How Australia can cash in on China’s PPP fever

China is increasingly looking to PPP’s to deliver steady infrastructure development. Australia should get in early or look forward to being locked out.

Cheng grew up in a village in Sichuan province. As a 13 year old, he left the village and got a job selling groceries in the provincial capital Chengdu. In his early twenties Cheng moved south to Guangzhou, the bustling capital of Guangdong Province. Old folks in Chinese villages like Cheng's hometown joke that when they die there will be no-one left in the village strong enough to carry their coffin.

Cheng's story is common. As many as 200 million people like Cheng are expected to move to Chinese cities in the next decade. This urban migration poses an infrastructure challenge for local governments. In addition, local government debt means capital investment is expensive. Local government debt is currently around 19.6 trillion yuan (US$3.2 trillion), and is like a ball-and-chain weighing down their development dreams. Beijing thinks Public Private Partnerships (PPPs) are the answer.

Earlier this year Beijing began encouraging its local governments to use PPPs. They hope focusing on PPPs will allow local governments to continue delivering capital investment while at the same time avoiding sinking further into the red. The new focus on PPPs gives the green light to SOEs, and other Chinese and foreign companies, seeking deeper involvement in China's urban infrastructure boom.

Things are now moving quickly. On 21 September 2014 the State Council -- China's cabinet -- released guidelines on managing local government debt. The guidelines mention PPPs as a pillar of the debt management strategy.

When the State Council speaks, everyone listens. On 23 September the Ministry of Finance and Commerce (MOFCOM) released a notice on questions relating to expanding the use of PPPs. This document is addressed to each province, municipality and autonomous region, and sets out the framework for rolling out PPPs into China's regions.

What is in the MOFCOM notice? The notice states that the first step is implementing policies and processes including procurement procedures, strengthening financial management, and ensuring "value for money". Risk management, project supervision and project evaluation processes are also featured.

China is catching PPP fever. Provincial-level governments have also released their own statements, guidelines, and examples of bankable PPP projects. Airports, railways, wastewater treatment, and aged care facilities are on the menu in Jiangsu province. Fujian province lists transportation, energy, environmental protection and aged care among its priorities

PPP is literally translated into Chinese as "Government and social capital cooperation". This suggests the standard distinction between "public" and "private" may not work in the Chinese context. We are talking about a public partnership, but between what entities? Foreign companies may be able to access the emerging market through an appropriate special purpose vehicle. But it is likely that local players, including SOEs, will have the edge. "Public-pseudo private-partnerships" may be more accurate. At least we can still call them PPPs.

Whoever the partners are, they will have skin in the game. Get ready to see more competition and better outcomes in Chinese infrastructure delivery. The idea behind the value of PPPs to a government -- sharing project risks and unlocking private sector efficiencies and expertise -- still applies. Projects will be awarded to "private" companies bearing bigger project risks. These companies will work hard to drive down costs and deliver better results.

The Chinese PPP market is high risk-high reward. Soaring debt, economic structural imbalances and a potential property bubble are three reasons to be wary. Financial, legal, technical and political project risks are also high. As always in China, good relationships with local officials are crucial.

But transparency is improving. The corruption crackdown and renewed focus on better law-enforcement after the recent fourth plenum will encourage transparent processes and better contractual certainty. Eventually PPP opportunities may be tendered to the market. It should only be a matter of time, given China's gradual but determined structural reforms.

Despite these risks Australia can, and should, be involved. Australia should share and sell its huge technical, financial and legal PPP expertise. However, larger Chinese construction companies may have the edge in the short term. China Communications Construction, China State Construction Engineering Corp, and China Railway Construction Corp are the biggest players. Each is bigger than (for example) Leighton Holdings based on 2013 revenue, and each has been delivering large projects globally for years.

­­­The Chinese PPP market is emerging, and it will keep growing as China's cities fill with hopeful migrants like Cheng.

Edward Kus is a solicitor at an international law firm in Melbourne, Executive Director of the Australia-China Young Professionals Initiative, and a Fellow of the ACYPI Policy Unit.

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