PPP rules tightened to reduce fiscal risk

China will reinforce regulations on public-private partnership projects as part of its efforts to prevent illegal borrowing by local governments, according to a senior official with the nation's top economic regulator.

"Strengthened supervision over local governments' financing for PPP projects, which began earlier this year, marks a new starting point (in PPP management)," said Han Zhifeng, deputy head of the Fixed-Asset Investment Department of the National Development and Reform Commission.

It will be a long-term process, he told China Daily. "Local governments should adapt to long-term strengthening of oversight."

Han also said controls will be extended to specific projects. "Control of risks should be improved at an early phase and carried out on a case-by-case basis," he said.

PPP is an effective way to engage private investment in local development. But some local governments have used it to disguise too much borrowing from banks, increasing the country's overall financial risks.

Controlling local government debt risks will be a long-term task, according to a statement released after the National Financial Work Conference held in July.

In June, six top government regulatory bodies issued a guideline on ramping up efforts to controls such risks.

The statement specified that local governments will be prohibited from providing guarantees for securing fixed returns for enterprises and lenders in PPP projects.

Local governments are not allowed to shoulder the responsibility for reimbursement for those projects or use government income to repay debts, according to the statement.

"The PPP contracts should clarify the rights and obligations of local governments and private investors," said Xu Dongsheng, a manager of Beijing Enterprises Water Group.

"Without clear rules, uncertainties that emerge during years of construction will cause disputes," he said.

Clear boundaries will help boost private participation, said Wei Jianguo, vice-president of the China Center for International Economic Exchanges.

Experts said the country is facing a challenge because financial risks can be found in areas like the property market that include local government debts.