Global Determinants of Stress and Risk in Public-Private Partnerships (Ppp) in Infrastructure

By Reside, Renato E. | Journal of International Business Research, July 1, 2009 | Go to article overview

Global Determinants of Stress and Risk in Public-Private Partnerships (Ppp) in Infrastructure


Reside, Renato E., Journal of International Business Research


ABSTRACT

This study analyzes determinants of stress in public-private partnerships (PPPs) in infrastructure investment. While project failures seldom occur, there are many stresses that hinder success. One of these is broad political risk: the prerogative of government executives to make sweeping changes in investment rules or regulations-through measures such as protracted tariff freezing-that undermine a project's market value. Broad political risk can constitute the biggest threat to project outcomes. However, this is usually only realized after other risks, such as currency risk, have materialized first. Thus, broad political risk can be controlled. The empirical analysis in this study yields a number of surprising results: (i) strong growth and rigid currency regimes heighten risk by leading to adverse selection of proponents and moral hazard in project design; (ii) many of the World Bank's indices of governance quality lead to perverse outcomes, suggesting that new governance standards must be used to judge PPPs; and (iii) except for political risk guarantees, loans and equity from multilateral institutions have no effect on outcomes; however, political risk guarantees are rarely utilized, suggesting that they may need to be redesigned or marketed better to be more useful. The paper concludes with suggestions for policy improvements.

INTRODUCTION

The 1970s and 1 980s saw the emergence of privatization as a means to improve public service efficiency in developing countries. Multilateral financial institutions (MFIs) encouraged the pursuit of infrastructure privatization for a number of reasons. It was envisioned that improvements in service provision and efficiency would in the long-run mitigate the lost benefits of state-provision. Privatization was also expected to help relieve state budgets, which had been perpetually strained by state-owned enterprises operating energy, transport, telecommunications and water services. Finally, it was argued that deficit-biased countries could count on privatization to achieve macroeconomic stabilization; this in turn would help relieve pressures on prices and on monetary policy in general.

Chile, followed by Argentina, began to pursue bold programs in privatization, fully divesting themselves of infrastructure assets. Over the last 30 years, the rest of the developing world, in varying levels of intensity, would try to follow suit, prompted by widening gaps between public resources and the perceived demand for infrastructure (see Table 1; Yang 2008; Dailami and Leipziger 1998; Fay and Yepes 2003).

As privatization of infrastructure proliferated, new modalities of public-private partnerships (PPP) in infrastructure emerged in response to stakeholders' evolving preferences in areas of ownership and control, which in turn reflected their differing attitudes towards risk-bearing. The divestment model gave way to more complex modes of PPP, such as concessions of existing assets, greenfield investment, and management contracts.

A nation's capacity and readiness to undertake PPP in infrastructure depends on a number of variables. Among these are risk factors specific to the country, such as the macroeconomic environment, and legal and regulatory regimes; factors specific to projects themselves, such as contracts; and whether or not government and private sector participants such as investors and suppliers can agree on an acceptable allocation of risks. Thus, PPP investment projects often reach closure when stakeholders perceive that an acceptable risk allocation ex ante has been achieved. Subsequently, risk allocation is contracted, and the project is implemented. But while investments are driven by risk allocation ex ante, the success or failure of privatization always depends on the realization of risks ex post. This study looks at investment outcomes of projects ex post.

OBJECTIVES AND RATIONALE OF THE STUDY

This study aims to develop a basic model of PPP project outcomes in order to estimate the factors that account for the greatest level of stress in infrastructure projects with PPP, over a long horizon.

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