Toll Roads Carve A Path To Public-Private Partnerships

Denis Abramov / Vedomosti

Moscow City Hall is unveiling public-private partnerships (PPP) and concessions to attract investment into schools, hospitals and transport infrastructure.

The Deputy Mayor for economic policy, Andrei Sharonov, told REQ how investors could build private schools, and recoup their costs by offering some places at the market rate. The city would provide a virtually-free land plot and the school would be transferred to the city after a number of years.

Hospitals may also be fully or partly privatized. The European Medical Center has submitted a tender to take part in the reconstruction and operation of municipal hospital No. 63. Under the deal, a proportion of the patients or treatment costs would be covered by state health insurance.

"At the moment we are putting together a list of other municipal health care facilities the renovation of which can be financed from private sources," Sharonov said. "One of the municipal priorities is primary education facilities. We are currently working on various approaches to cooperation with the private sector on projects involving such facilities."

Spending on roads, railways and ports is struggling to compete with rival claims on federal and local budgets. Federal infrastructure investment in 2012 was 4 trillion rubles (about $130 billion).

Russia spends about 7 percent of GDP on infrastructure, however especially roads, are worse than countries with similar climates. Russia ranks 136, out of 144 countries, for the quality of its highway infrastructure, according to the World Economic Forum's Global Competitiveness Report (France ranks the best).

Despite a few PPP projects launched in the mid-2000s, the federal authorities mostly use a complex method of distributing budget funds through state-owned corporations.

Jean-Alexandre Blanchard,  principal banker, Transport Team, at the European Bank for Reconstruction and Development, said budget regulation makes it difficult for the public sector to take a financial commitment beyond three years. "Of course, it is possible to sign PPP contract for longer than 3 years but the financial commitments of the public sector party beyond this date will subsequently  have to be reconfirmed in yet another budget document by the relevant legislative body. If the duration of the contract exends to 20 to 25 years this process might have to be repeated several times. This creates a political risk."

Another problem is the way the public sector accounts for loan guarantees.  The practical effect is to freeze the equivalent budget borrowing capacity because no off-balance sheet funding is possible.

" So there is no budget incentive for public entity to choose PPP rather than simply to borrow the money and build the road itself."

While the government has continued to spend more than $100 billion a year on infrastructure, it is not getting the biggest bang for its buck: the total length of regional roads has increased by 5 percent in the past 15 years and federal highways not at all, Sergey Kelbakh, Chairman of the state company Russian Highways (Avtodor), told The Russia Forum, which Sberbank hosted in Moscow in April.

The quality of legislation required to encourage private investment varies between industries. Dr Alexander Nazarchuk the chief executive of Global Ports, whose terminals handle one third of Russian container traffic, told the forum that legislation encouraged private investment in the port industry in contrast to rail. Avtodor's Kelbakh said an imbalance between land rights, legislation and budget law was a hurdle to building more infrastructure.

Russia's concession law operated according to the build, operate, transfer or BOT model until 2012 but is now being reviewed. Federal level concessions involve transport infrastructure. Municipal and regional projects range from water and energy utilities, to sanitation, recycling, along with health and educational facilities.

The Moscow-to-St. Petersburg toll road is scheduled to open in 2014. The Western High Speed Diameter Project will also connect St. Petersburg's port to the road network.  The project is being conducted under the St. Petersburg law on PPPs.

Regional authorities followed St Petersburg's example, and enacted regional PPP laws. However the quality of those laws varies greatly, said Blanchard of the EBRD. "The St Petersburg local law has been used successfully but as of now, very few regional projects have been realized under a regional PPP scheme."

The Federal Concession law allows only one type of contractual scheme: the build, operate, and transfer (BOT) model. With the exception of road projects, the concession law may only be used with cash-generating public assets. In fact the law says the state can subsidize only part of the project, implying that the private operator must finance part of the project based on revenues derived from the exploitation of the project. "So you can use the concession law to build a toll road but not a hospital or school, as is widely done in France or Great Britain, because no one except the public sector will pay for the use of such a building."

However, a recent amendment to the law promises to facilitate "availability payment" schemes with public assets other than roads.

Several Russian PPP projects are making headway. Blanchard highlights the pipeline of the State Company AvtoDor, "which is going to generate many projects in the coming years such as the M-11 Moscow-St Petersburg highway but also the M-1 Moscow-Minsk one."

The Federal Road Agency, RosAvtoDor,  is preparing a tender for a satellite truck tolling system,  covering the federal highway network. A satellite communication device in each truck will record information about the number of kilometers travelled and, at end of each quarter the truck operator will get the bill for using the federal network. RosAvtoDor is also currently developing as a PPP the project of the  bridge over the Lena river in Yakutia.

Andrei Sharonov,

Deputy Mayor for economic policy in Moscow City Hall, explains the plan to lure private investors.


Social Services

Andrei Sharonov
Sergey Porter / Vedomosti

Moscow has taken a new approach to its investment policy and attracted private investors for  projects, including PPP, to finance social services, such as education and health care. More than that, education and health care have now been prioritized for financing. In 2012, 153,400 square meters (vs. 35,500 square meters in 2011) of premises assigned for educational purposes were financed off-budget, which is five times more than in 2011.


Hospitals

We have tendered a concession for the reconstruction of the municipal hospital No. 63 and the provision of medical services on the platform of this hospital. The investor has been selected and at the moment the tender is in its final phase. The concession agreement runs for 49 years with a four-year investment phase.

The internal rate of return of this project is 16.9 percent, the discounted payback period is 22 years. Of the medical services, 20 to 40 percent of those provided by the private partner will be covered by the obligatory state medical insurance.


Kindergartens

In late 2012, early 2013 we tried out a pilot concession project involving construction of four kindergartens that would have accommodated 750 children, including 218 free-of-charge, municipal applicants. Unfortunately, the interest was very low and we could not find an investor.

However, we think that there are even more effective methods of private financing. For example, the city is ready to rent out the land and the related buildings for as long as 49 years, so that the investor could set up kindergartens or elementary schools. After commissioning, and provided that the residents of Moscow will constitute up to 80 percent of the pupils, the rent for such facilities will be brought down to 1 ruble per square meter per year. This scheme of financing will be applied to 30 facilities which are planned to be tendered soon.


Transportation

Another priority of the municipal authorities is transport. We are putting together a list of target transport facilities which we are planning to offer for a three-year financing. Such facilities involve:

—     construction of the transport hubs, business and shopping/entertainment centers linked with the existing infrastructure of the Moscow underground;

— transport energy efficiency;

— rehabilitation of the water transport infrastructure;

— passenger traffic on the Moscow ring railway and construction of passenger transfer hubs.


Subsidies

One more stimulus for the private partners who work under concession agreements and who are ready to provide services to the free-of-charge municipal applicants, is subsidies from the municipal budget. The relevant resolution was passed in February 2013.