How private public partnership agreements can transfer unsustainable liabilities to the future

Q. Explain how private public partnership agreements, in long gestation infrastructure projects, can transfer unsustainable liabilities to the future .

What arrangements need to be put in place to ensure that successive generations' capacities are not compromised? 

Ans. The private public partnership agreements, in longer gestation infrastructure projects, can transfer unsustainable habilities to the future because high transaction and legal costs due to the number of parties involved and the long-term nature of their relationships which often result in complicated contracts and complex negotiations.

• In the long gestation projects, the private player may either become insolvent or make large profies. The private players work to reduce this risk. In most of the long gestation infrastructure projects, debt is incurred long before the benefits appear. Sometimes, a public sector entity could borrow more cheaply alone than it could via the private sector. 

•  The private players in PPP projects are largely dependent on banking finance at larger interest rates. The corporate bond market in India is still at an early stage of development.

Some suggestions to ensure that the successive generations capacities are not compromised

• Public sector capacity to successfully execute PPPs needs to be built up rapidly as there is insufficient capacity within the PPP sponsoring public entities to identify and implement deals and execute PPPs.

• Specialized skills are required to conceptualize, evaluate, structure and appraise the projects. The required skill sets include assessing financial projections and revenues, effective ring-fencing of the project, risk appraisal and allocation/mitigation and other areas related to contract monitoring, tariff adjustments and dispute resolution. 

• The corporate bond market should be developed to finance private players in the PPP infrastructure projects. There are a number of bottlenecks which require an early detection and should be dealt with as early as possible. Firstly, Institutional bottlenecks such as lack of legislation, absence of policies and framework. Secondly, organizational bottlenecks such as lack of capacity-administrative, political, private implementing, low trust between the parties. Thirdly, project bottlenecks such as factors like economic viability, social aspects, contractual issues; management regularization etc. The best way to overcome these bottlenecks is through capacity building.