PPP financing able to mobilize private capital?

Confronted with mounting local government debt and a pressing need to fund urbanization, China is looking at a new style of finance to leverage private capital.

On Wednesday, China's State Council released an investment and financing guideline which emphasizes the significance of public-private partnership (PPP) in mobilizing private capital.

The financing mode refers to long-term cooperation between governments and private companies on infrastructures or public services. In most cases, PPP projects are funded and operated by private investors and supervised by local governments.

This was the second time PPP was promoted by the central authorities within two months. In September, the Ministry of Finance issued a notice and decided to expand pilot projects based on PPP.

Sources with China's top economic planner the National Development and Reform Commission told Xinhua that a detailed guideline on PPP will be unveiled soon. The first batch of 32 national-level pilot projects will also be launched.

PPP came to the spotlight at a time when China is grappling with huge local government debt during rapid urbanization.

The funding method has existed since the 1980s, though public money and debt securities issued by the government have been the main channel to fund infrastructure development for decades.

But the increased scale of investment required means government finance alone is not sufficient with public institutions generally lacking qualified people.

"Government-invested projects usually had low return rates and the way of operating them were primitive," said Jin Yongxiang, general manager of Beijing-based consulting firm Dayue.

These drawbacks can be avoided using PPP. For that reason, it is increasingly favored by policy makers, according to Jin, an experienced consultant on PPP projects.

According to accounting firm KPMG, PPPs are set to drive infrastructure projects and help accelerate urbanization in China.

Guan Qingyou, an economist with the Minsheng Securities' research institute, predicted the financing need for urbanization nationwide will rise to about 42 trillion yuan (6.8 trillion U.S. dollars) by 2020.

Meanwhile, China has to deal with billions of yuan in local government debt accumulated over the past two decades.

Put simply, China is counting on PPP for a new way of supporting urbanization, according to Guan.

But analysts said PPP initiatives may only be encouraged by the government, with private investors hesitating because investment in infrastructures is usually long and sometimes risky.

Often the government enters into investment projects to see how much they can solicit, but investors are more interested in how much they can earn.

To lure investment, some local governments have promised returns as high as 30 percent, which is much higher than the real profitability in the sector.

"Once the promise ended up as a bad check, a win-win cooperation will decay into a lose-lose one," said Jin.

A sound PPP is like a marriage, Jin says. Both sides are supposed to work to nurture the relationship over its lifetime, rather than quarrel over how many presents they can get from the wedding.

Previous failures show local governments not fully considering all the situations they may encounter during the whole project. Some even went back on their word, said Tsinghua University professor Wang Shouqing.

"A good PPP project needs a scientific and formal contract and every detail involved in the cooperation should be prescribed beforehand," he advised.

Wednesday's guideline urged local governments to safeguard the benefits of private investors while protecting the interests of the public.

"Government's role should be more about setting the regulatory frameworks and monitoring compliance and performance in a transparent way that is clearly codified and accepted in the eyes of private investors," said Stephen Ip, partner and head of Government and Infrastructure, KPMG China.

"PPPs are long-term in nature. They must not only gain current local government support but also continue to receive support and be monitored for the duration of the project or service," said the KPMG executive, adding that consistency and sustainability are key.