In an attempt to address growing demand for public services and budgetary concerns, China’s central government has issued a series of documents paving the way for public-private partnerships. Many of these projects have already been launched across provinces and municipalities. As this new model becomes increasingly popular, it is imperative to strengthen risk management.

Under the model, a public sector authority signs a contract with a private party that allows private capital to flow into infrastructure and public services. In essence, the model is intended to set up a long-term partnership based on equal cooperation between public and private capital. It has three core features—partnership, and mutual benefit and shared risk.

Nonetheless, there is widespread misunderstanding, particularly among local departments, that the model is a new tool for government financing and a means of dissolving government debt.

When planning a project, local governments do not regard the public-private model as a new means of management or consider whether it is appropriate to apply this model.

By attracting for-profit and non-profit investment in infrastructure and public services, the public-private model can help to relieve the pressure on government budgets. However, this does not mean reducing overall government spending but rather allocating current spending over the next two or three decades. Moreover, because financing costs in the private sector are much higher relative to government costs, the public-private model may aggravate the long-term burden on taxpayers.
 

Thus, risks will be high if public-private projects are promoted and implemented in such a context. Before launching a public-private project, some local governments fail to conduct a careful evaluation of the applicability, compliance and market returns of the project as well as their fiscal solvency.
 

The selection of partners lacks competition and transparency. Local governments often opt for appointment and negotiation to avoid the complexity and costliness of bidding.
 

Also, mechanisms to assess and distribute risk are ignored in the contracting process. Furthermore, some government organs fail to fulfill the obligations prescribed by the contract when implementing projects.

In order to make the public-private model sustainable, an effective mechanism of risk management and control is needed. Above all, the selection of partners needs to be scrutinized. We should introduce strict procedures, including prequalification, screening and negotiation. Moreover, we can identify several alternatives through public or invitational bidding, and examine and quantify their credit, resources and scale before choosing the best partner based on scores.
 

Then, we should construct a reasonable risk-sharing mechanism. The basic principle is to distribute the risk to the party that is more capable of risk control. For each public-private project, it is necessary to conduct a quantitative risk assessment and construct a dynamic risk-sharing framework.

In addition, a scientific mechanism to set and adjust prices is needed. Because a public-private partnership may last a decade or even several decades, a detailed price adjustment scheme should be outlined in the contract so the project can achieve sustainable development while ensuring the common interest of both sides.
 

Last but not least, regulation is needed for the entire process. An association should be encouraged where authorities, third parties and social organizations can participate in providing technological support, policy service, evaluation and consultation.

 

Luo Liping is the deputy director of the Institute of Regional Economics and Systematic Engineering at the Hunan Academy of Social Sciences.