Public-private partnership in high-speed rail financing: Case of uncertain regional economic spillovers in China

Abstract

Abstract This paper sets up an integrated economic model to analyze an optimal public-private partnership (PPP) in financing a high-speed rail (HSR) project. The model considers the HSR's spillover onto the regional economy, which is uncertain in terms of both the direction (i.e., benefiting or harming the regional economy) and magnitude. The optimal private ownership is found to increase with the expected value of the marginal economic spillover of HSR traffic. In view of the risk sharing, the government also raises the private ownership when there is a higher uncertainty concerning the marginal spillover. However, when either the expected value of the marginal spillover or its uncertainty gets too high, the government may choose not to adopt PPP, but rather to entirely finance HSR projects with public funds. Essentially, in this case, PPP would require too much private ownership and as a result, seriously reduce social welfare. Finally, we apply our analytical results to offer an explanation for why China has so far implemented PPP for HSR construction only in its eastern/coastal regions.