Bazhenov: PPP is not a legal norm but an economic concept

26 april 2013 года

Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov’s Interview to RIA Novosti News Agency

On April 26, the State Duma is to consider a Draft Law “On Basics of Public Private Partnership in the RF” which will make it possible to form a legal framework for implementing PPP projects. Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov told us about Russia’s experience in implementing PPP projects, the imperfect legal base and the essence of the new draft law.

Quite often essential infrastructure development projects can’t be funded with budgetary funds. A way out is to use public private partnership (PPP) mechanisms which allow us to raise private capital to fund socially significant projects. On Friday, the State Duma is to consider in the first reading a Draft Law “On Basics of Public Private Partnership in the RF” which will make it possible to form a legal framework for implementing PPP projects. Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov told Prime Agency about Russia’s experience in implementing PPP projects, the imperfect legal base and the essence of the new draft law.

- Russian PPP highway projects are familiar to many people. Are there any examples of using PPP mechanisms for developing communal and social infrastructure, implementing projects on territories comprehensive development? How positive is the experience gained?

- Our transport sector is the most advanced one in terms of using PPP. We don’t have as many highway projects as we would like to: two federal highways are being built on the basis of concession model, a number of projects were launched by State Company Avtodor under the procedures set forth by the regional legislation. A project to launch the second stage of the West High-Speed Diameter Road Construction was also launched. In such airports as Pulkovo, Sheremetjevo, Koltsovo, Kurumoch and such ports for example as Ust-Luga federal property assets are financed with budgetary funds and commercial assets are in parallel funded by private investors.

Communal infrastructure is the second important PPP market. Historically first PPP projects were fully completed in Moscow where a private investor, selected on the basis of tenders, designed sewage treatment plants, funded, constructed and maintained them for 12 years, covered its investments and transferred the plants into the ownership of the city. In the communal infrastructure sector about 25 million people are provided with water supply services by private operators which are lessees of municipal water supply and sewage networks. This is more than in Eastern Europe put together. One of the largest by the world’s standards projects aimed at developing water supply and sewage infrastructure of a whole agglomeration is being implemented in the Rostov region.

In the heat supply sector the situation is more intricate because local heat supply markets are formed on the basis of generating companies’ private assets and private owners of boiler houses as well as municipal boiler houses and networks. It is typical that where territorial generating companies manage to integrate local markets efficiency of operating infrastructure and quality of services improve. In this respect, PPP might give this sector a chance to speedily address problems associated with securing risks of long-term investing in infrastructure.

This is also the case in household solid waste management sector. There are examples of projects in household solid waste treatment in the Nizhny Novgorod region and the Volgograd region on concession terms. A project on the construction of a rubbish recycling complex in Saint Petersburg is coming up against a lot of problems. Given great demand from territories for creating an industrial base for waste collection and processing, implementation of investment projects on a commercial basis creates insurmountable difficulties: poor institutional regulation of this sector, an investor is not in a position to cover expenses on the construction of a rubbish processing plant because there are no recyclable waste processing plants, no tariffs for waste utilization, municipalities are not responsible for volumes and morphological composition of wastes sent for recycling because waste collection and removal activity is classified as a competitive line of business.

There are also successful projects aimed at developing engineering infrastructure for deploying new production facilities. For example, a project in the Kaluga region on the construction of auto cluster in which Vnesheconombank participates. More than 60 projects on the comprehensive development of territories are being implemented with parallel funding of infrastructure with financial resources from the Russian Investment Fund (the budget) and private funding of production facilities.

Social infrastructure is now being formed as the most actively developing market for PPP projects. In the Nizhny Novgorod region they built sport and fitness complexes on the concession terms, an Ice Palace - in Ulyanovsk, schools in Saint Petersburg. They have just conducted a tender in the Astrakhan region for the construction of 31 pre-school education institutions in 17 small population centers. Demand is being formed for such projects in the public healthcare sector. Of course if budgetary funding of federal education and healthcare programs is increased the authorities could reduce a level of activity on forming PPP projects. As far as regional and municipal authorities’ initiatives on using PPP are concerned, the situation has changed radically. The said PPP pilot projects on the construction of waste processing facilities in Moscow remained to be as such at that time and nobody followed this experience in the regions. But the current situation has changed for the better. The monitoring found more than 700 initiatives on launching PPP projects in various sectors controlled by the state and municipalities. In 64 Russian regions they followed Petersburg’s example passing regional laws on conditions for regions’ participation in PPP projects. This is undoubtedly a positive signal demonstrating that many authorities are actively involved in developing their territories rather than queuing humbly for budgetary funding.

