Effect of private capital in rival projects on public-private partnership adoption in China

ABSTRACT

This study analysed how local governments react to intergovernmental competition for private capital in the public goods market. Using microlevel data for public-private partnership (PPP) projects in China from 2012 to 2018, we found that the more private capital rival cities have attracted, the more likely local governments start to introduce PPP projects, especially those whose future returns are paid by governments. The results are robust to an instrumental variable estimation using the financing demand of rival cities. The effect of rival projects was found to be related to information disclosure, financing facilitation, and governors’ responsibility. The results suggest that local governments tend to promise future obligations for payment to decrease advanced capital expenditures. This study also provides implications for political and economic research by shedding light on local competition in the progress of marketization.

KEYWORDS:

• Public-private partnership
• payment obligation
• intergovernmental competition
• private capital

JEL CLASSIFICATION:

• H41
• H54
• H77

Acknowledgments

This work was supported by the Youth Program of Research Foundation for Humanities and Social Sciences of the Ministry of Education [“The Effect of Social Capital Absorption in China’s Infrastructure Investment: An Empirical Study Based on China’s PPP Project Data”, 18YJC790027], the Fundamental Research Funds for the Central Universities [JKN012022005], and the China Postdoctoral Science Foundation [2018M631985].

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Since state-owned enterprises occupy a large portion of Chinese enterprises, private capital in Chinese PPP is defined as enterprises other than financing-platform companies and state-owned enterprises operated by local governments.

² Demonstration projects are set by provinces or the state for prefectural governments to learn how to design projects.

³ We defined other prefectures in the same province as rival prefectures.

⁴ In Table A2, we used project-level data to examine the effect of payers of future returns on the portion of private capital attracted. The results show that if the returns are to be paid by local government, the private capital portion increases by 1.95 percentage points, verifying that adopting government-paid projects is effective to attract private capital (Feng et al., 2020).

⁵ We used demonstration projects as placebo tests and results show that the three channels are not influencing mechanisms of demonstration projects in the adoption of government-paid projects.

Additional information

Funding

This work was supported by Youth Program of Research Foundation for Humanities and Social Sciences of the Ministry of Education [18YJC790027]; the China Postdoctoral Science Foundation [2018M631985];  Fundamental Research Funds for the Central Universities [JKN012022005].