The role of institutional and governance factors in public–private partnerships infrastructure investments in emerging economies

• Published date: 01 November 2023
• Author: Aparajita Gupta,Anil Kumar Sharma
• Date: 01 November 2023
• DOI: http://doi.org/10.1002/pa.2874

RESEARCH ARTICLE

The role of institutional and governance factors

in public–private partnerships infrastructure investments

in emerging economies

Aparajita Gupta | Anil Kumar Sharma

Department of Management Studies, Indian

Institute of Technology, Roorkee, India

Correspondence

Aparajita Gupta, Department of Management

Studies, Indian Institute of Technology,

Roorkee, India.

Email: agupta1@bm.iitr.ac.in

The overall development and sustained growth of any economy depend heavily on

its infrastructure provisioning. Emerging economies are usually characterised by con-

strained public investments in infrastructure. Budgetary constraints of the govern-

ments are one of the major hurdles to these investments. Due to these reasons that

governments of emerging economies continuously seek collaborations with the pri-

vate sector for additional sources of funding infrastructure. Economies with solid

institutional and governance frameworks are known to provide a conducive environ-

ment for enhanced private sector attraction in the sector. However, emerging econo-

mies face greater institutional and governance issues than developed economies, and

they sometimes fall short of luring private investments in the infrastructure sector.

The objective of this study is to empirically evaluate the role of institutional and gov-

ernance aspects in private sector attraction in emerging economies. This study pro-

vides empirical evidence with a sample of 114 emerging economies over a period of

20 years. Various econometric estimates were developed to explore the interplay

between public-private partnership investments and governance factors. The results

of the study provide an evidence of a positive association between these factors and

private investments in public-private partnership arrangements.

KEYWORDS

control of corruption, government effectiveness, infrastructure, political stability, public–private

partnership, regulatory quality

1|INTRODUCTION

In recent times, increasing the amount and quality of infrastructure

capital has become an integral aspect of the sustained development

of any economy (Fay et al., 2011). Infrastructure is a vital factor of

production, and building resilient infrastructure has been a crucial

component of the sustainable development goals (SDGs). Infrastruc-

ture has been playing a critical role in attaining other development

goals of economic growth, market access to health and education and

environmental and climate policy objectives.

Although the public sector has always been responsible for deliv-

ering infrastructure and other public services, the private sector has

long been engaged in the field. Recently, government budgetary

support, which has been the main source of funding for infrastructure

provisioning, has not been adequate to finance the infrastructure

needs in the majority of emerging economies due to their fiscal

limitations (Arezki, 2020). Given the importance of infrastructure pro-

visioning for fulfilling the needs of persistent economic growth, an

ever-growing population and swift scientific and technological

advancements, there has been an expansion of the infrastructure

financing mechanism in the past few decades.

Furthermore, during the early 1980s, the doors of several econo-

mies opened to globalisation, and there was a diminution in the state's

influence. Notably, the state contracted out some of its functions to

private parties. Public–private partnerships (PPPs) proliferated and

gave rise to a novel approach to delivering public services in order to

Received: 1 December 2022 Revised: 5 April 2023 Accepted: 22 May 2023

DOI: 10.1002/pa.2874

J Public Affairs. 2023;23:e2874. wileyonlinelibrary.com/journal/pa © 2023 John Wiley & Sons Ltd. 1of16

https://doi.org/10.1002/pa.2874

solve the problems of government financing. The responsibilities of

both public sector and private sector were redefined by PPPs

(OECD, 2014). In this context, PPPs, as a method of financing and

operating infrastructure, asserted themselves in this setting as a cru-

cial tactic in public politics (Mota & Moreira, 2015). Despite the

enhanced private sector's contribution to infrastructure development,

the government has continued to be the primary source of funding

for infrastructure in developing countries, contributing roughly 70%

of what is required, while the private counterpart is also a significant

contributor of 22% of the investments, the last 8% coming from the

official development assistance programmes (Somma &

Rubino, 2016). Even though there have been cumulative investments

in PPPs of more than $2069 billion in the developing world, the

research on the various factors influencing private PPP investments in

emerging economies is still ambiguous and has not been able to pro-

duce conclusive findings (Sharma, 2012).

