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PPPs vs. Concessions in Russia

PPPs vs. Concessions in Russia

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Public private partnerships and concessions are effective tools to allow governments to partner with the private sector to develop and finance key infrastructure projects. These forms of collaboration are particularly relevant in Russia, where infrastructure investment needs are estimated by the World Bank to be about USD 1 trillion.

Not surprisingly, Russia has a well-developed legislative framework around PPPs and concessions to ensure the balanced allocation of risk between investors and public entities, with separate federal laws on PPPs (effective from 2016) and on Concession agreements (effective from 2005) supplemented by regional and municipal legislation. 

PPP and Concession Law – Similarities and Differences

The key difference between a PPP and a concession under Russian law is that in a PPP the investor gets ownership of the developed object, while in a concession the public entity acquires ownership. Another important difference is that in a PPP the technical maintenance and functional operation of an object can be split between the private and public entities; this is not allowed under a concession agreement, where both functions must be performed by the concessionaire. 

Both PPP and concession laws allow direct agreements with the financing parties in order to define the details of their participation in projects, including relevant step-in and other protection mechanisms.

Currently, real (immovable) property is always required to be part of any infrastructure to be delivered under the PPP or concession agreement. Equipment, machinery, and other assets considered as movable property can be delivered under the agreement only if they are technically and functionally attached to an immovable part of the infrastructure. The Russian government is planning legislative changes to allow such agreements to be concluded with respect to IT infrastructure without requiring the involvement of immovable properties. The draft federal law on developing IT infrastructure under PPP and concession agreements was adopted in the first reading on January 10, 2018. 

As a general rule, PPP and concession agreements are concluded through a competitive tender. However, as an alternative, potential investors may submit a “private initiative,” which — in a nutshell — is an unsolicited proposal to a public partner or grantor to execute a PPP or concession agreement. The proposal for the private initiative should include a draft of the proposed agreement and a financial model.  The public partner or grantor will then consider the proposal and decide whether or not to implement the project, and if so, whether to accept it under the proposed or modified conditions. If the decision is positive, the government must officially publish the project to give other investors the chance to bid. If other bidders come forward, a competitive tender is required. In the absence of other bidders, the PPP or concession agreement may be concluded without a tender.  

There are special rules regarding the participation of foreign companies in Russian PPP and concession projects. As a general rule, foreign companies are allowed to participate in concession agreements, with the exception of projects related to utilities or military infrastructure, but only Russian companies can participate in PPP agreements. However, these restrictions are not applicable to Russian subsidiaries of foreign companies registered as Russian legal entities. 

What’s Next?

Russia’s PPP and concession laws are constantly developing to make such projects more attractive to investors and financing organizations. There are currently a large number of proposed amendments aimed at further improving the PPP and concession legislation, including the aforementioned draft law on IT-related projects. The Russian President also announced a new mechanism, called an “infrastructure mortgage,” which would allow the full compensation for the investments of the private partner or concessionaire by the public partner or grantor. The specifics of this mechanism are still being developed and discussed by the authorities. The Russian Ministry of Economic Development has also prepared and announced a massive set of upcoming amendments to the PPP and concession legislation to further increase its attractiveness to investors.   

Leading Russian banks like Gazprombank, VTB, and Sberbank are very active in initiating and financing PPPs and concessions, and they have built up teams and departments to focus on such infrastructure projects. So far, these banks remain the leaders in PPPs and concessions in Russia, at least on the federal and regional levels. However, this situation is changing and local construction and operations companies, which historically operated based on classic public procurement mechanisms, are starting to take a more proactive position and increase their competencies in order to take a more leading role in the PPP and concessions market in Russia.

By Karina Chichkanova, Partner, Dentons

This Article was originally published in Issue 5.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.