Caixin
Oct 28, 2016 02:54 PM

Public-Private Partnerships May Have Added to Debt Overhang

(Beijing) — As Chinese authorities address the nation's debt crisis, the Ministry of Finance is increasingly concerned that public-private infrastructure projects have accumulated excessive debt, according to sources close to the matter.

Since 2013, as part of the central government's push for private investments in local projects, thousands of public-private partnerships (PPP) have been launched. The strategy was intended to alleviate pressure on local government borrowing.

But now finance regulators are investigating whether the PPP arrangement has created extra borrowing that falls outside of normal supervision. On Oct. 20, the Ministry of Finance ordered local finance departments to survey local governments' debt as well as spending on PPP projects.

As of the end of August, the number of PPP projects proposed by local governments reached 10,313, with planned investments totaling 12.3 trillion yuan ($1.8 trillion), according to the Ministry of Finance. Projects that have broken ground involve investments totaling 1.4 trillion yuan.

Local officials have embraced public-private partnerships partly because they offer a way to continue economy-boosting projects while easing the debt burden on local governments. Official data showed that by the end of August, local governments had direct repayment obligations of 16 trillion yuan, while locally owned state-owned enterprises (SOEs) had total liabilities of 39 trillion yuan.

Under the PPP model, which originated in Britain in the 1980s, government units cooperate with private investors to build roads, airports, subway lines, utilities and other infrastructure. Local and central governments have promised financial and policy support for such projects to lure private capital.

But private investors have shown less enthusiasm than governments because of concern about fair access and low returns. In practice, the notion of PPP has been revised in China so that investments by state-owned or state-backed enterprises and financial institutions have also been counted as "private capital."

Caixin learned from the Chongqing branch of Citic Bank that in most PPP projects, a government-backed principal founding shareholder would form an investment fund or company with capital raised from bank wealth management funds. It would then partner with other social-capital institutions such as insurance and pension funds to invest in a PPP project.

Critics said such arrangements may allow local governments to conceal actual debt totals. An official at the state asset administration in a central province told Caixin that many local governments have used PPP projects as vehicles for new borrowings, and that some of the projects are designed to favor certain SOEs rather than private investors.

A banking industry source said some local government financing platforms have sought to issue more corporate bonds through PPP arrangements, with local governments as the implicit guarantor.

Experts are concerned that the involvement of banks' wealth management funds, which are mainly raised from retail investors and stay off banks' balance sheets, offers a sort of shadow financing to PPP projects and exposes individual investors to too much risk.

Wealth management funds managed by Chinese banks are usually seen by investors as having an implicit guarantee from banks.

"The original intention (of PPP) was to encourage private investors to take part," said an executive at a state bank. "But now there are mainly wealth management funds entering the projects, rather than private companies." Because good assets are scarce amid the economic slowdown, PPP has become a preferred target for bank investment, the executive said.

Contact reporter Han Wei (weihan@caixin.com)

Part1: China Confronts Danger of Large Debts With Broad Restructuring

Part2: China's Debt-to-Equity Push Triggers Concern

Part4: Government-Backed Investment Funds to Help With Deleveraging

Part5: Bankruptcy Becomes Option in Addressing Debt Crisis

Part6: Closer Look: China's Debt Crisis Has Similarities to 1998 Situation

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