As a whole we can say that expectations for using PPP actively, given quality regulatory and legal framework, have been formed. A Draft Law “On Basics of PPP in the Russian Federation” should support these expectations

- Can we say that PPP on the basis of concession agreements has been recognized as having no prospects?

- No, we can’t. Concession is a form of PPP which under applicable legislation provides for private investments in government or municipal assets and their recoupment through providing commercial services to consumers by a private investor.

About 500 concession agreements were registered in the country for the most part at a municipal level.

As far as the use of concessions for the construction of motorways is concerned the financial sector refused to give a vote of confidence to such model asking for significant amounts of government guarantees and capital grants to fund the Moscow-Petersburg Motorway project and the Odintsovo Bypass project. After that, transport workers initiated amendments that made it possible to form concession agreements based on accessibility payment model when the concessor pays to the concessionaire. For this model to be implemented, road funds have been resumed and are being used now. These funds’ formation depends on the transport activity.

Now the Regional Development Ministry wants to learn lessons from the Transport Ministry.  They are introducing a regulation in the law on water supply that provides for a possibility to engage private investors on concession terms only. So, recoupment is expected to be secured by tariff receipts, the growth of which is limited by consumers’ paying capacity. We can boost efficiency on a massive scale only through renewing fixed assets on a massive scale but it would be difficult to find investors who could assume commercial and institutional risks of housing and public utilities.

And how should we launch this model for public education and healthcare services infrastructure? And in the depth of the country? Even in Moscow with its great potential to cover non-budgetary investments, concessions are not developing. And in the depth of the country consumer demand is limited and electorate size is not big enough to prioritize budgetary financing.

In fact, all countries that started to use PPP actively followed the path of transport ministries.  Economic science shows that infrastructure development results in economic growth and increased incomes in the budgetary system. So countries that experimented with concessions through commercial recoupment took advantage of another model: the budget pays but private business is responsible for a project, construction, operation and maintenance.

- What can you say about Russian applicable legislation on PPP? Why is it imperfect? What complaints are being voiced?

- PPP is not a legal norm but an economic concept. So, strictly speaking there is no law on PPP as such. One of contractual form of PPP is regulated by the Federal Law “On Concession Agreements”. PPP development in the regions is based on contractual arrangements being formed as part of the Civil Code. Public partners assume obligations under the Budget Code, the Federal Law “On Competition”, the Land Code. So, PPP agreements are regulated by various laws and this results in certain contradictions with the new reality where the state becomes an investee in order to fulfill its obligations more efficiently. A new law should specify a single tender procedure that provides for the investor to assume obligations on investing in an asset, for the state to provide the investor with a plot of land for operation and for the investor to receive payments from authorities.  There is also a need to differentiate PPP projects from projects on the terms of government purchases. There is also a need to regulate relations between Russian constituent entities and municipalities.

- What problems are typical for the regional legal framework regulating PPP?

- In response to frequent complaints I would like to stress that regional laws do not specify  any new contractual arrangements instead of federal legislation, they specify conditions for RF regions’ participation in PPP projects associated with the aim of PPP projects, obligations to be assumed with established powers, tenders to select investors provided that a procedure for a specific contract is not set forth by a special law.

Saint Petersburg is the leader in best practices in PPP. Several years ago they passed a regional law on the city’s participation in PPP projects. They launched a whole portfolio of projects that created an absolutely new image of the city’s investment appeal.

Today, another 63 Russian regions passed laws on PPP. Their quality is quite different even if they originated from one and the same source. These laws are often of declarative nature. But this shouldn’t frighten us. We can improve the quality of a regional law upon preparing a specific project.

In order to improve regional legislation we need to regulate various parts of federal legislation as applied to PPP.

- What’s new in the draft law on PPP?  What limitations related to the imperfect legal framework does it remove?

- The draft law sets forth principles and criteria for classifying a project as a PPP one. It also specifies the scope of authority of the RF, a constituent entity and a municipality. The draft law determines the procedure for a tender to select a private investor. It also introduces necessary changes in the land, tax, budget codes and the law on competition.

- Are there any issues in the draft law needed to be finalized?

- The Federal Antimonopoly Service offers to add requirements for tender selection procedures and differentiate PPP subject matter from relations regulated by the law on government purchases. The Finance Ministry proposes to determine a procedure for forming spending obligations on PPP projects. The Russian Union of Industrialists and Entrepreneurs proposes to determine a procedure for initiating PPP projects by private investors. These are very constructive proposals. As far as the draft law is concerned, we are also interested in determining Vnesheconombank’s role in enhancing the PPP projects market (the authorities’ support for forming qualitative proposals concerning PPP projects).

- Does the draft law address the absence of the state’s long-term guarantees for private partners? What sort of mechanism could it be (insurance, guarantees from the budget)?

