Amendments to The Law on Concession Agreements Introduce The Private Finance Initiative (PFI) in Russia

On 1 May 2015 new rules introducing the Private Finance Initiative (PFI) in Russia will come into force. This significant novelty brought about by Federal Law No. 265-FZ “On Amendments to the Law ‘On Concession Agreements’” (the “Law”) comes alongside other amendments in force since 1 February 2015 which also bring the Russian legal environment more in line with international practice. The Law on Concession Agreements is a key federal legislative act regulating PPP projects in all infrastructure sectors, including transport, energy, public utilities, healthcare, sport and leisure. These developments remove some of the legal obstacles affecting the bankability of PPP and concession projects, thereby opening new opportunities for financial institutions, pension funds, private investors, private operators and all market players having a vested interested in the Russian infrastructure market. The new regulation in combination with the recent significant depreciation of the Ruble has made entrance into the Russian infrastructure market easier in the short term. While such an opportunity is temporary, the investments would likely remain profitable on a long-term scale.

Private Finance Initiative

Under the Law investors who are able to demonstrate that they have at their disposal or can access at least 5% of the investment needed for a prospective project can offer to conclude a concession agreement with the grantor of the concession without having to go through a regular tender procedure. The investor may either select a project from those that are published annually (on a mandatory basis) by public and local authorities on the internet before 1 February of each year or identify a project for a potential concession itself. The draft concession agreement is then submitted to the grantor by the investor and unless there are material obstacles to the conclusion of the concession agreement, e.g. the object is owned by a third party, the grantor must take a positive decision on entering into the agreement under proposed conditions within 30 days. Alternatively, the grantor may also enter into negotiations with the investor to amend the draft concession agreement proposed by the investor.

Once the grantor has positively decided on entering into the concession agreement, within ten days of such a decision the relevant information will be published on the internet for a period of 45 days. The concession agreement will have to be concluded with investor without a tender within two months after this period. The investor will have to demonstrate that it has at its disposal or that it is capable of attracting the required funding for the project. A regular tender procedure will be required only if other investors apply for the same project within the publication period (45 days).

This procedure of pre-emptive tenders for concession projects does mirror equivalent provisions in a number of other jurisdictions and may provide opportunities for speculative bidding. The time periods for response by the grantor of the concession and conclusion of the concession agreement are however short and may require bidders to carry out significant preparation at risk prior to making an offer to the grantor.

Improvement of the bankability of concession project

The Law repealed a prohibition on the assignment of rights and duties under a concession agreement before a project is put into operation, which was included in the initial version of the Law on Concession Agreements. As a result, an assignment of rights under a concession agreement may be used as security for lenders from the beginning of the project. Furthermore, using such an assignment as security for lenders is now allowed for all concession projects and not only for road and public utilities projects (as was the case previously). This development will be welcomed and provides an additional security mechanism for prospective lenders to privately financed projects equivalent to that available in other jurisdictions.

The Law enables to replace a concessionaire without a new tender (Step-in) if the concessionaire breached material conditions of the concession agreement or if its activities resulted (or may result) in harm to the life or health of people. A decision to replace the concessionaire is taken by the grantor after consulting with and getting the opinion of the lenders. The only requirement for the substitute concessionaire is to meet the requirements for tender participants established under Russian law and the initial tender documentation. Again, this development is to be welcomed as it allows for step-in and replacement of a concessionaire by lenders in order to rescue the project.

The Law provides the concessionaire with safeguards in the event that new legislation leads to an increased tax burden for the concessionaire or otherwise adversely affects its position resulting in a material loss of the benefit it expected to receive under the concession agreement at the time of its conclusion. In such case the grantor is obliged to secure the refund of investments made and the payment of gross proceeds in an amount specified in the concession agreement through (i) an increase of the grantor’s payments, (ii) an extension of the term of the concession agreement (if the concessionaire agrees), (iii) an increase of the capital grant for the construction of the object or (iv) a provision of additional state or municipal guarantees.

Amending the concession agreement

The Law provides a possibility of extending the term of the concession agreement, but establishes certain restrictions in that respect. The maximum extension period is five years and, in addition to the agreement of the parties, the approval of the highest executive authority of the grantor, i.e. the Government of the Russian Federation (if the Russian state is acting as a grantor) is required. In addition, if the grantor is a region of Russia or a local authority, the approval of the Federal Antimonopoly Service of Russia is required.

If a concession agreement cannot be performed as agreed due to force majeure, a significant change of circumstances or a decision of a court or other authority (e.g. antimonopoly authority), the Law provides that the concession agreement may be amended by a resolution of the grantor with the prior approval of the antimonopoly authority. If in such circumstances the grantor does not adopt the relevant resolution within 30 days from the concessionaire’s request, the concessionaire is entitled to suspend the performance of the concession agreement.

Other provisions

Under the Law concession agreements may be concluded in respect of several different objects, unless these objects relate to heat, water and sewage systems, which cannot be combined with other facilities.

If the object to be built under a concession agreement will be owned by different public entities, the Law provides for the possibility to conduct a joint tender according to an agreement between these public entities and in which all the tender conditions must be agreed upon. As a result of such tender a concession agreement with several grantors is executed.

If the grantor decides to privatize the object of the concession agreement upon expiry of the agreement, the Law provides the concessionaire with a preemptive right to acquire ownership of the object provided that the concessionaire duly fulfilled its obligations under the concession agreement.

Under the Law concession agreements may be concluded not only with respect to consumer waste management objects (as was the case in the initial version of the Law on Concession Agreements), but in relation to all waste management facilities, including those handling industrial waste. This new provision, together with the recent introduction of producer/importer responsibility for the recycling of waste (on which we previously reported), create a framework for attracting investments into waste management industry.


With the introduction of the concept of PFI the Law will undoubtedly encourage investments in the infrastructure market and the conclusion of more concession agreements in Russia. Improving the bankability of new projects by removing certain restrictive provisions will also play a role in this development and bring concession agreements under Russian law closer to international standards through the introduction of step-in rights and direct agreements.

Furthermore, the Law has extended the applicability of these provisions, which were successfully used in in certain significant industry sectors (such as motorways), to other sectors of PPP and added some new sectors where concession agreements may be used, e.g. industrial waste management.

These amendments together with recent high-level political decisions to privatize or conclude concession agreements in respect of all public utilities facilities (including those that are currently operated inefficiently by state or municipal enterprises) as well as the recent introduction of long-term tariffs, create an opportunity for entering into or expanding on the Russian infrastructure market. In order to seize this opportunity, which may not last, investors, operators and other market players should act now without delaying their decision.

If you have any questions on the matters referred to here, do not hesitate to contact Dr. Artem Rodin.