In summer 2008 Russian PPP finally looked to have some momentum, as both international sponsors and bankers competed to get a head start in what looked to be a vast and promising new market. The September 2008 market disturbances came just as the first PPP projects had been awarded, and sent government and sponsors back to the negotiating table as plans for debt financing by then looked unrealistic. One and a half years on and the Western High Speed Diameter in St Petersburg remains stalled, while the Orlovsky Tunnel is about to re-start its tender process.

But financial close is near on two of the other pathfinder projects in the roads and airports sectors. "Pulkovo Airport and the first section of the Moscow to St Petersburg motorway are well placed to reach financial close during 2010," says Innokenty Ivanov, partner at Freshfields in Moscow. "Significant support is expected from multilaterals, including the EBRD, EIB and IFC, and from state owned Russian banks. In the coming months we will see the level of interest from private sector international financial Institutions."

The crunch had a disproportionately large impact on larger projects, which made the largest demands on sponsor and lender resources. There are signs that government, both federal and local, is likewise moving away from the large marquee PPPs. "The first Russian PPPs are very large projects, but going forward we will increasingly see smaller regional projects, potentially in the Eu200 million to Eu300 million range, being done under regional PPP laws, which are being adopted across Russia following the St Petersburg pattern, and these should include sectors such as water and social infrastructure," says Ivanov.

Pulkovo sets the – slower – pace

The concession for Pulkovo Airport, which has lurched through the crunch, is providing some of the impetus for this new-found enthusiasm for local PPP. The European Bank for Reconstruction and Development has finished its structural review of a Eu100 million ($136 million) A loan for the project, and it is now up for board approval on 13 April.

The airport deal involves a 30-year concession, covering the construction of a new passenger terminal by 2013, expansion of apron areas, development of real estate next to the terminal, and the modernisation of the airport's existing infrastructure. Pulkovo is being done under general civil law and the St Petersburg PPP law, as opposed to under the Federal Concession Law.

The Northern Capital Gateway consortium reached commercial close on the deal in November 2009. Lenders should find a reason to support the deal in the presence of experienced airport operator Fraport, which has a 35.5% stake. VTB Bank, with 57.5%, holds the biggest stake, and is also leading the debt financing. Greek investment and business group Copelouzos holds 7%.

The total investment is estimated at Eu1.4 billion, and Russian development bank Vneshekonombank (VEB) is likely to come in with a R10 billion ($332 million, or Eu224 million) 15- to 18-year loan, alongside loans from the International Finance Corporation, EBRD, state-owned Russian banks and some international commercial banks. But by leaning heavily on development finance banks, and their generous tenors, it will provide few meaningful opportunities for commercial lenders.

"We have had some discussions on Pulkovo with VTB, but the 15- to 18-year tenor goes beyond what we are prepared to consider," comments a London-based banker. "It will be interesting to see whether other banks find it too aggressive, and whether VTB themselves will have to cough up more than they planned," he adds. "We have not seen the structure yet, so will have to see how much commercial bank interest there is," adds a banker in Germany. "Clearly Russian banks will be able to offer uncovered bank debt, but the international banks are more likely to participate in IFC or EBRD B loans."

The consortium takes over the running of the existing airport in April, and while this is an informal deadline for financial close, bankers suggest that there is room for a short extension period for negotiations with banks if needed.

Lenders, however, note that Pulkovo Airport appears to enjoy the full support of President Dmitri Medvedev and Prime Minister Vladimir Putin, because it is one of the first PPPs in Russia, and because they see the new airport as important to economic development. Bankers are also comforted by the fact that Russia has managed to hold on to an investment grade rating, in spite of its recent economic troubles. In January, Fitch Ratings changed the outlook on its BBB sovereign rating from negative to stable.

But the crisis put paid to the notion of an aggressively private deal. VTB, a state-owned bank, now owns the majority of the project's equity, and the debt portion will be very heavily weighted in favour of multilaterals, state development banks and state-owned Russian lenders such as VTB or Sberbank, with a very small participation from foreign commercial banks. But the airport still attracted a top-tier global operator – Fraport – and the process, however flawed, has set some sort of template for future PPP deals in Russia.

