Do public-private partnerships benefit private sector? Evidence from an emerging market

Abstract

Purpose: We extend the literature on Public-Private Partnerships (PPPs) to understand the benefits of these incentive-compatible contracting arrangements to the private sector firms. We argue that the unique structure of PPPs helps in mitigating information asymmetry problem that drives underinvestment in the private sector of emerging markets and thereby enhances their investment efficiency. We test this hypothesis on PPPs that occurred in India over the last one decade. Methodology: We consider the investment-cash flow sensitivity. Findings: We find that, compared to the matched non-PPP investments made by the private sector firms, PPP investments result in significant reduction of investment cash flow sensitivity in the post-PPP investment period. Also, in the long run, the operating performance of the private sector firms improves in the post-PPP investment period. However, these benefits are sensitive to the nature of firm, commitment level of private sector and Government concessions. Overall, our results concur with the rising popularity of PPPs. Originality: Our paper is the first study that examines the benefits of PPP for private firms.