In a research analysis [1] prepared by a group of experienced experts [2] of the International Monetary Fund (IMF), emphasis is placed on the need that the countries of the Western Balkans must increase the presence of infrastructure. Among other things, this approach is expected to play a key role in meeting the objectives of the energy transition, pooling resources (capital and expertise) and sharing risks between public and private partners.
On the other hand, the countries should narrow the differences with the level of infrastructure in the countries of the European Union. But, for them, a main challenge for increasing public investments in the region is the lack of fiscal space.
In the meantime, there remains a big dilemma for each country, choosing an appropriate financing mechanism to meet development needs without compromising debt sustainability is thus a relevant issue for the region.
The IMF experts’ analysis aims to provide an overview and guidelines for the use of PPPs in the Western Balkans.
A summary of the recommendations through their findings are below:
While there are benefits to well-designed and implemented PPPs, they also carry a potential for large fiscal risks and increased costs if not managed well. The conceptual potential benefits of PPPs have been well documented in the literature and include efficiency arguments based on the allocation of resources according to the comparative advantages of the public and private sectors. When well-designed and executed, and applied to the right projects, PPPs bring many potential benefits.
The proper use of PPPs can support infrastructure development and enhance public service delivery. Nevertheless, PPPs as investment tools also carry potential drawbacks, chiefly due to their complexity and difficulties in accommodating unforeseen deviations in the long-term — these problems are reflected in a lack of cost efficiency in real world examples.
PPPs can also create a “fiscal illusion” for governments, or a perception of expanded fiscal space, which could lead to a take-up of low-quality and fiscally costly projects that would otherwise have been rejected.
Often, the direct and contingent liabilities created by PPPs on the public sector are not adequately recognized, recorded, and/or managed, which can be a significant source of fiscal risks.
Countries with successful PPP programs typically benefit from a clear and well-designed PPP governance framework, which covers all stages of the PPP life cycle.
These include: (i) institutional control over PPPs, such as a legal framework to govern PPPs, integration with a country’s investment strategy and budget, and strong powers of the Ministry of Finance in maintaining control over the possible fiscal consequences of PPP projects; (ii) practices for public procurement and contract management, to ensure a transparent, fair, and competitive bidding process, and well-designed and flexible contracts that include provisions on renegotiation and efficient dispute resolution; and (iii) management and reporting of fiscal costs and risks throughout the life cycle of PPPs. To implement some of these changes, the legal frameworks may need to be amended.
Western Balkan countries need to address gaps in their PPP governance frameworks to fully reap the potential benefits of PPPs.
• In terms of institutional control, while PPP governance frameworks have improved over time, several shortcomings remain.
Most Western Balkan countries need to establish integrated public investment planning processes for identifying priority projects, as a basis for the creation of a pipeline of PPP projects. PPP priorities should be aligned with respective national investment strategies. Governance frameworks also need to provide the Minister of Finance with a key and active role in managing a gateway process for approving PPP projects and in assessing fiscal costs and risks of PPPs.
Finally, PPP units, especially those recently created, need to be assigned effective and clear-cut roles. Consolidating the PPP planning, promotion, and negotiation processes with in one centralized PPP unit staffed with enough qualified personnel would allow governments to focus on priority projects across multiple sectors, reduce room for potential corruption, and pool qualified resources.
Separating the gatekeeping functions by allocating them to a different entity (i.e., procurement and subsequent contract management) will also help prevent conflicts of interest.
• Similarly, on public procurement and contract management, there is room for improvement along several dimensions.
There should be tighter regulations for recourse to direct negotiations. For countries that do not prohibit unsolicited proposals, these should be prohibited as a first best solution, or the same competitive procedure should be required for them as for other proposals. Finally, PPP legislations (rather than individual contracts) should specify the circumstances for contract renegotiation and offer space for alternative dispute resolution before resorting to more formal mechanisms.
• The management and reporting of fiscal risks remain one of the weakest areas for the Western Balkan countries. Countries should establish frameworks to assess fiscal risks from PPPs, including specific systems and comprehensive databases to account for explicit or implicit liabilities from PPPs. These assessments should then be operationalized to better manage fiscal risks from PPPs. Improvements to accounting standards to better reflect PPPs and disclosure in national budgets would help give a fuller picture of the true risks of PPPs
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