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Should Private Sector Participate in Public Private Partnerships? Evidence from China and India

In this paper, we investigate whether Public Private Partnerships (PPPs), with readily pledgable Government assets, reduce the underinvestment problems faced by private sector firms in emerging markets. We analyse investment-cash flow sensitivity and its determinants for the partnering private sector firms in China and India. We find that, PPP announcements create wealth to the partnering private sector firms in both countries. However, the nature of firm that undertakes PPP projects varies. In China, older, matured, better valued firms with high cash inflows engage in PPPs while in India, younger, higher debt burden, cash-constrained firms engage in PPPs. This indicates that underinvestment problem is more significant reason for PPP investments in India compared to China. In the long run, PPP involvement reduces investment-cash flow sensitivity in both countries’ private sector firms, however, higher reliance on Government and political connections are more beneficial in China compared to India.