Market Technologies: Partners not Executives


During the crisis the topic of public private partnership had chances to migrate from the category of fashionable topics to the category of well-mastered ones: it is in hard economic periods that the state and business need each other more than ever.

But, as the practice shows if the crisis becoms an impetus for movement towards each other, this interaction gains its specific features in Russia, that was pointed out at IX International Investment Forum that took place in Sochi in late September.

Laws are not Written

In Russia the notion of “public private partnership” (PPP) is not enshrined in law, lawyers point out. However, there are laws N 116-FZ of July 22, 2005 On Special Economic Zones in the Russian Federation and On Concession Agreements of July 21, 2005, which regulate the activity of PPP parties each in its domain. Gaps in the federal legislation are partially filled by regional acts.

Андрей Пушкин

Executive partner of the legal company Tenzor Consulting Group Andrew Pushkin highlights the significance of the law On Participation of Saint-Petersburg in Public Private Partnerships of December 25, 2006, thanks to which attraction of investments contributed to development not only of infrastructure projects but of the region on the whole. In many RF subjects laws on PPP, created on the pattern and likeness of the Petersburg document, have already been adopted or are being prepared to be signed up. Special economic zones (SEZs) appeared in Tomsk, Saint-Petersburg, Tatarstan.

Pushkin thinks that a concession is a promising scheme of interaction between the state and private business, especially current for the construction industry. Examples: concession projects of Saint-Petersburg, Tatarstan, the Krasnodar Territory (Orlovsky tunnel, the Western High-Speed Diameter), a perinatal centre in Kazan.         

Different PPP models are provided by means of creation of investment funds. In Ulyanovsk they learned to attract appropriations from the investment fund. Milliards of rubles of such companies as SABMiller and Mars have been working for a long time and quite successfully in this city. They would not begin realising their projects without budget investments to the infrastructure. The Administration of the Krasnodar Territory has recently signed a concession agreement on development of water and waste water services of the Territory.

The company “Yukov, Khrenov and Partners” names several large PPP projects: “Ural industrial – Ural polar”, creation of the first stage of the industrial zone “Volga region”, and construction of a station on sewage treatment in Moscow, South-West CHP (Combined Heat and Power) and CHP “Parnas” in Saint-petersburg,a multifunctional centre on rendering state and municipal services to population “Samara-Centre” in Samara, a project of reconstruction of boilers and outdoor heating systems of Petrograd region of Saint-Petersburg.

Discussion of PPP practice was the key topic of IX International Investment Forum “Sochi-2010”, which took place in late September. According to Chief Architect of the Krasnodar Territory Yury Rysin, the best example of interaction between the state and private business nowadays is the Olympics construction. The shares of participation of the state and private investors are in a ratio of 70 to 20. It is impossible to estimate effectiveness yet – all projects are in progress.

This feature – that is incompleteness of undertakings – is pointed out by many experts. Nowadays several dozens of projects are launched in different regions of Russia. However, the Partner of the legal company “Yukov, Khrenov and Partners” Alexandr Khrenov makes a reservation that it is early to speak about positive results, at the moment only the start was given and first difficulties became visible. The payback period of such projects is 15-20 years on the average.    

Sport Interest

Models of SEZs, as a rule, are based on huge territories and are often used in the tourism industry. Participants of a project get tax preferences. Concessions are more typical of the road construction domain.

Nickolay Vecher, Director of GVA Sawyer Saint-Petersburg, highlights that if there are no precise formulations, even the scheme of a government order can be interpreted as PPP. And the form of relations like “customer - contractor”, where the state acts as a customer, nowadays is more clear than PPP, where benefits of the parties are not evident yet.

There are a lot of accomplished projects in the capital, which were realised according to the scheme of investment contracts with the city. One of the recent ones – the project of development of the territory on the north-west of the capital by the company “City – XXI century”, which built two sports objects in Strogino: the stadium “Yantar” (it cost $8 million to the developer) and a multifunctional sports complex “Yantar” (it will become the School of Higher Olympic Figure Skating Skills, it cost 4 milliard rubles). Sports objects are encumbrance from the city. The company builds in Strogino 300 000 sq.m of housing. The investment contract in relation to fulfillment of obligations on construction of sports infrastructure dates 2001. The company does not give an assessment concerning the share of value of these objects to the total amount of expenses on building a new district. However, they point out that apart from stadiums in Strogino, according to another, later investment contract (of 2003) a new teaching and laboratory building of the Moscow State Institute of Electronics and Mathematics will be erected.

