Public–private partnerships and economic growth: a sectoral analysis from developing countries

Abstract

Governments, particularly in developing countries, are continuously faced with the challenge of expanding infrastructure to keep up with population growth and rapid urbanisation. This challenge arises from the fact that public resources are strained as governments face high budget deficits and rising debt-to-GDP ratios. At the same time, development institutions alone have not succeeded in narrowing this financing gap. The constraints placed on the budgetary requirements of governments have shifted attention to public and private partnerships in financing infrastructure projects, which are at the heart of service delivery in developing countries. Whilst the use of Public–Private Partnership (PPPs) is a growing trend in developing countries, there is limited empirical studies that have assessed the impact of PPP investments on economic growth. This article, therefore, extends the limitations in the literature by investigating the effect of PPP sectoral investments on economic growth among 35 developing countries from 1997 to 2018 within the neoclassical growth framework. Using the system GMM estimation technique, we find aggregate PPP investment and energy investment to positively contribute to economic growth, which highlights the multiplier effect of energy in stimulating economic growth in developing economies. The policy implications of the findings are discussed.

Keywords:

• PPPs
• economic growth
• developing countries

JEL Classification:

• H49
• H54
• O47 and O50

Acknowledgments

The authors appreciate the constructive feedback from two anonymous reviewers. This article is an extract from the master’s dissertation of the first author (Mofokeng 2019). All caveats apply.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The World Bank classifies these regions according to Gross National Income (GNI) per capita. The low-income group refers to countries with a GNI per capita of US$1025 or less in 2015, lower middle-income countries are those with a GNI per capita of between US$1026 and US$4035, whilst upper middle-income countries fall between US$4046 and US$12,475.

2 Mutambatsere (2017) classifies economic infrastructure as infrastructure in the energy, water, transport and Information and Communication Technology (ICT) sectors and social as infrastructure in the health and education sectors, among others. Sharma (2012) and Osei-Kyei & Chan (2017a) also highlights the importance of PPPs in developing countries to support their studies on the determinants of PPPs in developing economies.

3 This strand can be further categorized into two; the first on critical success factors based on project-level characteristics (see Cui et al. 2018) while the second focuses on the macroeconomic factors that explain PPP investments.

4 The database covers contractual agreements for public infrastructure projects in low- and middle-income countries. The projects have also reached financial closure and private parties assume operating risks. Projects are not entirely privately owned, financed or operated; some projects have public participation as well. Lastly, investment amounts reflect the total investment commitment entered into by the project entity at contract signature or financial closure.

5 Energy consists of electricity generation, transmission, and distribution; natural gas transmission and distribution.

6 The sectors were chosen based on the fact that they are the largest sectors under PPP investment and data is consistently available compared with other sectors.

7 In all models used in this article, other estimation techniques such as differenced GMM, OLS and fixed effects (least square dummy variable) models were also attempted. However, they did not satisfy the standard requirements of credible models.

8 Poor regulatory quality is indicative of the government’s inability to formulate and implement policies and regulations that encourages private sector development (The World Bank, 2019).