The Handshake: Why Do Governments and Firms Sign Private Sector Participation Deals? Evidence from the Water and Sanitation Sector in Developing Countries

Abstract

This paper uses a new dataset, WATSAN, of private sector participation (PSP) projects for water and sanitation in developing countries to examine the determinants of the number of projects signed for each country between 1990 and 2004. The new dataset improves on existing sources, in particular in its coverage of projects with local investors, and provides adequate data for cross-country regression analysis. The authors use a negative binomial regression model to investigate the factors influencing the number of PSP projects in a sample of 60 developing countries with 460 PSP projects. The regression results provide support for the hypotheses that PSP is greater in larger markets where the ability to pay is higher and where governments are fiscally constrained. The authors test several indicators of institutional quality and find that these are generally significant in determining the number of projects signed for each country. Measures of the protection of property rights and the quality of the bureaucracy emerge as the most important institutions that encourage PSP. Rule of law and the control of corruption are significant, albeit at a lower level, while the quality of contract law and political stability are not robustly significant.

Keywords: Private Participation in Infrastructure, Town Water Supply and Sanitation, Investment and Investment Climate, Infrastructure Regulation, Water Supply and Sanitation, Governance and Institutions