Problems Involved in Using Various Forms of Public Private Partnership in the Russian Federation.

15.06.2011

Since the beginning of the 1990s, there has been active discussion of the problems of stimulating investment and creating a legislative framework, encouraging local and foreign investors to invest production capital in the Russian economy, including by introducing concession and other agreements. Compared to the legislation of that time, major advances have been made in this direction, among them adoption of the important Federal Law of 21 July 2005 No. 115-FZ “On Concession Agreements” (the Law on Concessions). 

Yet the Russian legislation on PPP is still not fully developed and the list of forms of PPP, for which special regulation is envisaged, is very limited, while that of PPP forms used in practice is even shorter.

The majority of Russian PPP projects are implemented as concession agreements. This form is particularly used in such projects as the concession agreement on the Moscow-St. Petersburg Express Highway - Km. 15-58, the concession agreement on the “New exit on to the Moscow Ring Road from the Moscow-Minsk “Belarus” Federal Highway” and many other projects, including regional and local ones.

The Russian PPP legislation also gives a very narrow definition of concession relations.

Under Russian legislation, the essence of a concession agreement consists in the concessionaire undertaking to create and (or) renovate, at its own expense, certain property owned or to be owned by the grantor (that is, state or municipally owned) and conducting business using this property, and the concessionaire being provided with given property for possession and use (but not the title thereto) for a specific period of time.

Initially, the Law on Concessions envisaged even greater restrictions, insisting that the property provided to the concessionaire be free of any third party rights. If the subject of the concession agreement consisted in utility facilities, it was extremely difficult to meet this requirement, since most such municipal infrastructure facilities in the Russian Federation are under the operating control of specialised enterprises.

The Law on Concession was amended on 6 July 2010 so that, if a concession agreement related to municipal infrastructure systems and other such facilities, at the time of transfer they could belong to a state-owned or municipal enterprise by right of operating control. 

It was also established that the given enterprises might exercise individual powers as the grantor, including by transferring to the concessionaire the rights to possess and use real estate and the right to land plots. Before the amendments were introduced into the legislation, a public enterprise was not permitted to sublet land plots or transfer rights and obligations under lease agreements to third parties.  In addition, a number of changes were introduced to simplify the procedure for raising credits (although the given rules engender many questions from the practical point of view).

In general, the given amendments promoted greater use of the concession form of co-operation and also helped eliminate a number of difficulties involved in implementing projects launched previously.

Specialists also include production-sharing agreements among PPP forms. A special law was passed on these at the end of 1995 (Federal Law of 30 December 1995 No. 225-FZ “On Production-Sharing Agreements”).  A production-sharing agreement is one under which the Russian Federation grants a private partner, for a payment and for a specific term, exclusive rights to seek, survey and extract mineral raw materials on a subsoil sector, whereas the output produced is to be divided between the state and the private partner.  Despite the federal law, the given form of co-operation has only been used for three projects -- Sakhalin-1, Sakhalin-2 and Kharyaga.

Some experience has been gathered in Russia of other forms of PPP, too, including the BOOT (Build Own Operate Transfer) / BOT (Build Operate Transfer) models, under which public infrastructure facilities built by an investor are also operated thereby for a certain period, after which they are transferred to state ownership.

One of the first examples consisted in the projects to expand the purification plant in Zelenograd, as well as several projects for mechanical dewatering of waste water residues, which were launched back in 1997-1998. So, in accordance with resolution of the Government of Moscow of 17 March 1998, an investment contract was concluded between the Government of Moscow and a German investor granting the latter the right to build the purification plant in Zelenograd according to the BOOT model, on the condition of compensation of the investor’s costs within 12.5 years and subsequent transfer of the facilities to ownership by the City of Moscow.  For these purposes, the Department for Economic Policy and Development of Moscow was charged with allocating annual capital investment limits under investment programmes. Preparation and implementation of the given projects was based primarily on subjudicial regulatory acts of a regional level, given that there was no proper regulation of relations regarding expenditure of budget funds at the federal level and the Law on Concession had not yet been passed.

Relatively recently, Moscow launched yet another BOOT project for construction of a “Production unit (plant) for sodium hydrochloride” in accordance with directive of the Government of Moscow of 27 September 2007 No. 2144-RP, “On construction of an urban construction facility, constituting the subject of investment tenders, located at: Nekrasovka, Lyubertsy Purification Plant PU Mosochistvod MGUP Mosvodokanal, implemented on the BOOT model (Build Own Operate Transfer)”.
The structure of the given project is the following. The developer is a legal entity specially set up by the investor and belonging 100 % thereto. Once construction is complete, the developer is to lease the facility to a specialised company (a limited liability company set up by the Government of Moscow, the Developer and MGUP Mosvodokanal). When the investment pay-back period is over, Moscow must buy up 100% of the shares in the developer.

The possibility of using the BOOT model is envisaged by Law of St Petersburg of 25 December 2006 No. 627-100 “On Participation by St Petersburg in Public Private Partnership” (Clauses 2, 6, and 7, Article 5). At the same time, BOOT-structured projects were implemented in St. Petersburg even before the given law was passed. One example is the project to construct the South-West Purification Plant, under which GUP Vodokanal St. Petersburg is to buy up the built facility into St. Petersburg ownership, using both equity and raised funds (Law of St. Petersburg of 21 June 2002 No. 263-22 “On the St. Petersburg Target Programme ‘On completion of the South-West Purification Plant’”).

In some constituent entities of the Russian Federation, legislative acts have been passed proclaiming the possibility of implementing similar projects (see, for example, Clause 1, Article 5 of Law of the Republic of Udmurtia of 9 October 2009 No. 39-PZ, “On Participation by the Republic of Udmurtia in Public Private Partnerships”, Article 4 of the law of the Republic of Tyva of 2 November 2009 No. 1552 VХ-2, “On Participation by the Republic of Tyva in Public Private Partnerships”).
Recently, there has been increasing talk about the need for more active use and development of other public private partnership instruments, such as “life cycle contracts”, long-term investment agreements and infrastructure bonds.

Despite the existence of regional legislative acts, however, the federal legislation includes restrictions impeding use of the given forms of PPP (including the BOOT model). Yet it should also be stressed that the institution of PPP is a complex one and relies primarily on federal rather than regional legislation.

The given restrictions are associated mostly with (i) provision to the private partner of a land plot or real estate (the legislation lists the grounds for such provision and related procedures); (ii) complications in setting tariffs (if the private partner is to conduct business at state-regulated prices/tariffs); (iii) difficulties in the state accepting long-term financial liabilities and the specifics of the Russian budget legislation; (iv) lack of proper regulation of the procedures for selecting the private partner and other circumstances, including objective difficulties in compelling the state to discharge its obligations.

So, let us return to the law of St. Petersburg, which proclaims the possibility of structuring PPP-projects in a variety of forms. In particular, the project for creating, renovating and operating Pulkovo airport facilities on a PPP basis is structured  proceeding from the regional legislation, rather than the federal. Even so, during preparations for and the initial stages of the project, problems caused by objective federal restrictions had to be resolved.

Overall, however, it should be noted that there are significant, positive development trends in the Russian PPP legislation. The State Duma Expert Council for the legislation on public private partnership, various federal executive authorities and interested organisations are drawing up amendments to the Russian PPP legislation to improve and develop this institution. Practical implementation of PPP is also expanding in Russia - with respect not so much to large-scale projects as to small regional ones.  

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