Exploring Key Indicators of Residual Value Risks in China’s Public–Private Partnership Projects

Abstract

Public–private partnerships (PPPs) are gaining popularity in China because of governments’ increasing budget constraints and the urgent need to develop infrastructure since 2014. However, residual value risk (RVR) is a significant threat to the success of PPP projects and challenges the governance capability of China’s government, where key risk indicators (KRIs) can be used as a measure to reveal the potential presence, level, or trend of RVR. To help the public sector obtain estimated value as specified in a concession agreement when the projects are transferred back to the government at the end of the PPP agreement or in earlier termination due to RVR, this paper proposes and refines a KRI conceptual model composed of seven risk dimensions and 61 indicators. A structured questionnaire survey with PPP experts investigated the relative significance of those 61 KRIs for RVR management in PPPs. Although the survey results show that all KRIs are important, seven risk dimensions contribute differently to the exposure of RVR. A confirmatory factor analysis (CFA) was used to test whether the proposed conceptual model fit the observed set of collected data in a predictable way by goodness-of-fit indices, and to further consolidate the KRIs. The refined KRI model uses 41 KRIs based on survey and CFA results, indicating that residual value (RV) of a PPP project is strongly influenced by effective maintenance, long-term sustainable development, and reasonable profitability and refinanceability. The KRIs including high-quality design work in the early stages of PPP projects, construction quality and public service quality, comparatively low operation costs during the operation period, and feasible technologies adopted by private sectors have a greater value in corresponding dimensions. These 41 KRIs have the ability to indicate trends of losses of RV in PPPs, control weaknesses for RVR management in PPPs, and obtain long-term and sustainable development through PPP projects.