Public-Private Partnerships and the Last Wild River of Europe

Introduction

Vjosa, situated in Southern Albania, is a wild river that runs uninterrupted across the Albanian plateau from its SpringSource, the mighty Pindus Mountains. It is a river composed of 272 Km in length, the majority of it located in Albanian territory (192 km) while the remaining 80 km in Greece. Within this water stretch, a rich history can be traced back to the age of oracles and mythical heroes. The legacy and memories of Pyrrhus of Epirus, the Antigonid heirs of Alexander the Great, even Julius Ceaser himself are echoed amid the mysterious banks of this ancient river. Known in antiquity as Aoos (Αώος), it was subject of scrutiny by many renowned figures of antiquity such as Plutarch, Polybus, and Strabo. Inhabited originally by the Illyrian Thesprotian Tribe, the river carries with itself the very shadow of the glittering Greco-Roman civilization. Hence its history cannot be understated. This article will attempt to explain the legal backdrops of why this ancient river is at risk.

Prelude

Vjosa River has become subject of great scrutiny, and public debate as plans to construct two major hydropower plants in its body risks transforming, if not ending once and for all, the calm, steady rush of this river towards the Mediterranean. The Albanian government in 2005 designated this river basin (The Vjosa-Narta wetlands) as a protected area which was a follow up of Albania's ratification of the Kyoto Protocol in 2004. Kyoto Protocol is an important international treaty that commits states within the UN's framework (United Nations Framework Convention on Climate Change) to reduce greenhouse gas emissions and reduce the carbon footprint, based on scientific merit and consensus.

Albania has 44.000km2 of hydrographical territory, or 57% larger than its geographical territory, putting it on the map as a country with economic potential in hydro energy sectorial development[1]. This made the renewable energy sector a priority in terms of production, transmission, and distribution of energy. It was primarily achieved by constructing new hydropower plants or rehabilitating existing infrastructure and existing hydropower plants by using Concession/PPP models to improve the national power grid's technical and economic indicators.

To meet the needs of funding required in the public finance sector, Albania has resorted to mobilizing private capital without resorting to loans in international crediting institutions through PPPs[2]. In general terms, where Concession contracts are meet with acceptance and societal consensus, they tend to perform relatively well as policy initiatives[3]. The concession model as investment potential is endorsed by the Albanian government and will continue to be systematically used in the economic sectors including, hydro-energy, infrastructure, and tourism[4]. Governments tend to succeed or fail based on the citizens' perception of performance instead of success in particular financially driven endeavors[5] hence implying direct (political and legal when available) accountability for their actions. This accountability is reflected on many Concessionary projects through prior approval in the parliamentary process, ensuring a level of public accountability and transparency reflected in the legal specifications, procedures, and rules embedded therein.[6] The fact remains that this government policy has sparked an important debate over how well the public interests in these contracts are being protected and managed.

The issue of governance in Albania, to which the question mark of concession policy draws upon, is a crucial debate that compartmentalizes the reality of our ethical and moral societal convictions. This debate has taken on the performance of a phenomenon that is no longer influenced by the state and its mechanism as opposed to the totalitarian past where this opinion was completely instrumentalized. Today, it appears the political establishment seems to take this opinion in little to no account. As a product of society and its makeshift mechanism, public opinion reflects the dynamics with which society changes the trajectory of its development. The critical remarks within this opinion do not represent the struggle for political power but that of a political vision for society, the revival of human life, civil justice, and, undoubtedly, political morality.

Introduction to Public-Private Partnerships

There is no accepted etymological definition among academics regarding what constitutes a concession; however, we can trace its characteristics. In essence, PPPs stand as a form of collaboration between public and private sectors[7], providing a more direct impetus of governance and a more direct relationship between these sectors[8]. This impetus can be best observed mainly in the financing, constructing, designing, and managing large-scale projects that otherwise would have been strictly within the public sector domain[9]. One could best describe this relationship between actors in Concession/PPPs, as a sort of "marriage" of public procurement program about public sector purchases, with the private sector contracting[10]. As a result of this agreement, the private sector, International Monetary Fund says, enjoys infrastructural assets and services based on a previously managed platform by governments[11]. However, they (the private contractors) take the essential investment risk about management and ultimately the remuneration based on performance[12].

