Introduction

The concept of delivering public goods has been reshaped worldwide over the last thirty years (Jin et al., 2005). A public–private partnership (PPP) contract builds a long-term contractual agreement between public officials and one or more firms for delivering infrastructure and public utilities (Wang et al., 2020; Xiong et al., 2021). A range of infrastructures based on the idea of PPP contributes to promoting infrastructure investments, improving public services, and satisfying social demands. Research PPPs are expected to address complex global problems, advance data innovation, and generate benefits in the coming years (Webster, 2022; Bryant, 2022).

Although PPP model has been promoted in developed countries since the early 1990s, they were only introduced later in emerging countries (Wang et al., 2022). China launched PPP market at the end of 2014 and has achieved rapid growth in terms of investment scale. As of June 2022, more than 10,000 projects, with a total investment value of CNY 15.1 trillion (approximately USD 2.3 trillion), have been approved by China’s Ministry of Finance. With a rapid development, China’s PPP market has an over-investment problem, which is called the “alienation problem of PPP financing function” (Wang et al., 2020). A large scale of irregular contracts exists in China’s PPP market, characterized by “de jure equity, de facto debt” (Wang et al., 2020). In these irregular contracts, local governments often provide support for seeking politics, such as fixed commitments or higher shareholdings for investors (Tan and Zhao, 2019; Wang et al., 2020).

The role of government behavior in infrastructure investment has been discussed and investigated for many years (Zhou, 2007; Xu and Wang, 2010) and has become a crucial topic in the PPP field. Sufficient government support is a way of stimulating the private sector’s participation, but the misuse of government support can arouse much controversy, for instance, hidden debt, budget burden, or unnecessary supplements (Wang et al., 2020; Xiong et al., 2021). The motivations for government support have attracted the attention of China’s central government, practitioners, and academia. Prior literature focuses on how political motivation promotes such a super-rapid growth of the Chinese PPP market (Wang et al., 2018; Wang et al., 2020; Xiong et al., 2021). It is still not well known about the impact of government support on firm performance, and thus, this question is the focus of this paper.

This paper raises a scientific question: will local government support enhance a PPP-participating firm’s profitability? To answer this question, the study constructs a conceptual framework and empirically examines our hypotheses. The conceptual framework indicates that while government support can indeed enhance the private sector’s profitability, it may result in some negative consequences. Utilizing panel data of Chinese listed companies, we find a firm’s profitability can be improved by 8.2% when a project is included in the national PPP platform (normally, a representing government can arrange the fiscal budget for PPP project income), however, increasing the government’s shareholding can reduce a firm’s profitability significantly, by −23.3%. Hence, this paper implies that governments should reasonably support the private sector in PPP projects.

This study provides a new perspective on the role of government support. The incremental contributions of this research are as follows, first, the paper provides a theoretical framework of how central and local government support affects firm performance in PPP projects. Second, an important contribution to the PPP literature is the use of novel empirical evidence from the Chinese PPP market. The paper utilizes unique comprehensive project-level and firm-level panel data of 555 A-share listed companies in the Shanghai and Shenzhen stock markets from 2010 to 2019 to measure government support in PPP projects through new proxy variables. Third, the heterogeneity analysis implies government support has distinct different impacts on private firms and state-owned firms. Findings and implications, therefore, contribute to the literature on government roles in the Chinese PPP market as well as those in other transition countries.

The remainder of this paper is structured as follows: Section “PPPs hold the key to future development” discusses how PPPs contribute to future economic growth, especially in data innovation. Section “Literature review” presents the relevant review of the key prior studies. Section “Theoretical model and hypotheses” elaborates on theoretical analysis and provides hypotheses for this paper. Section “Empirical methods and data” and Section “Empirical results” outline our empirical methods and results. Finally, the article concludes with our discussion of the study’s results, implications, limitations of the study and future research.

PPPs hold the key to future development

Data innovation in next-generation infrastructure

The digital economy is a crucial driving force for global economic and social development. According to the World Bank, the digital revolution can transform a better delivery of infrastructure services, spur inclusive economic growth, increase job opportunities, and drive human capital development. The demand for digital infrastructure increases rapidly and enhances the complexity of public goods, such as artificial intelligence, big data, cloud computing and 5 G. To achieve the mission of digital revolution, the first thing is to conduct a reliable, standardized, and extensive data innovation (Marcelo, 2020).

