Subsidies needed to sweeten infrastructure projects

Government incentives are needed to attract private capital into state-owned infrastructure projects due to lower returns, say analysts

PUBLISHED : Friday, 25 April, 2014, 12:45am
UPDATED : Friday, 25 April, 2014, 3:35am

Beijing's move to allow private investment in 80 projects marks a significant step towards breaking monopolies but high costs and unattractive returns will dampen private firms' interest, say analysts.

Returns from investment in infrastructure projects are low and the gestation period too high, which might deter private companies from joining, said Xu Hongcai, director of the information department at the China Centre for International Economic Exchanges, a government think tank.

The opening up of more projects to private capital is a big step towards reform, but it would need more government incentives and subsidies to make the policy work, he said.

Eighty new public infrastructure projects, currently monopolised by state-owned companies, will be opened to private investment, it was decided at a State Council executive meeting chaired by Premier Li Keqiang on Wednesday.

The projects range from railways, port construction, IT infrastructure, clean energy and oil and gas pipelines, Li told the meeting. The move is in line with the country's reform plan to allow more market forces in the economy.

Utilities, airports and oil and gas exploration sectors would be opened to private capital in the future, said Li at the meeting.

Despite the government's moves to allow more private investment, it would take time to see the effect as it is not easy to break the vested interest of state-owned companies, said Raymond Yeung Yue-ting, a senior economist at ANZ Banking.

Some sectors or projects already opened up have turned out to be unattractive, Xu said, adding that more government support is necessary.

Entrepreneur Yuan Yafei of Sanpower Group, who bought a 30 per cent stake in brokerage Jintai Futures controlled by state-owned Guoxin Asset Management in 2011, last month said he had not received a dividend from Jintai.

Meanwhile, oil giant China Petroleum & Chemical Corp has capped shareholding for private firms at 30 per cent when it decided to allow private investment in its fuel marketing division in February.

For the new projects thrown open to private capital, the government could provide some subsidies to private players, Xu said. For example, the government should consider granting private companies in railways concession rights that would allow them to generate long-term cash flow by not limiting their investment in building infrastructure, he added.

Yeung said huge investment costs and the advanced technology needed would also create hurdles for private companies. "Domestic private firms could be allowed to work with foreign companies in joint ventures in some monopolistic projects."