Taxpayer support to controversial PPPs could undermine Albania’s public debt reduction agenda

Tirana Times
By Tirana Times August 18, 2018 11:26

Taxpayer support to controversial PPPs could undermine Albania’s public debt reduction agenda

TIRANA, Aug. 18 – Taxpayer support to public private partnerships is set to double in the next three years under the controversial €1 billion PPP program that the Albania government is implementing to boost road, health, education and waste management infrastructure, raising question marks over potential accumulated unpaid bills undermining the public debt reduction agenda.

In its 2019-2021 mid-term budget program, the Albanian government says it expects taxpayer support to some 11 existing and four upcoming PPP contracts to almost double to 18 billion lek (€143 mln) by 2021 when the second consecutive term of the ruling Socialists expires, compared to a projected 9.4 billion lek (€74.5 mln) for 2018.

Under the Albanian government’s baseline scenario, the PPP spending poses no threats to public finances due to remaining within the 5 percent ceiling of the annual tax revenue.

While the government expects budget support to PPPs to range from 2.4 to 3.7 percent of the annual tax revenue over 2018-2021, the International Monetary Fund has warned of a series of risks facing PPPs, often awarded without a thorough cost-benefit analysis and based on unsolicited proposals favoring companies with alleged links to the government.

According to the IMF, PPPs entail construction, financial, demand, political, force majeure and renegotiation risks and the Albanian government’s legislative threshold of annual payments to concessionaires not exceeding 5 percent of the previous year fiscal revenues is not reliable, reflecting a mix of mandatory and expected payments and worst-case estimates if pre-determined minimum revenue guarantees are triggered.

The IMF estimates Albania’s central and local government institutions accumulated arrears worth 26.6 billion lek (€210 mln) equal to 1.7 percent of the country’s GDP at the end of 2017, an amount which the Albanian government does not include in the public debt stock.

Current legislation allows the government to undertake corrective measures through tax hikes for two consecutive years in order to bring PPP spending in check in case of exceeding the 5 percent tax revenue threshold, a scenario that risk further increasing the already high tax burden compared to regional countries.

The Arbri Road linking Albania to Macedonia, several internal highways, the construction of 17 pre-university schools in Tirana are among the Euro 1 billion PPP program that the government intends to implement by 2021 and repay concessionaires over the next 12 years through annual installments.

PPP contracts also involve three controversial waste-to-energy plants which the European Commission has recently warned pose concerns in terms of compliance with EU principles since disposal and incineration are the least preferred waste management options.

Some of the PPP contracts, especially those in the health sector have been marred by allegation of corruption and favouring of Albanian concessionaires with alleged links to the government.

In a recent report, Albania’s Supreme Audit Institution said it uncovered 210 million lek (€1.6 million) in alleged abuses by the medical check-up concessionaire, run by an Albanian company which the opposition says is an electoral campaign sponsor of the ruling Socialists.

Interest by foreign companies to participate in the €1 billion PPP projects has been vague amid allegations of pre-determined winners in tenders where Albanian companies submitting unsolicited proposals have been advantaged through pre-tender bonuses.

The ambitious PPP agenda comes at a time when major energy related projects that drove Albania’s growth in the past four years are set to complete their investment stage by the end of this year and PPPs, tourism and potential oil investment by oil giant Shell are some of the few opportunities to fill the huge gap that the Trans Adriatic Pipeline and Devoll Hydropower leave.

Public debt at about 70 percent of the GDP, a high level for Albania’s stage of development, credit struggling to recover amid declining but still high level of non-performing loans are two of the key challenges facing the Albanian economy.

The Albanian government intends to bring public debt to 60 percent of the GDP by 2021, but the IMF has warned the ambitious PPP program could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP.

The Albanian economy has also been facing a series of negative effects from a sharp strengthening of the Albanian lek against Europe’s single currency during this year, with a series of implications for the country’s exporters, local producers facing tougher competition from cheaper imports and sizeable Euro-denominated savings and remittances.

 

Tirana Times
By Tirana Times August 18, 2018 11:26