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PPP in Kazakhstan: Investment Climate and Legal Regime
Russian Infrastructure Projects: An International Comparative View
Tony Humphrey and Anton Konnov
12 May 2010
Allen & Overy Legal Services
Outline
Introduction
PPP: A “global success story”
Why the international perspective matters
Our perspective
PPP in Russia
Russian successes
Strengths
Challenges
Proposals
Comparative Risk Allocation
Selected current topics
International trends
Russian developments
Concluding Remarks
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Introduction: PPP “A global success story”
Benefits of PPP:
Facilitates infrastructure developments that would be beyond reach of governments
Facilitates innovation by focus on “outputs” – i.e. services not assets
Risk transfer: risks being borne by those best placed to control them
is economically efficient as well as fair
By far the most successful procurement tool for complex greenfield
infrastructure projects
IFIs as well as governments across the globe see PPP as making a
positive contribution to economic growth
Recognized globally – see Global Guide to Public-Private
Partnerships
“PPP has transitioned from a value laden political tool to a value neutral procurement method"
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Introduction: Essential Ingredients for Success
Legal framework
Transparent procurement process
Standardised concession agreement
Realistic payment structures
“Fair” risk allocation
Realistic response to financial crisis considerations
Credibility and momentum
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Introduction: Legal Framework
Specific Concession/PPP law?
Examples
Czech Republic
Latvia
Poland
Spain
Kazakhstan
Hungary
The Netherlands
United Kingdom
Yes No
Depends on sophistication of legislation in force
General PPP law or sector specific?
Russia somewhere in the middle? BOTs etc outside
concession law
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Introduction: Legal Framework
Key legal considerations
Capacity of grantor
ability to contract with private sector
outsourcing “public” assets and services
long term financial commitments: inc budgetary considerations
Property law
Land rights
Expedited compulsory acquisition
Company law
Revenue law
Tax treatment of concessionaire / foreign investors
Security law
Procurement process
Dispute resolution / Arbitration
Other (e.g. consents/permits, interface with utilities, etc.)
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Introduction: International Perspective
Why the international perspective matters:
Currently 594 projects announced internationally, including 185 PPP/PFI projects e.g.
69 roads in Europe, Americas and Africa
17 airports / 38 ports
50 social infrastructure projects (schools, hospitals)
International investors, contractors and financiers have to choose which sectors/projects/countries to focus on
Non-financial selection criteria for sectors/projects/countries include comparative measures of:
legal system risks / uncertainties
fair and transparent selection process
jurisdictional track record
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Competition is in the heart of all successful PPP programmes: competition between
bidders but also between countries
complexity / credibility
probable lead times
risk allocation
Introduction: Allen & Overy Perspective
Our Perspective: Balanced Russian and international experience and views
Deep involvement in Russian projects include:
St. Petersburg Nadex – for City
Pulkovo – “fatal flaws” analysis
Roads – various
Social infrastructure - schools, healthcare, cultural facilities, etc
Power and Petrochemical - including co-investment projects with support from the Investment Fund of the RF
Participation in State Duma Committees on PPP and infrastructure bonds
Very extensive international experience:
top legal adviser on projects every year 2002 – 2009
adviser on 35 transactions winning “Projects of Year” award in 2007-2008
11 power / petrochemical deals
11 transport deals
6 infrastructure deals
adviser on 53 projects completed in 28 jurisdictions in 2009
extensive list of innovative “firsts” (e.g. “first PPP project” in jurisdiction or sector - 64 “firsts” in 2001 – 2008)
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PPP in Russia: Successes
• Top level political support for public-private infrastructure development
• Vast pipeline of potential projects: US$1,000 billion over 10 years
• Development of Federal and Regional legislation and institutional
framework
• Strong foreign investor interest demonstrated by response to existing
projects (leading investors, contractors and financiers)
• Active support from EBRD and the World Bank Group (including IFC)
and other development institutions and ECAs
• Successful Tenders:
• Moscow - St. Petersburg Highway (15 – 58 km): signed 27July 2009
