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

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 per 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 crosscountry regression analysis. We 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. We test several indicators of institutional quality and find that these are generally significant in determining the number of projects signed per 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. Comments are welcome. Corresponding authors: Olivia Jensen Frédéric Blanc-Brude London School of Economics and Political Science King’s College London Development Studies Institute Department of Management Houghton Street Franklin-Wilkins Building London WC2A 2AE 150 Stamford Street +44 7985 796 404 London SE1 9NN [email protected] +44 7985 934 330 [email protected] World Bank Policy Research Working Paper 3937, June 2006 The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org. The authors would like to thank Antonio Estache, Roger Strange and Stephane Straub and participants of the Applied Infrastructure Research Conference (Berlin, October 2005) for their helpful comments. WPS3937 P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed P ub lic D is cl os ur e A ut ho riz ed