TheGovernanceBriefISSUE46?2022AGovernanceApproachforManagingPublic–PrivatePartnershipRenegotiationsDavidBloomgardenThisgovernancebriefissupportedbyADBTechnicalAssistance-9791onStrengtheningFiscalGovernanceandSustainabilityinPublic–PrivatePartnerships.IntroductionHighinflation,fiscalconsolidation,andhighdebtburdensweighheavilyoninfrastructureinvestment,whichisalsoaffectedbyotherglobaldevelopmentissuesincludingRussia’sinvasionofUkraineandthecoronavirusdisease(COVID-19).Ontopofthis,theworldisexperiencingvolatilityinfinancialmarketsandthecontinuingthreatofclimatechange.ResearchbytheAsianDevelopmentBank(ADB)demonstratessignificantimpactfromclimatechangeinmultiplesectors,includingriskstohealthandnaturalecosystemsresulting,forexample,inan11%lossofgrossdomesticproduct(GDP)inSoutheastAsiancountriesby2100.1Infrastructureprocurementthroughpublic–privatepartnership(PPPs)isparticularlyvulnerabletothisdisruption.PPPcontractsareinherently

incompletebecausedecision-makerscannotpossiblyanticipatealleventsoverthe30yearsormorethatistypicalofaPPPcontract.PPPcontractstendtoberigidandhighlyprescriptive,whichcanresultincircumstanceswheretheprocuringagencyistiedtocontractualclauseswhichmaynotapplyoverthecourseofthecontract’slifespan.Renegotiationsmaybenecessarytoadjusttoachangingenvironmentandunanticipatedcircumstances.Astrongregulatoryframeworkandprojectpreparationcapacityinlinewithbestinternationalpracticescanhelptomitigateormanagerenegotiations.However,thefrequencywithwhichPPPsarerenegotiatedsuggeststhatrenegotiationsmaybeunforeseeneventsduetopoordesignofcontractsandopportunisticfirmbehavior.

Forinquiries,comments,andsuggestionsonthisgovernancebrief,pleasecontactHanifRahemtullaat+63286826997orhrahemtulla@,GovernanceThematicGroup,SDCC,ADB.PreviousissuesofTheGovernanceBriefcanbeaccessedat/Notes:?Inthispublication,“$”referstoUnitedStatesdollars.ADBrecognizes“Russia”astheRussianFederation.AsianDevelopmentBank(ADB).2015.SoutheastAsiaandtheEconomicsofGlobalClimateStabilization.Manila./sites/default/files/publication/178615/sea-economics-global-climate-stabilization.pdf.

publications/series/governance-briefs.TheGovernanceBriefADB’sAsianDevelopmentOutlookshowseconomicrecoveryof5.2%in2022and5.3%in2023,whichshouldhelptoreducevulnerabilitytoexternalshocksinmostcountries.Publicinvestment,includingforPPPs,willneedtobeavitalcomponentofthepost-COVID-19recoverytomaximizeeconomicdevelopmentinafiscallyconstrainedenvironment.Aneffectivepublicinvestmentmanagementframeworkisnecessarytoensureinvestmentincost-effectiveandaffordableinfrastructure,procuredcompetitivelythroughtransparentandpredictablerules,andthatdirectandcontingentPPPliabilitiesareincludedwithinthemedium-termexpenditureandfiscalframeworksandbudgettosafeguardfiscalsustainability.PPPs,whenproperlyprepared,structured,andimplementedwithinasoundpublic

