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Is the level of financial sector development a key determinant of private investment in the power sector?

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  • Gasmi, Farid
  • Lika, Ba
  • Noumba Um, Paul

Abstract

TThis paper seeks to assess the extent to which a country’s overall level of development and that of its financial sector, in particular, are factors that attract private capital into infrastructure projects. The authors investigate these effects in a 1990–2007 dataset on the power sector in 37 developing countries. The results suggest that economic growth is a key determinant of private investors’ investment in infrastructure projects, and that investors tend to take countries’ governance quality into account in their decisions to invest. The empirical results highlight that the development of the financial sector also plays a significant role in private investors’ decisions to enter infrastructure sectors. In particular, the degree of country risk and exchange rate volatility is found to be negatively This paper—a product of the Sustainable Development Department, Middle East and North Africa Region—is part of a larger effort in the department to promote infrastructure development in client countries through applied research targeting cutting-edge policy, regulatory and infrastructure finance issues. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at pnoumbaum@worldbank.org. related to the volume of private sector investment in power projects. Furthermore, when the banking sector and the capital market are separately treated in the analysis, the existence of a well functioning capital market is the main attracting factor. In addition, the existence of an independent energy regulatory authority significantly improves the level of private investors’ implication in energy projects. When accounting for the interactions between the overall economic development and the financial sector development variables, the effects of these variables are still significant and the results also confirm the importance of an independent energy sector regulator.

Suggested Citation

  • Gasmi, Farid & Lika, Ba & Noumba Um, Paul, 2010. "Is the level of financial sector development a key determinant of private investment in the power sector?," TSE Working Papers 10-194, Toulouse School of Economics (TSE).
    • Handle: RePEc:tse:wpaper:23347
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    References listed on IDEAS

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    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. Zhang, Yinfang & Parker, David & Kirkpatrick, Colin, 2005. "Competition, regulation and privatisation of electricity generation in developing countries: does the sequencing of the reforms matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(2-3), pages 358-379, May.
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    5. Estian Calitz & Johan Fourie, 2010. "Infrastructure in South Africa: Who is to finance and who is to pay?," Development Southern Africa, Taylor & Francis Journals, vol. 27(2), pages 177-191.
    6. Pargal, Sheoli, 2003. "Regulation and private sector investment in infrastructure - evidence from Latin America," Policy Research Working Paper Series 3037, The World Bank.
    7. Daniel Platz, 2009. "Infrastructure finance in developing countries—the potential of sub-sovereign bonds," Working Papers 76, United Nations, Department of Economics and Social Affairs.
    8. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    9. Farid Gasmi & Paul Noumba Um & Laura Recuero Virto, 2009. "Political Accountability and Regulatory Performance in Infrastructure Industries: An Empirical Analysis," World Bank Economic Review, World Bank Group, vol. 23(3), pages 509-531, October.
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    More about this item

    Keywords

    Infrastructure sectors; Public-private partnership; Power sector; Financial development; Economic growth;

    JEL classification:

    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L97 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Utilities: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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