How do you develop $1 trillion in PPPs for the PRC?

28 Apr 16

How can China best manage its huge growth in public-private partnerships?

The People’s Republic of China (PRC) is now developing more public-private partnerships (PPPs) than the rest of the world put together. The latest official data show that the PRC’s local governments are preparing or implementing a staggering 7,110 PPPs across 19 industries, with around $1.3 trillion in investment. In comparison, Europe closed 49 PPPs in 2015 worth $18bn.

The PRC’s PPP program had almost ground to a halt by 2012, crowded out by huge funding for conventional public investment projects under an economic stimulus package. But the PPP program is now at the forefront of wide ranging public finance reforms initiated in 2013, and a broader push for the market to play a decisive role in the country’s development.

The implementation of these PPPs is a priority for both delivering public services and helping maintain the PRC’s new ‘normal’ rate of economic growth.

Project preparation will take time. Land must be secured, pre-feasibility and feasibility studies and project implementation plans prepared and assessed, project approvals finalised, potential partners procured, PPP agreements drafted and negotiated, and so on.

Considerable resources will also be required. PPPs are normally developed by external advisory teams, as governments lack the full range of skills and experience required. Project complexity, combined with the high fee rates of the commercially oriented advisors used in PPPs, result in a higher than normal cost of project development.

How can the PRC’s rapid scaling up in PPPs be managed? The experience of many countries suggests that project development facilities (PDFs) can help make the task more doable. Development partners concur with this experience, with ADB among others running their own PDF for PPPs.

In brief, PDFs provide the specialised resources needed to conduct studies, to design and structure a PPP, and to procure the PPP. They pay for the upfront costs of developing a PPP, and then recover the cost from successful projects, operating as rolling funds that prepare project after project.

PDFs are much more than a bank account used to engage advisors and conduct studies. They are also used as a tool for setting and demonstrating good practice standards in PPPs.

The ADB working paper Peoples’ Republic of China: A Model Project Development Fund for Public-Private Partnerships draws on international experience to identify issues to be considered in using PDFs in the PRC. It offers suggestions on what PDFs should aim to do, how they should work, and who should be involved, responding to a call by the Standing Committee of the National People's Congress in June 2015 to explore PDFs for PPPs.

Some simple arithmetic brings out the common sense of exploring PDFs. If the PRC can keep the average development cost per project to $500,000, a low number by international standards, around $3.5bn would be needed to prepare the current batch of PPPs. It is unlikely that local governments have budgeted for this large expense. Many are probably unaware of the need to put extra effort into preparing a project delivered as a PPP.

Without adequate funding, projects are likely to be underprepared and go to the market too early. Potential consequences include difficulties in securing partners or financiers, and service disruption and disputes during the 10, 20, to 30 years of implementation.

One of the clearest lessons on PPPs from other countries is that good project development is the heart of a healthy PPP program. Too many countries have learned this the hard way. PPPs can deliver public services faster, at lower cost, and improved quality. But to achieve the potential benefits, the right projects need to be identified, and PPPs need to be developed and implemented well. Projects that stand the test of time are well prepared.

The cost of developing a PPP well through a PDF will pay for itself through the better value-for-money it provides – such as by providing timelier, higher quality, and lower cost public services. PDFs can make the difference between a successful and a disappointing PPP program.

But the use of PDFs will need to be actively promoted. If not, a lack of readiness among the PRC’s local governments may emerge as a key risk to the world’s largest PPP program.

This article first appeared on the Asian Development Blog

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