Keeping the 'private' in PPPs in the PRC

Published on Wednesday, 31 August 2016

Published by Craig Sugden on Wednesday, 31 August 2016

Construction workers on a bridge in the PRC.
Construction workers on a bridge in the PRC.

The Ministry of Finance (MOF) of the People’s Republic of China (PRC) pointed out this month what is holding back private investment in the country’s booming public-private partnership (PPP) program, under which more than 9,000 PPPs worth almost $1.6 trillion are being developed or have just been signed.

Sun Xiaoxia, Director General of the Finance Department, who is leading MOF’s work on PPPs, explained that the private sector still has reservations about profitability and a lack of policy clarification. In July, the PRC State Council also remarked that many private companies were reluctant to join PPPs for fear their investments will be at risk.

Despite these reservations, expectations of low private sector participation in the PRC’s new PPPs are actually proving to be overly pessimistic. Foreign investors were very active in the 1990s when PPPs first took off in the PRC, but state-owned enterprises (SOEs) have been dominating PPPs since the early 2000s. Much of the PRC’s infrastructure is delivered by SOEs, and they were expected to capture much of the boom in PPPs. But of the PPPs signed in the first half of 2016, 39% had private partners.

More can be done, nonetheless, to keep the private sector in PPPs and expand its participation.

A good target would be for the private sector to contribute 60% of PPP investment, which is the private sector’s share of economy-wide investment in the PRC. The main reason for the target would be to improve public services and thereby generate development opportunities. Competition among efficient operators with clear incentives to perform, and penalties for not doing so, would benefit the general public by lifting the quality of public services and also lower the cost of those services. Mobilizing new sources of finance would allow delivery of public services that both offer value-for-money and are fiscally affordable, but are beyond the reach of local government budgets at present.

To attract the private sector, the private operator needs to be given a fair chance of competing for PPPs and then of earning the profit required to recover their investment. A number of new measures could be put in place quickly to do so.

Firstly, tighter restrictions could be placed on non-competitive procurement so that open, competitive bidding is used. This would help create a level playing field for the private sector that would provide the confidence to bid for PPPs against SOEs. Competition would also help ensure that the winning bidder provides the best value-for-money.

Secondly, the adoption of a broad-ranging concession or PPP law could provide the private sector enhanced clarity and stability, both important triggers of investment. After being first proposed in the 1990s, such a law is now being considered by the State Council.

A single law would provide a unifying framework for the PPP program and help overcome uncertainty and differences between existing regulations. At present there is actually a PPP stream and a separate concession stream, without a clear distinction between the two. This is confusing and inefficient. A single law would provide a vehicle for important reforms, such as strengthening the legal standing of PPP agreements, addressing institutional barriers, protecting the rights of lenders, and lessening the fiscal risk from PPPs. A new law would be most effective if backed up by extra efforts to ensure timely enforcement by the courts and regulators of investor rights. Stronger laws, regulations, and enforcement would underpin respect for the legitimate interests of private investors.

Thirdly, more emphasis could be placed on project quality. Stricter checks on project quality, centered on achievement of value-for-money, would help clarify what the private sector will invest in, and how they will recover their investment. Without such checks, some local governments may compromise project quality in the rush to secure signatures on PPP agreements. Poorly prepared PPPs inevitably create problems over the long period of implementation such as service disruptions, disputes, fiscal problems, etc.

Adopting project development funds used in many other countries could also help by standardizing project development, and ensuring that minimum standards of project development are met. Good PPP programs in other countries employ a range of tools to ensure the government achieves its target results. The PRC has made rapid progress in recent years in developing its own tool kit. Now is a good time to pick up some more.

The State Council recently pointed to the potential imbalance between private investors and SOEs as a major issue for the country’s PPPs. It is impractical to exclude SOEs from the PRC’s PPPs, as doing so would rule out many good service providers and reduce competitive pressures. It is, however, important to keep supporting the private sector so as to curb the past dominance of PPPs by SOEs. This is both doable, and in the public interest.