The Paradox of Banks Backing PPPs

After the enthusiastic comments of the Rama government about the large number of investments that are expected in the context of the famous “One Billion Euro Plan,” the opposition has raised strong objections.

Opposition leader Basha clearly spoke out against the project, calling it an attempt to launder dirty money, and invited the American DEA and FBI to investigate the state budget as a giant money laundering operation. Also the LSI declared the the public–private partnerships that are the cornerstone of the plan are an attempt to hide state debt and allowed for massive money laundering.

To calm down the spirits, Prime Minister Edi Rama used the meeting of the Albanian Society of Banks to offer ironic comments on the accusations of the opposition and asked those who were present whether they were “under the control of crime,” which he followed up with the careless comment that his aim was to confirm that in Albania it was impossible to launder money.

The day after it was the turn of the governor of the Bank of Albania, Gent Sejko, to offer his support to the government, inviting banks to invite the public–private partnerships offered by the government to the Albanian market. He justified this euphoric invitation by referring to the healthy condition of the Albanian banking system, declaring that the Bank of Albania would to everything necessary to support the operation to get the PPPs financed.

And that’s precisely where the problem lies.

For many years now, the Albanian bank are under the control of the Bank of Albania, which doesn’t authorize the financing that is not supported by the necessary financial guarantees or assets, as well as a business plan that guarantees to payment of the debt by the borrower.

Moreover, there needs to be a credible balance between the borrower’s financial balance over the last three years, and no banking oversight institutions could approve a project of the size of the Rruga e Arbrit, won by a developer with a weak financial capacity in comparison with the investment, unsustained by a turnover that could guarantee any repayment of the loan to the bank.

This means that this type of investment can only end up with international financial institutions, which are not normal banks and which generally use their own funds and are not dependent on account holders. This type of financial institution, apart from being much larger than Albanian banks, is not subjected to the regular banking oversight regulations, and moreover is able to confront in a legal manner the financial risk of such large projects.

The logic is different with PPP projects such as the construction of schools  by the Municipality of Tirana, where the income to pay back the investment is guaranteed through a contract with the municipality, which will pay rent over a long period of time allowing the developer to pay back his bank loan.

But the latest recommendations of the IMF insist that PPPs need to include a transfer of risk from the public to the private company. The PPPs for schools do not include such risk transfer and are therefore bad deals for the government, which might as well have borrowed money on the international market against much lower interest rates. They should therefore, under the current law, not be considered as PPPs.

On the other hand, if there is a true transfer of risk, then Albanian banks will be unable to finance the PPP because there are no Albanian development and constructions companies that have the assets or liquidity to back up such projects.

Thus, by expressing his support for Albanian banks financing the government’s “One Billion Euro Plan,” Bank of Albanian governor Gent Sejko is not contributing to the financial stability of the country (the constitutional mission of his bank), but only the short-term stability of the government. Short-term, because even the Bank of Albania’s assurances won’t serve the goverment well in the middle-long term, when the high debt levels will threaten both the financial and political stability of the country.