TIRANA, May 22 – The International Monetary Fund has warned public private partnerships and the accumulation of new arrears pose two of the key threats to Albania’s public finances.
In a new country report published this week, the Washington-based financial institution says the government’s controversial €1 billion PPP program and newly accumulated central and local government unpaid bills of about 1.7 percent of the GDP pose key threats to the government’s public debt reduction agenda over the next four years.
“The current PPP framework is poorly designed and lacks proper recording and risk analysis of investment projects,” says the IMF report about the government’s ambitious program over the next four years comprising nine new PPP projects with an estimated investment cost of €1 billion, about 7 percent of the country’s GDP.
“To effectively manage fiscal costs and risks arising from PPPs, the Albanian ministry of finance should undertake a full-scale assessment of PPP-associated risks, their impact on the medium-term budget framework and debt sustainability,” adds the IMF.
While the PPP projects are expected to be completed in four years, the government intends to repay concessionaires over 12 years in annual instalments and road concessionaires are also expected to collect tolls to meet investment costs.
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.
Albania has been actively using PPPs to facilitate public investment in the past decade with more than 200 PPP contracts signed by mid-2017 with an estimated total investment of 505 billion lek (€3.7 billion), about 36 percent of the GDP.
In its 2018 budget report, the Albanian government expects taxpayer support to eight existing PPP contracts and three new concessions that become effective in 2018 to increase to 9.4 billion lek (€69.2 mln), yet at almost half of the 5 percent of tax income threshold.
The Arbri Road linking Albania to Macedonia as well as several internal highways, some 150 schools, hospitals and healthcare facilities are on the PPP agenda. 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.
The IMF also says the current practice of unsolicited proposals awarding bidders a 10 percent bonus ahead of tenders should be eliminated, but government authorities say they will not discontinue the practice before 2021 when the country holds its next general elections.
The International Monetary Fund has earlier warned the Albanian government’s ambitious Euro 1 billion public private partnership project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP.
The Washington-based lender of last resort predicts Albania’s public debt will not drop to 60 percent of the GDP before 2023 and remain the highest among regional EU aspirant Western Balkan economies.
The IMF says its baseline scenario expecting public debt to drop to 64 percent of the GDP by 2021, includes central and local government arrears but does not incorporate $57 million the Albanian government will have to pay to Bankers Petroleum, the country’s largest oil producer, after losing an arbitration case over a tax dispute as the payment mechanism is still to be agreed between the two parties.
“Despite the favorable environment and positive short-term outlook, risks and vulnerabilities remain, emanating from high public debt, non-performing loans in the financial sector, and weaknesses in public institutions and the judicial system,” says the IMF.
The IMF also recommends Albanian authorities should consider tax hikes and refrain from lowering tax rates or granting any new tax exemptions or preferential tax treatments that could complicate the tax system and distort the resource allocation in the economy.
The warning comes as the government has lowered the VAT turnover threshold negatively affecting small businesses, something which the IMF has criticized as non-efficient, and at a time when the government has unveiled plans to offer tax incentives for 2019 ahead of next year’s general elections.
New arrears
The IMF estimates Albania’s central and local government institutions accumulated arrears worth 26.6 billion lek (€209 mln) equal to 1.7 percent of the country’s GDP at the end of 2017.
If included in the public debt stock, the accumulated unpaid bills take Albania’s public debt to 71.8 percent of the GDP for 2017, up from a 4-year low of 70 percent of the GDP that the Albanian government reports.
Central government units owe the majority 17.4 billion lek (€ 136.5 mln) in arrears, of which VAT refund arrears mainly belonging to three major taxpayers account for 0.7 percent of GDP.
“Institutional improvements are needed to tackle arrears, including in VAT refunds and unbudgeted investment projects. As arrears represent unrecorded fiscal deficits, it is important to strengthen the registration of budget commitments and record unpaid bills,” says the IMF.
Albanian authorities say they are developing a payment schedule for the large taxpayers with an aim to repay all outstanding arrears by September 2019.
The accumulation of new arrears comes after some €500 million was cleared in 2015 in payments to private sector companies that had been contracted for public works and services under a two-year deal that is estimated to have strengthened private sector balance sheets, reduced nonperforming loans and supported domestic demand, although credit is still struggling to return to positive growth rates.
In its latest World Economic Outlook, the Washington-based lender of last resort expects the Albanian economy to register one of the region’s highest growth rates in the next six years, but growth will only linger between 3.7 percent in 2017 to about 4 percent in 2023.
The IMF’s role in Albania was downgraded to advisory in early 2017 after the conclusion of a 3-year binding deal supported by a €331 million loan also conditioning the government’s tax policies.