The necessity of PPPs in data innovation

In 2022, University of Florida and a private company (NVIDIA) signed a partnership in creating an AI university. The purpose of this research partnership is to create a data center, which houses the world’s fastest AI supercomputer. It is the first public–private partnership in data innovation in the United States. Also, in those developing countries, PPPs in data innovation are important ways of strengthening future economic and social growth. In Sep 2022, Saudi Arabia formed a public–private partnership with the World Bank for accelerating digital transformation.

PPPs enable public agencies to accelerate the development of digital infrastructure while leveraging private sector capital, technology, and expertize. Just like partnerships of the AI university, public agencies can promote research access to AI training, and tools for communities, and build momentum for transforming the future of the workforce. On the one hand, public officials always hold valuable and precise data resources, but they do not always have the talent to use this data efficiently. To achieve ambitious targets of digital transformation, governments need strategic partnerships with private companies and research communities. On the other hand, private companies and research communities may have the talent and experience in data innovation, but they cannot access data resources directly.

Thus, it is necessary for governments to form various forms of partnerships with competent private partners. According to the World Bank, digital PPPs consist of a broad range of data communications and technologies, from broadband and fixed-line networks to mobile connectivity and satellites. The partnership can achieve an effective development of the infrastructure, which provides a way to manage the protocols in different communities. This ensures that there’s a link in controlling the protocols to establish, configure and test the data link connection. Furthermore, it may provide a group of separate network control protocols to establish different types of networks. In America, New Hampshire Fiber Network Consortium is a public–private partnership established by the Community Development Finance Authority in New Hampshire, the University System of New Hampshire, and a company named FastRoads. The project will be structured in a manner to a “fiber condominium”. The public sector will be allocated a block of fiber strands and will have an equity stake, along with private participants who offer users on a commercial basis.

Three types of PPP mechanisms in data innovation

Designing and implementing a PPP agreement is a complex and challenging process. Kostura and Castro (2016) conclude three novel mechanisms for scientific and technical partnerships, including Cooperative Research and Development Agreements, Cooperative Agreements, and Joint-Venture partnerships. Public and private partners must realize that any mechanism cannot be appropriate for all PPP projects. It is crucial to balance the positives and negatives of each mechanism.

Type 1: Cooperative research and development agreements (CRADAs)

A CRADA refers to a written agreement between one or more federal laboratories and one or more non-federal partners sharing knowledge, personnel, facilities, and equipment in a joint research project. It allows public officials to identify the parties to negotiate different and flexible terms. CRADAs authorize the federal agency to set terms of the agreement through a prolonged exchange of ideas and resources. The purpose is to make the research infrastructure development using intellectual property in promoting interactions in different institutions. For example, in America, the National Oceanic and Atmospheric Administration has established the Big Data Project through a series of CRADAs to make environmental data more accessible to the private sector and the public through cloud-based platforms.

CARDAs can help public and private sectors to achieve their objectives. From the side of public sector, this authority allows the federal lab to seek out the resources it needs to accomplish an ambitious research goal and grants companies and universities access to government facilities and expertize. From the side of the private sector (e.g., scientific community and company), they can access vital research resources and bring these resources to the market in the form of useful products. The partnerships are expected to make useful, marketable products in different departments.

The difficulty of applying a CRADA is to carefully negotiate terms related to liability and intellectual property between the public and private partners. The parties must prepare the final CRADA in obtaining all the necessary approvals to make in different institutions. While the government mandates the federal lab make scientific and technical information available to the public, the research partners can also craft agreements to withhold the research results from the public for a certain period and to allow the private organization to patent any inventions for commercial use. Additionally, the federal research lab must consider whether pursuing a joint project will limit research freedom or divert public resources.

Type2: Cooperative agreements

A cooperative agreement is a partnership between a government agency and non-profit or for-profit organizations in providing public goods or services to communities, where researchers from all participating partners can collaborate. Essentially, government scientists will work with experts from private sector partners to solve a common problem, seeking value for the government and the public while creating potential revenue opportunities for the private partner. The advantages of cooperative agreements include a better application of resources, an increase in quality and a decrease in the total cost of goods and services. In a partnership, all participants can share the costs of running and maintaining data centers. To create a national network of Federal Statistical Research Data Centers, the U.S. Census Bureau utilizes more than 50 cooperative agreements to engage companies, universities, and nonprofits in projects that support and promote statistical research and methodology and improve their mission to make statistical data accessible to the research community (Kostura and Castro, 2016).

