PUBLIC-PRIVATE PARTNERSHIP DEVELOPMENT STRATEGY FOR

Transcription

1 Republika e Kosovës Republika Kosova - Republic of Kosovo Qeveria - Vlada - Government Ministria e Financave Ministarstvo za Finansije Ministry of Finance PUBLIC-PRIVATE PARTNERSHIP DEVELOPMENT STRATEGY FOR THE REPUBLIC OF KOSOVO ( ) Developed with the assistance of the United States Agency for International Development

2 TABLE OF CONTENTS I. Executive Summary... 1 II. Background... 3 II.1. Public Private Partnerships in Kosovo... 4 Kosovo PPP Legislation... 7 Kosovo PPP Institutions... 8 Kosovo PPP Review and Approval Process Kosovo Donor Assistance to PPP Department Kosovo PPP Practice III. Methodology IV. Key PPP Development Issues in Kosovo VI.1. Stakeholder Initial Consultations VI.2. SWOT Analysis Summary VI.3. Summary of Key Development Needs VI.4. Detailed Description of Key Development Needs Key Need 1 Increase the link of the PPP process to government policy and expenditure planning mechanisms Key Need 2 Building sustainable capacity to support PPP transaction development Key Need 3 Development of Private Finance Initiative (PFI) capacity by expanding awareness of PFI s as a PPP Option Key Need 4 Maintaining a publicly available pipeline of upcoming and potential PPP transactions Key Need 5 Developing a systematic approach for oversight of PPP contract management V. Strategic Objectives and Strategy Actions Strategic Objective 1 Build PPP planning capacity by linking it with Medium Term Expenditure and Medium Term Policy Priority Frameworks Strategic Objective 2 Build sustainable project development and implementation capacity in Kosovo by planning and establishing a Project Development Technical Assistance Facility Strategic Objective 3 Develop PFIs by expanding awareness of PFI s as PPP Option Strategic Objective 4 Increase private sector outreach by developing and publishing a Pipeline of upcoming PPP transactions Strategic Objective 5 Strengthen PPP contract management by creating a riskbased system of oversight VI. Conclusion VII. Next Steps Action Plan Year i

3 ANNEX I TO PPP DEVELOPMENT STRATEGY FOR THE REPUBLIC OF KOSOVO ( ) PPPs in Europe and the Region ANNEX II TO PPP DEVELOPMENT STRATEGY FOR THE REPUBLIC OF KOSOVO ( ) PPP TAF OPTIONS LIST OF ABBREVIATIONS AND ACRONYMS CEI EBRD EDVAP EPEC CPPPD GFSI IPAK MTEF MTPP PPP TAF PFI PIP PPP PPPC USAID Acronym Definition Croatia s Center for Monitoring Business Activities in the Energy Sector and Investments European Bank for Reconstruction and Development Kosovo Economic Development Vision Action Plan European PPP Expertise Center Central Public Private Partnership Department USAID-Funded Growth and Fiscal Stability Initiative Investment Promotion Agency of Kosovo Kosovo Medium Term Expenditure Framework Kosovo Medium Term Policy Priorities Framework PPP Technical Assistance Fund Private Finance Initiative Kosovo s Public Investment Program Public-Private Partnership Public Private Partnership Committee United States Agency for International Development ii

4 I. EXECUTIVE SUMMARY Kosovo s Public-Private Partnership (PPP) system is continuously evolving and developing. The key bodies guiding this development process are the Public-Private Partnership Committee (PPP Committee), an Inter-ministerial standing body chaired by the Minister of Finance with authority over PPP transactions and PPP policy in Kosovo, and the Central PPP Department (PPP Department) organized under the Ministry of Finance. Under this guidance, Kosovo is building its capacity to reach out to the private sector to provide needed infrastructure and public services through PPP. Kosovo s experience in PPPs is still modest to date, with a limited number of transactions having closed and several more in planning. Kosovo has a clear Policy Directive on PPP, in place since The legal/regulatory environment for Kosovo s PPP system is modern and in compliance with EU directives, and, with the PPP Committee (PPPC) and Central PPP Department (CPPPD), its institutional environment is well established. With fiscal pressures growing and infrastructure needs expanding, there is an ever increasing interest within Public Authorities to consider PPP alternatives for infrastructure and public service delivery. Consequently, the PPPC and CPPPD consider it vital to have a PPP Development Strategy in place establishing a planned development path for PPPs in Kosovo in the medium term. This document comprises the PPP Development Strategy, addressing the period from 2014 to It is developed based on review of the legislative and regulatory framework and consultation with key stakeholders, governmental and nongovernmental, including representatives of donor organizations. It encompasses a process of examination and identification of key development issues and, from these identified key development issues to determine appropriate strategic objectives that can be achievable and obtain results within the specified time frame and in light of available resources. The strategic objectives resulting from this process are the need to: 1) Link PPP planning with Kosovo s developing budget and policy priorities planning framework; 2) Build sustainable project development and implementation capacity in Kosovo by planning and establishing a Project Development Facility; 3) Develop Private Finance Initiative (PFI) capacity by expanding awareness of PFI s as a PPP Option; 4) Increase private sector outreach by developing and publishing a Pipeline of planned PPP transactions; and 1

5 5) Strengthen PPP contract management by creating a risk-based system of oversight. The next phase of this Strategy will be implementation and performance monitoring. It is envisioned that this Strategy will be revisited periodically, at a minimum annually, to review for performance and needed updates and changes. 2

6 II. BACKGROUND In today s challenging global economy, a country s ability to deliver needed infrastructure and public services has become ever more critical to its economic growth and stature in the investment community. Where there are insufficient resources and investment to meet core infrastructure needs, this infrastructure gap can present a serious challenge to the country s outlook for economic growth, human capital development, and social cohesion. States in Europe are increasingly looking to Public-Private Partnerships as an alternative to deliver needed infrastructure and public services. As an infrastructure and public service delivery model, PPPs are designed so that both the public sector and the private sector capitalize on their respective advantages relative to the other in the development of infrastructure and provision of public services. By allowing each sector to do what it has a comparative advantage to do, public services and infrastructure can be provided more efficiently and costeffectively. The growth of PPPs over the last several decades, and particularly the last ten years, has been motivated by two key drivers the need for enhanced quality of service and the limited availability of public funds relative to infrastructure and public service needs and expectations. More recently, PPPs have been developed and used in part due to financial shortages in the public sector, and they have demonstrated the ability to harness additional financial resources and risk management efficiencies inherent in the private sector. PPPs are often used in infrastructure sectors such as transport, public health, education, agriculture and national security, and provide a wide range of public services, like telecommunication, water plants, financial support, innovative financing, general public services, educations and research. Public authorities are increasingly turning to PPPs to deliver efficient and costeffective infrastructures and services. PPPs can help public sector agencies shorten delivery times, share risks, achieve better value for money and increase innovation in their infrastructures and provisioning of services. (Annex I to this Strategy provides a brief look at PPPs in Europe and the region). Such partnerships allow private sector organizations to apply their skills and experience to infrastructure development and operation and mobilize finances for long-term infrastructure investments. As a new state with the youngest population in Europe and an economy still transitioning from its central-planning past, Kosovo has an urgent need for increased investment in infrastructure and public services. In the recent past Kosovo had experienced consistent revenue growth, from 2007 to 2009 growing at an average of 14% per annum. However, in 2012 revenues appear to have decreased by 80 3

7 million, placing significant additional fiscal pressure on government budget entities, central and municipal, to prioritize current expenditure needs and defer lower priority projects to future budget periods. To address this growing gap, Kosovo looks to develop alternative sources of investment, including PPPs, to enhance its capacity to deliver needed infrastructure and public services. Having begun formalizing and regulating PPPs recently in the last decade, Kosovo is entering a phase of enhanced PPP growth potential that poses greater and more complex challenges to its PPP institutional capacity. These challenges have led the two key institutions overseeing PPPs, the PPP Committee (an inter-ministerial oversight body) and the PPP Department of the Ministry of Finance to take a systematic approach in identifying key upcoming need areas and strategic actions to address those needs. This Strategy embodies that approach and response. II.1. Public Private Partnerships in Kosovo In considering the opportunities that PPPs offer in addressing the infrastructure gap, the Government also recognizes that PPPs are complex, long-term arrangements that bring significant responsibilities in their identification, development and implementation. Long-term transactions create long-term obligations for Public Authorities. Indeed, significant political, legal, regulatory and institutional hurdles must be overcome in order to move from a traditional, public sector model of public service delivery towards one in which public and private sectors work together effectively. Not all potential infrastructure and public service projects are suitable for PPP. Therefore, PPP must provide equivalent or better value for money than a traditional public sector approach. Value for money does not equate to the cheapest bid or lowest price for an asset, rather it means diligent and careful consideration must be taken in opting for the best long-term solution for service delivery. Value for money requires a life-cycle view be taken, with a robust analysis of the total long-term costs of infrastructure and service delivery and concomitant public benefits. In addition, once designed and awarded, PPP transactions require significant resources and expertise to close and monitor performance throughout the life of the agreement. Whereas traditional procurement of infrastructure may cover a few years of construction monitoring to turnkey delivery, PPPs may cover decades. In recognition of the significant responsibilities that PPPs bring with them, Kosovo has established an elaborate framework of legislation, regulation, policies and institutions to guide the identification, development and implementation of PPPs. 4

