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PUBLIC PRIVATE PARTNERSHIP PROJECTS ON ROA

IN THE RUSSIAN FEDERATION
By Galina Atlasova, CIC Trans Project

Russia’s size is the main factor for the country having an insufficient number and low quality of roads. In spi
serious problems with organising domestic freight and passenger transport. The country’s poor infrastructure is
able to develop both in individual territories and as a whole.

The Russian Government is presently working on toll road construction projects through public-private partnership
been successfully employed throughout the world.

Legislation and the government’s stance

In 2005, the Federal Law on Concession Agreements was adopted, under which the implementation of PPP proje
the Law on Motorways was passed; it specified the definition of toll roads in Russia and permitted their cons
Finally, the Law on Russian Highways State Company (RHW SC), which regulates the operations of RHW SC, wa

The adoption of the above-mentioned legislation may be considered to be the beginning of toll road cons
Moreover, over the past five years, both former President Vladimir Putin and President Dmitry Medvedev publicl
of building toll roads under concession agreements.

At present, the principal legislative issues standing in the way of successful implementation of concession road co

• The Law on Concessio

roads, does not allow
subject of concession
hereinabove forbids th
concession as securi
institutions. In essence
types of PPP: Design
Operate, Operations a
This situation may affe
the part of prospective c
• Under the Law on Moto
another motorway as a
clear-cut definition, how
for its length, which, w
than three times as long
• State financial support
regulated by the budge
of the Russian Federa
Budget Code, adoption
regulated by numerous
governmental directive
Ministry of Finance, t
authorities of the Russian Federation. The Ministry of Finance can give clarifications and interpretations o
the Ministry of Finance has provided no specific clarifications with regard to public financing of PPP pro
planning budgets one year ahead of time, while requiring financing plans to be provided for the follow
enough for long-term concession projects.

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Public Private Partnership Projects on Road Construction in the Russian Federation ÆäÀÌÁö 2 / 3

• Throughout the world, infrastructure bonds are regarded as one of the principal sources of funding for PP
infrastructure bonds as a means of funding, however, a number of amendments should be made to the e
Concession Agreements and the Law on Joint-Stock Companies.

Despite the above issues, the regulatory framework for concession road construction projects may be deemed e
on Concession Agreements and the Law on Motorways. A number of law and by-law amendments, however, still

Sources of financing
Joint public-private financing is traditionally used for concession projects around the world. The Government of t
entity thereof – the Concession provider – legally and financially represents the public in a concession project in
Agreements. Russian Highways State Company (RHW SC) is thereby authorised to act for and on behalf of th
According to the Company’s Long-Term Capital Investment Program for 2011– 2015, the government’s maximu
concession road construction project is 65%; private capital is made up of borrowed funds (senior loans) a
shareholder equity. The financing structure of concession projects in Russia is illustrated below.

There are many difficulties in Russia related to debt financing, which amounts to 75% of total private capital. They

• Due to weaknesses in the long-term financing system in the national currency, fixed-rate loans for infra
more than 10 years. This is clearly insufficient for road construction under concessions, given that the ave
years. It could lead to refinancing risks that may make projects less attractive to investors. The issues
currency may be tackled through long-term financing in foreign currencies at floating rates. In this case,
currency and interest rate risks due to hedging.
• Under the Law on Concession Agreements, concessionaires are prohibited to use the subjects of co
increases the risks of the creditor banks, which leads to higher interest rates. This problem may, possibly
rights to the lending institution, for example, through transferring the right to collect road tolls. This me
defined in Russian law.
• Russia does not have a market for infrastructure bonds, which results in investors’ lack of trust in this finan

The reasons behind the above-mentioned issues are related to the lack of PPP experience and regulation in
working hard to change the situation. For instance, the Government provided additional state guarantees to
concessionaires participating in existing concession projects.

The Government also makes efforts to shape the market for infrastructure bonds. The Government provided guar
finance such projects as the construction of a new junction between the Moscow Ring Road and the Federal Mo
and Minsk, and the completion of the stretch between the 15th and 58th kilometres of the Moscow – St Peters
resolve some of the existing problems linked to long-term financing of construction projects. Although the bond
these bonds attract unabated investor interest.

Concessionaires’ income from building and servicing roads

Global practice presents several ways for concessionaires to earn income from toll roads, including the “direct p
direct payment method is more profitable and, therefore, more risky. The concessionaire obtains the right to all t
case, the concessionaire bears all the risks inherent in predicting traffic conditions. Since this risk is rather high, t
of traffic does not need to be specifically confirmed.
The service fee method is when the traffic risk is fully born by the Concession provider. In this case, the
maintaining the road’s condition and capacity rather than for the traffic density. The Concessionaire ensures the q
rubbish or precipitation, repairs engineering structures in a timely manner, etc. The requirements as to the quality
agreement.

The Concessionaire receives a service fee for being in compliance with the requirements. Fines can be imposed i

In Russia, some projects are implemented on the direct payment basis. Others, the bidding documentation for w
service fee model. The service fee agreement provides for an opportunity to receive part of the profits should traff
the toll road traffic exceeds the figure specified in the concession agreement, the Concessionaire will receive ex
road users. Toll roads in Russia in the public eye Until now, Russia has had virtually no toll roads, which affects
People do not fully understand the advantages of paying for proper road maintenance; many people do n
necessary. This mentality imposes certain limitations even on technical peculiarities in implementing projects. Th
feasible than equipping vehicles with on-board devices registering instances of entering and leaving toll roads for

Current PPP toll road construction projects in Russia

As of today, the following projects are under construction:

• Western High-Speed Diameter Highway in St Petersburg;

• Orlovski Tunnel under the Neva River (St Petersburg) as part of the VolgaBaltic Waterway development p

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Public Private Partnership Projects on Road Construction in the Russian Federation ÆäÀÌÁö 3 / 3

• The stretch between the 15th and 58th kilometres of the Moscow – St Petersburg Express Motorway; and
• The junction between the Moscow Ring Road and Federal Motorway M1 Belarus (Moscow – Minsk) bypas

Moreover, projects such as the construction of the Central Ring Road in the Moscow Region, the Motorway M-4
456th kilometres of the Motorway M-1 Belarus and the stretch between the 58th and 684th kilometres of the Mos
are now at the design stage. One may rest assured that, despite the above-mentioned challenges, the toll road c
Russia.

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