Different from CRADAs, cooperative agreements usually involve the transfer of government funds to a private partner. The governments purchase a cooperative agreement through a true cooperative or piggybacking mechanism. Each model has distinct advantages and disadvantages.

A true cooperative agreement generally involves two or more organizations, which combine their requirements to solicit bids and offers for goods or services, dividing into definite and indefinite quantity and delivery agreements.

  • Definite quantity and delivery purchasing model. In this purchasing modal, price, risks, members, schedules, and requirements of partnership are clearly identified. Because of guaranteed demand, this kind of agreement has low prices and high certainty. However, it is impossible to consider and predict all specific schedules at the beginning of collaboration. Thus, how to fulfill commitments to contractors is the biggest challenge in forming a definite agreement.

  • An indefinite quantity and delivery purchasing model. There is no commitment to specific purchases in an indefinite purchasing model. Thus, an indefinite agreement can offer more flexibility for members in negotiations during the whole partnership. The flexibility may result in raising a project’s price and reducing private sector’s confidence.

Piggybacking agreement involves one or more organizations representing their requirements in providing the goods and services. In other words, it includes an option for other organizations to “ride” or “bridge” the contract approved by the government. Advantages of piggyback contracts include a wide variety of participants and savings in administrative costs. However, piggybacking agreements may let some partners or vendors feel unfair. It also may harm some participants’ benefits.

Type 3: Joint-venture partnerships

A joint-venture partnership is a public–private partnership in which a government agency and its business partner jointly plan, invest resources in, and share any revenue generated from the project. It usually involves two or more entities joining together to do business with enough resources and expertize, with a common view of making a profit. It includes incorporating limited partnerships in implementing the partnerships needed to provide public goods and services to different people.

  • Project Joint-Venture. A project joint-venture is a combination of two or more parties that seek the development of an enterprise or project for profit. This encourages public officials to share the risks associated with the development taking place in the project. Private parties to the joint-venture must be two natural persons or entities eligible to enter into an agreement in managing the project.

  • Functional Joint-Venture. A functional joint-venture allows public servants to perform certain activities for an entity using the day–to–day management team. This encourages the public servants or the employees to perform different functions, which access resources such as finance, staff, and assets.

  • Vertical Joint-Venture. A vertical joint-venture is an agreement or transaction that takes place between buyers and suppliers with the intention to share the profits. It’s not economically viable or beneficial to either of the partners, they are approved to secure the target market in different institutions. Therefore, in these joint ventures, the suppliers obtain full profits while buyers achieve minimal gains within the given market. This is common in the production or distribution of goods and services. In addition, vertical integration involves the acquisition of business operations within the same production vertical.

  • Horizontal Joint-Venture. A horizontal joint-venture is an acquisition that takes place in a business where one company takes over another which is struggling to maintain performance. This is supported by the strategy developed by the management at the same level of the industry. Therefore, a joint-venture is a transaction that happens between companies in the same general line of business sold to the same group of customers.

Joint-venture partnerships are widely and commonly employed in practice. It can be simpler and more flexible than the other two arrangements, making them ideal for projects that require fast execution and new technologies. The flexibility of a joint-venture is especially important for partnerships around data as the value of data is unknown at the beginning of the process, and agile management allows the partners to change their work plans in response to new discoveries. While a joint-venture is the most flexible way to work together, it comes with its own set of risks. As in business, joint-venture partnerships with the government involve sharing both risk and reward. This implies an element of risk for both the public and private sector partners that are not necessarily present for a cooperative agreement or CRADA. The partners also openly share ideas during the proposal process but do not typically sign non-disclosure agreements to protect those ideas. Because the private sector does not receive direct funding or payment from the government and instead relies solely on fees for its services, each partnership must confirm terms for revenue sharing in the agreements.

