PPP implementation requires careful planning

Ownership, funding concerns could constrain use of spending model

China's economic growth pace continues to moderate, reflecting ongoing policy efforts to rebalance the economy through a series of ambitious structural reforms. Of the 28 provinces which had released annual work reports as of January 29, 26 set lower GDP expansion targets for 2015 compared with last year. In order to cope with mounting fiscal pressures, a number of localities have also revealed plans to utilize public-private partnerships (PPPs) to cope with budget shortfalls.

As the name suggests, such partnerships bring together public and private entities to collaborate on the funding, planning, operation and maintenance of business ventures. In many cases, the ventures in question involve the construction and management of fixed assets that have the potential to generate revenue while also serving the public good. Many local governments around the world have used this model to construct and operate assets such as roads, airports and subway lines with the help of private investors.

A number of local Chinese governments have already fleshed out regional PPP promotion plans for the coming year. Authorities in Hebei Province, for example, intend to experiment with use of the PPP framework in a number of urbanization projects, including several related to the Beijing-Tianjin-Hebei regional integration initiative. The Tianjin government will attempt to introduce private capital into a number of infrastructure and public service projects. Leaders in Beijing have announced plans to use the PPP model to fund water management projects. Further south, officials in Anhui Province have outlined plans to introduce private funding into the construction and management of public housing assets.

But before authorities across China embrace a funding model that is still quite novel to many in the country, extensive preparation is needed to ensure its viability within a local context. Even in places where PPPs are relatively common, such partnerships are applied to only about 15 to 20 percent of public projects, statistics show. It would be rash of China to adopt such a model on a large scale without ample forethought and careful consideration.

Several areas of potential trouble have already become apparent. A number of local governments have already made clear their intentions to maintain controlling stakes in PPP ventures. This has many wondering whether private companies will join such ventures if it means sitting in the backseat in terms of ownership. With stakes favoring authorities, private investors may be blocked from making key management decisions.

Funding shortages present another possible obstacle. Commercial bank credit is the primary source of funding for infrastructure projects in China. However, as many are aware, lack of industry competition, combined with a tendency to lend only to the largest State-owned firms, leaves little lendable capital left over for most private companies. To compensate for this shortfall, local governments may need to offer loan guarantees or subsidies - which, of course, won't be an easy task.

Despite the possible issues mentioned above, China should still experiment with the PPP model. Of course, much will be contingent on whether local governments can come up with a comprehensive management framework for such partnerships. While it would be inappropriate for local authorities to exert undue influence over every project, a completely laissez-faire approach is also inadvisable. Instead, officials should conduct careful inspections of each project. These inspections should extend to management, servicing, construction and environmental impact, to name a few points.

Last but not least, selecting the right projects will be vital to the PPP model's ultimate success or failure. Projects with the potential to deliver sustained financial returns over the long term should be given special consideration. Similarly, projects that could improve the livelihoods of ordinary people should also be supported by flexible policies and subsidy mechanisms.