## 11. Determinants of the Extent of Private Participation

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---

### Introduction and context
- Scope: empirical analysis of public-private partnerships (PPPs) in infrastructure projects for the period 1990 to 2003 using the World Bank’s Private Participation in Infrastructure (PPI) database.
- Motivation:
  - World Bank estimate: private sector financed about 20 percent of infrastructure investments—amounting to about US$ 850 billion—in developing countries during the 1990s.
  - Investment flows in PPPs peaked in 1997 at more than US$ 100 billion and receded to about US$ 55 billion in 2003.
- PPP roles: design, financing, construction, operation, maintenance, management, and ownership across education, health, water, waste, energy, telecommunications, transportation, and water sectors.
- Empirical contribution: first attempt to analyze determinants of PPPs across countries and industries with panel data (1990–2003), and to investigate determinants of the extent of private participation.

### Theoretical channels and hypotheses
- Determinants divided into seven channels and 12 testable hypotheses (H1–H12):
  - Government constraints
    - H1: Governments with large deficits and a heavy debt burden are more likely to have PPPs.
    - H2: Rentier countries with large sources of exogenous revenue are less motivated to engage in PPP projects.
  - Political environment
    - H3: PPP arrangements positively correlated with ethnic fractionalization.
    - H4: Governments friendly to market-oriented policies are more likely to engage in PPPs.
    - H5: PPPs are more prevalent in politically stable countries with accountable governments.
  - Market conditions and macroeconomic policies
    - H6: PPPs are more common in larger markets where demand and purchasing power are greater.
    - H7: PPPs are more prevalent in countries with credible, predictable, and stable macroeconomic conditions (lower inflation, stable exchange rates).
  - Institutional quality and legal system
    - H8: Weak institutions reduce likelihood of PPPs.
    - H9: Strong and effective legal institutions increase PPP prevalence.
    - H10: Legal codes that better protect investors’ rights increase PPP prevalence.
  - Past experience
    - H11: PPP arrangements are likely to be higher in countries with previous PPP experiences.
  - Extent of private participation
    - H12: Extent of private participation positively correlated with degree of impurity of goods/services and technology structure required.
- Theoretical foundations: x-efficiency, New Public Management, ownership/output valuation results (Besley and Ghatak 2001; Francesconi and Muthoo 2004).

### Data and methodology
- Data: World Bank PPI database covering projects that (i) are owned or managed by private companies in low- and middle-income countries; (ii) directly or indirectly serve the public; and (iii) reached financial closure after 1983. Analysis restricted to 1990–2003.
- Industry sectors in PPI database: energy, telecommunications, transportation, water.
- Dependent variable measurements:
  - Number of PPP projects (count) — Poisson, Negative Binomial, and Zero-Inflated Poisson (ZIP) models used; ZIP favored where over-dispersion and excess zeros occur.
  - Dollar value of PPP investments expressed as a percent of GDP — Tobit model used (with OLS/GLS benchmarks).
  - Extent of private participation — ordinal index scale from 1 to 12 (Table 1); Ordered Probit and Ordered Logit models used (OLS reported as benchmark).
- Explanatory variables mapped to channels (examples):
  - Government constraints: general government balance (percent of GDP), total debt (percent of total exports), aid per capita (current US$), fuel exports (percent of merchandise exports).
  - Political environment: ethnic fractionalization index, chief executive party orientation (1=left; 2=center; 3=right), opposition parties in legislature (number).
  - Market conditions: population (log), real GDP per capita (lagged).
  - Macroeconomic stability: inflation (annual percent change of GDP deflator), M2 (percent of GDP), international reserves (months of imports).
  - Institutional/legal: control of corruption (ICRG index), composite country risk (ICRG index), rule of law (Kaufmann et al. index), common law origin (dummy).
  - PPP experience: dummy for prior PPP project in country-year.
- Controls: time dummies (to capture global shocks) and regional dummies.