Hence we can identify as typical characteristics and motives for Public-Private Partnership contracts three elements: risk transfer, output specification, and life-cycle responsibility[13]. Luis Guasch, a prominent scholar in this area of law, concluded by identifying as key features permeating all forms of Public-Private Partnerships: the relationship between the concessionaire and contracting authority, the exclusivity of the concessionaire to enjoy the facilities awarded for a limited time, the obligation to carry out all necessary investments under the supervision of the public authority, and the right to be remunerated, directly from users, based on the tariffs established in the contract[14].

Kalivaç and Poçem Hydropower

The Albanian part of the river in 2020 was designated as Managed Natural Reserve hence enjoying legal protection as habitat. However, environmental groups are skeptical about the extent of protection offered by the law as eight dams and twenty-three hydropower plants are meant to be constructed in the Vjosa Basin alone. In this basin, the lion's share of the investment and risk is taken by the two Turkish Consortiums Kalivaç and Poçem Hydropower. Once the construction phase terminates, the huge dams created will create large reservoirs by flooding the surrounding area and eventually change the ancient course of the Vjosa River for good in its middle and lower course. In the process, over 140 protected species, from which 40 such species declared internationally as an endangered, risk the destruction of their habitat. Flora and Fauna are expected to transform as the ancient river's natural state radically and permanently changes. In the process, the area's economic activity will change dramatically, affecting the lives of its inhabitants and ceasing many tourist areas. Due to the public outcry on the dangers engulfing the last wild river of Europe, the Hydropower Plants' work has been suspended as the government refuses to grant them an environmental permit to the concessionaire. As the case makes its way across the Albanian judiciary, the Appeals Court upheld the First Instance Court's decision, giving the government the right.

Concretely, the Kalivaç Hydropower plant is expected to be 47 meters high, 1.700 hectares in covering a geographic area of 17 km2. The PPP contract was signed in 2018 with a 35-year term contract procured to the Turkish Consortium Ayen Enerji Anonim Sirketi, with a total investment cost at over 136 million Euros. Poçem Hydropower plant, on the other hand, is expected to be 30 meters high, 2000 hectares covering a geographic area of 20km2. The contract was signed in 2016 with a 35-year term procured to the Turkish Consortium Kovlu Energji with a total investment cost at over 114 Million Euros.

Value for Money Analysis (VfM) and the quest for economic profitability

There is an ongoing debate as to the economic profitability of these Concessions in the Vjosa basin. Howwever the question arises, how do we determine the profitability of a Public-Private Partnership? In this case, we use what we call a Value for Money Analysis (VfM). The viability of concessions as governmental tools in furthering public agendas depends on foreseeable benefit and efficient risk transfer between public authority and private party, creating a nexus between efficiency and creativity[15]. Since risk analysis processes in long term contracts imply inevitable consequences for the public, hence a forecasting analysis on the effects of a particular concession PPP through a Value for Money Assessment (VfM) helps the government decide whether the PPP/Concession option has more significant financial benefit compared to other traditional procurement options[16].

