TIRANA, May 29- The European Commission published today a progress report on Albania where it expressed positive remarks for the overall performance of the economy. However, the report has not shown the same attitude on the practices pursued for public-private partnership (PPP) projects that have recently expanded considerably. The report says that more and more support to these projects poses fiscal risk. Furthermore, the report states that most PPP contracts have been selected on the basis of unsolicited bids, which reduces competition in procurement.
The European Commission’s position on PPPs is in line with international institutions, notably the International Monetary Fund (IMF), which has warned of fiscal risks coming from focusing on PPP projects and the fact that the bulk of them are hidden debt. The EU Commission’s report assesses the performance of the economy, while recommending in particular fiscal consolidation and the fight against informality. It states that “Albania has made some progress and has been moderately preparing for the development and functioning of the economic market.”
To summarize, the report stated that the economic growth continued; unemployment declined, although it remains high; exports grew steadily; the current account deficit shrank; the high public debt ratio against GDP is steadily declining; stability of the financial sector improved; and banks continued to cut most problematic loans. Related to banking however, lending to the private corporate sector remained in place and widespread use of foreign currency in the domestic market prevailed, but several steps have been taken to develop the non-banking financial sector. The justice reform progressed well but some flaws in law enforcement continued to hinder business and curb investment. The business climate has improved only in some sectors and while formal employment increased, informality is estimated to remain high. Lastly, the energy market marked a progress in its liberalization, although with some delays.
Regarding the case of PPPs, the report states that public funding is not enough to overcome the huge infrastructure gap, so the government is seeking to mobilize private capital, mainly through PPPs. Public investment increased by an average of 6.2 percent per annum in the years 2013-2018 and averaged around 18 percent of total public spending. The increasing support on PPPs generates potential liabilities and consequently fiscal risks. The newly created fiscal risk unit does not have sufficient capacity to monitor these risks. The report recommends that infrastructure funding can be made more efficient by utilizing the potential for synergy in both planning and execution of both PPPs and conventional public investment.
State involvement and public subsidies remain generally low in the Albanian economy, but increased support on PPPs raises the potential of the country’s influence on certain markets. The government has increasingly engaged in PPP projects, particularly for energy and transport, where there are price or volume agreements for goods and services. According to the law the government payments for these contracts are limited to 5 percent of the previous year’s tax revenues, and for 2018 this limit is said to have been respected. Most of the existing PPP contracts have been selected on the basis of unsolicited proposals, which reduce competition in procurement. The report assesses the revision of legislation for limiting unsolicited projects. Although procurement legislation has recently improved, public procurement enforcement has remained deficient and continues to be perceived as non-transparent.
Here are some of the general recommendations the report made to Albania in order to improve the functioning of the market economy: to continue the fiscal consolidation and develop a plan to mobilize revenue and address informality; to ensure monitoring and fiscal control over the obligations deriving from PPPs and arrears; to improve access to finance by strengthening collateral enforcement and increasing financial inclusion; to improve the labor market by addressing quality and policy targeting, including further training of active force.
Supported by the overvaluation of the ALL, the public debt dropped to 67.3 percent of the GDP in 2018, remaining high. This high debt level can become unstable in the event of a shock in the economy. The government secured a 500 million euros eurobond with a seven-year term in October 2018, which helped to reduce the annual funding need and lowered the pressure to government’s financing from the domestic market.