The three collaboration mechanisms form public–private partnerships with more flexible terms than traditional procurement. Research PPPs has generated scientific and economic benefits (Webster, 2022). Not only they are good for the public sector, but also private partners benefit by gaining access to federal government data resources, learning from government scientists, and getting profits when value-added products and services are developed. As discussed above, each mechanism has its own advantages and limitations. For private sector, partnerships through a cooperative agreement and joint-venture might be favorable way because of their flexibility. In a cooperative agreement or joint-venture, government funds and kinds of support are key for private partners to create new business opportunities. For public sector, a significant advantage of CARDAs is that they do not need to transfer any funds to private partners. If a public sector provides irrational support, it may result in unfair revenue or risk sharing (for instance, those piggybacking agreements).

Literature review

China has invested more in PPP projects than any other country over the last two decades (Jones and Bloomfield, 2020). In China, the promotion of PPP investments is a top-down strategy (Wang et al., 2021); thus, the government’s role is a focal topic related to PPP projects (Uzunkaya, 2017; Xiong et al., 2021). For the public sector, the motivation for promoting PPP projects is inherently consistent with the motivation toward infrastructure and public service. The central government promotes PPP mode to enhance the quality and efficiency of public services. Thus, maximizing social welfare, improving quality of life, and achieving sustainable economic growth are the central government’s preferred benefits (Wegrzyn, 2018; Wegrzyn and Wojewnik-Filipkowska, 2022).

However, local governments initiate PPP projects while bypassing barriers to fiscal budgetary constraints (Cheung et al., 2009; Yescombe, 2011) or political promotions (Xiong et al., 2021). We conclude that the motivations of local governments are not completely in line with the objectives of the central government. First, PPP projects can help local official leaders attain the highest-level satisfactory achievements of political goals (Scharle, 2002). Local governments can expand their scale of infrastructure by attracting social capital (Wang et al., 2021). The concept of “Promotion Championship” is a reason why China’s PPP market has developed rapidly (Zhang et al., 2019). Second, fiscal pressure has also driven the boom of China’s PPP market. Local leaders tend to initiate more PPP projects if they have great financial pressures, high off-budgetary debts, or lower budgetary deficits (Jamali, 2004; Cheung, 2009; Yescombe, 2011).

Generally, PPP projects face multifaceted and unobservable risks and challenges in the long-term (Tang and Shen, 2013). The complexity and dynamic changes of such project risks pose challenges to private sector when participating in PPP projects, especially in developing countries (Chen et al., 2005; Tang and Shen, 2013). Thus, not all firms are interested in investing in such high-risk infrastructure projects. To attract social capital, many local governments provide various kinds of direct and indirect support. Direct support in PPP projects refers to the financial cash flows, capital, and in-kind subsidies across their whole cooperation (Wang et al., 2019). Wang et al. (2019) have found that while direct government support can attract more private firms, indirect government support cannot; however, although indirect support cannot reduce costs significantly, it is still useful, as indirect support is conducive to alleviating operational uncertainties and risks.

As seen in the above analysis, the importance and effect of government support is a crucial topic in PPP projects. However, little is known about the impact of government support on the private sector’s motivation or performance. Thus, this question is the focus of this paper. Utilizing both a conceptual framework and empirical analysis, we attempt to explore how government support affects the private sector’s profitability.

Theoretical framework and hypotheses

In the past eight years, the PPP mode has achieved multiple objectives in China, e.g., promoting supply-side reform, stimulating the growth of GDP, and releasing fiscal pressure. However, in terms of local governments’ improper guarantees or high shareholdings, a large scale of China’s PPP projects is characterized as “de jure equity, de facto debt”. These pseudo-PPP projects have therefore failed to transfer benefits and risks to the private sector (Xiong et al., 2021). Thus, we introduce “a binary structure” of China’s PPP market that includes pseudo-project and compliant project markets. Government support is a core principle among pseudo- and compliant projects. The misuse of pseudo-projects is also called the “alienation financing problem of the PPP mode”.

A binary structure in the PPP market of China: Pseudo vs. Compliant

“Whether to establish a pay-for-performance mechanism” is the core criterion to determine whether a project is in line with regulations. In China, both the Ministry of Finance and the National Development and Reform Commission encourage every PPP contract to be signed with fair and proper benefit-sharing and a risk-transferring mechanism. However, according to the PPP contracts from 2014 to 2016, 78.42% of total PPP projects had fixed commitments in China (Wang et al., 2020). Based on the principle of a pay-for-performance mechanism, we classify the whole Chinese PPP market into two submarkets, i.e., pseudo-project and compliant project markets as shown in Table 1. The two types of PPP contracts in terms of their critical contents of risk transfer, benefit-sharing and private-sector involvement. A compliant PPP contract should satisfy the following criteria. First, the contract should reasonably design investment return and duration according to a project’s performance during its whole life. The public sector is forbidden to provide any bottom-line or fixed guarantees and commitments within this PPP contract. The duration of project operation should be longer than ten years (the minimum requirement). Second, the private sector should take thorough responsibility for building, operating, financing, and managing the contract. Controversially, a pseudo-PPP contract fails to satisfy the above requirements.

