Getting PPP off the ground has been a slower process in Russia than initially expected when the first pipeline of deals was announced two years ago. Although awarded last month, the Western High Speed Diameter (WHSD) pathfinder road concession in St Petersburg was left with just one bidder at the table and the terms of the concession have still not been finalised.

But if WHSD is not an ideal template it is at worst a tangible start on a PPP market that two years ago was long on discussion and short on action, legal or financial. "Long term Russian infrastructure projects are viewed as a good bet, though clearly PPPs and concessions are a new product in Russia, so there is no track record. Sponsors and lenders want to see the Western High Speed Diameter move forward as a benchmark project which will help the development of the overall market," says David Griston, Head of the Energy and Infrastructure Group at Clifford Chance in Moscow.

Initially there were four WHSD bidders: MLA Lieferasphalt (a consortium including ALPINE Mayreder Bau, FCC-Construccion and Deutsche Bank), ZSD Nevsky Meridian LCC (including Strabag, Bouygues Travaux Publics and Hochtief PPP Solutions); Vincida Grupo de Inversiones (including Obrascon Huantre Lain and OHL Concessions), and St Petersburg High Speed Thoroughfare (including Bechtel). But the clear favourite was the grouping of Strabag, Bouygues and Hochtief, all of which have experience of construction projects in Russia, as well as track records in PPP in other countries.

Added to this is the fact that Basic Element, the group owned by Russian metals billionaire Oleg Deripaska, has a 30% stake in Strabag, which it acquired for Eu1.2 billion in April 2007. Basic Element was brought in as a core shareholder partly to enable Strabag to gain better access to the fast growing infrastructure market in Russia, particularly bridges, roads and tunnels where Strabag has a strong track record.

The strategy has worked. The winner, announced in June by Governor of St Petersburg Valentina Matvienko, goes under the name WHSD-Nevskij Meridian. It features Strabag together with Basic Element, while the other partners are Bouygues, Hochtief, EGIS Projects, and Russian construction firm Mostoodryad No 19.

Negotiations over the concession agreement are scheduled to take place in St Petersburg over the next few months, and in addition to talking to the Russian and St Petersburg governments, the consortium also has to start firming up bank debt in a difficult financial environment.

Firming up banks and the concession structure

"We still have to see how the project will develop, and we are working with the Russian authorities to structure a package which is feasible," a consortium member told Project Finance. "There is quite a lot of appetite from both Russian and international banks but in the end it will depend on what the contract looks like. Obviously the further away a project is the easier it is for banks to say that they have the appetite to lend, but as we get near to financial close we will see who is willing to take Russian PPP risk."

With a strong line-up of well-known PPP sponsors in the consortium, banks should be interested in participating, and according to advisers working on the concession the Russian government is taking a flexible and realistic line on how it will be structured. According to Oleg Pankratov, managing director and head of VTB Infrastructure Capital Group, funding out to 15 years is potentially on offer from several Russian and international banks – "Swaps in excess of $1 billion of roubles to dollars can be structured with tenors stretching beyond 10 years," says Pankratov – thus mitigating forex and interest rate risk for the sponsors.

Main construction work is expected to begin in spring 2009. The WHSD will be mostly eight lane and have an overall length of 46.6km. Around 55% of the ring road will be on elevated sections, and there will be 14 interchanges.

The total project contract has a volume of around R212 billion ($9 billion). Approximately 50% of construction costs will be contributed by the Federal Government, and early construction work has already started.

The importance of WHSD for the Russian government is high – despite realising enormous revenues from the oil and gas sector. "That money is earmarked for other things, and the government is not necessarily looking to use oil revenues to build out infrastructure," says Griston. "PPP is viewed as a good model to use for certain infrastructure needs, and the transport sector is clearly a priority. Bankers generally view Russia positively, and corporate names like Gazprom, and Rosneft have been able to access commercial bank debt despite the difficult global financial environment."

"Once the concession law has been tested with WHSD it should be easier to move forward with other infrastructure concessions," says Innokenty Ivanov, partner at Freshfields in Moscow. "The legislation is new, but the government and the private sector have now clarified many points, some of which have been set out in recently published amendments to the concession law."

Further PPP deals

There are two PPP models being followed in Russia in parallel. The first involves the Federal Government's concession law under which the physical asset remains owned by the government during its 30 year life thus making enforcement of bank security complicated.

The second is a specific PPP framework developed by the St Petersburg government where the deal pipeline is most advanced. For example the $1 billion Pulkovo Airport concession "is not being done under the Federal concession law, but is a BOOT structure under general civil law and the specific regional PPP law in St Petersburg," says Ivanov.

The Pulkovo roadshow in London in early May attracted a lot of interest. The official target for announcing the winning consortium is March 2009, with the contract then to be signed by the end of June. Citigroup is advisor to the City of St Petersburg.

Following the announcement of the successful bid for WHSD, the two other projects most likely to proceed in the near future are the Orlovski Tunnel and Nadzemny Light Rail, with initial proposals now being prepared and submitted.

The Orlovski Tunnel is a 1km long tunnel under the River Neva in St Petersburg, but the project is also important to the federal transport network, since it will help increase capacity of the Volgo Baltic Waterway. Thus the Federal Road Agency and the Government of St Petersburg are acting as the joint grantors of the concession.

Last December the Ministry of Transport of the Russian Federation announced that four bidders had made it through pre-qualification. These are; Nevskaya Concessionaya Companiya (led by Vinci);Nevskij Tonnel (featuring Strabag, Egis Project) Suri Holdings and Zueblin AG); Boyuguesproekt Opereiting (led by Bouygues); and Neva Traverse (led by Hochtief and including Royal Boskalis Westminster NV). And in January the European Bank for Reconstruction and Development expressed interest in principal to provide financial support.

The other upcoming high profile PPP project is the Nadzemny Light Rail concession in St Petersburg. This will run for 30 years, and requires the successful bidder to design, build, part finance and maintain the system which will have 16 stations and 30km of track. The sponsor will be paid on an availability basis during the life of the concession.

In April this year it was announced that five bidders have been shortlisted. These are; Mitsui; a consortium of Ansaldo Transporti Sistemi Ferrovanti with Soares da Costa Grupo SGPS, ATM Azienda Transporti Milanesi, and Skoda Transportation: Yuzhny Express comprising Alstom, Bouygues, Tranadev and Mostootryad 19; Strelna-Express comprising Bomardier and Vinci; Express-Severnoy Stolitsy, comprising Strabag, Siemens, Basic Element and VTB Bank.

There are other very large projects planned for the future, including more roads, seaports and hospitals. In the early planning stages is the Moscow to St Petersburg toll road, and the Moscow to Minsk motorway, though these clearly need the WHSD to be signed in order to help them move forward.

In July various amendments to the Russian concession law were published, and are now applicable to all concessions, but bankers and sponsors are still waiting to see the exact details of the contract for the WHSD – in short the private sector still need more clarity on some points.

"The WHSD is very complicated, and there were always concerns about using it as a flagship first PPP – if there are any problems with the negotiations it can only hurt other PPPs," says a local banker. But he notes that the very high quality of the list of participants in the WHSD, including the local knowledge provided by Basic Element, is a big plus and makes the project look more bankable.

The original timetable may have been much too optimistic, but the WHSD is finally happening, and should provide forward momentum for PPP in Russia. Certainly, during the years of discussion about PPP, Russia has emerged as an energy superpower and as a higher quality credit than even five years ago. It has a positive outlook on its sovereign credit rating at a time when many other sovereigns have a negative outlook. Against this background bankers will probably want to come in on secured lending opportunities with first class sponsors and a strong macro-economic story.