PPP companies unable to pay contracts

Tirana Times
By Tirana Times June 5, 2019 11:48

PPP companies unable to pay contracts

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  • But the data show that companies do not have financial capacities and find it difficult to borrow in banks with their balances due to the high level of liabilities to their own capital. This leaves as an option for the state to emerge as a guarantor for them.

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TIRANA, June 4- The government has engaged in a number of public private partnership (PPP) projects for road construction. The government’s inability to secure immediate funding from its own funds is the main argument for this choice, as initial funding should be made by companies and then the state starts paying from the budget with installments at the moment when at least 25 percent of the works are finished.

But the data show that companies do not have financial capacities and find it difficult to borrow in banks with their balances due to the high level of liabilities to their own capital. This leaves as an option for the state to emerge as a guarantor for them, being the same as if the state is itself borrowing, which casts doubt on the real source of money to be used. This is also accounted for the inflated project costs up to 15 million euros per kilometer which is one of the most expensive in Europe. According to WorldHighways, the most expensive highway construction costs in Europe (excluding rocky terrains) are in Austria with 12.87 million euros/km, Hungary at 11.21 million euros/km, Slovakia at 9.56 million euros/km, the Czech Republic at 8.86 million euros/km, and in Germany 8.24 million/km.

In the analyzed 2017 financial balances of companies engaged in PPP contracts, such as A.N.K. (Milot-Balldren concession, 260 million euro plus VAT), Gjikuria (Orikum-Dukat, 80 million euros plus VAT), Gener 2 (Thumanë-Kashar, suspended for the moment), Gjoka Konstruction (National Road of Arbri, 312 million euros plus VAT), and Albstar (Tirana-Durrës, ongoing), is was found that companies have low incomes, liquidity and capital in relation to the projects they claim to finance, while they have higher levels of liabilities in relation to their assets (with the exception of Alb-Star), which makes it difficult to obtain loans in banks. Most of the loans these companies have are usually taken by their partners or other third non-banking parties. The optimal ratio of debt to equity is considered to be at most 1, ie the obligations to be equal to the capital. This measures the company’s sustainability, health and ability to pay off its obligations. If this ratio is growing, the company is being financed by creditors rather than by its means, which can be a dangerous trend. Lenders and investors usually prefer low debt-to-equity ratios. The bankers claim that the ratio should be lower than 1, as the company will be more protected in case of problems. Only Alb-Star has a ratio of liabilities over capital at 0.8, while the highest is at Gjikuria with 4.96, meaning (he liabilities are five times bigger than the capital.

The two largest companies with revenues of about 68 million euros each are Alb-Star and Gener 2, which are also the largest construction companies in Albania based on their income. Alb-Star has a total capital of 50 million euros and 60 million euros in short-term assets ( (cash in the bank and accounts receivable). Then comes Gener 2 with about 28 million euros capital and 38 million euros in assets. Gjoka Konstruksion follows with 36 million euros in revenues and 43 million euros short-term assets. Gjikuria and A.N.K. are smaller companies with 19.5 and 16.5 million euros respectively in revenues, and no more than 14 million euros each in short-term assets. With the exception of Gjoka Konstruksion, which has a profit rate of 16 percent, the other companies have minimum indicator at 1-4 percent.

Nevertheless, these companies still can’t afford the project thus their main hope of PPP funding is bank lending. But it is impossible that a single bank to finance a concession, as the amount of money needed is excessive. Banks, according to the law, can not grant loans to a single customer more than 20 percent of their regulatory capital (10 percent when it comes to a company related to the banking group). The largest bank in the country has a capital of about 300 million euros, so it can not lend more than 60 million euros to a single customer.

The bankers claim that the only solution for large loan loans, is through syndication loans. But these loans are little preferred by banks in Albania, because trade union projects are at high risk and have not been very successful.

Most banks though are involved more in transactions than lending. According to the Bank of Albania data, the regulatory capital of the banking system was about 1.1 billion euros at the end of 2017. If all the banks were to join, the maximum amount that could be allocated to a single customer is 220 million euros. Another problem is the borrower’s exposure. If the company has borrowed at least one of the union syndication banks, this can lead to rejection of the common credit.

Tirana Times
By Tirana Times June 5, 2019 11:48