From public-private to public-public partnership?

15.06.2010 (15:40)

The model of public-private partnership (PPP) can be considered to have come into effect in our country. Despite the crisis and relative newness of such interaction between businesses and the Government in Russia, no major transport infrastructure projects based on concession agreements have been terminated. PPP is showing itself to be able to effectively solve its main task of attracting other than budgetary funding.

This conclusion was made by the 6th Annual Forum of the Adam Smith Institute “Transport Infrastructure in Russia", which took place from 1st to 2nd June 2010.

However, despite the recent economic stabilisation, doubts were expressed by the conference participants regarding the ability of the State to fulfill all its obligations under the PPP transport projects, in conditions of budget constrains. It is noteworthy that the Investment Fund has reduced the amounts given for infrastructure projects. For example, in 2009, the amounts mentioned in the project passports and approved by the governmental commissions were cut by 50%. This trend continues in 2010.

The amounts have been reduced by 40%, and the Budget has given only RUR 31 billion from the planned RUR 80 billion necessary to finance the projects in 2011. However, Anna Pechenova, Deputy Director of Project Investment Department at the Regional Development Ministry, asserted in her speech, that these commitments were a priority for the State. And the situation where the state may breach its obligations in the concession agreements is impossible. "Otherwise, the state will have to pay huge fines, which exceed the amounts necessary to invest by the State as a business partner in these projects," said Ms Pechenova.

Innokenty Ivanov, a partner and head of Russian infrastructure and transport practice group at Freshfields Bruckhaus Deringer LLP, said that those concerns referred to the myths and practices of the late 90's. "In spite of all the imperfection in our legislation, which is currently going through its creation stage, the existing laws (first of all, the Civil Code) allow for solving controversial issues of non-compliance in the PPP projects. The risk which results from various interpretations of laws, and which shows itself in aggressive inflexibility of managerial bodies, is more relevant for investors," said Mr Ivanov.

"The most effective protection from possible risks created by the state organisations is the demand for such projects,” said Vincent Piron, Director of Business Development at Vinci Concessions. “It is impossible to suspend the construction of such an infrastructure site as a road, for example, when street traffic makes people themselves to lobby such a construction. Project safety defines its usefulness,” he concluded. At the same time, Mr Piron thinks that if concession projects fail in spite of all expectations of businesses and assurances of the government representatives, it may seriously delay the development of PPP in Russia.

Elena Shibunina, Deputy Director General of Roads of Russia State Company said that her agency pays special attention to the PPP experience worldwide, including not a very positive experience. For example, a large number of projects is not being implemented in such countries as Hungary, Spain and Chile, because laws are inflexible, or vice versa, because the attempts are made to make them too flexible, "pulling" laws to the requirements of certain projects. "It is good for these particular projects, but very bad for all the rest," the expert emphasised.

Mr A. Chichkanov, Chairman of the Committee on Investments and Strategic Projects at the Government of St Petersburg, believes that it is possible to avoid these dangers in our country if to give most of the management functions to regional authorities. Own legislation about participation in PPP could be worked out in the regions on the basis of the federal law, which would provide regions with recommendatory, rather than obligatory, model agreements.

However, most participants of the forum think that in order to achieve this result, it is necessary to increase the competence of authorities at all levels. "For example, the government is responsible for the risk of changes in the legislation. Each municipality should also take the same kind of responsibility for changes in federal laws. And they should not consider the standpoints of their private partners to be whimsical," said Mr Chichkanov.

Rauf Yabbarov, head of PPP/Concessions and International Project Management at Transstroy, thinks that the current contours of the PPP model in our country are showing its paternal characteristics, because Russia's economy is growing, and the experience of public-private partnership is small so far. In addition, there is a tendency to further evolve the system towards a public-public, rather than public-private partnership. In his opinion, it is not crucial, especially considering that it does not go in any contradiction with the experience of some European countries. Also, it has such advantages as a stable funding (because using the Budget funds is more predictable), and the project risks lay with the State (which is very important in the initial stages of any project). "The only negative point here is that this scheme has a very small market," said the representative from Transstroy.

So, as Ms Shebunina said, the most important current issue for Russia in the matter of PPP projects implementation is availability of standpoints clearly stated by the power, especially by the Government, as well as a systematic expression of its will to implement them by means of appropriate memoranda of dynamics, priorities and strategies for the development of infrastructure projects. With such declarations, both the market and business are ready to cooperate.

Oksana Perepelitsa
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