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

Abstract

This study analyzes global stress in public-private partnerships in infrastructure investment. While project failures seldom occur, there are many stresses, such as broad political risk: the ability of the highest government executives to use discretion to make sweeping changes to investment rules or interventions in regulation that adversely affect a project’s market value. This includes protracted tariff freezing. However, this is usually only realized after other risks, such as currency risk, have materialized first. Thus, broad political risk can be controlled (one way to do this is to exert strong efforts to build local currency debt markets). Other causes of stress include opportunistic government behavior and price cap regulation, which may needs to be strengthened to adapt to crisis situations. Except for political risk guarantees, loans and equity from multilateral institutions have no effect on outcomes. Ironically, strong growth and rigid currency regimes before projects start to operate heighten risk, as they can lead to adverse selection of proponents and moral hazard in project design. While political risk guarantees lead to favorable outcomes in general, they are rarely utilized, suggesting that they may need to be re-engineered or marketed better to be more useful. Surprisingly, many of the World Bank’s indices of governance quality lead to perverse outcomes. Thus, new governance standards must be used to judge PPPs. Many suggestions for policy improvements are made.

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