Political Incentives And Public-private Partnership

China has pushed forward national strategies such as the “Urbanization” and the “Belt and Road”,which raise new requirements on the infrastructure construction.Public-Private Partnership(PPP)has emerged as an alternative channel to meet the shortage of government finance for infrastructure projects.The government expects the PPP to contribute capital from the private sector,which can bring in their advantages in technology,information and management,and relieve the financial pressure of the government.However,there are various problems during the implementation of PPP projects: Firstly,PPP projects are difficult to implement due to a lack of incentive for the private sector to participate in these projects.Secondly,the government abuses the PPP model for government financing.60% of PPP projects often adopt the method of government payment,which actually worsen the fiscal burden.In fact,the PPP model has been alienated into real debt,and most PPP projects are funded by the government,which deviates from the original intention to ease the fiscal burden.The PPP has attracted widespread attention and debate in academia and industry.Firstly,how to deal with an insufficient willingness of private capital for participation? Secondly,what is the institutional root for the alienation of PPP model into real debt,and how can we change the status quo of real debt? It's essential to evaluate whether the PPP has eased the financial burden of the government,which are key theoretical and practical issues for the implementation of PPP projects.This paper analyzes these issues from the perspective of political incentives,and put forward policy implications for the government and industry.This paper proceeds as follows in four parts.Part 1 is the institutional background and research design.This paper constructs the political incentive model of the PPP based on the principal-agent theory,and discusses the incentives designed by the central government towards the local government.The paper finds that local government officers put too much emphasis on the promotion incentives such as economic growth,which ends up in a low success rate of the PPP projects.Government officers make tradeoff on the costs and benefits for the political promotion,which is not aligned with the incentives of the private capital,and thus leads to insufficient incentives for the private sector to participate in PPP models.Part 2 studies the market reactions to the announcement of the PPP projects,and examines the role of political incentives.This paper examines the market reaction of PPP project announcements during 2015-2018 using event study method,and explores the ways to deal with the incomplete constraint of PPP contract.The paper finds that there is no difference between market reactions to the PPP projects and other projects,while PPP projects with sufficient political incentives have higher market reactions.Political incentives of the government officers can help alleviate the problem of incomplete contracts of PPP projects.Part 3 studies promotion incentives and risk sharing.The paper analyzes the role of promotion incentive for the phenomenon of real debt,and raises some policy implications.A higher promotion incentive of government officials will end up in PPP projects where the government takes more risks.The payment method of government and feasible gap is the bottom line of PPP projects,which ends up in the alienation of private capital into government debt.With the increase of age and tenure,the probability of promotion decreases,and the incentive for promotion increases.Officials will choose PPP projects with more risks for the government.In the fourth year of the tenure of the officials or when the age at 54,the incentive for promotion reaches the peak,when the tenure exceeds the fourth year or the age of 55,the incentive for promotion decreases,and the PPP projects with more risks for the government significantly reduce.The legal environment regulates the relationship between promotion incentive and PPP project risk sharing.The better the legal environment is,the more the government officials can be regulated.The PPP projects is more curtailed when officials take more risks based on promotion incentive.Part 4 investigates the PPP projects and fiscal incentives.Using the urban investment bonds and PPP projects in 210 cities during 2011-2017,this paper studies whether PPP can relieve the financial pressure of the government.The paper finds that PPP projects can not only meet the fund shortage of local government projects,but also alleviate the financial constraints of local government through land income and urban investment bonds.The investment in PPP projects can be capitalized into the land,which increases the land income of the government.Local governments use the land income as collateral to increase the issuance of urban investment bonds.Thus,PPP projects can play a role of leverage in the process of government financing,which are more efficient than the ordinary fixed asset investment of the government.