Partnership is our strength

At the end of last year in Kaliningrad under the auspices of the Ministry of Finance of the region was held a series of conferences, whereon the experience of the western region of Russia which was acquired in the implementation of the state program «Effective Finance», and in particular its sub-program «Improving the efficiency of budget expenditures» under the cross-border cooperation programme was reviewed and analysed. Among other issues, the problems of the implementation of Public Private Partnership (PPP) and the attraction of private investors to the solution of social problems were discussed.

The process of adaptation

The absence of a federal law on Public Private Partnership should not hold down the use of this mechanism. As it was mentioned by the chairman of the board of directors of the TRANSPROEKT Group (Moscow), V. Maximov, it is optional to implement the Public Private Partnership projects in the framework of specific legislation. There is a practice of implementation of sufficiently large projects under the Federal Law of the 25th of February, 1999 №39-FL «On investing activity in the Russian Federation in the form of capital investments». The Federal Law of the 21st of July, 2005 №115-FL «On Concession Agreements» is effective, despite some restrictive guidelines.

In addition, there is a sufficiency large base of regional laws on PPP (passed in 71 subjects of the Russian Federation). Of course, not all of these legal acts are viable; many of them should be amended and supplemented, some by-laws should be adopted. Nevertheless, they form the basis for the implementation of PPP projects. And the improvement of the legislative framework in the process of implementation of the project is a normal process of adaptation. Furthermore, if we look back at history, we can note that such projects have been implemented long before the special investment legislation appeared in Russia. For example, with the use of principles of Public Private Partnership pollution control facilities were built in Moscow in the 90s.

Regarding some of the finer points

The number of PPP participants is not limited by two sides – the government and private investors, for example, financial institutions are also involved. In this connection there is a moot point: whether the government should wonder if the selected private investor is able to borrow proceeds or not. «The point is subtle – agrees Maximov. – On the one hand- it is a direct problem of the investor. But if the government is going to implement the project, it has to help with solving this problem». Moreover there are some negative examples when the selected private investor was unable to obtain a credit. And this is a serious problem. But if in a similar situation with the public procurement there is an opportunity to undertake a tendering procedure, then in the implementation of the PPP-project, when the main part of time is spent on the preparation of the project- it is a few months step back, since we need to determine the failure: the project is not viable or it is the insolvent partner?

In any case, it is necessary to look for a way out. The state can help the investor to resolve the issue of borrowing proceeds or try to implement the project, to reclassify it to the state order. But to avoid the arising of the problems in the beginning, it is necessary, first of all, to learn to create well-planned, interesting projects, secondly, to learn to listen to the investor and hear what he says and analyse his chances to come to an agreement with the bank. For example, in the Kaluga region there is a lack of the active public private partnerships, but a significant investment volume is noticed. It conducted not only the large number of the industrial parks, but also a well-structured interaction with the investor, the general can-do attitude which allows to have a significant effect of this activities in the future, when the PPP will reach an active phase.

The legislative traps

The using of the regional legislation in preparation and implementation of PPP projects is complicated by some traps prepared by the federal legislation. It creates difficulties with structuring projects and submitted claims from the monitoring institutions. «That’s why it is necessary to carefully reconcile the documentation on PPP projects – said Maximov. – There are plenty of negative examples when was a risk of occurrence of retraining or contesting the project for various reasons because of the sustainable competition in the relevant tender».

The first concessional tender was appealed by the Federal Cartel Office, which pointed to the restriction of competition. The competition was limited due to the fact that for the implementation of the project the experience in the operation of toll roads was needed, and such exploiter simply did not exist in Russia at that time. In this case the access of Russian companies to this competition is restricted.

The Federal Law №44-FL makes other difficulties. Legislators have tried to use it the concept of «life cycle contract». Traditionally, this term is applied to the PPP mechanism. And if the Federal Law №94-FL caused certain reclassifying risks, the entry into force of the law on the contract system greatly increased those risks. So when the start the project is planned, it is necessary to examine all the details and try to stay within the limits of the legislation, not only the special one.

The management of preparation of PPP projects

The first stage of management of PPP projects is the selection justification. At this stage the financial, economic, technical, organizational and legal conditions are being analysed and stipulated. It is necessary to evaluate the social effects of the project, to understand the demand for state support, its form, terms and sources. As a result, a certain conception of the project to work with is generated. But it must be understood that the concept itself does not motivate a serious investor to come into the project. The fact is that by signing up to participation in the partnership, the investor will not be able to give it up easily. It means, a priori, that now he has commitments to the state, obliged to be perform, and even if they become impossible to perform, there will not be the possibility to turn the clock back.

Therefore, the concept of the project requires some serious consideration, and the state should manage to deal with this itself or with the help of consultants. To outsourcing of this part of work to the presumptive investor is fraught with unpleasant consequences. To assume that investor will address the preparation of the project objectively, without trying to make it profitable for him, but not for the state, is naive. In the practice of Russia there is a case when an owner of private business had documented the ability to break the agreement any time and to demand the full amount of the incurred expenditures, as well as a risk premium, and a representative of the state government has affixed it with a signature.

The preparation of the project consists of four elements: organizational, legal, economic, technical. Organization-wide preparation, which usually is the state’s frame of reference, includes a determination of quality targets and the effectiveness of the project, development of the procedure to reach the necessary socio-economic and budgetary effects of its implementation. So there are managemental details that need to be reconciled before the start of the project. For the implementation of the other three stages the consultants can be engaged.

