Private capital plays a key role in China's urbanisation plan

Last year is likely to be remembered as a landmark year for China's new vision for urbanisation and the ramifications this has on the country's future economic and social development for years to come. The announcement of the National New-type Urbanisation Plan (2014-2020) on March 16, marked the country's first official plan covering urbanisation.

The scope of the plan provides not only much better insights into how the country is expected to develop but also potential opportunities that urbanisation on the massive scale envisaged may bring.

According to the plan, the urbanisation rate at the end of 2013 was 53.7 per cent. The target by 2020 is for the number of permanent urban residents to reach 60 per cent of the population. This would involve moving 90 million to 100 million rural residents.

Another objective is for 100 million migrant workers and permanent urban residents to obtain city household registration ( hukou) by 2020, representing 75 per cent of total permanent urban residents, which will increase demand on basic services.

The core theme of the plan is improving the quality of urbanisation with people as the focal point, which in turn drives many of the government's policies, especially in terms of development of basic services, social housing, transport, environmental issues, modernisation of industries and optimising city functions and layouts.

The infrastructure requirements required to cater for the new urban residents in small towns, small cities, regional cluster cities as well as continued development of the major cities, are immense and funding is one of the biggest challenges.

Throughout 2014, the central government has been increasingly vocal in its desire to see greater involvement of private capital in funding and managing infrastructure. The primary approach that is being promoted is PPP (public private partnership) where the public sector (i.e. government) and private sectors share risks, rewards and responsibilities for the success or failure of delivery of the underlying public service.

PPP is a long term contractual agreement between the public and private sector partners and can range from a simple operating contract to more complex forms where the private sector runs the service as standalone business; the key differentiator being the level of risk transferred between the partners.

Although the existence of PPPs in China is not new their use has not been widespread with government dominating the procurement, financing and operation of infrastructure assets.

However, the Ministry of Finance has been rolling out various measures to increase awareness of PPPs' benefits and wider applicability in China. On May 5 last year, I attended the first of a series of monthly PPP workshops arranged by the ministry's PPP Research Committee in Beijing, which showcased lessons learned from previous PPPs in China and internationally.

The key messages from that first workshop were that PPP is not merely a financing method but an innovative solution that combines management and governance to help with more efficient allocation of resources to help tackle the challenges of high local government debt and future urbanisation needs.

The significance of PPPs to China's infrastructure development has been underlined with the recent State Council and ministry announcements regarding investment and financing guidelines and the initial launch of 30 national level pilot PPP projects covering a range of urban infrastructure and public services.

The essence of PPP is to allocate risk to the party best able to handle such risk. Areas covered include design, construction, financing, operations, demand and regulatory aspects. PPPs can be considered when the public sector wants to deliver a new project or service or improve the efficiency and delivery of an existing service or to recycle capital in an existing project or service.

To make sure the benefits of involving the private sector are achieved, there needs to be better allocation of risk and incentives to perform in order to create better value for money than if the service was procured directly by the government.

Private sector expertise also brings opportunity for integrating the service needs with the design of the project, greater competition to drive efficiencies through setting appropriate commercial incentives and clearer delineation of responsibilities over the long term.

Characteristics of projects or services where PPP is more suited include the ability to charge user fees, an identifiable business or cost centre and limited integration with other public services.

The successful execution of PPPs in China depends on many factors but it is critical to find the right pricing model that incentivises the mobilisation of private sector capital. Refinement of the legal and regulatory framework to ensure the long-term involvement of government in monitoring and supporting the PPP agreements, thereby securing the confidence of the private sector in bidding for such projects, will also be key.

Stephen Ip is China lead partner, Government & Infrastructure at KPMG in Shanghai