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The author thanks Alexander Plekhanov, Isabel Rial, Laura Papi, Geremia Palomba, Roger Nord, Genevieve Verdier, Wendell Daal, Laura Doherty, David Gentry, Axel Schimmelpfennig, Leandro Medina, Francisco Arizala, Kenichi Ueda, Yasuyuki Sawada, Hiroaki Miyamoto, Yasushi Iwamoto, Yoshito Takasaki, Rudolfs Bems, Nobuhiko Fuwa, Nozomi Nose, Alberto Simpser, Moritz Zander, seminar participants at the University of Tokyo, the 2015 Annual Bank Conference on Development Economics (ABCDE), the IMF’s African Department, and the 11th Midwest International Economic Development Conference for useful comments and suggestions.
The value for money means the cost-effectiveness of public service (better quality services with lower cost) under PPPs compared with traditional public procurement (World Bank, 2014b).
Foreign investments are shielded from political risk in democratic countries (Jensen 2008), in countries with stronger property rights and legislative check-and-balance system and with less frequent political turnovers (Li and Resnick, 2003; Li, 2009; Humphreys and Bates, 2005). The likelihood of disputes also relates to fragility and inclusiveness of political institutions (Besley and Persson 2009, 2010).
Government guarantee takes different forms such as the minimum payment guarantee for covering the demand risk, the debt guarantee for covering the insolvency risk, the revenue guarantee for securing minimum revenues for private parties, and the exchange rate guarantee for covering the currency risk (World Bank, 2014b).
Direct subsidies are payment commitment, such as a regular subsidy over the life-cycle of the project (called “availability payments”) and a capital subsidy for covering initial construction cost (World Bank 2014b).
The political constraint will be more binding in countries that receive supports from MFIs (Jensen et al, 2017) and in democratic and stable governments (Arezki and Gylfason, 2011; Besley and Ghatak, 2010).
Among parametric models (such as exponential, loglogistic and lognormal distributions), the Weibull distribution is preferred as it gives the largest log likelihood and the smallest Akaike information criterion.
Negative (positive) Polity IV score means autocratic (democratic) regimes following Besley and Kudamatsu (2008). This paper assigns a score from 0–20 (where 0 means the most autocratic and 20 is the most democratic regime).
This is typically the case in developing Asia and BRICs. More than 60 percent of the contracts involve local investors in countries such as Turkey, Colombia, Argentina, and Nigeria.
Woodhouse (2006) discusses the obsolescing bargaining power of foreign investors and describes the situation where an investor loses the bargaining power as the contract ages since exiting from a committed investment becomes costly due to high sunk costs, providing host governments with stronger leverage to break contracts.
The dataset is available at http://www.imf.org/external/np/fad/publicinvestment/#5.
Matured market group includes top 7 countries in the appendix A (i.e., China, India, Brazil, Mexico, Chile, Argentina, and Turkey). Disputes in LAC region tended to be triggered by government’s expropriatory actions which are different in nature compared with disputes in other regions (see Weems, P. and Salo, M. (2012) Mitigating Expropriation Risk of Natural Gas Projects, Energy Newsletter, July 2012).
Data can distinguish dispute type between the government-led vs. firm-led cases only for contracts signed before 2012, nd thus the sample size declines to 4,500.
The PIMA index rates the quality of PPP management for 25 countries, and the World Bank’s index provides similar scores on PPP procurement for 82 countries. Both indices are highly correlated with the EIU’s Infrascope index. As the Infrascope misses some countries which receive significant PPP investments, the estimates from the Tobit regression (which regresses the Infrascope index on the PIMA and the World Bank’s index) are used to extrapolate data for those missing countries.
Overall PPP quality measures the soundness of PPP regulations, PPP institutional framework, and operational maturity (e.g., project selection, risk assessments, and implementation of PPPs). The budget transparency index is the average scores on the transparency in reporting fiscal stocks and the fiscal institutional coverage (i.e., the disclosure of fiscal operations for general, central, and local governments).
Karlan and Zinman (2009) used similar strategies using field experiment data to disentangle adverse selection from moral hazard to explain the default risk of consumer loans in South Africa. In my context, the provision of guarantees in PPP contracts may potentially affect firm’s efforts in managing PPPs (i.e., possible moral hazard effect). However, conditional on contracts that receives guarantees, the difference in hazard rate between high vs. low PIM group identifies pure adverse selection effect.
The results of this section remain robust when the outcome variable is replaced with the government-led disputes. The additional results are available upon request.