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PPP in Russia: Experience and Problems of Implementation

Interest in public-private partnership scheme has been growing lately. It is due to the problems and challenges of the present stage of economic development. It becomes obvious that corruption, an inefficient public sector, weak competition, excessive centralization of authority at the federal level are obstacles to the modernization of the country.

This problem is exacerbated by a lack of investment and outflow of capital from the country, but in this case it is clear that money alone will not solve existing problems. There is a need to look for structural solutions and new governance arrangements. Extremely relevant are the proposed decentralization of powers between levels of government - primarily for the benefit of the municipal level - including appropriate adjustments to the national tax system, the principles of inter-budgetary relations, as President Dmitry Medvedev said at the Forum in St. Petersburg.

One of the tools for attracting investment and reducing costs is a mechanism for public - private partnership, which is recognized as one of the most promising forms of private sector involvement in creation and financing public infrastructure and services based on them. Today, with limited investment opportunities from the government and the reluctance of the government to increase public debt, the authorities are increasingly turning to the private sector in search of opportunities to transfer provision of some public services to them.
Among the advantages of PPP is its versatility: it can be used in most industries, it can be used to develop the rail, water, underground transportation, to construct engineering infrastructure, telecommunications, to develop healthcare, education, culture, tourism and sports.
А single generally accepted definition of PPP does not exist: it is often denoted as PPP (Public-Private Partnership), P3 (PP Partnerships), Private Finance Initiative (PFI), as well as a concession. In Russia the accepted term is "public-private partnership" (PPP). The various definitions of the phenomenon of PPPs highlight the main features of the interaction between the public and private sectors. Researchers emphasize mandatory sharing of risks, costs and profits as a condition of partnership, the state’s desire to use private sector capital to improve the quality of public services (output-based approach) or the asset management of the public sector, the need for long-term contract between the government and the private sector, in which resources and risks are allocated for the development of social infrastructure.

In Russia, the scope of PPP often includes the entire spectrum of relationships without specifying the specifics of PPPs. In the modern sense the PPP is the institutional and organizational alliance between government and business in order to implement national and international, large-scale and local, but always socially significant projects in a wide range of areas: to develop strategic industries and research (R & D), to provide public services. As a rule, any such alliance is temporary, thus implying a certain period to implement a specific project; PPP ceases to exist after the project’s implementation.

In this regard, there is a need to consider a number of issues and problems:

  • Are there incentives for further development of PPP in Russia;
  • What is special about PPP scheme;
  • How the PPP mechanism (and what specific models) can help address the public sector problems;
  • What areas of investment (industries) can count on funding by the State, investors and creditors, which yield results;
  • What tools (mechanisms) of controls and forms of PPP can provide a specified return on investment for investors and timely resolution of infrastructure problems for the state at a reasonable level of risk.
  • One of the biggest challenges is the lack of experience and expertise on the part of local government regarding procurement in PPP context.

PPP projects implementation in Russia

PPP projects in Russia began in the mid-1990s. There is a great demand for infrastructure development, the private sector’s interest in infrastructure projects, availability of various sources of long-term funding and well-developed legislation.  Such projects were implemented in the areas of public utilities, construction of pipeline systems, power facilities, etc., with major large-scale projects implemented in the framework of the BOOT (Build - own - operate - transfer).

In the early PPP projects in Russia, the state took a significant part of project risks, so that risks of exploitation did not affect the recurrent funding, because the state has assumed the part of the infrastructure costs, regardless of the results of operational performance of constructed facilities.

The adoption in 2005 of the Federal Law "On Concession Agreements" influenced the increased use of PPPs in the development and implementation of major transportation projects. After the adoption of this law some tools have developed such as the Investment Fund, model concession agreements and tenders for major transportation projects. Under this law, the implementation of projects using the PPP is only possible under a concession agreement. In particular, one cannot use models BOOT and DBOO.

Other important documents for PPP development are, in particular, the Russian Federation Government Resolution dated March 1, 2008 № 134 "On approval of rules of formation and use of budget funds of the Investment Fund of the Russian Federation"; method of calculating and applying the criteria of effectiveness of regional investment projects (ratified by Order of the Ministry of Regional Development on July 31, 2008 № 117). The evaluation and selection of transportation projects and the use of the Investment Fund are carried out by the Ministry of Regional Development of Russia. 

Regions of Russia also attempted to develop legislation for PPP (the relevant laws have been adopted in the republic of Dagestan, Altai Republic, Tomsk Oblast, the Republic of Kalmykia, the Chelyabinsk Region, Kurgan Region, the Omsk Region, the Republic of Tuva, the Republic of Ingushetia, the Vologda Region, Krasnodar kray, Ivanovo, Nizhny Novgorod regions).

The most interesting experience is found in St. Petersburg, where a law was passed on December 25, 2006 № 627-100 «On participation of St. Petersburg in public-private partnerships", significantly differentiating forms of the City’s involvement depending on the type of the property provided.

The analysis of the legal regulation of PPPs at the regional level revealed significant differences in the interpretation of forms of PPP, global practice inconsistencies, lack of regulation of decision-making processes.

The results of the research project "Public-private partnerships in the Russian regions (survey of 18 regions of the Central federal district)" carried out by the Centre for Development of PPP in conjunction with the Institute of Contemporary Development show that  ".... In the regions officials do not really know what a public-private partnership (PPP) is, the officials and businesses iinterpret it differently. The officials do not have a vision of how to develop it.” 

