Russian PPP investment drive hits pothole in Khimki Forest

By bne IntelliNews September 13, 2010

Tim Gosling in Moscow -

When Russian President Dmitry Medvedev ordered a delay to the construction of the first stage of the new M10 motorway through Khimki Forest, it was hailed as a triumph of civil society and a sign the Kremlin is ready to give environmental concerns a fair hearing. However, it also threatens a vital investment drive.

The public-private partnership (PPP) agreement with North-West Concession Company (NWCC) - a consortium led by French construction giant Vinci - to build the motorway was a milestone. Russia has been trying to get a PPP programme up and running for around a decade to help with the gigantic investment needed for its roads, railways and ports.

In 2007, the government said it planned to spend $1 trillion on upgrading the country's crumbling soviet-era infrastructure. The economic crisis put paid to that idea, but helped step up action to push the necessary complex legislation through. The RUB60bn ($8bn) deal with Vinci was a major reward for finally cutting this Gordian knot.

The final deal with NWCC was inked in April, with the state handing the consortium a huge, guaranteed financing package in order to get the ball rolling. The motivation for this generosity was to show investors that PPP is open for business in Russia.

PPP pothole

Whilst Medvedev's order just three months later is a PR dream for those trying to soften the image of the Kremlin, it's proving a nightmare for the PPP programme. "A problem like this is of course likely to have a significant negative effect on other investors thinking of entering Russia via PPP," admits Vladimir Melnikov, a director at Graylings PR agency with extensive experience in working on infrastructure projects.

Whatever happens next in the saga surrounding the Moscow-St Petersburg highway, the damage has already been done: the sudden halt illustrates that PPP projects are open to uncertainty - and uncertainty is poison for investors. "This is almost the first contract of its kind by the Russian government, and now we are going to lose it because of a bunch of people who claim that they are saving nature," Nikolai Lizunov, an adviser to the Moscow regional administration's transportation department raged to The Moscow Times at public hearings on the route of the road in early September, though crucially he conceded that the hearings should have been held before the contract was signed.

For the meantime, Vinci are toeing the line. Xavier Huillard, president of the company, told reporters in late August: "We were surprised by the statement of Mr. Medvedev... but Vinci continues to believe the authorities will find a swift solution." He was careful to add, however, that the contract is only binding once funding is finally received and the land made available.

As damaging as the delay could be to the government's PPP programme, what will worry potential investors even more is it looks increasingly likely that corruption has played a role in the delay.

Speculation is rife the project has worsened the bad blood that exists between Moscow City Hall and the Moscow Region administration, with an anticipated rise of at least 30% for land surrounding the completed motorway thought to be at the core of the spat. To many observers it seemed shocking that city authorities appeared to offer support to the environmental protestors, with reports in business daily Vedomosti in 2009 suggesting that Inteko - the real estate company owned by Moscow Mayor Yuri Luzhkov's wife - holding land along the main alternative route for the road through the village of Molzhaninovo was the motivation behind it.

However, reports of mayoral u-turns that emerged on September 6 suggest city hall has been persuaded - or ordered - to back off. Luzhkov had said he was opposed to construction all along and made "demands for more analysis," according to RIA Novosti. Two weeks later, the mayor wrote in Rossiiskaya Gazeta that: "The planned and agreed route should stay. It is realistic, some sacrifices have been made, and it is a pity. But the price is more justified than the alternatives."

Meanwhile, the Moscow Region authorities and local Khimki administration leapt into action to whip up support for the route through the forest to continue. Media reports have widely reported that local residents were pressured to sign petitions to the government. The Khimki administration controls the land through the forest.

Analysts such as Nikolai Petrov of the Moscow Carnegie Center now expect the road to plough onwards through the forest in the near future. "It's a tactical move to allow things to calm down," he told The Moscow Times. "Then they'll carry on with it. I'm not waiting for any real stop on the project."

Russia put around 20 major PPP projects on the table in 2006, most of them roads, and a handful are reported to be in the midst of negotiations with international investors. The sudden halt to work on the Moscow-St Petersburg highway is only likely to make those talks tougher for government officials.

However, Melnikov hopes a silver lining could yet emerge. "As so often in Russia, bad news can actually be good," he suggests. "Encountering a problem early in the implementation of such a pilot scheme usually means that the leadership will make sure they smooth out the wrinkles."

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