Do contract characteristics impact on private investment in public-private partnerships? Evidence from China

Wang etalHuanming Wang, Bin Chen, Wei Xiong and Guangdong Wu

Over the past three decades, many developed and developing countries have witnessed the increasing provision of public goods and services through private firms. With the New Public Management movement, state monopolies in many infrastructure sectors have been relaxed and privatization has been utilized as an alternative way of delivering public services. Private-capital investment has been allowed to build, operate and maintain components of the infrastructure through various types of cooperation between the public and private sectors. As a result, public-private partnerships (PPPs) have become a prominent part of the local government landscape. Advocates have emphasized the advantages of private investment in PPP infrastructure projects: enhanced efficiency, cost savings, improved effectiveness, better quality of services, and reduced government overheads.

Why are private investors willing to invest in infrastructures through PPPs? Our recent Policy & Politics article entitled Commercial investment in public-private partnerships: the impact of contract characteristics explores whether the characteristics of such contracts affect the degree of private-sector investment in PPP projects. In our study, we investigated the relationship between contract characteristics and private investment in the PPP market, using some of China’s PPP projects as our empirical data. Since 2014, China’s central government has made strenuous efforts to develop PPPs for building infrastructure and delivering public services. As the largest PPP market in the world, China offers an excellent case for investigating our research question.

Our findings suggest that the extent of private investment in PPP projects tends to be (1) motivated by the use of a competitive tendering process in awarding contracts; (2) increased in large projects (large projects would achieve economies of scale) and projects with higher levels of asset specificity; and (3) significantly associated with specific contract types (eg a higher degree of residual rights retained by the private sector would stimulate more private investment).

These findings are important because the study complements the existing literature by elaborating on contract characteristics, including ways of awarding contracts, complexities of the contract, types of contract, and contract duration. We illustrate the multidimensional impacts of contract design on private investment, enriching the existing studies that only focused on the relationship between contract design and PPP performance. In addition, our micro-level analysis provides practical insights for policy makers in local governments who are interested in attracting private investment. Such contract-specific factors are much easier to change than external factors (e.g., law, political stability, and control of corruption) and will be of interest to researchers interested in PPP, government policy-makers and commercial investors.

You may read the original research in Policy & Politics:

Wang, Huanming; Chen, Bin; Xiong, Wei; Wu, Guangdong (2018) ‘Commercial investment in public–private partnerships: the impact of contract characteristics’Policy & Politics, DOI: 10.1332/030557318X15200933925414

If you enjoyed this blog post, you may also be interested to read:

The effects of privatisation on the equity of public services: evidence from China

British educational trajectories from school to university: evaluating quantitative evidence in policy formulation and justification

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