The other major project heading for financial close this year is the first section of the Moscow-to-St Petersburg toll road, and lenders are currently deep in negotiations. This is a 30-year concession, with a five-year extension option. The Federal Road Agency Rosavtodor granted the M10 road concession to the North West Concession Company, which is led by Vinci, together with Russian company Ntrans. The consortium's adviser is Societe Generale. North West was selected November 2008 after an international tender, and the deal was supposed to close within six months, before the crisis and oil price collapse intervened.

The concession agreement involves the construction of a 43km stretch of motorway, starting at the MKAD, or Moscow ring road. It includes seven major interchanges, 37 bridges and a toll collection system. It will alleviate congestion on the existing M10 link between Sheremetyevo International Airport and the city centre. Total project cost is around Eu1.5 billion, of which the European Investment Bank said in November 2009 it might contribute Eu200 million as debt. According to Vinci, the concession contract will come into force during the first half of 2010, once financing arrangements have been completed, and will be followed by a 36-month construction phase.

For those gone on

Financial close may finally be near for Pulkovo and the Moscow St Petersburg road section, but the other big mega projects lag behind.
Work continues on the Western High Speed Diameter around St Petersburg – which was once seen as a flagship for PPP in Russia – but as a public works project, after the PPP element stalled. The winning consortium in June 2008 was the WHSD-Nevskij Meridian group, which including Strabag, Basic Element, Bouygues, Hochtief, Egis Projects, and Russian construction firm Mostoodryad No 19.

But the sponsors missed the chance to quickly put bank debt in place, and sponsors and government have gone back to the negotiating table to see how the project may re-emerge, with some but not necessarily all of the original sponsors. Work continues on roads around St Petersburg as public works projects, though the authorities say they remain keen to bring in private partners.

In October 2009 a transcript was published of a meeting between Putin and St Petersburg's governor, Valentina Matvienko. Matvienko alluded to the difficulties with federal and municipal budgets, but said that in order for the ring road to be finished on time by 2014 it was necessary to look at new ways to attract private investment. She called for rapid progress on legislation to create infrastructure bonds, with a planned issuance of R90 billion, and suggested that the WHSD could itself issue R25 billion of bonds.
But the necessary legislation has still not been passed. "The law remains very controversial, though infrastructure bonds may yet be important for the future of PPP in Russia, though it clearly is too late for the deals looking for financial close during 2010," says one industry analyst.

The delayed tender process on St Petersburg's R48 billion Orlovsky Tunnel project was about to be re-activated as Project Finance went to press. And a banker suggests that the Nadzemny Express PPP will probably move forward once Pulkovo is closed, since it is also being done under the St Petersburg PPP Law rather than the Federal Concession Law. Moscow's Odinzovo town North bypass is also being planned as a PPP, with a similar structure to the first Moscow-St Petersburg road section.

But these large, well-known, projects could be becoming much more rare. In addition to roads, regional deals are expected for municipal buildings and in the education sector. The first wave of Russian PPP transactions tended to be very large, even by comparison with established western European jurisdictions such as Germany. Smaller local PPPs will make fewer demands on lender resources, but will be viewed as having more political risk.

Larger projects have more powerful backers. When the memorandum of understanding for the Pulkovo PPP was signed in July 2009 those present included Matvienko, President Medvedev and German Chancellor Angela Merkel. Smaller regional deals have a greater likelihood of falling victim to local politics and will lack the political access that is sometimes required to resolve disagreements.

But in practice, the success of PPP in Russia may depend primarily on the price of oil. Russia enjoyed favoured access to western banks in 2005 and 2006, and even in 2007, as the crisis bit, it continued to enjoy access to internationally-syndicated debt because of a vast increase in oil revenues. But oil went from a peak of $147 in July 2008 to only $33 in December of that year. As the oil price sank and the Russian economy fell into recession, lenders pulled back. The Russian economy contracted by 8.5% in 2009, but it is now bouncing back faster than the European Union.

The price of oil is now back in the $80 per barrel area, and for 2010 some GDP growth forecasts go as high as 6.4%. As a result, some banks may soon be tempted back. Certainly, PPP remains at the centre of Russian government plans for infrastructure investment. VEB set up a specialised PPP centre in summer 2008, charged with supporting and speeding up the development of national, regional and municipal infrastructure projects as well as to raise the quality of municipal services through the usage of PPP. Russian state support for PPP will now have to be much more direct.