What determines investment and the number of projects in Public-Private Partnerships in emerging economies?

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Responsible researcher: Eduarda Miller de Figueiredo

Article title: DETERMINANTS OF PUBLIC-PRIVATE PARTNERSHIPS IN LATIN AMERICA AND THE CARIBBEAN

Article authors: Rodrigo Nobre Fernandez, Leonardo Cordeiro, Felipe Garcia, Jean Marcel Del Ponte Duarte and André Carraro

Intervention location: Latin America and the Caribbean Sample size: 29 Emerging economies

Sector: Economic Policy & Governance Type of intervention: Effects of Public-Private Partnerships

Variable of main interest: Investment and total number of projects

Assessment method: Others

Policy Problem

Public-Private Partnerships (PPPs) emerged in the United Kingdom during the 1990s as a contractual form in which the public sector uses the private sector as a partnership for infrastructure-related projects, that is, it grants the capacity and enters into new commercial partnerships that allow attract new private investments. That is, the public sector found an alternative solution for the provision of goods and services within a context of fiscal restrictions.

In a scenario where new investments need to be made even in fiscal constraints, PPPs offer advantages and opportunities in terms of fiscal stability, fundraising and efficiency gains (Estache, 2006). This form of contract allows the public sector to carry out more appropriate assessments and also introduces competition into the provision of public services, as the private sector is able to provide cheaper infrastructure services compared to the opposite sector (Wright, 1987).

That said, the article summarized here sought to investigate the channels that stipulate investment and the number of PPP contracts for countries in Latin America and the Caribbean.

Assessment Context

Privatizations appeared when the governments of Latin American countries perceived the private sector as an opportunity to obtain the necessary resources that would allow infrastructure improvements. Furthermore, PPPs have an important relationship between infrastructure and economic growth, given that, based on ideal infrastructure conditions, there is an increase in the return on private inputs, stimulating investment, as stated by Canning and Bennathan (2002). In light of this, railway, energy, highway, sewage and water treatment projects, which require high levels of investment, have been replaced from public provision by PPPs.

These partnerships are characterized by the grouping of investment and service provision in a long-term contract, where the private sector partner manages and controls the assets in exchange for usage fees and fees granted by the public sector. The assets listed in the contract, at its end, remain for the public sector. According to the 2009 European PPP Report, the focus of PPPs is on contracts involving the energy sectors (generation, transmission and distribution), transport (roads, railways, airports and ports), telecommunications (local, long-distance telephone and international) and sanitation (capture, treatment and distribution).

The literature shows that PPPs appear in greater numbers when there are large public deficits, in economies with greater economic stability and in countries that have low levels of corruption and stricter compliance with legislation.

Policy Details

To carry out the investigation of the channels that determine PPPs, the authors developed 4 hypotheses:

Hypothesis 1: Countries with low savings rates and a smaller stock of external debt are more likely to engage in PPP projects.

It is possible for there to be a positive relationship between a country's level of savings and its participation in infrastructure projects, where savings can be complementary to private investment. However, there is the possibility that there is a substitution effect, in which the nation that saves more may be substituting private investments for public ones (Estache, 2006).

Hypothesis 2: Investments in PPP projects are more common in countries with stable macroeconomic conditions.

Hammami et al. (2006) points out that infrastructure projects have high costs and generate revenue for the private agent in the long term. In this way, the authors test whether the countries' macroeconomic conditions are relevant factors for formulating this type of contract.

Hypothesis 3: A good business environment is likely to attract a large number of private companies to get involved in PPP projects.

More effective governments tend to attract private companies, however, these same governments may not need to turn to private partners due to their efficiency.

Hypothesis 4: PPPs will be more prevalent in environments where the legal code better protects investors' rights.

The presence of legal institutions has a significant impact in relation to private investment (Pistor et al., 2000).

Methodology Details

To carry out the study, the World Bank database on private participation in infrastructure investments for the 29 emerging economies in Latin America and the Caribbean was used in the four sectors: energy, telecommunications, transport and water.

The authors investigate the determinants of the total investment of Greenfield and Divestment contracts and the total number of projects. Greenfield contracts are a private entity that builds and operates a new facility over a specified period. The Alienation contract deals with a private entity that purchases a stake in the capital of a state-owned company.

For estimation, panel data with a fixed effects model were used, where unobservable factors are considered constant over time. Furthermore, the Poisson and Negative Binomial model was used when the dependent variable assumes the counting value in relation to the total number of PPP projects.

Source: Authors

Table 1 presents the explanatory variables and the explained variable assumed the values[1]: (1) total investment; (2) total investment of Greenfield contracts; (3) total investment of Sale contracts; (4) total number of PPP projects.

Results

When considering the total invested in PPPs as a dependent variable, the results in relation to the Legal System indicate that the 1% increase in the time required to fulfill the contract reflects a reduction of approximately 3% in investment in PPPs. And gross savings as a percentage of GDP has a positive and significant effect on investment, that is, there is an indication of complementarity between the two variables. On average, a 1% increase in the time to open a business increases investment in PPPs by 0.72%.

In relation to Greenfield contracts, a 1% increase in contractual fulfillment time reduces investment in this type of contract by 2.32%, where regulatory quality has a positive effect. With regard to Alienation contracts, it was found that macroeconomic stability is essential for the private sector to invest in projects that were normally managed by the public sector.

When estimating the total number of projects, using Negative Binomial, it is observed that regulatory quality really is a decisive factor for the increase in the number of projects. However, for Poisson, this effect is smaller and has a negative impact on the time to fulfill the contract.

It was found that inflation has a positive effect. In other words, countries with less favorable macroeconomic conditions need PPPs as an investment alternative. Furthermore, it was found that honoring the commitment with creditors encourages the increase in the number of PPPs, but this capacity ends up easing the government's budgetary restriction, allowing the public entity to carry out infrastructure investments alone. In view of the above, the article shows that the government's budgetary constraints play an important role in the total number of projects.

Public Policy Lessons

PPPs are present in the economic agendas of developing countries, as an alternative and efficient contractual arrangement to provide investments in infrastructure. Therefore, it is clear that credibility, the macroeconomic environment, ability to attract private investment and compliance with contracts are required conditions for attracting new investments.

Reference

FERNANDEZ, Rodrigo Nobre et al. Determinants of Public-Private Partnerships in Latin America and the Caribbean. Economic Perspective, v. 13, no. 2, p. 86-99, 2017.
[1] All investment values ​​are in millions of dollars.

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