Introduction

The 1970s and 1980s saw the emergence of privatization as a means to improve public service efficiency in developing countries. Multilateral financial institutions (MFIs) encouraged the pursuit of infrastructure privatization for a number of reasons. It was envisioned that improvements in service provision and efficiency would in the long-run mitigate the lost benefits of state-provision. Privatization was also expected to help relieve state budgets, which had been perpetually strained by state-owned enterprises operating energy, transport, telecommunications, and water services. Finally, it was argued that deficit-biased countries could count on privatization to achieve macroeconomic stabilization; this in turn would help relieve pressures on prices and on monetary policy in general.

Chile, followed by Argentina, began to pursue bold programs in privatization, fully divesting themselves of infrastructure assets. Over the last three decades, the rest of the developing world have followed suit, prompted by widening gaps between public resources and the perceived demand for infrastructure (Table 1 [ PDF 28.5KB | 1 page ]; Yang 2008; Dailami and Leipziger 1998; Fay and Yepes 2003).

As infrastructure privatization proliferated, new modalities of public-private partnerships (PPP) in infrastructure emerged. These modalities evolved in response to stakeholders' changing preferences in ownership and control, which in turn reflected their differing attitudes towards risk-bearing. The divestment model gave way to more complex modes of PPP, such as concessions of existing assets, greenfield investment, and management contracts.

A nation's capacity and readiness to undertake PPP in infrastructure depend on a number of variables. Among these are risk factors specific to the country, such as the macroeconomic environment, and legal and regulatory regimes; factors specific to projects themselves, such as contracts; and whether or not government and private sector participants such as investors and suppliers can agree on an acceptable allocation of risks. Thus, PPP investment projects often reach closure when stakeholders perceive that an acceptable risk allocation ex ante has been achieved. Subsequently, risk allocation is contracted, and the project is implemented. But while investments are driven by risk allocation ex ante, the success or failure of privatization always depends on the realization of risks ex post. This study looks at investment outcomes of projects ex post.

While a study of this nature is not new, much of the previous analytical work has focused on contract renegotiations in Latin America, notably Guasch (2004), who showed that renegotiations often occur at the onset of most projects. In contrast, this paper studies projects that have been concluded, canceled, or are currently operational or distressed, with an emphasis on stresses beyond renegotiations, and over a broader horizon.

Apart from Guasch (2004), there are a number of anecdotal studies on the outcomes of PPP projects. Chief among these is the excellent study by Woodhouse (2006), which analyzed global anecdotal evidence from 33 independent power producer (IPP) projects. Woodhouse argued that sophisticated risk engineering in contracts; payment security and official credit support; participation by MFIs; and arbitration and dispute resolution were of limited effectiveness in improving IPP outcomes. Instead, strategic management of IPP programs, including competitive bidding and cost management; managing counterparty risk; commercial planning and flexible management; local partnerships; and managing rights, responsibilities, and incentives, were more effective in mitigating IPP problems. After analyzing the anecdotal evidence, Woodhouse argued that, since exposure to macroeconomic shocks rose in proportion to the fraction of power supplied by IPPs, IPPs would be more sustainable if they accounted for only a small proportion of the country's power sector. This study will empirically test this hypothesis, for a broader set of sectors and projects.

In addition to building on the existing literature on ex post outcomes, this study is also meant to complement studies that analyze ex ante investment in infrastructure PPP. The previous literature suggests that investor perceptions of good governance and macroeconomic stability drive cross-country investment patterns in PPP. Of particular interest is whether the pattern of investment outcomes validates the factors that drive global PPP investment. A study of ex post outcomes of global PPP such as this can help lay the groundwork for future policymaking on privatization; it can also create clearer expectations for stakeholders.

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