Vedomosti

5.1 million passengers passed through St. Petersburg’s Pulkovo airport in the first half of 2009.

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Although many of the city’s PPP projects have been delayed and reworked because of the current economic situation, this form of development looks set to weather the storm.

October 30 saw the signing of St. Petersburg’s first public-private partnership, or PPP, contract. The city government signed the 30-year agreement with Vozdushniye Vorota Severnoi Stolitsy, a consortium including VTB Bank and Fraport, a German company that operates Frankfurt International Airport, to redevelop and then manage St. Petersburg’s airport. The 1.4-million-euro ($2.1 million) deal will come into force on April 30, 2010, Interfax reported.

The city’s governor, Valentina Matviyenko, said that work on the project would begin in June 2010, the Regnum news agency reported. Aside from the winning consortium, other bidders included a joint tender from Vienna International Airport, Lider and Gazprombank as well as Changi Airports and Basic Element.

	Vedomosti Pulkovo is set to be redeveloped  using private capital in one of the city’s PPP projects.

Meanwhile, other projects planned along similar lines are not faring so well. At the beginning of the year the city’s deputy governor, Alexander Vakhmistov, announced that project work on the Orlovsky Tunnel would be temporarily slowed, Regnum reported.

The prime minister, Vladimir Putin, attending a forum in the Tula region entitled PPP — The basis of post-crisis regional development, said that the current economic situation had greatly affected many PPPs. “Many projects... we have been forced to postpone or the government has been forced to take upon itself investment that had previously been expected from private investors,” said Putin, according to comments posted on the prime ministerial web site. However, he reconfirmed the government’s support for the schemes. “But this does not mean that the instrument should die, quite the reverse,” he said, adding “We as the government will further perfect these instruments.”

In October Arkady Dvorkovich, a Kremlin aide, said that there were only a couple of examples of successful public-private partnership projects so far. These examples deal primarily with the activity of development institutions. Russia’s Investment Fund and Development Bank joined with private companies to finance certain projects. Road construction is the most common infrastructure project the government is starting together with private companies.

However, budget legislation, as well as tax and financial legislation do not promote the development of public-private partnerships in Russia, as in most cases the government and private companies taking part in joint projects do not feel protected enough, Dvorkovich said at RussiaTALK, an annual investment forum in Moscow. “Based on our experience and these examples we are gradually changing the legislation. In the coming months we’ll be able to create comfortable conditions for public-private partnerships,” he said.

Private companies can partner with the state even without signing contracts. One example is the public-private partnership in regional employment programs where business is in charge of boosting the efficiency of certain companies’ restructuring, and the local authorities create new jobs web sites and are responsible for improving employees’ qualifications. Several regional employment programs began this year as part of the government’s measures to emerge from the crisis. These programs have already shown their efficiency but there is still no large-scale process, Dvorkovich said.

WHSD.RU Parts of the Western High-Speed Diameter totaling 5.7 kilometers were opened at the end of October.

Public-private partnerships are intended to bring the resources and capabilities of the private sector into providing and managing state infrastructure or social services. The PPP concept has been gaining popularity in the European Union and North America as a way of providing services. These partnerships are mutually beneficial instruments used to realize complex, investment-heavy projects that are aimed at improving the quality and effectiveness of social services. They speed up the realization of infrastructure projects that are important to the state and positively influence the overall economic development of a particular area.

With infrastructure in Russia greatly underdeveloped and its improvement key to the development of the country’s economy, the advantages of these projects in Russia are clear. There are numerous social and economic projects that would be impossible for the state or private sector to realize on their own, and PPP is a symbiosis that enables these problems to be solved.

However, with long-term private financing greatly reduced, or in many cases simply not available, interest in PPP projects from private investors is also reduced. Meanwhile, state funds across the globe are greatly reduced, meaning they are less keen to take on large-scale infrastructure projects. Nevertheless, work on four major PPP projects in St. Petersburg is continuing, albeit at differing and generally much reduced rates.

In St. Petersburg, public-private projects provide the city authorities with an opportunity to develop strategically important projects key to the city’s development that are difficult or impossible for the city to fund alone. This is particularly clear when economic development slows and the city’s tax revenues decrease, which is characteristic of the recession and post recession period.

St. Petersburg cannot develop as a large-scale metropolis without the corresponding level of infrastructure. Infrastructure development is necessary both on a city-wide level and in its individual districts. While PPP projects can cover a wide range of infrastructure and service, the development of transportation facilities is what the city is focusing its use of PPPs on. Much of St. Petersburg’s infrastructure is distressed and technologically out of date, and does not meet today’s requirements. A depressed district will remain economically depressed, if no major roads providing logistics are constructed either in or around it. However, although it is a pressing topic for St. Petersburg, the city’s plans remain paper projects.

