return on its invested equity and possibly some of the invested equity itself (EPEC 2013; World Bank 2019).

There is limited data available on losses incurred by governments in cases of early termination of PPPs. The data on the recovery rates of bank loans to PPP projects, mainly those in developed economies, collected by the Data Alliance Project Finance Consortium show that the average ultimate recovery rate is 79.3 percent (Moody’s Investor Service 2019).<sup>17</sup> This might be a low estimate in the context of South Asia since the model PPP concession agreements in the road sector in India guarantee as much as 90 percent of the debt financing even in cases of the project company’s default or force majeure.

The data on compensation of private equity is even scarcer than data on recovery rates of bank loans. The government’s loss given distress on the private equity depends on the reason for termination, the actual clauses in the contract and, potentially, the negotiation at the time of termination. Road concession agreements in India offer a range of possibilities depending on the source of termination of the contract. In the case of the project company default, the concession agreements do not foresee any compensation on equity, but in the case of public authority default, the contract entitles the private sponsor to 150 percent of its equity. If there is a force majeure event which is indirectly caused by a political event, the private party is entitled to 110 percent of the equity it invested in the project. Anecdotal evidence also suggests that no matter the cause for termination governments might pay a premium on the equity to compensate the private party for the loss of expected return on its investment.

It is safe to assume that, in the event of project termination, the government loses the entire public equity. Based on all the considerations discussed, equation (2) can be written as follows, assuming three separate scenarios—low, medium and high—are considered for the loss given distress (LGD). E = P D D E (5) Scenarios: ii ii<sup>�PPeeDDtt</sup> ii<sup>EELLPP+ P</sup> ii<sup>+ P</sup> ii<sup>EELLPP</sup> EEiiDDEE<sup>�DDPPiicc EPPiittEEiiPttee EPPiittEE</sup>

1. Low: D D = 0.793; E = 0 2. Medium: D D = 1; E EEiiDDEE= 1= 1 EELLPP EELLPP

Scenarios:

1. Low: D D = 0.793; E = 0 2. Medium: D D = 1; E EEiiDDEE= 1= 1 3. High: D D = 1; E EEiiDDEE= 1.5= 1.5 EELLPP EELLPP

2. Medium: D D = 1; E 3. High: D D = 1; E EEiiDDEE= 1.5= 1.5 EEiiDDEE EELLPP EELLPP In the low scenario, the LGD on debt is assumed to be the recovery rate estimated by the Moody’s Investor Service (2019). Assuming this, the government does not cover the loss of private equity, and only loses its own equity in the PPP. In the medium scenario, the LGDs on both debt and equity are assumed to be 1 such that the government guarantees the total financing of the project but does not compensate for the foregone return. In the high scenario, on top of the debt the

> 17 The most recent Moody’s infrastructure projects default study which covers the period from 1983 to 2017 which uses the data shows that 209 of the 1,970 PPP projects included in the data set are from the emerging markets and developing economies (Moody's Investor Service 2019).

20