Does government support affect private partners’ profitability in public-private partnerships? Evidence from China

Public-Private Partnerships (PPPs) have become a significant mechanism for delivering public goods and services globally. While the PPP model has been adopted in developed countries since the 1990s, its implementation in emerging economies, such as China, is relatively recent. China's rapid growth in PPP projects since 2014, while substantial, has also presented challenges, including over-investment and irregular contracts characterized by 'de jure equity, de facto debt'. This paper focuses on the crucial role of government support in attracting private sector participation and its impact on firm profitability. Government support, while vital for stimulating investment, can also lead to negative consequences such as hidden debt and budgetary burdens if not implemented properly. The research question is: does local government support enhance the profitability of firms involved in PPP projects? This study uses a conceptual framework and empirical analysis to investigate this question, considering both the potential benefits and drawbacks of different forms of government support.

Extensive research examines the role of government behavior in infrastructure investment and the PPP field. Existing literature highlights the importance of sufficient government support in stimulating private sector participation. However, the misuse of government support can lead to controversies. While much attention has been given to the political motivations behind the rapid growth of China's PPP market, the impact of government support on firm performance remains under-explored. This paper addresses this gap by examining the effects of both compliant and non-compliant government support on firm profitability, drawing on insights from existing studies on political motivations and the challenges faced by PPP projects.

The study utilizes a unique dataset of comprehensive project-level and firm-level panel data from 555 A-share listed companies in China between 2010 and 2019. The researchers created new proxy variables to measure government support, including inclusion in the national PPP platform, designation as a pilot project, and the government's shareholding in the project. The dependent variable is the firm's profitability, measured as the return on assets (ROA), adjusted for industry averages. The empirical model employed includes the government support variables, control variables such as project investment scale, local population, project financing market environment, government level (central, provincial, or municipal), corporate ownership (State-Owned Enterprise or private), and one-year lagged ROA. The model accounts for project-fixed effects and time-fixed effects to control for unobserved heterogeneity. Heterogeneity analyses were conducted to examine differences based on government level (provincial vs. municipal) and firm ownership (SOEs vs. private firms). A robustness check was also performed using an alternative measure of profitability based on the difference between real investment returns and contract rates.

The empirical results reveal a dual effect of government support on firm profitability. Inclusion in the national PPP platform, representing compliant government support, significantly enhances firm profitability by 8.2%. This suggests that the mechanisms associated with platform inclusion, such as guaranteed future cash flows through fiscal budgets and access to various subsidies, positively impact private sector returns. Conversely, increasing government shareholding, reflecting potentially non-compliant support, significantly reduces firm profitability by -23.3%. This indicates that higher government involvement may lead to additional transaction costs and decreased economic benefits for private partners. Heterogeneity analysis shows that the positive impact of platform inclusion is primarily observed in projects at the municipal government level. The negative impact of increased government shareholding is also more pronounced at the municipal level and specifically affects private firms more than State-Owned Enterprises (SOEs). The robustness check, using an alternative measure of profitability, confirms these key findings.

The findings highlight the importance of appropriately designed government support mechanisms in PPP projects. While compliant support, aligned with regulations and promoting transparency and fair risk-sharing, can significantly improve private sector profitability, non-compliant support that undermines the private sector's role and increases government involvement can have detrimental effects. The difference in impact between municipal and provincial government support underscores the need for context-specific policies and interventions. The stronger negative effect on private firms compared to SOEs further emphasizes the need for mechanisms to ensure that government support effectively attracts and benefits private sector participation rather than favouring state-owned entities. These results challenge the common assumption that government support in PPPs uniformly benefits private partners and suggest a more nuanced approach to designing and implementing government involvement in PPP projects.

This study contributes to the literature by providing a theoretical framework for the dual effects of government support in PPPs and empirical evidence from China's unique context. The findings show that while compliant government support is beneficial, increasing government shareholding can significantly harm private sector profitability. These results underscore the importance of designing effective and well-targeted government support policies to maximize the success and efficiency of PPP projects while ensuring fair risk-sharing and incentivizing private sector involvement. Future research could explore the optimal level and type of government support for different project contexts and the role of institutional factors in shaping the effectiveness of government interventions.

The study's focus on China limits the generalizability of the findings to other contexts. The reliance on publicly available data may also limit the scope of the analysis, potentially excluding projects with less transparency or information disclosure. Future research could broaden the geographical scope and consider alternative data sources to further validate and extend these findings.