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Ministry tightens scrutiny of PPP projects to curb risks

By Chen Jia | China Daily | Updated: 2019-05-24 09:05

By the end of March, 8,839 PPP projects were registered with the Ministry of Finance, with total investment of 13.42 trillion yuan. [Photo/VCG]

A new round of investigation on risky public-private partnership (PPP) projects has started in China, with an eye on slowing the growth in local government debt and preventing financing risks, the Ministry of Finance said on Thursday.

PPP projects worth more than 13 trillion yuan ($1.88 trillion) will be re-evaluated, to figure out whether the financing process has increased the off-budget debt of local governments. The order has been sent to all provincial-level local governments, a senior official from the ministry's Finance Department, who did not want to be named, told China Daily.

The investigation is expected to be completed by the end of June, and after that all PPP projects will be supervised by a national government debt supervising system, according to the official.

The investigation was conducted because the auditing department raised doubts that some local governments might add contingent liabilities, a part of debt that is hard to measure, in the name of supporting PPP projects, the official said.

"Projects that will increase local governments' contingent liabilities should be stopped or transferred in other legal ways for continued construction," said a notice sent by the Ministry of Finance to provincial-level local government officials.

The provincial financial departments should also remove all illegal PPP projects from the registration process. Experts and consultancies that offered illegal services or provided false information for project assessment will be punished, the document said.

The measure will be another strong measure to curb local government debt, especially when they have compulsions to borrow more due to the economic slowdown to support State-owned entities and stabilize local growth, said analysts.

The leverage ratio of local governments is likely to reach 23 percent of GDP in 2020, a 3 percentage point increase from 2018, according to Moody's, a global ratings firm.

The PPP financing model, which was promoted by the central government from 2015, aims to ease part of the local governments' infrastructure spending pressure. But the rising liquidity shortage, mainly due to the high reliance on short-term debt and limited access to external financing, sparked policymakers' worries on debt risks.

By the end of March, 8,839 PPP projects were registered with the Ministry of Finance, with total investment of 13.42 trillion yuan. Municipal engineering and transportation projects accounted for most of the projects under the scheme.

The Ministry of Finance had tightened PPP regulations earlier and imposed conditions that local governments can inject only a maximum of 10 percent of their annually budgeted spending into PPPs, which in turn crimped project growth. Accounting distortions also clouded prospects for PPP projects, which could have understated some financial risks, analysts said.

"But PPP will remain the main financing model for Chinese local governments to fund infrastructure investments over the medium term, despite a tightening in regulations," said Yang Jing, director of the corporate research department of Fitch Ratings.

The move also indicated a trend that China's central government has begun to exercise stronger oversight of local governments, and the local governments' investment decisions are much more aligned with the central government's aim of supporting economic growth, according to economists.

"It could be challenging for the central government to manage the risk spillovers in an economic slowdown," said Lillian Li, a senior vice-president with Moody's. "While the central government would likely try to prevent any risk contagion, potential policy missteps or the complexity of local economic systems, or both, could hold back policy support in a timely manner."

As the central government seeks greater transparency for its contingent liabilities, local governments' direct financing through the bond market has increased while their reliance on indirect financing through local government financing vehicles, or LGFVs, has declined, said Moody's.

According to the Wind Info, a Chinese financial information platform, bond issuances by local governments accounted for 27 percent of the total bond issuance of governments and local government financing vehicles last year, up from 15 percent in 2015, while LGFVs' share declined to 30 percent from 40 percent.

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