Endnotes

¹Although estimates of the incidence of renegotiation are presented in Table 4.

²A more comprehensive study of the pattern of global divestments, as well as global renegotiations in PPP, is left for further study.

³Although laws are the domain of legislators, and not executives, I have labeled changes in law as political risk as well.

⁴The exception in Asia was Indonesia, which placed a cap on tariffs charged by IPPs during contract renegotiations. Pakistan also renegotiated IPP contracts in the late 1990s, but not because of the Asian crisis. The trigger was a change in government, which brought in officials who believed that IPP contracts negotiated under the previous regime were extremely disadvantageous to the state. Unlike the early experience with privatization and PPPs in Latin America, where renegotiation was often initiated by firms, the Asian experience has been dominated by government-initiated renegotiations. This is particularly true in the case of IPPs, which have experienced government-led renegotiations in Thailand, the Philippines, Indonesia, and Pakistan.

⁵There were a few exceptions in Asia, however. In Indonesia and Pakistan, government authorities set limits on tariffs after IPP contracts were renegotiated (effectively tariff freezes).

⁶The government also set up a special commission to renegotiate contracts.

⁷Also called creeping expropriation.

⁸These controls are also the dominant reason for PPP failure in the PRC.

⁹Protracted tariff rigidity, however, can be short-sighted, because it increases the risk of supply shortages. The countries cited above suffered from power shortages because of inadequate investment in affected sectors.

¹⁰Not all political risk is endogenous. Exogenous political risk includes nationalizations that are driven by purely political or geopolitical motives. Examples include the recent resource-based nationalizations of oil and gas assets in Russia and Kazakhstan.

¹¹More complicated, limited variable estimation can be performed in future studies.

¹²Given the positive correlation between currency risk and political risk, it follows that a rigid exchange rate system also underestimates political risk.

¹³However, not all nationalizations are necessarily unwelcome fiscal events, from the point of view of the country. In the non-PPP sphere, opportunistic resource-based expropriations made for strategic political purposes may be justified, if it sacrifices short-run fiscal costs in favor of perceived long-run revenues (e.g. Russia and Kazakhstan).

¹⁴These measures are effectively creeping expropriation, and yet are not explicitly defined as such.

¹⁵Perhaps a good example of relatively orderly workouts during times of crisis is the treatment of PPP projects in Thailand during the Asian crisis. No tariffs were frozen, although many investors were forced to bear partial currency risks.

¹⁶In Asia, devaluation risk for European investors is exacerbated by the pegging of domestic currencies to the US dollar. Thus, as the Euro has appreciated tremendously relative to the US dollar in recent years, the values of European PPP investments in Asia have been affected as well. This partly explains the fall of European PPP investments in Asia, as well as the pattern of European divestments out of projects in Asia (out of the water sector, in particular).

¹⁷Based on interviews and a review of existing literature.

¹⁸Per the World Bank’s governance criteria, well-governed countries tend to attract a lot of PPP investments.

¹⁹A stress event is defined as tariff freezing, or the renegotiation or cancellation of a contract.

²⁰This is especially important for those firms operating concessions, since they are in direct contact with consumers.

²¹Although data from the PPI dataset were thin, they were nonetheless used in the regressions.

²²See previous footnote.

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