Through public-private partnerships (PPPs), private sector entities provide public sector services and goods by investing in such sectors as utilities, infrastructure and public real estate. The success of PPPs depends on the successful identification, allocation, mitigation and management of risks. Perceived political risks have a strong impact on investment in PPPs because the degree of perceived political risks often impacts on project costs.

A survey commissioned by James Neal, partner, global head of project finance at Ernst & Young, was conducted earlier this year among 29 PPP practitioners. The respondents came from various Asian, European and North American countries with different backgrounds in lending, investing, insuring and advising. The survey investigated the perceived impact of political risks on investment in PPPs in Asia. (The first report, ‘Balancing risks against returns’, was published in the August/September issue of fDi.)


Some political risks are insurable by public and private insurers, such as:

  • Currency inconvertibility and transfer restriction (CI/TR): any introduction attributable to a host government of restrictions on the transfer of currency outside the host country into a freely usable currency, including the failure of the host government to act within a reasonable period of time on an application for such transfer.
  • Expropriation: any legislative or administrative action from a host government that deprives the investor of its ownership or control of or substantial benefit from its investment, with the exception of non-discriminatory measures of general application.
  • Breach of contract: any repudiation or breach by a host government when there is a) no recourse to a judicial or arbitral forum to determine the claim; b) a decision by such a forum is not rendered within a reasonable time; or c) such a decision cannot be enforced.
  • Political violence: war and insurrection/civil disturbance, terrorism and sabotage, and landowner and/or indigenous people’s disturbance in the host country.

Other political risks are not insurable by public and private insurers, such as:

  • Legal, regulatory and bureaucratic risks: risks within the administrative processes that cannot be directly attributed to those already mentioned. They include the legal enforceability and execution of laws, conflict of authority, corruption, transparency, issuing of approvals and consents, change of government causing changes in law, policy and taxation, and obstruction during arbitration process.
  • Non-governmental action risks: risks over which the government has no direct influence and which do not fall into any of the above categories. These include environmental and union activists, religious fundamentalism and ethnic tension, interventions by the US and/or EU, and foreign exchange risks.


Survey design

The survey covers PPP opportunities in Bangladesh, Cambodia, China, India, Indonesia, Japan, South Korea, Malaysia, Pakistan, the Philippines, Singapore, Taiwan, Thailand and Vietnam. The sectors it covers are utilities (power, water and waste water, and waste treatment and management), infrastructure (toll roads, railways, sea ports and airports) and social infrastructure and public real estate (mail delivery, IT and telecommunications, education, health, leisure and sports, administration and security). The respondents were asked to indicate their perception by using a seven-grade scale from ‘extremely low’ to ‘extremely high’. The survey consists of two parts: a political risk assessment of PPP opportunities in Asian countries and sectors; and perceptions on the likelihood and impact of the six political risk factors on financial decision criteria in specific projects.

The results show that investment in PPP opportunities depends on the level of perceived risk, and that the perception of political risks is different within and across countries.

Political risks

In Asia, perceived political risk varies considerably. For all Asian countries except Japan, Singapore and South Korea, legal, regulatory and bureaucratic risks are perceived as having the strongest negative impact on PPP opportunities. These are followed by CI/TR, breach of contract, non-governmental action and expropriation. The least risky factor is political violence.

The picture differs significantly for the mature economies of Japan, Singapore and South Korea, which appear to bear little internal political risk. The political risk that may impact on PPP opportunities the most in these countries are actions outside the control of the host governments. The second most risky perceived factor is legal, regulatory and bureaucratic risks, followed by breach of contract, political violence and expropriation. The least critical factor in these comparatively strong economies is CI/TR.

This comparison of survey results indicates that PPPs in developing countries need to mitigate different political risks than mature economies. While developing and mature Asian economies have in common the notion that breach of contract risk is higher than expropriation risk, it is the opposite for CI/TR, political violence, legal and regulatory risks, and non-governmental risks. There is a weak positive correlation between the two country sets (r = 0.143) and the level of significance of this correlation (less than 75%).

PPP opportunities

The survey responses indicate that in the near future, fewer PPP opportunities are expected between 2006 and 2009 than between 2010 and 2025. While in the developing Asian countries, increasing opportunities are envisaged between 2016 and 2025, the peak for PPP opportunities in the mature economies of Japan, Singapore and South Korea is seen between 2010 and 2015.

Comparing the survey results on future PPP opportunities by country provides a more accurate picture. While India is on average seen as the single champion, Bangladesh, Cambodia and Pakistan are perceived to have the fewest PPP opportunities. Singapore ranks second best in 2007 but declines drastically in subsequent years. Vietnam and Indonesia, by contrast, are exceptional and display promising PPP opportunities. Malaysia at first rises, then declines, while the Philippines is the reverse. Japan remains unchanged at rank seven. China, South Korea and Thailand vary at a high rank but show neither drastic rises nor declines. Taiwan starts from the third highest level and at first picks up momentum, but then declines and remains at a lower level.

