Guideline to boost investment via PPPs
Analysts have highlighted the need for private and foreign capital to boost investment as local governments, facing a funding gap of trillions of yuan, look for ways to spur big construction projects.
On Friday, just a day after the finance minister met the media at a news conference, the Ministry of Finance released the final version of a guideline to encourage financing through the public-private partnership model. Funding from the private sector and foreign investors is welcomed for government-led projects, a document released on the ministry’s website said.
After the release of the guideline for PPP investment, the country’s first national PPP law is expected to be issued soon, experts said.
Local governments should not set discriminatory rules or any additional requirements for foreign companies or Chinese companies’ overseas branches when they join the projects, the guideline said.
The ministry will encourage investment from insurance companies and national PPP funds. Capital could be used effectively through more flexible transactions of equity, assets and securitized assets, it said.
The guideline could be seen as a response to investors’ hesitation, as they have held back injection of funds since the authorities suspended some PPP projects last year to check whether the financing method had increased governments’ contingent debt, according to a deputy head of the finance ministry’s financing department.
“The aim is to strengthen investors’ confidence to better take advantage of the PPP financing model,” he said.
Before the nationwide scrutiny, local governments with limited budgets were looking for ways to supplement the huge financing demand for infrastructure investment during a period of rapid State-led urbanization.
PPP is an innovative financing model born during this process. In China, the model refers to a mix of financing resources including fis- cal spending, bank loans, quasimunicipal bonds and trust funds.
But this financing model has also increased the debt burden for local governments. As it is not written down on the balance-sheet, it is hard to monitor debt risk.
The reforms and legal frameworks to establish or improve enabling environments for PPPs are encouraging, as they will help mitigate legal constraints that have caused developers and investors to avoid PPPs in certain markets, said David Baxter, a senior adviser to the International PPP Resilience Center in New Orleans, the United States.
“Governments are more aware that they need to market themselves if they wish to compete successfully for foreign direct investment,” he said. “The reality is that investors are not sentimental and it is increasingly important that governments tell good stories about opportunities, meaningful bankable projects, and risk mitigation if PPP investors are to be attracted.”
Local governments will face large gaps between their real spending needs and relatively limited revenue sources this year, more than 8 trillion yuan ($1.19 trillion) as predicted, according to Moody’s.
“Local governments may continually increase infrastructure spending this year to support economic growth, while at the same time, revenue growth is expected to slow alongside the economy and the implementation of further tax cuts,” said Amanda Du, a Moody’s analyst.
Governments are more aware that they need to market themselves if they wish to compete successfully for foreign direct investment.” David Baxter, senior adviser to the International PPP Resilience Center in New Orleans, the United States