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Cover Stories Series 2014> Reform Initiatives Underway for 2015> Retrospect> Feature
UPDATED: December 15, 2014 NO. 51 DECEMBER 18, 2014
Slashing Debt
Are public-private partnerships the key to curbing government debt?
By Wang Jun

A possible kink in the regulations includes the fact that each was written without the opposite regulator's knowledge, so the documents will require comparison.

"It is good news that the NDRC and the MOF will issue documents on the same day. But this may also need coordination from the State Council, otherwise the public would not know which document to follow when the two documents contradict," said Sun.


The State Council is of the opinion that, in order to strengthen the management of local government debt, finance departments of local governments should encourage and guide projects financed by local financing platforms to be transformed to the PPP model, so as to attract more private funds to participate in these projects and effectively reduce risks in local government financing platforms.

According to Sun, another target for promotion of PPP is to reduce the existing debts, which can be done through the transfer-operate-transfer (TOT) form, where a private investor buys the property and operational rights of a facility, and receives the returns through normal business operations within a concession period. At the end of such a period, the investor then transfers the facility to the government for no cost.

Li Maonian, Director of Strategic Development of Minsheng Securities Co. Ltd., said it is necessary to accelerate development of the PPP model. China is now accelerating the urbanization drive, which will grow the size of fixed-assets investment. If China's GDP doubles to 80 trillion yuan ($13 trillion) in 2020 and the ratio of fixed-assets investment against the GDP is reduced to 60 percent, fixed-assets investment will reach 48 trillion yuan ($7.84 trillion). That is far too little to meet such a huge demand for fixed-assets investment, and it becomes necessary to introduce private funds.

"China is now promoting the PPP model, whereas the build-operate-transfer (BOT) would be a good model for newly approved projects," Sun said.

Li believes that PPP is important to the transformation of local government financing platforms.

"We should not just input more money to these financing platforms," Li said. "China can transform local government financing platforms into companies for infrastructure construction and operation, even professional PPP investment institutions."

Besides financing, PPP can also help improve the efficiency of the projects. Jin Yongxiang, General Manager of Dayue Consulting Co. Ltd., said PPP is conducive to balancing the relationship between the government and private companies. Through PPP, the government and companies become equal parties through a contract, and thus the companies will take more initiatives to improve the business efficiency.

Abuse prevention

Due to its ease of access, the PPP model is growing and will continue to grow rapidly in China. However, the model has shown hiccups in practice. Sun worries that private sector companies may take advantage of the government funds offered by PPP.

Sun said some local governments mix up PPP and the models previously used. For instance, when developing an industrial park, a local government may assign some private companies to provide services that should be assumed by the government or even assign a single company to monopolize a certain business that should be market-oriented.

"This may lead to corruption, and is not what it was designed for," Sun said, who believes that the income that belongs to the government must go to the government, while the benefits that belong to private sector must be given in legal ways, instead of through transactions under the table.

"We must first define the specific forms of PPP. Otherwise this concept might be abused in the future," Sun said.

In developed countries, PPP is a more clearly defined and tested system. For instance, PPP refers to Private Finance Initiative in the United Kingdom, and it refers to BOT in the Philippines. South Korea adopts the forms of build-transfer-operate and build-transfer-lease.

"To prevent an abuse of PPP, the government must first define the concept of PPP clearly. Now we have a definition of PPP, but it is not accurate enough," Sun said. According to him, there are two primary requirements for a PPP project: It must be a project of for public interests within the responsibilities of the government, and it must include private investment. Moreover, "government expenditure on a PPP project must be combined with the project's performance in providing products and services," said Sun.

Email us at: wangjun@bjreview.com

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