Academic journal article Journal of International Business Research

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

Academic journal article Journal of International Business Research

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

Article excerpt

INTRODUCTION

The 1970s and 1980s 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. The study is global in scope, since many of the risks involved are global or regional in nature. For this study, stress is defined as a situation where private sector proponents have exited, or are contemplating exit from a project. Information on stress was derived from the World Bank's Private Participation in Infrastructure (PPI) dataset, which was used as the source for much of the data used in the estimation. This global dataset contains project-specific information on a large number of projects classifiable as PPP, including the total value of investment, sector, sub-sector, type of transaction, and multilateral participation. It covers projects which achieved financial closure from 1984 up to the present. The data is cross-sectional, with projects classified according to their current status (i.e., whether they are operational, distressed, canceled, or concluded). Although the data is cross-sectional, it contains temporal information that can also be used in analysis. Because the sample period spans the emergence of PPP in the late 1980s, through the Asian and Argentine crisis, and beyond, the sample includes many projects that have undergone the most tumultuous experiences in PPP, as well as the periods of consolidation that followed. …

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