New | Unattractive returns a challenge for China PPPs
Partnerships face difficulty in luring private capital to ease local governments' debt burden
Beijing's efforts to promote public-private partnership (PPP) as a way to attract private capital to infrastructure projects and ease the debt burden on local governments face difficulties due to unattractive returns, analysts and an infrastructure firm said.
Wang Dehua, the chief financial officer of Zhejiang Expressway, said newly built toll roads in Zhejiang province were mostly loss-making and many non-listed infrastructure projects were not delivering high returns, but private enterprises would require at least an 8 per cent to 10 per cent rate of return when investing in such projects to cover their high financing costs.
Sun Jie, secretary general of the public-private partnership research committee at the China Public Finance Academy, a think tank set up by the Ministry of Finance, said private-sector investors should not expect very high returns from such projects. "Some of them are for public welfare," he said. "It would be unfavourable for the public if the returns are too high."
The ministry rolled out 30 "model PPP projects" for public tender at the end of last year, with total investments worth 180 billion yuan. Sun said 22 of them were finished projects held by local government financing vehicles that would be transferred to the private sector through transfer-operate-transfer schemes, aimed at shifting the debt burden.
Sun said the costs of financing PPP projects would rise when the debt-issuing body changed from local government financing vehicles to private firms.
"Special-purpose vehicles holding PPP projects have lower credit ratings than local government financing vehicles," he said.
State-owned enterprises, which can also participate as "private partners", would have a definite advantage when bidding for such projects because of their lower financing costs. In the case of Zhejiang Expressway, which is state-owned, its cost of financing was close to the benchmark rate, about 5.6 per cent for a one-year loan, after the rate cut late last year, Wang said.