Infrastructure growth is expected to slow in China in 2018. Fitch Ratings predicts recent regulations on public-private partnerships (P3s or PPP) will cool down such projects. The new rules are designed to contain risks and increase transparency.
The new regulations are structured to encourage private capital for P3s since they restrict state-owned enterprises (SOEs) from being involved in P3s. Over half of PPP projects “were driven by SOEs in 2017,” said Fitch. Some such projects have already been stopped due to the new regulations, which were put in place late last year.
There is typically a small return on P3s, roughly between 5%-10%, noted Fitch. This will make it difficult for private investors to fill the shortfall left by the regulations. “SOEs can generally borrow at lower interest rates, and are therefore more willing to accept lower project returns.” The infrastructure investment slow down has already begun, with year-over-year fixed asset investment declining steadily since the beginning of 2017.
As a result of the new regulations, local governments may now need to fund more of their projects through on-balance-sheet borrowing since the regulations remove the option for off-balance-sheet financing. This will likely increase local government debt, but it will be at a slower pace compared to years past, explained Fitch. The initiatives may expose risky practices and cause disruption in the short term, but will ultimately increase overall transparency in local governments, concluded Fitch.
-Michael Miller, associate editor