8 Kosovo PPP Policy By Policy Directive dated July 4, 2008, Kosovo established four policy objectives for PPP: 1) The Government of Kosovo hereby declares its unambiguous support for the implementation of public-private-partnerships as a means for stimulating investment in public infrastructure and providing public services; 2) The Government of Kosovo and its institutions shall encourage and support the participation of the private sector in the provision of public infrastructure and services at both the central government and municipal level, wherever the utilization of PPP will create better value for money; 3) In order to ensure that projects are sustainable and successful, while simultaneously minimizing public sector risks and liabilities, the Government of Kosovo is committed to implementing PPP in a systematic and orderly manner, in accordance with international best practices; and 4) The Government of Kosovo is resolutely committed to implementing PPP through competitive, fair, and transparent procedures and shall insist -without exception- that all parties to a PPP comply faithfully with their concomitant rights and obligations. These policy objectives established and provided the policy position of the Republic of Kosovo on PPPs, allowing for specialized institutions to prepare and approve the PPP legislation and regulatory framework, with clear allocation of responsibilities and procedures. Following the establishment of these policies, the PPP Inter-Ministerial Committee and the PPP Unit were created and assigned responsibilities to develop regulations and tools to implement PPP projects, including standard documents, guidelines, raising awareness and capacities, the PPP project implementation environment has been developed within international best practices. The policy first objective addresses the need to invest in Kosovo s infrastructure and provide better quality public services. Kosovo recognizes that PPPs provide a means of engaging the private sector and assigning risks to stimulate investment and optimize certain capital investments and public services. PPP concessions can tap into potential commercial revenue streams that provide an acceptable market rate of return over time to compensate for heavy, up-front capital expenditures, relieving the investment pressure on the government s budget and debt. PFI s can provide similar relief in return for the public authority s obligation to make availability payments over the expected life of the infrastructure agreement. Both require appropriate assignment of risks among the public and private sector players to optimize design, construction, regulation, service delivery, and operation and maintenance. Approach to First Policy Objective: Addressed by providing the support for the PPP environment, through the PPPC and CPPPD. 5

9 The second policy objective addresses when PPP s should be used: that they should be used when they would provide value for money. Discussed above, value for money as a concept correlates to an option analysis: PPPs should be used only when it is expected to provide better results from a life-cycle perspective than other delivery alternatives e.g., public delivery, privatization, hybrid. In other words, PPPs are not to be used simply to circumvent current budget restrictions. The partnership must be demonstrably the optimal delivery option. Approach to Second Policy Objective: Codified through the PPP Law, Article 23, and into regulation through PPP Directive 1, Article 9. The value for money analysis is a key aspect of the feasibility analysis that is required in the preparation and evaluation of every PPP transaction. The third policy objective addresses the how issue in implementing PPPs at a macro-level for the country. PPPs must be implemented in a systematic and orderly way, and in accordance with international best practices. This objective suggests the need for significant advance planning in implementing for PPPs. Rather than provide for PPPs to be developed ad hoc, Kosovo s PPP system should provide for a significant planning exercise as part of the process for defining PPP design, type, and transaction sequencing. It should involve consideration of how the infrastructure or service delivery fit into the country s economic development and its budget planning policies as a whole. In other words, PPPs should not just be implemented where possible, but rather where they serve the country s policies. As a practical matter, if this planning process is carried out systematically and publicly, it provides the public sector with the opportunity to critically assess how it fits in with the country s economic development policies and its budget plans. It also provides private sector the pool of potential partners and transaction support advisors with advance notice to prepare and plan resources for upcoming transactions in the future. This advance notice will be critical to the country s credibility in infrastructure transactions and to the planning capacities of potential partners. Approach to Third Policy Objective: Addressed through the procedures prescribed within the PPP law and its directives. The fourth policy objective addresses the how on a transactional level. Transactions should be implemented competitively, fairly, and transparently and should ensure compliance with the rights and obligations created under the project. Kosovo s legislation is designed to implement this policy objective, setting out detailed competitive tender procedures for selecting private partners, a centralized processfdea for review and approval of transactions and monitoring transaction closure, and a process for managing implementation of PPP agreements over the life of the agreement. Approach to Fourth Policy Objective: Addressed by applying clear competitive and transparent procedures applicable by the PPP law and Public Procurement law. 6

10 Kosovo PPP Legislation Although the process to award concessions was governed by the 2005 Law on Procedure to Award Concessions NO. 02/L-44 (2005 Law), the first standalone legislation in Kosovo specifically addressed to PPP was the Law on Public-Private- Partnerships and Concessions in Infrastructure and the Procedure for Their Award, enacted in Abrogating the 2005 Law, the 2009 PPP law established key institutions, the PPP Inter-ministerial Committee (PPP-ISC), headed by the Minister of Finance and Economy, to provide centralized leadership in PPP and exercise transaction review authority, and a PPP Central Unit organized under the Ministry of Economy and Finance to provide support to the PPP-ISC and contracting authorities and play a screening role in potential transactions. In 2011, the new PPP Law was passed, in order to provide a clearer regulatory framework, clarify the procedures for implementing Public-Private-Partnerships and comply with EU directives and UNCITRAL Model Provisions. The new PPP Law converted the PPP-ISC and PPP Unit into today s PPP Committee and the Central PPP Department within the newly restructured Ministry of Finance. As a result, the PPP Committee s approves all PPP projects prior to tendering and signing. As defined by the new PPP Law, PPP means any contractual or institutional cooperation between one or more Public Authorities and one or more Private Partners whereby the Private Partner: - provides a public service or a public infrastructure on behalf of the Public Authority; - assumes financial, technical, construction and operational risks, including demand and/or availability risks, in connection with the provision of the public service or the public infrastructure; - receives a benefit for providing the public service or the public infrastructure in form of: o payment made by the public authority from the budget of such public authority; o charges or fees to be collected by the private partner from users or customers of a public service or a public infrastructure provided to them; or o a combination of such payment and such charges or fees. 7

11 Kosovo PPP Institutions The public institutions involved in PPPs in Kosovo are the Public-Private Partnership Committee, the Central Public-Private Partnership Department and Public Authorities Figure 1: PPP Organizational Chart PPP Committee Central PPP Department Public Authority Public Authority Public Authority Private Partner Private Partner Private Partner Private Partner Private Partner PPP Committee Under the PPP Law, the PPP Committee is the lead body charged with oversight and coordination of Kosovo s PPP system and policy. The Committee is a standing body of five senior government officials (ministers and deputy prime ministers). Article 16 of the PPP Law provides that the Minister of Finance serves as the chairperson, and the remaining four members are appointed by government decision. Under current government decision of January 11, 2012, the other four members of the PPP Committee are: Prime Minister s representative, Member Minister of Infrastructure, Member Minister of Trade and Industry, Member Minister of Economic Development, Member While providing leadership in the development of PPP policies, projects and programs, the PPPC has the following rights and responsibilities: Development and management of the national PPP program; 8

12 Development of general PPP policies; Issuance of implementing regulations and clarifications regarding rules, procedures and standards for PPP projects and project documents, which shall be binding on all Public Authorities; Issuance of decisions to Public Authorities for the purpose of ensuring the proper implementation of laws and regulations related to a PPP Project; Review and approval or disapproval of Project proposals on the basis of value-for-money and other considerations in the public interest; Identification of a Contracting Authority for specific Projects; Acting as a Contracting Authority for specific Projects; Approval or disapproval Economic Supports for Projects; Oversight and review of performance compliance and project execution; Review and approval of proposed amendments and modifications to Agreements on the basis of value-for-money and similar considerations; Maintenance of a national PPP registry; Making decisions relating to the use of funds deriving from PPP appropriations; and Making other relevant decisions relating to PPP. In addition, where necessary the PPP Committee may act as the contracting authority itself in a transaction, though this is usually performed by the relevant budget entity responsible for the transaction subject matter area. PPP Department The PPP Department is organized under the Ministry of Finance and provides support for policy implementation. Its mission is the promotion and support for implementation of public private partnerships in many economic sectors with the aim of providing more efficient infrastructure and public services at lower cost. The PPP Department reports and is accountable to the PPP Committee and is responsible for: 1) Providing technical assistance, advice and support to Public Authorities and the PPP Committee on all matters relating to PPP: 2) Making recommendations regarding the PPP legal, regulatory, institutional and policy framework; 3) Developing and promulgating procedures and standards based on best international practices; 9

