TRANSPORT INFRASTRUCTURE IN THE RUSSIAN FEDERATIONIs Russia Ready for Public-Private Partnerships?
Global projected infrastructure investment needs are massive
Canada: closing infrastructure gap requires investment 6-10x the level of current annual government spending. Investment needs for urban roads and bridges are $66B over 10 years
United States: infrastructure deficit total $40bn a year in roads sector alone. ASCE estimates total investment needs over next 5 years to be $1.6 trillion
Australia and New Zealand’s infrastructure deficits are estimated at $19B and $4B, respectively
Canada: $125B
US: $1.6T by 2010
California: $500B by 2026
Latin America & Caribbean: $71B
MENA: $28B
Ireland:$127B
Germany: $843B by 2010
Sub-Saharan Africa: $26B
India: $250B by 2010
East Asia/Pacific: $178B
Russia: $1T by 2020
Australia: $18B
NZ: $3.6B
Europe: Infrastructure needs for EU run into trillions of dollars. Energy sector alone requires $1.2T over next 20 years. $90B needed in Germany each year
India: spends just 6% of GDP on infrastructure compared to China’s 20%.
Developing economies in E. Asia need to invest $165B per years over next 5 years for electricity, telecom, inter-urban roads, rail, water, and sanitation. This amounts to nearly 6.2% of the GDP for the region. China will account for 80% of regional infrastructure expenditures
Source: Deloitte Research, 2008
In developing countries, the private sector has long contributed to public infrastructure investment
2008 US$ billions New projects
Source: World Bank and PPIAF, PPI Project Database.
This has occurred across a diverse range of sectors and geographies
Total: US$797.3 billion (2008 US$) Total: US$843.3 billion (2008 US$)
1990–2000 2001–08
Source: World Bank and PPIAF, PPI Project Database.
What are public-private partnerships?
Contractual agreements formed between a government agency and a private sector entity that allows for greater private participation in the delivery of public infrastructure projects
PPPs are used around the world to build and upgrade public facilities such as schools, hospitals, roads, waste and water treatment plants and prisons
Compared with traditional procurement, the private sector assumes a greater role in the planning, financing, design, construction, operation, and maintenance of public facilities
PPPs are unlikely to fully replace traditional financing of infrastructure, but offer several benefits to governments
Allow the costs of investment to be spread over the lifetime of the asset
Solid track record of on-time, on-budget delivery Transfer certain risks to private sector and
provide incentives for assets to be properly maintained
Can lower the cost of infrastructure by reducing construction and overall lifecycle costs
Encourage strong customer service orientation Enable the public sector to focus on outcome-
based public value
Various procurement models are employed for PPPs to allocate specific risks
Public responsibility Private responsibility
NEW PROJECTS
EXISTING SERVICES & FACILITIES
Design-Build Design-Build-Maintain
Design-Build-Operate
Design-Build-Operate-Maintain
Build-Own-Operate-Transfer
Build-Own-Operate
Service Contracts
Management Contracts
Lease Concession Divestiture
The government contracts with a private partner to design and build a facility in accordance with set forth requirements. The government assumes responsibility for operations and maintenance after completion.
Also known as Build-Transfer-Operate. The private sector designs and builds a facility. Once completed, the title is transferred to the public sector, while the private sector operates the facility for a specified period.
The government transfers an asset, either in part or in full, to the private sector. Generally the government will include certain conditions with the sale of the asset to ensure that improvements are made and citizens continue to be served.
The government contracts with a private entity to provide services the government previously performed
The government grants a private entity exclusive rights to provide, operate, and maintain an asset over a long period in accordance with performance requirements. The public sector retains ownership of the asset, while the operator owns any improvements to the asset.
