Driving down new roads

By bne IntelliNews May 25, 2010

Tim Gosling in Moscow -

Final documents to kick off Russia's first major private-public partnership (PPP) projects were officially signed at the end of April. The deals not only finally conclude a long and winding process to get this particular brand of investment up and running in Russia, but mark important steps in improving the country's investment climate and developing its transport infrastructure.

The first across the line was Glavnaya Doroga's agreement to build and operate the Odintsovo Bypass just outside Moscow, with North-West Concession Company's (NWCC) agreement with the Federal Road Agency on construction of a 43-kilometre section of the planned Moscow-St Petersburg toll expressway hot on its heels. Three days after that, Northern Capital Gateway (NCG) signed the financial closing on the redevelopment and operation of St Petersburg's Pulkovo airport.

On the one hand, the deals are an important step in the Kremlin strategy to improve the country's investment climate. It illustrates that the government has the will, and more importantly the ability, to negotiate complex legislative reform for this purpose - although it has taken several years. At the same time, they open an important avenue to help attract private money and resources into the massive effort needed to update the country's aging infrastructure. More specifically, two of them kick off new road building in Russia, which has been almost utterly neglected over the last decade or so.

There is one downside however, and that's the huge political support at least two of the deals needed. Russia has thrown its arms open to the private investors, hoping the deals will kick start desperately needed infrastructure development without putting further strain on the already-weakened public finances after the crisis. The danger is that the government could still end up with a huge tab, just like the one the UK had to pick up as its 1990s PPP programme (on which the Russian model is based) hit the buffers.

Generous terms

The Russians originally launched a wide PPP programme in 2006 and approved 20 projects intended to follow that particular route, including many highways such as the Western High Speed Diameter bypass in St Petersburg, which with a bill of RUB213bn is still stalled. However, progress was first hampered by legislative issues, and then stopped dead in its tracks by the crisis.

The road concessions just signed were the first put on the table in September 2007. With state guarantees of RUB11bn (€290m) for the RUB25.6bn Odintsovo scheme and RUB23bn towards NWCC's RUB60bn project costs in place, legislation on further financing has finally been tweaked sufficiently to allow the deals to be signed. A central pillar is special legislation, passed on April 1, to allow project-specific government guarantees for infrastructure bonds, an interim measure whilst a federal infrastructure bond programme is being thrashed out between the ministries.

The hope is obviously that these first deals will set the model for future PPP projects - $50bn worth of which were presented in May at the Russia Strategic Infrastructure Leadership Forum, spanning sectors from highways to high-speed rail, water and waste to energy and power. Not only do they set out legislative and financial formulas, but also the likely profile of the private participants. All three consortia are built in a fashion common in the construction and development sectors in Russia: large western partners, which import expertise and technology, will link up with domestic companies with the know-how to negotiate the tricky local environment.

Three years ago, a whopping $1 trillion was earmarked to redevelop Russia's ailing Soviet-era infrastructure - with most of it set for the transport sector. However, the crisis soon put an end to that, with state resources pumped into social welfare and keeping the economy afloat. The issue remains vital though; it's no coincidence, for example, that shipping companies and ports are at the forefront of the government's new privatisation drive.

Just how keen the government is to finally get the PPP programme moving is illustrated by the financing structure of the new deals, especially the NWCC project. On top of the state guarantee, development bank Vnesheconombank (VEB) and state-controlled Sberbank opened a RUB29bn 20-year credit line for the consortium, as well as a RUB4.5bn VAT facility. The government will also fully guarantee RUB10bn in infrastructure bonds, 70% of which VEB has committed to buy.

Presumably, not every private partner in the future can expect to have the entire financing package handed to them on a plate. In the case of NWCC, it was somewhat forced by the refusal of the international financial institutions - which have been heavily involved in advising on the government's PPP programme and a couple of which had originally signed memoranda of intent - to get involved with the new stretch of road, due to public protest over its route through a forest just outside Moscow. That said, Glavnaya Doroga managed to get the government to agree to guarantee a RUB8.2bn bond issue very late in the day after it claimed concern that it wouldn't manage to raise the cash from banks.

Thankfully, sealing the €1.2bn Pulkovo deal was far easier on federal funds, with VEB - which has a special PPP department and aims for 30% of its loan portfolio go to such projects by 2012 - contributing around one-third of a total of €716m in long-term credit. The remainder will come via five international development banks, but the real bonus is that the European Bank for Reconstruction and Development (EBRD) and World Bank are sourcing €190m from commercial banks for the project, which should help expand sources of finance for future projects - and that's the main point, after all.

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