Private Participation in Infrastructure and Macroeconomy: The Experience of Korea

Abstract

The purpose of this paper is to analyze the macroeconomic impact of private participation in infrastructure in Korea. Using a unique time series dataset of public investment, private investment, and investment through public-private partnership (PPP) in construction activities, we find that an increase in current PPP is associated with a decrease in current and future public investment, suggesting that PPP substitutes for government spending on infrastructure. Consistent with the crowding-out effect of PPP, we also find that fiscal balance is an important determinant of PPP. In contrast, we find that current PPP is positively correlated with current private investment. Cross-regional data analysis shows that PPP has a positive impact on the transportation industry, but no effect on aggregate output. A cross-country analysis on PPI database compiled by the World Bank also reveals that PPP investment does not have significant relationship with economic growth. The paper also examines the characteristics of participating firms in PPP projects using firm level financial statement data in Korea.