Pretty on paper, poor in practice: Infrastructure PPPs a struggle for governments in Eastern Europe and the CIS

By EBRD  Press Office
@ebrd

Governments in Eastern Europe and the CIS (Commonwealth of Independent States) are turning to private firms to help fund essential infrastructure, but even countries at the forefront still lack the experience, capacity and skills to partner effectively with businesses, according to a new regional ranking produced by The Economist Intelligence Unit and commissioned by the European Bank for Reconstruction and Development (EBRD). Public-private partnerships (PPP) joint deals between governments and private companies to build, own and operate infrastructure—require strong national institutions and well-crafted regulations, but many countries in the region struggle to implement best practices, says the study. Countries in the region considered to be the most experienced in completing projects, on the other hand, often suffer from poorer regulatory, legal and institutional frameworks, giving rise to loosely organised project planning structures which create unnecessary inefficiencies and risks. Even so, a number of countries performed well in the study: Croatia, Lithuania and Slovenia were top rated among the 25 countries evaluated in the index, scoring between 60 and 65 points out of a possible 100.

The 2012 Infrascope for Eastern Europe and the CIS is the first regional edition of an index that evaluates the region’s infrastructure development environment. It focuses specifically on the readiness of countries to implement PPPs in the water, sanitation, transport and energy sectors.

“This regional edition of the Infrascope is unique in that countries with high levels of PPP project experience do not hold top spots, as they would in other regions” said Vanesa Sanchez, research manager for The Economist Intelligence Unit. ”Regulatory and institutional reforms have lagged behind, allowing smaller countries with relatively less project experience but stronger regulatory and institutional frameworks to occupy the top ranks."

Outright divestiture or simple management contracts are the easiest ways to involve the private sector in an infrastructure project. Concession contracts are a more complex but often-attractive alternative; they keep asset ownership in the hands of the state, place project investment and service provision in the hands of a private firm, and give the private operator the right to all future cash flows for a significant period of time. As a result, stakes are high for both private and public partners.

The Infrascope is based on an evaluation of six broad factors: 1) a country’s legal and regulatory framework for concession projects; 2) the capacity of institutions that prepare, award and oversee projects; 3) the government’s ability to enforce laws and regulations for concessions, as well as the success rate of past projects; 4) the business, political and social environment for investment, 5) the financial facilities for funding infrastructure, and 6) ability to implement PPPs at a sub-national level.

“The ways to develop PPP-related institutions could be different depending on specific circumstances by country” said Erik Berglöf, the Chief Economist at the European Bank for Reconstruction and Development. “and it is useful to identify specific strengths and weaknesses for every country to make further improvements”.

Key findings

  • No country achieved a perfect score of 100 for its PPP investment environment. Croatia finished first with a score of 63.5, owing to a reasonably well-developed legal, regulatory and institutional framework. While the country has had extensive historical experience implementing varied forms of private participation in infrastructure, it is still relatively new at implementing the types of PPPs examined in this study.

  • Most countries in the region scored between 25 and 55 points. This suggests that the vast majority of countries must substantially improve their regulatory and legal structures, as well as implementation capacity, if they hope to attract, and successfully engage with, private-sector infrastructure investors.

  • Belarus finished last, about fifteen points behind Mongolia and the Kyrgyz Republic, the closest other countries near the bottom of the table. Belarus’ lack of true PPP project experience, combined with an extremely cumbersome legal framework at national and local levels, set it in the bottom fourth of all index categories.

  • Over the past ten years Turkey has been the clear regional leader in project implementation, followed by Bulgaria, Russia and Slovenia. Yet these countries still struggle to implement effective regulatory reforms for PPPs despite their ability to sign deals and carry out projects.

  • Other countries have struggled with changing political attitudes towards PPP projects—specifically, Slovakia and Hungary come to mind.

  • While many countries in the study have made attempts to reform laws and regulations for PPPs, many of these same countries struggle to apply these effectively in practice, and are in the early stages of PPP expertise and capacity development.
  • Although almost half the countries in the study have a functioning local public debt market, deep and liquid long-term debt markets in both public and private instruments are generally absent. Moreover, capital markets are still incipient and lack the liquidity, sophistication and longer-term financing instruments that enable PPPs.

Economist Intelligence Unit 2012 EECIS Infrascope rankings