### Key descriptive statistics and features
- Regional distribution of PPP projects:
  - Latin America and the Caribbean 47 percent; East Asia and the Pacific 24 percent; Eastern Europe and Central Asia 15 percent; South Asia, sub-Saharan Africa, and Middle East and North Africa about 4–5 percent each.
- Sector project counts (Table 2):
  - Energy: 1,116 projects (Concession 454; Divestiture 286; Greenfield 261; Other mode 7)
  - Telecommunications: 600 projects (Concession 81; Divestiture 134; Greenfield 347; Other mode 72)
  - Transportation: 735 projects (Concession 406; Divestiture 58; Greenfield 226; Other mode 45)
  - Water: 261 projects (Concession 110; Divestiture 20; Greenfield 8; Other mode 150)
  - Total: 2,712 projects
- Contract types (Figure 1) — number of projects by contract:
  - Build-Own-Operate (BOO): 690 projects (38.9 percent of all projects)
  - Build-Own-Transfer (BOT): 317 projects (17.9 percent)
  - Build-Rehabilitate-Operate-Transfer (BROT): 135 projects (13.2 percent)
  - BOO, BOT, BROT together represent 70 percent of projects
- Development agencies supporting projects (Figure 2) — number of projects supported:
  - International Finance Corporation (IFC): 756 projects
  - Inter-American Development Bank (IADB): 231 projects
  - Multilateral Investment Guarantee Agency (MIGA): 157 projects
  - European Bank for Reconstruction and Development (EBRD): 156 projects
  - European Investment Bank (EIB): 124 projects
  - International Bank for Reconstruction and Development (IBRD): 103 projects
  - Asian Development Bank (ADB): 65 projects
  - Corporacion Andina de Fomento (CAF): 53 projects
  - Banque Ouest Africaine de Developpement (BOAD): 46 projects
  - Central American Bank for Economic Integration (BCIE): 34 projects
  - Inter-American Investment Corporation (IIC): 31 projects
  - Islamic Development Bank (IDB): 8 projects
  - African Development Bank (AfDB): 7 projects
  - Caribank: 2 projects

### Main empirical findings — cross-country (all sectors aggregated)
- Channels with consistent empirical support:
  - Market conditions:
    - Larger market size (population (log)) and higher purchasing power (real GDP per capita (lagged)) are strongly associated with a greater number of PPP projects and higher PPP investment shares.
    - Population (log) and real GDP per capita (lagged) significant across count and Tobit specifications.
  - Government constraints:
    - Higher total debt (percent of total exports) associated with more PPP projects and higher PPP investment (total debt coefficient positive and significant in many specifications).
  - Macroeconomic stability:
    - Lower inflation associated with more PPP projects and higher investments (inflation negative and significant across models).
  - Institutional quality and legal system:
    - Better control of corruption and stronger rule of law associated with more PPP projects and larger investments (control of corruption and rule of law positive and significant in many regressions).
  - Past PPP experience:
    - Presence of prior PPP experience associated with more PPP projects and higher investment levels (PPP experience dummy positive and significant in several specifications).
- Political environment: less robust evidence in aggregate regressions; political variables generally weaker predictors when all sectors pooled.
- Regional patterns:
  - Latin America and the Caribbean lead in number of PPPs; most other regions significantly lag behind Latin America and the Caribbean, holding other channels constant.
- Time effects:
  - Time dummies significant — global boom and crisis periods (e.g., Asian and Russian crises, Argentine crisis, September 11) influence PPP flows.

### Sectoral findings — sector-specific determinants
- Energy sector:
  - Market size, purchasing power, and low inflation significant determinants.
  - Government constraints: fuel-exporting countries have fewer energy PPPs (fuel exports percent negative and significant).
  - Political orientation: center-right governments more likely to engage in energy PPPs (chief executive party orientation positive and significant in some specs).
  - Control of corruption positively associated with energy PPP prevalence.
  - Country risk index sometimes positive (unexpected sign) for energy.
- Telecommunications sector:
  - Market size strong determinant (population (log) significant).
  - Many institutional and macro variables (inflation, rule of law, control of corruption, PPP experience) less significant, possibly reflecting high profitability of telecom projects.
  - Total debt and fuel exports positive in some specifications.
  - Europe and Central Asia show a lead in telecommunications PPPs.
- Transportation sector:
  - Market conditions (population (log), real GDP per capita (lagged)) and rule of law are important determinants.
  - Ethnic fractionalization positively associated with transportation PPPs (supports H3 in this sector).
  - Political orientation: center-left governments tend to have more transportation PPPs (chief executive party orientation negative coefficient indicates center-left associated with more projects given index coding).
  - Latin America and the Caribbean significantly ahead of other regions in transport PPPs.
- Water sector:
  - Market conditions (population and real GDP per capita (lagged)) and rule of law significant determinants.
  - Composite country risk found with unexpected sign in some specifications (negative coefficient where a positive deterrent effect might be expected), suggesting complex interactions possibly mitigated by multilateral guarantees.
  - Middle East and North Africa and South Asia lag significantly in water PPPs.