- The draft law stipulates that a public partner can assume obligations under a long-term agreement.  Fulfillment of a number of these obligations is specified by the budgetary code. In the case that a public partner fails to fulfill its obligations a private partner can to seek judicial decision and obtain appropriate compensation.

A number of obligations are designed to take certain actions to enable a private investor to fulfill its obligations. In the case that a public partner fails to act, it’s not possible at the moment to secure judicial decision to force it to fulfill such obligations.

- The Federal Antimonopoly Service (FAS) fears that if the state’s and municipal assets are not distributed by way conducting auctions, it is bound to eliminate equal opportunities for gaining access to these assets and limit competition. FAS also believes that the fact that PPP agreements are not regulated by the law on placement of orders and that budgetary funds can be spent under appropriate agreements would make it a lot more difficult for  natural and legal entities  to participate in legal relations under consideration and would create advantages for some economic entities acting as private partners and generate a potential for corruption. How high are these risks for investors?

- PPP is not privatization because a private partner creates assets in the interests of a public partner.  As far as PPP projects are concerned, property is not expected to be transferred from a public partner to a private one.

PPP is not a procurement because a risk of raising financing and creating an asset through using non-budgetary funds rests with a private partner. Procurement provides for making payments to a contractor (seller) using budgetary funds and in case of creating an asset – advance payments prior to construction. Tenders for the right to conclude PPP agreements do not limit private sector’s opportunity to participate in them as these procedures do not provide for any limitations or discriminatory factors. All algorithms will be specified in detail in regional laws. Closed tenders can be conducted only in cases provided for by the law on state secrets. This is in line with established practice in the country and regarded as being absolutely normal.


Vnesheconombank Chairman V.A. Dmitriev’s Interview to the TV Channel Russia 24

22 april 2013 года

TV Channel Russia 24,
22.04.2013, 16:37

HOST: Vladimir Alexandrovich, good afternoon.

Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.

HOST: We are seeing each other in Washington in the course of the G20 meeting. Russia is a chairman of the G20 and one of its main tasks is to fund investments. I know that now VEB is opening its subdivision in Hong-Kong to raise Asian investments to fund Russian projects. Could you tell about your Asian subsidiary’s functions, are there any preliminary agreements, projects, key lines of activity?

Vladimir DMITRIEV: In fact, Vnesheconombank’s Supervisory Board made a decision to open a financial and investment company in Hong-Kong. This Vnesheconombank’s company is designed to both raise investments and safeguard Russian companies’ interests on the Hon-Kong stock exchange, provide consulting services, help Russian companies to tap international financial markets and raise foreign investments for Russia. This is one of its main missions.  We also have other priorities related to a growing trade turnover between Russia and China and using Hong-Kong as a sort of bridge for raising investments for Russia. But this is not the only institution designed to raise investments as part of Vnesheconombank. And we talked about it with our colleagues from national development finance institutions as well as with the leadership of such international development finance institutions as the World Bank, international finance corporations, the European Investment Bank and others. They of course want investments for Russia to be channeled through institutions controlled by the state and they regard these institutions as an instrument for guaranteeing and sharing risks with them and securing success of their investment transactions in Russia. I would also like to highlight the Russian Direct Investment Fund’s successful activity as an institution included in Vnesheconombank Group and responsible for raising investments. My high opinion about this Fund is shared by our county’s leadership.

HOST: What projects were implemented successfully?

Vladimir Dmitriev: The Fund’s financial resources in the amount of 500 million dollars made it possible to raise foreign investments worth 2 billion dollars. Sectors that are most attractive for foreign investors are those associated with our country’s dynamically developing middle class. Here I mean our financial sector, the Moscow Interbank Currency Exchange, public health services, medical industry, pharmaceutical industry, timber processing industry and a number of other sectors which are attractive for foreign investors who wouldn’t invest in Russia in the absence of a reliable mechanism represented by the Russian Direct Investment Fund. The Fund’s objective is to identify projects that could be of interest for foreign investors.

I’d like also to mention regional funds and corporations established specially for raising investments, for example the Kaluga Development Corporation. Just seven years ago the suburbs of Kaluga were nothing more than marshy lands no one wanted. Nowadays a unique industrial cluster was set up on these territories due to developing infrastructure by this corporation whose shareholders are Vnesheconombank and the Government of the Kaluga region. In this industrial cluster they manufacture Volkswagen cars, localized spare parts production, develop small and medium-sized enterprises and cooperate with other giants of automotive industry and electronics. This is an example showing that through infrastructure development and support provided by the regional authorities and the national bank for development Russia’s economy and regions became attractive for investors. Similar activities are undertaken by the North Caucasus Development Corporation implementing a whole number of interesting projects in the Caucasus as well as by the Far East and the Baikal Region Development Corporation whose mission is likely to be expanded and it will be able to participate in structuring projects based on concessions and principles of public private partnership. As far as raising investments for Russia is concerned, our contacts with national development institutions and international development institutions showed that Russia is attractive in terms of investments. Statements by Elvira Nabiulina and the current head of the Central Bank suggest that the state is obviously interested in looking for opportunities to co-invest in projects which are of interest for foreigners.

