Investors grow shy of China’s public-private projects
Just not enough return on their money
Investors have grown shy of China’s public-private partnership (PPP) schemes because of their lack of returns and legal protections for private firms.
PPP is a business model where private companies bid for and take over public projects — such as bridge or road building and running prisons — from local governments. Companies seek long-term profits through construction and operation of such projects.
China’s central government has been encouraging the model over the past two years to boost infrastructure investment and shore up slowing economic growth with private capital while not adding pressure to already heavily-indebted local governments.
Progress, however, is far from satisfactory.
Among 7,721 projects under the official PPP scheme, only 21.7 per cent of them had properly started by the end of March, according to the website of the Public-Private Partnerships Centre which operates under the finance ministry.
The value of contracted projects reached nearly 1 trillion yuan (HK$1.18 trillion) in the second half of last year, but in the first quarter this year, the contracted projects were valued at just 300 billion yuan, according to a research report by Minsheng Securities analyst Zhu Zhenxin.
In its latest move, the finance ministry and the National Development and Reform Commission issued a note on May 30 urging an “orderly” development of PPP through seven approaches including media promotion and enhanced regulation.
“There is a key issue unsolved. That is how to protect the private investors when local governments change their original plans,” Lu Zhengwei, Beijing-based chief economist at Industrial Bank said.
When a company invests in a bridge-building project by a local government, the two parties may agree that the city only needs one bridge. Ten years later, when there is growth in car ownership, the government decides to build another bridge. At that time the company can do nothing but see its income from bridge toll slide, Lu said.
“Private investors need a clear future view of urban planning, but most local governments do not have a consistent plan. They themselves can not foresee how fast a city will change,” Lu said.
Most PPP projects happen in developed countries, although developing countries are eager to take the same model on to make full use of private capital, Lu said.
“This kind of ‘government default’ should be allowed for the sake of city development, but we need a system to protect private companies,” Lu said.
Logically, a long-term investment generates low but stable returns, with comparatively low risk, but currently that is not the case for PPP.
In a developing economy like China’s, municipal infrastructure changes so quickly that private firms find it difficult to foresee the return of their PPP investment, Lu said.
In some mainland cities, a change of mayor will being a change in development plans.
Regulation is required to assure private firms reasonable compensation if they end up not getting paid. Arbitration is necessary, Lu said.
Liao Qun, chief economist at Citic Bank International in Hong Kong, said slim returns on public projects also dampened the will of private firms to participate.
“Many infrastructure projects are for the public good and offer low returns for operators. It’s hard for private firms to earn enough profit to cover their original expenses,” Liao said.
The average return of PPP projects is around 8 per cent, which is not really attractive for private firms when the interest costs they have to pay are included, Minsheng Securities’ Zhu said.
A project in populous and developed regions, such as the Yangtze River Delta, is likely to have higher profitability, but most PPP projects are in central and southwest China, Liao said.
Projects in Guizhou, Shandong, Yunnan, Henan, Sichuan and Jiangsu provinces made up 51.9 per cent of total projects in terms of asset worth.
The pricing system is not sufficiently market-driven either, Liao added.
In the past, China’s infrastructure projects belonged to state-owned enterprises, so the pricing process was completed among government-owned bodies and the profitability of the projects was uncertain.
“Private firms see profit as priority,” Liao said. “It may take some time to form a suitable pricing system for the PPP projects.”
The Chinese government has launched a fact-finding mission to boost private investments amid an economic slowdown, as private investment rose only 5.2 per cent in the first four months, in sharp contrast with a 23.5 per cent rise from state-owned enterprises, the South China Morning Post reported last week.
The Chinese market, in general, has an excess of capital, Liao said.
“For some property developers, they could consider investing in PPP projects if they are not sure about the future of the property market,” he said.
The precondition, however, is that private investors remain confident about the Chinese economy and believe it will grow and the risks are controllable.