Regional Regulation of PPP Projects in Russia

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Public-Private Partnership ('PPP') Agreements, in simplified form, are agreements between public and private partners on the creation, management, operation, funding and transfer of the objects of the agreements through mutually beneficial cooperation.

Federal legislation regulates just one of these forms: concession agreements, which are covered in a relatively narrowly sense in the relevant law. Moreover, the regulations for such agreements at federal level are relatively stringent and do not provide private investors with the guarantees and concessions that they would expect to receive under PPP projects elsewhere in the world. Consequently, PPP projects based on federal legislation are not very common, and have frequently been criticised by professionals. This has also been the main reason for the development of regional PPP legislation in Russia.

The widespread adoption of such regional laws was one of the clearest trends in PPP regulation in 2010 and 2011. At the time of writing, more than 45 member states of the Russian Federation ('member states') have adopted regional laws regulating PPP projects in one way or another. 22 laws were adopted in 2010 and 15 in 2011. However, it is important to note that, unfortunately, some of these laws are exclusively declaratory; moreover, it is clear from the new laws that the member states do not understand PPPs as a mechanism developed in global practice. In particular, one of the most noticeable common features of the regional laws is that they confuse various forms of interaction between the state and business with PPPs.

Analysis of the regional laws shows that categories such as ownership interest in legal entities (e.g. the laws of Moscow Oblast, Yaroslavl Oblast, Saratov Oblast, the Republic of Ingushetia and Rostov Oblast), the provision of tax breaks (e.g. the laws of Zabaykalsky Krai and Bryansk Oblast), concluding public contracts (e.g. the laws of Kirov Oblast and Chelyabinsk Oblast), the creation of special economic zones (e.g. the laws of the Kabardino-Balkar Republic and the Altai Republic), and so on, are often classed as PPPs.

Moreover, even the likes of personnel training (Kemerovo Oblast) or simply 'investment activity in the form of capital investments' (Stavropol Krai) are classed as PPP projects.

Clearly, none of these would qualify as PPPs as the latter are generally understood. Though they are indeed types of interaction between the state and private business, they all lack the features distinguishing PPP projects in global practice, such as partnership relations between the parties, risk allocation, the achievement of joint goals, etc.

This confusion can also be seen in the fact that the member states (including those that have not adopted separate PPP laws) include provisions on PPP projects in their laws on investment support. For example, 'the organisation of private–public partnership' and 'the creation of favourable conditions for the development of public–private partnership' are envisaged, but such projects are not regulated. The Penza Oblast law On investments and public-private partnership in Penza Oblast is indicative here. This law regulates the investment procedure and forms of state support for investment, and contains a chapter consisting of three articles concerning the regulation of public-private partnership. Clearly, this law, while technically counting as one of the adopted regional PPP laws, does not actually strengthen the regulation of this mechanism in Penza Oblast.

This example also shows that not only is there confusion over what forms of cooperation between the state and business count as PPPs, some regional laws are nothing more than declaratory. In particular, several regional laws specify PPP goals and principles but do not regulate the implementation of such projects in any way. Some of the laws (e.g. those of Vologda and Omsk oblasts) consist of 6 or 7 articles that literally amount to a single page stating that the region in question aims to implement PPP projects, attract investment, increase performance, etc. However, the consolidation of such principles cannot in itself automatically lead to the achievement of the aims set out in the laws.

Thus, analysis shows that the member states' ideas of what counts as PPP are evidently to a large extent the result of a subjective interpretation of the concept of PPP as any form of interaction between the state and business. Moreover, this interpretation itself varies. Furthermore, the not unjustified view that such regulation and such projects also have the right to exist, and that the member state' work in this area also increases their investment appeal, is now common in Russian legal circles. Indeed, these mechanisms have even been given their own name: quasi-PPP projects. That said, without denying that the regions' work in this area is a positive factor, it should be stressed that this understanding of PPPs is nevertheless mistaken, so such 'quasi-PPP projects' should be viewed separately from genuine ones.

