On 8 November 2023 the General Office of the State Council forwarded the Guidance on Regulating the Implementation of the New Mechanism for Government and Social Capital Cooperation, issued by the National Development and Reform Commission and the Ministry of Finance (Guo Ban Han [2023] No. 115). The document is short, but it redraws the boundaries for a market that had stalled for several years.
The key words of the new mechanism are not “expansion” but “discipline” and “focus”. It narrows projects to those financed by user charges, unifies implementation through concessions, puts private capital first, and treats new hidden local government debt as a red line.
Focus on user charges
The new mechanism requires projects to focus on user charges, with operating revenue covering construction investment and operating costs, so that the cooperation model does not add to local fiscal expenditure.
This changes the logic of earlier projects. Some relied on government payment or viability-gap subsidies, effectively locking in future fiscal spending. The new mechanism requires projects to generate their own cash flow, making “can charges be levied, at what level, and by whom” a precondition for the project to exist.
For investors, due diligence moves forward: instead of negotiating construction first, they must verify the charging mechanism, price adjustment and demand forecast. Projects with insufficient demand or capped prices may pass the list but stall at financing.
All projects through concession
The new mechanism requires all such projects to adopt a concession model, choosing among build-operate-transfer, build-own-operate-transfer, transfer-operate-transfer and other forms according to project characteristics.
Concession means rights and obligations must be written into the concession agreement: scope, term, exclusivity, price adjustment, early termination, handover standards and liability for breach. The agreement is not a framework document; financing, operation and exit all depend on it.
Three areas tend to cause trouble: a concession term that does not match asset depreciation and payback; a price-adjustment mechanism without triggers or procedure; and an early-termination compensation formula that is unclear. If these are left vague at signing, later disputes are difficult to resolve by negotiation.
Prioritising private capital
The new mechanism states that for new concession projects, private enterprises should be prioritised, with a principled requirement for their equity share. This is not mere encouragement: private participation becomes a factor in how projects are structured.
For private investors, opportunity and risk rise together. The opportunity is entry into municipal, transport and environmental sectors previously dominated by state-owned enterprises. The risk is long project cycles, heavy capital commitment and uncertainty over government performance under the concession agreement.
Before participating, three checks matter: whether the project is in the plan and project list; whether the government has completed feasibility and fiscal-capacity assessment; and whether the agreement provides a clear remedy for government breach.
Preventing hidden debt
The new mechanism treats “no new hidden local government debt” as a bottom line, requiring strict review of funding sources and expenditure obligations, and prohibiting disguised debt through viability-gap subsidies or guaranteed minimum returns.
In practice, the familiar “government backstop” and “guaranteed return” arrangements will find it harder to pass review. Investors must accept that project cash flow determines returns, rather than government credit. Financial models should separate operating risk from policy risk instead of merging them.
Four preparations before participation
First, confirm project characteristics: whether user charges genuinely exist, whether prices are regulated, and whether demand forecasts rest on independent evidence.
Second, review the concession agreement, focusing on term, price adjustment, exclusivity, termination compensation and dispute resolution.
Third, verify the government’s capacity to perform, including budget arrangements, authorisation of the implementing agency and completion of approvals.
Fourth, design an exit path, including restrictions on equity transfer, asset handover and lender step-in rights.
For project company incorporation and equity arrangements, see our incorporation service; for concession and financing documents, see commercial contracts and financing and equity.
This article is based on the Guidance on the New Mechanism for Government and Social Capital Cooperation forwarded by the General Office of the State Council on 8 November 2023. It is for reference only and does not constitute legal advice.