13 4) Reviewing and issuing opinions regarding the viability of proposed projects and make recommendations to the PPP Committee and Public Authorities; 5) Disseminating information regarding the PPP program and individual projects; 6) Outreaching to stakeholders and public education campaigns on PPP; 7) Coordinating activities relating to PPP in all economic and social sectors. The PPP Department is also permitted to: 1) Require that Public Authorities provide details of projects being proposed, being prepared for tender, given for tender or for negotiations or that are in the process of implementation; 2) Issue standards and recommended PPP practices and procedures; 3) Prepare and distribute information and guidance on PPP; 4) Submit proposals for the strengthening of the legislative, regulatory, institutional and policy framework for PPP to the PPP Committee; 5) Coordinate technical assistance on PPP and specific PPP projects provided to contracting authorities; 6) Scrutinize project-proposals, tenders and contracts and systems of contract management; 7) Monitor and issuing opinions regarding the level of compliance of the Contracting Authority and the Private Partner with the terms of an Agreement; 8) Issue technical opinions to the PPP Committee and Contracting Authorities; 9) Regularly evaluate the performance and impact of the PPP system; 10) Determine whether a PPP project justifies the expenditure of additional Ministry of Finance or other resources outside of the Contracting Authority; 11) Participate in the development, implementation and management of any fund or other similar instrument established to provide funding of capacity related to the development and implementation of a PPP project. Public Authorities Public Authorities that may engage in PPP transactions under the PPP Law are: 1) One or more ministries or agencies of the Government of Republic of Kosovo; 2) One or more municipalities; 3) One or more publicly-owned enterprises or other bodies governed by public law; and 4) An association of such authorities or bodies. Kosovo PPP Review and Approval Process The PPP Law and PPPC Directives establish a layered review process for identifying, developing, approving, and conducting PPP transactions. 10

14 Figure 2: Kosovo PPP Process Kosovo PPP Process PHASE 1: PPP Pre - feasibility Select candidate project prepare Pre-feasibility Review of Pre-feasibility PHASE 2: PPP Feasibility study, draft contract and tender documents PHASE 3: Implementing PPP tender Submit PPP Qual.&Proposal Conduct feasibility study Prepare draft contract Prepare draft tender documents Implement tender Review documentation Approval/Disapproval PHASE 4: PPP contract management and performance monitoring Deliver Services Negotiate & Sign PPP Contract Manage PPP Contract & Monitor PPP Contract review Contract Approval/Disapproval Kosovo Donor Assistance to PPP Department USAID has provided significant assistance in the development of Kosovo s PPP system and provides continued support through its Growth and Fiscal Stability Initiative (GFSI) program. GFSI provides support to the PPP Department through technical advisory assistance to develop transactions by working with public authorities in assessing pre-feasibility and transaction viability and also providing guidance and direct one-on-one training in transaction development. GFSI also provides capacity growth support to the Department, by helping in the development of general PPP training and outreach for delivery to public authorities. With GFSI support, the PPP Department is in the process of finalizing Guidelines on PPPs in Kosovo setting out recommended procedures and tasks for the four phases of PPP transactions as reflected above: 1) Pre-feasibility Analysis; 2) Development and Review of Transaction Documents; 3) Conducting the Tender; and 4) Managing the PPP Contract. The Guidelines provide needed process detail on identifying, developing, conducting, and managing transactions. Based on the draft Guidelines, and with support from USAID GFSI, in 2012 the PPP Department also developed a multiple day training to deliver to public authorities on the PPP process. The training is a two-day training that is adaptable for condensed delivery to specific audiences based on need. It is generally a beginning level course. The PPP Department provides delivery of this training to various interested participants from among public authorities approximately once per month. The PPP 11

15 Department is planning the development of more specific, deep-dive courses specific to PPP project phases. Kosovo PPP Practice While Kosovo is still in the early phase of developing and implementing PPP transactions, it has made large strides toward building that capacity, enacting and refining standalone legislation regulating PPPs and creating dedicated central bodies for PPP policy and transaction guidance the PPPC and the Central PPP Department. These developments have served as significant steps in building PPP capacity in Kosovo. As a result, since passage of the first PPP law in 2009, Kosovo has been able to conduct and close two PPP transactions: one complex transaction for design, build, finance, operate and transfer of the Pristina International Airport Adem Jashari and one for provision of urban bus service in Peja Municipality. A PPP for provision of waste collection services in Suhareka Municipality has been awarded and is pending contracting. The following lists existing PPPs and potential upcoming PPPs for consideration: Table 1a: National Level PPP Transactions and Potential Upcoming Projects Transaction Type Size Status Pristina Airport Concession / 20 Years Over 100 Million Implementation/Constru ction Rt 7 Motorway Service Areas Concession / 20 years Over 12 Million Approved by PPP Committee Route 7 O&M Concession Prospective; Under Planning 12

16 Table 1b: Local Level PPP Transactions and Potential Upcoming Projects Transaction Type Size Status Peja Urban Bus Concession /10 years 2-5 Million Implementation / Operation Suhareka Management Waste Concession / 10 years 2-5 Million Award stage Pristina Parking Underground Gjilan School Support Facility Concession / 30 years 5-10 Million Submitted to CPPP for approval Concession / 15 years Under 1 Million Approved by CPPP Gjilan Urban Bus Concession / 10 years Feasibility Study Pristina Urban Bus Concession / 10 years Million Feasibility Study Viti Green Market Concession / 30 years Under 1 Million Feasibility Study Lipjan City Square Concession / 5 years 5-10 Million Revision of documents Prizren Center Commercial Concession Prospective; Under Planning Prizren Cemetery Concession Prospective; Under Planning 13

17 III. METHODOLOGY Why the need for a strategy? Kosovo s PPP system has grown steadily over the last five years with substantial technical support and guidance from the USAID and development of a highly professional team at the Central PPP Department. Public revenues will not be able to cover Kosovo s continuing infrastructure and growing public service needs. As a result, Kosovo will continue to rely on growth and expansion of its PPP system to help address these needs. The PPP Department has initiated this strategy exercise with the aim to define a systematic, objective-oriented approach for the coming phases of PPP development in Kosovo over the next three years. The strategy process offers the PPP Department and PPP Committee an opportunity to step back from day to day needs and operations and to evaluate what larger issues they face, what objectives should be pursued, and what path should be taken to achieve those objectives. By examining the current system, identifying key issues, and developing strategic objectives to address these issues, the PPP Department expects to focus its energy and resources to maximize PPP contribution to Kosovo s infrastructure and public service needs. The Strategy development process consists of review of legal and regulatory framework and consultation of key stakeholders to identify and discuss issues and explore potential actions to address those issues optimally. The consultation encompassed planned meetings with key government and non-government stakeholders in PPP to identify needs and opportunities for PPP development in Kosovo. As a result of these discussions, the PPP Department conducted a SWOT analysis for PPP development in Kosovo, identified of key needs affecting PPP development, and developed strategic objectives in response to these needs. The follow up to this Strategy will be implementation and periodic performance monitoring consistent with the requirements of the Strategy. Upon review, the Strategy s key needs, strategic objectives should be evaluated by the PPP Department to determine whether they remain current or relevant and whether additional or new needs or challenges have arisen that require revision of the Strategy. 14

18 IV. KEY PPP DEVELOPMENT ISSUES IN KOSOVO VI.1. Stakeholder Initial Consultations At this phase of strategic planning, the PPP Department has consulted with a core group of key stakeholders at the government, private, and donor levels to identify and refine current need areas for PPP development. The Department has consulted with the following: GFSI PPP Support Team Ministry of Finance o Budget Department (Central and Municipal) o Macroeconomic Unit o PIP Representatives of: Ministry of Infrastructure o Transportation Department o Investment Promotion Agency of Kosovo (IPAK) Kosovo Association of Municipalities European Bank for Reconstruction and Development (EBRD) West Balkans Infrastructure Fund (WBIF) Regional Development Agency-Central/Pristina UNDP IFC World Bank AmCham Kosovo Chamber of Commerce The PPP Department also discussed PPP strategy-related issues with the Ministry of Local Government Administration and with representatives of the Association of Banks. The strategy development process also included review of key laws and regulations affecting PPPs in Kosovo: PPP Specific Legislation and regulations: 15