### Determinants of the extent of private participation (index 1–12)
- Dependent: index of private sector participation (higher index = higher private commitment; index corresponds to Table 1 ranking of PPP types from Management contract = 1 to Full Privatization = 12).
- Significant positive determinants of greater private participation:
  - Control of corruption (index):
    - control of corruption 0.549** in Ordered Probit
    - control of corruption 0.766** in Ordered Logit
    - significance ** = 1 percent
  - Common law origin (dummy):
    - common law dummy 1.239** OLS
    - common law dummy 1.636** Ordered Probit
    - common law dummy 2.754** Ordered Logit
- Sector effects on private participation:
  - Water sector dummy: negative and significant
    - -1.124** OLS
    - -1.574** Ordered Probit
    - -3.021** Ordered Logit
  - Telecommunication sector dummy: positive marginally significant (significant at 90 percent level in some specifications).
  - Energy and transportation: intermediate; energy near neutral; transportation slightly negative but not consistently significant.
- Regional effects:
  - Sub-Saharan Africa dummy negative and significant:
    - -2.010** OLS
    - -2.692** Ordered Probit
    - -4.863** Ordered Logit

### Policy implications and conclusions
- Market conditions channel is the most important determinant: larger market size and higher purchasing power are crucial; demand risk is central to private sector participation decisions.
- Macroeconomic stability matters: lower inflation and overall price stability encourage PPP formation; policymakers should prioritize price stability to attract PPPs.
- Government solvency and fiscal constraints: heavy government debt is associated with greater PPP use, but contingent liabilities and exchange-rate guarantees can create solvency risks; governments should limit reckless guarantee exposure and manage currency-structure of borrowing.
- Institutional and legal quality: control of corruption and effective rule of law are critical to attract both more PPP projects and greater private resource commitments; common law origin is positively associated with higher private participation.
- Political economy: ethnic fractionalization and weak checks and balances can influence PPP prevalence in sector-specific ways (e.g., transportation); political pressures can encourage excessive contingent exposures — institutional safeguards are needed.
- Experience and multilateral support: prior PPP experience increases both number of projects and investment levels; multilateral development agencies (IFC, MIGA, IADB, EBRD, EIB, ADB, etc.) play important roles via guarantees, finance, expertise, and risk sharing to help countries overcome demand and country-risk constraints.
- Sectoral strategy: extent of private participation aligns with the impurity and technology-intensity of services:
  - Telecommunication: highest private involvement (technology-intensive, excludable, rival).
  - Water: lowest private involvement (more public good characteristics, lower technology).
  - Energy and transportation: intermediate positions (capital intensive; technology intensity varies).
- Regional observations:
  - Latin America and the Caribbean and Europe and Central Asia lead in PPP numbers; sub-Saharan Africa significantly lags in attracting private participation, even after controlling for all channels.
- Overall conclusion: PPPs are likely to remain an important instrument for infrastructure provision, but success depends on market size, macro stability, institutional/legal frameworks, prudent fiscal management of guarantees, and experience-building often supported by multilateral agencies.

*Source: IMF working paper, “11. Determinants of the Extent of Private Participation”, based on World Bank PPI database (1990–2003) and accompanying regression results and tables as presented in the source content.*

### References..............................................................................................................

