China indicates clearer direction for sustainable Toll-Road development

December 30, 2018

SINGAPORE - Recently-proposed reforms in China clear up some of the policy risk for toll-road investments and operations, and are generally credit neutral to positive for the sector, according to S&P Global Ratings, which  believes the proposals highlight the Central Government's attempts to balance its goal of containing logistical costs while also assuring the long-term sustainability of the toll-road sector.

"The proposed revisions are a move in the right direction in bringing more regulatory transparency and clarity," said S&P Global Ratings credit analyst, Yuehao Wu.
 "That said, the sector impact depends on the final form of the new regulations, and whether implementation varies across different provinces, particularly when political and economic agendas are overarching."
The draft proposals released on December 21 focus on:
 * Raising the thresholds for new toll-road investments;

* Allowing concession periods of more than 30 years for sizable investments
or major road overhauls;
*Providing more flexibility in setting and adjusting tariffs to ensure
debt repayment for government toll roads and reasonable returns for
franchise toll roads;
*Sustaining toll collection after the debt repayment of government toll
roads to cover maintenance costs; and
*Suggesting a compensation mechanism to operators to cut or remove tolls
as required by the government through subsidies and concession extension.

The proposed measures are an evolution of regulations that took effect in 2004, S&P says. The request for comments period ends on January 20, 2019. S&P says it sees no immediate impact on S&P-rated toll-road developers.
"Our ratings already capture a certain level of direct or indirect extraordinary support from the Government, the controlling shareholder, given the ownership structure and policy-oriented role of those State-owned companies will be unchanged," S&P says.
"While the draft revisions reinforce the role of the provincial government in funding and managing government toll-road development, we expect such a shift to take a rather measured pace over the next two years." (ATI).