Institutional and Political Determinants ofPrivate Participation in Infrastructure
Marian Moszoro
Berkeley-Haas & Kozminski University[with Gonzalo Araya, Fernanda Ruiz-Nuñez, and Jordan Schwartz]

International Transport Forum
OECD-World Bank-George Mason University
October 27–28, 2014, Washington, DC

Institutions, Politics, and Projects“I never handled any proposition
where the engineering problems were so simple

and the political ones so complex.”
Michael “Chief” O'Shaughnessy (1864-1934),
tenured Chief Engineer of the City of San Francisco,promoter of the controversial Hetch Hetchy project2

What Is a Public-Private Partnership?
The hen “cooperates”...

... but the pig is committed! I.e., long-term
sharing of investments, profit, and risks
3

The Story: Large Infrastructure Projects

energywater

sunk investments, natural monopolies,
public interest, non-relational contracting,informational asymmetries,
double-sided hold-up...
renegotiationstransport

10–95 years

4Literature Taxonomy and Mapping
Theoretical Framework
Empirical Studies
Economics/FinanceDiscount rate

Social discount rate (Arrow &Lind 1970); interest rate
differential (Moszoro 2014a)

Access to capital

Access to external financing (Esty2011)

Investment efficiency

Variables

Productivity differential
Bundling

Lower investment outlays andshorter investment period(Moszoro 2014a)
Lower operational costs (Moszoro2014b)
Incentive theory and economiesof scope (Iossa & Martimort
2013)

Risk allocation

Contracting flexibility &regulation

Corruption, politicalstability & rule of law
Bureaucracy

Political Economy

Lower government beta andaccess to capital vs.
investment efficiency andproductivity differential(Grout 2003)

Expropriation risk and LPVR
(Engel, Fischer & Galetovic
2001)
Post-tender renegotiations (Iossa& Martimort 2011)I nstitutional Analysis

Ourcontribution
Incomplete contract theory:
bundling of investment andoperations (Hart 2003;Hart, Shleifer &Vishny1997); governance ofhybrids and boundaries ofbureaucracy (Williamson1979, 1999)

Low third-party opportunism risk (Moszoro & Spiller 2014)

Regulatory and institutionalframework (Pragal 2003; Kirpatrick
et al. 2006; Basilio 2011); property
right and quality of the burocracy(Jensen et al. 2005).; corruption andrule of law (Hammami et. al., 2006);
burocratic quality (Barnejee et al.
2006; Gasmi et al. 2010; Tewodaj2013)

5Assumptions
Three-stage model: investment, predictable cash flows, and terminal value:1.

In t0, public agent and private investor invest I with certainty

2.

In t1,2,...,n, predictable cash flows CF are realized3.

In tn+1,...,∞, the terminal value (TV) is realized with uncertainty

4.

Public agent can receive transfers TR conditional on states of TV

5.

E(TR) = 0, so that E(TV+TR) = E(TV) and SD(TV+TR) < SD(TV)Private: TV
Public: TV + TR|TV

Investment

t0

t1

t2

t...

tn–1tnPredictable CFs
6Toy Model
Preference for private participation in infrastructure will be given by:Comparative statics:
Preference for PPI
Pr[NPV pr > NPV pu]

VariableM eaning

Captured econometrically by

1 – I pr /I pu

Investment efficiency+

Country dummies and subsample sector regressions;
GDP per capita controls

CFpr /CFpu

Productivity differential+

Country dummies and subsample sector regressions;
GDP growth controlnIndustry stability(inverse of industry risk)+

Subsample sector regressions; regulatory qualityr pu/r pr

Political stability(inverse of political risk)+

Political variables: rule of law, corruption perception,regulatory quality, and number of disputes; corporate
taxation and country exchange rate volatility controls
7Predictions
Controlling for economic and industry factors:

Prediction 1: An increase in the rule of law will be associated with lower
differential in the public and private discount rates and thus higher PPI.
Prediction 2: An increase in regulatory quality will be associated withhigher predictability of cash flows and thus higher PPI.
Prediction 3: An increase in freedom from corruption will be associatedwith lower political risk premium and thus higher PPI.

Prediction 4: An increase in the number of disputes will be associated withhigher political risk premium and thus lower PPI.

8Data: Rich Country-level Panel
1.

World Bank’s Private Participation in Infrastructure dataset

http://ppi.worldbank.org/
2.

Quality of Governance Standard Database
http://www.qog.pol.gu.se

3.

UNCTAD Database of Treaty-based Investor-State Dispute
Settlement Cases

4.

Country-level economic variables from the World Development

Indicators Database→

2.5K+ observations, 80+ countries, 100+ variables, ~30 years;
by sectors, focus on EMDEs
9Institutional and Political Variables
Quality of Government is the mean value of “Corruption,” “Law andOrder,” and “Bureaucracy Quality”

Freedom from Corruption relies on Transparency International’s
Corruption Perceptions Index (CPI) for 152 countries
Government Effectiveness combines the quality of public service
provision, the quality of the bureaucracy, the competence of civil servants,
the independence of the civil service from political pressures, and thecredibility of the government’s commitment to policies
Rule of Law includes perceptions of the incidence of crime, theeffectiveness and predictability of the judiciary, and the enforceability ofcontracts
Regulatory Quality measures the incidence of market-unfriendly policies
such as price controls, inadequate bank supervision, and excessive
regulation
10

Identification Strategy
Sector-specific moving averageControls

Political and institutional variables:a) freedom from corruptionb) government effectivenessc) rule of lawd) quality of regulationse) number of court disputes
11Summary Statistics
VariableObs

M eanStd. Dev.

