What hinders private sector investment in infrastructure projects-and what measures are available to overcome these obstacles-have important implications for setting public-private partnership (PPP) policies. Financing infrastructure involves a wide array of risks, the severity of which varies by sector. The presence of these risks may deter private sector investment in infrastructure. At the core of the PPP procurement model is the concept that PPP contracts allocate risks to the party most capable of managing them (IISD 2015). This functional feature of PPPs is a prerequisite for the increased involvement of the private sector in the delivery of infrastructure services. A major reason why there are relatively few infrastructure PPPs in developing Asia is that the private sector is not confident that governments will fulfill their contractual obligations. So, simply restructuring projects to shift more risks to the government may still fail to attract investors.
The two main measures of risk in an investment environment for sovereign entities are country and sovereign risks. These closely related concepts are prevalent in most countries in developing Asia and can deter the development of PPPs by making projects less financially viable. The Organisation for Economic Co-operation and Development (OECD) assesses country risk based on three general risk indicators: the payment experience of the participants and a country's financial and economic situation. Standard & Poor's (S&P) sovereign risk, however, refers to the capacity and willingness of a government to service its debt in accordance with the agreed terms. Country risk is broader because it incorporates credit risk exposures from other creditors within a country. Countries considered high risk by the OECD and S&P measures need some form of guarantee or additional government support to backstop their sovereign obligations. Based on these measures, a large percentage of the borrowing member countries of the Asian Development Bank (ADB) are classified as risky.
To mitigate these risks, tools are available that can promote the use of PPPs and make infrastructure projects attractive to private investors. Traditionally, this has been done through financial and legal transaction structuring and applying risk allocation, but governments in riskier countries should go further by providing sovereign guarantees or government support agreements. If these do not gain investor confidence, then multilateral development banks (MDBs) can play an important role by offering risk-mitigation tools such as credit-enhancement products.
This chapter examines country and sovereign risks in infrastructure PPP financing, and the complementary roles of governments and MDBs in mitigating these risks. Using case studies and the shadow bid financial model for a sample project, the potential financial benefits from mitigating measures involving governments and MDBs are presented.1 The chapter closes by describing implications for policymakers interested in reducing risks of government counterparties.