Fiscal Risks from Early Termination of Public-Private Partnerships in Infrastructure

Public-private partnerships (PPPs) in infrastructure provision have expanded around the worldsince the early 1990s. Well-structured PPPs can unleash efficiency gains, but PPPs create liabilities forgovernments, including contingent ones. This paper assesses the fiscal risks from contingent liabilities from earlytermination of PPPs in a sample of developing countries. It analyzes the drivers of early termination and identifiessystematic contractual, institutional, and macroeconomic factors that can help predict the probability that a PPPproject will be terminated early, using a flexible parametric hazard regression. Using the probabilitydistributions from the regression analysis, it simulates scenarios of fiscal risks for governments from earlytermination of PPPs in the electricity and transport sectors, adopting a value-at-risk approach. The findingsindicate that the rate of early terminations decreases with direct government support, greater constraints on executivepower, and the award of the PPP by subnational governments; it increases with project size and macro-financial shocks.The simulations show that fiscal risks from infrastructure PPP portfolios are not negligible in some countries,reaching as high as 2.8 percent of GDP. A severe macro-financial shock substantially increases the estimates,with the value at risk the year after the shock 11–20 times larger.