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Denis Kachkin, the Managing Partner at Kachkin & Partners, thinks that the federal law on PPP won’t bring any revolutionary changes into the regional economics and, in particular, into the economics of St. Petersburg.

Last spring the State Duma passed in the first reading the federal law on public-private partnership (PPP) which ideally must become a powerful driver for the development of long-term projects in all spheres of national economy. When there are no budgetary funds for infrastructure creation and operation, the law may create real instruments for attracting private capital, global one in particular.

However experts believe that the PPP draft bill is not elaborate enough at the federal level on a number of factors. The main pitfall is that the investor still has no guarantee of recovering the invested funds, which is nevertheless given in the regional St. Petersburg PPP law.

PPP to meet any taste

According to the RF Ministry of Economic Development, today there exist more than 10 PPP forms in the world practice. Western schemes take into account all groups of investors: both large ones and those possessing more modest potential; hence the diverse PPP models on offer.

Among the key PP instruments in the West are such plain schemes as Lease Contract (leasing with the right to reconstruct), Service Contract, Turnkey (design, construction and facility management on budgetary funds), Management Contract (asset management), such as LCC (life cycle contracts), BOT (building, ownership transfer, management), BOO (building, ownership, operation), BOOT (building, ownership, operation and title transfer), DBOOT (same as BOOT, but the investor also organizes project design), BTO (building, ownership transfer, operation), BOLT (building, ownership, leasing, title transfer), DBOLT.

But there are also more complicated contractual models that are meant for big business (the same as the BOLT model, but the investor also organizes design works), DBFO (design, construction, financing, operation).

In Russia only one contractual scheme is used: concessionary agreements. And in fact the new PPP draft bill just makes one more step towards further development of the provisions in the law «On Concessionary Agreement» that came into force in July 2005. However concessions impose numerous restrictions on the participants – for instance, that properties cannot be transferred to the ownership of a natural person.

«It would be helpful if the federal law described basic PPP models which are well-known to the Western legislator,» says development director at LSR Group, Vladimir Loginov. «It would significantly facilitate the drafting of specific PPP agreements while not excluding the liberty of such agreement and would speed up Russia’s integration into the PPP-based international business process.»

In the expert’s opinion, settling the property matters in the draft bill would not be superfluous. «The principles of distributing the ownership rights and other corporeal rights relative to the developed or redeveloped project, the schemes of the revenue and spending distribution as well as the model used to make decisions on most significant issues – are not quite clear,» states Loginov.

The proposed draft bill altogether contains very few specific norms, although, in expert opinion, the PPP law must solve only one problem: define the mechanisms and terms of attracting private investments to socially significant projects, for which the government cannot find requisite resources.

«In essence the draft bill stipulates that such legal relations are possible, but this is clear even without the new law,» comments Vladimir Loginov. «In addition, it also declares that the relationship between the parties must be regulated by their special agreement, which is again logical in the lack of detailed norms set in the law. Yet the draft bill only alludes that the role of government is in providing rights or property, while the private partner is expected to provide financing and also, when applicable, to organize the process of project development, redevelopment and operation. Nevertheless, even in this area the draft bill allows the parties to introduce their own «rules of the game».

St. Petersburg’s experience

«Both sides will benefit from a competently developed regulation,» believes Igor Onokov, CEO of Leontyevsky Mys, a developer. The builder obtains administrative resources and the government – socially significant infrastructural facilities and square meters of new housing and commercial real estate. For any project to be delivered the developer will need land, expensive utilities, raw stuff, etc. In case of attracting bank capital, this increases the project cost as early as at the initial construction stage, and with the involvement of the government, whose resources are a lot cheaper, the final cost will be way lower.»

Meanwhile, in the words of Denis Kachkin, head of infrastructure and PPP practice at Kachkin & Partners, the lack of any federal law has never been a hindrance for St. Petersburg. Back in 2006 the city on the Neva became the first among Russian regions to adopt its own PPP regulation. «At that moment the city actually exposed itself because there existed certain contradictions between the national and regional legislations. But owing to the fact that St. Petersburg then possessed a strong political will and powerful administrative strings, the law started working,» recalls Kachkin.

The examples of successful PPP schemes in St. Petersburg include the project of the Ring Road (KAD) that began functioning two years ago, modernization of Pulkovo airport and building of the Western High-Speed Diameter (WHSD) which is now at the concluding stage of construction.

