South Asia Development Matters Ser.

Front Cover

Contents

Acknowledgments

Executive Summary

Spotlight ES.1

Abbreviations

Overview

Analytical Framework

Empirical Findings

Policy Recommendations

Notes

References

1 Public-Private Partnerships in South Asia: Managing the Fiscal Risks from Hidden Liabilities While Delivering Efficiency Gains

The Need to Carefully Manage the Fiscal and Economic Risks of PPPs

Balancing the Efficiency Gains from PPPs against Their Risks and Liabilities

Booming Infrastructure PPPs, Their Country and Sector Distribution, and Signs of Distress in South Asia

Fiscal Risks from Contingent Liabilities Due to Early Termination of PPPs

Features of Contract Design That Matter: Exploring the Link between PPP Contract Design and Early Terminations of Highway PPPs in India

Improving Government Capacity, Due Diligence, and Contract Design to Better Manage the Fiscal Risks of the Growing PPP Programs in South Asia

Annex 1A. Methodology to Determine the Value at Risk of a Public-Private Partnership

Annex 1B. Definitions of Variables

Annex 1C. Distribution of South Asian Public-Private Partnership Projects by Sector

Annex 1D. Imputing the Missing Values for Predictions

Annex 1E. Model Selection

Annex 1F. Estimation Tables

Notes

References

2 State-Owned Banks versus Private Banks in South Asia: Agency Tensions, Susceptibility to Distress, and the Fiscal and Economic Costs of Distress

The Upsides and Downsides of State-Owned Commercial Banks

The Omnipresence of State-Owned Commercial Banks in South Asia

Bank Business Models by Ownership Type: The Example of India

Understanding Bank Distress and Its Main Factors

Analyzing the Effect of Firms' Banking with SOCBs Compared with Private Banks

Policy Recommendations

Annex 2A. Methodology for Determining Bank Distress.

Annex 2B. Regression Tables: Probability of Distress for South Asian Banks and Adjustments to Distress, 2009-18

Annex 2C. Regression Tables for South Asian Scheduled Commercial Banks: Country Results, 2009-18

Notes

References

3 South Asia's State-Owned Enterprises: Surprise Liabilities versus Positive Externalities

The Importance of Paying More Attention to the Hidden Liabilities of SOEs in South Asia

Describing the Opaque and Complex SOE Sector in South Asia Using Data

Analyzing the Roots and Extent of Hidden Liabilities in South Asian SOEs

What Drives the Contingent Liabilities from SOEs?

The SOE Sector Has a Role to Play in South Asia, Such as through Its Long-Term Investment in R&amp

D and Positive Spillovers on Private Firms

Only a Combination of Internal and External Policy Reforms Can Help Better Manage Contingent Liabilities from SOEs in South Asia

Annex 3A. Sources of Data about South Asian SOEs

Annex 3B. Summary Statistics and Estimations for Indian Enterprises

Annex 3C. Productivity Estimation

Notes

References

4 Subnational Governments in South Asia: Balancing the Fiscal Risks of Government Decentralization with the Returns

The Promise and Risks of Fiscal Decentralization in South Asia

The Unclear Extent of Subnational Fiscal Liabilities and Rising Fiscal Risks in South Asia

Fiscal Responsibility Legislation and Subnational Fiscal Risks

Subnational Debt, Data, and Transparency: Lessons from Pakistan

Estimating Contingent Liability Shocks, Adjustment Costs, and Mitigating Factors Using Data for India

Results: Examining the Occurrence of Contingent Liability Shocks

Improved Transparency and Fiscal Rules, the Disciplining Role of Markets, and Better Intergovernmental Frameworks Are Needed to Achieve Better Subnational Fiscal Outcomes in South Asia

Annex 4A. Methodology.

Annex 4B. The Kalman Filter

Annex 4C. Regression Tables

Notes

References

Boxes

Box ES.1 Applying the Purpose, Incentives, Transparency, and Accountability (PITA) Recommendations

Box 1.1 The Hidden Debt of National Highways in India

Box 1.2 Low-, Medium-, and High-Risk Scenarios for Computing Losses to the Government from Contingent Liabilities of Public-Private Partnerships

Box 2.1 Main Findings of the Overall Analysis

Box 4.1 Recommendations for Improving Fiscal Reporting and Transparency in Pakistan

Figures

Figure O.1 Some South Asian Governments (India, Pakistan) Use State-Owned Commercial Banks, State-Owned Enterprises, and Public-Private Partnerships More Commonly Than the Global Benchmark While Others (Bangladesh, Sri Lanka) Are Catching Up

Figure O.2 Analytical Framework: Links from Distress to Adjustments to Impacts

Figure O.3 Highlights of the Report's Findings on Distress, Adjustments, and Impacts

