Three is a crowd

PPP flop hammers home China's crowding out crisis

China's grand plan to woo private capital has so far been a flop. An effort to push private-public partnership (PPP) projects has instead spawned cozy deals between the government and state firms, a new study shows. That is bad news for cutting costs, trimming government debt, and boosting efficiency.

The state's top planning body, the National Development and Reform Commission, has raised over half of a 3.5 trillion yuan ($526 billion) target for PPP projects ranging from bridges and roads to schools and hospitals since March 2015.

But over 90 per cent of the funds have come from other state-owned firms, according to a study of 2,125 projects conducted by North Square Blue Oak, a specialist investment bank. Capital from companies without any state links is a mere $30 billion, NSBO estimates.

One problem is that many of the long-duration projects offer uncertain returns. But even those taken up in fast-growing cities like Beijing and Shanghai were 100 per cent state funded, the research found. That indicates that the state sector also monopolised those investments that were likely to offer decent returns.

This is more than just an embarrassment for top government officials who have pushed PPP as a way to boost economic growth. It means that local government debt will continue to mount. The failure also reflects how private investment has fallen off in recent months, with inefficient state firms playing a bigger, rather than smaller, role in propping up the economy.

China's private investment growth fell to a record low in July, growing 2.1 per cent for the month compared with 2.8 per cent for the first half of the year, according to government figures released on August 12. That compares with investment growth of 21.8 per cent by state firms in the first seven months of the year, the National Bureau of Statistics said.

The central government has ordered local authorities to offer "reasonable investment returns" to private investors and opened PPP deals to the insurance sector. But it is hard to envision success from a quick fix that depends on local officials who are already wary of dealing with non-state actors and mindful of the country's wider anti-corruption crackdown.