Table 1 The binary structure of the Chinese PPP market.
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Theoretical model and hypotheses

Generally, public goods always cause a free-rider problem. Any participant expects excessive benefits and hopes others bear their transaction costs as much as possible. The public sector may offer too much support for stimulating infrastructure and public services. The private sector expects a certain profit, as much as possible. We thus construct a matrix for the expected benefits among the central government, local government, and firm. We assume that each participant makes strategy decisions independently and adjusts them dynamically. The basic assumptions are as follows:

Assumption 1: The central government mainly undertakes responsibility for supervising the implementation of PPP projects. Its supervising strategies include strict supervision and weak supervision. Weak supervision means that the central government does not detect opportunistic behavior. Strict supervision means that the central government may have more supervision and management costs for PPP projects.

Assumption 2: Local government support for a project is crucial for attracting the private sector. Proper and efficient support is conducive to achieving PPP mode sustainability. However, for political reasons, some regional officials may provide irregular and improper guarantees to a company; for instance, the public sector may hold a higher share of PPP projects.

Assumption 3: In the decision-making process, maximizing a firm’s interests is the principle for making an investment decision. On the one hand, facing guarantees supported by governments, the private sector is motivated to take short-term excessive profits from pseudo-PPP projects. On the other hand, benefits should be generated continuously throughout the whole life cycle of a PPP project.

Assumption 4: A pseudo-PPP contract is signed only if the public and private sectors make an opportunistic decision at the same time. Pseudo-PPP contracts may bring benefits to local governments (stimulating local infrastructure and public services) and investors (some guarantees on investment returns) but may also create additional transaction costs Crent. A ratio δ of benefits flows to companies, and a ratio 1-δ means benefits flow to a local government. The transaction costs are finally borne by the central government.

According to the above assumptions, we construct a 3X3 matrix of the expected benefits to the central government, local government, and firm in Table 2.

Table 2 Matrix for the expected profits of each participant.
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Win-win is the basic principle for constructing partnerships between the public and private sectors. Both the public and private sectors are seeking to maximize their interests and benefits in a PPP project, although their forms and objectives are different (Wegrzyn and Wojewnik-Filipkowska, 2022). Theoretically, a compliant PPP contract can achieve all participants’ goals and aims, as shown in case (4). From the perspective of the public sector, a PPP project can enhance social demand \({\int}_P^{\bar P} {Qd_p}\) and promote tax and economic growth by t(PQ – Cp). From the perspective of the private sector, sufficient profits by (1 – t)(PQ – Cp) can stimulate their participation in PPP projects.

As discussed above, a local government often provides various forms of support to attract firms to infrastructure investment according to regulations, policies, and laws. Such proper support could stimulate incentives for the private sector to enter the PPP market, e.g., including projects in the national PPP platform. The national PPP platform was officially established in 2015 by the Ministry of Finance of China. A project can be in the PPP project platform only if it satisfies certain requirements, including qualifying conditions, regular operations, or perfect information disclosure. If a project can be approved and included in the national PPP project platform, this implies investment lines with regulations and government plans. When a project is included in the national PPP platform, the future cash flows and income are arranged in the government’s future fiscal budget. Therefore, we use whether a project is included in the PPP project platform or a pilot as a proxy for the government’s proper support. The first hypothesis in this research is thus as follows,

H1: Compliant government support can enhance investment profitability, such as including projects in the national PPP platform or arranging fiscal budget for further payment.

However, the government may make irrational decisions, such as increasing the shareholding ratio of PPP projects or providing some fixed guarantees. In these cases, higher government shareholdings may lead to extra transaction costs Crent, which can comprehensively harm the economic value of projects. In Table 2, case (1) shows how local governments prefer to provide partners with some improper support for political gain. An investor could obtain excessive short-term benefits, that is, Cs+δCrent. However, this improper cooperation may undervalue the long-term benefits to the private sector. The firm faces a net loss of (1-t)(PQ-Cp) due to the operation still being held by the government. Hence, we obtain our second hypothesis:

H2: Some government support (increasing its shareholding in PPP projects) may reduce the firm’s profitability.

