Developing successful PPPs in Russia by Pavel Kapunin, Capital Legal Services INTRODUCTION The concept of public-private partnership (PPP) in the Russian Federation has in the recent years been on the rise and has shown to be an effective tool in fostering social and infrastructure projects while at the same time nurturing business growth, along with giving businesses an opportunity to work with the state on projects of strategic importance. Historically this is a switch from the system where the state finances projects in full – in respect of which there has been much controversy as pertains to the potential scope of public investments and ways they can be injected into the national economy. With all the benefits of direct state investment, such as guarantee of stability, such direct public investments as a rule do little to stimulate the supply/demand balance of the market and hence do not facilitate creation and development of new business. What is actually needed then is to focus efforts on maximizing the efficiency of the Russian economic system through efficient investments, creating new mechanisms, principles, methods, and tools in order to change the structure of the Russian economy. With this in mind, any PPP-based investments may become one of the principle tools for macroeconomic regulation. The PPP mechanism itself proves to be fairly complex when it comes to its application; nevertheless it still raises much interest since it has significant advantages including:

PPP’s enhanced efficiency as compared to pure public investments;

competitive procedure for selecting state partners proves to be conducive to creating a competitive environment in previously monopolistic sectors of the state economy and thus raising their quality standards;

mutual control on the part of the state and the private investor allows for social priorities associated with mandated management;

wider selection of project finance tools and mechanisms secured by state guarantees and/or consideration of the state;

possibility of proportional distribution of risks between the state and private investor, as well as joint use of received results.

In many cases using the PPP mechanism proves to be the sole feasible and appropriate development strategy, since its implementation is associated with enormous expenses when the amount of requisite financing frequently surpasses the capacity of regional budgets. Under such circumstances

if a private investor is engaged as state partner then along with reducing the financial burden it also brings significant improvement of the quality of services, including public services. PPP IN RUSSIA Taking into consideration the fact that PPP projects are always of public significance and that the subject of PPP agreements in Russia is state or municipally owned property either of limited transferability or withdrawn from public circulation, the following areas may be singled out as the most relevant for using the PPP structure.

1. Public utilities: public transport, electric power, heating, gas supply and other utilities, water pipeline and sewerage, waste removal, renovation and maintenance of residential and public buildings, etc.

2. Infrastructure: construction and/or public operation of infrastructure facilities, including railways, highways, pipeline and light rail transport, hydrotechnical systems and structures, sea ports, river ports and airports, as well as other infrastructure facilities and their use and operation.

3. Social sector: construction and/or public operation of social infrastructure facilities (educational, health care, recreational, tourist facilities, etc.).

Ten years ago Mosvodokanal, one of the largest public utilities companies operating in Moscow, Smolensk and Tver regions and providing water to over 13 million people, became a “PPP pioneer”. The structure of the concession was based on the BOOT principle (Build – Own – Operate – Transfer) with a number of adjustments introduced into the classic scheme: investments were returned through the mechanism of covering investment costs from the city budget through Moscow government’s acquisition of shares from the project holder, rather than though selling services. Presently St. Petersburg where a number of PPP projects are implemented simultaneously is among the leaders in PPPs in Russia. Among St. Petersburg PPP projects the following deserve to be pointed out especially:

Western High Speed Diameter (WHSD) - a 46 kilometer toll motorway, part of the IX Pan-

European Transport Corridor linking St. Petersburg with Scandinavia;

Orlov Tunnel – a tolled tunnel running under the Neva river in St. Petersburg, linking the banks of the Neva in the central part of the city;

Elevated Express (‘Nadex’) – proposed light railway approximately 30 km long (18.6 miles) to run across the southern suburbs of the city, cutting across and thereby linking suburban rail and three metro lines;

Neva and Baltic water transport system – creation of infrastructure and water transport from the river and small sea vessels for arranging passenger traffic;

St. Petersburg’s Pulkovo International Airport – development of the fourth largest airport in the Russian Federation and the only civilian airport serving the St. Petersburg region.

The last project will be discussed in greater detail inasmuch as Capital Legal Services International is currently rendering legal support to the government of St. Petersburg with respect to the project on developing Pulkovo international airport.

