The former President of The People’s Bank of China, Jun Ma lectured at the Sino-U.S. Economic Cooperation and “The Belt and Road” Forum about the need to attract global capital to fill the immense gap of infrastructure investment along the One Belt One Road (OBOR). Jun Ma proposed mobilizing private capitals from China and other AIIB member countries.
In December 2016, after meeting with UNECE PPP department, the Chinese government agreed that the private-public partnership (PPP) model provides an opportunity for secured private-government partnerships to make riskier investments. After a phase of case studies, in May 2017, the Chinese National Development and Reform Commission (NDRC) issued three major policies on the financial, legal, and environmental aspects of PPP. This included the Memorandum of Understanding, which calls for the creation of international laws, an expert library, and a dialogue mechanism to be set up among One Belt One Road (OBOR) countries. However, things are not as simple as the regulations indicate. As China uses PPP models more extensively, we want to examine a few drawbacks and potential threats around this economic and politically-charged term. In our view, PPP in OBOR-settings is a hybridization of Chinese-domestic PPP and Middle-East-traditional PPP. The latter model has a 20-year history of operation, and in contrast with OBOR PPP model, the power of surveillance lies solely in the hand of local government.
First, we wondered, how much control does the Chinese government have over the OBOR programs after the recent policy shift towards public-private partnership (PPP) as the primary financing tool?
Indeed, this decision was made because of the huge gap in infrastructure investment on the global market. According to the OECD, 5,500 billion USD is needed to close the infrastructure investment gap, yet only 14 billion USD has been put forth directly by the Chinese government. Further, PPP is the standard approach to infrastructure construction in various western countries due to the large sum of initial investment, the long program cycle and the natural tendency of monopoly in this field.
China’s shift to the PPP model makes even more sense considering that PPP has been used in the North Africa-Middle East region for decades. This includes the Amman's 1994 Independent Power Generation Project (IPP), Tavira A-2 IPP in Abu Dhabi and the Ajman Sewage Treatment Project financed in 2003. However, the new policies such as the Circular on Issues Relevant to the Cooperation Project of Insurance Funds Investment between Government and Social Capital, establishes an external experts risk assessment mechanism to fully reveal investment risk, and sets up special business acceptance and registration green channel for programs that are of vital importance to the national development strategy. It implies PPP to be under the surveillance of Chinese government, and as a result, the OBOR PPP would differ from the precedents set by partnerships between global companies and local governments.
To better understand China’s new PPP model, there is a need to analyze how PPP has functioned domestically in China. In particular, under Chinese urbanization programs in 2015, PPP showed a contrastingly government-oriented character and embodied more of the traditional BT (Buy-Transfer) model, which hands the power of program evaluation, pricing, and monitoring to the government as indicated by the Smith Street Analysis graph.
In those programs, Chinese local governments witnessed a low participation rate on the private companies’ part, with private capitals reaching a signing rate of under 20 percent taking only 22 percent of all programs in the first round of PPP investment. This is done because a variety of reasons: 1) a low rate of return, 2) a lack of bargaining power against the government, due to the legal ambiguity of whether administrative or civil litigation would be applied to this matter, and 3) the spirit of contract remaining questionable since oftentimes new regulations come up and interrupt ongoing programs.
As a result, state-owned companies are often tagged as private capital to boost the outward appearance of the PPP programs, and 59 percent receive subsidies from the deal they cut with the local government (Abound). This reality raises two problems. First, the mechanism of risk-distribution is not in play, and as a result the Chinese government takes all the risks. Second, with new opportunities opening up in OBOR, most companies participating are still going to be state-owned companies, whose huge size slow the decision-making process. The sacrifices made on flexibility and individuality make PPP meaningless, since those two things are precisely the greatest advantage of the PPP model.
So, another good question is, why doesn’t China fully adapt the standardized legal procedures of Western PPP to solve the problems mentioned above?
One reason might be the differences between the legal structures of Civil Law (Chinese) and Common Law (UK, US, Singapore, Australia). PPP has certain conflicts with the Civil Law code, so the regulations and policies formulated by all the ministries and commissions oftentimes have low legal effectiveness. As a result, these laws are often introduced under the names of "notice" or "policy,” which is often perceived as a political risk by private entities. A second reason would be the lack of expertise in the Chinese administration to fulfill the requirements for conducting contract review and program evaluation as demanded by the law. Topics such as risk allocation, method of evaluation and the calculation of flexible costs demand highly specialized knowledge which the government currently doesn’t possess.
In conclusion, let’s revisit the question presented in the first paragraph: “how much control does the Chinese government have over the OBOR programs after the incorporation of PPP?” The government certainly still maintains control over the course of OBOR even if the PPP model is being implemented. But, by incorporating the state-owned corporations as tools to further its governmental goals, as stated in the 2006 Beijing Consensus, the Chinese government will likely encounter more obstacles in the future, because of lacking legal protection for its private sector partners and its lacking expertise to fully monitor and regulate the PPP projects.