Study on the impact of PPP project payment formula on investment income

Abstract

Nowadays, with the increasingly fierce competition in the PPP market, the bidding quotation and investment returns are gradually declining. This paper systematically analyzes the current transaction structure and payment formulas commonly used in PPP projects, such as the Ministry of Finance formula method, average capital method as well average capital plus interest methods, and variant forms such as price-tax separation and equity-debt separation methods. By comparison, the advantages and disadvantages of different payment modes are displayed as well as matters needing attention. The Ministry of Finance formula method usually offers little operating subsidy in the early period and more subsidy in the later period, which is difficult for the companies to repay the capital and interest in the early period. Due to influence of the discount rate with reference to the local government bond yields during the same period, the investment returns are generally not promising and is not commonly used in actual operation. The average capital plus interest method maintains a stable level of operating subsidies every year, and owns a good capability to repay the capital and interest, thus having a relatively fair investment return. Therefore, it is the most commonly used method at present. In terms of the equal capital method, the operating subsidy is usually huge in the early period and less in the later operation period, which will increase the financial burden of the local governments, so it is rarely recognized by the local government in the actual operation. At the same time, this article analyzes the impact of different methods of repaying the capital and interest on the project investment returns. As average capital plus interest repayment can fully take the advantage of the low-cost debt to refinance, the project investment return is also higher than the average capital method in the same project.