South Asia, by Country, 1990–2018

P ubli C-P riv A te PA rtners H i P s in sout H A si A 37

FiGURE 1.10 Composition of Public-Private Partnership Financing for Active Projects in South Asia, by Country, 1990–2018

100

80

Percent 60

40

20

0

Afghanistan Bangladesh Bhutan India Nepal Pakistan Sri Lanka Debt Equity Capital grant

Sources: World Bank staff calculations; Private Participation in Infrastructure database. Note: PPP = public-private partnership.

plus the equity return it had forecasted (World Bank 2019).

In the case of termination due to the private partner’s default or breach of contract, the market practice is to provide some amount of compensation. The justification for compensation is that if there is no compensation, the government might be seen as enjoying windfall gains unfairly and would have a hard time attracting lenders and investors for PPP projects in general (EPEC 2013; World Bank 2019). Even if a private partner defaults, the private partner may legally allege government responsibility, so the government becomes liable to compensate the private party or otherwise incur additional legal costs (World Bank 2019).

In the case of force majeure, because the event triggering distress is outside both parties’ control, the risk should be shared between both parties. As such, the government is liable for less than full compensation and has the right to take over the relevant asset, while the private partner loses any return on its invested equity and possibly some of the invested equity (EPEC 2013; World Bank 2019).

Only limited data are 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 in developed countries, collected by the Data Alliance Project Finance Consortium show that the average ultimate recovery rate is 79.3 percent (Moody’s Investors Service 2019; see box 1.2).20 This might be a low estimate in the context of South Asia because the model PPP concession agreements in the road sector in India guarantee as much as 90 percent of the debt financing, even in the cases of the project company’s default or force majeure.

The data on compensation of private equity are even scarcer than data on recovery rates of bank loans. The government’s loss involving private equity in the event of distress depends on the reason for termination, the explicit 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. If the project company defaults, the concession agreements do not foresee any compensation on equity, but if the public authority defaults, the contract entitles the private sponsor to 150 percent of its equity. If a force majeure event that is indirectly caused by a political event occurs, 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