When extractive political institutions affect public-private partnerships: Empirical evidence from Indonesia's independent power producers under two political regimes*

Abstract

This paper examines how extractive political institutions are associated with the performance of public-private partnerships (PPPs) using the case of the electricity sector in Indonesia, where a political regime shift has impacted the independent power producers’ (IPPs) arrangements in the power generation sector. Using a two-stage empirical strategy (data envelopment analysis and the difference-in-differences regression), I analyzed the economic performance of 20 coal-fired plants for the period between 2010 and 2016 that consists of IPPs endorsed by the two political regimes, both authoritarian and democratic, and the state-owned power plants. The results indicate that the extractive political institutions are associated with a reduced efficiency of the IPPs endorsed by the authoritarian Soeharto regime by −0.135 points, or 0.16% of the mean, showing that across all other power plants that produced the same output, the plants endorsed by the Soeharto regime used input or expenditure 0.16% higher than the average input or expenditure used by other plants. These findings are consistent with the political economy argument that extractive political institutions might have created economic policies that allow for the political elite to extract rents from PPPs.