HOST: You’ve mentioned Elvira Nabiulina’s initiatives, do you mean her latest statement that we can invest revenues from oil and gas exports, that is, from the National Wealth Fund in projects with the participation of the Russian Direct Investment Fund?

Vladimir DMITRIEV: We should talk about projects that could be attractive for foreign investors. It’s not a matter above all of investing financial resources of the National Wealth Fund at a good profit rate, although it’s an important goal in itself. Our objective above all is to broaden Russia’s investment appeal, for foreign investors to believe in the state’s readiness to co-invest in projects that are of interest for foreign investors in the context of activities undertaken by the Finance Ministry, G20 financial institutions and our presidency in this prestigious international association. Vnesheconombank put forward an initiative to hold a conference or a meeting of national and international development institutions’ on the sidelines of G20 countries finance ministers’ meeting in July of this year. Here I mean above all such our partners as the China State Development Bank, Germany’s Development Bank – KfW, development banks of BRICS countries and a number of European development institutions. Moreover, international financing institutions and international finance corporation showed interest in participating in this forum, for example the European Investment Bank and the European Bank of Reconstruction and Development. They are interested in discussing how national and international development institutions can achieve an objective on the agenda of a G20 meeting to be held in Saint Petersburg in autumn – this objective is to secure economic growth to create new jobs and increase employment.

HOST: How in general VEB and the Russian Direct Investment Fund cooperate with other international financing institutions and foreign national development banks?

Vladimir DMITRIEV: So far the Russian Direct Investment Fund has been working with private and sovereign direct investment funds rather than banks. And in this respect, the Fund has achieved a lot: it set up a joint fund with the China Investment Corporation, engaged Kuwait’s sovereign fund in the amount of half a billion dollars for co-financing projects proposed by the Russian Direct Investment Fund. Today we can see that both European national banks and international financing institutions such as for example the European Investment Bank are interested in discussing their potential participation in projects to be co-financed with the use of the Russian Direct Investment Fund’s financial resources. Our foreign partners trust Russia and are ready to invest in it and this is confirmed by the fact that Vnesheconombank together with Germany’s development bank established a major fund to provide support for small and medium-sized enterprises in Russia. The Fund is designed to enter into capital of companies operating in the high-technology sector. We have preliminary arrangements with other international financing organizations and private investors, private investment funds for them to enter the Fund or to co-invest projects to be identified by us with our German partners. This Fund is already functioning. It was created jointly by Vnesheconombank, the International Finance Corporation and the Russian Finance Ministry – the Fund to Support Regional Banks. It has already conducted two transactions where the Fund entered into capital of regional banks thus increasing their capitalization and ensuring that these banks’ loan portfolio is in the first place used to support small and medium-sized enterprises in the high-technology sector.

HOST: If we talk about BRICS, this subject is also being discussed and recently they have been voicing an opinion that the abbreviation itself has become outdated. Do you think that BRICS has a potential in particular with regard to a BRICS Development Bank project which has been hindered lately.

Vladimir DMITRIEV: To tell you the truth, I’m among those financiers who have a conservative approach to this idea. Neither Vnesheconombank nor BRICS countries’ development banks have been engaged for this project. An association of BRICS countries’ development banks has been set up in our country. This activity is being undertaken at a political level, at a level of finance ministries. But the states could instruct their national financial development institutions to participate in this sort of activity and instead of contributing 50 billion to capital of a BRICS Development Bank it would be better to contribute 2 billion to each of national development banks and each bank would be able to raise at least 15 and may be 20 billion on the market taking into capital adequacy ratio thus forming a significant capital base that would make it possible to fund appropriate infrastructure projects. The most important thing is to identify these projects but this is not our responsibility. If we mean projects that are of interest for all BRICS member countries, appropriate ministries of transportation, economics and industry should be involved in identifying these projects, set a task for us and we’ll be responsible for structuring these projects financially, searching for financial resources to fund them and for financing them. Nobody has answered this question so far. So, I don’t think that this bank will be established in the near future.

HOST: Vladimir Alexandrovich, thank you very much for answering our questions.

Vladimir DMITRIEV: Thank you for interesting questions.


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