Russia's flagship public-private partnerships (PPPs) – notably the $3 billion Western High Speed Diameter, for which the prequalified bidding groups (Hochtief/Bouygues, Bechtel/ Intertoll, Alpine/FCC, and OHL) expect tender documents in the coming weeks – grab the financial headlines.

But there is potentially much more than roads at the vanguard of Russian PPP – particularly at a regional and municipal level. For example, St. Petersburg is becoming a key test site for the financial and legal PPP models already used to support infrastructure regeneration in the EU and the market for expected projects in St. Petersburg totals several billion dollars over the next 10-15 years.

Catalyzing the Russian PPP market into action is the fairly new Federal Law On Concession Agreements (Law on Concessions), which has created incentives for foreign investors and lenders into Russian infrastructure projects.

However, concession is not the only form of Russian PPP. St. Petersburg has recently introduced regional legislation extending the range of possible co-operation practices between the private and public sectors – the Law On Participation of Saint-Petersburg in Public-Private Partnerships (SPb Law) signed on 25 December 2006.

Federal pioneer

According to federal law the federation, state or municipality, retains the property rights to the facility and receives payment for the property, while the private investor receives the operating return. The Law on Concession established a basis upon which broad variety of facilities, may now be constructed or reconstructed by private investors, including: schools and hospitals, transport infrastructure, energy facilities, housing and utilities, pipelines, and other.

The law also specifies that the land plots necessary for the project should be passed to the investor within 60 working days from the date execution of a concession agreement. This is a material guarantee for foreign investors who are not comfortable with clarifying legal issues during the life-cycle of the project.

The law also contains equal treatment provisions during the bidding process and throughout project implementation and the investor also has the right to recover damages caused to them as a result of illegal actions and failure to act by public authorities or individual officials.

These measures help to promote a legal framework under which foreign investors have some basic protection as has been born out by the greater number of foreign investors moving into the market for flagship deals like the Western High Speed Diameter Toll Road, New Holland, St. Petersburg-Moscow Toll Road etc...

New bills

Though the Law on Concessions contains many provisions that have clarified the situation for investors, (as with any relatively new act) it also contains some provisions that could be improved.

For example, the Law prohibits pledging facilities under construction, assignment of rights or transfer of debt without the prior consent of a concession grantor up to the time when the facility goes into operation. This provision was included to ensure the fulfillment of obligations by a particular bid winner, but it may cause problems with financing because banks often require step-in rights as a security measure. Such rights are guarantees for loan repayments both at the stage of construction (when the facility construction works are in progress and the value of the object may differ from the cost of a completed facility), and at the operational stage (when loan repayment depends directly on facility's management efficiency and not the quality or cost of the facility itself).

New bills are already in the pipeline to solve these few remaining controversial issues. The proposed changes cover the issues of transfer of water reservoirs, subsoil interior and artificial land plots, potentially essential for the location of concession facilities.

In addition, 12 government resolutions have been adopted to set up contractual guidelines. This is primarily important for small, less complex projects requiring no professional structuring support.

Added to these recent changes, the Russian law is accommodating when it comes to managing liabilities. Unlike in the EU where off-balance-sheet treatment of a project is a fairly complicated issue to decide, Russian Draft Law On Amendments To Concession Law (Draft Law) foresees off-balance-sheet status of facilities as a general rule. This enables parties to use a more flexible corporate finance policy and more easily attract finance from international markets.

The Draft Law allows large projects to be commissioned in separate units minimizing waiting and maintenance costs for completed facilities. In practical terms this means that for example a whole toll road can be treated in a single tender rather than split it in parts to be sold by several concession tenders. This may considerably reduce non-performance risks and administrative/transaction costs.

The Draft Law entitles concession agreement parties to establish procedures for introducing amendments to concession contracts. Without these provisions previously unsuccessful bidders would have the opportunity to challenge any subsequent amendments and ultimately, the results of the tender.

The Draft Law suggests considering the volume of investments when deciding the level of regulated prices (tariffs), an element that should be very much appreciated by investors. At the same time, many European countries link tariffs to the quality of goods and services rather than the volume of investment and we may expect the same provisions to be introduced into the law later on.

True regional PPP law

St. Petersburg has become the first region in Russia to introduce its own legislation on PPPs in the modern sense of the term. Although laws governing investment contracts of private parties with regions existed before, the St. Petersburg law is the first example of an integrated and structured approach to the complete range of investor-city relations. It leaves behind the federal legislation in terms of investor benefits. Some of the revolutionary provisions of St. Petersburg law are outlined below.

Transfer of property

The SPb Law provides for the possibility of investor's ownership of built assets for a certain period of time or permanently (BOOT – Build own operate transfer, and BOO – Build own operate models). Such a deal structure increases the attractiveness of investment projects and provides investors with broader rights.

SPb Law allows the public party to furnish the investor with a set of required for successful operation movables and exclusive rights. This should be seen as a step forward compared to federal legislation as it enables transfer of both rights and responsibilities for the entire assets and business operations.

Financing

According to the SPb Law the investor has the right to receive payments directly from consumers (direct-toll). However, where direct-toll collection is impossible the city arranges for availability payments or shadow toll to the partner "suffering" from the tariff regulations. Another measure to attract investors is the ability to secure cheaper loans against the guarantees of the City of St. Petersburg which has one of the highest investment ratings in the country according to S&P.

Guarantees to investors

Besides "grandfathering clauses", and similar to guarantees already mentioned, SPb Law declares that "absence or lack of funds within the budget of the City for financing obligations under the Agreement is not a basis for changing or canceling such obligations and release from liability to perform". This avoids a situation where the public party is immunized from any claims under the excuse that it does not have enough money in its budget.
Finally, unlike the Law on Concessions, the SPb Law provides for the possibility of pledge and conditional sale, a facility that significantly increases the chances of attracting cheap debt to the project.

Implications for PPP projects

Political opposition and a number of legal issues make the prospect of implementation of the SPb Law uncertain, and whilst the situation is unclear, it is recommended that contracts be structured under federal law.
Nevertheless, despite the fact that according to several politicians certain provisions of the SPb Law still may be appealed, it is currently an effective statutory act providing quite an attractive regime for investors.

The practice of this act by the authorities will determine how safe and beneficial it is for investors. But even if certain provisions are amended, the SPb Law significantly increases the attractiveness of infrastructure projects for the long-term infrastructure investors in St. Petersburg.