Professional Interpretation

Abstract： In China, sports venues are mostly invested by government directly, so that the cost of construction and operation is vast and the financial burden of government is increasingly. Thus, choosing an effective financing mode is significant. Based on the introduction of PPP modes and related issues, Corporate Business team of Beijing Docvit Law Firm further discusses the use of PPP modes for the construction and operation of sports venues.

Ⅰ. Introduction of sports venues and PPP modes

Sports venues, the generic terms of a kind of environment which provides spaces and subsidiary facilities for people to play various sports activities, are  key components of infrastructure for the development of cities. Through government-led construction, sports venues have social and economic functions to meet the needs of all kinds of sports events, professional trainings and public fitness and entertainment. In accordance with size, the types of sports venues are as below:

The object of this article only refers to large and medium-scale sports venues which are with large investment, good facilities and high maintenance cost. Due to small-scale sports venues do not need huge investment, PPP modes are not proper for them. Moreover, as sports facilities are spread all over communities and public places, people’s basic requirements of daily fitness activities are met. Therefore, in this article, discussion is not including small-scale sports venues.  

PPP, an acronym for the English initials of Public-Private-Partnership, is a new type of financing mode. Under PPP modes, by signing concession agreement, government cooperates with private capital to build public infrastructure projects. There are two benefits of PPP modes, the first is to lessen financial burden and the second is to improve projects operational efficiency.

Due to the rapid development of China’s economy and the growing awareness of national in physical exercise, sports industry has also developed in a high speed. In addition, the construction scale, specifications and operation management of sports venues have all achieved tremendous development. However, by reasons of high capital investment, high maintenance cost and high administration cost, there are still many problems in the development of domestic sports venues, such as below:

A. Lack of capital and limited financing options.

B. Difficulties in operational management.

C. With high maintenance costs, development faces obstruction.

D. With single function, utilization is low.  

Ⅱ. Feasibility analysis of PPP modes in sports venues

The mainly operation patterns of sports venues are self-management of administrative agencies, management of public institutions, management based on lease contract and management with enterprise-style. Under self-management of administrative agencies and management of public institutions, sports venues are with a property of public ownership and applicable to provide national fitness services of a relatively high level of publicity. Sports venues which are managed by lease contract, are mainly in private property right and suitable for services with relatively lower publicity such as competitive sports and artistic performances. Sports venues which are in enterprise-style not only play a strong social welfare but also take into account economy, and most of them are comprehensive large-scale ones, proper for all kinds of sports services.

But in practice, it is prone to the phenomenon that there is non-separation between government and enterprises as sports venues are invested only by government. Being an innovative mode, PPP is becoming a better choice for most large-scale sports services as it not only plays the administrative advantages of public sector, but also draws on strengths of private sector’s funds, technology, and management efficiency.  

According to Operation Guide of PPP Mode, stock and newly-built infrastructure projects are currently mainly used operation modes like BOT (Build-Operate-Transfer), TOT (Transfer-Operate-Transfer), O&M (Operations & Maintenance), MC (Management Contract), BOO (Build-Own-Operate) and ROT (Renovate-Operate-Transfer). Among these modes, BOT is the most popular one and derives many new patterns, such like BOOT (Build-Own-Operate-Transfer) and so on. For sports venues projects, BOT、DBFO and BTO are currently used more often.

Participating in the construction of sports venues, government can play administrative advantages. Generally speaking, large-scale sports venues cover wide area and have many complex facilities. Public sectors are able to conduct overall plannings and functional layout to ensure the sustainable development and utilization of site resources. In addition, public sectors may seek more opportunities for private sectors to host large-scale sports events or activities and may also help private sectors to expand operational benefits of sports venues.

On the other side, private sectors can give full play to the advantages of capital, technology and management to comprehensive large-scale sports venues.  Introducing private sectors to participate in the operation, management and maintenance of sports venues can not only reduce government’s financial pressure and risks significantly, but also ensure the efficient use of venue resources and achieve better economic benefits.

National Stadium, which is located in the southern part of the central area of Olympic Park, is a large-scale stadium in Beijing. It was built and put into use in June 2008. National Stadium served as the main stadium of the 29th Olympic Games and took charge of the functions of opening and closing ceremonies, track and field events and football finals. It is one of the most famous sports construction and Olympic heritage in Beijing. After the Olympic Games, National Stadium is positioned as a large-scale sports center which integrates sports, fitness, recreation, tourism exhibition and shopping. As a comprehensive stadium, National Stadium can host special competitions (such as World Championships and international football matches), various regular events (such as intercontinental competitions, national sports games, youth sports games, etc.), diverse comprehensive services (such as artistic performances, non-commercial activities of government, corporate group activities, business exhibitions, tourism and catering, etc.) and social welfare activities.

