BUILDING BLOCKS

Public, private partnerships are making a comeback after previous crackdown

China resumes infrastructure spending, this time with the help of public private partnerships,

Build, baby, build. Infrastructure spending in China is heating up again. But this time, the government wants help.

Beijing entered the year with a tough stance on debt, tightening its purse strings to head off the risk of a Minsky moment. The Ministry of Finance lowered its fiscal deficit target to 2.6 per cent of gross domestic product, the first cut since 2013, and went so far as to halt all government-funded work in Xinjiang, an area bigger than France. As a result, infrastructure growth ground to a halt, dragging on the economy’s expansion.

Public private partnerships, or PPP, in which private firms coinvest with local governments to build and operate public facilities, are making a comeback. Until recently, Beijing had been cracking down on these partnerships, shelving projects worth about 2.4 trillion yuan ($459 billion) since November. The downward trend stopped in June.

If anyone doubts the ministry’s intention to turn on the PPP tap again, just look at its quarterly reports. The theme in the first three months centred on cancelling local projects. By the time the second-quarter report was released, there was no such mention.

There were good reasons for the clampdown. PPP started to boom in 2014 as Beijing sought to control off-budget borrowing by local governments. Some municipalities used them as a tool to hide liabilities. For instance, the private partner could be promised a fixed return at regular intervals from government land sales, and a guaranteed equity buyback.

In addition, the projects often drew little in the way of private money: More than 60 per cent of the “private” partners in PPP projects are state-owned enterprises.