Evolving PPP Enabling Environments in Select South-Eastern European Nations – What Does this Mean for Infrastructure Investors?

Introduction

At the end of October, I participated in the annual Istanbul PPP Center of Excellence’s Istanbul PPP Week as a co-chair and workshop presenter.  Every year, select Public-Private-Partnership (PPP) practitioners (mainly from the public sector) are invited to attend the event which focusses on a specific theme. The workshop’s theme was “Boosting PPPs Together” and had a focus on procuring resilient infrastructure through PPPs.

Workshop presenters who led the interactive sessions were invited from across the globe.  They included representatives (from both the public and private sectors) from Turkey, Australia, the USA, Estonia, Ukraine, South Africa, and the World Bank. Workshops were presented on the following topics:  The Status of PPPs in Turkey; The Importance of Preparing Projects for PPP Delivery; Third Party Opportunism and Public Contracting; Risk Management and Accountability in PPPs; Coordinating PPPs with National Development Strategies; Growing PPP pipelines for transnational PPP projects; and State Support for PPPs in Emerging Markets; 

Attendees came from Kazakhstan, Ukraine, France, Bulgaria, Bosnia-Hercegovina, Belarus, Kyrgyzstan, Ivory Coast, Brazil, South Africa, the Republic of North Macedonia, Serbia, Tunisia, Cameroon, Kosovo, Mauritania, Nigeria, Albania, and Afghanistan.

During the sessions, coffee breaks, and during a feedback workshop numerous insights were gained into the challenges facing nations in the Balkans and former Soviet Republics which wish to implement PPPs and attract investors.  These included insights on country perceptions, challenges with governance, managing corruption, attracting investment in post-conflict nations transnational projects, building institutional capacity, and launching transnational PPP projects in landlocked countries in the region.

Addressing Perceptions

Many of the attendees at the Istanbul PPP Week are highly skilled practitioners who have been the benefactors of years of PPP policy, guidance, and procurement capacity building activities sponsored by aid and development organizations such as the EBRD, the EU, the World Bank, and USAID to name a few. The most common challenge that needs to be addressed, it was felt by delegates, is the perception that the global investors have about risks their countries in South-East Europe and their ability to identify bankable projects..

Institutional changes have been underway in countries in the region to improve the planning, procurement and monitoring of PPPs.  It is however important that the unique characteristics of each of the countries of the region be acknowledged and that not all countries are lumped together.  Each country has different needs (institutionally as well as sectoral), presents different risks, and offers different opportunities to investors. It is most encouraging to note, that most countries in the region are committed to making considerable efforts to improve their PPP enabling environments which will in turn positively influence perceptions that investors may have about bankable projects.

Competing in a Competitive Regional PPP Market – Western Europe versus South Eastern Europe

The advice and recommendations given to country participants at the conference were well received.  These in turn sparked a vigorous discussion on what countries can do to woo investors.  There was particular interest in how to attract investors to a particular country in the context of geopolitical differences that exist in the region. Historical and religious differences, combined with current political alliances have created a positive investment perception in some countries, while others have not fared as well.  The investment climate in South-Eastern Europe is also quite different to Western Europe and this makes competition between these countries quite unequal.

The dilemma that is faced is competition between South-Eastern European countries for the attention of the investors for similar projects.  The issue of competition for investment in transnational linear infrastructure projects for landlocked countries was also raised. I stressed that a success strategy for individual countries was to address investor perceptions head-on, by creating enabling environments that are equal to or better than their neighbor’s.

