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Eastern Europe struggles to make a go of PPPs

19 Jul 13 Public-private partnerships are proving to be pretty on paper but poor in practice for governments in Eastern Europe and the Commonwealth of Independent States (CIS), according to a new study.

PPPs require strong national institutions and well-crafted regulations, says the study, but many countries in the region struggle to implement best practices.

The analysis of infrastructure PPPs commissioned by the European Bank for Reconstruction and Development (EBRD) found that even countries at the forefront still lack the experience, capacity and skills to partner effectively with businesses.

Governments in Eastern Europe and the CIS are turning to private firms to help fund essential infrastructure, but the new regional ranking produced by the Economist Intelligence Unit found that most of the countries lacked suitable frameworks to make a success.

Countries in the region considered to be the most experienced in completing projects 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.

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“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.

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, says the report.

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.

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