Translated material
Dragon Dialogue
The state is looking for ways to attract businesses to implement budget projects
The emergence of legislation on public-private partnerships (PPP) can take beyond the legal framework those few projects that are already being implemented on the basis of agreements between state or municipal authorities and business, warned participants in the round table organized by the Institute of Contemporary Development (INSOR). Supporters of clearer regulation of mechanisms for attracting extra-budgetary funds for socially significant projects argue that only the adoption of a special legal act can make the use of PPP principles widespread. And at the same time help solve the problem of modernizing the country and overcoming the infrastructural backwardness of our economy. It is significant that on December 5, 2007, the Vremya Novostey newspaper organized a round table “How to decipher PPP,” where almost the same set of problems was discussed.PPP mechanisms could become a “master key” not only to state investment resources, but also to those huge commercial funds that are now languishing in bank accounts in anticipation of economically interesting projects. The round table participants are confident that they can be used to solve large-scale problems of updating and building transport infrastructure, modernizing housing and communal services and even the social sphere - education, medicine.
“Entire blocks of legislation are not ready for the implementation of large infrastructure projects using the PPP method,” says Igor Yurgens, Chairman of the Board of the INSOR Foundation, Vice-President of the Russian Union of Industrialists and Entrepreneurs. “Big holes in concession and tax legislation, in particular in the division of federal and regional taxes, and even in the Forestry and Water Code.” This leads to the fact that potential investors cannot take such projects to banks for lending, since this is contrary to their business practices and creates unknown risks. In addition, according to Mr. Yurgens, “at any moment, the State Duma, under the pretext of social importance, can interfere with any legislation and adjust, say, the tariff on which the entire economy of the project implemented by the concessionaire is based.” In Western practice, such agreements are often concluded for decades. “In Russia, in general, it’s quite difficult to count 30 years ahead,” Mr. Yurgens noted. But it will have to. “Either we are modernizing, and then we need a giant step in the development of infrastructure, investing in it those same notorious 1-2 trillion dollars by 2020, or we are seriously lagging behind and will be thrown back,” warned the head of INSOR.
However, those entrepreneurs who are already implementing projects on the basis of PPP urge to be very careful about changing the current legislation in general and the creation of a specialized law dedicated to PPP, in particular. And they can be understood. The projects being implemented are based on the legislative framework in force at the time the agreements were concluded, and any changes may jeopardize their implementation, and, consequently, the return of funds invested by the business.
“Many believe that existing legislation is sufficient for the development of PPP and that special legislation is not required for this,” confirms Yulia Orlova, director of the department for regional infrastructure development of the PPP Development Center. She is one of the authors of a study on the development of PPP in the regions of the Central Federal District, prepared for President Dmitry Medvedev for the upcoming meeting of the State Council dedicated to this topic. But the fact that the volumes of extra-budgetary funding attracted to solve government problems clearly does not correspond to the possible and desired potential of PPP indicates the presence of problems that local authorities and business are not able to overcome. “We need to help business and government quickly find a common language when preparing and implementing projects,” the expert believes.
It was the emergence of such legislation that led to the almost complete disappearance of new PPP projects in the public utilities sector, Igor Medvedev, First Deputy General Director of the Rosvodokanal Group of Companies, is convinced. Since 2006, only four attempts have been made to implement new projects, of which one has already been challenged in court, the other is mired in litigation. Weak regulation in this area in Ukraine creates even more comfortable working conditions for the company (it is the operator of the Lugansk Vodokanal).
“Sometimes new laws change the rules of the game and create risks for projects that are already being implemented,” agrees Fedor Teselkin, senior lawyer at Freshfields Bruckhaus Deringer. “Business has made an advance, investing money in such an incomprehensible area as housing and communal services, and is not receiving any return,” Mr. Medvedev is indignant. According to him, the municipal government has no interest in attracting business at all. There, either “family” companies are sitting on the resources, or local heads of districts and cities are thinking about quick elections, and they have no time for strategic projects.
“Now PPP is developing as an absolutely democratic process, which no one is imposing,” noted Alexander Bazhenov, director of the Vnesheconombank PPP Center. Many of the laws currently being adopted in the regions are very different from the model ones and require the formation of an extensive regulatory framework. But even if PPP is formalized at the legislative level, this does not mean that it will be successfully implemented. A lot depends on the quality of local government. “We have one power, but in many persons, between whom, like a dragon, there is no organized dialogue,” Mr. Bazhenov recalled. And this is a significant gap that cannot be closed by law.
The Ministry of Economic Development, according to Oleg Kostin, deputy director of the department of investment policy and PPP development of this department, is preparing several initiatives aimed at stimulating PPP in the implementation of important infrastructure and social projects. Thus, changes will be made to the legislation on concessions. Over the entire period of its operation, only four concessions appeared at the federal level and another 44 in 21 regions. “This is unacceptably low for a country like Russia,” says Mr. Kostin.
The Ministry of Economy proposes to extend the practice of concession agreements to a wider range of property complex in the housing and communal services sector (water and heat supply, sanitation), the degree of consistency between concession legislation and legislation on tariff regulation will be increased.
