Russian Federation: Government Decides On "Infrastructure Mortgage"

Last Updated: 16 March 2018
Article by Karina Chichkanova and Vladimir Kilinkarov

After the President of Russia, speaking at the St. Petersburg International Economic Forum in 2017, announced the mechanism of "infrastructure mortgage" to support priority growth rates of Russia's economy, business and the expert community put forward different proposals as to what precisely the mechanism would involve. In particular, the Ministry of Economic Development of Russia proposed considering the possibility of creating an infrastructure mortgage fund to provide private partners (concessionaires) with capital grants. The money would be raised through state guaranteed bonds of up to RUB 300 billion1. However, the Ministry of Finance did not support this idea.

Following lengthy discussions in the Russian Government, on March 12 the so-called infrastructure mortgage roadmap was approved by Dmitriy Medvedev and published on the Russian Government's website, thereby fulfilling the President's orders2.

The roadmap defines infrastructure mortgage as a set of measures to improve the system of managing the creation and upgrading of Russia's infrastructure and Russian Federation legislation to make PPP tools, including concessions, more attractive and effective. These measures involve not only developing new financing models for infrastructure construction and reconstruction, but, what is no less valuable, improving existing mechanisms.

The roadmap should contribute to achieving the ambitious task set by the country's leadership: to increase the share of private investment in public infrastructure manyfold by lifting legislative and administrative barriers and restrictions for such investments, and providing substantial government incentives. We believe that the roadmap is generally consistent with this task and identifies a number of measures for improving legislation which, if executed well, could do much to positively influence the development of the infrastructure and public-private partnership market in Russia and make it more attractive for investment.

One of the measures proposed in the roadmap is to designate the Ministry of Economic Development of Russia as the authority competent to elaborate PPP and concession state policy and statutory regulation (save for budget law issues, which are under the jurisdiction of the Ministry of Finance of Russia). The measures also include plans to introduce tax incentives for participants in infrastructure projects; eliminating a number of historical deficiencies in the legislation; and many others.

Below we provide a more detailed description of the key measures envisioned by the roadmap.

Key measures for developing public-private partnership tools in the infrastructure mortgage roadmap

The infrastructure mortgage roadmap consists of four blocks:

  1. Creating mechanisms for developing infrastructure construction and reconstruction in Russia
  2. PPP legislation
  3. Other regulations, including budget and tax legislation
  4. Other measures

I. The following measures from the first block seem most significant to us:

  • The development in March 2018 of new mechanisms for financing PPP projects and approval of related government resolutions. However, the roadmap does not mention specific mechanisms
  • The formation in May 2018 of a procedure for creating an "infrastructure map" and open unified register of projects for the construction and reconstruction of infrastructure in key sectors
  • The compilation of a list of PPP (MPP3) pilot projects and concessions whose socioeconomic efficacy has been confirmed
  • There are also plans to create a government coordinating commission for infrastructure development in March. The commission would have broad authority, including the authority to coordinate and monitor implementation of the roadmap, and to coordinate the elaboration of state infrastructure policy
  • The creation of ready forms, models and algorithms for investor and public party actions, and risk matrices and standard projects for different sectors as part of the Ministry of Economic Development of Russia's guidelines

II. The key measure of the roadmap's second block calls for amendments to two federal laws: No. 115-FZ on Concession Agreements of July 21, 2005, and No. 224-FZ on Public-Private Partnership and Municipal-Private Partnership in the Russian Federation... of July 13, 2015. The Ministry of Economic Development of Russia has already proposed such a draft law4 (the draft law has not yet been brought to the State Duma; public hearings are being held). Proposed amendments include:

  • To declare the Ministry of Economic Development the PPP market regulator and entitle it to elaborate PPP and concession state policy and statutory regulation (save for budget law issues) and give written clarifications on matters of applying PPP and concession law
  • To lift the ban on lending institutions and other legal entities controlled by the state from participating in PPP projects on the private partner's side
  • We note in particular the proposed possibility of entering into a PPP project for movable property without the concession agreement or PPP agreement having to include immovable property. This opens the way for implementing, for example, a large number of public transportation and information technology projects, and all other projects to manufacture and operate high-cost movable properties. Another important novelty related to the agreement facility is the Russian Government being authorized to specify which facilities can be the subject of concession and PPP agreements even if those facilities are not mentioned in the law as appropriate concession and PPP facilities. Student housing will also be added to the list of PPP agreement facilities
  • The draft law allows multiple parties on the side of the public party to a concession agreement and PPP agreement
  • The substance and nature of the concession grantor payment have been defined to mean "compensation (financial support) at the stage after facility completion of the private partner's costs to design, create, reconstruct, operate and/or maintain the concession facility and/or to compensate for income not received by the private partner from operating the facility." The Ministry of Economic Development also proposed the term "capital grant," which means financing part of the expenses to create the concession or PPP facility. At the same time, the limits on the timing and amounts of payments by the public party previously proposed by the Ministry of Finance of Russia have not been set. It should also be noted that the draft law does not resolve the issue of operating grants as a separate project finance tool. We suppose that the draft law's authors intend these payments to be structured like a concession grantor payment
  • The concept of minimum guaranteed revenue (MGR) has been proposed. MGR will apply in special circumstances. No major PPP project can do without a MGR term; however, there is no consensus as to whether this mechanism complies with current law. The possibility of stipulating compensation for special circumstances is proposed based on the possibility envisioned by the draft law for the concession grantor or public partner to undertake financial and other obligations that will be contingent on one of the parties taking or failing to take certain actions, or the occurrence or failure of certain circumstances stipulated by the concession agreement or PPP agreement to occur. We note that this possibility already exists, but only if the tender documentation stipulates such a term as a tender criterion; the draft law eliminates this restriction   
  • Another positive signal for the market is the introduction of the right of the tenderer who initiated the conclusion of a concession agreement or PPP agreement but did not win the tender to recover the costs to prepare the project: up to 1 percent of the total cost of creating (reconstructing) the facility. The tender documentation needs to set forth the obligation of the entity with whom the concession agreement or PPP agreement is ultimately concluded in order to ensure such reimbursement. This new development is a significant incentive to prepare new projects well: after all, the private sector bidder will get a guarantee of sufficient reimbursement of its expenses and will minimize the risk of losses related to preparing the project by specifying the need for such reimbursement in the proposed draft agreement. Both the bidder and the entities that have expressed readiness to participate in the tender on the terms proposed by the bidder must provide information that they have funds or are able to get at least 5 percent of the private party's investment declared in the agreement to create or reconstruct the agreement facility
  • The draft law makes it possible to implement concession and PPP projects according to the "take or pay" subscriber contract principle, where, on the one hand, the concession agreement or PPP agreement may contain state procurement guarantees but, on the other, the public procurement authority will be required to make payments even if the goods, work and services provided for by the public contract are not used in the amounts contemplated by the agreement    
  • It has been proposed to relieve the parties to a concession agreement and PPP agreement from the obligation to clear the extension of a given agreement with the antimonopoly authority. It is anticipated that such clearance will not be required if the agreement sets an extension term or way of determining it, and the grounds and procedure for such extension. Other amendments will require antimonopoly authority consent only if the public party's percentage of financial participation in the project is increased
  • There are plans to grant sector-specific federal executive agencies the authority to review private concession initiatives in their sectors, to make it possible to conclude agreements for "construction in progress," and to update the forms of model concession agreements
  • It will be permitted to refer disputes out of a concession agreement to international commercial arbitration, which is also an important new development in the wake of recent disputes over the possibility of referring concession disputes to international arbitration (e.g., the Orlov Tunnel dispute5). The draft law does not clarify the arbitrability of disputes out of a PPP agreement, which, together with other circumstances, likely evidences that such disputes can be subject to arbitration    