investmentmanagementframework,representaviableprocurementalternativetoincreaseprivatesectorinvestmentandreducetheinfrastructuregap.TheneedforprivatesectorinvestmentincludingthroughPPPswillintensifyasmanycountriesfacefiscalconsolidationandhigherdebtlevelsafterspendingheavilyonhealthandeconomicrecovery.PPPsmaybearelativelysmallpartofoveralldevelopingcountryinfrastructureinvestment,buttheytendtobeusedforlargerandmorestrategicprojects.PPPinvestmentindevelopingcountriesaccountforaround10%ofoverallinfrastructureinvestment,andaround3%ifincludingdevelopedcountries.2Figure1showsthegrowthofinvestmentcommitmentsbytheprivatesectorindevelopingcountriesbetween2020and2021;butdespitethisFigure1:InvestmentCommitmentsinPublic–PrivatePartnershipInfrastructureinDevelopingCountries,2016–2021$billion

8??EastAsiaandthePacificEuropeandCentralAsiaLatinAmericaandtheCaribbeanMiddleEastandNorthAfricaSouthAsiaSub-SaharanAfricaNote:TheWorldBankdefinesEastAsiaandthePacificasincludingCambodia,thePeople’sRepublicofChina,Indonesia,theLaoPeople’sDemocraticRepublic,Malaysia,Mongolia,Myanmar,PapuaNewGuinea,thePhilippines,Samoa,SolomonIslands,Thailand,Timor-Leste,Tonga,VietNam,andVanuatu.SouthAsiaincludesAfghanistan*,Bangladesh,India,Nepal,Pakistan,andSriLanka.ADBdevelopingmembercountriesincludedinEuropeandCentralAsiaareAzerbaijan,Georgia,Kazakhstan,theKyrgyzRepublic,Tajikistan,andUzbekistan.*ThisreportwaspreparedbasedoninformationavailableforAfghanistanasof31July2021.ADBplacedonholditsassistanceinAfghanistaneffective15August2021.HYPERLINK“/news/adb-statement-afghanistan”ADBStatementonAfghanistan|AsianDevelopmentBank(publishedon10November2021).Manila.Source:WorldBank.2021.PrivateParticipationinInfrastructureAnnualReport2021.Washington,DC.J.M.SarmentoandL.Renneboog.2021.RenegotiatingPublic–PrivatePartnerships.JournalofMultinationalFinancialManagement.Volume59.ISSUE46?2022 3signofrecovery,thesecommitmentsarestill12%loweroverallthanfrom2016to2020withvariationamongregions.EastAsiaandthePacific,forexample,haveinvestmentcommitmentsreaching$28.1billionin2021,196%over2020,butstill21%belowthepast5-yearaverage.PartofthereasonforthisrelativedeclineinPPPcomparedtoprior5yearsbefore2020istheincreasedperceptionofrisksassociatedwithPPPsoverthelifecycleofaPPPcontract.AccordingtoADB’sgovernancebriefonRestoringConfidenceinPublic–PrivatePartnerships–ReformingRiskAllocationandCreatingMoreCollaborativePPPs:“Amongotherconcerns,thereis,onthegovernmentside,aperceptionthatPPPsarenotdeliveringvalueformoneyand,ontheprivateside,thattherisksassociatedwithPPPtransactionshavebecomeexcessiveandunpredictable.”3Itgoesontosaythatstakeholdersintheprivateandpublicsectorboundtolong-termfinancingarrangementsinPPPcontractsarenotwellsuitedtoaddressingunanticipatedchangesespeciallyinatimeofrapidtechnologicalandsocialchangesthatcanaffectthelifecycleofaPPPcontract.4Thebriefproposedalternativecollaborativemodelssuchasalliancecontractinginwhichthegovernmentandtheprivatepartnerscommittosharingrisksandrewardsandagreeonatargetcosttoundertaketheproject,withpartiesagreeingtoshareequallyifgainsorlossesaremoreorlessthantheagreedupontargetcost.Alternativerisk-sharingapproachesandproactivedisputeresolutioncanhelptoavoidrenegotiationsandcostlyterminationbutrequireadequateinstitutionalcapacitytoimplement.GlobalDataonPublic–PrivatePartnershipRenegotiationsNearlyone-thirdor48outof146PPPprojects,or1in3projects,experiencedrenegotiation.EvencountrieswithgoodregulatoryframeworksforPPPs,suchasChile,experiencedexcessiverenegotiations.

