Public-Private Partnerships in Infrastructure Projects: The Role of Ida Status of a Country

Abstract

Public-private partnerships (PPPs) are increasingly promoted by advocates as an innovative policy tool for redressing inefficiency in traditional public procurement mechanisms. Governments, operating on razor-thin budgets in many developing countries, also pursue PPPs on the grounds that they will bridge their countries' infrastructure gaps. This paper empirically investigates the main incentives that motivate both public and private entities to pursue PPPs as an infrastructure investment tool, focusing on the International Development Association (IDA) status of a country. This study uses a cross-country panel regression for 36 developing countries over 1990-2019, where the outcome variable is the project count as well as the level of PPP investment (PPI). For the regression of the former the study applies Zero Inflated Poisson (ZIP), while for the latter it uses tobit model. While IDA status is negatively associated with PPPs, GDP per capita, economic growth, market size, M2 money supply and inflation are all positively related with PPPs. While volatile exchange rates discourage risk-averse investors, fuel export and foreign aid encourage them to participate in PPPs. Findings also suggest that private investors are less inclined toward PPPs in highly indebted and effectively governed countries. Although the years of PPP experience initially attract more PPPs, further experiences are proving to be frustrating and discouraging of future PPPs. The size of the market, purchasing power in terms of per capita GDP, and inflation all emerge as the most relevant factors in attracting PPPI. Countries with substantial foreign exchange reserves and higher fuel exports are found to attract greater PPPI. Similarly, crisis-ridden nations also pursue more PPPIs. Finally, government effectiveness is found to exert a negative impact on PPPI. The findings could be useful for governments of these countries to guide the design and implementation of policies conducive to a sound investment environment. The prevalence of PPPs in richer countries and the private sectors' preference for higher inflation and less effective government hint a rent-seeking motive on the part of private entities. Alternatives should, therefore, be investigated before pursuing the PPP route. If governments opt to engage in PPPs, they have to pay attention to certain macro conditions.