What needs to be changed in the PPP mechanism
Alexey Lazarev
PPP expert, EDB
As recent events have shown, businesses and governments have really seen that PPP is an effective mechanism for the fulfilment of tasks important to a society. I cannot agree with those who insist that the PPP market is stagnant. It is moving, albeit slowly, to finding correct patterns for mutually beneficial cooperation. The process will evolve in parallel with the ongoing development of the road network, transport and municipal infrastructure, and the social sphere.
Our successful experience in public-private partnerships (PPP) confirms that well-structured transactions are an effective mechanism for the development of infrastructure and provision of quality services, especially in view of budget restrictions. However, this process needs to be fostered. Russia’s market in PPPs is rather young compared to the EU countries, for example. The first serious talks about cooperation between public authorities and the private sectors began in 2005, when Federal Law 115-FZ on Concession Agreements took effect. More than ten years have passed since that time. The law was amended several times and it has become clear that it needs to be upgraded again. The direct proof of this is the so-called “Bashkiria case.” It has caused a serious stir among market players since there appeared a risk that all previous and future concessions with concession grantor payments could turn illegitimate.
What should be polished then for the PPP market to become more active? These are, in my opinion, three rather transparent and important things.
The first is that the regulatory framework needs to be improved. Although the Law on Concession Agreements proved to be an efficient legislative instrument, providing for one of the most popular and prominent forms for the attraction of private investments, there’s still room for improvement.
The long-awaited Law 224-FZ on PPPs, which took effect in 2016, imposes a number of restrictions and, for that reason, has not evoked any serious interest among market participants. Amendments to the law are intended to remedy this. As we know, they are in the process of consideration and, hopefully, will be submitted for review to the State Duma soon. The amendments concern, in the first place, the prohibition on the participation on the private part of companies with more than 50% of public control and this will automatically exclude some of the investors and financing institutions, which were historically active in the PPP market and are controlled by the state one way or another.
An important amendment to Law 224-FZ that concerns financing institutions’ risk profile is the one that governs compensation mechanisms used when a PPP agreement is terminated. The current wording may be interpreted so that creditors risk losing loan repayments without the possibility of collateral enforcement.
The second is that development banks should be involved more actively. What does an investor need to do? Investors need to take risks specific of PPP projects and provide long-term finance (usually, for about ten to fifteen years) with an interest that the project financial model would be able to bear. How many Russian banks can enter such transactions? Hardly more than two or three. In this situation, as we see it, international institutions that operate in the Russian market and are ready to invest in Russian transactions in crisis conditions should be given a greater role in the fulfilment of infrastructure projects. We should mention here that development banks and EDB in particular can offer non-standard solutions in addition to “long” money. These may include, for example, debt instruments conducive to the mutually beneficial optimisation of transactions, which is, in turn, an important criterion for the success of the project as a whole.
The third is misunderstanding of the PPP principles. While the algorithm at the federal level is rather developed (due to improvements introduced as a result of completed transactions), the experience in PPPs at the regional and municipal levels is less substantial and the degree of competencies in this area is not always high. As a result, authorities often cannot find an investor even for an attractive project for years. In this case development banks, with their high level of competency and serious pre-project appraisals, can also be helpful. Advisers or PPP development centres that are being created and whose aim is to present a project so as to make it attractive to potential investors and lenders can also play an important part.
Both sides know these problems very well. Their solutions are also no secret. What needs to be done is to move forward, without stops. Each successful PPP transaction provides an incentive and possibility to structure subsequent transactions at a higher level.