In the spring of 2008 the international tender for development of Pulkovo international airport was announced and applications were accepted by the government of St. Petersburg until the end of July 2008. The tender documentation established the following qualification requirements toward applicants:

the applicant must be experienced in constructing airports;

experience in raising investments of no less than 1 billion US dollars;

be involved for the last three years in operating an airport with annual traffic capacity of at least 10,000 passengers, having invested no less than 500 million US dollars;

must not be engaged in managing or owning an airport within 800 km radius from

St. Petersburg. The successful bidder shall invest approximately 1 billion Euro for comprehensive reconstruction of the airport and renovation of the airside infrastructure, in exchange it shall acquire the right to operate the airport facilities for 30 years, with the appertaining profits going to the investor. As a result of this partnership St. Petersburg in its turn shall have a rapidly developing international transport hub and a gateway to Northern and Eastern parts of Europe and Russia. However what makes this project stand out among the rest is not the scope of financing or the 30-year term of the PPP, but the fact that for the first time in Russian history a successfully functioning business, a large company with a vast infrastructure, an international airport, is undergoing restructuring. It should be noted specifically that this project is to be implemented without suspending or interrupting airport operations, moreover without reducing the efficiency of the airport services and with the gradual improvement of the traffic hub’s capacity to the point of achieving the scheduled traffic flow to meet international transfer hub standards. Practice shows that such PPP projects allowing for private investors to get on with their business from the outset appear very attractive to the business society inasmuch as they guarantee certain profitability and offer solid guarantees from the state. It should be pointed out that today the PPP mechanism in Russia is largely used in the context of major infrastructure projects. However, international practice shows that not only major projects involving large investments can be of strategic importance. Often the degree of the project’s importance is determined by the fact that its implementation may serve as a catalyst significantly accelerating business growth within a given location, sector or industry branch and thus considerably contribute toward the aggregate economic growth. It may be assumed that in Russia the next step should be extending PPP to those projects currently listed at the bottom, i.e. health care, education, culture, sports and tourism. RUSSIAN PPP LEGISLATION It should separately be noted that presently the concept of PPP in Russia is neither officially defined, nor interpreted. The phenomenon itself has not been duly and carefully studied by Russian legislative researchers. Throughout the last number of years the subject of PPP has been frequently referred to in the Russian government and fervently discussed by politicians, businessmen, and experts; it was likewise included in the texts of official programs and regulatory legal acts. At the same time it should be acknowledged that the Russian PPP experience has at this point in time hardly been systemized and studied.

Upon examining current Russian law, as well as statements and publications devoted to the subject of PPP, it may be said that presently the concept of PPP in Russia is mostly used in relation to:

1. Signing agreements on projects wherein the state or municipal authorities, on the one hand, and private companies, on the other hand, act as equal partners. Such form of PPP is comparable with the western concept of Public-Private Partnership;

2. Using monies of the Investment Fund of the Russian Federation and other state financial sources to support major strategic projects implemented by private businesses;

3. Creating special economic areas stimulating business project development through state support;

4. Creating corporations with both state and private equity to develop high-priority economic industries.

In Russian law general PPP issues are governed by civil legislation and up until now there has been no federal unified comprehensive law describing the government’s policy in relation to public-private partnership and its regulation. The main federal PPP law is the law of the Russian Federation “On concession agreements” of July 25, 2005, but it contains a number of shortcomings, for example:

it envisages only one possible PPP scheme between the government and private companies – the “build-transfer-operate” scheme;

expressly prohibits step-in rights under the concession agreement until the object of concession is commissioned into operation;

restricts the freedom of contract by providing for requisite use of template agreements

approved by the Government of the Russian Federation;

as well as other shortcomings. In the context when on the federal level no uniform approach has been developed defining PPP relations, yet at the same time there exists an actual need for implementing important projects through the PPP mechanism, the state authorities of constituent entities of the Russian Federation – i.e. the regions – create their own legal framework to the extent of their powers. For example, in 2006 regional laws stipulating the principle PPP provisions were adopted in St. Petersburg (law of St. Petersburg “On participation of St. Petersburg in public-private partnerships”) and Tomsk Region (law of Tomsk Region “On public-private partnership in Tomsk Region”). The main goal of these regional laws is to establish the procedure for the regions to participate in PPP, legalize PPP-related tender or bidding procedures and set forth the procedure for signing PPP agreements. Provisions and regulations on PPP agreements, legalized in form of laws, shall facilitate an efficient and predictable result as concerns such projects involving new relations between the state and the private business. The analysis given above shows that the PPP mechanism is in fact incorporated into the Russian Federation economic policy and that Russia has already accumulated certain experience in developing socially important projects through the PPP mechanism. At the same time, many experts point out that incorporating PPP in Russia is associated with various problems of legal, economic

and managerial nature thus resulting in interpretation of PPP forms and methods that stray somewhat off of the familiar path. The result then is that under such approach such uniqueness of interpretation fosters a certain dualism of projects since, on the one hand, when implementing PPP projects existing international experience is invariably taken into account inasmuch as investors, in particular international financial institutes, require a familiar and clear system of interaction in the context of PPP. On the other hand, since due to the specifics of Russian law customary PPP schemes are often altered thus significantly increasing the role of the local specialists experienced in PPP projects. Mr. Pavel Karpunin is a Senior Attorney at Capital Legal Services, St. Petersburg Office +7 812 346 7990 e-mail: pkarpunin@cls.ru