Gaurav Dwivedi & Shubhangi Shukla


Infrastructure needs of growing countries such as India and their population are vast. Sectoral experts and financial institutions have recognised that while often also referring to the funding gap in the demand and supply of infrastructure [Global infrastructure investment is estimated to reach US$79 trillion by 2040 while needs are estimated to reach US$94 trillion (Global Infrastructure Outlook, 2023). To meet the United Nations Sustainable Development Goals (SDGs), the global infrastructure investment gap is expected to be higher. For example, achieving SDG-6 and SDG-7.1, which call for universal access to water and sanitation, and electricity respectively, is expected to require an additional US$3.5 trillion in global investment needs between 2016 and 2030]. It is believed that this gap will widen over time and the SDG 2023 targets will also remain unmet unless some immediate measures are taken to address this. 

The most popular recommendation to this end is to increase private investments and private sector participation in execution of projects in infrastructure in developing countries. It is being suggested that governments alone are incapable of putting in required investment into infrastructure and private investment will be able to bridge the financial gap as well as bring greater efficiency in implementation of projects in the sector, for instance the World Bank’s policies such as ‘Billions to Trillions’ and ‘Maximizing Finance for Development’.

This argument has been put forth time and again by industry representatives as well as influential financial institutions such as the World Bank Group and Asian Development Bank (ADB). Efforts towards increasing private participation and investments across countries have been underway since the last few decades. Public Private Partnerships (PPPs) were encouraged in public infrastructure in a big way in economies including India since the 1990s with mixed results and a fresh revival of the same is under way at present as well. However, private investments have remained stagnant over the last decade with further dips during the COVID-19 pandemic with some recent signs of recovery (Global Infrastructure Hub, 2022). Risks such as

long time spans of projects, legal or bureaucratic hurdles continue to be cited by the private companies for investing in infrastructure projects and more and more government backing and support in the form of lesser regulation and policy change is being sought over and above fiscal stimulus.

The recent G20 events in India in September 2023 also saw conversations on the topic with talks of further opening financial markets for private infrastructure investments in India. Over the past few years there have been suggestions to share taxes in addition to the existing financial mechanisms with the private operators to increase the viability of the PPP projects.

Tax-based models for cushioning private investment

Infrastructure projects till a few decades ago were entirely government run and funded. With the arrival of PPPs, the ‘Build, Operate, Transfer’ (BOT) mode of projects came to be. Investors in this mode relied primarily on user charges to recover project costs after which the asset was transferred to the ownership of the government. With the private operators demanding further risk proofing, there have been some tax based models such as introductions of ‘betterment levy’ for residents of project areas.

The ‘Spillover Tax Sharing system’ is another such tax based cost recovery model which has frequently been backed by major financial institutions like the ADB directly or indirectly. This model goes a step further from levying additional taxes such as the betterment levy, cess or surcharges on direct beneficiaries of infrastructure projects to build and maintain them,  allowing private investors a 50% share of the all incremental tax gains on existing tax structure received by the government from project beneficiaries, seemingly, as a result of the project along with other pre-existing methods of revenue collection. For example, the construction of a new road potentially increases value of and revenue from land in the area, which could in turn increase tax collection from this land for the government as compared to previous year (also known as ‘land value capture’). The private investor will now be able to claim 50% of this additional tax received by the government on land.

This model does not stop at only land value capture which has been implemented with some success in certain parts of the world but aspires to capture all other kinds of economic and even social gains to community and individuals that can seemingly be attributed to the particular project. The premise of the proposition is that the benefits of creation of infrastructure projects go beyond its direct users and ‘spill over’ to other kinds of benefits and therefore, the ambit of cost recovery for the private investors should also include these avenues. In the words of the above mentioned policy paper advocating for the same, “The development of infrastructure, starting from the construction stage to that of operations, is believed to create spillovers in various aspects, such as increased economic activities brought about by the creation of new jobs and businesses and improved human capital through greater access to education and healthcare. This inherently means that governments also have the potential to capture, for example, the increase in profits of businesses and incomes of workers, which benefit from the development of infrastructure, through increased taxation.” 

The proposition of spillover tax sharing so far has limited detail on many fronts including the scope of ‘spillovers’ to be covered from which a share of incremental tax gains is to be extracted. Based on the above statement, it has a very wide range – from an increase in relatively easily quantifiable people’s personal income and business profits as compared to pre-infrastructure times, to the harder-to-calculate and pinpoint over short-run spillovers like having better health outcomes, improved air quality etc.

Some of these fall under pre-existing tax structures- such as income tax. But what about spillovers like better health? Could this lead to new taxes on such spillovers? How is one to pinpoint that the incremental tax gain in one of these spheres is a direct result of the infrastructure project? Even if it somehow is, better health can be a result of multiple factors such as better preventive healthcare, health and hygiene education, new breakthroughs in medicine and science and a country’s access to them, to mention a few. It is not just the construction of the road that may take you to the hospital more efficiently. How then, does one put a value on the exact share of contribution of the infrastructure project to this particular benefit?

