Public-private partnerships (PPPs) have become popular in the Western Balkans as governments try to catch up with developed countries in terms of infrastructure. However, a working paper published by the International Monetary Fund (IMF) warns of the risks from poorly managed PPP projects.
The last decade saw a surge in PPP projects in the Western Balkans, where, since 2012, PPP investments in the region have reached an average of 0.5% of GDP, which is higher than the EU and global averages.
Despite the benefits of using PPPs to reduce the infrastructure gaps in countries in the region – a legacy of the wars and political turmoil of the 1990s – the paper’s authors says that such projects “carry a potential for large fiscal risks and increased costs if not managed well”.
“PPPs that are not well designed and managed could in fact increase costs and introduce significant fiscal risks, due to the complex risk allocation structure and long-term nature of the projects. Moreover, risks could also materialise in the context of shocks,” says the paper, “The Future of PPPs in the Western Balkans”.
It notes that as yet, the “full impact of shocks from the COVID-19 pandemic and war in Ukraine are still playing out, with implications for the resilience of investment projects financed by PPPs.”
The infrastructure gap
The Western Balkans have long struggled to catch up to their European Union counterparts when it comes to public infrastructure development.
Historical factors such as political conflict in the 1990s depleted the capital stock in the region, and despite ongoing efforts to develop infrastructure, there is still a significant gap between the Western Balkans and the EU-15 countries.
The lack of quality public infrastructure in the Western Balkans poses a significant obstacle to higher economic growth and faster income convergence. The 2019 Global Competitiveness Index shows that the Western Balkan countries rank an average of 78 (out of 141 countries) for infrastructure, compared to EU-15 countries, which average 17, and CESEE countries 51. Higher public infrastructure investment can increase short-term output by boosting aggregate demand and longer-term output by expanding the productive capacity of the economy, says the IMF paper.
Lack of fiscal space
One of the major challenges for increasing public investment in the Western Balkans is the lack of fiscal space. Public debt levels as a share of GDP are elevated and fiscal deficits have widened considerably. This has brought about greater economic and geopolitical uncertainty, including higher inflation expectations and financial market tightening, which inflates government borrowing costs.
Several Western Balkan countries have thus turned to PPPs as an option to close the infrastructure gap.
PPPs could also play an important role in meeting energy transition goals by pooling resources and sharing risks between the public and private partners, the report’s authors note.
PPP investment grows globally
The increased interest in PPPs is not limited to the Western Balkans. According to the data in the IMF paper, globally, there has been a resurgence of interest in PPPs, and PPP-funded capital stock quadrupled between 2001 and 2019. The median global PPP capital stock climbed from 0.6% of GDP in 2001 to 1.8% of GDP in 2011, and further to 2.5% by 2019.
In Europe, PPPs have been primarily used for infrastructure and tend to be concentrated in the transportation sector in terms of the value of projects, though there are a large number of smaller projects in healthcare and education.
Annual PPP investment as a share of GDP has fluctuated from year to year, but strong growth has been seen since 2005, especially in Albania, Bosnia & Herzegovina and Serbia, while at the same time, the number of PPP projects in countries in the region is relatively low.
“While these data might not be fully comparable, they broadly suggest that PPP projects in the Western Balkans tend to be larger in percent of GDP compared to PPP projects in the EU. This implies that the failure of an individual PPP project could create a larger burden for these countries,” the report says.
Sound PPP frameworks needed
However, the report highlights that a sound PPP framework is a critical element in ensuring the success of PPP projects. While most Western Balkan countries have introduced a legal framework for PPPs, there are still many gaps in the underlying governance structure compared to internationally established benchmarks. Improvements are needed to strengthen the institutional control over PPPs, enhance competitive procurement processes, ensure more resilient contracts, and improve the management and reporting of fiscal costs and risks, the report argues.
Some of the specific recommendations include that finance ministers “should have the authority to veto projects – throughout their lifecycle – that lack value for money, are considered unaffordable, or entail significant fiscal risks.”
The paper also argues that unsolicited proposals “should normally be avoided, or at a minimum, be subject to strict scrutiny”. This has been an issue in Albania in the past, where the IMF and other international observers have urged Tirana to exercise more caution in giving the go-ahead to unsolicited PPP projects. They represent a sizeable share of PPP contracts, especially in the energy sector, the latest report notes.