14 October 2019
Ren Zhijiang says his investment in a Beijing subway line turned out to be "a generous donation". Photo: Bloomberg
Ren Zhijiang says his investment in a Beijing subway line turned out to be "a generous donation". Photo: Bloomberg

Why public-private partnership doesn’t work in China

Earlier this month, tycoon Ren Zhiqiang lambasted the public-private partnership (PPP) business model the Chinese government is keen to promote.

Ren, who retired recently as chairman of Huayuan Property, said his investment in Line 4 of the Beijing subway turned out to be “a generous donation”.

What he meant was that he had not reaped any profit as the second-largest stakeholder for more than a decade.

The line, a PPP project that also involved Hong Kong investors, was a loss-making project, he said, mostly because of the low subway fare.

In 2007, Beijing adopted a flat fare for the city’s subway system, 2 yuan (33 US cents) no matter how long the journey and how many times the passenger transfers from one line to another.

This fare, probably the lowest in a major city worldwide, will be replaced by a tiered pricing system from Dec. 28, with a starting price of 3 yuan.

It is uncertain whether the price hike can bring Ren a profit, but what is certain is that he is unhappy with not having had a say in this partnership.

The government made all the decisions, including pricing, investment and line extension, he said.

Ren’s complaints reflected a common problem for China’s PPP ventures. The government takes an excessively dominant role.

How governments benefit from this type of partnership is obvious.

It enables the public sector to improve its expertise and gain from the efficiencies the private sector can bring.

In addition, a PPP can bring capital investment to the public sector without incurring any debt.

The business model is popular and mature in many developed economies, but it was first tried out in China only about 10 years ago.

In recent years, the central government has decided to promote the model, which was listed by the State Council as one of the two major ways to manage local government debt. The other is the issuance of provincial bonds.

Clearly, the central government has pinned high hopes on PPPs. In May, the State Council listed 80 public projects that would include private investment and said they could herald an era when private capital can participate in government projects as local governments’ budget funds run low.

But these well-intended initiatives haven’t been a success. Private investors haven’t shown much  interest in these projects, government reports say.

The lukewarm response is a result of the legacy of a government-dominated economy.

In the PPP projects, the government always has all the say, while private investors are regarded as merely “cash cows” or “automatic teller machines”.

Private investors like Ren pay the bills and take the risks but do not have the right to determine how the projects are run.

The investors put their money in public projects to earn a profit, but many public projects are aimed at enhancing the welfare of society. So there is a balance to strike.

The government has to share part of the profit, if any, and respect the desire of private investors to make money. If not, why would private investors join hands with the government?

So the government must learn to take a step back in its PPP ventures.

A few things can be done to check the government’s power.

First of all, laws and regulations must be in place to protect private investors.

At the moment, the Infrastructure and Public Project Franchise Law is still being drafted, so investors are exposed to great policy risks.

Chinese governments, especially local ones, are infamous for their inconsistency and haphazard manner of designing and implementing policy. 

Other existing laws, such as the Company Law and the Procurement Law, should be amended to remove obstacles hindering the development of PPPs.

It is also important to have a few successful PPP projects so that private investors can build up their confidence in this new model.

Another thing to watch out for is corruption.

Without a transparent bidding process and power checks, PPPs could be a hotbed for rent-seeking behavior. Private investors may participate in loss-making PPPs as a tradeoff for benefits from other projects.

Bribery could also appear in the bidding process for profitable PPP projects. This is something that must be prevented.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.