### References

### Figures
- 1.         Number         of         Projects         by Types of Contract ...................................................................24
- 2. Number of Projects Supported by Development Agencies .........................................25

### Tables
- 1. Characteristics of Main Types of PPPs and Index of Private Participation.................22
- 2. Number of Projects by Industry Sector and Mode of Entry ........................................23
- 3. Channels, Hypotheses and Explanatory Variables, and Data Sources ........................26
- 4.         Correlation         Matrix .......................................................................................................28
- 5. Determinants of the Number of PPP Projects in Infrastructure ...................................29
- 6. Determinants of Investments in PPPs ..........................................................................30
- 7. Determinants of the Number of PPP Projects in Energy Infrastructure ......................31
- 8. Determinants of the Number of PPP Projects in Telecommunication Infrastructure ..32
- 9. Determinants of the Number of PPP Projects in Transportation Infrastructure ..........33
- 10. Determinants of the Number of PPP Projects in Water Infrastructure ........................34

*Source: _wp0699 - References..............................................................................................................*

### 11. Determinants of the Extent of Private Participation ....................................................35

### 11. Determinants of the Extent of Private Participation

### Introduction and context
- Scope: empirical analysis of public-private partnerships (PPPs) in infrastructure projects for the period 1990 to 2003 using the World Bank’s Private Participation in Infrastructure (PPI) database.
- Motivation:
  - World Bank estimate: private sector financed about 20 percent of infrastructure investments—amounting to about US$ 850 billion—in developing countries during the 1990s.
  - Investment flows in PPPs peaked in 1997 at more than US$ 100 billion and receded to about US$ 55 billion in 2003.
- PPP roles: design, financing, construction, operation, maintenance, management, and ownership across education, health, water, waste, energy, telecommunications, transportation, and water sectors.
- Empirical contribution: first attempt to analyze determinants of PPPs across countries and industries with panel data (1990–2003), and to investigate determinants of the extent of private participation.

### Theoretical channels and hypotheses
- Determinants divided into seven channels and 12 testable hypotheses (H1–H12):
  - Government constraints
    - H1: Governments with large deficits and a heavy debt burden are more likely to have PPPs.
    - H2: Rentier countries with large sources of exogenous revenue are less motivated to engage in PPP projects.
  - Political environment
    - H3: PPP arrangements positively correlated with ethnic fractionalization.
    - H4: Governments friendly to market-oriented policies are more likely to engage in PPPs.
    - H5: PPPs are more prevalent in politically stable countries with accountable governments.
  - Market conditions and macroeconomic policies
    - H6: PPPs are more common in larger markets where demand and purchasing power are greater.
    - H7: PPPs are more prevalent in countries with credible, predictable, and stable macroeconomic conditions (lower inflation, stable exchange rates).
  - Institutional quality and legal system
    - H8: Weak institutions reduce likelihood of PPPs.
    - H9: Strong and effective legal institutions increase PPP prevalence.
    - H10: Legal codes that better protect investors’ rights increase PPP prevalence.
  - Past experience
    - H11: PPP arrangements are likely to be higher in countries with previous PPP experiences.
  - Extent of private participation
    - H12: Extent of private participation positively correlated with degree of impurity of goods/services and technology structure required.

- Theoretical foundations: x-efficiency, New Public Management, ownership/output valuation results (Besley and Ghatak 2001; Francesconi and Muthoo 2004).

### Data and methodology
- Data: World Bank PPI database covering projects that (i) are owned or managed by private companies in low- and middle-income countries; (ii) directly or indirectly serve the public; and (iii) reached financial closure after 1983. Analysis restricted to 1990–2003.
- Industry sectors in PPI database: energy, telecommunications, transportation, water.
- Dependent variable measurements:
  - Number of PPP projects (count) — Poisson, Negative Binomial, and Zero-Inflated Poisson (ZIP) models used; ZIP favored where over-dispersion and excess zeros occur.
  - Dollar value of PPP investments expressed as a percent of GDP — Tobit model used (with OLS/GLS benchmarks).
  - Extent of private participation — ordinal index scale from 1 to 12 (Table 1); Ordered Probit and Ordered Logit models used (OLS reported as benchmark).
- Explanatory variables mapped to channels (examples):
  - Government constraints: general government balance (percent of GDP), total debt (percent of total exports), aid per capita (current US$), fuel exports (percent of merchandise exports).
  - Political environment: ethnic fractionalization index, chief executive party orientation (1=left; 2=center; 3=right), opposition parties in legislature (number).
  - Market conditions: population (log), real GDP per capita (lagged).
  - Macroeconomic stability: inflation (annual percent change of GDP deflator), M2 (percent of GDP), international reserves (months of imports).
  - Institutional/legal: control of corruption (ICRG index), composite country risk (ICRG index), rule of law (Kaufmann et al. index), common law origin (dummy).
  - PPP experience: dummy for prior PPP project in country-year.
- Controls: time dummies (to capture global shocks) and regional dummies.

