A Study On Risk Sharing Effect And Risk Mitigation Effect Of Public Private Partnership

With the continuous advancement of China's urbanization,the economic development has put forward requirement for the supply of infrastructure.Under the traditional time,in China,the infrastructure is generally provided by the government.However,in the recent years,the economy groth has shifted down,the growth of fiscal revenue has been significantly lower than the rate of GDP.In order to fill the deficit,local governments chose to issue Local Government Debt,City Investment Debt or other channels for external financing.As the debt raising behavior has push the risk of local government debt to a significant level,to control the risk,the State Council issued the "Opinions on Strengthening the Management of Local Government Debt" in2014,which required the Department of Finance to strengthen supervision of local government debt,and promoted the use of Public Private Partnership(PPP),as an important method to dissolve the risk by local government debt.Since then,the PPP was appreciated by local governments at all levels,and has now become one of the important solutions to resolve local government debt risks and provide infrastructure.To the end of 2019,there are 9,509 PPP projects in China,based on the dataset provided by the PPP centre of the Ministry of Finance,and 6,158 of which are in the implementation phase.With the development of PPP in China,a few questions are always being debated:First,whether the implement of PPP achieves the goal of policy that insolve the financial pressure of local government.Second,whether the risk sharing between the two parties in the PPP project is reasonable.Third,does the application of PPP bring more other risks?Therefore,this study attempts to use theoretical analysis and empirical analysis to further expand the research on PPP risks with the micro and meso levels by the view of the public sector.The study includes following parts: The chapter 1 introduces the research background,research significance,logical structure,research methods and innovations of the article.The chapter 2 reviews existing research with PPP projects in micro,and PPP to local government debt risk in meso.Then summarizes the study results and deficiencies of current PPP research.The 3 chapter discusses the definition,feature,property,and reviews the basis theories of PPP,defines thesharing risk utility of PPP.The 4 chapter divides PPP into 6 different types according to the operation mode and cooperation mechanism.This study constructs a model--the cash flow measurement method to evaluate the expenditure of PPP.Based on this model,this charpter study on the characteristics and the graph of the expenditure by the public.Then an empirical study about the expenditure of PPP and the financial expenditure by local government,by using the data caculated with the cash flow measurement method,is given.The 5 chapter begins with identification of PPP project risks,and sorts the risks by the ability of share-able.Then the study selects the risks which are ‘share-able but hard to control' risk,as measuring indicators in risk evaluation.Subsequently,carry out a quantitative research on the current PPP project risks,and find out the risks exposure to the PPP projects in China.Furthermore,evaluations of the risk sharing strategy based on the current PPP contract in practice.Chapter 6 porposes a theory: the substitution effect of PPP on fiscal expenditure.On one hand study in total debt level,empirical study finds the transmission channel between PPP expenditure and local government debt.On the other hand,a relative mitigation effect of PPP on local government debt risks is analysised as well.Chapter 7 summarizes the risk transfer effect of PPP projects and the mitigation effct of local debt risks based by PPP based on the conclusions of each charpter.In the end the study gives policy recommendations on the management and development path of future PPP projects.The main conclusions of this study include the following:First,it figures out the feature of PPP.PPP is a cooperation agreement between the government and private to provide a public service in order to improve social welfare.In practice,PPP is a continuation of the "franchise" in past period.PPP exhibits the characteristics of publicly and income stability;in different of traditional government procurement,PPP shows the property of equal and beneficial between the government and social capital,the return on investment is reasonable but non-profiteering,a long-time cooperation of the agreement.Based on these characteristics,a good PPP project should have the symmetry of benefits and risks,the clarity and accuracy of the duties and rights,and the completeness of legal guarantees,the continuity of economic policies,.Second,the risk Shareing and mitigation effect of PPP is reflected in the micro level on project and the meso level on local government debt.To the micro project level,the PPP model requires the local government and private access the risk scientifically and reasonably evaluate without preconditions.Share risks which is more suitable for private partner to handle from government.To the meso level with the relationship between PPP and local government debt,PPP attracts private to participate in public service investment,and reduces the pressure on financing by local government;sharing and isolation debt risks to private part.Achive the goal of resolve local government debt risks by deduct the expenditure and debt balance.Thirdly,when the project's return mechanism is same,the gap between PPP and traditional government procurement is completely same.By calculating and form the shape the total amount of project expenditure by the local government,the PPP model is usually dominant choice for construction and operation projects,but the transfer and operation projects can only achieve the goal of value for money by improve operating efficiency and share the risk to private partner.Taking into account the external effects of using PPP,this study finds that PPP projects cannot reduce the total amount of local fiscal expenditures,because the budget saving by adopt the PPP will spend on other investments.Fourth,to the micro level of the project,there is a range to share the risks of PPP between the public and private.Within the range that could be determined by a game.Responsibility for the risks that need to be taken.The risks of PPP projects are classified into three types: non-share-able risks,share-able but can be controlled effectively,and share-able but difficult to control.Among them,share-able but difficult to effectively control risks are the content that local governments need to pay attention to when adopting PPP model risk sharing strategies.At present,the risks that can be transferred but are difficult to effectively control mainly include three types: financing cost risk,price adjustment risk,and operating income risk.Combining the cash flow measurement method,this article estimates the risks assumed by the provinces since2014 by adopting the PPP model.If the risk is not shared,the expenditures of government departments at all levels across the country for PPP projects may have a cumulative loss of 183 million CNY compared with the exception.In practices,PPP contracts risk sharing strategy generally have effect on the financing cost risk and operating income,but there is room for further optimization;while the price adjustment risk sharing strategy is not effective.Fifth,as a tool to resolve local government debt,PPP is not a liability account from the accounting level,and it is a payment and subsidy from the policy level.Therefore,compliant PPP projects are not hidden local government debts and will not cause local debts.There are two alternative relationships between PPP and local government expenditures.The one is a pure alternative relationship,the other one is alternative and supplementary relationship,which is decided by whether the budget replaced by private re-invest in other projects.If the local government do not change their decision,it is pure alternative effect,or the alternative and supplyment.Sixth,the expenditure is determined by many factors,it's hard to figure how much local government debt risks are resolved with PPP by using econometric model directly to local government debt balance.Instand,the anaylysis from relative effects is more appropriate.In the scope of reducing debt ratios,by using PPP to provide could prived public infrastructure for about 889 million CNY from 2014 to 2019,can reduce the debt ratio of new public facilities supply about 40%,which reduces the debt risk with more infrastructures.In the scope of reducing external financing,the PPP push down the interest rate spread of city investment bonds,which stand for the demand of local government.