The Need for a Favorable PPP Regulatory and Enabling Environment

Successful efforts to attract Foreign Direct Investment (FDI) are contingent upon creating national PPP regulatory and enabling environments that provide consistent and transparent approaches to PPP procurements.  It is imperative to have procurement policies that are truly transparent and which mitigate the possibility of corruption.  Unless reforms are addressed with enthusiasm and conviction by national leaders, I pointed out that serious investors would consider non-reformist countries to be too risky to invest in.  I also pointed out that, if reforms supported by mandated best practices are adopted by countries, they will be able to ensure project Value for Money (VFM) and that their projects would be sustainable (this includes commercial, financial, operational and maintenance factors). This would result in projects being more bankable as well. I and many of the delegates firmly agreed that open competition, which embraces private sector vigor in PPP planning and procurement, will attract investment to projects that are beneficial to national strategic interests and sustainable development goals (SDGs). In the case of transnational projects, it is necessary that collaborating governments also make a case that all parties support the project because it is mutually beneficial to all.

Infrastructure Investment Strategies tied to PPP Pipelines

Countries which develop strategic infrastructure investment strategies, that have well defined long-term national PPP pipelines, are more likely to woo serious investors who need time to mobilize their resources for investment opportunities.  The longer the pipeline horizon, the better perceptions are regarding government’s commitments to a cohesive and harmonized national program. [Note: It is also important that countries have strong and consistent policies on unsolicited proposals for PPPs, which if left unmanaged and uncoordinated can have negative impacts on investors’ perceptions of competitiveness and transparency in a cohesive national strategy].

What Investors are Looking For

There are a number of elements (benchmark indicators) that non-predatory investors are likely to consider when they explore infrastructure investment opportunities in relationship to country risk.  The World Bank has identified four which I have referenced below.  They include:

• PPP preparation – Are projects being prepared that are bankable and offer Value for Money for all parties?
• Procurement Approach – Are there guidelines in place for consistent, competitive and transparent procurement procedures?
• Contract Management – How well are PPP contracts managed once they have been awarded?
• Unsolicited Proposals – How are Unsolicited Proposals for PPPs procured in a way that it protects both private and public sector interests and mitigates risks?

World Bank's 2017/2018 PPP Procurement Benchmarks for Sub-Saharan Countries

With these World Bank benchmark indicators in mind I referenced the World Bank’s (2017 and 2018) PPP Procurement Benchmark Country Reports (see report references at the end of this blog as well as a detailed table on the factors considered for the benchmarks) and was able to extract country specific information which addresses where select South-Eastern European countries stand in relationship to the questions asked above.

The table (see below) provides insights into 15 South-Eastern countries (Balkans and former Soviet Republics) and how their PPP procurement enabling environments have fared between 2017 and 2018 (the 2019 report is currently being prepared). Six countries were included for the first time in the two benchmark reports.  Although it is not possible to show how first-time entry countries fared between 2017 and 2018, the scores at least provide insights into the practice of PPPs in the respective countries for investors.  Some countries have fared better than others, but it is encouraging to note that South-Eastern European countries are working hard on establishing the foundations for enabling environments that are investor friendly. The differences in benchmarking scores, as revealed by the World Bank benchmark results will most certainly serve as an impetus for lesser performers to improve their procurement practices so that they can be competitive. 

[Note: Red text in table below indicates a regression in performance between 2017 and 2018, while green indicates an improvement. Black indicates no change or a first-time score].

It is interesting to note that 5 countries do not regulate unsolicited proposals while Croatia explicitly prohibits them.  Possible risks associated with unsolicited proposals should be carefully assessed in the case of countries where there are no regulations (See table below).

The Eastern Europe, Central Asia and the Southern and Eastern Mediterranean 2017 Infrascope PPP Report

The Economist Intelligence Unit prepared a report titled - Evaluating the Environment for Public-Private Partnerships in Eastern Europe, Central Asia and the Southern and Eastern Mediterranean - The 2017 Infrascope - An Index and Study by The Economist Intelligence Unit.  In the report, key findings on the practice of PPPs in the region were highlighted that would be of interest to investors.  These report findings are relevant for the countries that are listed in the previous table and should be considered when specific PPP markets are contemplated for investment opportunities.

