Slashing Debt

Are public-private partnerships the key to curbing government debt?

In China, all eyes—and heavy expectations—lie on the public-private partnership (PPP), which will hopefully reduce local government debts and furnish a fund for an urbanization drive.

Understandably, then, PPP will be the object of government oversight, and as expected, the National Development and Reform Commission (NDRC) and the Ministry of Finance (MOF) issued their guidelines and operational guides for the PPP on December 4. Both sets of rules define parameters for government-private investor cooperation that, hopefully, will yield positive economic results.

A PPP is a contract business relationship between a private company and a government agency that aims at completing a project in the public's interest.

The private sector promises to provide a public service or project, thus assuming substantial financial, technical and operational risks. In a PPP, the government will share a portion of the risks.

The PPP model can be used to finance, build and operate projects like public transportation networks, parks and convention centers, lessening the financial burden involved in completing a project quickly—or even making the project a possibility in the first place.

As Chinese local governments' financing platforms draw to a close, PPP may provide benefits, though the rules still offer opportunities for abuse.

Regulations

The NDRC's guidelines make it clear that PPP mainly applies to market-oriented operation and projects that fall under some kind of government supervision, like public services or infrastructure. Local governments can use the PPP, on projects involving gas, water, heat, garbage disposal, senior care, transportation, among others, though the rules encourage local government to begin by using the PPP model in the newly approved municipal facilities and urbanization projects.

The MOF regulations provide further information about the government sharing the risks involved in starting a new project with the private sector.

While the private sector takes responsibility for project design, construction, finances and operations; the government will assume responsibility for legal matters, policy and minimum demand risks. Both parties will share risks brought on by force majeure. The government will take into account its own risk control capacity, the agreement on investment returns and the risk control capability of the market.

To help transition into PPP, the MOF has designated 30 pilot projects (eight new, 22 transferred from local financing platforms) that will use the PPP model. The projects are worth a total of 180 billion yuan ($29.41 billion).

In an interview with Economic Information Daily, Sun Jie, Secretary General of the Public-Private Partnership Research Committee of China Finance Academy, said that after the State Council issued the opinions on strengthening the management of local government debt in September, local governments have paid more attention to the PPP model because it strictly limits the amount of government financing.

Local governments need money, because economic development starts from the ground-up, so the 40-trillion-yuan ($6.5-trillion) urbanization investment requires huge financing from the government. Local governments currently operate on bond-issue restrictions, so the PPP will become a key method for them to acquire needed funds.