March 2014

Recently, the Russian authorities introduced several novelties aimed at stimulating private investors to implement road projects in Russia based on PPP schemes. On December 28, 2013, changes were introduced into PPP legislation in regard to PPP toll road projects, to clarify the procedure of establishing tolls for using such roads. In addition, a new procedure of Parallel Competitive Financing (PCF) was introduced, which enables the private partner to avoid long negotiations with financial organizations and attract financing from the financial organizations suggested by the public partner instead.

Recent changes of legislation on toll roads

PPP projects in the road infrastructure have been gaining more and more momentum in Russia during the last few years on federal and regional level (both public and toll roads).

PPP road projects are usually implemented in Russia based on concession agreements, which is the only form of PPP agreement regulated at federal level, for example (i) the construction and further operation of sections of toll highway between Moscow and St. Petersburg (M11) with total length of 669 km, (these projects are currently at various stages of project implementation, e.g. the concession agreement was concluded in 2009 in regard to section 15 – 58 km), and (ii) a highway bridge over the river Lena in Yakutsk (the project is currently at the tender stage).

On December 28, 2013, some changes were introduced into PPP legislation concerning toll roads to clarify the procedure of establishing tolls for the use of such roads. More specifically, the federal law “On auto roads and road activity in the Russian Federation…” (the “Roads Law”) was amended to stipulate the following:

• The methods for establishing tolls for roads created on the basis of concession agreements, and maximum levels of such tolls, shall be adopted by the Government of the Russian Federation (for federal projects) or respective regional or municipal authorities (for regional and municipal projects).

• The concession agreement on construction/reconstruction and use of a toll road must include the procedure and conditions of establishing and amending of tolls as well as the highest possible amount of such tolls and possible procedure for its indexation. The toll collecting procedure must also be defined in the concession agreement.

The highest possible amount of tolls (established in the concession agreement) cannot be changed throughout the duration of the concession agreement. The only exception is when a legislative act adopted during the term of the concession agreement leads to heavy losses for the private investor (the concessionaire) and it could lose most of the expected gain.

Could these changes affect the implementation of PPP road projects in Russia?

Not long ago toll road PPP projects were rare in Russia. The legislation in this sphere traditionally had some significant ‘deviations’ from the common world-wide practice and did not provide a clear procedure for toll calculating. Basically any private investor knew that its profit depended significantly on the public partner, but was given no clear explanation on how and why tolls could be calculated. In other words, no guarantees were given that investor’s interest would be taken into account, and the investor had to rely only on the decision of the public partner.

With the recent changes introduced into the Road Law, the process has become clearer and the private investor does not have to step into the project blindly. The public partner shall still decide on the highest possible payment for toll road use, which shall certainly affect the private partner’s profit, but the private investor will be able to see and calculate his own risks and profits while signing the concession agreement. Also, there are some safety measures for the private investor and its interests in the project: the highest possible payment for toll road use stipulated in the concession agreement can be changed only for the sake of protecting the private investor’s interests.

The abovementioned changes into Russian Law are certainly favorable for private investors. The amendments create a legal framework for effective cooperation between the contracting state authorities and the concessionaire and should stimulate development of roads and road-side infrastructure in Russia

Parallel Competitive Financing (PCF)

Generally, PPP road projects are financed in whole or in part with the use of project finance arrangements. Project finance is deemed as the finance raising for the purposes of developing the large capital-intensive infrastructure and industrial projects (such as road projects), where the borrower is a special purpose vehicle (SPV) established for the purpose of project implementation. The repayment of the debt by the borrower will be dependent on the cash flows generated by a project.

Lately, a new procedure for selecting financial organizations, named Parallel Competitive Financing (PCF), has been applied in Russian PPP road projects. The procedure envisages that the public partner informs financial organizations of the essential terms of the project and negotiates with these financial organizations the possible terms for attracting the debt financing that the investor needs to implement the project.

The bidders also receive the revealed information and can use this information to form their bids. However, the private investor can choose a financial organization at its own discretion instead of using the information revealed during the PCF procedure. At the same time the financial organizations participating in PCF, in their turn, have to grant a loan to the successful bidder on the terms agreed upon with the public partner.

The tender documentation on PPP projects that apply the PCF procedure obliges the investor to provide the public partner with a signed agreement on provision of financial resources sufficient for the project implementation no later than on the signing date. Meanwhile, in PPP projects which do not apply the PCF procedure, the investor must provide the public partner with such agreement a certain time (e.g. 6 months) after the PPP agreement has been signed.

In particular, the PCF procedure is being introduced in the project on construction and operation of the 543 – 684 km section of the toll highway between Moscow and St. Petersburg with total project cost of 2.5 billion dollars. The construction of this section of the Moscow – St. Petersburg toll highway will be financed from two sources: 75% through capital grant from the federal budget and 25% through funds attracted by the concessionaire. The project is currently at the stage of selection of the preferred bidder. The State Company “Russian Highways” (Avtodor), in its capacity as the concessor in this project, negotiates with financial organization in order to attain the most favorable terms of attracting financing for the project’s implementation and shall inform the bidders of such terms by the end of the tender stage.

It is worth mentioning that PCF helps to reveal the possible market conditions (including base interest rate) for the private investor to attract senior debt, which helps to reduce the period of negotiations between the private partner and the financial organizations and cut the time required for reaching financial closure. At the same time, the PCF procedure does not exclude the possibility for the private investor to apply a standard approach to attracting financial resources required for project implementation, including financing using its own funds.

Taking this into account, the PCF procedure appears attractive and profitable for the private sector in view of the following:

-          The bid preparation stage could be accelerated;

-          The bidders avoid the costs of holding negotiations with financial organizations by relying on their bids on the information provided by the public partner regarding the financing terms;

-          The public partner bears the risks of attracting finance. 

This year, Avtodor plans to attract private financing for not only modernization of pre‑existing federal highways, but also for broad construction of new high-speed roads, including a network of highways that will connect the big cities in Russia. Obviously, this will create a good opportunity for applying the new procedure of PCF in PPP road projects and attracting the private sector to participate in such projects.