Study on the impact of PPP project payment formula on investment income
Authors: Wang Fei , Zhang Fahong , Yue Qinghua , Cheng Kaiyu , Yu Jialiang , Liu Jian 
Published: March 2024

<p align="justify"><span style="font-family: 'Times New Roman';">Nowadays, with the </span>increasingly fierce <span style="font-family: 'Times New Roman';">c</span>ompetition in the PPP market<span style="font-family: 'Times New Roman';">, the bidding </span>quotation and investment returns <span style="font-family: 'Times New Roman';">are gradually </span>declin<span style="font-family: 'Times New Roman';">ing</span>. This paper systematically analyzes the current transaction structure and payment formulas commonly used in PPP projects, such as the Ministry of Finance formula method, <span style="font-family: 'Times New Roman';">average </span>capital <span style="font-family: 'Times New Roman';">method as well average capital plus </span>interest method<span style="font-family: 'Times New Roman';">s</span>, and variant forms such as price-tax separation and equity-debt separation <span style="font-family: 'Times New Roman';">methods</span>. B<span style="font-family: 'Times New Roman';">y </span>comparison<span style="font-family: 'Times New Roman';">, the advantages and </span>disadvantages <span style="font-family: 'Times New Roman';">of different payment modes are displayed as well as matters needing attention. </span>The Ministry of Finance formula method <span style="font-family: 'Times New Roman';">usually offers little </span>operating subsidy in the early <span style="font-family: 'Times New Roman';">period and</span> more <span style="font-family: 'Times New Roman';">subsidy in the later period, which is difficult for the companies to repay the capital</span> and interest <span style="font-family: 'Times New Roman';">in the early period</span>. Due to <span style="font-family: 'Times New Roman';">influence of </span>the discount rate <span style="font-family: 'Times New Roman';">with </span>reference to the local government bond yields <span style="font-family: 'Times New Roman';">during</span> the same period, the investment <span style="font-family: 'Times New Roman';">returns</span> are generally not <span style="font-family: 'Times New Roman';">promising and is not </span>commonly <span style="font-family: 'Times New Roman';">used in actual operation.</span> The <span style="font-family: 'Times New Roman';">average capital</span> <span style="font-family: 'Times New Roman';">plus</span> interest method maintains a stable level of operating subsidies <span style="font-family: 'Times New Roman';">every</span> year, <span style="font-family: 'Times New Roman';">and owns a </span>good <span style="font-family: 'Times New Roman';">cap</span>ability to repay <span style="font-family: 'Times New Roman';">the capital</span> and interest, <span style="font-family: 'Times New Roman';">thus having a</span> relatively <span style="font-family: 'Times New Roman';">fair </span>investment <span style="font-family: 'Times New Roman';">return</span>. T<span style="font-family: 'Times New Roman';">herefore, it is the most commonly used method at present. </span>I<span style="font-family: 'Times New Roman';">n terms of </span>the equal <span style="font-family: 'Times New Roman';">capital</span> method<span style="font-family: 'Times New Roman';">,</span> the operating subsidy is usually <span style="font-family: 'Times New Roman';">huge</span> <span style="font-family: 'Times New Roman';">in the </span>early <span style="font-family: 'Times New Roman';">period</span> and less <span style="font-family: 'Times New Roman';">in the later operation period, which will increase the </span>financial burden <span style="font-family: 'Times New Roman';">of the</span> local governments<span style="font-family: 'Times New Roman';">, so it is rarely recognized by the local government in the actual operation. </span>At the same time, this article analyzes the impact of different <span style="font-family: 'Times New Roman';">methods of repaying the capital and interest </span>on <span style="font-family: 'Times New Roman';">the </span>project investment <span style="font-family: 'Times New Roman';">returns</span>. As <span style="font-family: 'Times New Roman';">average </span>capital <span style="font-family: 'Times New Roman';">plus </span>interest repayment can <span style="font-family: 'Times New Roman';">fully take the advantage of the</span> low-cost debt <span style="font-family: 'Times New Roman';">to re</span>financ<span style="font-family: 'Times New Roman';">e</span>, the project investment <span style="font-family: 'Times New Roman';">return</span> is also higher than the <span style="font-family: 'Times New Roman';">average </span>capital <span style="font-family: 'Times New Roman';">method in</span> the same project.</p>