Central Asian PPP portfolios grow as quality lags behind

Tashkent, Uzbekistan (UzDaily.uz) — Public-private partnerships (PPPs) in the member states of the Eurasian Development Bank (EDB) are experiencing a quantitative boom. However, experts and regulators warn that the growth in the number of contracts without a strengthening of the institutional environment is turning into a financial risk for states rather than a tool for development.

This conclusion was reached during a session at the EDB Annual Meeting dedicated to the development of PPPs in the region. Svetlana Maslova, director for PPP projects at the EDB, moderated the session.

PPP portfolios in the countries of the region are expanding. Kazakhstan has accumulated PPP obligations worth 1.3 trillion tenge over 10 years. Uzbekistan has increased its number of contracts five- to sixfold over the past six to seven years, and today possesses a portfolio that is several times larger than that of Kazakhstan, despite having significantly less experience. Kyrgyzstan had three projects worth US$4 million in 2023, but today it has more than 100.

However, Maslova outlined the limits of this optimism, stating that if one moves away from standard portfolio indicators, the picture looks somewhat different. She noted that the growth of a PPP portfolio by itself may not be as important, and that such growth is not needed without strengthening the maturity of the PPP environment.

A warning sign came in an April report by the International Monetary Fund (IMF) on Uzbekistan, in which the IMF recommended lowering the US$6.5 billion limit set in 2025 on new PPP agreements. Maslova noted that this is not a cause for panic, but it is a signal.

According to a survey conducted by the EDB among member states and partners, five systemic barriers characteristic of the entire region were identified: a shortage of long-term liquidity in national currencies; weak contract management after the financial closure of a deal; insufficient project preparation at the pre-investment stage; limited state guarantees; and low competence among officials who decide between PPPs and direct budget investments.

The final barrier was at the center of the discussion. Yeldos Kabat, deputy director of the Kazakhstan PPP Center, described a paradox where the analysis meant to select projects for PPP implementation has become the main obstacle. He noted that when comparing options, officials choose what is clearer to them. For PPPs, they calculate full lifecycle costs, including investments plus operations, whereas for budget projects, they only count construction costs, making the comparison unfair.

The data provided by Kabat indicates that global statistics show traditional public projects cost 40 percent more than similar PPP projects. In Kazakhstan, this figure reaches 70 percent.

Kazakhstan is the oldest PPP market in the region, with its concession law nearing 20 years old and its PPP center operating for 18 years. Consequently, the country's experience is viewed as instructive in both positive and negative senses.

Among the functioning tools, Kabat highlighted a program of high-priority PPP projects tied to specific international financial institutions. Five projects with a total value of US$4 billion are assigned to the Asian Development Bank in the areas of healthcare in the Karaganda region, education, and water supply. The EDB is supporting a university clinic project in Almaty.

Another practice, recognized by the United Nations as a top global example, involves replicable small-scale PPPs. In 2016, a study showed that 80 percent of school canteens in Kazakhstan required re-equipment. An investor offered to equip several canteens in exchange for a five-year contract. The rules were modified, and today more than 400 PPP agreements have been concluded under this model. Kabat noted that when ready-made, tested, and scalable solutions are available, they can be applied to any industry.

Concurrently, a digital PPP portal platform has been launched, transitioning completely to paperless document management, with creation of the system funded by the EDB. Since last year, accreditation has been introduced for market participants structuring PPP projects, requiring the mandatory inclusion of an international-level specialist.

The PPP Academy has trained several thousand civil servants since its founding in 2012. Last year, 175 representatives underwent training, 65 of whom were funded by the EDB. Kabat stated that it is highly problematic when officials do not understand the structure of PPP projects, as it leads to either inefficient deals or stalled projects.

Avag Avanesyan, deputy minister of finance of Armenia, presented a completely different model of challenges. Armenia underwent aggressive privatization in the 1990s and 2000s. The country's airport was transferred into a concession in the early 2000s, and today the state lacks public comparators for a number of sectors, leaving nothing to compare against.

Session experts called Armenia's PPP legislation the best in the region regarding investor protection, as the state partner cannot claim immunity when resolving disputes in arbitration under either PPP agreements or direct loan agreements. Maslova called this an excellent protection measure, especially for foreign investors.

