Do Public-Private Partnership Contracts encourage investment in infrastructure?

Responsible researcher: Silvio da Rosa Paula

Article title: IMPACT OF THE DETERMINANTS OF PUBLIC-PRIVATE PARTNERSHIPS IN EMERGING ECONOMIES

Article authors: Rodrigo Nobre Fernandez, Ronald Otto Hillbrecht, Gabrielito Menezes and Felipe Garcia Ribeiro

Location of intervention: Emerging economy

Sample size: 143 emerging countries

Sector: Economic Policy and Governance

Type of intervention: Identify the determinants of Public-Private Partnerships (PPPs)

Variable of main interest: Total investment in PPPs in millions of dollars as a percentage of GDP and number of PPP contracts in total and by sector

Evaluation method: Panel data with fixed effect, Negative Binomial and Poisson

Assessment Context

Investment in infrastructure is an essential factor for the quality of life and socioeconomic development of countries. Faced with the scarcity of financial resources, since the end of the 1980s, developing countries have looked to private companies as an alternative capable of leveraging investments in infrastructure sectors and minimizing the gap between the deficiency in quality provision and the growing demand for services.

Within the scope of contractual models, public-private partnerships are a type of contractual arrangement that allows private companies, in accordance with the institutional restrictions of each country, to manage activities previously provided by the public sector. In general terms, PPP laws take different forms between countries, but one of the main characteristics of this contractual model is that it is long-term, in which the public and private sectors make an adequate division of project risks, making the venture beneficial for both.

Given that public-private partnership contracts are frequently associated with privatization, it is important to highlight the differences between the contracts. Firstly, PPPs delegate the construction and execution of the public service to a private agent, for a predetermined period of time without handing over ownership of the asset. Second, privatization concerns the sale of public assets to the private sector, resulting in the company's total control over the administration, investment and provision of the asset, with no return to the granting authority.

Methodology Details

The empirical strategy used by the researchers was panel data estimators. Its use allows countries to be monitored over time, in order to capture their behavior over the years. When it comes to the number of contracts, the models used were Negative Binomial and Poisson, considered standard for counting data. In general terms, with the implementation of these methods, researchers seek to identify the channels that determine PPPs in emerging countries, having as variables of interest the total investment in millions of dollars as a percentage of GDP, the total number of PPP contracts, and the number of contracts by sector, such as energy, water and sanitation, telecommunications and transport.

Intervention Details

The analysis focuses on 143 emerging countries, for the period from 2005 to 2012. The data is sourced from the World Bank. Therefore, with the aim of identifying the determinants of investment and the number of contracts in Public-Private Partnerships in the countries, potential determining channels widely used in the literature were chosen to be analyzed. The possible determining channels and their description are presented below.

Intervention Details

The analysis focuses on 143 emerging countries, for the period from 2005 to 2012. The data is sourced from the World Bank. Therefore, with the aim of identifying the determinants of investment and the number of contracts in Public-Private Partnerships in the countries, potential determining channels widely used in the literature were chosen to be analyzed. The possible determining channels and their description are presented below.

• Budget constraint: indicates government spending as a percentage of gross domestic product (GDP) and external debt stock as a percentage of gross national income (GNI).
• Macroeconomic environment: refers to inflation measured by the GDP deflator; domestic credit to the private sector as a percentage of GDP and international reserves in months in imports.
• Business environment: consists of economic openness [(exports + imports) /GDP], number of companies created and the time required to open a company.
• Political environment and institutional quality: refers to the country's corruption index and regulatory quality.
• Demand for infrastructure: indicates the size of the country’s population.
• Legal system: consists of the time necessary to fulfill a contract and the rule of law.

Results

The results found for total investment in millions of dollars as a percentage of GDP in PPPs indicate that the macroeconomic environment and legal system channels are important factors in determining private investment. In this way, the macroeconomic stability of a country is important for the attractiveness of the private sector, combined with legal security for both contractual parties, where a country with good institutions would be a significant characteristic in terms of time to fulfill a contract.

In relation to the total number of contracts in PPPs, the government's budgetary restriction channels, macroeconomic environment, business environment and legal system stand out as being preponderant in determining the number of projects in the form of public-private partnerships. From this same perspective, when analyzing the number of contracts by sector, there is evidence for the energy sector that budgetary restriction channels, such as the debt stock and legal system, are decisive for this type of project.

Regarding the telecommunications sector, in addition to the macroeconomic environment and legal system, the business environment stands out, where the time to open a company and the creation of new businesses are important in determining the number of telecommunications projects. Furthermore, with regard to the results of the analysis of the transport sector, it is clear that countries with a stable macroeconomic environment, a good business environment and a legal system, that is, with well-structured institutions that guarantee compliance with contracts , and government budget restrictions, are important factors in determining the number of projects related to transport.

Finally, the water and sanitation sector is analyzed, which, in addition to the macroeconomic environment and legal system channels, highlights that emerging countries with a political environment with transparency and credibility generate attraction of private investment in the formulation of this type of project. In general terms, the business environment, macroeconomic and political stability combined with an efficient system of laws are important channels in the formulation of public-private partnership contracts.

Public Policy Lessons

PPPs are being used in several emerging countries as an option for governments to increase global infrastructure efficiency. According to the global report on private participation in infrastructure developed by the World Bank, in 2019, investments in this type of project reached US$96.7 billion.

In Brazil, the motivation for carrying out PPPs has been mainly due to the government's fiscal situation and its limitation in offering quality services to meet growing demands. Infrastructure projects are being developed in various sectors, such as highways, basic sanitation, energy and telecommunications, with the aim of leveraging economic growth and achieving sustainable development.

In this way, efficient partnerships between the government and the private sector, seeking an optimal allocation of risks, can be a good alternative to encourage investment and provide quality services, increasing efficiency, social well-being and economic development, being an important mechanism for policymakers to overcome government budgetary constraints.

Reference : FERNANDEZ, Rodrigo Nobre et al. Impact of the determinants of public-private partnerships in emerging economies. Planning and Public Policies, n. 44, 2015.