The Finance Ministry has disclosed that Public Private Partnerships (PPPs) are prone to “fiscal illusion”.
The Finance division in its Fiscal Risks Partnership report states that PPPs have characteristics that can obscure management and mitigation of fiscal costs and risk by their nature.
In addition, PPPs are prone to “fiscal illusion”. While cash accounting, which is the only accounting system that exists in Pakistan, provides a temporary benefit, over the project cycle the impact on GoP accounts could worsen.
The GoP is also wary of fiscal risks that may arise in PPP transactions from Minimum Revenue Guarantees (MRG) in future PPP contracts. This is because the MRG tends to act as contingent subsidies, meaning that they come into effect if the private partner does not generate the minimum revenues or demand specified in the contract. Lastly, there could be a fiscal risk from frequent re-negotiation or termination of PPP contracts.
Frequent renegotiations can lead to delays in project implementation and uncertainty for private investors, reducing their willingness to invest in future PPP projects.
There are several reasons why termination liabilities can pose a fiscal risk to the GoP. First, termination liabilities can be difficult to predict and budget for, particularly if they occur early in the contract period. Second, the cost of compensation may not be known until after the termination has occurred, making it difficult for the Government stakeholders to plan and allocate resources to cover the costs.
Third, termination liabilities can place a strain on the GoP’s finances, particularly if they occur at a time when the Government is facing other fiscal challenges, such as a natural disaster. Last, termination liabilities can damage the GoP’s reputation and credibility, making it hard to rebuild lost investor confidence.
The Report states that over the course of the last three decades, Pakistan has executed over 100 PPP projects. The bulk of these projects have been in the energy sector, accounting for around 90 percent of the total transactions, while the rest have been in ports, information, and communication technology (ICT), airports, roads and expressways, and waste disposal sectors.
The energy sector concessions are operated through an institutional framework, led by the Private Power and Infrastructure Board (PPIB) and Alternate Energy Development Board (AEDB). All PPP projects other than the energy sector projects now come under the P3A. Overall, the Government has attracted a total exceeding $28 billion of private investments in various PPP projects.
The P3A projects pipeline is now mainly sourced from the implementing agencies (IA) of the Government, which aims to attract private sector investment in developing and managing public infrastructure. To date, the investment value of high-impact infrastructure projects approved by the P3A Board is almost US$ 3 billion.
Out of the 4 high-impact approved transactions, two have already achieved commercial close while the third is pending award of the contract. Among the active and advanced PPP projects under P3A, GOP’s viability gap funding (VGF) obligations from Sialkot Kharian Motorway (SKM), Sukkur Hyderabad Motorway (M6) and Kharian Rawalpindi Motorway (KRM) are Rs. 10.94 billion, Rs. 9.50 billion and Rs. 16.22 billion respectively. Similarly, the estimated project costs for SKM, M6, and KRM are Rs. 27 billion, Rs. 307 billion, and Rs. 86 billion, respectively.
The GOP obligations for these approved projects (both direct and contingent liabilities) appear to be manageable and are within the fiscal ceiling of 2 percent of the GDP. Similarly, the GOP guarantee amount envisaged to be issued against these projects is to the tune of Rs. 36.66 billion (SKM: Rs. 10.94 billion, M6: Rs. 9.5 billion, KRM: Rs. 16.22 billion) against a total project outlay of Rs. 420 billion.
Source: ProPakistani