COMMENT: Why the PPP market right now in Russia looks like a strong bet

By bne IntelliNews June 15, 2015

Oleg Pankratov of VTB Capital -


Overcoming infrastructural constraints in the economy remains a key objective of policymakers in Russia in order to secure a substantial increase in long-term GDP growth. In the face of the external economic reality, investors in infrastructure face a number of challenges in the further development of public-private partnership (PPP) in Russia. Indeed, the state should shift its focus on attracting private capital to encourage the development of the infrastructure market in the country. Moreover, all investors actively involved in the infrastructure market are currently receiving clear signals that the government will continue to implement large-scale infrastructure projects, primarily on the basis of PPP which entails that a significant part of the financing should come from extra-budgetary sources. This is clearly a boon for investors that are looking at the Russian market.

This approach is particularly relevant for national projects such as the construction of a federal network of toll roads, the creation of new airport infrastructure, regional development projects, transport, utilities and social infrastructure. One of the key factors contributing to the appeal of infrastructure investments and PPP projects for Russian and international investors lies in stable and predictable returns.

Today, most professional investors maintain their interest in investing in the Russian PPP market. Good examples of this work can be seen in projects such as the reconstruction of the Pulkovo airport, which opened its doors to the public only this year (construction of a new terminal was completed in 2013). Upon its completion, the Pulkovo airport radically changed the transport situation in St Petersburg and the Northwest region as a whole. Today, with as many as 14.3mn passengers in 2014, the airport has reached its planned targets and even overtaken Vnukovo Airport, ranking third place in Russia. In St Petersburg, a consortium led by VTB Capital is also implementing a project to build and operate the Western High Speed Diameter road. Currently, only the north and south section of the highway are operational. The completion of the central portion is expected in 2016. VTB Capital also operates in other regions of Russia overseeing the construction of bridges across the river Kama and Bui in the Republic of Udmurtia and teaming up with the Vinci Concessions in a project for the construction of 7 and 8 sections of the road M-11, Moscow-C. Petersburg. VTB Capital also participated in the tender for the construction of sections 3 and 4 toll road CRR.

High interest rates remain one of the key obstacles in the Russian PPP market. Despite the steady recent years, interest rates severely discourage potential investors leary of the costs implicated in long-term projects. However, some positive developments forecasting a reduction of the rates by September 2015 have the capacity to drastically improve accessibility to infrastructure projects in Russia.

Today, VTB Capital is a lending leader in the Russian infrastructure market. We offer the best solutions for the structuring and financing of new projects, underlining the effectiveness of the PPP model as a way to achieve economic benefits while preserving the balance of interests between the state and private investors. In this regard, we consider the formation of long-term financial instruments very promising for the market, especially through its power to attract pension funds in infrastructure projects. Yield and risks of such instruments may be adapted to the particular type of project. For some instruments, the yield can be tied to the inflation rate. In the medium term, in addition to loans from commercial banks' major source of capital for major infrastructure projects could be pension funds.

It is our view that the number of projects offered to investors will steadily increase with each passing year, and the quality of these projects will also grow. Nevertheless, it is crucial for investors to understand the feasibility of the project in terms of economic performance as well as their ability to attract project financing. This depends largely on the approach of the state in regards to the distribution of project risks and the validity of long-term projections of revenues and expenditures as a contractual structure. We consider it right and appropriate for the development of new projects to take into account the experience of the legal and financial structuring already gained from the conclusion of the first PPP agreements and concessions in the transport sector.

On a broader scale, the further development of the PPP market depends strongly on an increase of projects prepared by the state. Moreover, we believe the current situation opens up much more opportunities, especially in the development of regional projects. All in all, we see 2015 as an ideal opportunity to prepare projects which can enter the competition next year.   

Oleg Pankratov is Head of Infrastructure Capital and Project Finance at VTB Capital. 

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