“…thefailureofdisputeprocessestoachieveasuccessfulresulthasoftenledoneorbothpartiesinaPPPtransactiontoseektherenegotiationoftheircontractor,inextremecases,itstermination.”Source:ADB.2020.RestoringConfidenceinPublic–PrivatePartnerships.Manila.LatinAmericahadthehighestrate(58%)andtransportwasthemostaffectedsector(42%).EastAsiaandSoutheastAsiahadtheleastrenegotiationeventscomparedtootherregionswith12%and13%,respectively.5NorthAmericaandEuropefaredworsethanAsianregionswith40%and28%,respectively.AlthoughthisGlobalInfrastructureHub(GIH)datashowahighpercentageofrenegotiations,itshouldbeinterpretedwithcaution.Thedatadonotindicateiftherenegotiationsrestoredvalueformoneyinadistressedprojectandavoidedcancellationorresultedinareductioninthevalueformoneyoftheprojectintheoriginaltenderingofthecontract(Table1).AlthoughoneinthreePPPprojectsgloballyexperiencerenegotiation,aPPPrenegotiationdoesnotnecessarilyresultinanegativeoutcome.Whennewtechnologiesandnewprioritiessuchascombatingclimatechangeandsustainabilityareevolvingrapidly,itisnotasurprisethatPPPsarerenegotiated.PPPrenegotiationscanhavepositiveimpactsiftheyhelpavoidmorecostlyprojectfailureandtermination.Renegotiationmayalsobeneededtoredefineascopeofworkduetoanunexpectedincreaseindemandbyusersandtoimprovealignmentwithnewpoliciesortoeffectivelyaddresschangesintechnology,suchasaddingchargingstationstoaroadtoenhancetheuseofelectricvehiclesthatwasnotenvisionedintheoriginalscopeofwork.Asanexample,Jordan’sQueenAliaInternationalAirportwasmodernizedandexpandedinaninitiativeoftheGovernmentofJordantoexpandthetourismindustryandestablishJordanasaregionaltravelhub.Theprojectcompanyinitiatedarenegotiation3yearsfollowingfinancialclosetodealwithscopechangesandtheADBdefinesvalueformoneyinPPPsasfollows:“Valueformoney(VFM)inpublic–privatepartnership(PPP)projectsisgainedthroughtheengagementofprivatesectorefficiency,effectiveness,andeconomy,andthroughtheappropriateallocationofrisksintheproject.TheassessmentofthepotentialtosecureVFMisakeyelementofthePPPassessmentprocess.TheconclusionsonVFMpotentialwillinformgovernmentsindevelopingmembercountries(DMCs)onwhethertoproceedwithaPPPprocurement,and,ifso,theformofPPPthatcouldbeused.”SeeADB.2012.InstitutionalDocument:Public–PrivatePartnershipOperationalPlan2012–2020,Appendix3.Manila.M.Moseley.2020.RestoringConfidenceinPublic–PrivatePartnerships—RestoringRiskAllocationandCreatingMoreCollaborativePPPs.ADBGovernanceBrief.No.41.Manila:ADB.GlobalInfrastructureHub(GIH).2018.ContractManagementManual.TheGovernanceBriefTable1:GlobalInfrastructureHubStudyonPrevalenceofRenegotiationbyRegionRegionProjectwithDataRenegotiationEventsPercentageEastAsia17212Europe431228LatinAmerica432558andtheCaribbeanMiddleEast8113andNorthAfricaNorthAmerica5240SouthAsia14536SoutheastAsia8113Total1464833Source:GlobalInfrastructureHub.2018.ContractManagementTool.Chapter4.accelerationofthestagetwodevelopment.Theprojectincludedtwoconstructionstages.Thefirststageofexpansionwasnotabletomeettheactualgrowthinpassengerdemandandbothpartiesagreedtoarenegotiation.Thepartiesagreedthattheprocuringauthoritywouldinvestanadditional$50million.Theprojectcompanyagreedtoborrow$150millioninnewdebt.Theprocuringauthoritywasabletoreachtheoperationalstagesooner.Boththegovernmentandtheprojectcompanyanditslenderswerewillingtoimplementthischangeduetoitspositiveimpactsonoverallprojectperformanceandrevenue.ThegovernmentcontributionrequiredapprovaloftheCouncilofMinistersandwasnotsubjecttoaunilateraldecisionoftheprocuringauthority.Lessonslearnedfromthisrenegotiationincludetheimportanceofadedicatedprojectteamtomanagetheproject,flexibilityoftheprocurementauthoritytodealproactivelywithunforeseencircumstances,andapprovalfromaseniorgovernmentbodyoutsidetheprocuringauthority.6Amongthemostfrequentcausesofrenegotiationareincreasedconstructioncosts,changesingovernmentpolicythataffecttheproject,andchangesintariffsandtariffregulationduringoperations.AccordingtotheGIHsurveydata,themostfrequentcausesthattrigger