### Key descriptive statistics and features (preserve figures exactly)
- Regional distribution of PPP projects: Latin America and the Caribbean 47 percent; East Asia and the Pacific 24 percent; Eastern Europe and Central Asia 15 percent; South Asia, sub-Saharan Africa, and Middle East and North Africa about 4–5 percent each.
- Sector project counts (Table 2):
  - Energy: 1,116 projects (Concession 454; Divestiture 286; Greenfield 261; Other mode 7)
  - Telecommunications: 600 projects (Concession 81; Divestiture 134; Greenfield 347; Other mode 72)
  - Transportation: 735 projects (Concession 406; Divestiture 58; Greenfield 226; Other mode 45)
  - Water: 261 projects (Concession 110; Divestiture 20; Greenfield 8; Other mode 150)
  - Total: 2,712 projects
- Contract types (Figure 1) — number of projects by contract:
  - Build-Own-Operate (BOO): 690 projects (38.9 percent of all projects)
  - Build-Own-Transfer (BOT): 317 projects (17.9 percent)
  - Build-Rehabilitate-Operate-Transfer (BROT): 135 projects (13.2 percent)
  - (Other counts shown in Figure 1; BOO, BOT, BROT together represent 70 percent of projects)
- Development agencies supporting projects (Figure 2) — number of projects supported:
  - International Finance Corporation (IFC): 756 projects
  - Inter-American Development Bank (IADB): 231 projects
  - Multilateral Investment Guarantee Agency (MIGA): 157 projects
  - European Bank for Reconstruction and Development (EBRD): 156 projects
  - European Investment Bank (EIB): 124 projects
  - International Bank for Reconstruction and Development (IBRD): 103 projects
  - Asian Development Bank (ADB): 65 projects
  - Corporacion Andina de Fomento (CAF): 53 projects
  - Banque Ouest Africaine de Developpement (BOAD): 46 projects
  - Central American Bank for Economic Integration (BCIE): 34 projects
  - Inter-American Investment Corporation (IIC): 31 projects
  - Islamic Development Bank (IDB): 8 projects
  - African Development Bank (AfDB): 7 projects
  - Caribank: 2 projects

### Main empirical findings — cross-country (all sectors aggregated)
- Channels with consistent empirical support:
  - Market conditions: larger market size (population (log)) and higher purchasing power (real GDP per capita (lagged)) are strongly associated with a greater number of PPP projects and higher PPP investment shares.
    - Population (log) and real GDP per capita (lagged) significant across count and Tobit specifications.
  - Government constraints: higher total debt (percent of total exports) associated with more PPP projects and higher PPP investment (total debt coefficient positive and significant in many specifications).
  - Macroeconomic stability: lower inflation associated with more PPP projects and higher investments (inflation negative and significant across models).
  - Institutional quality and legal system: better control of corruption and stronger rule of law associated with more PPP projects and larger investments (control of corruption and rule of law positive and significant in many regressions).
  - Past PPP experience: presence of prior PPP experience associated with more PPP projects and higher investment levels (PPP experience dummy positive and significant in several specifications).
- Political environment: less robust evidence in aggregate regressions; political variables generally weaker predictors when all sectors pooled.
- Regional patterns: Latin America and the Caribbean lead in number of PPPs; most other regions significantly lag behind Latin America and the Caribbean, holding other channels constant.
- Time effects: time dummies significant — global boom and crisis periods (e.g., Asian and Russian crises, Argentine crisis, September 11) influence PPP flows.

