Special Report

China Public Private Partnerships + One Belt One Road

by Alexious Lee / Apr 13, 2017

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The flurry of PPP policies and project approvals has markets excited. These mutually beneficial arrangements ease the burden on public expenses, while helping contractors transform their businesses. But companies have been wary of such schemes, as project failures and financial losses have highlighted associated risks. Recognising the need for investment, the Party has tipped the regulatory scales in favour of private players.

During the past four months, the National Development and Reform Commission (NDRC), along with other government agencies, which has pushed through policy approvals. This has led to a strong advance in stocks related to public-private partnerships (PPP). In late 2016, the Ministry of Finance provided a further boost by giving the green light to a third batch of projects, requesting they start before end-3Q17. We examine the 18 PPP-related policies released since 2014 to assess the benefits that they offer project participants.

Accelerated approvals and announcements of operational guidelines and policies Going beyond build-transfer and build-operate-transfer approaches, which are essentially funding agreements with private-sector investment, the guidelines mirror developed-world plans designed to overcome the shortcomings of BOT and private-finance initiatives. While they are still based on the user-pays model, they require cooperation between public and private sectors throughout the process. Transport infrastructure, waste recycling, water treatment and utilities are major sectors to engage PPPs but also China is opening up state-assets to private funding in another 30 major sectors.

Lots of room for further expansion There are three project categories in terms of earnings: profit-making, which attract money easily (eg, environmental protection); quasi-profit-making, which need government subsidies (eg, urban transport); and nonprofit-making, which are in the public interests and subsidised (eg, afforestation). We expect asset-operators to start booking earnings from 2020, and returns will be benchmarked against the initial internal rate of return (IRR) goals, while local governments will need to honour promises on subsidies and rebates.

Close to 400 listed names have participated in PPP projects The number of listed companies to announce participation in PPP projects grew from 40 in 2014, to 80 in 2015 and 280 in 2016 and we expect this to double by 2020. Participants have shifted from traditional constructors and state-owned enterprises (including banks) to private firms and operators (including foreign players). Contractors are taking ground from local government with their stake increasing from 11% in 2014 to 21% in 2016. Declining state participation should be constructive in deleveraging debt and improving transparency.