National Stadium is the typical application of PPP mode in China. In 2003, Beijing municipal government called for bids openly and the union of CITIC Group, BUCG and Golden State (hereinafter refer to as the union) won the bidding. Then, the union signed Concession Agreement, National Stadium Agreement and Joint-Operating Agreement with Beijing municipal government, Olympic Committee and Beijing State-Owned Assets Management Co.,Ltd. (hereinafter refer to as BSAM) separately. The total construction cost of National Stadium is about RMB 3.4 billion, 58% of which were invested by BSAM on behalf of the government and the other 42% were paid by the union. Moreover, the union and BSAM formed National Stadium Co.,Ltd. National Stadium Co.,Ltd was granted the franchise rights for 30 years by Beijing municipal government and was responsible for the financing, construction and operation of National Stadium. During the construction period, Beijing municipal government was responsible for providing venues, facilities, funds and policies supports. Olympic Committee was responsible for proposing requirements about events and venue functions.

During the franchise period, the ownership and the disposition rights of National Stadium belong to Beijing municipal government. BSAM gives up its 58% shares and does not participate in dividends within 30 years. However, according to Joint-Operating Agreement, BSAM has the right to supervise National Stadium Co.,Ltd.’s operation (including construction investment, operation maintenance and repair, etc.) and the right to protect and control public safety and interests. The union enjoys the right of operating and earnings. After the expiration of concession, National Stadium will be handed over to Beijing municipal government.

Guangzhou Gymnasium is a large-scale indoor stadium which was invested by Guangzhou municipal government to undertake the “9th National Games”. It was completed and put into use in June 2001, taking on the functions of closing ceremony and the competitions of basketball and gymnastics. Guangzhou Gymnasium covers a total area of 240,000 square meters and has a total construction area of 100,000 square meters. It is mainly composed of Hall 1 (the main venue, with 10,000 seats), Hall 2 (training gym, with 4,000 seats), Hall 3 (sports center) as well as residential and administrative buildings, commercial facilities and parking lots. The functional positioning of Guangzhou Gymnasium is a comprehensive multi-function stadium which integrates large-scale sports events, artistic performances, fitness and recreation, conferences and exhibitions.

Guangzhou Gymnasium is the stadium that used BOT mode earlier in China. In 1998, Guangzhou Pearl River Enterprises Group (hereinafter refer to as Pearl River Group) won the bid. The total investment of Guangzhou Gymnasium was about RMB 1.3 billion. Guangzhou municipal government invested about RMB 700 million, accounting for 53.8% of the total investment and Pearl River Group invested for 46.2%.

With signing concession agreement, Pearl River Group was granted the franchise rights for 30 years by Guangzhou municipal government and was solely responsible for the construction, operation and maintenance of Guangzhou Gymnasium. After the construction, the property of the assets is owned by Guangzhou municipal government and Pearl River Group together. In details, the ownership of the sports competition places belongs to Guangzhou municipal government and the ownership of the commercial service places belongs to Pearl River Group. Guangzhou Pearl River Sports and Culture Development Co., Ltd. (hereinafter refer to as SPV) is in charge of the operation of Guangzhou Gymnasium.

During the franchise period, SPV is responsible for its own gains and losses and has the operating right of Guangzhou Gymnasium and its affiliated facilities. Guangzhou municipal government no longer pays management fees to SPV, but they should be repaid in accordance with the terms of contract. Furthermore, Guangzhou municipal government keeps the right of controlling, supervision and final disposition. The athlete village is sold as commercial residential buildings and the earnings belong to SPV.

Ⅲ. Analysis of Related Risks 

A. Policies Risk

Policies risk means the profitability of one project is affected by changes of government policies during the implementation of that project. In order to minimize policies risk, the signing and accomplishing process of concession contract should be transparent, open and fair.

B. Economic Risk

Economic Risk is also called financial risk. This kind of risk happens mainly due to the change of monetary interest rate, foreign exchange rate and inflation rate in one country. If influenced by economic risk, one project may suffer losses.

C. Technical Risk

Technical risk mainly refers to the risk that one project cannot be used successfully due to some design defects in early stage or some problems of technical practicability. For large-scale stadiums, designs in early stage are extremely important. Therefore, avoiding technical risk effectively will bring huge economic benefits to sports venues.

D. Operational Risk

Operational risk mainly comes from the uncertainty of one project’s financial benefits. During operating process, one project may be effected by various factors so that the profitability often fails to meet the expected level, resulting from operational risk.

Ⅳ. Conclusion

PPP, as a financing pattern, is an effective way for large-scale sports venues to raise funds. Based on analysis, Corporate Business team of Beijing Docvit Law Firm considers that PPP modes could lessen financial burden of government and broaden investment channels for private capital. Both government and private capital should take a win-win attitude and adopt effective measures to manage risks so that the construction of venues can proceed smoothly.