In China, Public-Private Partnerships Are Really Public-Public

  • Government is promoting PPPs to boost infrastructure funding
  • Most project partners turn out to be state-owned companies

China’s effort to promote public-private partnerships to fund roads, bridges and railways and keep a lid on rampant debt growth is succeeding in luring companies to the projects. Problem is, they’re mainly state-owned.

Two years into the PPP push, the majority of partners in the projects have turned out to be state-owned enterprises, according to analysts at Fitch Ratings Ltd., Bank of America Corp. and Oxford Economics Ltd. The upshot: while debt pressure will be relieved for local governments, it’ll just end up on the books of another arm of the state.

"PPP projects are not by themselves a panacea," said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong. "PPP projects could run into the same problems about debt accumulating as the result of projects that are not economically or financially viable."

China is hooked on debt, challenging the long-term sustainability of its resilient growth. The credit-to-gross domestic product ratio rose nearly 100 percentage points in the last eight years to 260 percent by the end of 2016, according to Bloomberg Intelligence estimates.

More than 60 percent of the nation’s non-financial corporate debt traces back to state-owned enterprises, crowding out more productive private borrowers, according to a recent report by Wang Tao, head of China economic research at UBS Group AG in Hong Kong. Local government borrowing, accounting for most public debt growth since the global financial crisis, continues to expand rapidly, she wrote.

While it uses the English-language abbreviation PPP, China defines the non-government partner as "social capital" instead of "private capital," which opens the door for state-run firms. More than 11,000 such projects totaling 13.5 trillion yuan ($2 trillion) had been registered as of end of 2016, Ministry of Finance data show.

Among implemented demonstration projects selected by the government to show how PPPs should work, about 55 percent of the social partners are state-owned enterprises, Fitch said.

The SOE share is even higher according to analysis of a larger project database cited by Bank of America, which sees state companies taking up 74 percent of the projects by value.

“Most PPP investment may ultimately transpire as government debt, similar to those undertaken by local government funding vehicles,” Bank of America strategists led by David Cui wrote in a report this month. Investors may underestimate the Chinese government’s debt level and inflation risk due to the additional credit associated with PPP, he wrote.

Low returns, soured projects and deep-rooted suspicion between entrepreneurs and the government have contributed to the reluctance of private involvement.

Cheaper Financing

State firms are preferable comrades as they tolerate lower returns and get cheaper financing, said Liu Yuting, associate director of corporate research at Fitch in Beijing.

A typical example of such an alliance: Wuhu city in the central province Anhui wants to upgrade its public transit system by building two metro lines totaling 46.8 kilometers. The builders will have rights to operate and collect revenue from the rails for 27 years.

The government, unwilling to pay for everything on its own, published an announcement to attract "social capital" partners which can supply part of the 14.6 billion yuan for the rails.

Who took the bid? China Railway Group Ltd. and CRRC Corp. -- both state-owned groups directly administered by the central government. Wuhu city will hold 30 percent of shares in the new joint-venture in charge of this project, while subsidiaries of CRRC take 37.5 percent and China Railway account for the remaining 32.5 percent, according to the companies’ stock-exchange discloses.

China Gezhouba Group Co., China State Construction Engineering Corp. and China Communications Construction Co. are among others to disclose participation in PPP projects.

Authorities are aware of the low private take up. They’re considering offering more ways to raise funds for such projects. Regulators gave the green light last month for PPPs with at least two years of operations and stable cash flows to sell asset-backed securities.

Some private firms are getting involved. Sewage treatment provider Beijing Originwater Technology Co. sees the PPP an opportunity to drive sales, an executive told Bloomberg.

"The government will try to open the projects further to foreign companies and lower the barrier for private entities," said Ding Jianchen, professor of public finance at University of International Business and Economics in Beijing. "More private companies will join. They will realize that in China, you can only make money working with the government."