The impact of local government fiscal gaps on public-private partnerships: government demand and private sector risk aversion

• Published in: International public management journal 2023-07, Vol.26 (4), p.589-608
• Main Authors: Xiong, Min, Cheng, Shaoming, Guo, Hai (David), Zhao, Jerry Zhirong
• Format: Article
• Language: English
• Subjects: Local government; Participation; Private sector; Public finance; Public private partnerships; Public services; Risk
• ISSN: 1096-7494; 1559-3169
• DOI: 10.1080/10967494.2022.2119316

While government fiscal gap is traditionally considered a demand factor for the use of public-private partnerships (PPPs) to deliver public services, a high level of fiscal gap may signal elevated financial risks to private partners and deter them from entering into PPP agreements. A causal mediation analytic framework is used to delineate the two distinct causal pathways. We develop a conceptual model and test derived hypotheses with data of Chinese prefecture-level cities during 2015-2017. The findings suggest that government fiscal gap has a positive impact on PPP adoption, through the mediating role of the debt position. The fiscal gap, as a risk factor, is negatively associated with PPP participation. Risk aversion of the private sector manifests more conspicuously as smaller PPP investment amounts than as a lower likelihood of PPP participation. The adverse effects of the fiscal gap associated with financial risks may entirely offset any positive impact.