Whatever works

Guarantees made by Russia to clinch its first PPPs may not be conventional, but they are necessarily pragmatic.

The much-hyped Russian PPP market has delivered plenty of frustration to investors and little in the way of action. . . until this week, that is.

Suddenly, a quick trio of financial closes has seen Russian PPPs spring to life. The market saw the first-ever road PPP to reach financial close in the form of the $2.1 billion Moscow-St Petersburg highway. This was swiftly followed by the $850 million Odintsovo bypass and then the €1.1 billion Pulkovo airport modernisation project.

What insights can we glean from these closes? One is that Russia’s ambition to see public-private partnerships play a substantial role in addressing its $1 trillion infrastructure funding gap over the next ten years no longer appears far-fetched. A second is that in order to get clogged PPP pipelines flowing, governments may need to offer extraordinary assurances to investors in the form of guarantees.

Indeed, key to the two road deals are extremely generous state guarantees.  In the case of the Moscow-St. Petersburg highway, the financing package featured a RUB10 billion (€258 million; $340 million) bond issue secured by the government through a newly created bond guarantee mechanism. Furthermore, state development bank Vneshconombank has said it is prepared to buy up to 70 percent of the bond issue.  Meanwhile, the Odintsovo bypass financing also includes government-backed bonds issued by the concessionaire – with nearly $400 million of the total $850 million package predicted to be coming from the state budget.        

But is this not stretching the definition of a public-private partnership, you might ask? Exactly how much risk transfer needs to be part of the deal to comply with that definition? These are interesting philosophical questions – but don’t expect the Russian authorities to be unduly troubled by them. Nor should they be.  Russia is seeking to establish the kind of PPP arrangements that will work in a Russian context. As with many other emerging markets, this involves an honest recognition that investor concerns about political and currency risk can only be overcome by way of some pretty compelling incentives.

Also, let’s not overlook another motivation – namely, making projects sufficiently attractive for blue-chip PPP players to come onboard and share their experience and technical expertise. Some had worried that the Russian market would be a closed shop in which only local players would end up participating. But with VINCI leading the Moscow-St Petersburg concession and three non-Russian developers (Alpine, Brisa and FCC) involved in Odintsovo, these concerns do not appear well founded.

Russia is demonstrating how innovative – and downright generous – state incentives may need to be deployed in order to get embryonic PPP programmes up and running. To borrow a Woody Allen film title: whatever works.