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Chinese PPPs: The boom that wasn’t

Public-private partnerships have emerged as a key plank at a time when the country seeks to boost infrastructure while keeping debt in check. Sadly, it turns out they’re not very private.

Reading through Beijing’s 13th Five-Year Plan, which covers 2016 to 2020, you’d think a Chinese wall of capital will soon be descending on the country’s infrastructure. The asset class, indeed, continues to be seen as a key growth driver at a time when the economy is slowing down. The plan to achieve a 60 percent urbanisation rate by 2020, notably, will require investments of around 42 trillion yuan ($6.1 trillion; €5.8 trillion).

Increasingly, PPPs are being framed as a key ally in the country’s quest to meet this soaring demand. That’s been particularly the case since 2014, when a first batch of pilot projects, totalling 180 billion yuan, was rolled out. It was promptly followed by two other batches, the latest of which was worth 1.2 trillion yuan. By the end of 2016, China’s Ministry of Finance had 11,260 project proposals on its desk, worth over 13.5 trillion yuan. By some measure, 33 percent of them are now at the implementation stage – a brisk start if you consider that only 5 percent had reached that level in January 2016.

PPPs offer plenty of advantages to local governments, which form the bulk of counterparties for these projects. Most public-private schemes do not help governments deleverage, because contractual payments or subsidies still have to be booked as public debt. But the initial capital investment is shared with third parties, so there’s less to fork out upfront. And the longer lifecycle of PPPs – generally 10 to 30 years – compared to classic procurement models also helps smooth public authorities’ cash outflows.

Could PPPs be the Trojan horse that allows private money to own a greater share of the country’s infrastructure stock? That remains premature. While procuring authorities are embracing the model with enthusiasm, there is a catch: state-owned enterprises dominate the supposedly “private” end of the bargain. Under China’s guidance, PPPs are cooperative arrangements between governments and “social capital” to deliver public projects. The latter is an umbrella that includes SOEs, meaning these can act as capital providers in their own right – unlike in most other countries.

This point is eloquently made in a study released this week by Fitch, which analyses the sponsorship base of China’s pilot PPPs. The ratings agency found that out of all “demonstration projects” currently at the implementation phase, 55 percent had SOEs as social capital partners in 2016. That was especially true of the top 10 projects by size, where SOEs like China Railway Construction Corporation, China Railway Group and China State Construction Engineering featured prominently.

There’s an array of reasons for this, but mostly it boils down to investment performance. Chinese PPPs tend to generate returns ranging between 5 and 8 percent, which is rarely enough to entice private players. SOEs, by contrast, can source financing much more cheaply, enabling them to get better rewarded for their trouble. Why? Because banks see state-backed corporates as more stable, lower-risk borrowers. Private funds and financial institutions also tend to be weighed down by asset-liability mismatches, and lenders fear the pressure to refinance before projects start generating cash will cause some sponsors to collapse.

There is a lesson in this: if China really wants private sector participation to take off, it needs to help its members access affordable financing, either by incentivising banks or alleviating their burden through other means. It should also do more to clarify the legal framework, especially when projects flop. Failing this, China’s wall of social capital will remain mostly public.

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