By Ai Chu

Last month, the National Development and Reform Commission (NDRC) released the list for a third round of private-public partnership (PPP) projects worth RMB 2.14 trillion. This round of PPP projects focuses on promoting traditional infrastructure construction, covering 1,233 projects in seven major areas: energy, transportation, water conservancy, environmental protection, agriculture, forestry, and urban projects. China’s government is vigorously promoting PPP projects, considering them to be the most important domestic investment projects.

What Is PPP?

A private-public partnership is a contract signed between private companies and government entities on long-term public projects. Usually, PPP projects are financially driven by the private parties, which receive financial support or other forms of subsidies from a  partnering government entity. For instance,  the Management Measures for Special Funds for Financial Development, released by the Ministry of Finance (MOF) on September 28, says that the government will give reward incentives to private companies that invest in PPP projects based on their investment amount.

Heavily indebted governments rely on PPP projects to fill their funding shortfall. Developing countries, in particular, favor the PPP model, because it can divest risks and financial burden to the participating private entities, provide more sustainable funding to highly costly infrastructure projects, and stimulate private companies’ interests in investment in the public sector.  

PPP in China

The PPP model started gaining attention in 2014, when China made 30 pilot PPP projects public. In September 2015, China released the first official list of 1,043 PPP projects with a total investment of RMB 1.97 trillion. Only three months later, China launched the second batch of 1,488 PPP projects worth more than RMB 2.26 trillion. In September 2016, China introduced the third list of PPP projects with total investment jumping to RMB 2.47 trillion.

China’s government is promoting PPP projects to combat slowing economic growth and declining private investment. The large release of projects and increase in investment also shows the government’s urgent need for funding support from private investors. According to the latest data released by the National Bureau of Statistics (NBS), China’s private fixed-asset investment grew 2.1 percent in the first eight months of 2016. This figure is down 3.6 percent from the same time last year.The continuous drop in private investment demonstrates the impact of China’s economic slowdown and the private sector’s lack of confidence in the macro-economy. As a result, China is facing increasing pressure on its public spending budget, which drives to government to create new fiscal policies to attract private investment in public projects.

China’s PPP projects use a reward replacing subsidy system. Instead of adopting the traditional model, which provides subsidies before a project is launched, the Chinese government gives direct cash rewards to investors during the construction process or after projects are completed. This system is used to stimulate investment incentives while ensuring investors adhere to the authorized construction plan and construct high-quality works before receiving rewards.

Achievements, Problems & Prospects

While China’s PPP model is hailed by many as an innovative approach to cope with the lingering economic challenges, it’s not universally praised.  Most criticisms regard the degree of government influence in PPP projects. Completed PPP projects show that the Chinese government’s role is fairly strong. There are a few cases in which the government arbitrarily changed the original plan during construction or failed to protect its private partners’ rights during legal disputes. Due to the government-driven nature of the PPP model, it is difficult for private companies to retain a strong position, especially in arguments against the government.

Despite existing problems about governmental relations, so far, the PPP model has been able to attract an increasing number of private investors to join public projects. According to NDRC data, as of July 2016, 619 of the first batch of PPP projects were signed within one year. Others, from the second and third batches, which were recently released, are under negotiation.

So far foreign investors are not participating as actively as domestic companies in China’s PPP projects. Foreign investors participate at lower rates due to concerns about the lack of accurate information about China’s infrastructure system, for example. However, as projects from the first and second batches start construction, it is expected that the working scheme will gradually mature based on previous experiences. Moreover, as the recently published Five-Year Plans (2016-2020) for multiple sectors show, deepening urbanization and modernization is one of the Chinese government’s core priorities. This gives western companies, which are still much more advanced in technological innovation, abundant investment opportunities. The ongoing industrialization and infrastructure improvement in third and fourth tier cities, where many PPP projects are located, will provide sufficient and sustained investment momentum for both domestic and foreign investors for decades.

 

About the Author

Ai Chu is the business advisory services intern for the US-China Business Council’s Washington, D.C. office.

Posted by Ai Chu