Economic Highlights

New Delhi, 25 July 2015

PPP Fails

ENHANCE TAXES, SAYS UN

By Shivaji Sarkar

Public Private Partnership (PPP) needs to be junked. Not only is it for sheer private sector profitability but has failed the development objective, the third UN international meet on Financing for Development, popularly called Addis Ababa meet, concluded. It goes back to the concept of development bank financing for growth of developing economies.

The conference held this month to discuss Technology, Finance and Statistics for Sustainable Development Goal (SDG), however, sets the tone for a new financial and development architecture. India, despite some reservations, took the lead for establishing the new order in furtherance of achieving the MDG – Millennium Development Goal through SDG. The aim is to forge a global partnership in economic prosperity.

Overall the meet reached the broad conclusion that international funding is becoming difficult and advised nations to depend on domestic public resources for achieving sustainable development “through effectiveness in tax systems”. It stopped short of suggesting raising tax rates but called upon countries to set “targets for enhancing revenue”.

The meet also found that corporates worldwide are the biggest tax evaders and do so in various ways. Some large companies employ over 500 persons for “aggressive tax planning”. They invent loopholes to deprive the countries of legitimate taxes across the world. And therefore, the Addis Ababa meet called for upgrading UN mechanism and international cooperation to tackle this problem.  

However, in reality, there was no consensus on the issue of tax evasion. Not creating an inter-governmental body for cooperation in taxation "is a historic missed opportunity", Minister of State for Finance Jayant Sinha told the participants.

The World Bank that promoted PPP now states that the model has not only doubled the fiscal cost but also has extended the timeframe to 30 years. Very often governments have had to take over the PPP projects as these become expensive, such as high toll on highways, and therefore politically unacceptable.

Remember, PPP was premised on the concept that the private sector was more efficient than the public sector. However, the reality turns out to be just the opposite. In addition, it is not that India alone had an unsavoury experience with PPP but that most developing and even developed nations have suffered too. In India, the rural roads proposed through PPP by the previous UPA government for example got only 20 per cent of the funding and the task remains unfulfilled. And in Sweden PPP is banned PPP, says Jayati Ghosh, Professor of Economics  at the Centre for Economic Studies and Planning, School of Social Sciences, JNU.

The reason for the private sector finding long-term PPPs unviable is because users find these expensive. It has been found that once a government or public sector takes over the project is cheaper to operate and more affordable for users.

Indeed, the failure of PPP has posed a major problem. As MNCs avoid taxes, it has been found that they are not sharing public expenses and funding the development process. The UN committee of experts on international cooperation in tax matters has proposed enhancing the role of development banks and looking for ways to create incentives to have more contribution from the corporate (like corporate social responsibility)and incentivise FDI to developing countries, particularly the least developed ones.

The Head of ESCAP, South and South West Asia, Nagesh Kumar says that there is a proposal to allow companies in Bangladesh and Bhutan to be listed at stock exchanges in India. Development banks in China, Brazil and India in many areas are found to be contributing significantly. And the German Development Bank is the largest investor for innovation and other areas.

In yet another instance, Nobel laureate Joseph Stiglitz headed panel has given a unique proposal to tax multinationals as one unit as production is globally dispersed. The pooled taxes could be divided as per business and sales in different countries. However, while the proposal can rake in more taxes, the world has yet to evolve a collection and distribution mechanism.

The Addis Ababa document is significant as it calls for enabling conditions that allow governments’ to raise monetary resources. Official Development Assistance (ODA), largely south-south cooperation, has increased but remains far below requirements as decided at the UN meet at Monterrey, Mexico in 2002, which reflected global agreement between developed and developing countries on finance, trade, aid and debt relief.

Additionally, tax havens are another corporate deviant. Both developing and developed countries get almost 30 per cent funding through tax havens such as Mauritius, Luxembourg, Netherlands and even Delaware in the US. The OECD countries themselves have taken this up as a serious issue given that they are one of the largest losers of taxes.

Of the total FDI, developing countries get around 50 per cent of it. At the same time, overseas remittances are under a cloud. (India gets about $75 billion as remittances). The developed countries want place a check on it as they consider it a drain as migration increases to the West.

This apart, transnational corporations have almost $25 trillion funds, of which at least one-third should be made available to the Third world. There remains a $2.5 trillion investment gap a year for developing countries.

The meet thus called for transparency in capital flow. The global financial volatility is engineered through opaque flows. It is feared that short-term capital is to flow into the developing countries because the stable developed markets are less lucrative. Such flows could create bubbles and lead to busts. It has mulled over capital control mechanism. The European Union, South Korea, Indonesia and Thailand have taken recourse to it. Opinion is in favour of moderation in short-term capital flows.

Illicit flows remain a concern but a solution eluded the conference. However, there was agreement on the Green Climate Fund, with developed nations having agreed to raise $100 billion a year by 2020 for funding developing countries. This would be in addition to ODA commitment of 0.7 per cent of gross national income. The EU has promised to achieve 0.7 per cent target by 2030.

The document despite serious global conditions seeks to change the world order through better business practices, international financial stability to check volatilities and systemic risks. Fearing upswings in the food and commodity market it calls for checks.

Indeed, the meet has opened up a pandora’s box for a corrective system. It agrees that experiments of “neo-liberalism” have not succeeded but is unable to remedy the aberrations in global financing mechanism. Would Sustainable Development Goal become a reality? – INFA

(Copyright, India News and Feature Alliance)