Macroeconomic rates of return of investment in public-private partnerships: Evidence from South Asian region

Abstract

As a viable mechanism for the public sector to crowding-in private capital in the delivery of public infrastructure projects, public-private partnerships (PPPs) can play a vital role in accelerating economic growth. Using a panel of five South Asian countries over 1990–2017, we compute macroeconomic rate of returns to evaluate the effects of an investment in PPPs through a panel vector autoregressive (PVAR) analysis with four variables: public investment, private investment, PPP investment and GDP. One of the defining features of infrastructure is its large upfront cost. The funding sources (user fees and taxes), however, materialize only after the facility is built – and then only slowly, over its lifecycle. Under the PPP mechanism, private partners finance the projects to bridge that gap. However, PPP is not a free lunch; eventually public pays for it either through user fees, taxes, or both, therefore causing interest rates to rise, leading to a crowding-out effect on investment. PPP investment, however, can create additional favorable conditions for private investment, for instance, by providing relevant infrastructure such as roads, highways, sewage systems, harbors or airports. These may increase the productivity of private investment, resulting in a crowding-in effect on private investment. Hence, the study also carries out an assessment of the crowding-in/crowding-out effects of PPP investment. The findings show that rates of return to public investment are positive, while returns to private investment are negative. Although the total rate of return to PPP investment is found to be positive, the magnitude is very small. Moreover, the partial rate of return to PPP investment is negative. Concerning crowding-in/crowding-out effects, an increase in PPP investment crowds-in both private and public investment, while public investment results in a crowding-out effect in both private and PPP investment. Lastly, private investment shows a crowding-in effect both in PPP investment and in public investment. Findings of the study have important policy implications for South Asian economies. In terms of both macroeconomic rate of return and crowding-in effect, South Asian countries need to promote the forms of PPP investment. They should formulate effective policies to encourage private investors to invest in PPP projects. To this end, governments should establish a legal framework and favorable conditions for this type of investment to develop and create an environment that help stimulate investment efficiency.