This content is from: Local Insights

PPP project difficulties

Svetlana Savina

In the last few years, Russia has been increasingly discussing public-private partnerships (PPPs) and the need to develop them further. Yet the legislative framework being elaborated applies only to some PPP tools. In order to implement PPP models/tools frequently used worldwide, the Russian legislation should be amended. Furthermore, Russian PPP projects invariably involve certain universal objective complexities, caused by Russian legal specifics.

PPP projects presuppose the state undertaking civil-law obligations along with administrative commitments (to change legal treatment of a territory, introduce tariffs, and so on). It is hard to enforce such public partner commitments, especially if using civil-law remedies. In addition, such undertakings are sometimes beyond the scope of the authority signing the PPP agreement, often concluded by a state or municipality, but also requiring contribution by other bodies to enable project implementation.

A project's payback ability often depends on the applicable tariffs, regulation of these being the domain of state authorities at various levels. For instance, utility tariffs are defined by RF regions, while tariff surcharges for consumers are established by municipalities. In addition, tariffs are introduced for a limited period, normally one year. This might disable a state authority from guaranteeing favourable tariffs. Lawmakers have already tried to guard investors against this risk, but their efforts only apply for selected PPP schemes (for instance, concessions).

Russian legislation permits allocation of public land for construction purposes in limited instances: by special tenders and dedicated procedures (which disagree with PPP objectives and can hardly be used) or in cases expressly envisaged in the legislation – for a concession agreement, brownfield development, state or municipal contract, for example. The Russian Ministry of Economic Development has already drafted land law amendments to do away with these restrictions.

Russian legislation lacks specific partner selection procedures for most PPP formats. Without applicable regulations, the state itself lacks understanding of how to arrange the tender. Discretionary choice of the applicable procedure is associated with the risk that tender results might be contested and is also conducive to abuse and corruption. Legislative changes to govern investor selection are already being developed by the Council of Experts under the Russian State Duma.

The Russian government's capabilities to undertake long-term financial commitments are limited since the federal budget is drafted for three years ahead (the next fiscal year and a two-year planning period), while local budgets are developed for one or three years (the next fiscal year and the planning period). Though budget funds might be allocated under long-term special-purpose programmes, the law nearly always allows a competent authority to cut budget funds earmarked for a programme or discontinue a running programme (for instance, if it proves inefficient). The Russian legal community is discussing this hindrance and developing legislative remedies for it.

Other PPP challenges include difficulties with a public partner buying back completed facilities under BOOT projects. Privately-funded public property reconstruction projects also face issues of distributing the developed property and applying privatisation regulations. Impediments experienced by concession projects often derive from inflexibility and legislative restrictions.

Despite all this, some generally positive regulatory trends have shown up in the Russian PPP sector. A number of legislative amendments anticipated in 2011 will, hopefully, resolve most issues mentioned here.

Svetlana Savina

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