There is a vast literature on the determinants of private investments in infrastructure, such as the works of Hart et al. (1997); Hart, (2003); Harris, (2003); Bennet and Iossa, (2006); Engel et al., (2009); Iossa and Martimort, (2012); Iossa and Saussier, (2018). However, there are few empirical studies we are aware of that quantify the efficiency and the determinants of infrastructure investment in the use of concession contracts at an aggregate level for developing countries regarding the provision of water and sanitation services.
The provision of basic services, such as education, health, security and infrastructure, are the responsibility of government authorities. Basic sanitation is essential for the well-being of the population, where the lack of this provision with inadequate access to drinking water and sewage treatment directly affects public health, negatively influencing economic development and creating a favorable environment for diseases due to poor conditions. In line of this, a massive investment that fills this serious gap between provision and adequate access may significantly reduce diseases related to lack of sanitation and, especially, infant mortality (FUJIWARA, 2005).
According to the World Health Organization’s (WHO) report of 2014, for every dollar invested in water and sanitation, US$ 4.3 in health costs are saved worldwide. In this way, adequate provision of services in this sector may reduce the need for increased health care spending related to illnesses stemming from the lack of adequate access to services, which is quite common in developing countries.
In this context, the universalization of water and sanitation services is of great importance for sustainable development. According to the United Nations, developing countries have until 2030 to meet the targets set by the Sustainable Development Goals (ODS) agenda. Among the goals is the ODS6 for water and sanitation sector, with the objective of ensuring adequate access to safe water and sanitation for all and increasing the efficiency of the use of treated water in all sectors. Thus, infrastructure investments need to have a substantial increase in these economies in order to support economic growth and meet environmental goals related to preservation (IOSSA and SAUSSIER, 2018).
The resources collected by governments through taxes should be transferred largely to meet the demands for basic services. However, it is important to note that in developing countries, on average, financial resources for infrastructure investments are scarce. High growth rates may attract more investors, increasing demand for infrastructure and thus promoting partnerships among private companies (RESIDE, 2009). According to Acemoglu and Robinson (2010), differences in economic growth rates may have as a factor the heterogeneity of the institutions of each country. That is, the difference in growth among nations may be due to institutional problems .
Since the late 1980s, many developing countries have allowed private sector investment in infrastructure sectors, in order to reduce budget deficits, and expecting to foster investment and economic growth (TRUJILLO et al., 2002). To eliminate infrastructure deficiencies and achieve a higher level of well-being, the participation of private investors in alternative organizational arrangements has been stimulated by governmental organizations in order to finance investment projects in infrastructure.
In this sense, the entry of the private sector may help the end of this vicious circle, since it tackles its main aspects such as low tariffs, management inefficiency, obsolete business practices and the mix up between politics and the internal management of firms (FERREIRA, 2007). Thus, fiscal restraint serves as a lever for the emergence of new arrangements of public services contracts and a transfer of responsibility to private partners (GUASCH, 2004).
As Sharma (2012) points out privatization is not adequate in infrastructure projects due to the complexity of management and intensive capital. According to Yehoue et al. (2006), mutually beneficial partnerships between the public and private sectors may be important and private companies cannot have the responsibility for building and/or providing public infrastructures independently. In line with this view, we emphasize that public interest does not necessarily have to be attended only by public companies. In administrative terms, the responsibility for providing the services is public, but the management may be public or private. In these cases, the local authority remains partially responsible for the provision of services, while the private agent is in charge of the infrastructure and maintenance of the public good.
It should be noted that, for the purpose of this study, the main difference between public and private management lies in the incentives to which each one submits. Under private management, incentives can lead to cost minimization and, consequently, to the improvement of the quality of the services offered. On the other hand, in the public sector, incentives can be linked to political interests, stimulating rent-seeking, and promoting the redistribution of resources from society to these groups through the use of the political system.
