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

The paper examines whether local government support enhances a PPP-participating firm’s profitability. PPPs have reshaped public goods delivery globally and have grown rapidly in China since 2014, but concerns persist about over-investment and irregular contracts (“de jure equity, de facto debt”) linked to political motives and fiscal pressures. Government support is pivotal for attracting private capital but may create hidden debts and misaligned incentives if misused. The study asks: will local government support improve a PPP firm’s profitability? Using a conceptual framework and panel data on Chinese A-share listed companies, the authors hypothesize dual effects: compliant support (e.g., inclusion in the national PPP platform with budgeted payments) should improve profitability, whereas improper support (e.g., higher government shareholding or fixed guarantees) may reduce it. The paper contributes a theoretical framework and novel project- and firm-level evidence from 2010–2019, and explores heterogeneity by government level and firm ownership.

China has undertaken more PPP investment than any other country in recent decades, with PPP adoption promoted top-down by the central government to enhance public service quality and social welfare. Local governments, however, often pursue PPPs to bypass fiscal constraints and advance political careers, creating misalignment with central objectives. PPP projects face long-term, complex risks that deter some firms. To attract private participation, governments offer direct (financial) and indirect support. Prior work finds direct support attracts private firms, while indirect support reduces uncertainty but may not cut costs. The literature emphasizes political motivations, adoption drivers, and contractual choices, but offers limited evidence on how government support affects participating firms’ performance. This study addresses that gap by assessing the profitability implications of different forms of government support in China’s PPP market.

The study combines a theoretical framework with empirical analysis. Theoretically, the authors distinguish between compliant and pseudo PPPs in China based on whether contracts implement a pay-for-performance mechanism and proper risk-benefit sharing. They posit a binary market structure (pseudo vs. compliant) and model interactions among central government, local government, and firms, outlining assumptions about supervision, local support (including potentially improper guarantees or higher shareholding), firm profit-maximization, and the conditions under which pseudo-PPPs emerge. From this framework they derive two hypotheses: H1: Compliant government support (e.g., inclusion in the national PPP platform or arranging fiscal budgets for payments) enhances investment profitability. H2: Some government support (e.g., increasing government shareholding in PPP projects) may reduce firm profitability due to added transaction costs and reduced private sector involvement. Empirically, the authors estimate panel regressions for A-share listed companies involved in PPPs from 2010–2019: ROA_it = α + β gov_it + γ ROA_it−1 + δ Z_it + c_i + c_t + ε_it, where ROA_it is firm profitability relative to the industry average; gov_it captures government support; Z_it are controls; c_i and c_t are project and year fixed effects. Profitability is measured as firm ROA minus the industry average ROA (industry average weighted by total assets across seven PPP-relevant industries: transportation, municipal engineering, ecological construction, environmental protection, education, new infrastructure, others). Government support proxies: Included (project included in the official national PPP platform), Pilot (project designated as a pilot), and Shares (government shareholding in the PPP SPV). Controls include project investment size (lnInvest), local resident population (lnPop), local financing environment (ratio of total debts/loans to regional GDP), government level (central/provincial/municipal), lagged ROA, and ownership type (SOE). Data are compiled from the national PPP platform, listed company reports and announcements, government procurement sites, the Chinese stock market and accounting research databases, and official statistics (National Bureau of Statistics; People’s Bank of China). Fixed effects for year and project are included; standard errors are robust. Robustness checks use an alternative dependent variable: the difference between realized return on investment and the contract rate of return (collected from PPP contracts and bidding documents). Heterogeneity analyses consider government level (provincial vs. municipal) and firm ownership (SOE vs. private).

- Baseline results (n=555 PPP projects; ~4,410 observations with FE): - Inclusion in the Ministry of Finance PPP platform (Included) increases firm profitability by about 8.2% (coefficient ≈ 0.082; significant). Pilot status also shows a positive effect (coefficient ≈ 0.030; marginal significance). - Government shareholding in the PPP SPV (Shares) reduces firm profitability significantly (coefficient ≈ -0.233; about -23.3%; p<0.05). These findings support H1 and H2. - Heterogeneity by government level: - Positive effects of inclusion are significant mainly for municipal-level projects (Included coefficient ≈ 0.080*), while provincial-level coefficients are not significant. - The negative effect of higher government shareholding is concentrated in municipal projects (Shares coefficient ≈ -0.259**), indicating that local (city/county) interventions more strongly inhibit private profitability. - Heterogeneity by firm ownership: - For private firms, higher government shareholding significantly reduces profitability (Shares ≈ -0.335**, p<0.05). - For SOEs, the effect of Shares is not significant, consistent with SOEs’ closer ties and oversight by government. - Robustness checks (alternative profitability measure: realized return minus contract rate): - Inclusion remains positive and significant (coefficient ≈ 0.027***). - Government shareholding remains negative and significant (coefficient ≈ -0.223***). Overall, compliant support that ensures budgeted payments and platform inclusion enhances profitability, while increasing government equity participation reduces private partners’ profits, particularly in municipal-level projects and among private firms.

The findings directly address the research question by revealing a dual impact of government support on PPP firm profitability. Compliant support mechanisms—such as inclusion in the national PPP platform and budgeting of future payments—improve financial performance by ensuring predictable cash flows, access to subsidies, and lower financing costs. In contrast, increased government shareholding diminishes private sector involvement, introduces additional transaction costs, and reduces the private partner’s residual claim, thereby lowering profitability. These patterns are strongest at the municipal level, where interventions and political incentives are more pronounced, and among private firms, which lack the implicit support and alignment that state-owned enterprises enjoy. The results underscore that not all government support is beneficial: support that strengthens contract compliance, transparency, and payment certainty fosters profitability and sustainable partnerships, whereas equity-based or guarantee-like interventions risk creating pseudo-PPPs that undermine risk transfer, distort incentives, and harm private returns. Consequently, policy should prioritize compliant support frameworks to attract genuine private participation and enhance project performance.

The study develops a theoretical framework and provides empirical evidence on how different forms of government support affect PPP-participating firms’ profitability in China. Using project- and firm-level data (555 listed companies, 2010–2019), it shows that compliant support—particularly inclusion in the national PPP platform—raises profitability (≈8.2%), while increased government shareholding significantly reduces profitability (≈−23.3%). These effects are concentrated in municipal-level projects and among private firms, and are robust to alternative outcome measures. The research extends PPP literature by distinguishing compliant versus pseudo-PPP support and introducing shareholding as a key support dimension affecting firm performance. Policy implications suggest governments should emphasize compliant, rules-based support (platform inclusion, transparent budgeting) over equity participation that reduces private incentives and profitability, especially to attract non-state private partners. Future work could further explore causal identification strategies, dynamic effects over the project life cycle, and cross-country comparisons in varying institutional settings.