It’s all quite simple: in crisis conditions, this form of cooperation enables the state and business to gain mutual benefit. The state relies on private financial investments, the investor on a known administrative resource.
PPPs in Russia are more and more turning to innovative methods used by the state to conclude a contract with the private sector, using their capital and management potential in putting through socially important projects in accordance with set time frames and budgets. The state sector remains responsible for providing the population with various services in a manner beneficial to itself, and has a positive effect on economic development and raising living standards.
Why are PPPs particularly beneficial for Russian and foreign businessmen today?
Primarily because of the protection afforded to investments. In the long term, a private company is guaranteed to receive state assets and state orders for the object of the agreement.
Secondly, PPPs are guaranteed to be profitable. The entrepreneur obtains guarantees from the state on the reimbursement of the investments made. This is particularly important in a period of financial instability. Furthermore, there is still relative autonomy in taking operational decisions. Having freedom of management, a private company can, for example, increase the overall profitability of a project by raising labour productivity or reducing prime costs.
The Russian authorities have set themselves the task of raising the share of private investments in public infrastructure to a level of 12-15% of the total by 2020, and to do so primarily by using PPP mechanisms. This is facilitated by laws recently approved in Russia on state-private partnership and concession agreements (CA).
For example, the law on PPP of 15th July 2016 includes such innovations as financial projects by a consortium of banks, the exploitation of a facility by the public side, the reduction of the time taken to assess projects from 180 to 90 days, the expansion of the list of projects, and so on.
From 1st January 2017, the law on CA will guarantee a potential investor Federal monitoring of agreements, the possibility of compensation by the concessionary to the concedent for the organization of a tender, and the possibility of concluding a CA by a decision of the RF Government without a tender. Apart from this, the size of a lease payment for the use of plots of land will be an obligatory condition.
At the same time, for example, in the field of housing and the communal economy, these innovations envisage limitations on the participation of foreign legal entities in CAs.
Public-private partnership is cooperation between a public partner, on one hand, and a private one, on the other, legally formulated for a specific time schedule and based on combining resources and distributing risks. It is carried out on the basis of an PPP agreement with the aims of attracting private investments into the economy, ensuring the accessibility and improving the quality of goods, work and services which state and local authorities are responsible for providing.
Scale and profitability of 13-15%
Experts consider that the most in-demand and promising trends in the implementation of PPP projects, including for foreigners, are infrastructure objects in the education, health and transport systems, and also in housing construction.
According to the Main Directions of Activity of the RF Government for the Period up to 2018, the forming of conditions for the development of PPP mechanisms in the social sphere, including the expansion of the practice of concluding concession agreements, is defined as one of its priorities.
In Russia, they intend to attract about 250-270 billion roubles into the modernization of the infrastructure of the health service from non-budget sources using PPP mechanisms. It is intended to direct a further 50-70 billion roubles of private investment into the building of new hospitals and medical centres. A Coordination Council for the development of PPP in the health sector was recently set up for this purpose.
Moscow Province holds first place among the regions for PPP projects in the social sphere. For example, in 22 municipal entities here, a concession project for the development of the water supply is being carried out here. Pure drinking water will be available only a step away. A multi-purpose medical centre is being built in the Voskresensk district. Within the city of Dubna, a cableway across the Volga is being built. And in Naro-Fominsk, the design and construction of a toll road and viaduct are proceeding rapidly.
The largest-scale PPP projects are in Russia itself, in the transport sphere. The volume of investment in the construction of roads and motorways planned for 2010-2020 is 1449 billion roubles. Private financing comprises 35% of this. Furthermore, a whole series of new forms of contract are being introduced. They have a considerable effect on enriching investment facilities and on quality control in roadbuilding. These forms include concession contracts with direct payment collection and with concedent payment, a long-term investment agreement, an operator’s agreement and an investment agreement for the pre-project stage. The Russian regions are given expert support here in the field of preparing PPP infrastructure projects – from initiation to commissioning.
We present the PPP Unified Information System site in Russia:
and also the site of the PPP Development Center:
One of the most significant PPP projects is the Moscow – St. Petersburg motorway. To build this high-speed motorway, a PPP mechanism in the form of a concession agreement has been used for the first time in Russia. It ensures the attraction of private investments to replace some state budget expenditure. Such mechanisms are also being used today to build the Central Ring Motorway (CRMW), 530 km long, round Moscow. It will run about 50 km out from the Moscow Ring Motorway (MRMW), connecting to the main routes in Moscow Province. The CRMW is divided into five start-up complexes and 10 sectors. It is planned to open the first sector in 2018. Construction of the motorway will be completed in 2025.
The future of PPPs in the road building sphere is considered by experts to be very promising. Life-cycle contracts and long-term investment agreements are expected to produce a yield of 13-15% per annum.
Incidentally, the strategic forum “Transport Systems of Russia” was held in Moscow in the summer of 2016. It was organized by the PPP Development Center with the support of the RF Ministry of Transport, the Federal Highways Agency and the State company “Avtodor”. The forum discussed several topical trends in the development of PPPs in the transport sphere, in particular the financing of transport projects, return on investments, the prospects of using private concession initiatives in the transport sphere, assessment of the budget efficiency of PPP projects, and also the best practical forms of carrying out infrastructure projects in the transport sphere.
Risks and special features
There are of course also risks associated with PPP agreements, Their localization is the responsibility of the partners. For example, in Russia, the state covers such risks as nationalization (expropriation); changes in the law; political opposition to the project; changes in tax, customs and other regulations; and the possibility of protest actions at the initial stage of construction of the object.
The private partner undertakes the risks of planning; construction risks, including overshooting the time scale and projected cost of the object; risks of demand for services (goods) provided or produced in accordance with the PPP agreement; exploitation and operation risks; change in the value of attracted assets, and also inflation and foreign currency risks.
There are also risks which are covered jointly by the state and the private partner, namely: a change in the terms of the agreement; lack of experience in implementing the PPP; force-majeure; and the distribution of powers between the partners.
As you see, the forms and mechanisms of PPPs in Russia are becoming more and more interesting for potential investors, including foreign ones. And such partnerships are being applied in ever more spheres.
It is worthwhile for a foreign investor to take into account that a tender for a concession agreement my be closed or open. The form of tender and its criteria and parameters are set by the decision to conclude a CA.
It should also be remembered that many ways of implementing PPP projects exist. For example, the optimum PPP instrument in the communal and housing sphere may be the handover of communal infrastructure objects to operators on the basis of concluded CAs containing tasks clearly set out for the investor on raising the quality of communal services offered to customers, and also responsibility for their non-fulfilment.
There are also special features in the motor road, health and other spheres. But where are there not? In any country?
However, it is unlikely that any country other than Russia can offer such regional and industrial variety of best practices of state-private partnership. In the RF Ministry of Economic Development, they include the creation of a centre for small aircraft in Kaluga Province, the building of a sports complex with artificial ice near Ulyanovsk, the reconstruction of the buildings of children’s facilities in Novosibirsk Province, a canal project in Tver, a solid-fuel bio-boiler shop in one of the villages of Vladimir Province and a solid domestic waste disposal depot in Novocheboksarsk.
PPPs are on the increase in Russia. And here it is important not to leave it too late. The more so because in selecting a concessionary, the chances of success are much higher for a foreigner. The many years of Western experience of PPP projects should not be discounted. Nor should the persistent conviction of Russians, including officials, that the punctuality and responsible attitude of foreign entrepreneurs are the best foundation for any partnership.