Public-Private Partnerships Riddled with “Hidden Risk” in the Wake of Breakneck Growth

The Chinese central government has flagged greater scrutiny of public-private partnerships (PPP) due to concerns over the rampant accumulation of “hidden risks”, even if it means reining in their pace of development.

According to Economic Information Daily China has recently emerged as the world’s largest PPP market, with a total of 6778 projects in development as of the end of September this year representing a total investment amount of 10.1 trillion yuan, and a further 2388 projects already completed, representing a total investment amount of 4.1 trillion yuan.

At the 3rd China PPP Financing Forum (中国PPP融资论坛), jointly held by the Ministry of Finance (MOFCOM) PPP Centre and the Shanghai Financial Association at the start of November, the central government warned about the emergence of widespread problems in the PPP sector in the wake of breakneck development.

“In some regions the implementation of new development concepts remains inadequate, especially when it comes to reducing the PPP model to just a channel of financing for government,” said Shi Yaobin (史耀斌), vice-head of the Ministry of Finance and head of the PPP leadership team.

“[This] has produced widespread problems, including irrational risk allocation, debt disguised as equity, covert forms of government exposure, emphasis on construction and negligence of operation, poor performance assessment, and excessively high leverage by means of social financing, serving to accumulate hidden risks.

“We should be well aware of these problems and need to pragmatically resolve them.”

According to Wang Yi (王毅), head of MOFCOM’s finance department and chair of the PPP leadership team office, local government, social capital, intermediary organisations and supporting policies all suffer from the problem of a lack of standardisation when it comes to PPP’s.

Wang said that local governments “place excessive emphasis upon financing as a means of driving economic growth, while neglecting the formation of long-term effective mechanisms.

“[They] focus excessively on short-term investment returns yet overlook long-term risk standardisation, while social capital focuses on short-term earnings and neglects long-term operation.”

Wang said that the government would rather “hold steady the pace [of development] slightly, and raise the quality slightly, with the sole goal of wanting the tree of PPP in China to be an ever-green.”

To this end the Ministry of Finance plans to step up regulation, standardisation and risk control of the PPP sector in future, with Shi Yaobin calling for “strict protection of the bottom line, vigorous seizing of standardised administration,” “strictly seizing the applicable scope and definition of the PPP model,” “strict guarding the 10% red line for fiscal expenditures,” “strict prevention of off balance sheet business risk,” and “expanding the vigour of inspection and disposal of regulatory and legal breaches.”

The Ministry of Finance flagged policy shifts in four key areas – shifting from a sole focus on the volume of completed projects to a focus on project standardisation; shifting from a focus on increasing the volume of projects to a focus to the stock of projects, shifting from a focus on short-term returns to medium and long-term returns, as well as better promoting the use of the PPP model as a means of helping China’s state-owned enterprises to “go abroad,” and support the development of the One Belt One Road initiative. 

 

 

 

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