• "M-1 "Belarus“, a section of the Moscow-Minsk Highway (18 km): signed 17
July 2009
• Pulkovo Airport: Winning bidder: awarded 25 June 2009
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“We [the Government] cannot allocate budget funds to all the projects that need our support, that is why we need public-private partnerships”:
President Dmitry Medvedev (18 September 2009)
PPP in Russia: Strengths
Widely embedded recognition of importance of PPP approach:
PPP concept reflected in:
Governmental Programme for Modernization of the Russian
Transport System 2002 – 2010
Federal Transport Development Programme 2010-2015
Strategy for Development of Russian Railways Network until 2030
Concept for Development of Russian Airport Network 2008-2020
Regional development programmes
Establishment of an institutional and legislative framework both at the
federal and regional levels
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PPP in Russia: Strengths
Expert Council on PPP acting under the auspices of the State Duma,
Advisory Council on PPP development set up by the Russian Ministry of
Transport
RF Investment Fund created in 2006 to provide state co-financing for large
projects of federal importance (RF Investment Fund budget 2006: $3 billion
was available; 2007: $4.3 billion was available; 2008: $5 billion was available;
2009: $3 billion is available; 2010-2012: $4.3 billion will be available)
Vnesheconombank (VEB) has the leading role in promoting and financing
(debt and guarantees) for PPP projects in Russia: including “VEB PPP Centre”
to support PPP projects
Special Economic Zones (e.g. Krasnodar, Irkutsk and Kaliningrad regions)
were established to provide infrastructure development in special areas for e.g.
tourism, technical innovation and industrial manufacturing
Other initiatives: Russian Highways (Rosavtodor), Russian Roads Company,
Russian Venture Company, Regional Venture Funds, Regional Investment
Programmes
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PPP in Russia: Selected Major Projects
Project Sector Type Cost
(estimated)
Concession
term
Region
Moscow - St.Petersburg
motorway (15-58km)
Roads BTO US$ 2,0 bln 30 years Moscow, St.
Petersburg and other
regions
M1 Exit Motorway Roads BTO US$ 860 mln 28 years Moscow region
Pulkovo airport Airports BOOT US$ 1,3 bln 30 years St. Petersburg
Light Railway System in
St. Petersburg (Nadex)
Railway BOOT US$ 0,7-1,2 bln 30 years St. Petersburg
Western High Speed
Diameter (suspended)
Roads BTO US$ 7,5 bln 30 years St. Petersburg
Orlovsky Tunnel
(suspended)
Roads BTO US$ 1,5 bln 30 years St. Petersburg
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PPP in Russia: Legislative Framework
Legislative framework has been established at federal and some
regional levels by adopting the federal law “On Concession
Agreements”, local PPP laws (e.g. in St. Petersburg, Altai, Tomsk,
Dagestan) and investment legislation
New legislation on infrastructure bonds and model PPP Law for
Russian Regions is being developed
BUT there is not just one single Russian legislative act for public-
private infrastructure developments……
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PPP in Russia: Legislative Framework
Federal Law on “Concession Agreements” (2005)-amended 17 July 2009
RF Government Regulation “On Investment Fund of Russian Federation” (2005 and 2008)
Standard concession agreements have been developed and adopted by the RF Government for a number of asset types (2006)
Other Related Laws and Regulations:
Roads and Road Activities Law (2007); Sea Ports Law (2007)
Local PPP laws (St. Petersburg; Altay; Dagestan; Tomsk)
Civil Code; Laws on Investment Activities (1991), Capital Investments (1999) and Foreign Investments (1999)
Budget Code (1998)
Public Procurement Law (2005)
Law on State Registration of Real Estate Rights (1997)
Law On Special Economic Zones (2005)
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Russian Legal Framework: Challenges
Legislative framework untested and unclear: eg
Concession Law: covers BTO but not BOT schemes
Federal and Regional Laws: inter-relationship
Application of wider Federal laws: eg
Federal budgeting laws impact on:
long-term availability payments
state guarantees
Public Procurement Law (2005) impact on procurement of goods, works and services: compulsory tender process very restrictive and unsuitable for PPP projects
Competition Law (2006) impact on grant of land rights under non-concession PPP projects
No central “PPP Unit” to evaluate value for money (VfM) and set priorities for projects
Joint grantor schemes: concerns re competence of multiple authorities to act jointly
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Russian Legal Framework: Challenges
Legislative framework is overly regulated and restrictive:
Standard forms of concession agreements: there is limited scope to deviate
