China's public-private partnership (PPP) model will improve infrastructure project-funding and is likely to drive new contract growth for construction companies in 2016, said Fitch in a report on Wednesday.
There were 1,043 potential PPP projects valued at a total of 2 trillion yuan (314 billion U.S. dollars) announced by the National Development and Reform Commission (NDRC) in May this year. In September, the Ministry of Finance initiated a fund with 180 billion yuan to support PPP projects.
The PPP model facilitates cooperation between the government and enterprises in using social capital for projects, such as water conservation, transportation and environmental protection, said the report.
If the PPP projects are fenced off from the construction company's other operations, the debt raised under the project is off the balance sheet, which means it will not increase the company's leverage. This will reduce the capital requirements and financing expense for construction companies, it said.
The report also noted that construction companies could face higher risks when PPP projects fail.
For new PPP project contracts, financial institutions act as limited partners but they have prior claim to the project assets and returns, according to the report.
In these cases, the construction company might not be able to recoup any of its investments should the projects fail. In addition, it is not yet clear what kind of legal protection investors in PPP projects will have in the event the projects fail, said the report.