The share of the city has always been a sore subject for business, working with Moscow authorities under investment contracts. Especially in those cases when this share reached 50% of the value of the contract itself (in cash or in kind) and decreased greatly earning power of the project. However, it bought tangible benefits to the city in relation to development of the social domain. For example, according to the data of the Department of economic policy and development of the city 14 comprehensive schools were built in 2007 at the expenses of the city budget, while at the expenses of investors – 10. In 2007 the city build 10 sports and recreation centres, investors – 11, nursery schools – 88 and 13 respectively. However, during the crisis the share of participation of companies in erection of social objects decreased. For example, in 2009 the city built 10 schools and 29 nursery schools, investors did not build schools at all during that period, what about nursery schools - they built 4 of them. 20 sports and recreation centres were built at the expenses of the budget, while 5 such objects were built at the expenses of investors.  

In Techno-Style

The company “Espro-Property” thinks that the idea of PPP is realised best of all in industrial production zones and technoparks. One of the examples – an industrial park “A-Park” in Kaluga near the plant of the automobile concern Volkswagen in the technopark “Grabtsevo”, which is realised by the company together with the Corporation of development of the Kaluga region. The European bank of reconstruction and development also participates in this project, in Russia it actively mediates between business and authorities under realisation of PPP projects.

The “A-park” is designed for suppliers and producers of parts for the automative cluster, formed in the Kaluga region. It is realised according to the scheme “build-to-suit”, main tenants of the object will be companies Visteon, Lear, Benteler and others. Construction costs are borne by the investor, while infrastructure costs – by the state. This is the most wide-spread model of relations.

The company “Renova-stroygroup” (it is engaged in several projects of a intergrated development) generally interacts with the state under investment contracts, and financial burden is distributed according to the following scheme: up to 70-75% of money are invested by the company, the rest part is provided by the state. The company has a positive evaluation of the fact that the roles of all parties are clearly assigned in contracts. “Renova-stroygroup” acts as a main investor, creates ideology of the project, works out architectural decisions, prepares all project documentation, invests money in laying nets, its President Veniamin Golubitsky says. For its part, the state is responsible for roads and finances their construction – it happens within the framework of the project Intergrated Development “Akademichesky” in Ekaterinburg and “Yablonevy Posad” in Yaroslavl. The state compensates interests rates on construction of engineering infrastructure. At the expenses of the region, municipality and partially state social infrastructure is being built. Besides, the state in these and many other projects, in the Moscow region in particular, exercised extensive procurement of housing for state needs, first of all, for the Ministry of Defence, the Ministry of Internal Affairs and the programme of provision of housing for veterans.

“It is much easier for a developer to make arrangements with future clients if they know that the state represented by the local administration gives certain guarantees of the project realisation”, - Vitaly Antonov, General Director of “Espro-Development”, summarizes.

In concession projects the state always acts as a partner providing property rights, GVA Sawyer comments. What is needed from a private investor is money and operational control. The state resource is important in this case, as a medium term of realisation of a large project exceeds the term for which Russian banks are ready to give credits. The project in the PPP format is more expensive than in case when a company just acts as a prime contractor, for about 5-6%. But higher expenses are compensated by high effectiveness of realisation achieved by means of optimisation of risks distribution – between the state and a private investor. It is the main advantage of PPP.

The Order of Letters

The root of many problems related to realisation of projects in partnership with the state is revealed by the very formulation: it is not private public partnership, but public private one. As they say in cases like this one, the order is significant.

Practical difficulties of interaction between business and the state in joint projects result from those discrepancies, which are provided in the law, in particular, in the Federal law On Concession Agreeemnts, Alexandr Khrenov believes. “Private and public interests are not balanced”, - the lawyer says. All risks related to construction (reconstruction) of an object, are borne by a concessioner, including the risk of accidental loss or accidental damage to an object of the agreement even after the works were terminated. Non-specific formulations, referential rules, asymmetrical distribution of rights, obligations and responsibility among the parties, unfortunately, do not allow to speak about equality of parties of a concession agreement. A concession agreement does not provide any additional rights or any additional security to an investor, in comparison with the current legislation, but it imposes a number of significant obligations and restrictions. Last summer the law On Concession Agreements (02.07.2010 N152-FZ) was amended and this gap was partially filled. However, these measures are not enough for the institute of concession to become more attractive for business, the lawyers of “Yukov, Khrenov and Partners” believe.