19 Law on Public Private Partnerships o Directive 1 Procedures for Review and Approval of PPP Projects o Directive 2 Project Management Teams o Directive 3 Review and Approval of Municipal PPPs o Directive 4 Publication of PPP Notices Law on Public Financial Management and Accountability Law on Public Procurement Other Legislation Directly Affecting PPPs: Law on Local Self Government Law on Local Government Finance Law on Public Debt Law on Publicly Owned Enterprises Law on Mines and Minerals Policy Framework Documents and Sector Strategies EDVAP MTEF Kosovo Strategy on Multi-Modal Transportation ( ) Kosovo Energy Strategy ( ) Kosovo Heating Strategy ) Findings from consultation meetings During these consultation discussions a relatively short list of key development issues were repeatedly raised. All stakeholders consulted welcomed a strategic approach being adopted by the PPP Department. The issues raised most consistently and concretely during these consultations were: Low level of PPP planning at budget entity level /ad hoc nature of PPP transactions/lack of resource planning to support transaction design; Lack of capacity at budget entity level to handle PPP transaction identification and design Low level of comprehension of PPP opportunities at public authority level Low level of awareness within private sector of PPP opportunities 16

20 Concern by banks of creditworthiness of municipalities Absence of PFIs / Likely lack of PFI capacity at municipal level Donor leverage opportunity: In PPPs, EBRD will create regional Infrastructure Development Fund later this year to address transactions in road maintenance, municipal energy efficiency, and waste management. EBRD assistance will include taking minority interests and working with local banks to reduce finance risk by agreeing in advance on guaranty amount. 17

21 VI.2. SWOT Analysis Summary Based on key stakeholder consultations, the PPP Department conducted a SWOT analysis on PPP development in Kosovo, summarized as follows: Strengths Modern legislation reasonably consistent with EU and EBRD requirements Membership in EPEC, provides access to best practices Centralized PPP Department provides focal point of PPP awareness, promotion, guidance, and transaction screening Experienced experts at Central PPP Department Successful transactions closed and underway at central and municipal levels Several upcoming transactions on the way (MSA, Pristina Bus, Pristina Parking, Gjilan Bus) Opportunities Offering efficient public infrastructure and services Reduction of the Infrastructure Gap Restructuring of the economy via Private Sector Participation in Public Infrastructure and Services Possibility to attract foreign investment in PPP transactions Successful transactions bring more investors Possibility of strengthening local SMEs through PPPs Donor assistance on strategic advisory will likely continue in the short and possibly medium term Creation of Project Development Facility (PDF) with donor and government support Development of pipeline of transactions over medium and long term Expansion of PPP practice to encourage PFI development opportunities Weaknesses Relatively high transaction costs to develop and implement PPPs inhibits sustainable PPP development Low capacity at contracting authority level to develop PPP transactions without strategic advisory assistance provided by donors, CPPPD or contracted advisory services. Lack of adequate expenditure planning for transaction advisory services Low awareness/understanding of PPP within Public Authorities and private sector No publicly available pipeline of upcoming PPP transactions to allow potential investors to plan Oversight process for contract management can be further developed to handle anticipated increase in number of PPP transactions No clear connection between PPP planning process and MTPP and MTEF Threats Global economic malaise impacts Kosovo as in attracting Foreign Direct Investment Failure of successful high-profile project could chill private investment Donor technical support for strategic advisory in transaction formation likely to terminate in medium term Transactions not adequately linked with policy and expenditure framework may result in unplanned obligations 18

22 VI.3. Summary of Key Development Needs In response to the first round of consultations and SWOT analysis, the Central PPP Department agreed on a list of Key needs that should be addressed within the Strategy. These needs are summarized as follows: Key Need 1 Key Need 2 Key Need 3 Key Need 4 Key Need 5 Increase the link of the PPP process to government policy and expenditure planning mechanisms Building sustainable capacity to support PPP transaction development Development of Private Finance Initiative (PFI) capacity by expanding awareness of PFI s as a PPP Option; Maintaining a publicly available pipeline of upcoming and potential PPP transactions Developing a systematic approach for oversight of PPP contract management VI.4. Detailed Description of Key Development Needs The following provides a detailed description of key development needs identified by the PPP Department at this phase of the Strategy process. Key Need 1 Increase the link of the PPP process to government policy and expenditure planning mechanisms Governmental priority and budgeting planning processes offer an opportunity to identify and prioritize potential PPP and PFI transactions early. A system that establishes clear priorities of government and requires advanced planning on infrastructure transactions can also gather and provide information useful to assessing whether such projects may be viable through PPP. Such a system requires an enhanced degree of guidance at the central government level (PPP Department) and greater awareness of PPP at the budget entity level in forecasting capital projects. Kosovo s policy and budget planning framework currently consists of several tools: 1) the Medium Term Expenditure Framework, which combines revenue and economic forecasts with strategic priorities of budget entities to develop projected budget needs in the medium term (3 years); 2) the Economic Development Vision Action Plan, which clarifies government priorities at the activity level; 3) the Public Investment Program, which seeks information about planned investments in the medium term; and 4) the Medium Term 19

23 Policy Priorities Framework, which Kosovo is presently developing to establish policy priorities at the budget entity level through an annual review and reporting process linked to the MTEF. MTEF. Kosovo has established a process of budgeting and forecasting through an annually refreshed Medium Term Expenditure Framework (MTEF), compiled and developed by the Ministry of Finance by mandate of the Law on Public Financial Management and Accountability (03/L-048). The annual MTEF statement is a key document linking the Government's strategic priorities and annual budget for planning and resource allocation and for three year planning of the Kosovo budget. The MTEF exercise establishes general and budget entity-specific policy priorities for a 3-year period going forward and compares them with the macroeconomic fiscal and revenue forecasts for the period to establish a plan for aggregate budget expenditures projections by budget entity and by entity-level priority for the period. The most recently completed MTEF ( ), for the period , established four pillars to policy priories: Growth and sustainable economic development; Good Governance and strengthening the rule of law; Human resource development; Social welfare growth for all citizens. In line with these policy pillars the MTEF commits that that government will continue to finance the following sectors within the budget framework for the period: public infrastructure, energy, agriculture, reform of public order and safety sector, more efficient use of financial resources in education and public administration reform, health and social welfare. The MTEF sets a metric of capital expenditures not to exceed 40% of allocations. At the budget entity level the MTEF sets out entity strategic priorities and projects allocations for each priority. Descriptions among entities vary significantly in specificity with some budget entities establishing concrete capital projects along with specific projected amounts, while others establish budgeted amounts as an aggregate among several potential projects. MTPP. Kosovo is developing and implementing a tool to establish a policy priority planning framework that is linked to the MTEF, but which expands consideration of policies to those beyond priority policies covered by budget funding. Managed by Office of Strategic Planning of the Prime Ministers Office, the Medium Term Policy Priorities (MTPP) framework, establishes mediumterm policies and sets government priorities for the medium term period (three years going forward). In addition to policies that are to be supported from Kosovo s budget, it includes policies to be funded from other sources, including donors, other development partners and alternative mechanisms such as PPP. 20

24 The process solicits from budget entities an explanation of their respective policy priorities in the context of their expenditure constraints set out in the MTEF and the anticipated source of funding, budget or alternative sources. The MTTP seeks to establish an annual process to clarify and systematize policy priorities at a nationwide level. The MTPP framework is in early development, with the period being the first period of coverage. As this priority elaboration process continues to be developed it will be providing valuable information for awareness of PPPs as an investment alternative and serve as a robust platform for advance planning of PPPs. EDVAP. Another policy document at the central government level is the Economic Development Vision Action Plan (EDVAP). The most current EDVAP sets high level objectives of a 7-8% real economic growth rate in the medium term combined with reduction of unemployment by 8-10% per annum. EDVAP establishes strategic policy priorities five sector pillars that appear to share some conceptual overlap with the overall policy pillars expressed in the MTEF: Maintaining Macro-Fiscal Sustainability; Investments, Investment Environment, and Private Sector Support; Development of Public Infrastructure; Revitalization of Agriculture sector; Human Capital Development. Where the MTEF is organized by budget entity, EDVAP is organized by its policy pillars for economic development. Under each of these pillars, EDVAP sets out specific objectives and, under each objective, specific activities, time frames, indicators, and projected budget implications. The EDVAP is not a budget tool, but rather a framework document reflecting policy priorities of the government in economic development over the medium term through For infrastructure project planning, the most current EDVAP and MTEF documents contain similar, though not identical, information. At present, the EDVAP is broader in scope at the activity level, as it explicitly includes transaction information beyond budget implications, such as transactions funded or partially by donors and PPP transactions. PIP. Significant information about Kosovo s planned capital projects is contained in Kosovo s Public Investment Program (PIP), a software application and government process where budget entities at the central and municipal levels are required to input capital project information into planning software that covers a period of three years forward. PIP capital projects go through 21

