systems in emerging markets and developing economies hide the fiscal risks for government finances until the contingent liability materializes.

This paper tries to assess the fiscal risks that South Asian governments assume when infrastructure PPPs are terminated early. For the assessment, the study adopts the value-at-risk methodology. The expected loss from a PPP project is gauged using the probability of distress, exposure of the government in the event of distress, and the loss given distress. Using data from the World Bank Private Participation in Infrastructure (PPI) database, World Bank World Development Indicators (WDI), the Polity IV Project, and Laeven and Valencia (2018), the study identifies systematic contractual, institutional, and macroeconomic factors that can help predict the probability that a PPP project will be terminated early.

The analysis finds that, in the developing countries, PPPs show lower probability of early termination when they are contracted by subnational entities and when they are backed by direct support from the government, which includes capital grants, revenue subsidies, and in-kind transfers. Direct support from the government decreases the financing risk of the project. Early termination probability is also reduced for PPP contracts in countries with greater constraints in the executive power. Large physical investments and macro-financial shocks increase the likelihood of early terminations.

The analysis also derives lessons on contract structuring from the PPP highway sector in India for which richer data are available. In India, PPPs for national highways are more likely to terminate early if, through contractual obligations, they put the private sponsor under larger financial commitments—namely, larger payments to the government and a larger share of debt financing. The former might be a reflection of a perverse incentive structure that encourages overoptimistic bids on payments to the government in order to win tenders on PPP contracts.

The remainder of the paper is structured as follows. Section 2 discusses the benefits of PPPs and the government liabilities from PPPs. Section 3 discusses the use of PPPs in infrastructure in South Asia. Section 4 presents the estimated fiscal risks from contingent liabilities of PPPs. The section also discusses the empirical approach and the data used for the estimations. Section 5 assesses the contract and financing characteristics of national highways PPPs in India that tend to lead to early termination of PPPs. Section 6 concludes and discusses policy recommendations.

# **2. Benefits and liabilities of PPPs**

A public-private partnership is an organizational arrangement that enables the cooperation of public and private institutions in the provision of a public project, which in the context of this paper is an infrastructure project. As Grimsey and Lewis (2017) point out, a PPP is an enduring and relational partnership,<sup>4</sup> with each partner bringing something of value (money, property, authority, reputation) to the partnership. A key defining feature of a PPP is the sharing of responsibilities and risks for outcomes between the partners. Underpinning the partnership is a framework contract that sets out the “rules of the game” delineating each partner’s rights and

> 4 For example, a government buying goods or services from the same supplier year after year is not an enduring and relational partnership, and therefore not a PPP.

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