However, Avanesyan warned about the dual nature of strong guarantees, stating that when strong guarantees are provided, the question arises as to who exactly receives them and for which project, which prolongs the process. He added that if guarantees are weak, a project can be abandoned. The primary vulnerability is the concentration of competence within a single agency, meaning that if one knowledgeable official advances a project and is then absent, the project stalls. Avanesyan advised the market not to declare victory at the moment an agreement is signed, as the real work only begins then.

Nurbek Anarkulov, director of the PPP Center of Kyrgyzstan, described a trajectory that session participants called both impressive and questionable. The center was founded in 2019, followed by the pandemic a year later. By 2023, it had three projects worth US$4 million, but today it has more than 100 projects.

Among the key tools, Anarkulov highlighted a regulatory sandbox for pilot PPP projects, which allows for the accelerated implementation of innovative solutions. Eight agreements have been signed within the sandbox framework, including the country's first wind power plant in the Issyk-Kul region, signed within 11 months, renewable energy projects under an energy state of emergency, fuel marking, and a toll road for the eastern ring of Bishkek.

Anarkulov identified two structural limitations himself, noting that commercial banks are unable to issue long-term loans at acceptable rates for 15- to 40-year PPP projects, and the center lacks the resources to monitor 100 projects simultaneously. He acknowledged that while signing an agreement is one step, the center does not have the capacity to control the subsequent progress of a project.

Additionally, legislative consolidation was highlighted for small projects valued at up to 100 million soums with a simplified procedure, representing a unique experience in the region. More than 20 such projects have been implemented at the local government level, covering retail outlets, resort infrastructure, and agriculture.

Anarkulov noted that trade and logistics complexes on the border with China represent a defining trend for Kyrgyzstan.

The discussion on limits for PPP obligations revealed a fundamental divergence in positions among participants. Kazakhstan introduced a limit 10 years ago at 20 percent of the revenues of each region. Armenia focuses on the ratio of obligations to gross domestic product. Kyrgyzstan currently operates without limits, but Anarkulov admitted that they will have to be introduced very soon.

Kabat insisted that limits are not a brake but a signal of reliability, showing an investor looking to invest for 15 to 20 years that the government has undertaken obligations and is ready to fulfill them. To support this, he noted a negative example where the United Kingdom experienced a boom in private finance initiative contracts, but an audit in 2018 effectively halted the conclusion of new agreements. A counter-example was Portugal, which accumulated a volume of PPP obligations in the 1980s and 1990s with IMF support, the consequences of which were felt for decades.

Contingent liabilities, such as payments upon early termination of contracts, remain an unresolved issue. In Kazakhstan, these were not included in the calculation of limits until recently, with relevant rules planned for approval before the end of the year.

The EDB presented its own model of participation, which Maslova designated as upstream preparation, involving work at the zero stage before the start of competitive bidding procedures. The bank evaluates ideas for compliance with infrastructure plans, analyzes regulatory obstacles, tests market demand, and prepares project teams on the side of the public customer.

Two active examples include a waste processing project in Kazakhstan that extracts refuse-derived fuel instead of utilizing landfills, and a cross-border logistics project where the comparative advantages of a PPP have yet to be confirmed.

Over the past period, the EDB has trained more than 450 specialists in Belarus, Kyrgyzstan, Kazakhstan, and Tajikistan, and it funds a scholarship program for students specializing in PPPs.

Concluding the session, each speaker formulated practical recommendations.

Kabat advised investors to look at the allocation of risks rather than government guarantees, stating that if all risks fall on the state, the project is doomed regardless of any guarantees. He noted that each risk should be managed by whoever does it best, with political and regulatory risks handled by the state, and construction and operational risks managed by the private partner.

Avanesyan advised governments that an idea is not a project, and that a project requires preparation. He stated that all projects that pass through competitive procedures are sustainable, while those that bypass them are not.

Anarkulov advised all participants to approach international banks and funds before investing money in research to determine if an idea is viable.

The general trend agreed upon by all three speakers is a transition from manual management to institutional management, encompassing the standardization of contracts, digitalization of procedures, and contract management after signing, which remains the weakest link in the PPP market across the entire region.