Price Modes Identification and Pricing Methods for China’s PPP Projects

Abstract

Since the late 1980s, Public-Private Partnerships (PPPs) have been widely utilized in developing global infrastructure projects, emerging as the predominant trend in infrastructure and public services worldwide. However, despite their widespread adoption, there remains a significant global infrastructure investment gap that necessitates further growth of PPP projects to address this pressing need. China, which has employed the PPP model for infrastructure development for over 30 years, has experienced explosive growth in PPP development since 2014. While this growth has resulted in increased infrastructure construction and public services supply, it has also given rise to a series of issues that impede the long-term sustainable development of PPPs. China's updated PPP framework in 2023 has taken a stringent turn by exclusively permitting concession-style projects with user-paid revenue streams, effectively suspending all other models. This shift prioritizes fiscal risk reduction and places a paramount focus on ensuring the contract stability and contract performance of existing stock projects rather than launching new initiatives. The core of PPP projects lies in "risk and benefit sharing." However, in practice, both parties often prioritize their interests and risks, leading to a lack of full guarantee of rationality in the final project price. The unreasonable pricing of PPP projects is one of the main obstacles to their long-term success.

This study conducted a literature review on PPP project pricing and identified research gaps in the existing literature. These include 1) a lack of systematic summarization of core transaction term combinations related to different types of PPP projects, 2) insufficient understanding of the applicability and strategic effectiveness of pricing models, along with neglect of selection issues, 3) inadequate attention to the government's value-for-money (VFM) goal in PPP project pricing, 4) limited research on pricing models primarily based on availability payment, and 5) pricing models that do not adequately consider risk and lack a comprehensive framework for explaining their scope of application. This study researched price mode identification, mode selection, and pricing model development under different price modes. The main works of this study are as follows:

(1) Establishing PPP project price mode typology: Eight PPP price modes are identified through a China-based comparative case study of 80 typical PPP projects. The main findings are: 1) These price modes can achieve Five risk allocation configurations. Nevertheless, while different price modes enable the allocation of specific risks, these do not always align with the contracting parties’ original intentions. 2) IRR and RP modes may be less applicable because of their vulnerability in allocating critical risks and capacity for spurring opportunistic behavior. This typology provides a new theoretical perspective for understanding PPP project prices and offers insights into risk allocation and VFM considerations.

(2) Developing a selection model for PPP project price modes: This study identifies the decision process, key nodes, and influencing factors. Using a binary Logit model on survey data, it finds that selection depends on Maturity of pre-project work (MPPW), Capacity of potential investors (CPIN), Operating cost risk (OCRI), and Capacity of local government (CLGO). The resulting model advises using the UP mode for concession fee-based projects, while availability payment-based projects require multi-factor evaluation to choose O&M return methods. This provides a theoretical reference for PPP price mode selection.

(3) Developing a pricing model for concession price-based PPP projects: This study constructed a multi-objective stochastic optimization pricing model that incorporates risk effects. A solution algorithm was designed using scenario generation via Latin hypercube sampling (LHS) and K-medoids clustering. The non-dominated sorting genetic algorithm-II (NSGA-II) was applied to solve the model, identifying the Pareto front and optimal solution set. Local sensitivity analysis ranked solutions and supported pricing decisions. A real case validated the model, which also examines the effects of Annual Lump Sum (ALS) subsidy and Minimum Revenue Guarantee (MRG). The model internalizes risk impacts and solves all decision variables simultaneously, offering a practical pricing framework for user-pay PPP projects in China.

(4) Developing a pricing model for PPP projects with RIC-based modes: This study develops a pricing model for availability-payment PPP projects using RIC-based price modes, integrating VFM and social values. A DCF-based value evaluation model was established for both government and sponsors. A three-stage bargaining game model allocated project value, solved via backward deduction for subgame perfect equilibrium. The resulting solution set formed the feasible set under a MODM problem, with the optimal solution identified using a weighting method. Model results aligned with actual bid prices, confirming validity. Sensitivity analysis indicated that construction benefits strongly affect the solution set and optimum, while the optimal concession period is less sensitive to risk allocation changes. Varying risk ratios significantly alter optimal decision variables. The model can provide a value-sharing pricing framework that incorporates VFM and social values.

This study systematically developed price mode typology, selection, and pricing methods for China’s PPP projects. The research has theoretical and practical values. The applicability of different pricing models as well as their strategic effects in risk allocation and VFM, helps to promote a deeper understanding of PPP project transaction methods in both theoretical and practical circles. This classification framework lays the foundation for understanding the complexity of PPP project pricing mechanisms, helps identify best practices and lessons learned from different pricing models, and facilitates the selection of pricing models and the design of PPP contracts by local governments. Since the differences in risk allocation and control rights configuration effects of different price modes significantly impact project implementation, price mode selection decisions should be emphasized as important preparatory work during PPP project initiation. The model based on multi-objective stochastic optimization internalizes risk impacts into the pricing model, can be comprehensively applied to user-paid PPP projects. This provides a theoretical reference for pricing in future user-paid PPP projects. The multi-objective stochastic optimization pricing model helps balance the interests between the government and social capital, and its solving algorithm achieves equilibrium among multiple decision variables. Furthermore, this model can be customarily adapted to different government support methods that may be used in different projects, providing greater flexibility and adaptability to the pricing model. By constructing a project value framework that internalizes the government's VFM objectives and the project's social value into the pricing model. The introduction of social value allows the pricing model to balance the interests of the government and social capital while safeguarding public interests, which is beneficial for pricing availability-paid PPP projects by considering both economic and social benefits.

Date of Award	9 Sept 2025
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Xiaowei LUO (Supervisor) & Chuan Chen (External Supervisor)