renegotiationsareincreasedconstructioncosts(21%),policychangesbygovernment(19%),andchangestotariffsortariffregulations(16%)(Figure2).ThisanalysisbyGIHdoesnotanalyzewhethertherenegotiationswereopportunisticbyfirmstogetabiggerprofitorabreachofcontractualobligationbygovernment;itdoes,however,showthatrenegotiationsoccurrelativelyfrequently.OpportunisticRenegotiationsRenegotiationisdefinedasadjustmentsinthecontractifthechangesarenegotiatedbetweenthegovernmentandtheprojectcompanyoutside,insteadofthroughtheadjustmentmechanismsthatarepartoftheexistingcontract.RenegotiationsmaybejustifiedoverthelongperiodofaPPPcontract.However,misuseoftherenegotiationprocessforcorruptpurposesis“opportunisticrenegotiation.”Theconceptofopportunisticrenegotiationappliestotheprivatesectorandmayalsoinvolvegovernmentofficialswhoareinvolvedforpersonalgain.Weakgovernmentcapacityinprojectpreparationandriskallocation,tenderprocesses,poorlydraftedcontracts,corruption,andweakcontractmanagementcanleadtorenegotiation,whetherforjustifiablereasonstosaveadistressedGIHandTurner&Townsend.2018.ManagingPPPContractsAfterFinancialClose.GIH.J.L.Guasch.2013.GrantingandRenegotiatingInfrastructureConcessions.Washington,DC:WorldBank.ISSUE46?2022 5Figure2:CausesofPublic–PrivatePartnershipRenegotiation(%)DelayininterfaceprojectsChangeintariff/tariffregulationProjectcompanyunabletoraisefinanceWrongdemandforecastsModificationofpaymentmechanismOtherOtherincorrectforecastsProjectcompanysurplusprofitIncreasedconstructioncostsGovernmentpolicychangeIncreasedoperationcostsIncreaseddesigncostsSource:GlobalInfrastructureHub.2018.PPPReferenceTool.Chapter4,Rjectorinsomecasesforopportunisticreasonsthatunderminevalueformoney.AstudybytheWorldBank,whichanalyzedadatasetofmorethan1,000projectscoveringtheperiod1985–2000inLatinAmerica,foundrenegotiationreflectedweakregulation,inadequatelydesignedtenderprocesses,oropportunismbythegovernmentorprivatesector.Mostrenegotiationeventshadoutcomesadvantageoustotheprivateoperatorresultinginhighertariffsoradelayorreductionininvestmentobligations.7WhileitisnotpossibletoquantifythedegreeofopportunisminPPPrenegotiations,thereareseveralstudiesthatshowitisariskfactorforPPPs(Engel,Fischer,andGaletovic,2019;Lohmannetal.,2022).Mechanismsforchangewithinthecontractcanbeabusedifinternalcontrolsandanti-corruptionmeasuresarenoteffective.Opportunisticrenegotiationunderminespublicconfidenceintransparentandaccountablegovernanceofinfrastructure.OneofthemostegregiousexamplesistheOdebrechtscandalthattookplaceinBrazilresultinginthearrestofitschiefexecutivein2016(Box1).Thecompany,oneofthelargestconstructionconglomeratesinLatinAmerica,wasabletomisuseeconomicequilibriumclauseswithcontracts.EconomicequilibriumclausesinaPPPcontractrefertorebalancingthefinancial

