Role of government equity investment in capital structure of project finance: Global evidence from PPP projects in developing countries

Various types of government financial support are used to facilitate the financing of public-private partnership (PPP) projects in developing countries, wherein direct equity investment can have a unique impact on capital structure in project finance because of the changing role of the government as a shareholder. However, the distinct impacts of government equity investments have not yet been clearly revealed. This study clarifies the effect of government equity investment on leverage in project finance based on a two-step treatment effect model using a large data set containing 1,326 PPP projects in developing countries. Six hypotheses are proposed to test the direct impacts of government equity investment, participation of development-financing institutions, project characteristics, and moderating impacts from the governance environment on leverage. Empirical evidence reveals that government equity investment can significantly increase leverage in project finance when the ultimate ownership of the project will be transferred back to the government, and that the governance environment can affect the government's decision to invest. The findings suggest that host governments in developing countries can boost lenders' confidence in PPP projects through direct equity investment, but the investment decision should be prudent after considering the domestic governance environment and specific project conditions.