The capacity of a country to draw investments is influenced by

several factors, which also include the institutional endowment of that

country. In fact, structural changes in institutions and ways of gover-

nance are being made practically everywhere to foster an atmosphere

that will support higher investment levels. Relationships between the

executive, legislative and judicial branches, the bureaucratic structure,

political stability, conflict management, arbitrariness and the extent of

corruption (Di Liddo et al., 2019) are just a few examples of factors

that affect the institutional environment and its ability to draw private

investment (Eberhard & Gratwick, 2011). Prior literature has explored

various factors that can affect and decide PPP investments. These

include factors that operate at both the project and aggregate levels.

More specifically, the role of institutional and governance as

drivers of PPP investments is still unclear. The current study aims to

provide an empirical link between these factors. In this study, we

examine the function of governance, keeping in mind that institutions

play a crucial part in defining the regulatory framework

(Estache, 2016). The types of regulations, as well as the resources,

level of technical proficiency, and flexibility of the regulatory bodies,

are all influenced by institutions in particular. Institutions have a

greater impact on the level of regulation's flexibility, independence,

dedication and discretion. Thus, it is feasible to pinpoint two ways in

which institutions influence the effectiveness of regulation (Di Liddo

et al., 2019). Institutions have a crucial role in defining the social and

political context in which regulators function, as well as the character-

istics of the regulatory system.

The institutional structure is also intimately related to the degree

and quality of regulation and, therefore, to its performance in two

ways. First, through allocating authority, tools and resources, institu-

tions are in charge of creating and planning the regulatory bodies'

operations. Second, it is the responsibility of institutions to manage

the features of the political, societal and economic landscape in which

the regulators function. According to a study by Rodrik et al. (2004),

institutional quality is a key factor influencing changes in long-term

growth performance. As a result, taking into account a country's insti-

tutional history is crucial while examining the regulatory quality.

Accordingly, this study is undertaken to explore the relationship

between PPPs and the institutional structure of emerging economies.

Any possible trends that may have developed in this area during the

past 20 years are of special interest to us.

The article is structured into six parts. After this introduction,

Section 2discusses the rationale and scope of our study. A brief litera-

ture review examines the main institutional factors connected with

PPPs in Section 3. Section 4discusses the data and empirical model-

ling. The results are presented and discussed in Section 5. Finally,

Section 6will present the study's conclusion and limitations.

2|RATIONALE AND SCOPE OF THE

STUDY

The prior literature extensively examines PPPs in developed countries

like China, Canada, Australia, the United States and Singapore (de

Castro e Silva Neto et al., 2016; Tang et al., 2010). There are studies

that concentrate on some Asian and European Nations (de Castro e

Silva Neto et al., 2016; Malik & Kaur, 2022; Mota & Moreira, 2015).

Naturally, research on PPPs in emerging economies is a contemporary

research agenda. This study makes additions to the PPP domain on

the role of governance factors as drivers of PPP investments. This

research investigates how institutional and governance factors affect

private sector attraction in PPP infrastructure projects. The objective

of the study is to empirically explore the association between PPPs

and institutional and governance issues. This study makes new contri-

butions to the academic literature in two different ways. First, it

explores the link empirically for a large set of emerging economies.

Second, this study is focused on the scenario in emerging economies,

which are more prone to differences in governance factors. Con-

cretely, the current study utilises a sample of 114 emerging econo-

mies from 2001 to 2020. The findings indicate that countries with

better management of their institutional and governance structures

have a higher prevalence of PPP adoption. The conclusions of the

study hold up on the scrutiny of both the overall amount of invest-

ments and the total number of contractual agreements.

3|LITERATURE REVIEW

Under the aegis of New Public Management (NPM), the PPP model

was offered as an alternative to the traditional procurement one. PPPs

are an example of a government pioneering a movement in which the

public and private sectors share responsibilities (Hodge &

Greve, 2007). These types of arrangements can be viewed as a

method of modifying conventional public administration by encourag-

ing collaborations with the private sector. PPP agreements ensure the

provision of essential goods and services at a reasonable cost to the

public (Chunling et al., 2021; Khan et al., 2020). In line with NPM, the

use of PPPs was intended to achieve efficiency and competitiveness

as a success criterion in infrastructure projects (Bovaird, 2010;

Reynaers & Graaf, 2014). These arrangements between the public

sector and private sector are expected to contribute to innovation

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