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Public-Private Partnerships in Russia: A Time to Change
There was a milestone event in Saint-Petersburg in the beginning of 2012. A school offering general education for 285 students was opened in the city on the river Neva. It is the first public facility to be constructed by investors under a public-private partnership (PPP). The key feature of using a PPP to build social infrastructure is that the investor is responsible for construction and the subsequent operation of the facility for the period laid down in the agreement. However, this type of cooperation in Russia is still quite rare.
Implementing major PPP projects to construct infrastructure facilities is rather widespread abroad. In meeting the need to build roads, airports, recycling plants and reconstruct purification plants and social infrastructure, the government attracts money from private investors and gains the possibility to reduce the financial burden on budgets already in the red. Private investors obtain guarantees that their invested capital will be returned, which results in a stable, long-term and, as a rule, socially significant project. But things are not so rosy in Russia.
One of the main reasons is due to inadequate legislation. There is no standard or legal regulation covering this area in Russia. There is no uniform federal law covering Public-Private Partnerships, but the need to adopt such a law has been under active discussion recently. Meanwhile, the Federal Law on Concession Agreements adopted in 2005 is still in force, but it regulates only one specific type of PPP - the concession.
Due to the absence of a Federal Law on PPPs, more than 40 regions of the Russian Federation have adopted their own laws. Regional authorities believed that well-developed framework at the local level would increase investments and the authorities and business would be able to get off the ground. Nevertheless this approach failed to solve all the issues. Regional laws vary too much, so that an investment project that could be implemented in one region or cannot be implemented in another. Moreover, regional laws often contradict Federal Law on Placing orders for government or state needs.
A typical PPP project envisages the possibility of constructing an infrastructure facility using funds from a private investor who then plans to lease or rent this facility to the local authority. Therefore, PPP agreement should envisage possibility of providing a land plot and of concluding a construction contact, as well as the subsequent conclusion of a lease contract. In such cases, Russian law provides that a private investor should take part in three separate tenders, i.e. a land plot tender, a tender to conclude a government (municipal) contract for the construction of the facility, and a tender to conclude a lease with representatives of the local authority. This is despite the fact that the main idea of PPP is a single tender for the right to implement a project that includes the provision of all of the above. Such approach triples the efforts and puts investors off negotiations.
On the other hand PPP projects have the long payback period of between 25-30 years. It goes without saying that the local authority should provide reliable guarantees to its private partner that the latter will received his funds back. The main problem here is that pursuant to the Russian Budget Code, the “budget horizon" is limited to three years. This is the maximum period for which money equivalent of guaranties can be incorporated into the State budget. Longer guarantees can be provided only under “special-purpose” local government programs which are – in turn – subject to approval and cancellation by the local authorities themselves. This means that even if the current local authority leadership has decided to start a “special-purpose” program, this decision could be easily reassessed by a new incoming team. So for the private investor, these conditions underpinning the issuing of guarantees are beneath criticism.
As for perspectives of Public-Private Partnerships in Russia expert opinion is currently divided. Some believe that a Federal Law on PPPs is indispensable, while others believe that some direct amendments to the current regulations will be sufficient. Nevertheless, virtually no one doubts that changes in the federal regulations governing this area are inevitable, and the time for such changes has come.
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