Centralization and Fragmentation: Analysis on the Institutional Environment of Public-Private Partnership in China

China’s practices of public-private partnership in infrastructures and public utilities began in the 1980s, and have been powerfully deployed by the country’s central decision-makers since the second half of 2013. Given that the central authority is vigorously advocating PPPs, concerns and wait-and-see moods of China’s private capitals keep high paradoxically. This provides food for the research question on whether the strong central support could establish a conducive institutional environment for PPPs. A gap between reforms initiated by the central government and path dependencies existing in the local governments is a non-negligible feature embedded in the new wave of PPPs in China. Given that most of PPP projects are implemented on the local authority level, the behaviors of local governments would directly affect the performances of central policies. It is thus worth to analyze the subtle interactions and connections between the central and the local governments around PPPs. Besides, policy fragmentation due to the functional divisions of major relevant ministries within the central authority increases the governance costs of PPP transactions. So it is also necessary to study that whether relevant ministries could coincide with policy goals and integrate to push the development of PPPs forward. This paper would apply transaction cost economics to analyze the features of institutional environment where PPPs are carried out in China and impacts of the settings on governance structures of PPP projects. By reducing PPPs per se to transactions in nature, the paper concludes that tensions originated from centralization and fragmentation in the institutional environment would increase the transaction costs of PPPs and thereby discourage private enterprises from investing PPP projects. Hence, the promotion of PPPs in China should start with the improvement on the institutional environment.