China’s state-owned builders signed US$85 billion in new public-private partnership (PPP) contracts last year, reflecting how state firms are dominating a scheme meant to open the door to private sector investment in infrastructure building.
China Railway Group, China Communications Construction Corp (CCCC) and China Railway Construction Group said in their annual results this week they collectively signed over 586.7 billion yuan (US$85.04 billion) of PPP contracts in 2016, which helped drive up their overall contract wins in the year.
Beijing has been encouraging the use of PPP to alleviate the debt burdens of its local authorities, who in the past would have used debt to finance projects such as bridges and municipal works. Under PPP, they partner with firms, though many of the participants so far have been state-owned enterprises (SOE).
“Under the PPP development mode, the construction market is undergoing earthshaking reform,” CCCC said in its results statement. “The local government has showed great enthusiasm for promoting PPP projects, making the quantity and amount of landing projects hit another record high.”
This has pushed these SOEs to change from being pure contractors to investors. However, private companies have said that many PPP projects offer poor returns and they are crowded out by SOEs from the good ones.
Private sector investment accounted for less than 30 percent of total PPP contracts, according to Moody’s Investor Service.
The government, whose data showed there were currently 11,784 registered PPP projects valued at 13.9 trillion yuan, has said it will take measures to get more private investors involved in PPP.
While PPP will likely boost overall construction activity, analysts cautioned the contracts could impact future earnings for construction giants.
“Many PPP projects only offer low returns…so going forward it may accelerate revenue but may lower the bottom line,” said Guotai Junan analyst Gary Wong.
Some analysts also said that it signalled how responsibility for infrastructure projects was simply being moved from one arm of the government to another.
“In developed countries, the spirit of PPP is that the government transfers the risk in the public projects to a private party, so it’s not only a way to broaden financing resources…but also introduce efficiency,” said Ivy Poon, an analyst at Moody’s Investor Service.
State-owned companies hold the majority of China’s US$18 trillion corporate debt burden, which is equivalent to about 169% of GDP, according to figures from the Bank for International Settlements.
The success, speed and efficiency of China’s SOEs in dams, railways, highways, bridges, etc.within budget is rarely matched by any private party in so-called developed nations. It is time to stop assuming that private parties are always more efficient than SOEs.