M inM ax

ln GDP_1

7,388

22.76985

2.411881

15.9930730.33849

ln Inflation_1

6,588

1.954061.402989-13.4379

10.19474ln Trade_1

6,938

4.141784

0.638758-1.17505

6.13225

Debt_1

4,242

4.927175

6.7669340208.0971

Growth_1

7,140

2.051126.012271-50.2904

92.58597

ln Population

8,178

15.33762

2.106291

8.982059

21.01901

Access to finance

2,291

7.47474

17.92406

0150

Free of corruption

2,987

40.0726523.22481

0100

Government effectiveness

2,437-0.05928

0.997779-2.45416

2.407654

Rule of law

2,492-0.06741

0.993558-2.67015

2.001923

Regulatory quality

2,438-0.06711

0.991987-2.67544

2.247345

Gini coefficient

2,710

41.53993

9.80825

20.96

74.33

Disputes

4,780

0.687657

3.303972

065
12Results (1) — General Specification
VARIABLES
Freedom from corruption
Government effectiveness
Rule of law
Quality of regulation
Access to finance

(1)

(2)

(3)

(4)

(5)

(6)

ln_PPI

ln_PPI

ln_PPI

ln_PPI

ln_PPI

ln_PPI(0.610)(0.639)(0.607)(0.692)(0.792)(0.633)0.00718*

0.0166***0.00669*0.0110**0.0161***0.0155***(0.00406)(0.00420)(0.00402)(0.00459)(0.00497)(0.00416)

0.0587-0.1070.120-0.1090.0178-0.0461(0.178)(0.180)(0.177)(0.201)(0.215)(0.179)0.404**

0.279

0.431**

0.463**

0.436**

0.325*(0.180)(0.179)(0.178)(0.201)(0.219)(0.177)0.431***

0.638***

0.317**

0.660***

0.598***

0.515***(0.152)(0.150)(0.153)(0.173)(0.185)(0.150)0.00455**

0.00539***0.00355*

0.00205

0.00251

0.00405**(0.00196)(0.00195)(0.00195)(0.00220)(0.00244)(0.00195)

0.00318

0.00757-0.000675(0.00967)(0.0116)(0.00959)

Gini coefficient
Disputes (moving sum)-0.0385***-0.0378***-0.0350***-0.0380***(0.00908)(0.0104)(0.0105)(0.00844)

0.03350.0237(0.0223)(0.0227)

Dispute time

Observations

1,041

867

1.041

771

651

867

R-squared

0.487

0.547

0.497

0.528

0.540

0.559

Number of countries

11198

111

1089598

Controls: ln GDP_1, ln Inflation_1, ln Trade_1, Debt_1, Growth_1, ln Population;
country & year fixed effects

13

Results (2) — General Specification
1.

Political regimens such as parliamentary democracy, mixed (semipresidential) democracy, presidential democracy, civilian dictatorship,military dictatorship, and royal dictatorship do not affect significantly
the level of PPI infrastructure investment

2.

Countries with large markets and high demand for infrastructure(larger population and higher lagged GDP) tend to have more PPI

3.

Governments with less inflation have a more stable environment
fostering private sector investments in infrastructure PPIs

4.

Coefficients associated with freedom from corruption, rule of law,quality of regulations, and number of disputes have the expected
sign and are economically and statistically significant
14

Results (3) — General Specification
5.

Decreasing corruption by 10 points can increase PPI by 6.7%
[E.g., Serbia ↔ South Africa]

6.

Improving rule of law by one standard deviation (i.e., by 0.1) canincrease PPI by 4.3%
[E.g., Buthan ↔ Jordan]

7.

An improvement of one standard deviation (0.1) in quality ofregulation produces an average increase of 3.2% in the level ofinfrastructure investment in PPIs
[E.g., Mexico ↔ Turkey]

8.

One more project going to court decreases investments by 4%
15

Results — By Sector
1.

Freedom from corruption is statistically significant for energy, telecom,and water sectors except for transport•H: Corruption affects investors’ decision to enter the transport market, notsubsequent level of investment (protected once they do invest?)

2.

Rule of law are of the same magnitude as for all sectors, but notsignificant at the sector level (smaller sample?)

3.

Quality of regulation is statistically significant for all sectors except
water•

H: Water is a socially sensitive and likely to be politically influenced; investors may

prefer price controls and strong regulation to limit ex ante the risk of domestic politics

4.

Coefficient on disputes is statistically significant for all sectors except
for energy. Having one more dispute can decrease PPI investments intelecoms and water by approximately 12%
16Results — Robustness Checks
1.

Regressions without year dummies: insignificant changes in the mainresults2.

We expected that countries with more experience on PPIs and higher
income would have PPI investments less sensitive to institutional andgovernance variables. However, results do not vary by quartile ofexperience, GDP, and GDP per capita•

H: Not the quantity, but quality of experience matters (i.e., successful projects, forwhich we do not control)

17Conclusions
1.

Industry and political stability key to increase PPI2.

PPI highly sensitive to the quality of government variables: freedom
from corruption, rule of law, quality of regulations, and disputes

3.

Results hold when data is disaggregated at the sectoral level; morework needed to understand exceptions
4.

No difference in the results across experience and economic level
quartiles

5.

Upstream “enabling” institutions, policies, and regulations and sector
economics down to pipeline development need to be addressed
simultaneously
18Institutions, Politics, and PPI“I never handled any proposition
where the engineering problems were so simple
and the political ones so complex.”Some institutions and politics do matterfor private participation in infrastructure
19