In view of this, even though, as mentioned above, more than half the member states have adopted regional PPP laws, in practice many of these laws do not guarantee regulation of PPP projects in their regions. Hence, we suggest that for the most part regional PPP project regulation needs to be fundamentally different.

At the same time, there are also successful examples of regional PPP project regulation, such as, in particular, Saint Petersburg. Although Saint Petersburg's current law On the participation of Saint Petersburg in public-private partnerships ('the Saint Petersburg law') has also been criticised by professionals, it does have an essential advantage: as shown in practice, it genuinely facilitates successful PPP project implementation.

In addition, the Expert Council on Public-Private Partnership Legislation of the State Duma Committee on Economic Policy and Entrepreneurship ('the Expert Council') developed a model law in 2009 for the purposes of the participation of member states and municipalities in PPP projects ('the Model Law').

We suggest that member states might look to Saint Petersburg's experience and the provisions of the Model Law as an example when adopting new regional laws or improving existing ones. The individual provisions of the Model Law in one of its latest editions discussed by the Expert Council (which in many ways mirrors the Saint Petersburg law) may serve as basis for a regional PPP law.

In particular, the Model Law does not specify an exhaustive list of PPP project models. This makes it possible to move away from strict formalisation of the agreements and to conclude them in different forms appropriate to the characteristics and goals of each particular project. At the same time, it is important to note that this aspect of the Model Law has led to the aforementioned problem of a lack of uniformity and incorrect reflection in regional laws of which projects qualify as PPP projects and how they are implemented. In this light, we suggest that it would make sense to implement the most common such models alongside the general rule on the non-exhaustive list of PPP models.

With regard to rights to the object of the agreement, the Model Law permits not only the rights of possession and use but also ownership title to be transferred to a private partner. Many of the regional laws do not reflect this provision. We believe that it is frequently of fundamental importance to the investor; furthermore, several forms of PPP directly allow for the transfer of title to the object of the agreement to a private partner. The lack of this possibility seriously narrows the range of PPP projects that can be implemented in a region.

The Model Laws establishes that both a member state, in the shape of one of its government bodies, or a municipality, in the shape of a relevant local government body, may take part in a PPP project on the public partner side. The Model Law also allows legal entities wholly owned by a member state or a municipality to take part on the public partner side. Creating such a specialised organisation gives PPP project implementation more flexibility.

By analogy with the Saint Petersburg Law, the Model Law allows for rights under PPP agreements to be assigned, and for the object of the agreement to be pledged. An important plus of the Model Law is that it stipulates additional guarantees to the private partner. Among other things, the Model Law stipulates guarantees regarding insufficiency of budgetary funds (lack of or insufficiency of funds in the budget does not constitute grounds for amending or terminating the obligations of a public partner, or for releasing the latter from liability). It also allows the scope and time frame of a public partner's participation in PPP project financing to be altered in the event of changes in inflation and currency exchange rates. This reflects the Model Law's general move away from the concept of 'authority - subordinate' to one of partner relations, something also reflected in the nature of the relations between the parties in PPP agreements.

Notably, the Model Law stipulates a procedure for holding a tender at a regional level. This allows the conditions of the tender to be more flexible than those set by federal legislation. However, it should be borne in mind here that the question of whether member states may establish a tender procedure, and what discretionary power they have, is still under discussion.

That said, for all the substantial advantages of the Model Law, we believe that member states should not simply copy its provisions, as an important advantage of regional legislation is the possibility to take account of the specifics of the region and its requirements in terms of PPP regulation and working with business. Furthermore, it is important to bear in mind that the requirements of federal legislation also need to be taken into account here, as the issue of what discretionary power member states have in establishing PPP project regulation procedures is fairly controversial.

Therefore, in order to implement its own PPP law to meet its internal requirements, a member state should analyse both the Model Law and the requirements of federal legislation (legislation on concession agreements, budget, land and civil law, and legislation on the protection of competition), as well as the global experience of legislation regulating PPP projects.

KPMG in Russia and the CIS

 

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