Public-private partnerships (PPPs) will eventually become the main funding format for China’s infrastructure projects in the years up to 2020, according to Fitch, with the model likely to help construction firms expand their order books.
Before that trend truly emerges, though, China is going to have to move on from the standard framework in which PPPs are currently nurtured.
Fitch warns that, for the time being, there is still a significant preference among China’s local governments for partnerships involving state-owned enterprises (SOEs).
In the rating agency’s assessment, this is because returns on most PPP projects – typically between 5% and 8% – lack appeal in the eyes of private investors.
However, they tend to be sufficient for SOEs, which enjoy lower financing costs.
Fitch points out that PPPs can help Chinese local governments invest in more infrastructure investments, as the initial stake is shared with ‘social capital’.
In China, that term refers to capital from the private sector – including SOEs, but excluding local-government financing vehicles.
However, in their current form, PPPs do not help local governments deleverage, because local governments’ contractual obligations to procure the service or to subsidise projects are still considered public debt.
Plus, Fitch notes, loss absorption for private investors in the event of project failures remains untested, as China lacks the relevant legal machinery for bringing and hearing cases of that nature.
With all that in mind, the rating agency’s message is that China still has significant work to do to pave the way for a more favourable climate in which PPPs with large components of private investment will thrive.
There are, though, signs that improvements are already under way.
Around the time that Fitch published its opinion, China’s State Council unveiled plans for a major PPP boost focused specifically on rural infrastructure projects, with the aim of narrowing the urban-rural gap.
According to China Central Television, Tang Renjian – deputy director of the Council’s Central Rural Work Leading Group – has confirmed that the government will allocate 3.4 trillion yuan ($495.2bn) to these PPPs up to 2020.
That funding will be dedicated towards sweeping renovations of road, water, electricity and communications services in rural areas.
At this stage, however, only one third of the funds have been secured – so the government is looking to step up the involvement of private investors.