In the meantime, it should be noted that incentives for corruption gains may occur in both public and private sectors. The difference is that the private agent has more incentive to seek profits, in some contractual arrangements, they take all risk. Thus, incentives in the private sector may reduce costs and improved service quality. It should be emphasized the importance of property rights, since residual control rights determine who has the authority to approve changes in the process or innovations related to the asset (HART, 2003; IOSSA and MARTIMONT, 2012).
In the context of contractual models, privatizations, and concessions, such as public-private partnerships, are some alternatives to bridge the gap between fiscal restraint and demand for infrastructure, according to the institutional constraints of each country, to manage activities previously provided by the public agent. It is recurrent to the association of concession contracts and public-private partnerships with privatization. Given this, it is important to highlight the differences between these contracts.
In the first place, the concession delegates the execution of the public service to a private agent, without giving ownership of the property, contrary to privatization. In the second place, public-private partnerships (PPPs) are a type of concession contract, but they have different rules from those of common concession law regarding how the private agent’s remuneration.
In general, PPP laws take different forms among countries, but usually this contractual model has a long-term. Finally, privatization refers to the sale of public assets to private enterprises, resulting in the control of private company over the property (e.g.: administration, investment and provision).
In this context, private sector participation may present an alternative solution for infrastructure financing, substituting the provision of fully public and private services, inducing the minimization of production costs by the private provider and of possible market failures that could occur under full privatization (CHONG et al., 2006). In this sense, in the traditional concession contracts all the risk lies with the private sector. PPPs, on the other hand, have an advantage where public and private sectors share the investment’s risks given the high initial investment required and the uncertain long-term return. This contractual model allows to pool risks and to limit the liability of only one of the contracting parties, also sharing the benefits (NISAR, 2007).
As for the empirical evidence, Chong et al. (2006) estimates the impact of organizational choice on performance in the sanitation sector measured by consumer prices, controlling for supply and demand aspects that may affect prices. The authors find evidence that consumers pay more when municipalities choose PPPs. Wang et al. (2011) analyze the impact of the private sector on water supply in China and find evidence that private sector participation significantly improves water supply capacity, and that private international firms improve sector performance more than local private companies do.
Within this context, Yehoue et al. (2006) highlight the importance of governance and political stability issues on private investment in infrastructure. The authors investigate the determinants of public-private partnerships in emerging economies from 1990 to 2003, using a Zero Inflated Poisson (ZIP) model for the number of infrastructure projects for sectors such as energy, sanitation, transport and telecommunications. The study uses proxies aiming to investigate possible channels for budget constraint, market size, political environment, economic environment, and institutional quality. The results indicate that private investment prevails in economies with relatively large markets, high budget deficits and a stable political environment.
In the same line, Sharma (2012) studies the determinants of PPPs in developing countries from 1990 to 2008. Using a ZIP model, results show that macroeconomic stability, regulatory and governance quality and also market size are important for the private sector to engage in infrastructure projects.
Similarly, the study by Fernandez et al. (2015) sought to identify the determinants of investment and the number of public-private partnerships (PPPs) for developing countries in four sectors: water and sanitation, energy, telecommunications and transportation. Specifically for the water and sanitation sector, the important channels to determine the contracts were the political and legal systems, and macroeconomic environment. In a recent study, Pusok (2016) investigates how foreign private investment through public-private partnerships affects access to water and sanitation in developing countries. The results demonstrate the negative effects of corruption on the efficiency of private investments, given that when corruption is high in a country, private investors seek to maximize profit regardless of the demand for sanitation, which leads them to provide better quality water, but not adequate sanitation.
The studies of Prasad (2006), Frone (2013), Jiang et al. (2015) and Zeneli (2017) find evidence that private sector participation may have positive effects on infrastructure projects. In short, the literature provides evidence that private sector participation may be a good alternative in infrastructure investment improvements for developing countries, bringing innovation and technology to the water and sanitation sector. In the next section, we present the hypotheses of our study, in order to investigate the determinants of the numbers of contracts in the sanitation sector.