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

Author

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

Abstract

This 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 37developing 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 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

  • Ba, Lika & Gasmi, Farid & Noumba Um, Paul, 2010. "Is the level of financial sector development a key determinant of private investment in the power sector ?," Policy Research Working Paper Series 5373, The World Bank.
    • Handle: RePEc:wbk:wbrwps:5373
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    Cited by:

    1. Scholtens, Bert & Veldhuis, Rineke, 2015. "How does the development of the financial industry advance renewable energy? A panel regression study of 198 countries over three decades," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113114, Verein für Socialpolitik / German Economic Association.
    2. Marian Moszoro & Gonzalo Araya & Fernanda Ruiz-Nuñez & Jordan Schwartz, 2015. "What Drives Private Participation in Infrastructure Developing Countries?," Palgrave Macmillan Books, in: Stefano Caselli & Guido Corbetta & Veronica Vecchi (ed.), Public Private Partnerships for Infrastructure and Business Development, chapter 0, pages 19-44, Palgrave Macmillan.
    3. Noah Afees O. & David Olalekan O., 2024. "Infrastructure Development And External Financing Nexus In Sub-Saharan Africa: Panel Vecm Analysis," Folia Oeconomica Stetinensia, Sciendo, vol. 24(2), pages 229-251.
    4. Jie Yang & Wuqing Wu & Xiao Mao & Zongwu Cai, 2019. "Quantile Analysis Of Investment In Private Participation In Infrastructure Projects," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-26, March.

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    Keywords

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    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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