Apart from the amendments to those laws, there are also plans to adopt a federal law devoted to criteria for possible implementation of a project using PPP and concession mechanisms. Notably, there were earlier reports of disagreements among three agencies, the Ministry of Economic Development, the Ministry of Finance and the Federal Antimonopoly Service, over distinguishing between public procurement and concessions. Each agency proposed its own wording of the distinction. For example, the minister of economic development criticized the measures proposed by the Ministry of Finance, citing the "Bashkiria Case"6 and investor concerns caused by it.  

III. The following measures related to the block of measures for other (e.g., tax and budget) legislation seem essential:

  • Examining the issue of whether amendments need to be made to the Tax Code of Russia relating to accounting of property (including property rights) for tax reasons when a PPP project is implemented
  • There are plans in April to prepare a draft law on amendments to the Civil Code of Russia to eliminate the requirement to liquidate an SPV created to implement a PPP (concession) project if the company's net asset value drops below its minimum charter capital at the end of the second or each subsequent fiscal year
  • Amendments to Russian Government Resolution No. 1119 on Selecting RF Constituent Entities Entitled to Receive Government Incentives in the form of Subsidies to Recover Costs for the Creation, Upgrading and/or Reconstruction of Infrastructure Facilities of Industrial Parks... of October 30, 2014 to "generate sources of financial support for infrastructure development projects... from additional tax and customs revenues from the implementation of investment projects on the basis of new infrastructure." The roadmap does not answer the question of whether this means only industrial and technology parks and PPP in industry, or whether there are plans to introduce the TIF (tax increment financing) mechanism in Russia. TIF implies the transfer to the private partner from the budget of additional tax and customs revenues related to implementation of the infrastructure project
  • And, finally, in March the Russian Government also wants to approve a concept for modernizing the budget process with the introduction of a financial audit procedure and a plan for implementing it. The concept should call for financial due diligence of various options of taking actions, i.e., to develop infrastructure, using best practices of substantiating and structuring projects

IV. The following measures have been proposed in the "other" block:

  • To eliminate obstacles to using special purpose project finance entities and collateralized bonds to finance PPP projects
  • To do advanced training of civil servants and entrepreneurs to raise awareness of PPP mechanisms and their popularity
  • To create a set of measures to ensure competition, promote the use of modern technologies and cut design and construction costs

On the one hand, such changes should be viewed favorably, as the overwhelming majority of the measures listed above are intended to lift existing barriers and restrictions for private investors planning to invest in infrastructure.

At the same time, in our opinion, to fulfill even some of the country's leaders' plans for priority economic growth and to radically increase the flow of private investment into public infrastructure, the measures outlined above should be accompanied by serious financial incentives from the state.

The program of the infrastructure mortgage fund proposed by the Ministry of Economic Development providing state guarantees could become one such financial incentive. However, the roadmap presented does not include creating such a fund, apparently because at the time there was no agreement to this effect between the Ministry of Economic Development and the Ministry of Finance. It is hoped that the agencies will be able to agree on a position on this issue soon and that the requisite financial mechanisms will nonetheless be created.

We would be happy to answer any questions and provide more detailed comments on the roadmap, the measures it describes and the possible consequences of implementing them for the market and specific infrastructure projects.

Footnotes

1 Currently approx. €4.3 billion.

2 http://government.ru/news/31625

3 So-called "municipal-private partnership."

4 http://regulation.gov.ru/projects#search=%D0%9E&npa=78562

5 Resolution of the Northwest Circuit Commercial (Arbitrazh) Court of February 17, 2016 in case No. А56-9227/2015.

6 Resolution No. 09AP-50816/17 of the Ninth Commercial (Arbitrazh) Court of Appeal of October 20, 2017.

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