The government grants the right to finance, design, build, operate, and maintain a project to a private entity, which retains ownership. The private entity is not required to transfer the facility back to the government
Source: Deloitte Research; National Council for PPPs
PPPs can be implemented across a range of infrastructure sectors, with the most mature models in developed markets
Sector Transport Water, waste
Education Housing Hospitals Defense Prisons
Leading practitioners
Australia, Canada, France, Greece, Ireland, Italy, NZ, UK, US
Australia, France, Ireland, UK, US, Canada
Australia, Netherlands, UK, Ireland
Netherlands, UK, Ireland
Australia, Canada, Portugal, South Africa, UK
Australia, Germany, UK, US
Australia, France, Germany, UK, US
Main PPP models employed
DBOM, BOOT, Divestiture
DB, DBO, BOOT, Divestiture
DB, DBO, DBOM, BOOT, DBFO/M, Integrator
DBFM, Joint venture
BOO, BOOT, Integrator
DBOM, BOO, BOOT, Alliance, Joint venture
DB, DBO, BOO, Management contract
Challenges
•Demand uncertainty•Supply market constraints•Opposition to tolls•Transportation network impacts•Competing facilities
•Upgrading costs and flexibility•Technological uncertainty•High procurement costs•Political sensitivity
•High cost due to uncertainty about alternative revenue streams•High procurement costs for small project•Uncertainty about future demographic or policy changes
•Refurbishment costs and flexibility•Uncertainty about future demand and revenue streams•Joint delivery
•Uncertainty about future public health care needs•High transaction costs in small-scale projects•Political sensitivity around privatization concerns
•Uncertainty about future defense needs•Rate of technological change•High upfront costs in small-scale projects•Securing value for money in noncompetitive situations
•Political sensitivity •Public purpose issues•Specifying outcomes
Source: Deloitte Research, 2008
Public transportation projects account for a significant share of the world’s projected infrastructure investment needs
McKinsey estimated in 2007 that private sector opportunities to invest in public transportation through PPP from 2005-2010 were worth more than $330B
Banks, pension funds, and private equity funds are increasingly attracted by the combination of growth, predictable cash flows, and income streams uncorrelated with public equity markets. The value of funds dedicated to infrastructure jumped from $5B in 2004 to $45B in 2007.
Source: McKinsey Quarterly, 2007
In developing markets, private investment in transport infrastructure has been at historically high levels, driven by India and China
Source: World Bank and PPIAF, PPI Project Database.
2008 US$ billions New projects
2008 US$ billions Investment commitments to transport projects with private participation, by country income group, 1990–2008
Investment commitments to transport projects with private participation in developing countries, by subsector, 1990–2008
Russia has been a leading destination for PPI in the developing world
Top 10 by investment in infrastructure projects with private participation in 2001‒08
Country
Investment*(2008 US$ billions)
Share of total (%)
Brazil 111.9 13.3 India 110.2 13.1 Russian Federation 74.7 8.9 China 57.2 6.8 Mexico 49.3 5.9 Turkey 32.0 3.8 Poland 24.8 2.9 Indonesia 22.9 2.7 Nigeria 22.2 2.6 South Africa 21.4 2.5
Total 526.7 62.5* Includes investment in projects reaching financial closure
in 1990‒2008.
CountryNew
projectsShare of total (%)
China 602 30.6India 232 11.8Brazil 141 7.2Russian Federation 56 2.8Mexico 54 2.7Nigeria 45 2.3Colombia 43 2.2Chile 35 1.8Indonesia 32 1.6Malaysia 32 1.6Total 1,272 64.6
Top 10 by new infrastructure projects with private participation in 2001‒08
Note: China and India are classified as lower-middle-income countries by the World Bank, and Brazil and the Russian Federation as upper-middle-income countries.
Source: World Bank and PPIAF, PPI Project Database.
But there has been a lack of PPI in Russia’s transport sector relative to other countries and to other sectors within Russia
Source: Primary analysis based on data from World Bank and PPIAF, PPI Project Database.