In other cases, the spillover benefit from one project may also be offset by other factors. Is the beneficiary to still be taxed without compensating or subsidizing him or her for the negative impacts of another or the same project? An example of this could be construction of a new road  or railway line leading to opening to new businesses and generating employment. But this would also include environmental costs for the same people in the area such as poor air quality or foul smell, reduced groundwater supply, reduced fertility in agricultural land etc. Some people may only be at a disadvantage and get no benefits. While some people may benefit from  a project, it may take livelihoods away from some or displace others. There could be loss of wildlife and habitat, roads and irrigation systems may be constructed across reserved forest areas, the increased human activity could overburden existing resources. Dams and mines are  an example where the opportunity costs are high, including submergence of entire villages with no real benefit to the local communities. Therefore, while one is discussing levying tax on people as they ‘benefit’ from the projects, what happens to the disadvantages/ negative impacts of the project remains a pertinent question. 

The conversation is also currently vague on the definition of beneficiaries, timelines and model of tax collection from them. Is there to be a gradation- like user, direct beneficiary and indirect beneficiary? People also may move to other cities, change residence, and may not be permanent residents. Are these residents also to be taxed and on the same scale? Some of these ‘spillover benefits’ benefits being pointed out can only show up in the long run, and some benefits may last beyond a generation. So how long is the tax sharing to continue? What about projects such as highways which are not limited to, nor as essentially made for local people but have a more widespread, indirect, impact, including cross-country? What happens to maintenance costs when these intricacies are introduced?

Problems of assessment apart, there are other concerns with the proposition such as those of maintaining transparency, accountability, and even efficiency.  Furthermore, there are also ethical questions of social justice, equity and access.

The expectation with the spillover tax sharing model is that individuals and businesses will self declare their incomes and profits, but is that feasible? Is financing and flow of money in infrastructure projects in developing countries that straightforward? What have been the transparency and accountability systems in PPPs and their performance, historically, after almost 3 decades of the model being in currency across countries? What is the state of transparency on expenditure of existing taxes paid to the government to now additionally tax infrastructure and further involve private players? Is there any aspect of public consent and consultation now that separate taxes are going to be levied on project basis?

Another assumption while pushing for private investment is that private companies are inherently more efficient than the public sector.  What is the basis of this assumption?  What has been the performance of PPP projects in the past to now involve more of them? Do any large scale, cross country assessments on performances of PPP projects exist? Multiple case studies across the world have shown the poor and even worse than before state of these projects and services. And the problem of affixing accountability is even worse. Moreover, when it comes to increasing PPPs in essential infrastructure, it remains that by their very nature, private companies are accountable to their shareholders and not citizens. 

Another argument while promoting private participation is that private companies bring in more finance. However, while substantial evidence over time and across countries to prove this general point does not exist, noteworthy case studies to prove the contrary do. In many a projects, the contracts leave the public sector disproportionately exposed to excessive risk as compared to the private investor. The public purse has also been known for having to foot the bill and bear unfair share of losses in case of PPP project failures, or bail the projects out.  Due to these issues a trend of moving away from PPPs has been observed in European countries in recent years, however despite not so encouraging results in the earlier attempts there is a push to revive PPPs in developing countries.

That there is a gap in infrastructure investment has been assessed by looking at finances required to create infrastructure facilities to meet SDGs vis-a-vis finances available for the same. However, SDGs advocate for greater or universal access to these projects and services which is not the model or priority for the private sector who may prioritize profitability over access and inclusivity. Some of the projects that will be taxed in this fashion may be essential services like water, sanitation, energy, health and transportation and therefore there are risks in promoting PPPs in critical sectors. Covid has highlighted the need for crucial infrastructure, at the same time showing how private motives cannot be relied on for such occasions . PPPs in critical sectors are known to undermine the right to health, water etc. There has been questionable diversion of public resources in times of crisis to maintain profits for private investors. But there is a  contradiction in interests in advocating for the spillover tax  “increasing charges for users may reduce consumer demand even if the private sector is able to do so to pay for construction and operations (under the PPP agreement). The incompatibility between user and investor needs could cause PPPs to fail.”