This is mainly due to the serious planning and probation periods PPP projects require. Developing effective schemes requires time as both the demands of local legislation and the stringent requirements on investors looking to join a project lengthen the process. Nevertheless, St. Petersburg has taken a lead nationally in developing public-private partnerships.

The city’s interest in PPP projects is understandable, but the private sector’s interest in these projects is less clear. PPP schemes assume a return of the capital invested as well as profits for the investors over a prolonged period. Private investors’ interest in receiving a return on their investment is based on the state’s guarantee and a clear and well-defined financial scheme over a clearly defined time frame.

One of the basic principles of public-private partnerships is that the completed project either becomes or remains state property. Meanwhile, the state is expected to provide the developer a certain guarantee. There is no standard form of agreement for PPP schemes. They all depend on the specifics of the project, the required investment levels and local legislation. However, the most common forms of public-private partnerships are the concession and rent-return projects.

The legal framework

Regulation of St. Petersburg’s PPP projects was originally based on the 2005 federal law on concession agreements. However, following early work on the Western High-Speed Diameter project it became clear that further legislation was required to facilitate this type of project. Consequently, the following laws and decisions were made on a regional level to regulate PPP activity in the city:

There are four main infrastructure projects currently in various stages of planning and development in the city that are using forms of public-private partnership to provide investment.

The Western High-Speed Diameter

The Western High-Speed Diameter, or WHSD, is a highway linking the south-west of St. Petersburg with the city’s north-eastern districts, avoiding the center. The total length of the highway is 46.4 kilometers. Preliminary data suggest that the highway will be able to take over 100,000 vehicles per day. The planned completion date for the work is 2013, although earlier 2010 had been announced. The total cost of the project stands at $10 billion. The first stage of the project is located in the south-west of the city and will be completed using the federal and regional budgets. The first sections of the WHSD, which run from the city’s ring road at Predportovaya-2 to where it meets Krasnoputilovskaya street and the intersection with the third and fourth districts of the city’s Bolshoi seaport on a section of Avtomobilnaya street, were opened October 30, 2008. The current total length is 5.7 kilometers, of which 2.5 kilometers are part of the road to the port.

From 2011 further development of the project will be carried out on the basis of a concession agreement, with funding from the Russian Federation’s Investment Fund, the St. Petersburg city budget and a private company.

The agreement on the WHSD was the city’s first experience of PPP projects and the process was long and repeatedly delayed. A decision on the final winner of the tender, Nevsky Meridian, was only made in June 2008, after a competition to select an investor was launched at the beginning of November 2006. Applications were originally due to be received by January 15 2007, and results were to be announced by June the same year. However, the deadline for tenders was consistently prolonged, first to November 2007 then February 2008 and then finally to April 2008.

In mid March 2007 four tender documents had been submitted from the following companies:

In April, 2008 it was announced that construction work, or part of it, would be carried out by Mostostroi No. 6.

The Orlovsky tunnel

This tunnel project under the Neva River will connect the two banks between Piskarevsky Prospekt and the Smolnaya Embankment. Total investment is estimated at 26.3 billion rubles ($903 million). The timetable for this project has also been put back. Originally, the city administration intended work on the project to start in 2011, with tender applications due by December 2008 and a decision by February 2009. However, because of the crisis these dates were postponed and the following timetable adopted: the tender will open on February 18, 2010 for a private company to construct the tunnel, with a winner declared on April 2, 2010.

Vedomosti Participants in the tender for the Overland Express have taken part in city-led seminars on the project.

Pulkovo Airport

The competition for the tender to reconstruct Pulkovo airport was announced in April 2008. Despite the current economic situation, a range of potential investors showed interest in the project. The winner, the Vozdushniye Vorota Severnoi Stolitsy consortium, should invest around one billion rubles in building the new airport by 2013, the planned date of completion for the first stage of the project. The company will then manage Pulkovo for 30 years. The project’s appeal for investors is that they will be permitted to operate an income-generating property.

The Overland Express

Announced in December 2007, this project intends to develop a new form of public transport in the city on the basis of a public-private partnership. A commission headed by the city’s governor assessed the six applications to develop and run the planned Overland Express in April 2008. In May the same year it announced that the following companies had made it through the preliminary selection round:

A range of seminars were held in July and October 2008 for participants to discuss various aspects of the project and its PPP format with the committee and international advisors. The city’s executive used various comments from the participants in drawing up adapted competition documentation. The city then decided to postpone the deadline for receiving tender documentation to November 16, 2009, on the advice of the participants and international financial organizations.

Considering the limited liquidity available for project financing, the city government is currently studying possible measures to update the division of risks within the project as it stands to ensure it better meets the needs of both outside investors and potential external creditors, Russian and foreign. It is also working together with project consultants to analyze participants’ comments and suggestions on the tender documentation.

The altered tender documentation will then be sent to participants in competition for further discussion. The tender for the first stage of the project, from Strelny to Baltiiskaya Zhechuzhina district, may be announced closer to the end of 2010.