require PPP contracts to introduce various negotiation models, including reconciliation mechanism and expert mediation mechanism, which can facilitate negotiations and communication between the public and private parties. As clearly stipulated in the French Administrative Law, the PPP contract must include or establish the ‘terms of dispute prevention and mediation procedure’. Second, considering the professional and practical advantages of arbitration, specific legislation should recognize the arbitrability of PPP contracts. Even in civil law countries, the law should not exclude PPP contracts from going to arbitration. For example, France ‘prohibits representatives of public law from arbitrating in principle, with the exception of public works contracts and supply contracts.’ Germany, Italy and Taiwan have similar provisions. Third, in order to strengthen investor protection, social capital should be given the priority to the choice of the dispute settlement mechanism. For example, the Act on Public-Private Partnerships in Infrastructure of South Korea stipulates that when social capital files a special mediation application for PPP, the government must agree.

3. Establishing PPP Implementing and Promoting Agencies at the Central and Local Levels to Coordinate the Division of Public Powers and Reduce Institutional Conflicts. — At present, the Clean Development Mechanism Fund Management Center of the Ministry of Finance has temporarily set up PPP centers with the nature of public institutions, whose organizational positioning, functions and powers are far from the internationally prevalent implementation and promotion agencies of PPP units. And it is worth discussing that the Consultation Paper still adheres to the practice of co-management of PPP by the central ministries and commissions. The institutional conflicts caused by the horizontal games between the central ministries and commissions and the vertical games between the central and local governments are the weakness of the development of PPP in China. Therefore, legislation needs to create institutional roles that can coordinate the division of public powers in both horizontal and vertical dimensions, namely from central (legislative coordination) to provincial (project review), two-level PPP implementing and promoting agencies.

Firstly, considering that PPP specific legislation is typical cross-sectional legislation, the financial unilateral simple budget restriction considerations cannot cover all the content of PPP. Therefore, the affiliation of PPP implementing and promoting agencies to the Ministry of Finance is not an absolute option for legislation. A considerable number of countries have embedded this institution in other parts of the network of government organizations. The specific legislation for PPP in China should consider the establishment of a PPP implementing and promoting agency at the central level directly under the State Council and across ministries and commissions, thus giving the agency the necessary independence. At the same time, through joint sessions of ministries and commissions, we should bridge the cognitive differences of PPP understanding among finance, development and reform, land, taxation, financial supervision and other departments, reduce the costs of legislative game, and promote integration of PPP specific legislation and other department laws.

Secondly, specific legislation can consider setting up provincial PPP implementing and promoting agencies under provincial governments and at the same time authorize this agency to review PPP projects in cities and counties in provinces. The rationality of this approach lies in that provincial governments have sufficient human resources and information collecting capabilities, and have a certain motivation to supervise the financial expenditure of their subordinate cities and counties due to the PPP, so as to reduce the information costs of the central supervision over the first-level cities and counties’ legitimate operation of PPP projects. Provincial PPP implementing and promoting agencies can set up project review committees, which allows representatives of five parties, who are the public (People’s Congresses), the government of the project site, industry professionals, subject experts and social investors of existing projects, to democratically decide whether to implement a project through voting. On the other hand, provincial PPP implementation and promotion agencies are also responsible for policy advocacy, think tank support and contract standardization of city and county projects to improve the implementing capacity of grass-root governments for PPP projects. 

VI. CONCLUSION

‘Only when a country has a safe, predictable, stable, sustainable and business-oriented legislative framework, can PPP flourish.’ PPP is essentially a rectification of nationalized monopoly of public stuff supply. As a compulsory formal constraint, the legal system can provide the elements of institutional changes for the orderly development of PPP. The three basic conclusions of this paper are as follows. Firstly, the PPP model has its inherent disadvantages such as insufficient incentives for the quality of public stuff, spread of opportunism and high operating costs, which are the legal basis for specific legislative intervention. Secondly, specific legislation can remedy the external institutional environment of PPP from three aspects of legitimacy, trust and implementation, restrain and overcome its inherent disadvantages, thus forming the same origin of the basic framework of global legislation. However, the specific system choice and actual system effects of PPP specific legislation in a country will be subject to the obvious different features of local conditions. Thirdly, improper generalization of PPP caused by local financing, poor public-private trust due to lack of credibility of grass-root governments’ and institutional conflicts caused by games between public institutions are the three major obstacles to the orderly development of PPP in China. PPP specific legislation should adhere to the orientation of native issues, incorporate the experience of other countries, gradually improve the endogenous institutional environment, and ensure the orderly advancement of PPP.