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A new report from Fitch Ratings predicts public-private partnerships will serve as the main financing model for China’s local-government infrastructure projects in the coming years – but for now, at least, the “private” component of those tie-ups is typically state-run.
Fitch expects adoption of the public-private partnership (PPP) model will help Chinese construction companies to expand their order books in the period between now and 2020, potentially providing greater stability to the sector. That might help compensate for policymakers’ moves last year meant to cut off developers from China’s bond market as part of a clamp-down on property market speculation.
But the ratings agency adds that state-owned enterprises (SOEs) have emerged as the main partners for local governments thanks to low returns of around 5 to 8 per cent that usually make these projects unattractive to private firms.
It also notes that SOEs are viewed by local governments and banks as more stable partners because their state backing means they can stand to take a hit if a project goes south. Private firms are less resilient, Fitch says, because “[l]oss absorption for investors in the event of project failures remains untested as China lacks an established legal framework to deal with project failure.”
Template PPP agreements for resolution of disputes between local governments and private firms do, in fact, exist. But private firms are often wary of participating in such partnerships because they would be vulnerable to abuse from local governments and likely to receive limited legal protection from local courts in the event of a dispute, according to analysis published last year in the People’s Court Daily, a state-run legal newspaper.
Nor will PPPs help with much-needed deleveraging of local governments, since their contractual obligations to procure services or subsidise projects “are still considered public debt”. Rather, the chief benefit of the structure could be smoother local government budgets thanks to longer project life cycles, according to Fitch.
Yet if PPPs do become the main model of infrastructure finance in China as outlined above, they would entail local governments hiring state-owned firms for low-profit undertakings underwritten by largely state-owned banks, all relying on implicit guarantees from Beijing to offset project risk. Where exactly actual private firms might ultimately fit into such partnerships remains an open question.