Responsible researcher: Bruno Benevit
Original title: Do Public-Private-Partnership-Enabling Laws Increase Private Investment in Transportation Infrastructure?
Authors: Daniel Albalate, Germà Bel and R. Richard Geddes.
Intervention Location: United States
Sample Size: 177 public-private partnerships
Sector: Public Sector Economy
Variable of Main Interest: Private investment in infrastructure
Type of Intervention: Enabling laws
Methodology: DID, Counting Methods
Summary
Infrastructure is a fundamental characteristic for the development of countries, often requiring a strong participation of private capital to promote it. Public-Private Partnerships (PPPs) can make projects viable in contexts in which the State does not have the necessary investment capacity. In this sense, this study analyzed the impact of PPP enabling laws in 35 states in the United States on the use of private investments in infrastructure. The evidence found demonstrated that these policies increased the participation of private investments and the number of PPP projects made viable.
Investment capacity represents one of the greatest challenges related to the feasibility of infrastructure projects, especially for highways. At a global level, it is estimated that there is a difference of $350 billion between the required investment and the investment rate for infrastructure (WOETZEL et al., 2016).
In this context, Public-Private Partnerships (PPPs) can make projects viable in situations where investment capacity does not meet the required needs, promoting long-term contracts between a public project sponsor and a private partner. Thus, PPPs can improve project delivery on time and within budget, stimulate innovation in project execution, better allocate risks and improve project performance (ALBALATE; BEL; GEDDES, 2020).
In the United States, PPPs contrast with the traditional project delivery model, which involves separate contracts for design and construction, financed by the public sector through tax-exempt municipal bonds. The public sector is also responsible for operation and maintenance. In PPPs, activities such as design, construction, financing, operation and maintenance can be combined, exploring synergies between these functions. However, the implementation of PPPs depends on state laws that regulate contractual issues, such as the acceptance of unsolicited proposals, the application of PPPs to new or existing infrastructure, revenue sharing and the inclusion of non-compete clauses.
The lack of adequate legislation can increase risks for private partners, hindering the development of infrastructure projects. Specific laws that authorize PPPs can stimulate the capture of private investment for this type of project, as they clarify contractual issues – such as the treatment of unsolicited proposals, the feasibility of using PPPs in existing and new infrastructure –, and the sharing of revenues with public sponsors, making them financially viable.
In the United States, private participation through PPPs encompasses the management, operation, and renovation of existing transportation facilities, as well as the design, construction, financing, and operation of new facilities. In the transportation sector, especially highways, PPP contracts define how infrastructure will be renewed, maintained and expanded. These contracts also specify the determination of tariffs and the duration of concessions, in addition to including performance indicators, such as safety standards and pavement quality, with clear financial and operational incentives. Between 1988 and 2016, PPPs were used to finance and build at least 177 transportation projects in the United States, totaling $115 billion. The use of PPPs has increased over time, with annual investments rising from 2.4 billion dollars to an average of 7.5 billion between 2011 and 2016.
Legislation authorizing PPPs plays an important role in attracting private investment, offering legal certainty and reducing political uncertainty. Laws specific to PPPs help avoid the need for additional legislative approvals, which can discourage investment. States with more advanced legislation for PPPs tend to attract more private investment, with 60% of projects occurring in just six states that had these laws. By 2012, 34 states and Puerto Rico had laws that granted explicit authority to enter into PPP agreements, which boosted the number of projects and the volume of investments in the modality.
The study's data set covered the period from 1988 to 2016 and included information on the adoption of laws authorizing PPPs by states in the United States. Specifically, the data contains an indicator for the year in which each state passed its first PPP enabling law, as well as the provisions of those laws. The study used a state-year panel, covering the passage of the first modern PPP law in 1988 through 2016, the last year for which complete data is available. The final sample comprised a total of 1,450 observations
In addition to analyzing the impact of the existence of an enabling law for PPPs on private investments, the study also investigated the importance of specific provisions of these laws in attracting investments. 13 provisions were identified that form a favorability index for PPP laws. A questionnaire was sent to PPP experts to assign weights to each provision based on its perceived influence on private investment. These weights were used to calculate a favorability score for each enabling law, ranging between 0 and 10, with newer and amended laws receiving higher scores. The study also considered that some states replaced their old laws with new ones during the study period, and these changes were incorporated into the favorability index. The average favorability rating increased over time, reaching its peak in 2012 and remaining constant until 2016.