Levying additional beneficiary based taxes and its sharing with private investors to improve infrastructure may in fact act as a deterrent for people to access and maintain it. Areas with already poorer infrastructure may be taxed more since they would need more investment in infrastructure to begin with. Poorer neighborhoods with less incomes and opportunities will be able to generate less taxes or may be forced to shell out greater proportions of their incomes whether an equal amount of benefit is accrued or not, even if existing tax slabs are not altered. It can lead to systematically poorer infrastructure in low income areas. This argument when taken to institutions and businesses level could also be at odds with the notion of incentivising new enterprises/ businesses/ start ups. Would not such a tax deter them from emerging? Small businesses could be disproportionately hit vis-a-vis large industries. The government could, on the one hand, end up giving tax breaks to large industries such as through special industrialisation schemes, while further taxing common people and small businesses for essential services.

Larger Experience with PPPs

PPPs are also historically known to be more common in countries with large and developed markets to allow for a faster recovery of costs and more secure revenues from private investors. As the literature on PPPs shows, this implies a selection bias in PPPs, also known as ‘cream-skimming’, which also occurs within countries, with investment directed towards affluent urban areas. This could further jeopardize the needs and interests of poorer areas.

The trend in PPPs has also been the promotion of large scale projects at the cost of potentially more sustainable, user friendly smaller and medium sized projects since the scale of profit in the former is larger. The scale and magnitude of the project then is not defined by the needs of the communities who will use it, but profits, ease and financial interest of investors. Environmental costs could have also been overlooked in this manner.  The focus on attracting private investors has also resulted in the project designs that undermine environmental protection and the fight against climate change in the name of ‘ease of doing business’ and attracting private investors.

A 2020 study commissioned by the European Federation of Public Service Unions (EPSU) and Eurodad studied the experience of PPPs in Europe and mentioned eight main reasons why PPPs are not working which hold much weight. They are as follows-

  • “PPPs do not bring new money – they create hidden debt. 
  • Private finance costs more than government borrowing. 
  • Public authorities still end up bearing the ultimate risk of project failure. 
  • PPPs do not guarantee better value for money. 
  • The search for efficiency gains and design innovation can result in corner-cutting. 
  • PPPs do not guarantee projects being on time or on budget. 
  • PPP deals are opaque and can contribute to corruption. 
  • PPPs distort public policy priorities and force publicly run services to cut costs.”

Case studies can be found to substantiate each of these claims.

According to other experts, “The problem of hidden indebtedness of PPPs to the host governments remains unaddressed, and is a source of concern, particularly in the context of a growing debt crisis and a forecast of a global recession.” Furthermore, “PPP operations are often recorded off balance sheet and they frequently lack transparency and accountability, in part due to the cloak of commercial confidentiality. This helps create a ‘fiscal illusion’ that prevents a careful assessment.” 

Role of Multilateral Institutions

Involvement of Multilateral Development Banks (MDBs) has been recommended to negotiate between private parties and the state in the spillover tax sharing system to ‘guarantee the efficiency and continuity of the spillover tax-sharing system’, essentially as watchdogs. It is mentioned that MDBs such as ADB can also ‘ensure the accountability and transparency of the system’ due to their vast experience in working with both public and private sectors and governments.

While the proposition makes the process sound fairly linear and simplistic, it will in fact be very complex in its implementation even if MDBs are successful in being able to act as intermediaries between administrative boundaries and supervisors for the state and private investors as proposed. It also remains to be seen on a case by case/ country by country basis whether the investment risks perceived by the private sector apply to all developing countries at all or other kinds of subversions  make up for it.

MDBs, led by the World Bank Group, are devoting considerable attention to advising countries in their use of PPPs. The same effort seems lacking when it comes to improving the quality and effectiveness of publicly financed infrastructure and public services. Not enough research and affixing accountability has been done in failed PPP projects by the financial institutions backing such proposals.

The larger overarching question also remains-  why should private investment be preferred over government spending at all when historically, governments have often had to bail many of these private projects out or invest partially in them in any case? Why cannot the government directly invest and keep the returns which are clearly significant enough to be shared with private parties? If the answer is that governments across developing nations are unable to finance the sum, then there is a contradiction there. In India, the government is financially assisting private investors in infrastructure through schemes like Viability Gap Funding scheme and ‘India Infrastructure Project Development Funding Scheme’(IIPDFS) amongst other measures in an attempt to attract private investment in infrastructure. The share of government investment in these schemes is up to 60% and 75% of the total project cost respectively, which is the majority of the project cost.  This further raises the question that  when the private investors already deem critical infrastructure projects ‘unviable’ and the government is having to finance more than 50% of the cost, why the stress on including private investors at all? Furthermore, how far is this logic of additional sectoral or project wise tax going to go? 

Given the concerns listed above and those flagged in the case studies referenced,  it is clear that a lot more thought needs to be paid not just to propositions of tax sharing with the private sector but also before pushing PPPs in all sectors. The role of MDBs in the process also needs to be critically reviewed. Justly so, there have been calls for “the promotion of high-quality, publicly funded, democratically controlled, gender-sensitive and accountable public services, based on the fulfillment of human rights and the protection of the environment” as the need of the hour.

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