Subject: Economy

The emergence of Public-Private Partnership (PPP) as a vital infrastructure development model has raised concerns about its potential to create unsustainable financial burdens for future generations, especially in long-gestation projects like highways, ports, and airports.

How PPPs Can Transfer Unsustainable Liabilities

Financial Risks and Cost Overruns:

• Project Delays: Land acquisition challenges and construction setbacks lead to significant cost escalations, creating additional financial burden on future taxpayers.
• Revenue Uncertainty: Fluctuating market demand and overoptimistic traffic projections result in revenue shortfalls, requiring government bailouts or increased user charges.
• Between 1990-2022, 89 Indian PPP projects received government guarantees, creating potential future fiscal obligations.

Long-term Fiscal Implications:

• Contingent Liabilities: Government guarantees and minimum revenue assurances create hidden fiscal risks that materialize during economic downturns.
• Debt Burden: Long-term debt financing of PPP projects can strain future public finances, especially when projects fail to generate expected returns.
• Studies indicate that nearly half of India's PPP projects have experienced financial stress due to poor contract and risk management.

Arrangements to Protect Future Generations

Robust Project Planning:

• Implementation of comprehensive feasibility studies and realistic demand forecasts to prevent overestimation of project benefits.
• Adoption of the Value for Money (VfM) framework to ensure optimal risk allocation between public and private partners.

Financial Safeguards:

• Establishment of dedicated PPP units for better project monitoring and risk assessment.
• Integration of fiscal responsibility frameworks to cap government exposure through standardized contract documents.
• Utilization of instruments like Viability Gap Funding and Infrastructure Project Development Fund for sustainable project financing.

Institutional Mechanisms:

• Creation of independent regulators to oversee tariff revisions and service quality standards.
• Development of transparent dispute resolution mechanisms to address contractual issues promptly.
• Implementation of robust infrastructure governance frameworks to ensure project sustainability.

The success of PPP arrangements requires a delicate balance between attracting private investment and protecting public interest. Through systematic risk assessment, transparent contracting, and strong institutional frameworks, India can harness the benefits of PPPs while ensuring intergenerational equity and fiscal sustainability.