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Moody's Investors Service says that the Chinese government's (Aa3 negative) strong commitment to public-private partnerships (PPPs) as an alternative means to develop and fund regional and local government (RLG) infrastructure projects is supporting the sector's medium- to long-term growth prospects.
"China's PPP market is still in the early emerging stage, due to its evolving framework and the dominance of state-owned enterprises (SOEs) rather than private sector developers and investors," says Ivy Poon, a Moody's Assistant Vice President and Analyst.
"The government has since 2015 introduced numerous directives and measures that provide more clarity and guidance on the PPP framework, which will support the market's development and likely lead to more third-party private investment," adds Poon.
Poon was speaking on the release of a Moody's report entitled "Infrastructure and Project Finance -- China: Public-Private Partnerships: Government Support Provides Strong Growth Potential".
Moody's report points out that in China, PPPs are primarily seen as a means of broadening the financing options available to RLGs for infrastructure development.
The country's announced PPP project pipeline continued to grow in 2016, with 11,260 projects with a total investment of RMB13.5 trillion at various stages of development at end-2016, compared to 6,997 projects with a total investment of RMB8.1 trillion at the start of 2016.
Despite this large announced pipeline, third-party private sector participation remains limited. In contrast to more developed markets such as Australia, the UK, Canada and the US, PPP involvement is characterized by SOEs.
But, similar to the more mature PPP markets, the Chinese government is also interested in PPPs because they allow governments to transfer risks to the private sector at a fixed price that can accelerate project delivery, lower total project costs, and improve cost certainty for the public sector offtaker on a whole of asset life basis.
The legal and contractual framework for PPPs in China is evolving. As such, Moody's views the government's efforts to improve the transparency of the PPP model while also increasing new investment instruments to support PPP projects are positive for the market's development.
Moody's further expects RLGs to remain supportive of PPPs as a means to reduce their immediate fiscal burden for infrastructure development. In general, PPPs are likely to be mostly utilized in regions where funding requirements for infrastructure projects are sizeable, but RLGs' financial resources are limited.
