Financial close for Russia’s first road PPP

The $2.1bn Moscow-St. Petersburg highway has become the first Russian road PPP to reach financial close. Sberbank and Vnesheconombank have provided ruble funding for the project which includes a bond issue guaranteed by the Russian government.

Russia’s first road public-private partnership (PPP) – the initial stretch of the Moscow-St. Petersburg highway – has reached financial close and, as previously reported on, a government-guaranteed bond issue proved essential in closing the deal.

This initial stretch of the highway will run over 43 kilometres and aims to alleviate congestion on the existing M10 link between Sheremetyevo International Airport, Moscow’s main airport, and the city centre.

Sberbank, Russia’s largest bank, and development bank Vnesheconombank have provided around RUB33.5 billion (€864 million; $1.1 billion) for the roughly RUB60 billion road deal, with the federal budget contributing RUB23 billion. The 20-year commercial loan breaks down into RUB29.4 billion of senior debt and a RUB4.5 billion VAT facility. About RUB23 billion will be provided by the federal budget.

Key to the debt package will be a RUB10 billion bond issue secured by the government through a recently-created bond guarantee mechanism. The bond will mature in 20 years and will be linked to inflation, “thus making the financial instrument extremely attractive for long-term investors such as pension funds and insurance companies,” Troika Dialog, an adviser on the project, said in a statement.

Importantly, the role of the bond guarantee in the project’s financial close “may be considered the first cry of the newborn infrastructure bond market,” Troika Dialog said. This will be good news for the $750 million Odintsovo Bypass, connecting Moscow’s city centre to the existing Moscow-Minsk highway, which also plans to issue a $282 million bond to reach financial close.

It also paves the way for other Russian PPPs – such as St. Petersburg’s Pulkovo Airport – to tap the local capital markets in order to reach financial close. Given that international banks have been wary of taking on currency risk ever since the financial crisis broke, the closing of the Moscow-St. Petersburg highway demonstrates that local projects are able to close with local sources of financing.

A consortium led by VINCI and several local companies reached commercial close for the 30-year contract last July. Construction for the road is set to start this year and should last for 36 months. The PPP contract covers the first part of the Moscow-St. Petersburg highway. The government plans to complete the rest of the 626-kilometre, $20 billion highway by 2015.