Overview and Concept

Governments have always accumulated obligations and exposures outside direct central-government borrowing. State-owned enterprises, subnational entities, public banks, guarantees, long-term contracts, public–private partnerships and commodity-linked financing are not new. Yet the prevailing legal and institutional architecture for debt governance has developed primarily around discrete categories of public and publicly guaranteed borrowing. We refer to this architecture—rules on authorization and borrowing, professional debt-management institutions, and arrangements for transparency and oversight—as Debt Governance 1.0. Institutions and actors charged with implementing these rules recognize that risks also ariseelse where, but adaptation remains uneven, responsibilities are fragmented, and risks keep crossing institutional and legal perimeters.

These challenges are increasingly important as low- and lower-middle-income countries seek tomeet substantial infrastructure and energy investment needs under constrained fiscal and debtconditions. Financing through SOEs and utilities, reliance on long-term offtake agreements,guarantees and project-finance structures can mobilize investment that might otherwise notoccur. It can also defer or obscure public costs, particularly where returns depend on tariffs,subsidies, foreign-currency revenues or other public support. Allocating an obligationcontractually to an SOE, utility or private investor does not necessarily remove the underlying financing gap. In recent experience, gaps have resurfaced through arrears, subsidies,recapitalizations, guarantee calls, pressure on public banks or transfers to the sovereignbalance sheet.

The central challenge is to preserve governments’ capacity to mobilize essential investmentwhile ensuring that public costs and exposures are properly assessed, authorized, monitoredand reviewed. Governments should not avoid all risk: an approach focused exclusively onlimiting fiscal exposure may reduce one vulnerability while contributing to persistent underinvestment. The goal is for governments to exercise agency, to identify the risks they are prepared to assume to enable necessary investment, on what terms and through what governance processes–and for accountability institutions to exercise informed, constructive oversight. Debt Governance 2.0 extends and builds on the prevailing governance frameworks to map the institutional reforms required to achieve this goal. Rather than simply expanding the definition of public debt, it would complement existing controls with a dynamic approach to public financial risk governance: considering the policy rationale for investment alongside assets, liabilities, contracts and financial flows; assessing economic, financial, fiscal and social viability together; tracking how exposures migrate; and examining where benefits, risks and losses ultimately fall. The objective is to help governments distinguish risks consciously and sustainably assumed forlegitimate policy objectives from those that are hidden, mispriced or allocated to institutions unable to bear them.

Guiding Questions

• Why are financing structures outside traditional sovereign borrowing created, and whatinvestment or policy objectives do they serve?
• How should economic, financial, fiscal and social viability—and the assumptionsunderpinning each—be assessed together?
• Which risks should governments assume to enable investment, and which should remainwith investors or other parties?
• How do risks evolve across contracts, institutions and balance sheets, and where do theresulting costs and losses ultimately fall?
• Who should assess and authorize public risk, and how should its expected cost bedisclosed, budgeted and monitored?
• What information and warning signs should trigger reassessment, mitigation, repricing orrenegotiation?
• How should responsibilities be divided among finance ministries, debt managementoffices, sector institutions, SOEs, regulators, central banks, public banks and oversightbodies?
• Which improvements require legislation, and which depend primarily on mandates,coordination and accountability?