Select Key findings extracted from the EIU report include the following:

• Public-private partnerships (PPPs) are playing an important role in driving infrastructure development across the region. 
• Governmental co-ordination is strongly correlated with the overall PPP environment. 
• Greater transparency is needed across the PPP cycle. 
• Sustainability criteria are not sufficiently embedded in PPP frameworks. 
• Utilization of capital markets for PPPs is limited.
• Countries’ regulatory frameworks are converging with international best practice.
• Best practices for project selection and procurement are found across countries, but full transparency is not yet the norm. 
• Regulatory gaps remain in risk allocation and renegotiation procedures. 
• All countries conduct environmental impact assessments, and half have regulations requiring public consultations on PPPs.
• PPP agencies exist in most countries, providing technical support and co-ordination, and are associated with the overall quality of the enabling environment for PPPs. 
• PPP agencies face a variety of challenges, including a lack of independence, skills and clear guidelines regulating agency interactions. 
• Most countries need to improve institutional transparency. 

[Note: It must be stressed that these key findings vary across countries and the full report should also be referenced for country specific performance].

The Infrascope report also ranked seven countries according to their institutional scores and ability to implement PPPs.  These countries were scored as follows:

• Mature Score (80 – 100):  Turkey (83)
• Developed Score (60 – 79.9): Romania (68); Serbia (63); Ukraine (63)
• Emerging Score (30 – 59.9): Belarus (56); Bulgaria (51); Albania (33)
• Nascent Score (0 – 29.9): None

The Infrascope PPP Benchmarking Tool (2019)

The 2019 Infrascope Benchmarking tool, which evaluates the capacity of countries to implement sustainable and efficient PPPs in key infrastructure sectors, reviews 5 components.  They include the following:

• Enabling laws and regulations
• The institutional framework
• Operational maturity
• Investment and business climate
• Financing facilities for infrastructure projects

These components have been used to generate performance indicator scores for eight countries that were ranked in 2019 (See table below).

UNECE People First PPPs

At the Istanbul Conference widespread interest was shown in promoting “People First PPPs” that are being championed by the UNECE PPP Center of Excellence in Geneva (see link - https://www.uneceppp-icoe.org/people-first-ppps/what-are-people-first-ppps/). The interest in “People First PPPs” is being driven by governments who wish to promote PPP infrastructure and service projects that are in harmony with their Sustainable Development Goals (SDGs) and which are people and user friendly.

Conclusion

Overall, I feel that investment opportunities for PPPs that offer Value for Money (VfM); which are bankable; and which are focused on people (community needs) are emerging in select countries in South-Eastern Europe. Based on conversations with representatives from these countries, I feel that if governments carry out their intentions to improve their PPP enabling environments and institutional capacity to procure PPPs competitively and transparently, less risky investment opportunities will present themselves in 2020. There is also increasing interest in wooing green fund investors to invest in PPPs that are focused on sustainable and resilient development. 

It will also be interesting to see how members of the World Association of PPP Units and Professionals (WAPPP - https://wappp.org/) who are active in the region will advance the practice of PPPs in South-Eastern Europe in the next few years.

Sources:

Evaluating the Environment for Public-Private Partnerships in Eastern Europe, Central Asia and the Southern and Eastern Mediterranean - The 2017 Infrascope - An Index and Study by The Economist Intelligence Unit.

https://infrascope.eiu.com/wp-content/uploads/2017/05/Infrascope-2017_EECA-SEMED_Final_5-May.pdf

Procuring Infrastructure Public-Private Partnerships Report 2018 - Assessing Government Capability to Prepare, Procure, and Manage PPPs – World Bank

https://openknowledge.worldbank.org/handle/10986/29605

Benchmarking Public-Private Partnerships Procurement 2017 : Assessing Government Capability to Prepare, Procure, and Manage PPPs – World Bank

https://openknowledge.worldbank.org/handle/10986/32501

Benchmarking Metrics (extracted from the World Bank 2017 Benchmark Report – see table below)