Nevertheless, a number of projects was put on hold because of the rising cost. «The main problem remains the impossibility of accurate financial and temporary planning on account of instability of labor costs, the prices of energy, construction materials and the inflation rate. Inadequate attention to the issues of design and planning the process of works production also plays an important role,» explained Vladimir Loginov. Experts also partly attribute the rise in prices for concessionary PPP projects (Orlovsky Tunnel, Overland Express, etc.) to imperfections in both the federal and local PPP regulations.

Notwithstanding, St. Petersburg is an avowed leader among the Russian regions in terms of implementing PPP mechanisms. Unlike the murky federal draft bill, all norms are clearly stipulated in St. Petersburg’s law, including the possibility for the investor to register ownership rights to a finished project over the term fixed in the agreement or forever. «This allows the investor to attract loaned funds on better terms,» explained the press service of St. Petersburg Committee for Investments. «In addition, St. Petersburg’s law better guarantees the investor’s rights, including in case of any amendments to the law or discovery of the earlier unknown encumbrances on the plot of land allocated for the investor.»

On the other hand, the claims of offended investors who invested in subsequently cancelled projects do not always hold water. Thus, in the opinion of Denis Kachkin, the rights of the concessionaire LLC Nevskaya Concessionary Company (part of FirstQuantum Group) were not violated in the Orlovsky Tunnel project. «As regards Orlovsky Tunnel, this is not a legal problem,» Kachkin believes. «The project was not well structured and the private partner, without waiting for the conclusion of an agreement, incurred certain costs at its own risk and peril, which the company could have avoided. On the other hand, there were no problems with those projects that were carefully prepared and the city always kept its commitments.»

Time presses

Experts are positive that they’ll hardly wait for the federal law to be finalized in St. Petersburg. The time is ticking away, since the base of promising investment projects to be realized on PPP terms is being actively built up.

As we were told at St. Petersburg Committee for Investments, now the project portfolio of St. Petersburg government counts 18 significant projects, including the facilities of industrial, sporting, social and transport infrastructure. In particular, the project of a double-level pedestrian bridge over the river Neva with dedicated cycling lanes, shops and restaurants plus an open terrace, which will serve as a link between Krestovsky island and 300th Anniversary Park in Primosky district, is now underway. To speed up the return on investments, the investor will be provided with plots of land on adjacent grounds, on concessionary terms. The project cost amounts to 1.5bn rubles, while the return on investments is planned in 20 years from now.

In addition, a multilane 20‑km long motor road is planned between Fayansovaya and Zolnaya streets, which will be a section of the outbound artery from WHSD to KAD on the right bank of the Neva. The project is estimated at 130bn rubles, the tentative recoupment time is 25 years. As we were told at the Committee’s press service, the project effectiveness was calculated on the basis of source data for WHSD.

In the nearest future St. Petersburg authorities hope to find a partner for implementing four new objects of the street and road grid, with the extension from 1 to 5 km. The cost of each project is estimated at about 4bn rubles, the recoupment time is 18 years.

The project of a creative cluster to bring together the representatives of creative industries can also be of interest both to the city and potential investors. According to the designers, complementary facilities with their creative atmosphere must be laid out on the former territory of Tram Depot #2 covering 2.4 hectares on Vasilievsky Island. These will be workshops, showrooms, entertainment areas as well as retail space, hotels, clubs, restaurants and offices of creative companies. Total built-up area will come to 32,000 sq.m with the level of investments standing at 1.3bn rubles. The project will pay for itself in 9 years from now. The authorities intend to build this quarter solely on private investments, limiting their participation to assistance in formalizing the legal and ownership status, passing through coordination and approval procedures, preparing for auctions or land allocation on leasehold terms for the specific purpose of building culture and education facilities.

Not so much needed

So there’s no reason to wait, when the national Russian bill is brought to fruition. «Since the federal draft bill is not very specific, future PPP agreements will to a greater extent depend on regional legislators and on specific law-enforcement agencies which will be formulating these agreements,» explains Loginov.

Denis Kachkin also believes that the federal law won’t introduce any radical adjustments to regional economies, including the St. Petersburg economy. «It may remove certain barriers on the way to developing the PPP mechanism, but will not be able to get rid of them compeletly,» Kachkin resumes.

But this may well add some headache, given that an important norm is proposed in the federal draft bill: attracting a private partner on a competitive basis. «Here the first problem arises: repeating the mistake made in the government procurement law, where the price, regardless of its denomination, is used as the only benchmark,» Loginov warns.

At any rate, the draft is not elaborate yet and it’s unclear when it will be endorsed by the Kremlin. The second reading scheduled for last December was pushed back. Obviously, St. Petersburg and other regions will have to cope on their own.

Tatiana Elekoeva