Value for Money as absolute measurable numerical value is expressed as the net present value (NPV) of the project procured through traditional forms (LCCPSC) and net present value (NPV) of Public-Private Partnership method (LCCPPP) through the formulas[17]:

VFM = LCCpsc-LCCppp

LCC hence represents the totality of the service quality at the lowest whole life cycle cost[19]. The cyclical behavior measurement concerning VfM analysis is the object of such formulas. Public Sector Comparator (PSC) serves as a benchmarking mechanism between calculable costs under public procurement and PPP. The illustrated graph shows what approach to Value for Money makes these formulas applicable:

Fig. Value for Money[20]

PPP project calculation is a complex task involving numerous commercial and financial Assessments. Quantitative Assessment is a crucial concept used to assess three public procurement costs, notably transferable risks, competitive neutrality, and retained risks[21]. Qualitative Assessment is also used to empirically quantify socio-economic benefits and bidder qualification or the differences in deliverable services[22]. However, a central feature of VfM analysis is the "standard investment appraisal technique," which is essentially a comparison of the discounted cost forms of different available options[23]. This centrality on affordability criteria, academics have described it, as an "a double-edged sword" that revolves around the fact that affordability is bent on higher price for projects and can only work if they offer innovative solutions that would impress the client (the government)[24]. The layer of subjectivity added to the process can be ambiguous but is a necessary predicament. Albania has made it obligatory for public authorities who carry out concession PPP-based projects to conduct a VfM analysis[25]. However, this analysis is not carried systematically before PPPs' approval, and there is no regular reporting on PPPs and the technical and capacity building skills to analyze the design and Assessment of potential PPP projects that need further development[26]. VfM, however, if implemented rigorously, is a tool that can provide predicament on issues of quality planning, process delivery, risk allocation of projects, and the way contracts are framed.[27]

The Canadian Institute for Sustainable Development conducted a 2020 VfM study on the Vjosa where it calculated and compared the financial costs and benefits of building these two HPPs. According to them, the Poçemi HPP will have 233 million euros in cost more than benefits, while the Kalivaç HPP will have 321 million euros in cost. From this total, the damage to agriculture alone from the two HPPs is estimated at 174 million euros. Hence the VfM analysis indicates a negative return on behalf of the public authority in the long run.

The real problem lies in the consequences these contracts bring. In any PPP agreement, the time duration is one of the most critical indicators in determining success and profit in a Concession/PPP project[28]. It is generally understood that in essence, the concession period duration ought to give sufficient time for the concessionaire to achieve investment returns. At the same time, simultaneously not prolong it beyond reasonable time frames as that would inadvertently affect the general public and its benefit[29]. Hence Albanian law has established the 35-year term as the maximum period for the concession/PPP duration[30]. What is essential is that the law establishes a minimum requirement towards contracting authority who must guarantee in its feasibility studies that the contract's duration timeline should not restrict competition to protect the concessionaire's interests and take into account the cost-risk analysis assumed by the latter throughout the contract[31]. Accordingly, as any contract is not to be presumed as static but as a legal instrument capable of adapting the parties' needs, any contractual terms' modification is proportionately reflected through an extensive duration. Hence the future is grim; a 35-year contract, flawed as it is, could easily become 50.

However, where do we stand as of now? Anyone with a basic understanding of the rule of law comprehends that the contracts are binding documents with the law's full power behind it. Any breach and that would make the other party liable in court, in this case, before international arbitration courts. Recently Albania suffered a massive blow as the New York Arbitration Court, in a similar situation, known as the Bechetti Case, was made liable to over 100 million euros in contractual damage. In PPPs, the risk for changes in policies is always taken by the contracting authority i.e. the state. Presumably, the same fate occurs to Poçem and Kalivaç Hydropower PPPs, and the state budget risks paying an indemnity for many generations to come. Hence the solution that ought to be sought will likely reflect a momentous exasperation of a continuously mismanaged and poorly conducted legal policy.