The community outreach

Another element of the PPP is the consumer. One of the most important elements requiring elaboration in the preparation of PPP projects –is the definition of effective demand. Different researches, surveys of potential consumers are being conducted to be able to define it. In addition, the preparatory work with the citizens, directly affecting the implementation of the project is necessary.

For example, the construction of a chemical integrated plant may carry both negative and positive consequences for the inhabitants of nearby areas. It may deteriorate the environmental situation, but at the same time, develop the infrastructure and create working places. And the acceptance or non-acceptance of a project by the citizens cannot be ignored; therefore the explanatory work becomes a particular importance at this stage of preparation. The studies of the social and environmental issues at an early stage of preparation of the project can affect the further work. If the research is not conducted or the conclusions are ignored, the PPP project may be exposed to the risk of nonfulfillment.

Public Private Partnership in the health sector

A.Duhin the general manager of «LabTechLtd» LLC (Saint-Petersburg) talked about the experience of the public private partnership in the health sector using the establishment of the centralized laboratory in the Pskov region as an example. By the year 2012, the state of laboratory diagnostics in the Pskov region was found to be on a very low level: 45 laboratories operated per 660K citizens, with 450 employees, while the staff was manned by 50% and 30% of employees were pensioners. Through the implementation of the priority national project «Health» laboratory equipment has been purchased, however the variety of laboratory studies was not too wide. «For example, a doctor in the United States – said Dukhin – gets the 90 % of information about the patient from the laboratory, in Europe it is 80 %. In our country, it is an average of 15-20 %».

After the reviewing the situation, two tasks were set – re-equipment and implosion of laboratories. The options of the implosions of laboratory studies were considered: establishment of the state centralized laboratory, private laboratory and on the basis of public private partnership. The first option could significantly increase the costs of laboratory researches, while the labor efficiency would not change. The second option is difficult to perform, as private owner starts activities in the region only on certain favourable terms for him, but not always interesting to the region.

For example, the regional administration should guarantee the flow of researches to the private centralized laboratory by passing all the orders from hospitals and clinics to the laboratory. In case of the bankruptcy of a private owner or if he leaves the region for some other reason the region loses the entire laboratory services.

As a result, in the Pskov region it was decided that the most effective option is the public private partnership. Preparation of the documentation took a year; the centralization should be based on the laboratory of the Pskov regional hospital – the largest in the region. The expenditures on the research will not increase and will run at an average of 35 roubles per test. The region reserves the right to monitor the laboratory services.

As a result of the establishing of the centralized laboratory no budget funds will be spent, and the variety, volume and quality of the researches will increase. The laboratory will work 24/7; the timing of the express analysis will be reduced to one hour. The system of collecting centres will keep the availability of laboratory researches for the region residents. «At the end of the project – said Dukhin – we hope to get the centralized laboratory, with clear logistic and formed relations with the majority of medical institutions of the region».

The start from scratch

The question of the viability of public private partnership in the current economic situation is becoming increasingly important. Decades long investments under the gaining momentum inflation processes cannot cause orderly concerns. On that score, the experience of the Republic of Belarus seems quite interesting. In Belarus the inflation is high as well; however, the country shows one of the most successful approaches to the development and implementation of PPP projects.

The first step that Belarus has made on this way – is the organization of teaching process to develop a pool of professional trainers for the development and implementation of PPP projects and implementation of educational programs in all regions of the country. The second point – the development of the national infrastructure plan which includes the list of the goal-directed infrastructure projects, defined in the strategy for socio-economic development of the country. And out of this national plan the projects that can be implemented with the use of PPP are being selected.

The ultimate principle held by the Belarusians, and the useful for us to stick to – is planned movement towards the goal and the alignment of the situation, when the investor feels support at all levels, the willingness to it is voiced by the deputies, authorities and banks, and the return on investment mechanism is abundantly clear to the private owner. «The development of the public-private partnership – is one of today’s priorities, – said the Minister of Finance of the Kaliningrad region Victor Porembsky – Now when the budget restrictions are growing, the integration of the investment opportunities, the efforts of the government and private investors is especially important».


PPP projects in the Kaliningrad region

Sovetsk

The two PPP project are being prepared for the implementation in the Kaliningrad region. These are the construction of the boiler station in the city of the Sovetsk and the construction and operation and maintenance of the complex for the recycling and utilization of the consumer wastes. Regarding the first project, it is the vital project for the city of Sovetsk. Now the town is heated by the boiler station, which belongs to the company at the stage of bankruptcy proceeding. The project is proposed to be implemented on the basis of the concession agreement, and the feasibility study which identifies all the risks and guarantees has been prepared by the «Business-expert» company (Kaliningrad).

The list of risks mentioned by the general director of the «Business Expert» company I. Tyusenkova:

  • The land is a property of a private company. This problem should be solved primarily, otherwise it will be difficult to find an investor for the project;
  • The municipality should provide a guarantee that the services of the new boiler station will be purchased;
  • The designing estimates documentation was developed by the company, which will not participate in the implementation of the project. Thus, when the private investor is found, he will revise the documents, and it leads to the additional costs.

The project is optimized for at least ten years of vigorous efforts of the concessionaire, and then it pays for itself and returns a profit.

The project of the construction of the landfill for the consumer wastes is assumed to be implemented on the basis of the concession agreement. The first year of the project involves high investment costs in the amount of more than 1.5 billion roubles. In the 15th year of the implementation of the project the investments should be recouped, so the consultant proposes to enter into the contract with an investor for 25 years: in 15 years the private owner will recover his values and there will be time for the realization of the profit.

S.Martynenko, the «Budget» magazine, February 2015.