Of the three Russian pathfinder public-private-partnership (PPP) deals closed last year the financing for the Eu1.24 billion ($1.65 billion) Pulkovo Airport concession stands out. Not only is Pulkovo Russia’s first airport PPP, the deal did not go the state-guaranteed bond route adopted by the Odintsovo Bypass and Moscow-St Petersburg road deals. The financing also in­cludes an IFC/EBRD B loan placed with international commercial banks – a prece­dent no other Russian PPP has achieved, although Pulkovo has the advantage of significant foreign income streams to off­set forex risk and historical traffic figures upon which to base cashflow forecasts.

According to Oleg Pankratov, co-head, global banking and head of infrastructure capital, VTB Capital – part of the spon­soring consortium, “One of the key conditions of the tender was that the entire financing for the project should be raised without recourse to any state sub­sidies or guarantees. This was an am­bitious requirement, but it proved suc­cessful in demonstrating that a complex infrastructure finance transaction can be implemented in Russia on a purely com­mercial basis.”

The commercial case for the project is a strong one. The existing airport has dis­played strong historic passenger growth – a compound annual growth rate (CAGR) of 11.2% between 2000 and 2009; relative stability during the onset of the world financial crisis in 2008-9 – just a 4.4% drop in passengers in 2009; and pas­senger growth of 28% between January and October 2010. Pulkovo shows simi­lar growth rates to the Moscow airports and has recovered even faster than Shere­metyevo. Consequently, the approved busi­ness plan, which estimates an average passenger growth of 4.5% per year bet­ween 2009 and 2039, does not look am­bi­tious in its forecasts.

The 30-year PPP concession includes taking over existing buildings, operations and employees; the construction of a new 140,000 m2 passenger terminal capable of handling 17.5 million passengers per year with the possibility of expansion to 22 million; the expansion of apron areas, de­velopment of real estate adjacent to the terminal and the modernisation of the airport’s existing infrastructure.

The concession awarder, the government of St Petersburg via state-owned Pulkovo Airport Company (the former airport operator), issued a call for expressions of interest in 2008 and shortlisted three bidding groups – Basic Element, Vienna Airport and North­ern Capital Gate­way – in early 2009. Northern Capital Gate­way (com­pris­ing VTB Capital 57.5% (also financial ad­viser), Fraport 35.5% (lead operator) and Copelouzos, via Horizon Air Investments, 7%) was selected as preferred bidder on 29 June 2009 and signed the concession contract in October.

The sponsors will transfer 11.5% of income from the airport to the St Petersburg government throughout the life of the concession. There is also a minimum fixed concession fee, which is structured as lease payments for the airport land, of around Eu2 million per year.

Although there is no state guaranteed financing on Pulkovo, the deal is heavily supported by development banks and multilaterals – most significantly Vnesheconombank, the EBRD and IFC. “Debt financing for Pulkovo was raised at the height of the financial crisis, therefore it’s only natural that support from IFC/EBRD was welcomed in ensuring that the necessary volume of bank debt could be raised. The international commercial lenders have shown strong interest in the deal, and we are confident that, had the market conditions been more favourable, the depth of the commercial debt market would have been sufficient to cover the entire debt financ­ing needs of the project,” says Pankratov.

VTB did look at other options, as Pan­kratov admits: “It is hardly ever the case in pioneering infrastructure finance deals that the transaction structure remains fixed from inception to completion. There­fore, from the very beginning VTB Capital had defined key parameters (financial, legal, technical, risk allocation) wherein it would be acceptable for us to participate. The final model reflects multi­ple case scenarios for traffic, cost base and financing, and withstood a number of sensitivity checks carried out by 15 finan­c­ing institutions and three equity sponsors.”

The total financing includes Eu480 million of equity and around Eu760 mil­lion of debt. The debt comprises a R10 billion 15-year term loan from Vnesh­econombank; a Eu170 million 15-year IFC and EBRD A loan split Eu70 million and Eu100 million respectively; and 15-year credit facilities from the Eurasian Devel­opment Bank (Eu67.67 million), Nor­dic Investment Bank (Eu50 million) and Black Sea Trade and Development Bank (Eu15 million).