The study examined the impact of laws allowing PPPs on private investment in highway infrastructure in the US. The two main outcome variables were (i) the percentage of private investment in relation to total investments in roads and highways and (ii) the number of PPP projects completed. The first variable captured the share of private investment in total spending. The second variable was used to assess whether the introduction of PPP laws influenced the number of projects reaching the financial close stage.
In the main analysis, the difference-in-differences (DID) approach was used to compare the average impact of PPP laws in states that implemented them versus those that did not. To control factors that may influence the results, the model included variables such as per capita public debt, fuel tax revenue, federal aid for highways, real per capita income and state population. The degree of unionization, which can affect the adoption of PPPs, and the specific fixed effects for each state and year were also considered, allowing us to capture unobserved variations.
The study also used counting models, such as the conditional negative binomial model with fixed effects and the zero-inflated model, to predict the annual number of PPP projects that reach financial close. As control variables, controls similar to previous models were used. Finally, an analysis was carried out on the effects of the provisions of the laws according to the specificities associated with PPP projects.
The results showed that both the existence of PPP legislation and the favorability index of PPP legislation are statistically significant determinants of the proportion of investment in PPP in the states. The presence of a PPP law has a significant positive effect on investment, with an average increase of 0.004 in the proportion of PPP investment in the treated states, which represents a nearly six-fold increase compared to the period before the law. The favorability index also had a positive impact, such that an increase of one unit in the index increased the investment proportion by 0.0011, indicating economic relevance. However, no statistical significance was identified for changes in the index for states that already have a law.
The results of the counting models indicated that the presence of a PPP law increases, on average, between 4.5 and 5.2 times the number of projects that reach financial closure compared to states without such laws. However, changes in the favorability rating after the law's passage were not statistically significant. Regarding the substitution effect, the analysis showed that the increase in spending via PPP did not result in a decrease in public investments in roads and highways. This result suggests that private spending does not replace public spending, but complements total investment in infrastructure.
Finally, the analysis of the effects of the provisions on investment in roads demonstrated that the clauses that strengthen PPPs are the only ones with a statistically significant impact. The addition of such a provision increased the percentage of PPP investment by 0.004, more than doubling its average value. This represents a substantial increase in private investment, although it is still a small part of total investment. The other categories of provisions, such as those dealing with contractual and financing definitions, did not show significant effects. Therefore, including clauses that directly encourage PPPs seems to be the most effective strategy to attract private investment.
In this article, several empirical approaches were conducted to identify how the laws that regulate PPPs and the favorability of these laws impact private investment and the number of completed PPP projects. The results indicated that the existence of these laws is associated with a significant increase in the number of projects that reach financial closure, while the qualitative aspect of these laws did not show statistically relevant effects. Additionally, it was evident that the implementation of these laws did not generate a substitution of public for private investment, suggesting that both can coexist without prejudice to state action via investment.
The evidence from this study provides relevant information for public policymakers seeking to attract more private investment in infrastructure. The presence of a specific law for PPPs plays an important role in creating a more favorable environment for the viability of these projects, while the design of its provisions may have more limited effects. Thus, policies that encourage the approval of PPP laws have the potential to increase the number of infrastructure projects carried out via PPPs, promoting the expansion of infrastructure and, consequently, economic development.
References
ALBALATE, D.; BEL, G.; GEDDES, RR Do Public-Private-Partnership-Enabling Laws Increase Private Investment in Transportation Infrastructure? The Journal of Law and Economics , vol. 63, n. 1, p. 43–70, Feb. 2020.
WOETZEL, J. et al. Bridging Global Infrastructure Gaps . Shanghai: McKinsey Global Institute, 2016.
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