Empirical methods and data

This section introduces our model’s construction, variables’ descriptions, data, and results. Our hypotheses are tested using the panel data of PPP projects of Shenzhen and Shanghai A-share listed companies from 2010 to 2019 (Table 3).

Table 3 Variable definitions and measurements.
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To explore the impact of local government support on the profitability of companies participating in PPPs, the empirical regression equation is as follows in Eq. (1):

$$ROA_{i,t}\,=\,\alpha +\beta gov_{i,t} + \gamma \Delta ROA_{i{{{{,}}}}t{{{{ - 1}}}}}{{{{ + }}}}\delta Z{{{{ + }}}}c_i + c_t{{{{ + }}}}\varepsilon$$
(1)

The dependent variable ROAi,t represents the profitability of a firm that participates in PPP projects. The independent variable govi,t represents the local government’s support, and its coefficient β depicts the impact of support provided by the local government. Z denotes control variables. ci and ct denote project-fixed effects and time-fixed effects, respectively.

Dependent variables: profitability of the PPP-participating firm

To measure how PPPs improve private sector performance, we use a profitability indicator as the proxy. We calculate this as the difference between the profitability of a PPP company and its industry’s average level. The PPP projects are mainly distributed in seven industries: transportation, municipal engineering, ecological construction, environmental protection, education, new infrastructure, and others. The average market rate of return is the weight of the total assets of the seven major industries. After excluding all ST companies, we obtain the industry average level as Eq. (2),

$$ROA_{m,z} = \mathop {\sum}\limits_{t = 1}^{10} {\frac{{Asset_{i,t}}}{{\mathop {\sum}\nolimits_{t = 1}^{10} {Asset_{i,t}} }}ROA_{i,t}}$$
(2)

where i = 1,2,3…555 denotes the company participating in PPP projects, t denotes the year from 2010 to 2019, m = 1,2,3…7 denotes seven major industries of PPP markets.

Independent variables: government support

The influential factors for participation in PPPs are the same as those for infrastructure investments. Bertelli (2018) points out that infrastructure and public service are not merely public management issues but complex political questions. Government support may have dual effects on investment. PPP projects either spur economic growth or lead to hazards if they involve too much irregular behavior during investment. According to the methods of support, we classify government support into two categories. On the one hand, we use inclusion in the national PPP platform (Included) and a pilot project (Pilot) for measuring government support in line with regulations, laws and policies. On the other hand,we employ shares held by the local government (Shares), which measures the degree of financing support provided by the public sector.

Control variables

In addition, we control for project-level characteristics, market-level, government-level, and firm-level characteristics. We first control for project and market characteristics, which determine the expected income from PPP projects, including the investment scale of a PPP project (lnInvest), the resident population of the project’s location (lnPop) and the project financing market environment (Financial). The project financing market environment is measured by the ratio of total debt and loans in the local financial market to its GDP. Second, we use the government level (GovLevel) to reflect government characteristics, including the central, provincial, and municipal governments. Third, we control for the key influential factor of firm profitability, for instance, one-year lagged return on total assets (ROAt–1) and corporate ownership (SOE).

Data sources

Our database covers information about projects and listed companies and regional economic data. The objects are A-share listed companies in the Shanghai and Shenzhen stock markets. First, through crawling and manual collation, project-level data are mainly obtained from the national PPP project platform, each company’s annual reports, announcements, and government procurement websites. Second, firm-level data are retrieved from the Chinese stock market and accounting research and annual financial reports. Third, the data on the regional economic and financing environment mainly include the population of residents and the scale of debts and loans in the local financial market. These data are from public information offered by the National Resident Bureaus of Statistics and the People’s Bank of China. Table 4 reports the descriptive statistics of variables.

Table 4 Descriptive statistics.
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Empirical results

According to our theoretical analysis, our empirical tests are used to prove the following concepts: First, only proper support can protect investors’ interests. At the same time, some kinds of support may harm investors’ interests. We, therefore, test the effects of compliant support (inclusive in the Ministry of Finance PPP project platform and pilot) and irrational support (increasing shareholdings) on firm profitability. The above methods are three common government support in practice.

