8. Public-Private Partnership and Government Debt

This chapter delves into the critical role of external financing instruments, such as debt and Public-Private Partnerships (PPPs), in helping local governments manage budget constraints exacerbated by economic downturns and the COVID-19 pandemic. The study introduces the concept of the External Financing Ratio (EFR) to measure the degree of reliance on these instruments, providing a comprehensive framework for analyzing local government financing strategies. Through empirical analysis of Chinese local governments from 2015 to 2019, the research reveals that local governments exhibit a pecking order preference for internal financing over external financing, and within external financing, debt takes precedence over PPPs. The study also highlights the existence of a target EFR, towards which local governments continuously adjust their financing levels, balancing marginal revenues and costs. Notably, the adjustment behaviors for debt and PPP differ, with PPP adjustments being less elastic due to its off-balance sheet nature. The research concludes that local governments must remain vigilant about the fiscal risks posed by these financing instruments and strengthen performance evaluations to maximize social interests. This insightful analysis offers valuable guidance for policymakers and practitioners navigating the complexities of municipal finance in the face of fiscal stress.