Public-private partnerships (PPPs) have become a widely utilized form of infrastructure development across numerous nations globally. By combining the capabilities of public and private entities, efficient and sustainable infrastructure projects can be achieved. One potential issue that could potentially impede the success of these PPP projects is transfer pricing. Transfer pricing is a method of determining the value of goods and services exchanged between associated entities, such as a parent corporation and its subsidiary, with the intent of optimizing tax benefits. This article will investigate the effects that transfer pricing has on PPP projects and the actions that can be taken to alleviate them.
In order to grasp the implications of transfer pricing on Public-Private Partnership (PPP) projects, it is essential to first gain an understanding of how transfer pricing is carried out. Generally, the private partner delivers the capital, fabrication and running of the project, while the public partner provides the terrain and regulatory authorization. The private partner may also be responsible for procuring and acquiring commodities and services from affiliated entities, such as the parent firm. If these products and services are priced at a rate more than their market value, it could lead to reduced profitability for the PPP project, and in certain cases, could result in a loss for the public partner.
An instance of transfer pricing influencing Public-Private Partnership (PPP) initiatives is evidenced in the situation of the Kribi Port in Cameroon. In 2015, the Cameroonian government and the French company Necotrans reached a PPP accord for the construction and management of the Kribi Port. However, following the completion of the project, it was brought to light that Necotrans had overvalued the cost of equipment and materials procured from its parent organization. This resulted in a rise in the project’s cost, which the public sector partner had to bear. Consequently, the Cameroonian government rescinded the PPP agreement and took over the port’s operation.
As such, the consequences of transfer pricing for PPP initiatives can be consequential. Primarily, transfer pricing can lead to an unequal apportionment of returns between the public and private sectors. If a private firm overstates its expenses through transfer pricing, the public sector may bear a higher financial burden than necessary for the infrastructure project. This, in turn, can reduce the economic feasibility of the project and make it less appealing to private investors.
Secondly, transfer pricing can create transparency and accountability issues. PPP initiatives frequently involve intricate contractual frameworks, which can make it challenging to establish if transfer pricing is being utilized equitably. This can undermine the public’s confidence in the project and decrease overall support for PPPs.
Thirdly, transfer pricing can also affect the societal and economic benefits of PPP projects. PPPs are frequently employed to deliver infrastructure projects that have a positive impact on society, such as hospitals, schools, and transportation systems. If transfer pricing inflates expenses and diminishes project profitability, the private sector may be less willing to finance socially important initiatives. This can result in a reduction in the overall quality of infrastructure in a particular region or country.
To overcome the challenges that transfer pricing poses, PPP projects must be structured with transparency and accountability in mind. This entails having clear and unambiguous contractual frameworks, with mechanisms in place to monitor and report on transfer pricing activities. It also implies that governments must have the resources and capability to enforce transfer pricing rules efficiently.
In conclusion, transfer pricing can have far-reaching consequences for PPP initiatives, affecting profit distribution, transparency and accountability, as well as the social and economic benefits of the project. To address these difficulties, PPP projects must be constructed with transparency and accountability in focus, with distinct contractual arrangements and active enforcement mechanisms. By doing so, PPP initiatives can be a valuable tool for providing sustainable and effective infrastructure development.
Author: Eddie Opiyo