### Sectoral findings — sector-specific determinants
- Energy sector (Table 7):
  - Market size, purchasing power, and low inflation significant determinants.
  - Government constraints: fuel-exporting countries have fewer energy PPPs (fuel exports percent negative and significant).
  - Political orientation: center-right governments more likely to engage in energy PPPs (chief executive party orientation positive and significant in some specs).
  - Control of corruption positively associated with energy PPP prevalence.
  - Country risk index sometimes positive (unexpected sign) for energy.
- Telecommunications sector (Table 8):
  - Market size strong determinant (population (log) significant).
  - Many institutional and macro variables (inflation, rule of law, control of corruption, PPP experience) less significant, possibly reflecting high profitability of telecom projects.
  - Total debt and fuel exports positive in some specifications.
  - Europe and Central Asia show a lead in telecommunications PPPs.
- Transportation sector (Table 9):
  - Market conditions (population (log), real GDP per capita (lagged)) and rule of law are important determinants.
  - Ethnic fractionalization positively associated with transportation PPPs (supports H3 in this sector).
  - Political orientation: center-left governments tend to have more transportation PPPs (chief executive party orientation negative coefficient indicates center-left associated with more projects given index coding).
  - Latin America and the Caribbean significantly ahead of other regions in transport PPPs.
- Water sector (Table 10):
  - Market conditions (population and real GDP per capita (lagged)) and rule of law significant determinants.
  - Composite country risk found with unexpected sign in some specifications (negative coefficient where a positive deterrent effect might be expected), suggesting complex interactions possibly mitigated by multilateral guarantees.
  - Middle East and North Africa and South Asia lag significantly in water PPPs.

### Determinants of the extent of private participation (index 1–12) — Table 11
- Dependent: index of private sector participation (higher index = higher private commitment; index corresponds to Table 1 ranking of PPP types from Management contract = 1 to Full Privatization = 12).
- Significant positive determinants of greater private participation:
  - Control of corruption (index): coefficient positive and significant (control of corruption 0.549** in Ordered Probit; 0.766** in Ordered Logit; significance ** = 1 percent).
  - Common law origin (dummy): positive and significant (common law dummy 1.239** OLS; 1.636** Ordered Probit; 2.754** Ordered Logit).
- Sector effects on private participation:
  - Water sector dummy: negative and significant (water projects tend to have less private sector involvement: -1.124** OLS; -1.574** Ordered Probit; -3.021** Ordered Logit).
  - Telecommunication sector dummy: positive marginally significant (telecom projects tend to have more private involvement; significant at 90 percent level in some specifications).
  - Energy and transportation lie between extremes (energy near neutral; transportation slightly negative but not consistently significant).
- Regional effects: sub-Saharan Africa significantly trails other regions in attracting private participation (sub-Saharan Africa dummy negative and significant: -2.010** OLS; -2.692** Ordered Probit; -4.863** Ordered Logit).

### Policy implications and conclusions (empirically grounded)
- Market conditions channel is the most important determinant: larger market size and higher purchasing power are crucial; demand risk is central to private sector participation decisions.
- Macroeconomic stability matters: lower inflation and overall price stability encourage PPP formation; policymakers should prioritize price stability to attract PPPs.
- Government solvency and fiscal constraints: heavy government debt is associated with greater PPP use, but contingent liabilities and exchange-rate guarantees can create solvency risks; governments should limit reckless guarantee exposure and manage currency-structure of borrowing.
- Institutional and legal quality: control of corruption and effective rule of law are critical to attract both more PPP projects and greater private resource commitments; common law origin is positively associated with higher private participation.
- Political economy: ethnic fractionalization and weak checks and balances can influence PPP prevalence in sector-specific ways (e.g., transportation); political pressures can encourage excessive contingent exposures — institutional safeguards are needed.
- Experience and multilateral support: prior PPP experience increases both number of projects and investment levels; multilateral development agencies (IFC, MIGA, IADB, EBRD, EIB, ADB, etc.) play important roles via guarantees, finance, expertise, and risk sharing to help countries overcome demand and country-risk constraints.
- Sectoral strategy: extent of private participation aligns with the impurity and technology-intensity of services:
  - Telecommunication: highest private involvement (technology-intensive, excludable, rival).
  - Water: lowest private involvement (more public good characteristics, lower technology).
  - Energy and transportation: intermediate positions (capital intensive; technology intensity varies).
- Regional observations: Latin America and the Caribbean and Europe and Central Asia lead in PPP numbers; sub-Saharan Africa significantly lags in attracting private participation, even after controlling for all channels.
- Overall conclusion: PPPs are likely to remain an important instrument for infrastructure provision, but success depends on market size, macro stability, institutional/legal frameworks, prudent fiscal management of guarantees, and experience-building often supported by multilateral agencies.

*Source: IMF working paper, “11. Determinants of the Extent of Private Participation”, based on World Bank PPI database (1990–2003) and accompanying regression results and tables as presented in the source content.*

### References

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*Content derived from the PDF file _wp0699 - References.*

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