Tables 6.3-6.6 at the end of the chapter report estimation results using panel fixed effect and difference GMM models in static and dynamic settings. The following looks at the five main findings of the empirical results.
First, an interesting and unexpected finding is the negative and significant impact of bond market development on PPP investment in infrastructure. To further examine this negative influence, we break the bond market down into government and corporate bonds. Here, we find the negative impact is largely driven by dominant government bonds, indicating that government financing reduces the incentive for private investment because of the limited access of small corporate bond markets. Low- and middle-income countries still depend heavily on fiscal financing for infrastructure projects rather than private investment. This might be because of underdeveloped corporate bond markets in developing countries, which cannot provide sufficient long-term financing to the private sector for infrastructure investments.
Infrastructure PPP projects depend on market access to private borrowing, which enables the private partner to source the initial capital for projects upfront. PPP funds are, therefore, ultimately sourced from the capital markets. This means that access to finance plays an essential role in determining the financial viability of PPP projects. The level of financial market development is a key determinant of the ease in which a PPP project can be facilitated. Underdeveloped financial markets are often an obstacle to successful PPP projects. The lack of financial market development by host countries is another problem in this regard (Grimsey and Lewis 2004; Zhang 2001).
While private investors may provide part or all the funding needs of infrastructure PPPs, identifiable revenue streams should be secured for private investors over the term of the partnership. The income stream can be generated by various sources, including fees, tolls, availability payments, shadow tolls, and tax increment financing.5 Through securitization, the future income stream can be sold to the market. Therefore, the availability of well-functioning financial markets with the benefits of low financing costs and diversified financial products are an incentive for the private sector to invest in infrastructure PPPs.
Second, income level measured as GDP per capita is negatively associated with PPP investments-a surprising finding. The viability of infrastructure projects basically depends on future cash flows and financing costs. Large market size and the purchasing power of consumers are good indicators for potential cash flows. But it is a matter of conjecture whether countries with large populations are unable to provide sufficient access to infrastructure and infrastructure services to their citizens because GDP growth is positively related to PPP investment, although it is not statistically significant. In the dynamic panel with fixed effect regressions, economic growth is also positively related with PPP investment, indicating that countries with rapid growth and high demand for infrastructure have more PPP projects.
Third, macroeconomic variables have a direct effect on PPP investments. Exchange rates, for example, can critically affect the viability of projects since many in developing countries are financed with foreign capital in the form of loans and equities from abroad because of underdeveloped domestic financial markets. Currency risk is, therefore, one of the important risks that can stand in the way of increasing PPP investments. Because stable macroeconomic conditions encourage private investment, higher inflation discourages investing in PPPs, as expected. And because infrastructure such as highways, airports, and bridges have long life spans, high inflation is detrimental to investors who cannot hedge inflation for long periods. Macroeconomic stability is more common in countries with low inflation, and therefore stable inflation is essential for countries promoting infrastructure PPPs.
The results of the GMM regressions show pegged exchange rate regimes are positive for PPP investments because these can prevent exchange rate fluctuations, though they are not statistically significant. When infrastructure projects are financed with foreign capital, investors can limit their exposure to foreign exchange risks under pegged exchange rate regimes. But because revenue income from infrastructure projects is denominated in local currency, borrowers cannot avoid a currency mismatch problem.
Fourth, the previous-year volume of PPP investment is positively associated with the current level of PPP investment, and its coefficients are significant at the 1% level in the dynamic model of Tables 6.5 and 6.6. The efficiency might be reflected in public entities with experience in PPP projects, and with the expertise to optimally allocate risk between the public and private sectors. Because PPPs are complex arrangements between two different parties, it is necessary for the public sector to have the expertise to develop these partnerships. Public entities with previous experience in handling PPPs will attract more private investors.
Fifth, in the case of bank credit, empirical results seem unclear because more stringent capital requirement regulation under Basel III has made banks reluctant to lend to PPP projects since the global financial crisis. Nevertheless, some results in the GMM and dynamic panel regression confirm that banks remain major fund suppliers to private infrastructure project investments. According to the World Economic Forum (2014), commercial banks provided an estimated 90% of all private debt for infrastructure financing from 1999 to 2009. Underdeveloped capital markets in low-income economies cannot offer long-term financing. These markets often only have a few players, such as government banks and state-owned companies, which reduces pricing efficiency, distorts yields, and ultimately leads to high transaction costs, as noted in Platz (2009).