Figure O.4 State-Owned Commercial Banks Adjust Differently from Private Banks in Times of Distress, 2009-18

Figure O.5 Annual Government Support for South Asian State-Owned Enterprises Could Account for More Than 2 Percent of GDP, on Average, Depending on the Country, 2015-17

Figure O.6 A Profound Macrofinancial Crisis Could Trigger Failures among Public-Private Partnerships That Would Cost South Asian Governments up to 4 Percent of Revenues

Figure O.7 The Liabilities of Loss-Making State-Owned Enterprises in India, Pakistan, and Sri Lanka Have Been Huge, but More Than 80 Percent of Losses in Each Country Have Occurred in Only the Top 10 Loss-Makers

Figure O.8 Local Investments in Indian States Fall Significantly with a Contingent Liability Shock, Keep Dropping the Year After, and Stay Well Below the Trend for Three Years.

Figure O.9 Checks and Balances on Government Executives Help Prevent Distress of Public-Private Partnerships

Figure 1.1 Active Portfolio of Public-Private Partnerships in Infrastructure in South Asia, 1990-2018

Figure 1.2 Sectoral Distribution of Public-Private Partnership Projects with Financial Closure in South Asia, by Country and Number of Cancellations, 1990-2018

Figure 1.3 Number of National Highway Public-Private Partnership Projects in India, by Year of Financial Closure, 2001-18

Figure 1.4 Traditional versus Public-Private Partnership Procurement of Infrastructure in India, 2001-17

Figure 1.5  Distribution of the Percentage of Contract Period Elapsed, 1990-2018

Figure 1.6 Distribution of Failures of Public-Private Partnerships over the Contract Period, 1990-2018

Figure 1.7 Estimates of Survival and Cumulative Hazard for Public-Private Partnership Projects

Figure 1.8 Factors That Predict the Likelihood of Public-Private Partnership Distress

Figure 1.9 Distribution of Predicted Probabilities of Distress for Public-Private Partnerships in South Asia, from 2020 to the End of Contractual Period

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

Figure 1.11 Estimated Total Fiscal Costs from Early Termination of Public-Private Partnership Portfolio in South Asia, as a Percentage of GDP, 2020-24

Figure 1.12 Estimated Total Fiscal Costs from Early Termination of the Public-Private Partnership Portfolio in South Asia, as a Percentage of Government Revenues for a Single Year

Figure 1.13 Estimated Fiscal Costs from Early Termination of the Public-Private Partnership Portfolio in South Asia over Different Periods as a Percentage of Expected Government Revenues, 2020-24.

Figure 1.14 Estimated Fiscal Costs from Early Termination of the Public-Private Partnership Portfolio Assuming Profound Macrofinancial Shocks, as a Percentage of Government Revenues, 2020-24

Figure 1.15 Number of Indian Highway Projects Canceled versus Not Canceled, by Contract Type and Financial Closure Year, 2010-14

Figure 1E.1 Baseline Hazard Profile Estimates Using Semi-parametric Methods

Figure 1E.2 Baseline Hazard Profile Estimates Using Parametric Methods

Figure 1E.3 Baseline Hazard Profile Estimates Using Flexible Parametric Methods

Figure 2.1 South Asia: Share of State-Owned Commercial Bank Assets in Total Banking Assets, 2016

Figure 2.2 Bangladesh, India, and Pakistan: State-Owned Commercial Banks' Underperformance Relative to Domestic and Foreign Private Banks, 2009-18 Average

Figure 2.3 India: Branch Networks and Total Credit, 2018

Figure 2.4 India: Selected Funding and Credit Indicators, 2018

Figure 2.5 India: Selected Business Model, Performance, and Soundness Indicators, 2018

Figure 2.6 South Asia's Four Main Economies: Business Models and Strategies of State-Owned Commercial Banks versus Privately Owned Commercial Banks, 2009-18

Figure 2.7 India: Characteristics of the Average Client Firms of Scheduled Commercial Banks, 2009-18

Figure 2.8 India, Bangladesh, Pakistan, and Sri Lanka: Interest Coverage Ratio by Bank Type, 2009-18

Figure 2.9 Differences in How State-Owned Commercial Banks and Domestically Owned Private Banks Adjust in Times of Distress

Figure 2.10 Capital Injections by the Indian Government to Distressed State-Owned Commercial Banks, FY2009-FY2020

Figure 3.1 Total Number and Average Revenue of South Asian State-Owned Enterprises, 2017

Figure 3.2 State-Owned Enterprise Revenue by Sector in India, Pakistan, and Sri Lanka, 2016-17.

Figure 3.3 Net Profit/Loss of South Asian State-Owned Enterprises, 2014-17.