Public private partnership

St. Petersburg is undoubtedly the leader in Russia in the use of such form of interaction with businesses as public-private partnership.

As of today, St. Petersburg has 7 agreements on PPP-based projects, with another 7 projects currently at the stage of concept and tender documentation development.

A public-private partnership (PPP) is a public infrastructure development method based on long-term collaboration between government and businesses  where the private company takes part not only in designing, financing, construction or reconstruction of an infrastructure asset  but also in its subsequent operation (providing services using the completed asset) and/or maintenance.

From an economic perspective, PPP aims at encouraging private investment in services, work and consumer goods production, which are to be provided by public legal formations with funding from relevant budgets, and also at reducing government’s participation in the economic activity when the same objectives can be achieved by businesses in a more efficacious manner.

From a legal perspective, it deals with relationships between public legal formations (the Russian Federation, RF constituent entity, municipal formation) and private individuals. The relationships are based on a public-private partnership agreement (PPPA) or concession agreement (CA) signed between them and by their legal nature being civil law contracts.

PPPAs and CAs are independent legal institutes, with their conclusion and implementation governed by federal laws. However, CA is a form (model) of PPP.

PPPAs or CAs are always concluded by decision of an authorized public body representing the interests of a public legal formation, to implement a certain project.

The method to conclude PPPA or CA consists in launching a tender for the right to enter into an agreement. In addition, federal laws have separate provisions for the cases where it is possible to enter into an agreement without tender. The PPP mechanism is a popular and fast-developing form of interaction between private investors and government because it implies full risk sharing between them.

Key PPP models

Concession-based model providing for state (municipal) ownership of the subject of the agreement
 
PPP model whereby the subject of the agreement shall be held in private ownership, provided the conditions are met which are set out in  Federal Law No.224-FZ “On Public-Private Partnership, Municipal-Private Partnership in the Russian Federation, and Amendments to Some Regulatory Acts of the Russian Federation,”  PPP agreement, and other general provisions of the RF legislation.  

Law on Concession Agreements and Law on PPPs. Key differences

In 2015, the Law on Concession Agreements marked its 10th anniversary.  Essentially, it is the first statutory act in modern Russia to regulate PPP relationships. The key element of its legal regulation is concession agreements.

Under a concession agreement the concessionaire undertakes to create and/or reconstruct, at his own account, a property owned or to be owned  by grantor as well as to carry out activities using/operating the aforesaid property  which is assigned to it for this purpose for ownership and use for a period of time determined by the agreement.  

In 2015, the Law of Public-Private Partnerships was adopted which made it possible to use new, efficient and balanced PPP models in Russian practices.

The key element of its legal regulation is Public-Private Partnership Agreement.

The legal innovation provided by the Law of Public-Private Partnerships is that public infrastructure can now be privately owned. The investor is obliged to ensure full or partial financing of the establishment of such infrastructure and its operation in conformity with its designated use which is registered as an asset encumbrance.

For investors’ benefit the Law of Public-Private Partnerships and the Law on Concession Agreements provides for a mechanism to ensure the invariability of the key parameters based on which the decision was made to implement the project. In case of a change in macroeconomic conditions or legislation, which has direct effect on the project (taxes, preferences etc.), the agreement is to be reasonably amended in respect of the public party’s co-financing amount of the project and its implementation schedule.

Key differences:

  • under a concession agreement the asset ownership is always reserved for the public party (the grantor);
  • under a concession agreement asset operation is always vested in the grantor;
  • under a public-private partnership agreement asset operation can be vested in the public partner;
  • under a public-private partnership agreement asset ownership is assigned to the private partner.

PPP features

Long-term partnerships (for Public-Private Partnership Arrangements (PPPA) at least three years)
 

According to statistics, the Concession Agreements (CA) in Russia are concluded on average for a 13-year period.

The long-term nature of projects in the PPP sphere derives from the necessity of return on private investment and the complex nature of such projects

Allocation of risks and responsibilities among the partners by attracting a private investor not only to the creation of the object but also to its subsequent operation and (or) maintenance

The risks in infrastructure projects are possible changes in the project rates influencing profits and costs for the project’s parties.

Risk allocation is a mandatory condition of  structuring the relations between public and private parties in PPP projects, and the biggest difficulty during a PPP project preparation arises during the search of an optimal risk allocation.

Full or partial funding of the public infrastructure object creation by the private party

The main difference of PPP from the state order is the mandatory financing of the object creation by the private partner (concessionaire), meanwhile the public partner (concession grantor) has the right to offset part of the costs incurred in the creation of the object of the agreement and to carry out full or partial funding of the costs connected to the operation and (or) maintenance of the object of the agreement

 

Advantages of PPP mechanism

For the public party

For the private party

The opportunity to attract a private investor to finance the creation of the object enables one to implement infrastructure projects even in the absence of sufficient budget without increasing the debt burden in the current period

Determined terms of interaction  with the public side within the framework of a long-term agreement

The opportunity to combine  different stages (design, construction and operation) within one project

The opportunity to obtain land,  forest land, water area and (or) other (water, forest etc.) lands without tender  for the purpose of implementation of PPPA

The opportunity to purchase not the object, but the service by means of fees linked to the volume and quality of its provision, which also contributes to the development of competition in the market of socially important services

The opportunity of co-financing the project by the public party, obtaining additional guarantees (including minimal profitability)

The opportunity to use resources and  competences of the private partner (concessionaire) for the provision of socially important services, improving their quality and the opportunity to increase the project revenue through the delivery of  additional paid services and/or application of different solutions, reducing costs at the level of customer satisfaction, attraction of new technologies.

The opportunity to increase one’s revenue through the delivery of  additional paid services and/or application of different solutions, reducing costs at the level of creation or operation

Transferring part of the project risks to the private partner (the concessionaire)

Transferring part of the project risks to the public partner (concession grantor)

The decline of the state presence in the economy

The consolidation in the fields of activity traditionally occupied by the state

In  case of a private initiative – an opportunity to shift costs related to the project development to the private initiator of the project and to reduce the period of  investors’ selection as well as to increase the efficiency of the management of the property complex

In case of a private initiative – an opportunity to independently elaborate the project structure and suggest a draft agreement, reduce the timeframe of the conclusion of the agreement