Chizhou deal expected to open the PPP floodgates(2)

The State Council said on Oct 2 that LGFVs cannot now raise funds for local authorities, and that the government no longer has an obligation to repay debt that was not raised to fund public projects.

PPP is being seen as the government's most-favored option for alleviating the debt mountain, along with the limited release of control over its public assets.

And companies such as SWG are ready to step into the breach.

Zheng Qingzhang said even before his company sealed the deal with Chizhou, several cities in Anhui province had approached him for potential deals.

In Chizhou's case, the government promised to pay for the company's services at a fixed price offering in return for a guarantee that the project would receive stable, predictable revenue.

For existing sewer facilities, for instance, the yield is expected to be 8 percent－not huge, but certainly commercially viable for a water company such as SWG.

"We are a professional water company with 23 projects in many provinces," Zheng said. "What's important was that we can operate professionally and steadily."

In the past there has been sharp criticism of how local governments have run public utilities with regular accusations of lack of expertise, cronyism and primitive work practices.

At the end of 2013, PPP projects had raised just 1 percent of the total funds used on Chinese infrastructure spending. By comparison, in Brazil, for instance, the share was over 30 percent.

In that sense, the significance of an expansion in PPP in China goes far beyond mitigating the financial burden on local governments.

Huang Yonggui, an official with Chizhou's construction bureau, said the SWG deal will help solve deep flaws in the government's previous management of the water and sewage system.

"The sewage plants and sewage system were previously operated by two SOEs. When the quality of water failed to meet our standards, they ducked responsibility by blaming each other.

The problem will be solved by bringing all the responsibilities together under one firm" Huang said.

However, Chizhou's case might not be easily replicated.

SWG had actually developed a relationship with the local government long before this contract, having already worked alongside Chizhou's sewage treatment and tap-water supply companies. This long-time cooperation had already morphed into mutual trust.

Jin Yongxiang, general manager of Beijing-based consulting firm Dayue, which worked as a consultant on the Chizhou deal, said: "It is not because the project is water, heating or whatever.

The vital factor here is 'standardization'."

He explained that to have a PPP project really flourish, local governments have to learn lessons from the past as previous failed PPP deals have often involved local governments not fully understanding all the situations they might encounter during the course of a whole project.

"A sound PPP is like a marriage, not a wedding," Jin said, adding that for projects to work well both sides have to nurture their relationship over the lifetime of a deal. They cannot quarrel over how many presents they can get from the wedding.

For now, the marriage agreed by Jin's business looks like lasting, 120 possible deals are in talks, doubling from a year before. China Credit Rating Co Ltd has estimated that of the expected 10 trillion yuan in new infrastructure spending next year, 1.5 trillion yuan will be raised through PPP.