The Eu200 million IFC/EBRD 12-year B loan pulled in book­runner and man­dated lead arranger commitments from UniCredit (Eu55 million), Standard Bank (Eu39 million), Espirito Santo In­vest­ment (Eu23 million) and Nordea (Eu23 mil­lion). DZ Bank (Eu17 million), KfW-IPEX (Eu16 million), Mediobanca (Eu13.5 mil­lion) and RZB (Eu13.5 million) came in as mandated lead arrangers.

According to Pankratov, “all the multi­laterals lent on the same key terms en­abling us to achieve competitive pricing compared to recent infra­structure trans­actions in Russia and Western Europe.”

Pulkovo differs from other Russian pathfinder PPPs both in its debt and concession structures. “Pulkovo uses a BOOT structure under the St Petersburg PPP Law, whereby the project company owns the asset for the life of the concession, and differs from the other two Russsian pathfinder PPPs which have been imple­mented under a BOT scheme pursuant to the Federal Law on Concession Agreements,” notes Innokenty Ivanov, partner at Fresh­fields in Moscow. In effect, Pulkovo’s concession structure “creates an additional layer of security that can be offered to the project lenders and therefore facilitates the raising of debt financing on adequate terms,” says Pankratov.

With its international debt and BOOT structure the Pulkovo Airport financing is the yardstick against which infrastructure transactions in Russia and CIS will be measured in the coming years. Pankratov concedes Pulkovo has a number of unique features that cannot be easily replicated in other deals, but claims the majority of key aspects can be used as a template for future PPP projects.

Most significantly, the Pulkovo project demonstrates that global financing practices can be successfully married with the legal and commercial business reality of Russia, and therefore long-term cashflow-based lending to projects with construction and operational risk could become more common.

That is good news for a Russian infrastructure sector expected to need in excess of $1 trillion over the next decade. As Pankratov says, “the market will need access to all potential sources of capital – including state guaranteed bonds. Russian government initiatives to support the PPP market during its development stage are extremely important. But, over time, as the market matures and more sources of capital become available to projects, some of these initiatives may be phased out and replaced by the private sector.

“For example, the long term stable nature of infrastructure project cash flows and their intrinsic linkage to inflation makes PPP projects extremely attractive to pension funds that need such assets to match their pension liabilities. Pension funds already play an important role as investors in Russian debt instruments such as infrastructure bonds. They are also eager to invest in other infrastructure finance instruments such as equity. UC Leader, the manager of Gazprom’s pension fund, is a good example of such an investor.”

So, diversity in the way major infrastructure projects are financed and procured is likely to be Pulkovo’s lasting legacy – the first Russian PPP to move away from state guarantees. 

Pulkovo Airport PPP
Status: Financial close 28 April 2010, signed 16 July 2010
Description: 30-year BOOT PPP concession for
Sponsors: Northern Capital Gateway – VTB Capital, Fraport, Copelouzos
Financial adviser: VTB Capital
Concession awarder: St Petersburg government
Financial advisers to concession awarder: Citibank, IFC
Financial adviser to lenders: Ernst & Young
Commercial lead arrangers: DZ Bank, Banco Espirito Santo, KfW IPEX, Mediobanca, Nordea, RZB, Standard Bank, Unicredit
Development bank lenders: Vneshesheconombank, IFC, EBRD, Eurasian Development Bank: Nordic Investment Bank, Black Sea Trade and Development Bank
Legal counsel to lenders: Clifford Chance
Legal counsel to sponsors: Freshfields Bruckhaus Deringer
Legal counsel to concession awarder: Dewey & LeBoeuf
Technical adviser to lenders: Scott Wilson
Technical adviser to sponsors: Halcrow
Technical advisers to government: Mott Macdonald, ASM