# **1. Introduction**

Worldwide, close to 1 billion individuals are without electricity, 1 billion live more than 2 kilometers from an all-season road, and many are unable to access work and educational opportunities because of lacking or costly transport services. In South Asia, the annual investment needs to close the infrastructure gap can range from 7.5 percent of GDP (Rozenberg and Fay 2019) to 8.8 percent of GDP (Asian Development Bank 2017). To this end, infrastructure spending will have to increase by 3.5-4.3 percent of GDP.<sup>2</sup> There are different approaches to providing infrastructure services. In the traditional, publicprovision approach, line ministries, government agencies, or state-owned enterprises directly procure the infrastructure. In the private-provision approach, regulated or unregulated private companies that own the infrastructure assets provide infrastructure. Infrastructure provision through public-private partnerships (PPPs) falls in-between the public and private approaches. In a PPP, the private party has control rights over the infrastructure during the contract and returns the infrastructure to the government when the contract term expires.

Public-private partnerships can help emerging markets and developing economies expand their infrastructure stock, build required infrastructure more efficiently, and maintain it better in the long-run. The potential efficiency gains can be seized through an appropriate design of PPP contracts which bundle various aspects of the infrastructure project and allocate risks according to the partners’ ability to manage them. Economies such as Brazil, China, India, South Africa, and Turkey have keenly used PPP arrangements to boost their infrastructure investments.

Infrastructure PPPs are no free lunch. They create liabilities for governments, including contingent (hidden) ones. To share risk appropriately between the public and private parties, governments tend to provide explicit guarantees to the private party, such as revenue or credit guarantees. The government, as implicit guarantor of the endeavor undertaken by the PPP, backstops the fiscal and economic consequences of any failures by the partnership.

At the center of the PPP approach rests a trade-off between the efficiency of execution and the efficiency of financing. The private partners can achieve efficiency of execution thanks to their better monitoring of the project and the governments can finance projects more efficiently because they are usually able to finance a project at cheaper rates than the private sector, which pays a funding premium on top of the sovereign rate.<sup>3</sup> If the efficiencies in project execution are systematically overestimated or the contingent liabilities due to risk and uncertainty underestimated, the government may be better off executing investments through conventional contracting of the private sector or even state-owned enterprises.

The rising popularity of PPPs, and thus the increase in the contingent liabilities from them, warrant careful management of the fiscal and economic risks they pose. The opacity of financial records, confidentiality of most PPP contracts, and prevalence of cash rather than accrual accounting

> 2 Fay and others (2019) estimate infrastructure spending in South Asia was 4.5 percent of GDP in 2011.

> 3 In some cases, companies in developing countries are able to borrow at lower costs than the government. Companies for which this is true tend to have substantial export earnings and/or a close relationship with either a foreign firm or with the home government (Durbin and Ng 2005 and Grandes, Panigo and Pasquini 2017).

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