The platform company is wholly owned by the local government, and its main responsibility is to finance the government and carry out the construction tasks arranged by the government. It is not an independent entity that operates independently and is responsible for its own profits and losses. Such as city investment, construction investment, trading, and so on. In fact, they are another identity of the government, and sometimes they even adopt a set of people and two brands. Platform companies are the main source of hidden debts, which need to be repaid with financial funds.
Platform companies often raise funds by issuing corporate bonds, trusts and financial leasing. And use the raised funds for land consolidation, infrastructure and public service facilities needed by the government. Once the financing scale is out of control, it may exceed the financial payment capacity. As representatives of local governments, platform companies often set up project companies with social capital to implement PPP projects.
Risks of local government financing platform companies
Since the reform and opening up, with the acceleration of industrialization and urbanization in China, the demand for local constructive financing has increased rapidly. Since 1990s, some local governments have begun to try to raise construction funds by establishing financing platforms. Generally speaking, combining the advantages of bank funds, government credit and market forces through local financing platforms has played a positive role in promoting local economic development, especially in strengthening infrastructure construction.
At the same time, however, local financing platforms have also spawned some problems that need attention, mainly because the scale of debt financing has grown too fast and its operation is not standardized; Local governments provide guarantees in violation of regulations or in disguise, and the government debt burden is heavy. The main reason is that these places are divorced from the actual situation of local economic and social development and blindly guide consumption. To strengthen the control and management of local debt risk, we should not only further improve the restraint mechanism of local government financing behavior, but also guide local governments to practice.
Reference to the above content: Baidu Encyclopedia-Local Government Financing Platform Company