[1] European Commission Albania 2019 Report [2] ibid [3] Pauline Vaillancourt Rosenau, 'The Strengths And Weaknesses Of Public-Private Policy Partnerships: Editor's Introduction' (1999) 43 American Behavioral Scientist. [4] The Political Program of the Albanian Government, < https://www.kryeministria.al/wp-content/uploads/2017/11/PROGRAMI.pdf> accessed 15 August 2020 [5] M Chang, B Frankel and C Yong, 'Public-Private Partnerships: Lessons Learned' [2005] Prague: PPP Centrum Publication. [6] Geert Dewulf and others, Strategic Issues In Public-Private Partnerships (2nd edn, Wiley-Blackwell John Wiley & Sons, Ltd Publication 2012). [7] Marcus Ahadzi and Graeme Bowles, 'Public–Private Partnerships And Contract Negotiations: An Empirical Study' (2004) 22 Construction Management and Economics. [8] Jane Broadbent and Richard Laughlin, 'Control and Legitimation in Government Accountability Processes: The Private Finance Initiative in the UK' (2003) 14 Critical Perspectives on Accounting. [9] H.K Ho Paul, 'Development of Public Private-Partnerships (PPPs) In China' (2006) 15 Surveyors Times. [10] G. Allen, 'The Private Finance Initiative (PFI)' (2003) Research Paper House of Commons Library. [11] 'Public-Private Partnership Government Guarantees and Fiscal Risk' (www.imf.org, 2006) <https://www.imf.org/en/Publications/IMF-Special-Issues/Issues/2016/12/31/Public-Private-Partnerships-GovernmentGuarantees-and-Fiscal-Risk-18587> accessed 15 May 2020. [12] 'Public Private Partnerships Reference Guide' (www.pppknowledgelab.org) <https://pppknowledgelab.org/guide/sections/1> accessed 15 May 2020. [13] Mirjam Bult-Spiering and Geert Dewulf, Strategic Issues In Public-Private Partnerships: An International Prespective (Blackwell Publishing 2006). [14] J. Luis Guasch, Granting And Renegotiating Infrastructure Concessions Doing It Right (World Bank 2004). [15] J. Broadbent and R. Laughlin , ‘The Private Finance Initiative: Clarification of Future Research Agenda’ [2003] 15(2) Financial Accountability and Management 95-114 [16] J. Shaul, ‘A Crtitical Financial Analysis of the Private Finance Initiative: Selecting a financial method or allocating economic wealth’ [2005] 16(4) Critical Perspective Accounting 441-471 [17] Zhen Hu Shu Chen Xueqing Zhang , (2014),"Value for money and its influential factors: an empirical study of PPP projects in Japan", Built Environment Project and Asset Management, Vol. 4 Iss 2 pp. 166 - 179 [18] Second formulation has been used in many countries including Germany and UK as tools for doing the calculation of public secotr performance on services or works linked via Public Private Partnership. [19] Highways Agency (1996), Value for Money Manual, Highways Agency, London [20] Darrin Grimsey and Mervyn K. Lewis, 'Are Public Private Partnerships value for money? Evaluating alternative approaches and comparing academic and practitioner views' [2005] 29 Accounting Forum 345-378 [21] ibid [22] ibid [23] P.Edwards and J. Shaul, ‘Partnerships: for better, for worse? [2003] 16(3) Accounting Auditing & Accountability Journal 397-421 [24] ibid [25] Council of Ministers Decision No.575 date 10.07.2013, “On the approval of the rules for the evaluation and provision of Concession/Public Private Partnership”, article 7 para.1, “Economic and financial analysis is part of the feasibility study and its objective is to determine the “value for money” of the project.” [26]European Commission Albania 2019 Report [27] Wei Peng and others, ‘Achieving Value for Money: An Analytical Review of Studies on Public Private Partnerships’ [2014] Construction Research Congress 95-114 [28] Ma Guofeng, Du Qingjuan and Kedi Wang, 'A Concession Period And Price Determination Model For PPP Projects: Based On Real Options And Risk Allocation' (2018) 10 Sustainability. [29] ibid [30] Article 30 para 3 of the Albanian Law No. 125/2013 “On Concessions and PPP” (amended) [31] Article 30 para 2 of the Albanian Law No. 125/2013 “On Concessions and PPP” (amended)