Tender procedures prescribed by Concession Law are restrictive (including as to selection criteria and timing)
Concession Law and standard forms of concession agreement contain terms and restrictions inconsistent with international norms on such matters as:
security
termination payment
grantor obligations
no recognition of change of law and force majeure protection by grantor
assignment of concessionaire’s rights
direct agreements and “step-in” rights
dispute resolution and choice of law
15
Russian Legal Framework: Proposals
PPP Expert Council* has proposed useful amendments to Concession Law and to other Federal Laws, including**:
Clarification of scope of Concession Law to exclude BOTs and other non-concession PPP schemes
Standard forms of concession agreements to be advisory not compulsory
Concessionaires to have right to create security over rights under Concessionagreements
Scope for greater grantor (and State) financial support and stronger terminationcompensation
Recognition of importance of direct agreements between grantors andfinanciers
Reduction of obligation on concessionaire to provide security to grantor
More flexibility re tender procedures including selection criteria and ability toamend concession agreement after award
Changes to other Federal Laws to avoid unnecessary overlap
* PPP Expert Council of the Committee for Economic Policy and Business of the RF State Duma
** This list is not comprehensive
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Comparative Risk Analysis: Selected current topics
Financing / Re-financing risks:
Current financial market conditions coupled with policy priority to
stimulate infrastructure development leads some European and
Middle Eastern governments to consider:
absorbing refinancing risk (eg by debt buy-out or reimbursing excess
margin) in return for usual sharing of any refinancing gain;
partially underwriting bidders’ debt finance (eg by State guarantee or
reimbursing excess margin ).
Indications that Russia would be prepared to offer similar support
would be welcomed.
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Comparative Risk Analysis: Selected current topics
Foreign Exchange Risks
Exchange rates: for projects with RUR revenues but USD/Euro
funding and/or contractor costs. Possible mitigants:
Some revenues in USD/Euro (eg airports)
State or VEB guaranteed RUR infrastructure bonds to reduce USD/Euro
funding
Availability payments adjusted to reflect FX rate movements (common in
eg Middle Eastern projects): perhaps adjust only if rate moves beyond
agreed tolerance?
Availability payments adjusted to reflect increases in assumed hedging
costs
Conversion and remittance: should be covered by “change of law”
provisions in Concession Agreement and Lenders’ Direct Agreement
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Comparative Risk Analysis: Selected current topics
Termination payments
International lenders look to be paid out in full on termination including on
termination for project company default (eg breach of concession
agreement).
Standard in emerging markets projects (especially for jurisdiction without
established record for successful PPP projects)
In “boom time” some CEE precedent for pay-out on project company
default being limited to percentage of asset value (investment): but
market has hardened
Some examples of no termination payment for project company default
but only in markets:
with long-established PPP track-record;
robust “step-in” rights for lenders; and
settled and predictable legal system.
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Comparative Risk Analysis: Selected current topics
Third Party Risks
Positive Russian development: some protections for:
certain acts of Federal and Regional authorities
changes of law
International practice would commonly provide protections for actions
and inactions of authorities resulting in
prejudice to revenues (eg tariff or toll setting)
delays, non-issue or cancellation of permits, licences etc (unless project
company breach)
breach by authority as lessor of project land
unavailability of required utilities
requisition or interference in normal operations
20
Comparative Risk Analysis: Selected current topics
Security: Step-in Rights
Security: International practice shows that is not critical for project
company to own and create security over project tangible assets
provided:
Project company’s rights to use and exploit the assets is assured and
can’t be interfered with; and
Lenders have ability to remedy project company failures eg by taking
over management of project or arranging for another operator to do so;
and
Lenders have good security over project company revenues and over all
its contract rights including Concession agreement
Step-in Rights: Grantors now recognise that lenders can be their
allies in policing project company’s performance of its concession
obligations. Direct agreement should help reinforce this alliance.
