PPP: A quiet but key step in China’s economic reform

Wednesday 29th October 2014 11:00 am

Public Private Partnership (PPP), currently creating a buzz in the Chinese shadow banking industry, but yet to reach mainstream foreign media. Maybe it’s the talk of large scale government infrastructures that puts people off, a development model now seen as outdated as calls grow for China to switch to a consumption driven economy.

But the key reform lies in the use of private capital in these government led projects. Following last year’s Third Plenum meeting, the Chinese government hopes to increase the power of the free-market, whilst reducing the size of government in resource allocation decisions.

One way of achieving this is through part privatisation of state owned enterprises (SOEs). But in the China privatisation model, the government still remains a large shareholder, whilst management and operation of projects can be handed over to the more efficient private sector.

However this structural reform will take years to design and implement, so a quicker way of achieving similar results, is to raise funds from private capital, and encourage more private investment in local government projects. The central government hopes this will improve operating efficiency, as well as reduce funding costs for debt-laden local governments (around 3 trillion dollars outstanding).

And this means a boost for private enterprises in the finance sector and shadow banking players, as they seek to bridge the gap between local governments and private investors. Profit can be made by initially acting as agents, but the government hopes this will then lead to the formation of a more mature finance sector, able to lower funding costs, and price/diversify risk effectively.

A senior Chinese banker that spoke with chiecon, emphasised this is not because the central government is worried about an overall lack of funds. Rather one of the main drivers of this reform is to “give private investors more investment opportunities, and guide them into more stable investment projects.” i.e. divert private funds away from riskier shadow banking assets, which day by day increase the risk of a collapse in China’s financial system. (A burden which most Chinese investors believe would be paid off by the state banks).

However as part of the government’s reform plans to encourage more stable and sustainable growth, it hopes to guide investment into key areas of development. Therefore foreign investors and financial firms should also take note, since not only does this mean greater access for Chinese private capital, but also means the door is opening wider for foreign funds to capitalise on China’s next stage of growth.

Below is a translation from a Xinhua report on the Chinese government’s latest announcement on PPP, and the target areas of development.

———-
Xinhua (2014/10/25)

China Premier Li Keqiang yesterday chaired the 66th State Council executive meeting, which focussed on key innovation in the investment and financing sectors, in particular to create more room for the use of efficient private capital.

This forms part of wider reform initiatives to break down monopolies and market barriers, to allow investors to earn reasonable returns under fair competition, and energise market forces. Other desired outcomes include stable and efficient investment, increase the supply of public goods, promote stable economic growth, structural adjustments (i.e. rebalancing between the public and private sector), and improving people’s livelihoods.

The meeting called for a greater push in financing innovation by promoting the public private partnership (PPP) model, whereby private capital is invested alongside public funds in large scale projects.

Five target areas for PPP as follows:

1. Attract private capital in hydro-electric and nuclear power projects; construction of cross regional electricity transmission, regional backbone electricity networks; connection of distributed power generation to the main grid and electric vehicle charging facilities.

2. Attract strategic private investors into telecommunications companies, and guide private capital investment into the roll-out and operation of broadband networks. Private capital participation in the construction of national civil aerospace facilities such as ground based applications using satellite navigation systems, and the research and development, launch and operation of commercial remote sensing satellites.

3. Accelerate private capital investment in railway projects. Encourage private capital investment in ports, inland shipping facilities and airport hubs, major airport construction, urban water and heat supply projects, sewage and waste water management, and public transportation. Municipal facilities can be managed and operated by private capital.

4. Support investment for ecological construction projects by rural cooperatives, family farms etc. Encourage private capital investment in agricultural operations, irrigation works, enjoying the same government policy treatment as state-owned or collective funds.

5. Introduce supporting policies to attract greater amounts of private capital into education, healthcare, elderly care, sports and culture.
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