ES.1 Applying the Purpose, Incentives, Transparency, and Accountability (PITA) Recommendations in Fragile and Conflict-Affected Contexts ...................xvi 1.1 The Hidden Debt of National Highways in India

P ubli C-P riv A te PA rtners H i P s in sout H A si A 27

Contingent liabilities can be explicit or implicit. Explicit contingent liabilities created by PPPs are the contractual or legal guarantees by the government contingent on the occurrence of an exogeneous event. For example, the government may commit to a minimum revenue guarantee for a toll road or for an independent power producer in the PPP contract. Implicit contingent liabilities created by PPPs are the noncontractual liabilities that the partnership and incomplete contracts create in various states of the world. For example, even though the government might not contractually promise any guarantees to the private party in the event of a default, given that the government is the ultimate guarantor of public services in most societies, the government might have to bail out the private party or assume the remaining debt and service obligations of the private party to avoid service disruption. This means that when a PPP contract is agreed upon, the government assumes the ultimate insolvency risk (Irwin 2007). The most common implicit contingent liabilities of PPPs stem from renegotiation and early termination. Renegotiations can lead to additional fiscal burdens that could not be foreseen at the beginning of the contract. If the renegotiation process fails, the contract may be terminated as a last resort, and the government may be left to settle the claims of the creditors and the private sponsors at a rate beyond what is specified in the termination clauses.

The current public sector accounting principles do not provide an adequate framework for valuating and reporting the liabilities created by PPPs. This uncertainty exacerbates the fiscal risks from PPPs (see box 1.1). Cashbased accounting practices, which are still popular in many developing countries, do not provide a way to include the liabilities in government finances. Even the financial accounting frameworks recommended by the International Monetary Fund (IMF) and the European Union (EU) limit their inclusion based on assessment of the risks and control borne by the government (Heald and Georgiou 2010; de Vries 2013). Furthermore, governments facing fiscal constraints tend to increase their levels of PPP investments as a percentage of GDP without instituting proper institutional mechanisms to deal with the liabilities they create (Reyes-Tagle and Garbacik 2016).

The annual funding needs of the National Highways Authority of India (NHAI) are approved by the Ministry of Road Transport and Highways and the Ministry of Finance through the Union Budget. This includes a contribution from the Central Road and Infrastructure Fund (CRIF) and approval for market borrowings (with implicit or explicit sovereign guarantee). However, debt service for market borrowings and the payment obligations under the hybrid annuity model are also part of the annual funding needs of NHAI. Thus, NHAI, as a national authority, raises debt and undertakes long-term liabilities (PPP hybrid annuity model payment obligations) not on the strength of its financials, but on the assurance of government of India support through budgetary transfers. In short, the Ministry of Finance covers full debt service and payment obligations throughout the government’s public-private partnerships (PPPs), but such debt and liabilities are not explicitly stated on the government’s balance sheet—and thus become part of the “hidden debt.” This arrangement differs from other state-owned enterprises (SOEs), which are corporatized and have independent balance sheets.

BOX 1.1 The Hidden Debt of National Highways in india

Source: World Bank staff, based on inputs from World Bank experts. Note: Under the hybrid annuity model, the project company is entitled to receive from the NHAI both semi-annual availability payments during the operation of the road and a capital grant during the construction phase. The project company is responsible for the construction and the maintenance of the road, but it is the authority’s responsibility to collect tolls.