In court disputes among participants of PPP, as a rule, decisions are taken in favour of the state. It is known that it is very difficult to return paid money from the budget. Besides, relations between the state and business have initially been less flexible than relations between private companies. Any change, even insignificant one, requires a lot of agreements, if it is allowed by law at all. 

“For business it is important to see the prospect of a project longer than that one, which is determined by the budget for three years. At the moment the process is going the way of trial and error, and each time the process begins from scratch”, - Golubitsky says.

In some companies they point out that normal work is restrained by elementary incompetence of civil servants. In most cases civil servants are driven by the principle “I do as I know”, Igor Zaugolnikov, Director of the Department of Marketing Communications Rodex Group, believes.

Rodex Group describes the situation with projects in the Kaluga region: for construction of a youth village, which was initiated on the federal level, regional authorities were obliged to provide land, communication lines and social infrastructure, while a developer – to build objects and sell them at the fixed price. However, after the village was built and inhabited, it turned out that prices on electricity were increased several times; gas was not brought at the fixed term. Despite the fact that according to the plan in the infrastructure of the village, where 200 families live, a nursery school was included, authorities shifted the term of the object delivery for a year and a half, referring to the crisis. Things of that kind undermine the very idea of state projects, Zaugolnikov thinks.

The main reason of difficulties is trite – there is no clear scheme of interaction between local and federal authorities: the region waits when money will be allocated to it, and on the federal level, in their turn, they think that if there are no requests, then everything is fine and the situation is under control.       

“Work with governmental partners is notable for off scale bureaucracy, - Zaugolnikov summarizes, - The role of the document flow is out-of-limit, it even exceeds the significance of projects themselves. Civil servants in one and the same organization contradict each other, to say nothing of those from different organisations”.

“Relations between partners (shareholders, founders, etc) are more responsible and mutually bounding than relations between a governmental customer and an executive. At present everything looks different, - Sergey Bozrikov, the first Deputy General Director of Amdex Group laments, - At the moment, there are specialists with experience, whose competence is enough for organization of collaboration with the help of PPP mechanisms on the federal and regional levels. At the local level, such experts may simply not be present”.

What the Invest Fund Finances

Tatyana Kretova, Director of the Institute of regions development:

- As an example, I can name two projects, which are financed out of the RF investment fund within the framework of the Governmental Decree N134 which presupposes investment into regional infrastructure projects.

1. Comprehensive development of a residential area “South-West -2” in Belgorod. The area covers the territory of nearly a quarter of the city and has not been inhabited before. Now 2000 plots for individual housing construction are assigned here (citizens get land and credits for construction of a private house on preferential terms). In the centre of the cluster there will be multistory housing, about 0,8-0,9 million sq.m. About 40 000 people will live in this area, a recreation zone will be formed, a full complex of social infrastructure will be created. 968,9 million rubles was received from the investment fund in December for construction of roads. The area allocated 756 million rubles which were used to build transport networks and objects of water supply. Earlier, the region financed construction of engineering networks of the area. The investor, OAO (Open Joint Stock Company) “Directorate of South-West Area” will invest 7,1 milliards rubles in construction of housing (of an economy class, from energy efficient materials of local production) and objects of social infrastructure (at the moment co-financing from the regional budget is being considered).

2. Comprehensive development of the area of the B. Khmelnitsky Street in Cheboksary. Two apartment houses of the total area of 19 000 sq.m. will be erected. One of the houses will be built with the use of frame construction with ventilated façade, another – from modern panel structures. 508 million rubles will be transferred from the invest fund during three years (2009-2011), out of this sum 265,5 million rubles have already been transferred. 151 million rubles during four years will be transferred from the republican budget (79,3 million rubles have already been transferred). The investor’s money, OOO (Limited Liability Company) “SUOR”, will amount to 3,552 milliard rubles. Budget investments are directed to construction of infrastructure objects: water pumping and sewage stations, main water supply and sewage. After construction will be finished, all objects will be transferred into ownership of Chuvash Republic.

15 November 2010