conditionsagreedtointheinitialcontracttorestoretheagreeduponeconomicequilibriumsuchastherateofreturnspecifiedinthePPPcontract.Anexampleofeconomicequilibriumisifaconnectinghighwaybypassboostsdemandandthereforetollrevenueexceedsthelevelanticipatedinthecontract.Inthiscase,rebalancingcouldbenefitthegovernmentbyloweringusertolls,sharingadditionalprofitsoftheprojectwiththegovernment,orreducingthelengthofthecontractperiod.Inthiscase,theeconomicequilibriumisactivatedinfavorofthepublicsector.Rebalancingisalsosubjecttoabuse.OdebrechtanditscollaboratorsingovernmentwhoweremotivatedbybriberyenabledOdebrechttounderbidcontractsandtowinincompetitiveprocurementprocessesduetohavingthelowestprice.Intheconstructionphase,thecompanywouldrenegotiatethecontractsusingtherebalancingclausetoincreasethecostpaidfortheprojectandensurethecompanyearnsapositiverateofreturnintherenegotiatedcontract.“…experiencehasshownthatthemainefficiencygainsofPPPsareimprovedlife-cyclemaintenanceandearlier-completionofprojects.Thosebenefitscanbesubstantial.”Source:E.Engel,R.Fischer,andA.Galetovic.2020.Public–PrivatePartnerships:SomeLessonsAfter30Years.TheGovernanceBriefBox1:OdebrechtScandalandOpportunisticRenegotiationTheUnitedStatesDepartmentofJustice(DOJ)finedtheBrazilianconstructionfirmOdebrecht$2.6billionforpayingbribestogovernmentofficials.Basedoninformationrevealedinthepleaagreement,between2001and2016Odebrechtpaidbribestotaling$788millionin2Africanand10LatinAmericancountriesinvolvingmorethan100infrastructureprojects.TheDOJestimatedthatbribepaymentsincreasedOdebrecht’sprofitsby$2.4billion.Thisscandalaffectedbothtraditionalandpublic–privatepartnership(PPP)infrastructureprojects.Thescandalleftoneformerpresidentinjail.Itaffectedavice-president,ministers,senators,andtheimprisonmentofOdebrecht’schiefexecutiveofficerandgrandsonofthecompany’sfounder.Around200officialswerebribedandimportantprojectsweredelayed.BrazilpermitstheuseofeconomicrebalancingtomanagechangesinPPPcontractsduetochangesineconomiccircumstancesnotenvisionedatthetimethecontractwasissued.Whilethiscanbeusedtomakenecessaryandreasonablechangeswithinthecontract,italsohasthepotentialforabuseasexemplifiedbytheOdebrechtconstructioncompanyscandal.WhilethecontractswerewonbyOdebrechtthroughacompetitivebiddingprocess,itunderbidthecontractswithalowballbidandwiththebriberyofpublicofficials.Aftercommercialandfinancialclose,thecompanywasabletorenegotiatethecontractstorestoretheeconomicbalanceofthecontract.WhileOdebrechtisnottheonlyBraziliancompanyguiltyofthispractice,thescandalstandsoutforitssheersize.Source:N.Camposetal.2019.RenegotiationsandCorruptioninInfrastructure:TheOdebrechtCase.2September./abstract=3447631.MechanismsforChangewithinPublic–PrivatePartnershipContractsrenegotiationcannotoccurincircumstanceswhentariffsareadjustedbasedonaformulaagreedtointhecontractorindexedtoinflationorsomeotherindexspecifiedinthecontract.Renegotiationsdonotapplytoautomatictriggersforrequiredinvestments,paymentstotheoperatorregulatedunderthecontract,orcorrectionsoferrorsinthecontractthatdonotresultinnewobligationsorcommitmentssuchastyposorcontradictorylanguagethatcouldaffecttheimplementationofaPPPcontract.frameworksandcontractswillprovideforsomeflexibilitythroughvariationclauses.Thegovernment,forexample,canusuallyrequestvariationsforworksandservicesofferedinthePPPcontract.Examplesofvariationsincludeminorscopechangesandclaimsprocedures.Thisflexibilityincontractdesignenablesgovernmentstomanagecircumstancesthatwerenotforeseenatcontractsigning,withouttheneedforarenegotiation.Othermorecomplexnegotiationsmayfallunderclausesformaterialadverseactionsbygovernment,changeinlaw,disputeresolution,forcemajeure,andcontracttermination.Thecontractmayalsostipulatelimitationsonthesizeornatureofvariationsthatthegovernmentcanaskfororrequiretheprivatesectorpartnertocarryout.