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Comparative Risk Analysis: Selected current topics
Law and Dispute Resolution
International practice would indicate that Concession Agreement
governed by Russian law is acceptable but strong preference for:
International arbitration
Lenders’ direct agreement (and all other finance documents) to
be under English law
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Concluding Remarks
PPP is a tool that, if used well, can contribute significantly to economic growth
Very significant progress to date in Russia and in Kazakhstan but further development of law and practice would be beneficial
Opportunities are very substantial in Russia and in Kazakhstan
PPP infrastructure projects are competing in global market place: other jurisdictions have been very successful by being “generous” initially and tightening terms once track record established.
Please feel free to access our Global Guide to Public-Private Partnerships
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The Global Guide to PPP
As governments around the world grapple with an estimated USD71
trillion bill for new infrastructure between now and 2030, Allen & Overy
has launched a Global Guide to PPP highlighting the key issues for the
growing number of governments using PPP projects as a delivery
method. Covering 21 countries in detail (including Russia), it identifies
the legal and regulatory issues commonly faced and opportunities
available across the globe.
To see an electronic version of the guide go to:
http://viewer.zmags.com/publication/8d44813d#/8d44813d/1
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Allen & Overy– 34 offices in 25 countries
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Frankfurt
Hamburg
London
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Madrid
Mannheim
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Paris
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Middle EastAbu Dhabi
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Asia PacificBangkok
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* associated office
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Global project finance legal advisor league table
Rank Firm Total allocated deal amount Total no. of deals
2009
1 Allen & Overy LLP US$12.5bn 55
2 Latham & Watkins US$15.7bn 373 India Law Services US$11.2bn 264 White & Case LLP US$9.9bn 225 Clifford chance LLP US$9.7bn 32
2008
1 Allen & Overy LLP US$23.4bn 732 Clifford Chance LLP US$34 bn 503 Linklaters US$22.3bn 374 White & Case LLP US$18.9bn 225 Milbank Tweed Hadley & McCloy US$11.4bn 35
2007
1 Allen & Overy LLP US$22.3bn 692 White & Case LLP US$19.9bn 323 Clifford Chance LLP US$16.2bn 504 Milbank Tweed Hadley & McCloy US$14.8bn 505 Latham & Watkins US$14.6bn 39
2006
1 Allen & Overy LLP US$18.1bn 692 Clifford Chance LLP US$14.4bn 393 Latham & Watkins US$13.3bn 364 Linklaters US$13 bn 355 Milbank Tweed Hadley & McCloy US$12 bn 36
2005
1 Allen & Overy LLP US$18.6bn 582 Clifford Chance LLP US$13.5bn 443 Latham & Watkins US$10bn 274 Skaddden Arps Slate Meagher & Flom US$9 bn 115 Milbank Tweed Hadley & McCloy US$7.7bn 32
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Source: Dealogic Projectware 2010 (the only independent and single most authoritative guide on deal data)
Contacts
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Moscow office
Tony Humphrey
Managing Partner, Global Head of Russia /
CIS Practice Group
Tel +7 495 725 7915
Anton Konnov
Partner
Tel +7 495 725 7919
Alexander Dolgov
Senior Associate
Tel +7 495 662 6424
Elena Shishmariova
Senior Associate
Tel +7 495 725 7931
London office
Andrei Baev
Partner
Tel +44 20 3088 2669
David Lee
Partner
Tel +44 20 3088 4733
Nigel Pritchard
Partner
Tel +44 20 3088 3317
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The
term partner is used to refer to a member of Allen & Overy LLP or an employee or
consultant with equivalent standing and qualifications or an individual with
equivalent status in one of Allen & Overy LLP's affiliated undertakings.
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