Principal investigator: Bruno Benevit
Original title: Do Public-Private-Partnership-Enabling Laws Increase Private Investment in Transportation Infrastructure?
Authors: Daniel Albalate, Germà Bel and R. Richard Geddes.
Location of the Intervention: United States
Sample Size: 177 public-private partnerships
Sector: Public Sector Economics
Primary Variable of Interest: Private investment in infrastructure
Type of Intervention: Enabling laws
Methodology: DID, Counting Methods
Summary
Infrastructure is a fundamental characteristic for the development of countries, frequently demanding strong private capital participation for its promotion. Public-Private Partnerships (PPPs) can enable projects in contexts where the State does not have the necessary investment capacity. In this sense, this study analyzed the impact of PPP enabling laws in 35 states in the United States on the use of private investment in infrastructure. The evidence found demonstrated that these policies increased the participation of private investment and the number of PPP projects enabled.
- Policy Problem
Investment capacity represents one of the major challenges related to the viability of infrastructure projects, especially highways. Globally, it is estimated that there is a difference of $350 billion between the investment required and the investment rate for infrastructure (WOETZEL et al., 2016).
In this context, Public-Private Partnerships (PPPs) can enable projects in situations where investment capacity does not meet the demand, promoting long-term contracts between a public project sponsor and a private partner. Thus, PPPs can improve the delivery of projects on time and within budget, stimulate innovation in project execution, better allocate risks, and improve project performance (ALBALATE; BEL; GEDDES, 2020).
In the United States, PPPs contrast with the traditional project delivery model, which involves separate contracts for design and construction, financed by the public sector through tax-exempt municipal bonds. The public sector is also responsible for operation and maintenance. In PPPs, activities such as design, construction, financing, operation, and maintenance can be combined, exploiting synergies between these functions. However, the implementation of PPPs depends on state laws that regulate contractual issues, such as the acceptance of unsolicited proposals, the application of PPPs to new or existing infrastructure, revenue sharing, and the inclusion of non-compete clauses.
The lack of adequate legislation can increase risks for private partners, hindering the development of infrastructure projects. Specific laws authorizing PPPs can stimulate private investment in this type of project, as they clarify contractual issues – such as the handling of unsolicited proposals, the feasibility of using PPPs in existing and new infrastructure – and the sharing of revenues with public sponsors, making them financially viable.
- Policy Implementation Context
In the United States, private sector participation through PPPs encompasses the management, operation, and renovation of existing transportation facilities, as well as the design, construction, financing, and operation of new facilities. In the transportation sector, particularly in highways, PPP contracts define how infrastructure will be renovated, maintained, and expanded. These contracts also specify tariff determination and concession duration, and include performance indicators such as safety standards and pavement quality, with clear financial and operational incentives. Between 1988 and 2016, PPPs were used to finance and construct at least 177 transportation projects in the United States, totaling $115 billion. The use of PPPs has increased over time, with annual investments rising from $2,4 billion to an average of $7,5 billion between 2011 and 2016.
Legislation authorizing PPPs plays an important role in attracting private investment, offering legal certainty and reducing political uncertainty. Specific laws for PPPs help avoid the need for additional legislative approvals, which can discourage investment. States with more advanced PPP legislation tend to attract more private investment, with 60% of projects occurring in just six states that had such laws. By 2012, 34 states and Puerto Rico had laws granting explicit authority to enter into PPP agreements, which boosted the number of projects and the volume of investment in this modality.
- Evaluation Details
The study's dataset spanned the period from 1988 to 2016 and included information on the adoption of laws authorizing PPPs by US states. Specifically, the data contains an indicator for the year in which each state passed its first PPP enabling law, as well as the provisions of those laws. The study used a state-year panel, covering from the passage of the first modern PPP law in 1988 to 2016, the last year for which complete data is available. The final sample comprised a total of 1.450 observations.
