16
H IDDEN DEBT
FIGURE O.9 Checks and Balances on Government Executives Help Prevent Distress of Public-Private Partnerships Debt crisis Banking crisis Currency devaluation Checks & balances for executives Investment size Direct government support Water utility Treatment plant Toll roads Railroads Airports –4
–3
–2
–1
0
1
2
3
4
5
Statistical significance (t-score) Factors that reduce distress probability
Factors that increase distress probability
Source: Original calculations for this report. Note: The bars depict the t-scores of the estimated adjustment coefficients. Like the z-score for the population average, the t-scores for the estimated regression coefficient help illustrate the “economic” significance of the estimate by combining its estimated magnitude and associated degree of uncertainty. That is, longer bars in the figure denote that the estimates are generally large and certain, while small bars denote that the estimate is small or uncertain.
premium payments to government may create an unsound incentive structure and provoke overly optimistic bids from the private sponsor to win a PPP contract. • SOCBs. The extent of government ownership matters in the frequency of distress at SOCBs. SOCBs with a government share of between 50 and 70 percent can be less prone to distress than SOCBs in which government has more than 70 percent ownership. SOCBs can be more fragile by design (Calomiris and Haber 2014). That is, the overall governance around and at SOCBs can expose them to more or greater shocks, such as directed lending, directed support of government programs, political interference in management, forced overemployment, and unqualified employment (Cole 2009; Ashraf, Arshad, and Yan 2018; Richmond et al. 2019). The likelihood of distress increases as bank size decreases. Therefore, smaller SOCBs with more concentrated business models are the most prone to distress. Banks—and SOCBs in particular—that are not able to intermediate the volume of deposits they mobilize are less efficient
and more vulnerable to distress. Credit risk culture and management can help explain the more frequent distress at SOCBs. Interestingly, SOCBs do not appear to take on more risk than private banks. The organizational culture, possibly from formative experiences in sheltered markets, explains the patterns of slower adoption of credit scoring technology and inferior risk management among India’s SOCBs relative to new private banks (Mishra, Prabhala, and Rajan 2019). But this report’s findings also implicate broader governance issues and political economy influences as important factors in shaping the structures and decisions underpinning credit risk management in SOCBs. • SOEs. South Asia’s SOEs do not engage in inherently more risky activities than private firms. For instance, India’s SOEs do not have more volatile sales or profits than comparable private firms, nor are the SOEs concentrated in sectors that have lower profit margins. So, what factors explain SOE underperformance and recurring distress? SOEs overemploy capital
