Governments must watch out for hidden debt to avoid financial crisis

A key risk for India is the government’s guarantees for debt raised by PSUs for public-private partnership (PPP) infrastructure projects.

Published: 30th June 2021 09:24 AM  |   Last Updated: 30th June 2021 09:24 AM   |  A+A-

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By Express News Service

NEW DELHI:  Public sector lenders as well as companies in South Asian economies, including India, are at the centre of a rising debt wave and sizable hidden liabilities that could lead to a financial crisis, the World Bank warned on Tuesday. A key risk for India is the government’s guarantees for debt raised by PSUs for public-private partnership (PPP) infrastructure projects.

State-owned commercial banks, according to anecdotal evidence, focus more on meeting lending quotas for the volume of extended credit than they focus on the quality of project screening and underwriting. These quotas are more easily met by serving larger firms—including state-run entities implicitly backed by a government guarantee—than riskier SMEs. However, the Covid-19 pandemic may lead to the cancellation of many projects and the estimated fiscal cost from early termination over the remainder of contract periods of PPPs ranges between $9.7 billion to $18.5billion in India, it said.

“Infrastructure public-private partnerships are no free lunch. They create liabilities for governments, including contingent (hidden) ones. To share risk appropriately between the public and private parties, governments tend to provide explicit guarantees to the private party, such as revenue or credit guarantees. At the center of the PPP approach rests a trade-off between the efficiency of execution and the efficiency of financing,” the World Bank added. 

For instance, the annual funding of the National Highways Authority of India (NHAI) is approved by the government through Union Budgets. The Ministry of Finance covers full debt service and payment obligations throughout the PPP model, but such liabilities are not explicitly stated on the government’s balance sheet—and thus become part of the “hidden debt,” the World Bank said in its report. 


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