State-owned enterprises, rather than private investors, have emerged as the dominant force in Chinese PPPs, which will serve as the main financing model for infrastructure investments in the country before 2020, according to Fitch.
The rating agency says returns on most PPP projects, typically standing at between 5 and 8 percent, are not appealing to private investors but are sufficient to SOEs, which enjoy lower financing costs. In addition, local governments and Chinese banks tend to view SOEs as more stable, longer-term partners.
What's more, loss absorption for investors in the event of project failure remains untested as China lacks an established legal framework to deal with such events, Fitch added.
The use of PPPs in China is expected to help smooth out local government budgets by introducing “social capital” – which refers to capital from the private sector, including SOEs but excluding local governments’ financing vehicles – into projects with much longer lifecycles than those using the traditional build-transfer model.
However, the framework does not help local governments deleverage as their contractual obligations to procure the service or to subsidise projects are still considered public debt.
China’s PPP programme had 11,260 projects registered in the data base managed by the country's Public Private Partnerships Centre, as of last December. Funding all of them will require a total investment of 13.5 trillion yuan ($1.96 trillion; €1.86 trillion).
A subset of 1,351 schemes, representing 2.2 trillion yuan of investment, have been awarded and have now entered the next phase of development, according to the PPP centre’s latest quarterly report.
The PPP centre also pointed out that 277 pilot projects in the programme have registered their financial details with the centre. It reveals that some 163 local private investors, 16 from Hong Kong, Macau and Taiwan, and six overseas companies are involved in these projects, outnumbered by the 232 investors with a state-owned backgrounds that also participate.