China is facing a huge financing shortfall in infrastructure investment and the funding mode of public-private partnership (PPP) can help fill the gap, an economist said this week.
Wang Tao, chief China economist at UBS, said in a research note that infrastructure investment is spearheading the government's bid to temper the economic slowdown driven by the ongoing property downturn, but local governments are facing financing difficulties due to sliding tax and land sale revenues and tighter debt controls.
She estimated that slower nominal GDP growth and tax reforms could lead to a revenue shortfall of 300 billion yuan (48.9 billion U.S. dollars). The decline in land sales may result in a reduction of 500 billion yuan.
Replacing local government financing vehicles (LGFV) with only new local government bonds will leave another gap of 1.4 trillion yuan, according to the economist.
LGFVs refer to companies set up by local governments to raise funds and bypass restrictions on direct government financing.
"PPP has been championed as an important alternative to LGFVs for carrying out infrastructure investment," said Wang.
PPP refers to long-term cooperation between governments and private companies on projects, which are mainly funded and operated by the latter and supervised by the former.
China's cabinet has released two guidelines and a string of measures to encourage more use of PPP to fund costly infrastructure and public service projects, but the uptake of the financing mode has been slow.
While PPP projects worth over 2.5 trillion yuan has been announced across the country, only around 10 percent has been initiated and signed with corporate partners, said Wang.
UBS predicted the government will allow some LGFVs and quasi-government entities to join as PPP partners, and accelerate utility price and other structural reforms to speed up PPP uptake for the rest of 2015.
"Such pragmatism can help fill the financing gap in the near term," said Wang.
