Author:ZHAO HONGRUI

　　With continued economic growth expected over the next decade in China, basic infrastructure will remain one of the most attractive areas for domestic and foreign investors.
　　Construction of roads, especially toll roads, has become a lucrative business. Returns on investments, in most cases, are guaranteed by the steadily flowing revenues from fees paid by motorists.
　　The Road Law of China, promulgated in 1997 by the Standing Committee of the National People's Congress, or China's parliament, formally recognized toll roads and granted investors, whether domestic or foreign, the right to charge fees.
　　The law, in essence, gives investors the incentive to participate in the sector.
　　As road construction takes a relatively long time and requires huge funding, diverse financial sources - such as government investments, bank loans, stock or corporate bond issues and allowing investors to charge tolls - must be found.
　　Investors select the financial vehicle after assessing the project's merits, analysing the financial cost of each funding source and examining legal and policy restrictions.
　　Based on our experience, financial leasing could be a new funding vehicle in certain cases. It could be more practical and/or less expensive than other funding sources.
　　A basic form of financial leasing used in road financing is the so-called sale-and-lease-back system, which has been recognized by China in numerous laws and administrative regulations.
　　The funding source was defined in the "Measures Concerning the Administration of Financial Lease Companies," issued by the People's Bank of China, as a form of financial lease in which a person sells the items he owns to another and then leases them back after signing a contract.
　　The person, as seller/leasee, realizes his/her fixed assets; the other party, as purchaser/leaser, receives profits from rent on a regular basis.
　　Such arrangements may prove especially useful for a company operating a road but is searching for funds.
　　Chinese laws allow investors in toll roads to transfer their fee-collection rights to a third parties to recover their investments, which could otherwise take years to recoup.
　　Many road companies have used this system.
　　The third parties, however, are prohibited from transferring the franchise rights to others.
　　That prohibition is outlined in Article 26 of the "Measures Concerning the Non-free Transfer of Road Operative Rights" issued in 1996 by the Ministry of Communications.
　　The third parties must turn to other funding sources when trying to raise money for road construction.
　　Bank loans could be an ideal funding source, especially since interest rates have been falling in recent years.
　　Other obstacles exist that might not necessarily fall under Chinese law.
　　For instance, domestic banks often impose on borrowers a wide range of use restrictions on loans. 　　The banks often are critical of credit standing.
　　The tightening of bank credit in recent years has compounded the issue. Also, domestic banks generally are reluctant to grant loans to companies from other regions.
　　For example, a Beijing-based bank might be hesitant to extend a loan to a Shanghai-based firm.
The banks, plagued by bad loans, might be justified, as they are trying to minimize risks. But they are squeezing funding channels.
　　Regarding stock or corporate bond issues, there could be many more legal and policy restrictions, and costs of funding could be very high.
　　A third party might be able to avoid such restrictions and raise funds through sales-and-lease-back system.
　　Based on our experience, a road company may sell its fixed assets to a financial lease company, and then lease them back.
　　The road company pays rent regularly to the leaser, with the franchise right as pledge.
　　Property listed in the fixed assets is transferred back to the road company when the lease expires.
　　The road company receives low-cost funding almost immediately, and avoids restrictions over the transferral of the franchise right.
　　Financial lease companies are more inclined than domestic banks to participate in this funding mechanism, as they are less locally focused and face fewer legal and policy restrictions.
　　Also, financial lease companies' interests are largely secured by their holding the property in the leased items rather than by third party guarantees.
　　Given the nature of such financial arrangements, financial lease companies are unlikely to get involved when the roads are being constructed.
　　Road construction projects are generally supported by loans or direct investments.
　　The author is a partner in Beijing-based Zhong Sheng Law Firm.

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