When the long debated Federal Law on Public-Private Partnership (here in Russian) was adopted on 13 July 2015 (the “Law” or the “new Law”), the regional legislators were given almost a year to bring their regional PPP legislation in line with the new Law, namely by 1 July 2016.
Some regions have already decided to repeal their regional PPP law (Leningrad Oblast, Perm Krai and Vladimir Oblast) or to amend it in accordance with the Law (Republic of Tatarstan). St. Petersburg, one of the country’s leading PPP pioneers, which has implemented numerous infrastructure projects (such as the Pulkovo International Airport) under the regional PPP law, will soon, most probably, also amend its regional PPP law to comply with the new Law.
To date, no PPP project has been implemented under the Law, which came into force on 1 January 2016. However, many significant PPP projects were based on the regional PPP laws that were enacted before the Law. Thus, the requirement to update regional legislation affects not only the majority of Russian regions with their own PPP laws, but, most importantly, also the PPP projects that were launched before 2016 and based on the regional legislation.
The impact of the Law on regional projects
Under Russian constitutional law, federal laws prevail over regional laws. According to the Law, the existing regional PPP laws may remain in force, but they have to be brought in line with the provisions of the Law by 1 July 2016. Failing this, such regional laws will only be effective in so far as they do not contradict the new Law.
Such contradictions may arise as over the past 10 years, most Russian regions adopted their own regional PPP laws to provide options for implementing PPP projects that were based on private ownership of the relevant infrastructure objects. The regional authorities simply filled the legislative gap that existed at the federal level as the federal legislation at the time did not provide for infrastructure objects to be held in private ownership in the context of PPP projects. As a result, it was difficult to use many common international PPP models, such as BOO and BOOT, without the adoption of a regional legislation that allows private ownership of infrastructure objects. The most notable example of a regional PPP law is the St. Petersburg PPP law, which was adopted in 2006.
Though the new Law has no express retroactive effect (it even states that PPP agreements signed under the regional PPP laws before 2016 remain in force as signed until their expiration), Article 47 of the Law is worded in such a way that it could in fact be interpreted as applying retroactively. This is because under Article 47(3), the provisions of the Law will apply, if amendments to the regional PPP laws lead to modifications of the provisions of the PPP agreements. This means the fate of the PPP agreements signed before 2016 is, to a large extent, in the hands of the regional legislators.
It is useful to outline the main provisions of the Law in order to understand its consequences for the existing and future PPP agreements.
The key aspects of the Law
The Law is aimed at removing legal risks and restrictions in the regulation of the Russian PPP sector and stimulating private investment in Russian infrastructure. The Law, among other things, has introduced the concept of a PPP agreement, a new private initiative procedure and additional guarantees for private investors.
A PPP agreement
A PPP is defined by the Law as the co-operation between a public partner (the Russian Federation, a region of the Russian Federation or a municipal entity) and a private partner on the basis of a PPP agreement, which is aimed at increasing the quality and availability of public services by attracting private investments. Under the Law, only a legal entity established under the laws of Russia may become a private partner. That said, the Law, however, does not impose any restriction in relation to foreign shareholding of a private partner.
Under a PPP agreement, the private partner must (re-)construct an infrastructure object, fully or partially finance such (re-)construction, as well as operate and/or maintain the object. The private partner may also be required to prepare the design documentation, and fully or partially finance the operation and/or maintenance of the object.
The Law contains an exhaustive list of infrastructure objects that may form the subject of a PPP agreement. This list, among others, includes private roads, bridges, roadside utilities, public transportation (excluding metros), railways, pipelines, sea and river ports, airports, electricity generation plants, public health facilities and social infrastructure. Any infrastructure that cannot be held in private ownership under the Russian law is excluded from the scope of the new Law. Such infrastructure objects may only be subject to a concession agreement.
The Law contains no exhaustive list of PPP implementation forms. It, nevertheless, allows for private ownership of infrastructure facilities. As a result, the Law enables the implementation of BOO, BOOT and other typical forms of PPP that are based on private ownership, as well as the use of security instruments for financial lenders, such as pledges of assets, pledges of rights under a PPP agreement and step-in mechanisms. In contrast, the Law on Concession Agreements (which was adopted in 2005) (here in Russian) limits the use of most of these possibilities, as it only allows for public ownership of infrastructure facilities.
Private and public partners
A PPP project may be initiated either by the public partner or by the private partner, thus providing investors with a right to enter into a PPP agreement through a non-tender private initiative procedure.
Major Russian state-controlled PPP market players (such as state-owned banks and state investment funds) are prohibited from controlling more than 50% of a private partner. As a result, such Russian organizations have to enter in consortia with private entities, including foreign investors, to finance PPP projects under the Law.
Guarantees for private investors
The Law provides private investors with guarantees on return of their investment in PPP projects, where the activity of a private partner is regulated and prices (tariffs) are fixed by public authorities. This is, for instance, the case with waste infrastructure projects, but not for water and wastewater projects, which can only be structured as concessions.
The Law provides that if, during the effective term of a PPP agreement, the applicable federal, regional and/or local laws and regulations are amended in a way that adversely affects the private partner, the provisions of the PPP agreement must be reviewed in order to ensure the economic balance and guarantees on return of investment initially envisaged by the parties.
The adoption of the new Law has become a significant milestone in the development of the legal regulation of the Russian PPP sector. The Law is aimed at attracting private investment in Russian infrastructure (which is already existing under the Law on Concession Agreements) and, together with the other positive improvements of the Russian law, provides investors and financial lenders with PPP models and security instruments that are commonly used in international best practices. However, the adoption of the Law has created certain legal issues for investors with respect to the regional PPP laws and the PPP projects that were implemented on the basis of such regional laws.
The investors and financial lenders who joined PPP projects that started before 1 January 2016 should closely monitor the legislative developments in the Russian region(s) where they have their PPP projects, as they may be affected by the changes. Those who are considering joining new PPP projects in the country should carefully study the provisions of this new Law and compare them with those of the Law on Concession Agreements.
If you have any questions on the matters referred to here, do not hesitate to contact Dr. Artem Rodin.