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Business
Print Edition> Business
UPDATED: August 1, 2014 NO. 32 AUGUST 7, 2014
Local Governments Out of Pocket?
Owing to authorities' efforts to tackle public debt, local governments now face difficulties in securing funding for urbanization
By Wang Jun
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WAY OF EFFICIENCY: Passengers wait for trains on a platform in Xidan Station on Line 4 of the Beijing Subway. Line 4 became the first subway line to be incorporated into a public-private partnership scheme in Beijing (YU ZHIQIANG)

The chasm between the size of local government bonds and the funds needed for urbanization becomes apparent when they are compared. Wang Baoan, Vice Minister of Finance, estimated in March that China's urbanization rate will reach 60 percent by 2020, which will prospectively create an investment demand of some 42 trillion yuan ($6.8 trillion).

When interviewed by Beijing-based Economic Information Daily, Wu Xiaodong, Chairman of Hefei Construction Investment and Holding Co. Ltd. in Anhui Province, calculated that by 2020, 7 trillion yuan ($1.13 trillion) will be needed each year on average. Local governments are currently required to invest at least 30 percent of the funds needed for each urbanization project, and the other 70 percent have to come from private capital. That means each year local governments have to raise 5 trillion yuan ($810 billion) from the market. "It would be unrealistic for local governments to be expected to rely on issuing municipal bonds alone to achieve it," Wu said.

Wu said that of the 10 local governments taking part in the pilot, none of them can issue municipal bonds worth more than 15 billion yuan ($2.43 billion) this year.

Take Anhui as an example. Even if the province issued 15 billion yuan of municipal bonds, the money raised would have to be shared among its 16 prefecture-level cities. To take that example further, if the provincial capital Hefei were able to get its hands on 4 billion yuan ($650 million), a lower-level government in the city would still only be entitled to about 400 million yuan ($65 million). "This would be utterly inadequate for the city's infrastructure construction, representing a drop in the bucket," Wu said.

In May, the NDRC pioneered an innovation in bond financing for shantytown redevelopment. For the first time, it allowed issuance of project revenue bonds for the rebuilding of dilapidated areas in cities. Project revenue bonds are a financing instrument used by governments to raise the funds necessary to acquire and develop "essential use, public purpose and private activity" projects. The bonds are issued by a government agency and purchased by investors, including but not limited to institutional investors, private investors, or syndicated investor groups.

As opposed to financing measures present in local government financing platforms, project revenue bonds can separate the debts of the issuers from those of local governments, thus effectively preventing the fiscal and financial risks associated with traditional financing platforms.

Ye Feng, an analyst with the Rating Department of China Credit Rating Co. Ltd., suggests local governments increasingly inject market-oriented business assets and adopt more market-oriented measures to support the transformation of their financing platforms into "real entities" with stable cash flows to issue project revenue bonds.

Ye believes under the guidance of market- and business operation-oriented principles set by the regulatory authority, it will present another option for local governments in regulating direct financing channels by transforming their financing platforms into "special platforms," such as those that issue project revenue bonds.

The PPP scheme

In order to meet the demand of funds for urbanization, the government may do well to consider the introduction of the public-private partnership (PPP) scheme to complement bond financing, according to Liu Shangxi, Deputy Director of the Research Institute for Fiscal Science under the MOF. He said that this scheme can "unload" the heavy burden on the government budget and stimulate the inflow of more private capital.

A PPP is a government service or private business venture that is funded and operated through a partnership of government and one or more private companies. It involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risks in the venture. In developed countries, this type of scheme is widely used in infrastructure construction projects such as waterworks, power plants, subways and highways, and other non-profit facilities such as hospitals and schools.

"The MOF is selecting appropriate projects for trial implementation of the PPP scheme among all the existing and newly approved urban infrastructure projects all over the country," Vice Minister Wang said.

However, the PPP scheme may also bring new risks to local governments if not properly designed and implemented, according to industry insiders.

"Only when the government and private companies both benefit from the projects, will PPP prove itself a good scheme," said Wu with Hefei Construction Investment and Holding Co. Ltd.

According to Wu, what the government wants are low-cost development funds coupled with efficient management of projects. At the same time, private companies hope to invest in projects that carry low costs and promise stable returns, which are typical to most government projects.

"PPP in and of itself cannot achieve such a 'win-win situation,' and only fair and open tenders made within an equitable competitive environment will make PPP an effective scheme," Wu said.

Email us at: wangjun@bjreview.com

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