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Business Analysis: Time for a real partnership in the Baltic

  • 2010-11-24
  • By Charles Cormack

I am getting a sense of deja vu. People in the West have started talking about the Baltic economic miracle again!! You would think that, following the recent crisis, that would be enough to break me out in a cold sweat, but this “miracle” does not refer to stratospheric property-fuelled economic growth rates, but rather to the ability of all three governments to deal with potential financial meltdown.

As Ireland teeters on the verge of disaster, and is likely to receive around 80 billion euros of emergency support (which puts the Latvian loan in context!), and other larger economies contemplate savage cuts, people are starting to look at the Baltic and see what lessons can be learnt.

I saw this with my own eyes a few weeks ago at an event in London which was organized by the British-Latvian Chamber of Commerce. They had persuaded Ilmars Rimsevics, the governor of the Latvian central bank, to speak, and the room was full of UK government officials keen to see what they could learn.

The trick now is for the governments to use this new-found reputation for economic probity to move forward with a range of financial instruments which will solidify the recovery, and promote growth. I am particularly keen to see all three governments fully embrace and implement Public Private Partnerships (PPP).

For those who don’t know, PPP is a mechanism which allows the state to contract with the private sector to build and maintain social infrastructure projects. Although controversial, because of the excessive liabilities its earliest manifestations imposed on the state,  it has been used successfully across Europe and in many other areas of the world. To put it simply, the government procures a new building, for example a school, and the private sector bid to build and maintain it. The private sector supplies the money for the project, and undertake to build and deliver the building, and also to maintain and manage it over a twenty or thirty year period; at the end of that time the property belongs to the state. During the contract the government pays an annual fee, which allows the private company to recoup its investment, cover its costs and make a profit.

All three Baltic States have been flirting with the concept of PPP for some time, and pre-crisis there were moves to implement the necessary legislation. However, now that the crisis is abating and Europe considers that the Baltic economies have weathered the storm, it is time to push forward aggressively with the introduction of PPP.
Lithuania has taken the lead and is already preparing their first 6 projects, with a further 20 to follow in the next 12 months. This will allow the government to build new schools, universities, hospitals, prisons and social housing now, without having to find the capital in the state budget.

But as well as allowing for the building of these projects, experience shows that the government will also get better value for money as the build and management is in the hands of the private sector (both local and international) meaning better procurement and project management. For example, as the private sector partner will need to maintain the building for the life of the contract, and be liable to pay for that maintenance, it does not make sense to cut costs on the build.

So PPP in the Baltic offers a range of benefits, it allows governments to invest in social infrastructure now; it will stimulate the construction industry, increasing employment in a range of sectors.  It will also create a template which will allow the public and private sector to work together, as well as potentially bring in many millions of euros of foreign investment.

However, the key issue, which - as usual - I fear may be missed, is that the governments are going to need to invest now in the best international advice and consultancy, as the system is being set up, to ensure it is built in a way which will allow and encourage international financial investment into the projects. I have spoken to a number of very large investors, and know that if the system is properly structured, that they are interested in coming to the Baltic.
I have heard rumors that this may not happen, and governments will go for a “local” solution. If they do, it will be a huge mistake, and could lead to the process being stillborn.

This will be a tragedy for the people in the Baltic States who need the investment in their hospitals and schools now, and the jobs that it will bring. It will also be a tragedy that all three countries cannot benefit from the new found respect they have earned.