Comparing risks and opportunities shows that with increasing risk perceptions come fewer PPP opportunities.

Sector risks

The survey indicates that there are greater PPP opportunities in sectors that are also perceived as more exposed to political risks, such as the power sector. In general, PPP opportunities in utilities are perceived to be most risky, followed by infrastructure. The survey suggests that social infrastructure and public real estate are least exposed to political risks.

Legal, regulatory and bureaucratic risks and non-governmental action risks are perceived as the most critical ones. Currency inconvertibility and expropriation are perceived as the least risky. Political violence and breach of contract are ranked medium across the aggregated sectors. Except for the railway sector, legal, regulatory and bureaucratic risks are the single worst risk category across all sectors.

Sector opportunities

In general, the peak for PPP opportunities is likely to be between 2010 and 2015. There are likely to be fewer opportunities in the near future than after 2016.

Mail delivery, security, administration and education appear to offer the fewest PPP opportunities in the future, while PPPs in power, water and waste water, and leisure and sports promise the greatest opportunities. Opportunities in railways and waste management and treatment are continuously increasing over the years, while IT/telecommunications, airports and toll roads vary in the middle range. Health remains relatively unchanged and PPP opportunities in seaports decline.

In the aggregate, between 2007 and 2025, social infrastructure and public real estate appear to offer the fewest PPP opportunities, while infrastructure is second and the most PPP opportunities reside with utilities.

Investment appetite

With increasing perceived political risks, investment appetite decreases. Also, with increasing political risks, the expected minimum internal rate of return (IRR), minimum required debt-service-coverage-ratio (DSCR), risk margin on loans, and insurance premiums increase. The survey shows that there are also positive correlations between loan risk margins and minimum required DSCR, and positive correlations between investment appetite and minimum expected IRK.

The survey respondents were asked to provide their perception of the likelihood of occurrence and possible consequence of the six single political risk factors on five financial decision criteria in specific projects. They were also asked to provide absolute values on project-specific financial criteria as reference. By applying fuzzy sets and fuzzy aggregation, the perceptions can be quantified. Project-specific risk perceptions correlate with general country and sector perceptions. Numerical results fall within the actual market data, as presented by HSBC.

On average and aggregated across Asian countries and sectors, the investment appetite in PPPs is 28% (leverage of 72%) and the minimum expected IRK is 14%. The minimum required DSCR is 1.36 while the risk margin is 188 basis points (bp). Political risk insurance premium is on average 115bp.

The results of the political risk assessment with the QQIR method (see table 1) can be compared with generalised market data, as presented by HSBC (see table 2).

The survey also asked for absolute values in the financial decision criteria. A comparison of the QQIR results and the absolute value polls show that in 77.5% of all cases the results of the QQIR method and the absolute value polls fall within 0.85 standard deviations.

Impact assessment

The three data sets of survey findings are consistent and correspond with current PPP market data. This survey has clearly shown that political risks have a significant impact on a country’s development. The higher the perceived political risks, the fewer chances for PPP opportunities and the higher the costs for PPPs. While, for example, Bangladesh, Cambodia and Pakistan are perceived as most risky, they are also are perceived as providing the fewest PPP investment opportunities.

By contrast, the survey also yields the result that the risk-return perception may be different by sector. While, for instance, the power sector is perceived as being among the most risky types of investment, power also promises some of the highest future investment opportunities.

In general, utility projects are perceived as riskier than infrastructure projects but are also perceived as promising more investment opportunities. However, there should be no simple conclusion that in politically risky countries, only investments in risky projects such as power projects are the most promising opportunities, nor that in countries with fewer perceived political risks, such as Singapore, educational projects offer the fewest PPP opportunities. Investment opportunities and risks must be assessed by the country and sector, and may contradict the general trends described here.

The survey reinforces a commonly held view that perceptions matter and there is no better way to foster a healthy foreign investment climate than to create a national investment regime that is competitive on the global stage. This means creating and enforcing internationally accepted foreign investment laws, and governments demonstrating by their actions that foreign investors may invest with confidence.

Tillmann Sachs is a PhD candidate at Nanyang Technological University in Singapore; Robert Tiong is an associate professor at Nanyang Technological University; and Daniel Wagner is senior co-financing specialist (guarantees) at the Asian Development Bank in Manila. The views expressed are the authors’ own.

Correlations of investment appetite, risk margins on loans, and insurance premiums for specific projects in Asia