Albania ranks third in the world, after Brazil and Peru, for fiscal risks from PPP concession contracts

Albania ranks third in the world after Brazil and Peru for fiscal risks, which stem from the termination of concession contracts with Public-Private Partnerships (PPP), analyzes a recent World Bank study "Mitigating risks from accounts outside of fiscal indicators".

The bank points out that of the countries under study, the fiscal risks from the early termination of active PPPs are the highest in Brazil, Peru and Albania with reference to 2020.

Fiscal risks from the PPP portfolio are estimated at 0.87-2.78 percent of GDP in Brazil, 0.44-1.19 percent in Peru, and 0.44-1.17 percent in Albania (see bottom chart).

The World Bank advises that these figures represent the amount, as a percentage of 2020 GDP, that governments should set aside today as an emergency fund to cover the maximum expected loss over the entire contract period.

Premature terminations of PPPs are rarer than renegotiations, but their fiscal costs tend to be greater. In Mexico, the cancellation of toll roads created a significant cost to the treasury and contributed to the increase in debt by 1.6 percent of GDP in 1997.

That's how the government in India paid $2.4 billion for the canceled Dabhol power project in 2001.

The World Bank assessed the risk of PPP concession contracts through three scenarios, low, medium and high.

In the low scenario, the government covers 79.3 percent of the PPP debt in case of early termination. In this case, the government does not cover the loss of private capital, but only its own capital in the PPP.

In the middle scenario, the government covers all the debt and private equity, thus guaranteeing the total financing of the project. The value is equal to the amount of investment accumulated in PPP.

In the high-risk scenario, the government compensates the private sector for 150 percent of the capital it invested in the project, in line with contract terms used in some countries, such as India.

The World Bank suggests that Albania should maintain a contingency in the budget worth 1.1 of GDP to cover the problems that may come from the premature termination of concessionary contracts with PPP.

The contingency fund must be reviewed every year also depending on the end of the contracts./ Monitor