25 layers of review at the sub budget entity level, budget entity, Ministry of Finance, Government, and Assembly levels. The resulting list will be projects that have funding appropriated through the Kosovo Budget. As such the Kosovo PIP contains a significant number of infrastructure projects, many of them schools, hospitals, and government buildings, particularly at the local level, that might otherwise be considered for potential PPPs. Moreover, the PIP exercise at the budget entity level provides a natural entry point for consideration of PPPs as an option for infrastructure projects. While the EDVAP identifies a few potential PPP transactions (PPPs for municipal bus stations; possible PPP to revitalize Brezovica Ski Resort), this is not the result of a systematic process to identify, prioritize, and filter potential transactions; rather it reflects an observation that budget funds do not exist for particular transactions, and therefore these transactions might be appropriate for concession PPP. MTEF itself is not designed to identify specific PPPs but rather project expenditure needs in the medium term. Neither of these critical planning processes solicits information systematically to permit an exhaustive list of planned potential PPP transactions within the context of Kosovo s strategic priorities. In practice, PIP appears to be used as a budget advocacy tool and as such does not provide sufficient information to determine viability or appropriateness of PPP for any particular project. Thus, as it is now, MTPP, MTEF, EDVAP, and the PIP system do not incorporate detail sufficient to allow for effective PPP early identification and planning. As will be set out below in discussion of the strategic objectives, below, if PPP planning is linked to these planning processes, it would allow budget entities and the PPP Department to better identify and plan for appropriations needed to develop these transactions. Conclusion for Key Need 1: The Strategy should consider a strategic objective to link PPP planning with Kosovo s process of establishing medium term priority policies and the MTEF process of planning expenditures. Key Need 2 Building sustainable capacity to support PPP transaction development In several of the PPP transactions listed above significant strategic advisory assistance has been, and continues to be, provided by Central PPP department and USAID through its GFSI program. CPPPD provides PPP assistance to all Public Authorities that are interested and request assistance at different phases beginning from project identification and initiation to preparation of tender documents. 22

26 USAID s assistance is designed to build capacity within Kosovo s Public Authorities to develop PPP transactions through experience. Strategic advisory consists of support to prospective contracting authorities, be they ministries or municipalities, to evaluate the suitability and potential viability of a proposed transaction for PPP and pre-feasibility screening. In cases that are progressing forward it includes support for developing feasibility studies and legal due diligence, drafting of tender documents and PPP agreements, and support during the tender process. Generally, the expertise to identify, screen and develop PPP transactions is underdeveloped within both central and municipal budget entities. Availability of this expertise at the PPP Department greatly enhances the quality of proposed PPP transactions that go forward and likelihood of their success. For more complex transactions, strategic advisory assistance also includes support to develop terms of reference and quality assurance management for the contracting authority to engage outside transaction advisors. Transaction advisors are typically engaged to handle at a significantly more technical or industry-specific level the legal, financial, technical, and marketing aspects of the transaction. Support to design the engagement of an outside Transaction Advisor was provided by USAID through the PPP Department (then the PPP Unit) in the Pristina Airport transaction. CPPPD has prepared a Terms of Reference template, to be used in conjunction with necessary forms approved by Public Procurement Regulatory Commission, based on Procurement Law, for contracting of a transaction advisor to perform services of preparing a complete feasibility study and transaction advisory. As donor support for strategic advisory services is graduated, which it eventually will be, Kosovo is likely to face a challenge in providing strategic advisory support to prospective contracting authorities. More complex transactions require significant funding to engage outside transaction advisors at market rates, which funding is not often effectively planned in advance to be available in the Public Authorities respective budgets.. In order to assure that appropriate transaction support is to be provided for PPP project implementation, the Government of Kosovo needs to examine means to provide funding for providing transaction advisory services. Transaction advisory services command significant expenditures as well since they involve engaging professional firms that are highly qualified in the sector or subsector. This expenditure requires advance planning for budget appropriations to be available in time for a transaction. As revenue flatten and potentially decrease, the availability of budget funds to engage transaction advisors for complex transactions will decrease. It will increasingly become necessary to develop self-sustainable capacity to continue providing these critical support functions. 23

27 Therefore, these pressures in Kosovo evidence an upcoming technical gap the ability for the PPP department to sustainably provide transaction advisory services to public authorities in identifying and initially evaluating transactions; and a present financial gap the availability of funds for public authorities to engage outside transaction advisors to assist in the design and marketing of complex PPP projects. Conclusion for Key Need 2: The Strategy should consider a strategic objective addressing the need for sustainable provision of strategic advisory and transaction advisory support for PPP transaction development as donor support winds down. Key Need 3 Development of Private Finance Initiative (PFI) capacity by expanding awareness of PFI s as a PPP Option So far, the PPP transactions planned and concluded in Kosovo consist only of concession-based PPP transactions, transactions providing for recovery of upfront infrastructure investment through user fees or commercial revenues (or both) available from the operation and maintenance of the infrastructure project. PFI transactions or Public Contracts, following the rubric of the PPP Law where the Public Authority itself makes availability payments over time to the private partner, have so far not been planned or developed. Instead, for capital projects for which no, or insufficient, commercial revenue stream may be available, Kosovo budget entities instead carry out projects on a procurement basis, engaging in transactions as budget funds to cover capital expenditure become available through budget appropriations rather than through PPP. This approach limits infrastructure investment to immediately available funds. The pressure to deliver needed public infrastructure has also led to several Public Authorities in exploring and pursing PPP options to build public facilities and combining them with commercial revenue generating opportunities, such as developing public buildings and providing space for commercial activities and revenue streams to offset the investment cost and provide an adequate return to the private partner. With greater fiscal planning, however, it may become feasible to examine possibilities for such transactions to be conducted as PFIs. In many other countries PFIs provide significant benefits in infrastructure development. Croatia, for example, has a well-developed practice of implementing PFI s to contribute responsibly to infrastructure development needs in key social need sectors, such as schools and hospitals as well as for design and development of public buildings. 24

28 Greater attention to PFI opportunities would allow many of needed projects to be designed and built (or renovated) in return for payments to be made by the Public Authorities over the life of the asset. As with concession-type PPPs, PFI s will require a showing of value for money that the provision of a public infrastructure or services results in a higher economic, social and financial benefit, including cost, price, quality, quantity, risk transfer, compared to the provision of such public infrastructure or services in any other form. PFI commitments will also enhance the need for financial planning controls, as PFIs represent Public Authority commitments. For the Public Authority to make PFI engagements, the planning process for these transactions will be vital to manage their impact on the budget. Conclusion for Key Need 3: The Strategy should consider a strategic objective to stimulate and support greater awareness and consideration of PFI-type PPP transactions. Key Need 4 Maintaining a publicly available pipeline of upcoming and potential PPP transactions With the development of PPP transactions over the last several decades, many countries have begun developing, maintaining, and publishing a pipeline of PPP transactions. This pipeline is generally a list of planned upcoming PPP transactions, usually by sector, that provides information about what kind of transactions are being planned by the Public Authorities and what relative time frames such transaction are expected to take place. Why is a PPP pipeline desirable? Generating this information and making it publicly available serves several valuable purposes. First, developing and maintaining a PPP pipeline requires the government to go through a process of screening and identifying potential transactions and evaluating them from a sector-level and country level perspective, providing a quality review process prior to committing substantial resources to transactions, as opposed to an ad hoc approach where each transaction is considered in isolation. A pipeline approach allows identification and evaluation of issues that may arise where multiple transactions are being prepared at the same time that risk competing for limited available resources, giving opportunity to minimize the risk of exceeding local transaction capacity or proceeding with transactions that are not consistent with sector or country-level priorities. Developing a pipeline for PPPs also helps generate demand as part of the government s engagement with the private sector for investments. A well maintained PPP pipeline provides potential investor partners in the private sector with advance notice of planned transactions. This allows investors themselves to plan for an upcoming potential transaction, for example, by organizing and planning resources to be available for a specific investment 25

29 timeframe and locating potential partners for more complex transactions. It is a standard practice in many developed and developing countries. Finally, producing and maintaining a PPP pipeline helps generate needed credibility for developing and transitional economy like Kosovo, where the depth of successful transaction experience may be relatively light compared to more experienced markets competing for investment. A well maintained and polished PPP pipeline signifies that the government is taking diligent action to plan transactions, improving the likelihood of successful transactions and improving competition among potential private partners. Conclusion for Key Need 4: The Strategy should consider a strategic objective to develop, maintain, and publish a robust pipeline of upcoming PPP transactions. Key Need 5 Developing a systematic approach for oversight of PPP contract management PPP transactions cover a substantial period of time, generally matching the expected useful lifespan of subject infrastructure, often decades. Once a transaction is planned, designed, tendered, contracted and financially closed, the contracting authority undertakes to manage the agreement s implementation, first through construction phase, and then through the phase of service or operations and maintenance for the life of the agreement. There are two process levels of the management process: direct contract management at the contract authority level i.e., between the contract authority and the private partner and oversight of that contract management at the PPP Department level. Direct contract management is highly specific to the respective contract, based on its output requirements, time, cost, quantity, and quality. The contract manager also will need to deal with countless issues that will inevitably arise over the life of performance of the agreement that were not, or could not have been, foreseen and addressed in the agreement. The oversight process is designed to place performance expectations and reporting requirements over the contract manager to ensure that contracts are managed in a planned and standardized way. Oversight of this contract management process is a fundamental part of healthy PPP systems. Disparate contracting authorities at the central and municipal levels of government, if left without oversight, will invariably develop disparate practices and levels of quality in contract management. Since PPPs involve public assets and public services, and often involve exercise of monopolistic activities and access to public resources, effective management of these agreements will remain a paramount public interest for the life of the agreement. While technical aspects of contract performance may be managed 26

