Yesterday Mayor of Tirana Erion Veliaj presented his project for the construction of 17 new schools in Tirana through public–private partnership (PPP) constructions. This project is embedded within the “One Billion Euro” plan of Prime Minister Edi Rama, presented nearly two weeks ago.
During the presentation, Mayor Veliaj explained the details of this financing scheme:
We had two possibilities: to sleep or to use this creative system that allows us to inject $60 million from the private sector. In any case we will spend the same budget, but we’ll receive the material goods, the buildings, the schools, right at beginning.
We have built a financial model that won’t bear down on the finances of the municipality. We will continue to spend the same sum that we have for the construction of schools, paid through yearly installments for the construction of those new schools.
First, the PPP schemes used by Prime Minister Rama and Mayor Veliaj break with the traditional financing scheme for public infrastructure that are used around the world. As we have explained before, the financial scheme that the mayor plans to implement is very similar to the PPP schemes implemented by the Rama Government, and completely unjustifiable from an economic and financial point of view.
Mayor Veliaj didn’t explain why the municipality had chosen for a collaboration with the private sector, when the construction of public schools can be perfectly financed through public debt, which would be the most correct and transparent form of financing.
To understand why, we first need to emphasize that the interest rate paid by the state for public debt is significantly lower than the interest rate for private businesses. This is even more true today, both in Albania and around the world. More concretely, the interest rate that the Albanian government needs to pay for a 12-month government bond is 3.05%, following the most recent auction.
This rate is considerably lower than the average interest rate for 12-month credit for businesses, which according to the most recent data from the Bank of Albania is 6.8%.
When a private company is contracted for the construction of a school, which the state will pay back over a long period of time, the company will certainly have to borrow money on the private market. As a result, private investors will only be interested to participate in these PPP constructions if the payment of the government is higher than the total sum of that the company will have to pay back to the bank.
In other words, Albanian citizens will pay through these PPP constructions at least double the interest rate for exactly the same school. It is unclear why Mayor Veliaj would want to engage in such an unprofitable deal.
Moreover, the claim that these PPP constructions do not bear on the municipality’s finances is not correct. As the income of the municipality is in part the result of taxes levied on citizens living in Tirana, those citizens will eventually pay for the inflated construction prices that are the result of the indirect and expensive lending scheme proposed by Mayor Veliaj.
The long-term costs of these PPP schemes are far from clear, apart from the fact that, as we have shown multiple times, PPP schemes are rife with corruption and questionable “deals.” In the end, the citizens will pay for a government that wants to have its pie and it too: investing without putting additional debt on the budget balance.