In 2010 in Russia there were more than 350 PPP projects under various phases of implementation.

Important projects in the water supply and sanitation sector are the Comprehensive program on construction and reconstruction of water supply and sanitation facilities in Rostov-on-Don and in the southwest of Rostov region; construction, reconstruction and operation of water supply facilities at the Northern Water Supply Plant “Nevskaya Voda” in St Petersburg; and the lease of water supply and sanitation infrastructure in more than 20 regions.

One of the ongoing PPP projects in the territorial development is to construct engineering infrastructure for industrial parks of the Kaluga region. In the area of solid waste treatment the country is looking to construct a solid waste processing and treatment plant in Yanino in St Petersburg. Evolving PPPs Project Finance International

The education sector in Russia is experiencing significant need for financial resources, for introducing modern management techniques, technology, services and maintenance. Budgetary and extrabudgetary funds, targeted funding cannot fully meet this need, so it becomes necessary to engage private sector.

While the transportation sector is leading the way in PPP projects, the government is also looking to boost its social infrastructure sector. Some of the ongoing projects in this sector are the construction and operation of buildings designed to accommodate educational institution on the territory of Pushkin region in St Petersburg; construction of the Palace of Arts in St Petersburg; construction of sports and recreation centers in Nizhniy Novgorod region; managing buildings in Khanty-Mansiyskiy Autonomous district.  According to the chairman of the St. Petersburg Committee for Investments and Strategic Projects A. Chichkanova in St Petersburg there are 30 project proposals of regional administrations to build schools and healthcare facilities under PPP, and the PPP scheme is already being used in construction of children’s educational institutions in the districts of New Izhora and Slavyanka.

  • Experience of such projects shows that the use of PPPs the key issues are about the structuring of transactions, identification and assessment of possible risks, and developing an action plan to minimize risks, including risk-sharing among participants.
  • It is necessary to increase not only the spectrum of used PPP models, but also that of the areas in which PPP can be used to reach government objectives for the provision of infrastructure and updating them, including schools, public transport, health, roads, airports, prisons, water,  tunnels,  ports,bridges,museums,courts,government agencies.
  • There is an urgent need to clarify legal definitions (risk sharing, a special purpose company, financial closure, etc.), and conditions for the participation of financial institutions based on the study of international experience and good practices of PPP projects.

Examples of PPP projects in St. Petersburg

  1. The first step in the PPP was made St. Petersburg in 2003, supporting the scheme of completion of SWTP developed by "Vodokanal St. Petersburg". A unique financial scheme combines private financial institutions in Europe and the Russian state structures. A law was passed on a special purpose program, under which the budget of St. Petersburg provides means for an amount not exceeding the amount of liabilities "Vodokanal St. Petersburg" on the project each year. In total, the financing of the construction of SWTP involved 15 organizations. They represented the Nordic governments, donor agencies (SIDA, Ministry of Environment of Finland, "Northern Dimension", TACIS), European financial institutions (EBRD, NIB, EIB, Svedfond, FinFond), as well as Russia. Follow-up: Reconstruction of the North station under PPP. Afterwards the station will be given to the investor for 25 years.
  2. A second approach to the scheme of public-private partnership was a joint project of OAO "Gazprom" and the St. Petersburg government on the full reconstruction of boiler houses and heat networks in Petrograd district. The so-called pseudo-concession scheme has been used when an investor invests money into state property, and the city through the tariff policy and subsidies  ensures their repayment in specified time (8-10 years). According to the agreement, "Gazprom" will provide within a period of four years 4 billion rubles for the reconstruction of 115 boiler houses in Petrograd rayon. The project is implemented by a specifically established company "Peterburgteploenergo."
  3. PPP scheme was used in construction of heating pipeline from the North-West central heating station to Primosrkaya boiler, as well as in the construction of South-West central heating station and Parnas central heating station. In these cases, the projects are implemented entirely by the investor; the city (public participation) is to provide a land plot and to participate in the management of the object (via the regulation of tariffs).
  4. Construction of toll motorway, which will take place in the western part of the city, connecting the northern, central and southern areas and providing access to the road network of the federal roads. The road will be 46.4 km long with 15 interchanges at different levels. In accordance with the decision on the conclusion of the concession agreement (order of the Government of Russia from 31.10.2006 № 1494-p, the decision of the Government of St. Petersburg of 01.11.2006 № 1344) a competition is being held for the concession agreement (design, construction and operation ) of the WHSD. Russia, St. Petersburg
  5. Design and construction of toll Orlovsky Tunnel under the Neva river in the range of Piskarevsky etc. - Orel Str.  This will be a link between the right-bank and left-bank districts of St. Petersburg, which will increase the time of keeping the Neva bridges raised to meet the growing demand for international transportation on the route of the Volga-Baltic Waterway, as well as provide direct access from the core areas of the historic center of the ring road through Piskarevskiy avenue and highways of Vsevolozsk rayon and Priozersky rayon. In accordance with the decision on the conclusion of the concession agreement (the order of the Russian government from 03.05.2007, № 695-p and Government Regulation of the St. Petersburg 03.09.2007, № 1090) a competition for the concession agreement is being

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