30 more easily by a line ministry, department, or municipality, public fiscal and user interests tend to prove more challenging. The Law on PPP, in Article , requires the establishment of a professionally qualified contract management team to monitor and enforce strict compliance by the Private Partner with the terms of the Agreement. The PPP Committee has established rules of contract management in its Administrative Directive 2. Under PPP Directive 2, the contracting authority is required by the PPP Law to appoint a Project Management Team, which remains in existence for the life of the agreement and reports to the contracting authority leadership and to the PPP Committee through the PPP Department. The PPP Department is required to establish a terms of reference for the project management team. The Directive provides for the Project Management Team at the contract authority level to report on a regular basis, or as may be requested to the public authority and to the [PPP Committee] through the [PPP Department]. However, there are no standardized requirements, processes, guidelines or templates for this reporting. Contract management is also addressed as a chapter in the PPP Department s upcoming PPP Guidelines, yet the Guidelines do not provide detail on the role and function of oversight as a standardized process. At present, with a small number of completed transactions, the oversight burden on the Central PPP Department is not substantial and can generally be handled individually. However, as we accumulate more long term PPP transactions over time, contract management and oversight requirements will become more complex, and the burden of overseeing many contracting authorities on multiple PPPs will become increasingly challenging for the CPPPD. In anticipation of this eventuality, the CPPPD should consider developing a standardized process based on risk-management principles for periodic contract authority reporting to the PPP Department. Risk management principles would suggest a standardized process for capture and reporting of basic performance information to the oversight authority and for archiving or analysis by the oversight authority of information reported depending on the type of information reported. Low attention would be paid to basic performance data and the information would be archived and readily retrievable for analysis. However, reporting requirements would also include key performance metrics and potential exceptions that indicate changes in quality of performance or trend toward potential future performance problems. For these key performance metrics and exceptions, the oversight authority will pay heightened attention. These include specific issues, such as repeated failure to meet required standards or key performance indicators, increased likelihood of default, or prospect of having to renegotiate. With a risk-based system of oversight, the PPP Department would receive and archive data on a standardized and regular basis and only need to pay greater attention where 27

31 need areas arise. Where greater attention is warranted, the oversight authority then has the option to engage with the contract management body to develop intervention strategies appropriate to the situation presented. By planning and establishing an oversight system based on risk-management principles, the PPP Department would be creating an effective system of monitoring capable of handling a greater load of transactions, generating intervention only where needed to address potential and actual issues as they arise. Subsection Conclusion: The Strategy should consider a strategic objective that formalizes a contract management monitoring process based on risk management principles 28

32 V. STRATEGIC OBJECTIVES AND STRATEGY ACTIONS Starting from a solid foundation in its initial phase of PPP growth, Kosovo needs to continue building sustainable capacity to develop and support PPP transactions. As discussed above, at present Kosovo has developed a strong initial practice of developing and implementing PPPs, but relies significantly on donor technical assistance that will eventually be completed. Through review of the legal framework impacting PPPs, current policy documents, and interviews with stakeholders, this strategy effort has identified several issues that should be addressed at this stage of development. This strategy correspondingly suggests several objectives that Kosovo may pursue in order to address these identified issue areas. Figure 3: Key Needs and Strategic Objectives KEY NEEDS 1 Increase the link of the PPP process to government policy and expenditure planning mechanisms 2 Building sustainable capacity to support PPP transaction development 3 Development of Private Finance Initiative (PFI) capacity by expanding awareness of PFI s as a PPP Option 4 Maintaining a publicly available pipeline of upcoming and potential PPP transactions 5 Developing a systematic approach for oversight of PPP contract management STRATEGIC OBJECTIVES Build PPP planning capacity by linking it with Medium Term Expenditure and Medium Term Policy Priority Frameworks Build sustainable project development and implementation capacity in Kosovo by planning and establishing a Project Development Facility Develop PFI capacity by expanding awareness of PFI s as PPP Option Increase private sector outreach by developing and publishing a Pipeline of planned PPP transactions Strengthen PPP contract management by creating a risk-based system of oversight The following describes these Strategic Objectives and suggests how they may be achieved. Strategic Objective 1 Build PPP planning capacity by linking it with Medium Term Expenditure and Medium Term Policy Priority Frameworks. Kosovo is continually developing its planning process each year, with the MTEF looking three years into the future for anticipated expenditure needs planning and the more recently initiated MTPP process working to set up a similar 29

33 procedure to centralize policy priority planning. As these processes develop, Kosovo gains an increasingly clear picture of its policy priority areas upcoming in the medium term, allowing it to allocate available and expected resources to these areas and improve government performance. This helps build transparency in planning and budgeting and engenders greater confidence in Kosovo s infrastructure plans. Advance planning is an integral part of mature PPP systems as well. As long term, complex transactions, PPP s require significant advance planning to cover the needed expenditures to engage experts for screening, designing, implementing, and managing transactions. Without advance planning, budget entities will need to find these resources in an ad hoc manner, usually transferring funds at the expense of other existing policy initiatives or infrastructure plans, or finding a donor willing to provide funds for a specific transaction. To reduce this outcome, PPPs should be increasingly linked to the government policy formation and medium term expenditure framework. PPP processes will improve with greater planning, rather than ad hoc, as budget entities will gain a better ability to engage professionals in these transactions. The MTPP, MTEF, and PIP processes provide an excellent opportunity for expanding awareness of, and encouraging advance planning for, PPPs at the budget entity level as well as at the central government level. As budget entities, municipalities and ministries, participate in these planning processes they are required to examine their current priorities and performance and refresh their priorities on a periodic (annual) basis. This process provides a potential platform for early identification of capital projects and public service initiatives that may be appropriate for implementation through a PPP. Early identification provides time for consideration and planning of options for funding the PPP development process through the budget or other sources, such as donor funding or centrally-provided services from the PPP Department (discussed elsewhere in this strategy as a development area). Strategy Actions SO 1. To accomplish Strategy Objective 1, the PPP Department should plan on the following actions: A PPP early identification system can be initiated through data obtained in the MTPP, MTEF, PIP, and Budget circular processes by including a query for each identified and planned capital project whether the budget entity has considered conducting the project as a Public-Private Partnership. This kind of query will stimulate greater consideration and inquiry at the project level whether a PPP transaction might be appropriate. 30

34 The PPP query is also likely to generate greater awareness and interest in learning about the functions and potential uses of PPPs at the budget entity level. Therefore, together with the query, the instruction or circular requesting the information should also provide a contact point for more information at the PPP Department and a link to its website. These actions are unlikely to generate one hundred percent accurate results, as budget entity-level personnel are not yet fully aware of the scope and application of PPPs. But that is not their function. Since these instructions are provided on a periodic basis they should serve to progressively generate greater awareness of PPP s as a tool for handling capital projects and build interest in learning more about them. Consequently, these Strategy Actions should serve to build awareness and planning capacity for PPPs, generating an increase in PPPs in the medium and long term. Strategic Objective 2 Build sustainable project development and implementation capacity in Kosovo by planning and establishing a Project Development Technical Assistance Facility As observed above in the Developmental Issues section of this Strategy, Kosovo needs to address both a technical gap in identifying and evaluating viability of transactions and a financial gap to finance the engagement of outside transaction advisors to design, develop and carry out complex transactions. Developing a PPP transaction for tender is usually considerably more expensive and resource consuming than alternative methods such as procurement or donor supported transactions. PPPs necessarily require a rigorous, systematic approach including feasibility study, value for money analysis, due diligence, and extensive contract documentation to cover assignments of risk over every phase of a long term project. This brings a concomitant need for highly trained professionals and in many cases outside transaction advisors to carry a transaction through to financial closing. It is unreasonable in the short and medium term to expect budget entities to have professionals with skills and capacities needed to identify, plan, prepare for, design, tender, negotiate and close PPP transactions. This expense and complexity in transaction development can be challenging. Together with lack of awareness of PPP as an effective infrastructure delivery method, it serves as a key factor inhibiting the growth of PPPs in Kosovo. Moreover, where transactions are not adequately designed, whether through incorrect or unclear assignment of risk, overly optimistic market assumptions, or poor definition of performance outcomes, significant risk arises of transaction failure. To help offset these costs and mitigate these risks, the Central PPP Department provides strategic advisory assistance to contracting authorities in several cases, in some cases including technical assistance from USAID s 31