APPPcontracttypicallywillincludeaprocedurefortheprivatepartytoconsiderandrespondtoarequestforacontractvariation.Othervariationclausesmayaddresstheprocessforgovernmenttodecideifthevariationcostsprovidevalueformoney.Variationscanalsoaddresshowanyadditionalcostorsavingsfromproposedvariationsareallocatedbetweenthepublicandprivatesectors.Streamlinedprocessesmayalsobeprovidedforsmallvariations.PPPcontractsalsomayhaveclausesthatofferflexibilityforeventssuchasachangeinlawandunilateralterminationbytheprivatesectororgovernment.Inadditiontovariationsembodiedinthecontract,aprocuringagencymaywishtoproactivelyconsidernoncontractualinitiativestoavoidarenegotiationleadingtoprojecttermination.Thisreflectsamutualinterestbetweenthepublicandprivatesectorstoseekresolutionwithoutresortingtoadisputeresolutionprocedureandthelongleadtimesfortheseprocesses.InthePhilippines,forexample,inresponsetoconcernsregardingtheimpactofthepandemicontheinfrastructuresectorinits“Build,Build,Build”program,theGovernmentofthePhilippinessuggestedproactivearrangementstoextendtermsoftheconcessions,togivetheprivatesectormoretimetoearnareturn;anddeferringtheobligationsoftheconcessionairestoshareprojectrevenueswiththegovernment.8ADB.AchievingTransparencyandAccountabilityintheRenegotiationofPublic-PrivatePartnershipContracts(InternalPresentation);M.Mosley.2020.RestoringConfidenceinPublic–PrivatePartnerships—RestoringRiskAllocationandCreatingMoreCollaborativePPPs.ADBGovernanceBrief.No.41.Manila:ADB;andB.deVera.2020.MorePPPseyedtoexpandDuterte’sinfrapipeline.PhilippineDailyInquirer.26October./310452/more-ppps-eyed-to-expand-dutertes-infra-pipelineISSUE46?2022 7ADB’spublicationtitledCOVID-19andPublic–PrivatePartnershipsinAsiaandthePacificprovidesguidanceforprojectsunderdistressduetoCOVID-19,butcanalsoapplymorebroadlyaspracticalstepsunderotherdistressscenariostoprovidenoncontractualrelief.9Theserecommendationsincludethefollowing:Governmentshouldcreateanactionplanoragreedprinciplestoguidecoordinationandsupporttheeffectivemanagementofchallengesfacingaproject.Anyadditionalsupportprovidedbygovernmentshouldbeintegratedwith(i)legal,regulatory,andinstitutionalframeworksenablingfiscalsoundnessandbestpracticesforprojectimplementationandmanagement;and(ii)qualitycontractdesignandriskallocationforeffectiveandflexibleimplementationofthePPPprojectacrossparties.ProactivemanagementbygovernmenttosupportandreachouttoPPPpartnersbeforeinsolvency.Aninsolventconcessionaireisnotintheinterestofgovernment.Assistancetocontractorsfacingdelaysmaybemorefruitfulthanimposingcontractualenforcementactions.OpenandongoingdialoguewithallPPPstakeholderswillhelpgovernmentunderstandprojectrisks,suchasthepandemic-inducedrisks,andhelpindevelopingpragmaticsolutions.HiddenDebtandFiscalImpactsofRenegotiationDebtinAsiaandthePacificissustainableoverall,but“sustainabledoesnotmeanriskless.”10TheSustainabilityofAsia’sDebt:Problems,Policies,andPracticeshighlightsthefactthatmanymiddle-andhigh-incomecountriesinAsiaandthePacificshiftedmostborrowingtodomesticcapitalmarkets.Othersareimplementingstructuralreformstoimprovedebtandfiscalsustainability,andglobalinvestorscontinuetoseetheregionas

