ey presentation on russian ppp lessons for kazakhstan

Public Private Partnerships Russia: Some Lessons for Kazakhstan

Jannat Salimova-Tekay

22 May 2012

Contents

Section Page

1. Comparing Municipal Infrastructure in Russia and Kazakhstan

3

2. Municipal Infrastructure in St. Petersburg5

• Yanino Waste Recycling Plant9

• North Water Station Modernisation 16

3. Some Lessons for Kazakhstan21

Russia

► Federation► Enables some municipalities

to make their own laws concerning PPP

► Concession Law► Enacted in 2005► Used primarily for road

projects (М1, M10)

Kazakhstan

► Unitary state► Changes in legislation for

specific projects should be adopted at the central level

► Concession Law► Can only be used for projects

with strong cash flows (not applicable for most projects in municipal infrastructure)

Comparing municipal infrastructure in Russia and Kazakhstan

Russia

► Tariffs and Subsidies► Regulated at local level► Targeted social subsidies► Possibility of budgetary

grants from local budgets

Kazakhstan

► Tariffs and Subsidies► Regulated at local level► Targeted social subsidies► Budgetary grants only at the

approval of the central government


Russia

► Private sector participation► Private operators in water,

solid waste and power utilities

► Technical characteristics► Most assets were

commissioned in the Soviet era and are now considerably worn down

Kazakhstan

► Private sector participation► Limited to several cases of

heat and power utilities ► Almost all cases of

privatisation of late 90s were renationalised

► Technical characteristics► The situation is similar to the

Russian


Municipal Infrastructure in St. Petersburg

Municipal Infrastructure in St. Petersburg

The City of St. Petersburg Municipality

► One of the first in Russia to implement PPP projects

► The first law on PPP (2006)

► An experienced PPP implementation team

► Large number of projects at advanced implementation stage

The World Bank estimated the PPP programme implemented in St. Petersburg as currently one of the

largest globally

Some PPP Projects in St. Petersburg

Pulkovo International

Airport

$ 1.3 billion

Yanino Waste Recycling

Plant

$ 450 million

Western High Speed

Diameter

$ 4.5 billion

North Water Station

RUR 11 - 14 billion

and many others…

Orlov Tunnel

$ 1.5 billion

Yanino Waste Recycling Plant

Project Summary

► Project Objectives► Reduction in solid waste disposal volumes

► Environmentally sound, reliable and modern technologies

► Fiscal burden reductions

► Proposed Solution► PPP based on St. Petersburg law

► Recycling of not less than 350K tonnes of SW► 20% of all volumes

► Below the 30% permitted for disposal

► The DBFOT-type 30-year contract

Implementation Stages

► November 2009 - Announcement of tender

► February 2010 - Three investors pre-qualified

► December 2010 - Two bids submitted

► January 2011 – The Greek consortium of “Aktor" and "Helektor“ declared as preferred bidder

► May 2011 - PPP agreement signed

► July 2012 – The expected financial close and contract effectiveness

► The Partner commits to:► Raise the financing and

complete the construction within 3.5 years

► Provide at least 80% recycling depth

► Comply with environmental and availability standards

► Transfer the plant to St. Petersburg in 30 years of the signing

► The City commits to:► Deliver at least 350K tons of

SW pa to the plant► Fixed payments

► Determined by the agreed payment mechanism

► Less the penalties for failure to comply with the processing requirements

► Preferred Bidder’s capex estimated at RUR 12 billion ($400 million) for the proposed biomechanical processing technology

Commercial Terms

Payment Mechanism

RUB

Households Agency

Output products

Transportation companies

Partner

Residual waste

Waste

Waste*

RUB*

RUB

* Payment and volume of waste are guaranteed by the City

Домохозяйства

Тариф

Тариф

Платеж

Агентство ТБО

Партнер

ТБО

ТБО

Транспортные компании

Непереработанные отходы

Продукты переработки

►Payments for waste Recycling►Compensation from the City

Partner ConsumersCity

Payments for Waste Recycling

Compensations

Households

Tariff

WasteTariff

Solid Waste Agency

Collection Co’s

PaymentPartner

Waste

Waste

Products of recycling

Un-recycled waste

North Water Station Modernisation

Project Summary

Project structure►Design, construction, modernisation and

operation

Technical characteristics

►NWS capacity: Before: 608,000 m³/day After : 800,000 m³/day

►NWS provides about 40% of water supply in St. Petersburg

►Pilot testing to demonstrate the suitability of the proposed technology

Capex ►RUR 11 - 14 billion ($ 450 million)

Timeline►Contract term: 30 years

Construction period of 6 years (start of operation 2-3 years before completion)

Implementation Stages

Large and technologically complicated project

Includes the North and the Main Water Stations

Discussion with the City and

banks

Exclusion of the Main Water Station

Tight schedule for prequal submissions

Pilot testing at prequalification stage

High standards to the construction and operation track record

Close cooperation with investors and the

City, including seminars

Two months submission deadline extension

Pilot testing is permitted at the tender stage

The competition and the high level of interest to the project remain unchanged, ensuring the participation of strong bidders

Standards softened

Road Shows

The project requires construction of tunnels

Exclusion of tunnels

Payment Mechanism

– Sources of guaranteed income

Partner

City Consumers

Supply of water

VodokanalPayments under water purchase and sale contract

Drinking Water Supply

Com

pens

atio

n pa

ymen

ts

Reb

ate

Guaranteed income: the amount that the Partner

will receive annually

Some Lessons for Kazakhstan

Lesson 1: State Support

► Virtually all projects obtained a financial support in the form of capital grants, minimum revenue guarantees or availability payments.

► Private investors are not ready to assume tariff risk in municipal infrastructure where tariff setting mechanisms are non-transparent and unpredictable.

► There seems to be no alternative to “availability payments” for the future PPP projects in the municipal infrastructure.

The Government is not ready to assume some risks

Without explicitly accepting the risks, the Government will still pay for them

The Speed Temptation

Delays at the tendering and financing stages

Escalation of costs for all parties

Poor competition

Unfavourable conditions

Unrealistic timetable

Poor project development

Lessons for Kazakhstan

1. Private sector is ready to assume more risks when they are clear

2. A well-structured project is the best way to the right risk allocation

3. Delays in decision making almost always lead to significant cost escalations

Lesson 2: Realistic Timelines

Lesson 3: Narrow Financial Markets

► Only a few banks and funds are ready to finance infrastructure

► Even fewer are able to lend in local currency (5 banks can lend in Roubles in Russia)► High interest rates (>10-11%)

► Fixed interest rates up to 7-10 years

► Tenors up to 6-9/15-20 years

► The Government does not assume refinancing risks

The financial markets in Russia are significantly broader than in Kazakhstan. Therefore, the

“financeability” of large projects must be thoroughly investigated

Lesson 4: Shortage of Financial Instruments

► Interest rate volatility and lack of interest rate swaps► Lack of long-term Forex hedging► Most projects are supported by state equity grants and

guarantees: risks of future budget financial commitments. ► Proper project structuring is key to ensuring the interest

from banks

Implementation of smaller projects, initially in municipal infrastructure, will allow broadening the

PPP financing circles

Questions?

Contacts

Jannat Salimova-TekayHeadProject and Infrastructure Finance GroupCentral Asia and Caucasus

Tel.: +7 727 258 5960Fax: +7 727 258 5961Mobile: +7 702 737 9031Email: [email protected]

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