35 GFSI program together with the PPP Department. These services consist of outreach to identify prospective PPP transactions, screening proposals to determine technically suitable transactions, working directly with contracting entities to develop a feasibility study in conformance with the PPP Law and then assisting in development of the transaction tender documents and PPP agreement. However, in complex transactions requiring highly specialized, transaction specific advisory services, significant alternative funding will be needed to engage outside transaction advisors. In planning for improved funding and technical assistance to develop PPPs, the PPP Department has been actively considering options on how to continue providing these services, most recently examining the possibility to create a PPP Technical Assistance Fund (PPP TAF). This prospective program suggests the creation of a jointly government and donor-funded facility to improve contracting authorities access to expert advisory in developing transactions. The program would establish funding for contracting authorities to engage transaction advisors from a list of pre-qualified advisors to complete the studies and documents required to tender a PPP transaction. The PPP TAF approach is a developing model for PPP growth and development. Several countries have developed programs to provide technical and financial support in PPP transactions. In considering which type of system would be an appropriate option to consider, the PPP Department concludes that Kosovo s current gap areas are both funding and technical. Prospective public authorities, central and local, generally do not have sufficient expertise in house to handle transaction study, screening, and development, so transaction advisory is necessary. In the short to medium term these bodies, for the large part, will not be able to plan funds needed to engage transaction advisors. Thus the availability of outside funding would be highly useful in preparing transactions where technical expertise is lacking financial need is demonstrated. Therefore, this Strategy confirms the Central PPP Department s decision to follow a model that addresses both the financial gap and the technical gap of contracting authorities. An analysis selecting this model based on alternative international approaches is set out in the Annex to this Strategy. Strategy Actions SO 2 To move forward with a transaction advisory funding model, Government of Kosovo will need to determine a few key points: How the facility will be funded. In addition to funding from the budget, significant initial funding may need to be provided by international donors. Additionally, since not every funded engagement will result in a successful transaction, funding will need to be refreshed from time to time. Kosovo s PPP Law (in 32

36 Article 13) provides for contracting authorities to charge winning private partners for reimbursement of transaction costs and/or oversight. This reimbursement provision may need to be amended and expanded if Kosovo is to move forward with a selfreplenishing project development fund. How the facility will be managed. A key issue for resolution is how such a fund would be maintained. If the fund is maintained by a state controlled body or involves any public funds, then under the law on Public Financial Management and Accountability any contributions to it would enter into the Kosovo s budget and would be subject to the annual appropriations process. Contributing donors would likely require reassurance of a continual evergreen re-appropriation each year to ensure the donor funding continues to serve the intended purpose of supporting PPP transaction development and to clarify distribution rights on dissolution of the fund. How strategic advisory will be provided. Public authorities will continue to require strategic advisory assistance to pre-screen and develop transactions and support to manage transaction advisory engagements. This function is provided through the Central PPP Department and is currently supported by USAID technical assistance. In the short to medium term, the Central PPP Department expects to continue developing its strategic advisory team with support by USAID. However, as donor technical assistance is graduated, the PPP Department will work to further develop capacity to continue providing strategic advisory support. Given the high level of market expertise put into this strategic advisory support service, it is likely that the cost of providing these services will exceed civil service limitations. If so, these may need to be provided through outsourcing relationships with qualified professionals, either on an individual or firm/entity basis. Therefore, the PPP Department will need to plan budgeting in the medium term for these outsourcing engagements within the expected time frame for wind-down of USAID support of strategic advisory at the Department. The PPP Department s next steps in designing a PPP TAF will be to: Assess the feasibility of a fund and determine the conditions necessary to establish the facility, including identifying donors that may be interested in participating in the PPP TAF and particular requirements/conditions of those donors. Develop a plan addressing steps for setting up a PPP TAF, including legal amendments and regulation development 33

37 Develop an Operational Agreement among participants, Draft a Charter for the fund under the PPP TAF Establish a Guidelines documents with clear Roles and Responsibilities and authorities indicated Develop a Rules and Procedures statement governing all business process flows for the PPP TAF Strategic Objective 3 Develop PFIs by expanding awareness of PFI s as PPP Option Currently, all of Kosovo s completed and prospective PPP transactions involve concessions, where infrastructure and service is paid for through third-party use payments, be they lease fees, regulated service delivery fees, or commercial revenues earned on the infrastructure site. The PFI model of transaction, where payment is made largely or completely by the government entity, rather than end-user payments, is a growing model of transaction worldwide. It is recognized under Kosovo legislation as Public Contracts where the budget entity makes payments for availability of the infrastructure or provision of the public service. PFIs commonly address public infrastructure and service in circumstances where there is no or insufficient third party user revenue to make a transaction viable without significant government contribution. Typical PFI s include schools, hospitals, and public facilities. Examination of the Kosovo Annual Budget shows significant planning at the central and municipal levels for building and renovating public facilities, schools, and hospitals through procurement. These may represent opportunities for PFI development. Why are PFI s important? PFI s would allow for the expansion of capital expenditure capacity where little or no commercial revenue is reasonably available to support the development. By designing and implementing PFI s central and municipal government offices may be able to plan development and delivery of public infrastructure that they are not otherwise possible through current budget appropriations. In an environment of low economic growth and low revenue growth, PFI s offer the Public Authorities alternatives to procurements and concessions. PFI s however, bring with them the need for planning and projecting revenue capacities into the future. A government entity s obligation to make availability payments extends for the life of the agreement, which will typically match the life span of the planned infrastructure. Careful planning and transparency will be necessary to design and develop PFI s. Additionally, PFI s should not be carried out simply because there are insufficient appropriations for development through procurement (or insufficient donor funding). The government entity must prepare a value for money analysis demonstrating that conducting the 34

38 transaction as a PFI constitutes the best economic alternative to infrastructure development and delivery. As smaller economic units, municipalities are particularly challenged in developing infrastructure, and PFI s may present a significant opportunity. However, it is important also to note that given the costs of designing and developing transactions are considerably larger than straight procurement, it may be necessary to develop larger transactions (e.g., schools) to build a sufficient economy of scale to make a PFI transaction feasible. This may require bundling, or agreement among multiple municipalities, in order to develop a transaction that is economically viable. This raises issues of planning and cooperation, and provides an opportunity for the PPP Department to play a guiding role in promoting and planning PFIs. Strategy Actions SO 3 Most budget entities, particularly municipalities, are not apparently aware of PFIs as an infrastructure delivery alternative. At a recent awareness meeting between the PPP Department and municipalities, several municipalities expressed significant interest at PFIs existing as an infrastructure alternative. Consequently the PPP Department should expand its outreach and training program to develop and implement a plan of targeted outreach to municipalities on the specific issue of PFI alternatives for building awareness of PFIs as an infrastructure delivery option. Targeted outreach consists of individual meetings and discussions with identified municipalities and central budget entities on the basis of information about their respective planned infrastructure and public service needs. To develop outreach targets, the PPP Department should obtain enhanced access to information about budget entity infrastructure and service needs. It can do this through access to regularly collected information from budget entities as part of the MTPP, MTEF, PIP, and annual budget circular processes, as described in the Strategic Action SO2, above. The PPP Department s targeted outreach plan should include periodic review by the Department of this information to identify and prioritize potential PFI opportunities. The Department would then meet with the budget entities with top ranked potential PFI opportunities to discuss whether there is interest and political will to develop the project as a prospect for PFI. The support approach should include delivery of specialized training on PFIs to appropriate persons within the budget entity, to build appreciation and understanding of the PFI development process. 35

39 As PFI s may require bundling of multiple municipalities in order to achieve a sufficient volume for an economically viable size for a transaction, the PPP Department may need to facilitate agreement among multiple municipalities to participate in a joint transaction, including assignment of clear roles and responsibilities among municipalities. The PPP Department should prepare a separate guideline for the implementation of PFI s, including promoting detailed information on benefits of PFI models. Create separate training module while including specific case studies pertaining to the needs of the Public Authority. Furthermore the CPPPD should in conjunction with the Prime minister s office, Ministry of Public Administration and Ministry of Environment and Spatial Planning prepare specific guidelines on implementing PPP/PFI for public buildings, Together with this outreach, it will be important for PFIs to be treated openly and transparently within government. As binding contract obligations with significant investment by the private partner, PFI transactions will serve as a constraint on service delivery options of the Public Authority through the life of the PPP agreement. The PPP Department clarifies that fiscal reporting of PPP transactions (including PFIs) should adhere to Eurostat Decision (18/2004) projects be classified as nongovernmental and off the books if the private partner bears the construction risk and either the availability or the demand risk. Strategic Objective 4 Increase private sector outreach by developing and publishing a Pipeline of upcoming PPP transactions The Central PPP Department maintains internal information about possible upcoming transactions, which is updated through meetings with Public Authorities and it has been presented and promoted to various audiences, but has not yet established a publicly accessible pipeline of transactions. In order to set up a pipeline and publish it, the Department will need to put in place an effective method of pre-screening transactions, so that only credible and likely transactions are published. Transactions that appear in the pipeline and that do not proceed on a relative timeframe as published will risk negatively impacting the credibility of the pipeline. Therefore, pipeline effort will require effective prescreening with a qualitative component assessing likelihood that the public authority is preparing for the project, and a quantitative component that establishes the potential economic feasibility of a project (but not feasibility). As a consequence, a significant amount of due diligence will need to be taken in order to place a project into the public pipeline. The PPP Department will need to establish minimum criteria for the pipeline. At a minimum, to be useful for investors the pipeline should include a brief project description including the anticipated infrastructure / public service metrics and 36

