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Principal investigator: 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
Location of the intervention: Latin America and the Caribbean Sample size: 29 Emerging economies
Sector: Economic Policy & Governance Type of intervention: Effects of Public-Private Partnerships
Primary variable of interest: Investment and total number of projects
Evaluation method: Others
Policy Problem
Public-Private Partnerships (PPPs) emerged in the United Kingdom during the 90s as a contractual model in which the public sector uses the private sector as a partner for infrastructure-related projects; that is, it grants the capacity to establish new commercial partnerships that allow it to attract new private investments. In other words, the public sector found an alternative solution for the provision of goods and services within a context of fiscal constraint.
In a scenario where new investments are needed even under fiscal constraints, PPPs offer advantages and opportunities in terms of fiscal stability, fundraising, and efficiency gains (Estache, 2006). This type of contract allows the public sector to conduct more appropriate assessments and also introduces competition in the provision of public services, since the private sector is able to provide cheaper infrastructure services compared to the opposing sector (Wright, 1987).
That being said, this article, summarized here, sought to investigate the channels that determine investment and the number of PPP contracts for countries in Latin America and the Caribbean.
Evaluation Context
Privatizations emerged when Latin American governments recognized the private sector as an opportunity to obtain the necessary resources for infrastructure improvements. Furthermore, PPPs (Public-Private Partnerships) have a significant relationship between infrastructure and economic growth, given that ideal infrastructure conditions lead to increased returns 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, are being 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 charges granted by the public sector. The assets listed in the contract revert to the public sector upon its termination. According to the 2009 European PPP Report, the focus of PPPs is on contracts involving the energy sector (generation, transmission and distribution), transport (highways, railways, airports and ports), telecommunications (local, long-distance and international telephony) and sanitation (collection, treatment and distribution).
Literature shows that PPPs appear in greater numbers when there are large public deficits, in economies with greater economic stability, and in countries with low levels of corruption and stricter enforcement of legislation.
Policy Details
To investigate the determining channels of 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.
There may be a positive relationship between a country's savings level and its participation in infrastructure projects, where savings can complement private investment. However, there is also the possibility of a substitution effect, in which the nation that saves more may be substituting private investment for public investment (Estache, 2006).
Hypothesis 2: Investments in PPP projects are more common in countries with stable macroeconomic conditions.
Hammami et al. (2006) point out that infrastructure projects have high costs and generate revenue for the private agent in the long term. Therefore, the authors test whether the macroeconomic conditions of countries are relevant factors in the formulation of this type of contract.
Hypothesis 3: A good business environment is likely to attract a large number of private companies to engage in PPP projects.
More effective governments tend to attract private companies; however, these same governments may not need to resort 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 on private investment (Pistor et al., 2000).
Methodology Details
For this study, the World Bank database on private sector participation in infrastructure investments for the 29 emerging economies of Latin America and the Caribbean was used, across four sectors: energy, telecommunications, transport, and water.
The authors investigate the determinants of total investment in Greenfield and Divestment contracts, as well as the total number of projects. Greenfield contracts involve a private entity that builds and operates a new facility for a specified period. Divestment contracts, on the other hand, involve a private entity that buys a stake in the capital of a state-owned company.
For the estimation, panel data with a fixed effects model was used, where unobservable factors are considered constant over time. Furthermore, the Poisson and Negative Binomial models were used when the dependent variable assumes the value of a count 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 Disposal contracts; (4) total number of PPP projects.
Results
Considering the total invested in PPPs as the dependent variable, the results regarding the Legal System indicate that a 1% increase in the time required for contractual compliance reflects an approximately 3% reduction in PPP investment. Gross savings as a percentage of GDP also has a positive and significant effect on investment, indicating complementarity between the two variables. On average, a 1% increase in the time to open a business raises PPP investment by 0,72%.
Regarding Greenfield contracts, a 1% increase in contract fulfillment time reduces investment in this type of contract by 2,32%, where regulatory quality has a positive effect. Concerning Divestment 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 the Negative Binomial distribution, it is observed that regulatory quality is indeed a decisive factor in increasing the number of projects. However, for the Poisson distribution, this effect is smaller and has a negative impact on the time to contract fulfillment.
It was found that inflation has a positive effect. That is, countries with less favorable macroeconomic conditions need PPPs as an investment alternative. Furthermore, it was found that honoring commitments to creditors encourages an increase in the number of PPPs, but this capacity ends up softening the government's budgetary constraint, allowing the public entity to carry out infrastructure investments on its own. In light of the above, the article shows that the government's budgetary constraint plays an important role in the total number of projects.
Lessons in Public Policy
Public-private partnerships (PPPs) are present on the economic agendas of developing countries as an alternative and efficient contractual arrangement for providing infrastructure investments. Therefore, it is evident that credibility, the macroeconomic environment, the capacity to attract private investment, and contract compliance are essential 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, n. 2, p. 86-99, 2017.
[1] All investment figures are in millions of dollars.
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