PPP projects can effectively reduce the overall cost of the project by relying on the partnership of benefit sharing and risk sharing. Figure 1. 1 shows the cost comparison between the projects independently carried out by the public sector and the PPP model. When the public sector independently carries out a project, the overall cost of the project consists of the following parts: project construction cost, operation cost, maintenance and renovation cost, management cost and self-retained risk.
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Under the PPP model, project financing is mostly completed by private institutions, which relieves the pressure of public sector to increase budget and debt, so public sector can carry out more and larger-scale infrastructure construction. PPP mode can provide off-balance-sheet financing for the government when it is unable to carry out large-scale financing due to fiscal austerity or credit decline.
See figure 1.2 for the comparison of government expenditure under the traditional government mode and PPP mode. Under the PPP mode, the government can not only save the upfront investment expenditure of infrastructure, but also lock in the expenditure of project operating expenses, on the one hand, reduce the financial pressure of raising a large amount of funds in the short term, on the other hand, improve the controllability of the budget, both of which are beneficial to the government to further expand its investment in infrastructure.
This advantage of PPP is of great significance to domestic local governments at this stage. By promoting the PPP model, the local government debt risk can be resolved. By means of transfer-operation-transfer (TOT) and reconstruction-operation-transfer (ROT), the existing infrastructure and public service projects of financing platform companies will be transformed into cooperative projects of government and social capital, and social capital will be introduced to participate in the transformation and operation, thus reducing the debt pressure of local governments.