40 relative size (e.g., 39 kilometers of motorway, 9 schools of 350 students, but not expected capex), current status, and contact information at the PPP Department and contracting authority to provide more information to potential investors. If a transaction advisor is expected to be engaged, that information should be included. In terms of presentation, a series of links for each project is preferable to a simple spreadsheet. Strategy Actions SO 4 The PPP Department should start by establishing a plan for developing a pipeline. The plan should include agreement on metrics for the pipeline and processes for maintaining it and keeping it current and realistic. While it will be aware of many potential transactions, the PPP Department needs to have a high level confidence the projects published in the pipeline will proceed. Therefore, the Department should plan on the following actions: Continue to engage in meetings with key government offices, agencies, ministries and municipalities to identify planned transactions that may be suitable for PPP and assemble information relevant to transaction viability. Key Ministry meetings would include: Ministry of Economic Development, Ministry of Public Administration, Ministry of Trade and Industry, Ministry of Agriculture and Rural Development, Ministry of Environment and Spatial Planning, Ministry of Health, Ministry of Education, Science and Technology, Ministry of Culture, Youth and Sports to understand infrastructure plans and needs relating to PPP opportunities. Establish a methodology for project pre-screening that includes a qualitative evaluation of the capacity and level of commitment of the contracting authority, and light, or summary, quantitative assessment indicating the potential for economic viability, as well as a written commitment or memorandum by the contracting authority or authorities outlining the plans to move forward on the project. USAID s GFSI project has developed a qualitative and quantitative pre-screening tool that may be useful to consider in establishing this transaction pre-feasibility. The pipeline should also be coordinated with the Investment Promotion Agency of Kosovo (IPAK) and cross-linked with its website. Strategic Objective 5 Strengthen PPP contract management by creating a risk-based system of oversight As stated in the Background and Issues Identified section above, the current rules of contract management set out in the Administrative Directions and the 37

41 PPP Department s Guidelines do not set out a standardized process for oversight of the contract management process. While not a hindrance under the PPP Department s current project load, this project load will increase over time and place challenges on effective oversight. The PPP Department is therefore in a position no to plan for this increase in load and to develop an oversight system based on risk management principles. Such a system should consider the use of systematic reporting of performance data, archiving of this data, and analysis of exceptional data information that suggests problems may be on the horizon. Strategy Actions SO 5 The modest PPP load, such as that expected in the reasonably near term future in Kosovo justifies a two-tier reporting system one level at the contract management team / contract authority level with monthly reporting, and one at the contract authority/ppp Department level with periodic reporting focusing on compliance and exception issues. The Central PPP Department, should prepare a PPP directive on contract management procedures to expand and further develop PPP Directive 2. The Central PPP Department should develop guidelines on contract management oversight and preparing standardized templates for periodic reporting by project management teams to provide general performance data for archiving and compliance and exception issues for intervention. As part of this process, the Central PPP Department should also consider providing project by project training to ensure the project management teams within contracting authorities understand and have the capacity to manage contracts and provide effective reports, calling attention to actual and anticipated performance issues. The PPP Department should create a division or unit within, to provide technical assistance in contract management. This division/unit should be staffed appropriately to be able to monitor all PPP projects that have reached effective date. Taking into consideration that monitoring may not be full time work; the division/unit may also assist in other areas as seen fit based on the needs of the Department. 38

42 VI. CONCLUSION This Strategy establishes current key needs to PPP development, strategic objectives addressing these key needs, and actions to be taken in order to accomplish these objectives. In addition to these issues, objectives, and actions, there are additional issues that do not raise to the level of key issue or strategic objective, but which remain important and relevant to PPP development. Smaller Transactions. One such issue raised in stakeholder consultations concerned the degree of complexity of the PPP requirements relative to smaller transactions. This complexity encompasses the cost and time consumption of the feasibility study process and the complexity of the PPP agreement. In particular, smaller public authorities, such as municipalities, are challenged by the degree of resources and time needed to prepare PPP transactions relative to the size of the transaction and to the time and resources that would be needed for traditional procurement rather than PPP. Though not rising to the level of a Key need generating a Strategic Objective, the PPP Department recognizes this as an issue area that should be addressed. Therefore, to be responsive, the PPP Department will undertake a review to determine the viability of establishing more modest feasibility study and tender document templates to accommodate such smaller transactions, for example, transactions that are estimated at less than 2 million in capex. Fiscal Monitoring. Another issue is that of how best to monitor overall fiscal impact of PPPs in the future in Kosovo. Despite requirements and exceptions in accounting requirements, PPPs have an impact on future fiscal flexibility, and monitoring this impact will become more important as the number of transactions grow. There is significant professional consideration currently being given toward recognizing this issue and suggesting potential tools and approaches to developing effective PPP fiscal monitoring systems (e.g., Public- Private Partnerships in the New EU Member States Managing Financial Risks, World Bank Working Paper No. 114, currently available online at: The PPP Department recognizes this need, and in future strategy periods, as PPP transactions grow in number and more effective fiscal monitoring tools are developed, acknowledges that Kosovo will need to consider whether and how to best further develop its own approaches to monitoring as it proceeds toward deeper integration into the European and world markets. 39

43 VII. NEXT STEPS This preparation of this Strategy represents the completion of the first phase of the Strategy process. The second phase of the Strategy process will be implementation and periodic performance monitoring consistent with the requirements of the final Strategy. Upon periodic (annual) review, the Strategy s key needs, strategic objectives should be evaluated by the Working Group to determine whether they remain current or relevant and whether additional or new issues or challenges have arisen that require revision of the Strategy. Summary of Implementation Actions to be taken over the Strategy period: For SO1: Review of budget circular and questionnaires for MTEF and MTPP and software program for PIP to establish appropriate PPP query for planned infrastructure projects Develop query and included in circular and questionnaires and PIP For SO2: Conduct Feasibility Study for PPP TAF Develop Establishment Plan for PPP TAF Draft Operational Agreement for PPP TAF Draft Charter for PPP TAF fund Prepare PPP TAF Guidelines Promulgate Rules and Procedures statement for PPP TAF For SO3: Develop PFI Outreach Plan based on review of data from planning processes Assessment of transaction bundling possibilities to reach economic scale for prospective transactions to be viable Develop specialized training on PFIs for delivery to target budget entities 40

44 For SO4: Prepare PPP Project Pipeline Development Plan Target meetings with public authorities to identify and clarify prospective PPP transactions sector by sector Develop / refine methodology for transaction pre-screening for viability Develop template memorandum of understanding for transaction commitment Develop initial pipeline and publish Linkage to IPAK For SO5: Develop guidelines and sample sector-specific oversight template based on existing and prospective transactions Develop project-specific training on contract management and oversight 41

45 ACTION PLAN YEAR 1 42

46 ANNEX I TO PPP DEVELOPMENT STRATEGY FOR THE REPUBLIC OF KOSOVO ( ) PPPs in Europe and the Region Historically, PPP growth in Europe has been strong, though impacted by the global economic recession. According to the European Investment Bank for 2010, more than 1,300 public-private partnership projects, worth 250 billion, were implemented in the EU between 1999 and During that time frame France has dominated, with Britain and Spain following not far behind. PPPs implemented in the EU market are of greater value than the anticipated value of any PPP projects in other countries. Despite this strong performance of PPP transactions for the previous two decades, the market for PPPs in Europe is also currently experiencing downward pressure, as new PPP transactions in Europe have been closing at a slower rate than the previous ten year average. EPEC reports that the 66 transactions closed in 2012 with a value of 11.7 billion, down from 84 projects and 213 million in Figure 4: European PPP Market by Volume and Number of Transactions Source: EPEC Market Update, Review of European PPP Market 2012 Croatia In the region, Croatia is a longstanding strong performer in PPP. Croatia initiated its first segment of the Istria Y highway construction as a concession PPP in 1995, and since then as implemented a robust series of PPP transactions. In 2008 Croatia passed standalone PPP legislation and created a centralized PPP body, the PPP Agency. Croatia s PPP practice has further expanded into Private Finance Initiatives, 43