agoodinvestmentopportunity.PPPsrepresentasourceofpotentialgovernmentliabilitiesduetoarenegotiationorotherindirectcontingentliabilities.11ADBestimatesthatpossiblePPPcontingentliabilitiesasapercentageofGDPare,asofend-2019,0.7%inthePRC,3.4%inIndonesia,and5.3%inIndia.TheADBreportarguesthatdangersstillloomoverthedebtandfiscaloutlook.EconomicgrowthisyettofullyrecoveritspasttrajectorysincetheonsetofCOVID-19andrecentmacroeconomicandgeopoliticaleventshaveposedarisktothegrowthoutlook.Agingsocieties,forexample,inEastAsia,canpotentiallyresultinamagnificationofcurrentdebtlevels.Finally,regardingPPPs,centralgovernmentsareultimatelyresponsibleforfiscalobligationsarisingfromcontingentliabilitiesassociatedwithPPPprojects.ThemostcommonimplicitPPPcontingentliabilitiesariseduetorenegotiationandearlytermination.Contingentliabilitiescanleadtoaddedfiscalcoststhatwerenotanticipatedatcontractsigning.Comparedwithotherregions,SouthAsia(Afghanistan,Bangladesh,Bhutan,India,Maldives,Nepal,Pakistan,andSriLanka)hasmoreriskexposuretohiddendebtandcontingentliabilitiesfromstate-ownedenterprises,state-ownedcommercialbanks,andPPPs.Thisisduetomorerelianceonpublicsectoroff-balancesheetoperations.InSouthAsia,around8%ofcontractsresultinearlycancelationbeforetheplannedexpirationofthecontracts.While8%maynotseemhigh,ithassignificanteconomicimpactonthestakeholders,includingtheprivatesector,communitybeneficiaries,andstate-ownedenterprisebanks.Forexample,theStateBankofIndiahasthemostnominalamountofdebtassociatedwithIndianhighways.About20%ofitsloanstoportsandhighwayswerenonperforminginstatusbytheendof2016.TheIndiannationalroadPPPprograminitiallyhadaverylowrateofrenegotiation,whichwasfollowedbyawaveofarbitrationsinthemid-

CentralgovernmentsareultimatelyresponsibleforfiscalobligationsarisingfromcontingentliabilitiesassociatedwithPPPprojects.ADB.2021.COVID-19andPublic–PrivatePartnershipsinAsiaandthePacific:GuidanceNote.Manila.Ferrarini,M.Giugale,andJ.Prandelli,eds.2022.TheSustainabilityofAsia’sDebt,Problems,Policies,andPractices.Manila:ADB.NotallcountriesreportonliabilitiesrelatedtoPPPs,andorganizationssuchastheInternationalMonetaryFund(IMF)andtheInternationalPublicSectorAccountingStandard(IPSAS)32recommendstreatingPPPdebtascreatingpublicsectorliabilities.ThisreportestimatesliabilitiesbasedontheWorldBank’sPrivateParticipationinInfrastructuredatabaseinlow-andmiddle-incomecountries,whichincludethedollaramountofeachproject,investmentyear,percentageofprojectthatisprivatelyfinanced,andthe