In turn, the Ministry of Transport proposes to extend the concept of concession to the design stage. According to Mr. Kostin, this will be another way to ensure the rights of the concessionaire. The legislative framework is currently being developed for such a form of PPP as life cycle contracts, which will allow projects to include not only the construction stage, but also the creation of contract and estimate documentation, as well as a certain period of operation of the new facility.
The development of a draft law on project financing will require, according to Oleg Kostin, amendments to the Civil Code, corporate legislation, and bankruptcy law. The law intends to consolidate the status of a special design company, which will be created by regional authorities. It will be protected from bankruptcy: first of all, the property claims of those creditors who sponsor the projects will be satisfied. A new way of attracting liabilities will appear - pledging funds and property rights.
The Ministry of Regional Development considers the most promising implementation of regional projects, even if they are small. According to the deputy director of investment projects of the department, Anna Pechenova, 15 federal (five more projects have been approved, but are still waiting for money) and 23 regional projects are financed from the Investment Fund. A total of 146 billion rubles have been allocated for these purposes. At the same time, only 13.5 billion rubles were allocated for the implementation of all regional projects. federal funds, despite the fact that the total volume of their financing amounted to 104 billion rubles. -- the rest of the money was allocated by regional and local authorities or raised on a commercial basis. “Regional projects have proven themselves to be a very effective anti-crisis tool,” noted Ms. Pechenova. She is confident in their effectiveness. Only by expanding the tax base over ten years, budgets at all levels will receive three times more funds than they invested in their implementation.
The investment fund has become a catalyst for attracting business funds to infrastructure projects. For example, in housing and communal services projects, for one ruble from the Investment Fund there are two rubles of commercial structures. Therefore, according to a representative of the Ministry of Regional Development, the possibility of forming regional investment funds is being discussed. Moreover, their creation and assignment to them of a corresponding expenditure item in the budget will become a mandatory condition for the region to receive funds from the federal budget.
This does not mean that the federal center intends to shift responsibility for financing long-term projects to the regions if the capabilities of the federal Investment Fund are exhausted. It is assumed that financing of projects will be carried out with the involvement of at least 50% of commercial funds, and the ratio of funds from the federal and regional investment funds will be in the proportions of 85 and 15%, respectively. Financing for such projects should be more than 10 billion rubles. per year. All regions will receive a quota for the funds of the Federal Investment Fund in accordance with the indicators of the subject’s budgetary security, the index of budget expenditures, the number of population and the unemployment rate. A draft government resolution has been prepared and will be approved. They want to make information about the projects publicly available on a special website, where they can not only be discussed, but also get acquainted with the progress of financing and implementation.
Potential participants in PPP projects often forget about another important partner, without which the implementation of the plan becomes unrealistic - these are banks, notes Igor Medvedev from Rosvodokanal. To demonstrate the importance of involving banks at the very initial stage of preparing PPP projects, he cited the experience of his own company, which had to spend two years bringing its contractual framework with municipal authorities in line with the requirements of the bank. Therefore, he proposes to direct budget funds to those projects where there is a qualified operator who understands the situation in a particular sector.
“There are a huge amount of funds that can be invested in infrastructure development, and they are wandering around restless,” says Pavel Besshapov, Deputy General Director for Investments of the Leader management company. His company, which manages long-term pension funds, for example, is interested in implementing city bypass projects. “There are no prepared projects suitable for bank financing,” agrees senior EBRD banker Svetlana Radchenko.
The main obstacle to the widespread dissemination of PPP practice in the implementation of important public projects is that Russian legislation does not guarantee the return of the funds invested to a private investor, Sergei Aristov, head of the economics department of the Tver region, is convinced. Our budget legislation requires a maximum of three-year planning. For large projects this period is unacceptable. Hence the main problems with banks and the inability for investors to calculate their risks. “The government must fulfill its long-term obligations, but there is no such mechanism in the Budget Code,” agrees Alexander Bazhenov from Vnesheconombank. As a result, changes in the economic situation jeopardize the fulfillment of the obligations undertaken by the administrations under PPP conditions.
To solve this problem, the Tver region began to include guarantees of return on investment in the regional regulatory framework. For example, when attracting commercial funds for seven years to build a road, the region adopts a corresponding law that guarantees an expense item in the regional budget for the entire period of repayment of the investor’s money. Moreover, such a scheme allows commercial companies to take the road for the entire period of return of invested funds in management, which sharply increases interest in the quality of construction and reduction of operating costs.
Adjusting concession legislation will not be able to solve all problems, believes Alexander Bazhenov. He proposes, following the example of Germany, France, Brazil and many other countries, to provide Vnesheconombank as a Development Bank with guarantees from the federal government for the obligations of regional authorities participating in the implementation of PPP projects. “This does not mean that we are going into the budget. A mechanism is being created to force regional and municipal authorities to fulfill their obligations, for example, through the mechanism of interbudgetary relations,” explained Mr. Bazhenov.