Baseline estimation results: a dual effect of government support

Table 5 shows the dual effect of government support on firms’ profitability. As is well known, if the project is included in any PPP project platform, future cash inflows will be arranged in government fiscal budgets. Column (1) implies that inclusion in the Ministry of Finance PPP project platform can significantly enhance investor profitability. This kind of support increases a firm’s profitability by 8.2%. Thus, compliant government support, according to relevant regulations, can enhance a firm’s profitability. In Column (2), the effect of being a pilot program is positive. The regression results of compliant support indicate that a promised or certain future cash inflow is one of the critical factors of private partners’ profitability. First, according to the salient regulations, policies, and laws, once a project enters the PPP platforms, its future cash inflows and payments are received through fiscal budgets and plans. Second, most categories of PPP subsidies are available only for those projects on the PPP project platform. Investors may obtain more economic support at lower prices if their projects are on the PPP platform, e.g., various special funds, tax deduction bonds, or construction funds.

Table 5 Baseline estimation results: a dual effect of government support.
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We use government shareholding in PPP projects as a proxy in Column (3). The regression coefficient is −0.233 and is significant at the 5% level. The higher the government shareholdings in the project, the higher the degree of protection for the project company. This implies that when the government increases its shareholding (i.e., reduces the private sector’s involvement) in the PPP project, the private sector’s economic revenue would be reduced significantly. This result thus verifies our second hypothesis.

Heterogeneity analysis of the project’s government level

The lower the level of the government is, the stronger its motivation to intervene in PPPs. Heterogeneity may exist at the government level. To analyze this possible heterogeneity, we further divide all samples into the provincial level and the municipal level. Municipal governments include all city-level and county-level governments. Table 6 reports the heterogeneity of government level. The results indicate that the impacts of government support are mainly represented in samples of municipal projects, including all projects owned by city-level and county-level governments. Columns (1) and (2) show that the effects of inclusion in the national PPP platform only significantly promote partnerships’ profitability created by municipal governments. The regression results in Columns (3) and (4) represent different effects of raising shareholding on profitability generated through partnership. They indicate that this kind of support only inhibits the economic benefits of municipal projects. Thus, it supports the existing concept that government support might not help attract real private partners (Jones and Bloomfield, 2020; Xiong et al., 2021). Furthermore, comparing the coefficients, the positive effect of compliant support (coefficient is −0.259) is much greater than that of raising shareholdings in municipal government (coefficient is 0.080). As of December 2021, only 22% of PPP projects had been initiated by provincial governments, and 78% of projects had been initiated by city and county governments. Our results provide an explanation of why some local governments fail to stimulate the enthusiasm of the private partners’ participation.

Table 6 Heterogeneity at the government level.
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Heterogeneity analysis of corporate ownership

Theoretically, state-owned firms have natural relationships with the government, similar to sibling or child relations. Their investments always need to be approved and supervised by the government. Thus, any proper or irrational support for PPP projects might not influence the performance of partnerships between governments and state-owned enterprises. In terms of ownership, we therefore further classify the samples into two groups: state-owned and private firms. Table 7 reports the heterogeneity of firm ownership. According to the results in Table 7, the regression coefficient for private listed companies is −0.335 and passes the 5% significance test. We can conclude that the negative impact of increasing government participation is only significant on non-state-owned firms. Participation of state-owned firms in PPP projects in China is significantly higher than that of private firms (Jones and Bloomfield, 2020; Liu and Cao, 2021). From official website of the Ministry of Finance PPP platform, as of Dec 2022, state-owned enterprises in China accounted for 84.35% of the turnover of PPP projects, while private enterprises accounted for 14.55% of the turnover and foreign enterprises accounted for 1.1% of the turnover. Thus, governments should find and adopt efficient support methods to enhance return or revenue of real private sector. This is key to attracting more private partners into PPPs rather than state-owned firms.

Table 7 Heterogeneity of corporate ownership.
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Robustness check

We modify our measurement method of the dependent variables for robustness. The new dependent variable is the measured difference between the real return on investment and the contract rates of investments. The contract rates are collected and retrieved from PPP contracts, bidding announcements, the government procurement website, and the Ministry of Finance PPP platform. Table 8 shows the effects of government support on this new proxy variable. First, the coefficient of compliant support (included in PPP project platforms) is 0.027 and significant at the 1% level. Second, the coefficient of government shareholding is −0.223 and significant at the 1% level. These regressions still support the results of benchmark regression. Overall, this paper’s first and second hypotheses are therefore verified again.

