Historic departure

In 2007, the Russian government estimated the need to invest $1 trillion over the next 10 years in Russia’s outdated infrastructure. The infrastructure sector has been severely under-financed, and the government is now determined to improve the situation.

As part of this ambition, it is vital for the government to attract both domestic and international funding. The latter is crucial as limited domestic resources make it difficult to raise equity and debt in the volumes required for the infrastructure modernisation program. Therefore, the government turned to international finance markets that have accumulated vast experience in infrastructure projects globally.

One of the most successful legal paradigms for implementation of infrastructure projects has been public-private partnerships (PPPs). The PPP achieves optimal risk allocation among all participants and keeps the government closely involved in the project while allowing private participants to benefit from the commercial upside.

For the success of the PPP concept in a new jurisdiction, it is essential to build an accommodating legal basis. Russia started this process in the mid-2000s when the Federal Concession Law was adopted to provide a springboard for launching pioneer PPP projects. Shortly afterwards, some key Russian regions (including St Petersburg) developed their own PPP frameworks, largely consistent with the Federal law and accommodating local specifics such as governance structure, budgetary codes etc.

Critical mass

By 2006-07, the critical mass of the new PPP legislation had developed and a number of major projects were announced. The highest-profile of these were the Moscow-St Petersburg road, Western High Speed Diameter, Orlovsky Tunnel, Pulkovo Airport reconstruction and Nadex light railway express in St Petersburg. VTB Capital is taking part in several PPP projects, most of them being developed in St Petersburg.

Most of the projects announced in Russia relied on state support in the form of subsidies and/or availability payments as the only source of income. The financial crisis in Russia in 2008-09 forced the government to suspend many PPP projects as the state budgets could no longer afford such a financial burden.

One of very few exceptions was the Pulkovo Airport reconstruction project in St Petersburg, which continued through the crisis to its successful completion in April 2010. A key distinguishing feature of the Pulkovo project is that its solid economics enabled it to be implemented on a purely commercial basis without the need for government support. Project revenues are generated by airport’s profitable operations.

Pulkovo has become the first truly international PPP project in Russia completed without state support. The project was launched by the City of St Petersburg in May 2008 as an open international tender and attracted strong interest from international investors, leading airport operators and banks.

Three international consortia submitted competitive bids in May 2009. The winner was announced in June 2009: Northern Capital Gateway (NCG), a consortium consisting of VTB Capital (the major shareholder and financial adviser), Fraport (the operator of Frankfurt airport) and Copelouzos (a Greek investment group). NCG signed a 30-year PPP agreement with St Petersburg for the reconstruction, financing and operation of Pulkovo Airport under local PPP law. From 29 April 2010 the airport operations together with the assets and employees were fully transferred to NCG.


Pulkovo Airport is the air gateway to St Petersburg, Russia’s top tourist destination and a leading business centre. The airport, which served around seven million passengers in 2009, is the fourth-largest airport in Russia and by far the largest in the north-west of Russia. There is little competition to Pulkovo for traffic to and from St Petersburg. The airport has direct connections with many major European cities. It is believed that, over the next 30 years, traffic at Pulkovo can increase to 30 million passengers. This would turn it into a key transportation centre not only for Russia but for the whole of Northern Europe.

The ambitious growth plans for Pulkovo must be matched by development of the airport’s infrastructure. The existing airport facilities have long been in need of a major overhaul, and the whole airport is capacity constrained. The PPP project is aimed at full reconstruction of the airport through: the building of a new passenger terminal for 17 million passengers; the expansion of airside facilities; the reconstruction of the existing domestic terminal; and the building of new landside facilities such as a hotel, a business centre and car parking.

The total cost of reconstruction is close to $1.5 billion and will be completed by the end of 2013. Further expansion of the airport will be driven by traffic growth. Under the PPP agreement, NCG will pay a concession fee of 11.5 percent of the airport’s annual revenue to St Petersburg and, in return, will have the right to earn the upside from the airport’s operations.

VTB Capital participates in this project in two roles: as a majority shareholder and financial adviser to NCG. The financing aspect of the project was crucial to its success as, even in good market conditions, raising $1.5 billion of long-term financing for a complex project would not be easy.

As financial adviser, VTB Capital looked into all debt financing options available in the market: bond issuance; non-recourse commercial loans; export-import financing; and the involvement of international financial institutions (IFIs) and development banks. Our key criteria in selecting an optimal debt source were availability of volumes, maximising the debt-to-equity ratio, long term (10+ years), and affordable pricing. No state financial support was ever assumed to be available to the project.

After thorough market analysis, we concluded that the optimal debt financing package could be provided by an A/B loan structure offered by the European Bank for Reconstruction and Development (EBRD) and International Finance Corporation (IFC). Under this structure, the EBRD and/or IFC can offer long-term loans utilising their own balance sheets (A-loans). The A-loan lending must be supported by the participation of commercial lenders in the syndicated B-loan facility. It is essential for the IFIs that the syndication of the B-loans proves successful and confirms commercial viability of the project. For Pulkovo, this was a key prerequisite of financing by the IFIs.

The IFIs and development banks are represented in the Pulkovo project by six institutions, comprising EBRD, IFC, Vnesheconombank from Russia, Nordic Investment Bank, Eurasian Development Bank, and Black Sea Trade & Development Bank. EBRD, IFC and Vnesheconombank have been actively supporting the project from its official launch.

Successful syndication

NCG, its advisers and the IFIs have structured the project in the best traditions of international PPP transactions and thus managed to achieve successful syndication of the B-loans among commercial banks. The B-lenders participating in this transaction include top-tier European names in infrastructure financing. NCG has raised long-term (10-15 year) non-recourse project finance loans of $900 million to co-fund airport reconstruction.

The remaining $600 million is provided by the shareholders of NCG in the form of equity and cash from airport operations. The entire financing package is currently available to NCG for undertaking the ambitious expansion programme.

We believe the Pulkovo Airport project could pave the way for other major international undertakings in the Russian infrastructure sector, as it has demonstrated the possibility of realising a truly international and ‘bankable’ project in Russia. It has also removed a number of doubts relating to, for example, the level of commitment of the Russian government to its modernisation initiative as well as the openness and transparency of the country’s market to foreign investors.