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Print Edition> Business
UPDATED: June 8, 2015 NO. 24 JUNE 11, 2015
Market Watch NO. 24, 2015


PPP Projects: Gold Mine for Foreign Investors

As trillions of yuan is needed for recently announced public-private partnership (PPP) projects, China, the world's largest emerging economy, is gradually moving toward a new era of attracting foreign capital. (Note: On May 25, the National Development and Reform Commission announced the details of 1,043 proposed projects in which private investors are invited to participate through the PPP model. Focusing on infrastructure and public services such as water conservation, transport and environmental protection, the investment needed for these projects totals 1.97 trillion yuan, or about $322 billion.)

PPP refers to cooperation between governments and profit-making as well as non-profit businesses on projects. The scheme originated from the UK in the early 1990s as a new way of offering public services by combining the efforts of the government and private-sector businesses. It has been widely perceived as a new type of relationship between the government and the market. The adoption of PPP not only helps provide better public products and services but also helps contain and prevent debt risks within local governments.

Virtually, PPP aims at offering better-quality public services and products by soliciting social capital. PPP is mainly adopted in public areas including rail transit, public facilities, eco-environmental protection, clean energy and elderly care, because these areas are in dire need of private and foreign capital.

According to the World Bank's estimation, PPP is often used in sectors such as energy, electricity, transportation and water treatment. According to data from Public Works Financing, a journal of record on PPP in infrastructure development, the nominal value of global infrastructure investment in the form of PPP totaled $775.1 billion from 1985 to 2011. PPP has been maturely used in countries like the UK and Australia and less often used in developing countries, despite a rapid increase of the number of PPP projects in developing countries in recent years.

China's capital stock lags far behind those in developed countries, which means investment is still needed. Compared with developed nations, China falls short of investment in public facilities related to people's livelihood, such as education, medical care, care for the elderly and social security. As the country's urbanization drive continues, investment should also be increased in shantytown renovation, construction of affordable housing projects and weak links in rural and urban infrastructure—intercity transportation, urban underground pipe network, energy saving, environmental protection, agriculture and water conservancy, road construction in rural areas and highway and railway construction in central and western regions.

In the meantime, social capital should be encouraged to invest in municipal public utilities and to participate in city management. More studies should be conducted on the transfer of state-owned facilities and assets to diversify means of direct financing. The industrialization of municipal public utilities, by separating the right of ownership, management and maintenance in public utilities, will attract social capital from various sources. The collected funds can then be directly put toward the construction and management of public utilities, which can increase the operation efficiency of state-owned facilities and assets. In addition, the adoption of PPP will greatly alleviate the burden of local governments in paying the debt.

That said, the PPP model in China has encountered several problems, such as the absence of a mature management model and an effective mechanism and the government's leading role in PPP projects. By contrast, most successfully implemented global PPP projects are spearheaded by businesses.

Therefore, the government should provide standardized project contracts to lure mature private investors, sovereign wealth funds and global investors. In developed countries, the operation of PPP projects is quite standardized, with sound economic laws and regulations and transparent government policies. China should learn from that and attract more foreign capital to its PPP market to increase efficiency in the management of public services.

In recent years, the Chinese Government has been pushing forward the purchase of public services from private sector. It has also lowered the threshold for foreign investment by adopting a negative list and changing from an approval-based to a registration-based administration system. This will create a fairer and more open system for foreign investment in China, therefore giving the market a larger role in allocating resources. As a result, the room for foreign capital in China's PPP market will certainly show further expansion.

A recently released plan by the Beijing Municipal Government on opening up its service industry has encouraged foreign capital into the city's emerging industries, such as software and information services and integrated circuit design, in an attempt to promote innovations in areas like cloud computing, the Internet of things, mobile Internet and the next generation of the Internet.

Multinationals will be encouraged to set up research and development centers, offshore service centers and operational headquarters in Beijing. They will also be encouraged to set up joint ventures and cooperate with their Chinese counterparts by way of talent introduction, technology imports and joint development.

This is an edited excerpt of an article by Zhang Monan, an associate research fellow at the China Center for International Economic Exchanges, published in Securities Times



Year-on-year sales growth of Honda Motor cars in China in May

3.77 bln tons

Freight on rail, road and waterways across China in April, a year-on-year increase of 3 percent

142.46 bln yuan

Income from investment earned by China's social security fund in 2014, with an 11.69-percent return on investment


Consumption's contribution to China's GDP growth in 2014


Average minimum wage growth of 19 regions on the Chinese mainland in 2014

1.04 mln

Number of high net worth individuals (people having more than 10 million yuan of investable assets) by the end of 2014


Copyedited by Kylee McIntyre

Comments to yushujun@bjreview.com

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