enforced is usually limited. In the words of a senior project finance lawyer based in Asia: “a good contract gives you a seat at the negotiation table, not more.”<sup>22</sup> The very positive effect of the control of corruption can be surprising at first in a sector (construction) that is very prone to corruption and where competitive bidding has not always been the norm. This finding is however consistent with most studies of the link between investment, particularly FDI, and corruption (Moosa 2002).

However, we must be cautious in interpreting the significance of the different institutional indicators. Some of the indicators exhibit multi-collinearity, which suggests that the indicators are capturing some of the same underlying institutional attributes for which we do not have more direct indicators. In the absence of better indicators that would allow us to ‘unpack’ institutions, the key finding is that the institutional indicators as a group do appear as significant. In order to pursue the analysis of the impact of institutions on infrastructure investment flows, qualitative analysis would be a promising approach.

# **7 – Conclusion**

Quantitative research on private participation involvement in the water sector has been held back until now by limitations in the data. The poor quality of the data is in turn due to the relatively lower levels of investment in water and sanitation and the smaller average project size, compared to other infrastructure sectors. International data on infrastructure penetration and the operating and financial performance of water utilities that can be used for cross-country analysis is very limited because of the highly fragmented structure of the sector. Many national governments do not collect information from municipal and regional providers.

The development of the WATSAN PSP database is a first step towards closing this gap in the literature. This new database includes well over twice the number of projects covered by the best existing source, the World Bank PPI Database. While this constitutes a significant improvement, we are currently deepening and strengthening the WATSAN PSP database further to allow for more extensive analysis.

With the information available, we are able to use a negative binomial count regression model to carry out a first analysis of the factors affecting PSP contract signature (the “handshake”) in the water and sanitation sector. We find that demand for higher coverage levels and constraints on government finances are significant variables. Institutions that support the government’s commitment to uphold its agreements with private partners and to maintain stable regulatory arrangements are also important. Among these, investor protection against expropriation and the quality of the bureaucracy emerge as the most significant. However, the indirect measures of institutional characteristics provided by the existing indicators do not allow us to identify the underlying institutional attributes that are significant to PSP rates. This points to the need for qualitative analysis to help identify these underlying attributes and the mechanisms through which they affect investment.

This initial analysis of the new dataset has delivered promising results and suggests a number of areas worthy of further investigation. Firstly, the institutions captured in indices like the ‘rule of law’ and ‘government effectiveness’ developed by the World Bank need to be unpacked. More precise measures of the institutions relevant to private investment in infrastructure need to identified and tested. Secondly, more information on legal and regulatory structures for water and sanitation across countries is needed to study the relationship between these sector-specific institutions and the level of private investment in the sector. The operational and financial performance of the sector seems a likely driver for PSP but cannot be tested because of the absence of country-level data. Thirdly, the role of international financial institutions in shaping government preferences with regard to PSP could be investigated further. Recent research pointing to a political backlash against policies linked with IFI involvement suggests a complex and interesting relationship (Henisz and Zelner 2004). Finally, it would be interesting to extend the analysis to

> 22 Interview: Milbank LLP, Singapore, February 2004

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