Table 8 Robustness analysis.
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Conclusion and discussion

Summary of findings

This paper considers the effect of government support on a PPP-participating firm’s profitability. Constructing a theoretical model and empirical tests, the findings reveal that government support has dual impacts on the performance of partnerships. Government support could improve projects’ performance in theory, whereas some support may have negative consequences. Utilizing comprehensive data on 555 unique project-level and firm-level Chinese A-share listed companies from 2010 to 2019 and new variables to measure government support, we find that while project inclusion in the national PPP platform can enhance firm profitability by 8.2%, increasing government shareholding may reduce a firm’s profitability significantly, by −23.3%. Empirical results remain robust after further robustness checks. The findings of this paper highlight the importance of choosing a proper support mechanism in the adoption of partnerships between public and private sector.

Theoretical implications

The study enriches the body of knowledge in three significant ways. First, we provide a theoretical framework for the dual effects of government support in a partnership. The dual effects extend the literature on prior studies. The positive effect of some proper government support in PPP relationships is consistent with Wang et al. (2019), while the negative effect of raising shareholdings extends the literature on government support. The prior studies have proven that government support is an essential factor in adoption (Levin and Tadelis, 2010; Bertelli, 2018; Wang et al., 2019) or contractual choice (Xiong et al., 2021) between the public and private sectors based on an assumption that the PPP model tends to assume only government subsidies on externalities capital (Chatterjee and Morshed, 2011; Wang et al., 2019). This paper considers that the government often shares the risk with enterprises through ways of joint ventures or special project vehicles, and thus, further introduces a new variable (e.g., raising shares held by government) while considering government subsidies. The dual effects in this paper are more consistent with the actual situation of projects in China, as well as in other countries.

Second, an important contribution to the PPP literature is the addition of novel empirical evidence from private sector’s perspective. Many studies show that government support influences both PPP-project performance (Takashima et al., 2010; Armada et al., 2012; Osei-Kyei and Chan, 2017) and private sector’s choice (Wang et al., 2019; Xiong et al., 2021). Government support can benefit PPP projects’ construction by reducing the cost of capital (Soumare and Lai, 2016). Besides, government support significantly attracts more private capital including direct capital, revenue, and in-kind subsidies (Wang et al., 2019). However, there is a lack of insight into the topic of whether government support achieves the goal of boosting private partners’ revenues. We test the effect of government support on the private sector by utilizing unique comprehensive panel data and taking proxy variables of government support found based on reality. So thus, this paper provides important advancements to the empirical evidence on the effects of government support on private partners’ performance.

Third, the heterogeneity analysis implies government support has distinct different impacts on private firms and state-owned firms. It confirms the concept that heterogeneity of corporate ownership exists in the impact of PPP projects on the company’s total factor productivity (Liu and Cao, 2021). Our results imply that the government should properly and reasonably provide support to the real private sector rather than state-owned companies.

Practical implication

Many economies have received a rapid increase in private-private investment over the past decades (Osei-Kyei and Chan, 2017). The public sector’s support of PPPs has drawn the attention of worldwide governments and international organizations. Government support is one of factors in promoting partnerships (Soumare and Lai, 2016; Wang et al., 2019), however, some support fails to attract sufficient private investment and results in over-investment problems (Wang et al., 2019; Xiong et al., 2021). An important practical contribution of this study is that public sector should understand the effects of their support on private partners’ performance. Meanwhile, the private sector becomes aware of how government support can enhance their profits. It can guide public and private partners in choosing a true PPP agreement.

Limitations of the study and future research

Maximizing profits or revenue is one of the key missions of private investment. This paper investigates the effect of government support on PPP firms’ profitability. The study provides a new perspective for future research, but still has some limitations. Today, a range of PPPs form partnerships in information technology services, consulting, and software. In the next-generation partnerships, private partners are likely to have more objectives, targets, and scopes of partnerships. Private firms and institutions may work with the government for seeking various intangible resources, such as social responsibility, public trust, reputation, unique techniques and so on. Hence, further research can continue exploring mechanisms between government support and new potential missions.