Is climate risk affecting private participation in infrastructure projects? Empirical evidence from developing countries

Abstract

Purpose: Climate risk emerged as a new source of systematic risk and should be considered in investors’ strategies. An empirical analysis is conducted to explore the effects of climate risk on private participation in infrastructure projects developed in low- and middle-income countries (LMIC), using data from 2011 to 2020 obtained from the World Bank’s PPI Database. Methodology: Two different proxies are used to measure private participation: the amount of private investment and the degree (the percentage) of private participation. Appropriate regression techniques are adopted - Tobit and fractional regression models. The independent variables include the climate risk index (CRI) which provides a quantified measure, by country of extreme weather-related economic losses; and, as control variables, factors at the project level and, related to the host country macroeconomic and institutional/political environment. Findings: The results suggest that higher climate risk is associated with a higher amount of private investments in infrastructure, and it is not considered in the degree of private sector commitment. This should be interpreted with caution, because higher private investment amounts may be a consequence (ex-post) of the harmful effects of extreme weather events on each country’s infrastructure systems. Research limitations: This is an exploratory study. With this data, it is not possible to further investigate the eventual ex-post nature of investments. In addition, results may be conditioned by the proxy of climate risk used. Only projects developed in LMIC are recorded in the database. Originality: This research contributes to the nascent strand of the literature that studies the impact of climate risk on investments. Results may be useful for private investors and public authorities, identifying the key factors that drive the private sector participation.