Cover Story: How Regulation Shake-Up Cast Public-Private Partnerships Into Limbo

A Shenzhen-listed garden landscaping company, Palm Eco-Town Development Co., has taken legal action against the Laiyang city government in Shandong province for contract breach, spotlighting the challenges faced by public-private partnership (PPP) projects in China as local investments decline [para. 1]. The company's subsidiaries have experienced contractual issues, including delayed land provision and altered terms impacting payment schedules for projects in Haikou city [para. 2][para. 3]. These problems reflect a broader issue within China's PPP sector, where government arrears and the financial burden have led to an estimated 2.8 trillion yuan ($385 billion) funding shortfall [para. 4][para. 5].

PPP projects are designed to deliver public assets or services through partnerships between private entities and government bodies, where the private sector assumes significant risk and management responsibilities [para. 5]. However, the implementation of these projects since 2014 has sometimes masked local government borrowing and increased debt risks despite aiming to alleviate financial burdens on local governments [para. 6][para. 7].

Central government interventions, including a comprehensive review by the National Audit Office in February 2023 and a new PPP supervision framework by the National Development and Reform Commission (NDRC) and Ministry of Finance, intend to tighten oversight and address these issues [para. 8][para. 9]. The framework mandates that new projects follow a concession model overseen by the NDRC, but there's ambiguity over supervision for existing projects, leaving many in a state of limbo [para. 9][para. 10][para. 11].

According to Zhang Liao of Jumbo Consulting, the handling of existing projects fails to align with policy expectations, as local governments often apply a uniform approach without considering unique project conditions [para. 12]. The abolition of existing regulations and previous management structures has prompted concerns among financial institutions regarding compliance and management of ongoing PPPs [para. 13][para. 14].

Local governments face shrinking fiscal capacities, complicating payments for existing PPPs amid widespread government arrears, threatening both the quality of infrastructure and the financial stability of the lenders involved [para. 15][para. 16]. As of October 2022, China had over 10,332 approved PPP projects with total investments of 16.6 trillion yuan, mostly debt-financed, imposing significant repayment obligations [para. 17][para. 18][para. 19].

While some companies have turned to legal means for redress, the rarity of such actions highlights the need for a reassessment of the PPP legal framework to establish clear contract liabilities and dispute resolution channels [para. 21][para. 22]. Recent government guidelines for managing existing PPP projects emphasize categorization, issue rectification, and scrutiny for new projects, although oversight for ongoing projects remains unclear [para. 23][para. 24][para. 25].

The Ministry of Finance's decision to abolish prior regulations has complicated the management of existing projects, requiring local governments to develop their mechanisms [para. 28][para. 29]. Amidst financial strains on local authorities, compliance with payment obligations remains a challenge, leading to stalled projects and financial repercussions for partners [para. 30][para. 31][para. 32].

Mounting local government payment responsibilities for existing PPPs amount to a forecasted 8.31 trillion yuan from 2024 to 2033, prompting discussions on incorporating funds for managing PPP arrears within special government bond issuances [para. 36][para. 37][para. 38]. However, regulatory clarity for ongoing PPPs and an adapted management framework remain critical for local governments, especially at the provincial level, to ensure the stability and compliance of these projects [para. 42][para. 44].