OREANDA-NEWS. Fitch Ratings believes the public-private partnership (PPP) model promoted by the Chinese government will improve infrastructure project-funding and is likely to drive new contract growth for construction companies in 2016.

China's National Development and Reform Commission (NDRC) on 25 May 2015 announced 1,043 potential PPP projects valued at a total of CNY2trn. In September, the Ministry of Finance has initiated a fund with CNY180bn to support PPP projects. The fund was created together with 10 Chinese financial institutions, including the China Construction Bank, the Agricultural Bank of China, the Bank of China, the Bank of Communications, CITIC Group, and China Life Insurance (Group) Co.

The PPP model facilitates co-operation between the government and enterprises in using social capital for projects, such as water conservation, transportation and environmental protection. Unlike build-operate-transfer (BOT) projects, the construction company does not own the project and only acts as one of the investors under the PPP model. If the PPP projects are ring-fenced from the construction company's other operations, the debt raised under the project is off the balance sheet, which means it will not increase the company's leverage. This will reduce the capital requirements and financing expense for construction companies.

However, construction companies could face higher risks when PPP projects fail. In contracts recently signed for new PPP projects, the financial institutions mentioned above act as limited partners but they have a prior claim to the project assets and returns, leaving the construction company subordinated. In these cases, the construction company might not be able to recoup any of its investments should the projects fail. In addition, it is not yet clear what kind of legal protection investors in PPP projects will have in the event the projects fail.