In addition to analyzing the impact of the existence of a PPP enabling law on private investment, the study also investigated the importance of specific provisions of these laws in attracting investment. Thirteen provisions were identified that form a favorability index for PPP laws. A questionnaire was sent to PPP experts to assign weights to each provision based on its perceived influence on private investment. These weights were used to calculate a favorability score for each enabling law, ranging from 0 to 10, with more recent and modified laws receiving higher scores. The study also considered that some states replaced their old laws with new ones during the study period, and these changes were incorporated into the favorability index. The average favorability index increased over time, peaking in 2012 and remaining constant until 2016.
- Method
The study examined the impact of laws allowing PPPs on private investment in road infrastructure in the US. The two main outcome variables were (i) the percentage of private investment relative to total investment in roads and highways and (ii) the number of completed PPP projects. The first variable captured the share of private investment in total spending. The second variable was used to assess whether the introduction of PPP laws influenced the number of projects that reach the financial close-up phase.
In the main analysis, the difference-in-differences (DID) approach was used to compare the average impact of PPP laws in states that implemented them versus those that did not. To control for factors that could influence the results, the model included variables such as per capita public debt, fuel tax revenue, federal highway aid, per capita real income, and state population. The degree of unionization, which can affect PPP adoption, and state- and year-specific fixed effects were also considered, allowing for the capture of unobserved variations.
The study also used counting models, such as the conditional negative binomial model with fixed effects and the zero-inflated model, to predict the annual number of PPP projects that achieve financial close-up. Control variables similar to those used in the previous models were employed. Finally, an analysis was conducted on the effects of the legal provisions according to the specificities associated with PPP projects.
- Main results
The results showed that both the existence of PPP legislation and the PPP legislation favorability index are statistically significant determinants of the proportion of PPP investment in the states. The presence of a PPP law has a significant positive effect on investment, with an average increase of 0,004 in the proportion of PPP investment in the states treated, representing an almost six-fold increase compared to the period before the law. The favorability index also showed a positive impact, such that a one-unit increase in the index raised the proportion of investment by 0,0011, indicating economic relevance. However, no statistical significance was identified for changes in the index for states that already have a law.
The results of the counting models indicated that the presence of a PPP law increases, on average, the number of projects that reach financial closure by 4,5 to 5,2 times compared to states without such laws. However, changes in the favorability index after the law's approval were not statistically significant. Regarding the substitution effect, the analysis showed that the increase in spending via PPPs did not result in a decrease in public investment in roads and highways. This result suggests that private spending does not replace public spending, but rather complements total infrastructure investment.
Finally, the analysis of the effects of provisions on road investment demonstrated that clauses strengthening PPPs are the only ones with a statistically significant impact. The addition of such a provision increased the percentage of investment in PPPs by 0,004, more than doubling its average value. This represents a substantial increase in private investment, although it is still a small part of the total investment. The other categories of provisions, such as those dealing with contractual definitions and financing, did not show significant effects. Thus, including clauses that directly incentivize PPPs appears to be the most effective strategy for attracting private investment.
- Lessons in Public Policy
This article presents several empirical approaches to identify how laws regulating PPPs and the favorability of these laws impact private investment and the number of completed PPP projects. The results indicated that the existence of these laws is associated with a significant increase in the number of projects that reach financial closure, while the qualitative aspect of these laws did not show statistically significant effects. Additionally, it was evidenced that the implementation of these laws did not lead to a substitution of public investment for private investment, suggesting that both can coexist without detriment to state action through investment.
The evidence from this study provides relevant information for policymakers seeking to attract more private investment in infrastructure. The presence of a specific law for PPPs plays an important role in creating a more favorable environment for the viability of these projects, while the design of its provisions may have more limited effects. Thus, policies that encourage the approval of PPP laws have the potential to increase the number of infrastructure projects carried out via PPPs, promoting infrastructure expansion and, consequently, economic development.
References
ALBALATE, D.; BEL, G.; GEDDES, RR Do Public-Private-Partnership-Enabling Laws Increase Private Investment in Transportation Infrastructure? The Journal of Law and Economics, v. 63, n. 1, p. 43–70, Feb. 2020.
WOETZEL, J. et al. Bridging Global Infrastructure Gaps. Shanghai: McKinsey Global Institute, 2016.
