There is a big gap between the pace at which infrastructure is being built and upgraded in developing Asia, and the demand for more and better infrastructure that the region's strong economic growth is creating. Insufficient finance remains a bottleneck to infrastructure across the region. The public sector should continue taking the lead in developing sustainable and resilient infrastructure to support economic development and well-being. But PPPs can bring real advantages to the provision of infrastructure through additional funding, more efficient management, and better public services. These partnerships, however, face considerable risks and challenges. Lack of project preparation and competitive systematic bidding methods, poor governance, misaligned priorities, the underrepresentation of the public sector in decision making, and lack of coordination and cooperation between partners are just some of the risks that PPPs commonly face.
The increased use of PPPs for infrastructure since the mid-1990s has been accompanied by a rise in contract disputes between public and private sector partners. And the cost has been high: the renegotiation and termination of PPP contracts impede infrastructure development, disrupt public services, discourage private investments, and increase risk premiums. That said, the chances of a PPP project in developing Asia surviving are good, estimated at about 90% during the contract period. MDBs can contribute to infrastructure development nationally and regionally, and reduce PPP project risks. Because the involvement of multilateral partners in PPP contracts reduces the risk of disputes, MDBs play an important role in narrowing funding gaps. While MDBs can support the expansion of infrastructure and play a vital role in mitigating risks in infrastructure PPP projects in developing Asia, the public sector should lead the PPP process.
Governments can bear some PPP project risks by providing capital and revenue subsidies. Direct government subsidies and indirect support through guarantees can help projects become more viable. Solicited projects have made a significant contribution to infrastructure development in the region, but unsolicited projects remain a concern because of their higher failure rates. These can, however, be brought down by more competitive bidding processes. Greenfield projects are at a lower risk of cancellation than brownfield ones because greenfield agreements allow governments to divest themselves of design, construction, and market risks.
The results of our empirical analysis confirm the literature showing that robust economic growth leads to good PPP project outcomes, as demand for output rises. The high average real GDP per capita growth during the 1990-2015 analysis period had a negative and significant coefficient for the hazard rate of PPP projects. For fiscal and institutional factors, higher ratios of debt to GDP have a negative elasticity with the hazard rate of projects. Strong legal systems and a low level of corruption reduce the hazard rate. Beyond the analysis, PPP projects in developing Asia will increasingly be affected by the rising frequency and ferocity of weather disasters, and the impact of climate change. And this will have significant policy implications.