Russia’s transport infrastructure, which has suffered from relative neglect over the past twenty years, is being upgraded only slowly
Non-pipeline freight turnover was 2,100B ton-km in 2006, of which 90% was by rail Structure of transport system has changed since Soviet times reflecting reduced
subsidies and more private cars Public transport carried 21B passengers in 2006 vs. 44B in 2000
Railways: 87,000km of track in 2006 (2nd highest in world), half of which is electrified Roads: 870,000km (738,000km paved) in 2005
Safety record is poor; mortality from road accidents in 2005, 24 per 100,000 people Upgrade of road network has accelerated with creation in 2006 of $2.5B investment
fund, a large part of which is earmarked for PPPs Air transport: 45M passengers in 2007, up from 23M in 2000
Russian airlines face increased competition from foreign airlines which accounted for 45% of volumes in 2007
Sea ports: 43; port development being driven by aggressive expansion plans of oil majors Russian oil exports – 248M tons in 2006 Current projects to increase export capacity are not sufficient to keep pace with the
expansion of crude oil output
Source: EIU Country Report 2008; Rosstat
Russian government officials have acknowledged the need for massive infrastructure investment
The government has announced plans to spend over $1T on infrastructure improvements by 2020
The goal is to have up to 80% of this financed by the private sector
Expected investments: Highways: $300B Railways: $400B Airports: $30B Ports: $50B
Source: World Bank; based on comments by First Deputy Head of Government, Ivanov in Sochi, September 2007
Estimated annual expenditure needs in infrastructure without rehabilitation
In recent years, Russia has taken a number of measures to improve the frameworks and institutions necessary for PPP implementation
Legal framework Federal Concession Law – sets stage for utilization of PPPs in
transportation, energy, education, health care, and utilities sectors
St. Petersburg PPP Law – offers flexible framework for structuring, tendering, and supporting non-concession based projects St. Petersburg has most advanced project pipeline
Development institutions Investment Fund – intended to be one of the state’s primary PPP
funding sources and to act as a catalyst in attracting private investment
State Development Bank (Vneshekonombank) – state-owned banking institutions assigned with promoting Russian infrastructure financing Sept. 2008 – committed to 69 projects worth Rb 392B
From 2007-08, several high profile PPPs were tendered, marking the first real test of new Russian PPP legislation The potential volume of private investment in Russian transport
infrastructure has been estimated at 12-15B Euros per year
Project Description Facts
Western High Speed Diameter Motorway (WHSD)
46km motorway linking St. Petersburg’s trade seaports with the national road network. To the north it will provide a connection to Scandinavia
• Construction started in 9/05 and expected to be completed in 6-7 years•Total project contract value estimated at $9B•50% of construction costs to Federal government
St. Petersburg-Moscow Motorway
The first 58km section of the toll motorway linking the 2 cities aims to relieve congestion on one of the busiest highways in Russia
•Estimated value of up to $2.1B•Estimated to take 5 years to complete•50% funding from the state
Orlovsky Tunnel 1km long tunnel under the River Neva in St. Petersburg will open inland shipping to international transport. And will increase general capacity of the Volgo Waterway
•In August 2006, the project was allocated $300mm from the Investment Fund, with the balance from the city budget
Nadzemny Express 26km rail line that will pass through 5 southern city districts and will encompass extensions to Pulkovo Airport and Petrodvorets
•16 stations and 30km of track•Concession for 30 years
Pulkovo Airport St. Petersburg’s main airport is arguably the most important part of transport infrastructure in northwest Russia and is fast developing.
•$1.5B to be invested through an SPV to upgrade the airport•Concession for 30 years
Source: Freshfields Bruckhaus Derringer, 2008
But Russia has a long way to go before PPPs are as commonplace as in Western markets
The announced deals to date have mostly been high-profile “one-offs”, concentrated in St. Petersburg
Hard to see a clear pipeline of projects due to lack of central PPP unit
In general, level of PPP “readiness” is perceived to be low
Source: McKinsey Quarterly, 2007
Readiness composed of 3 factors:
• Extent of government commitment to PPPs•Clarity of vision, project pipeline robustness and transparency, stakeholder perception
• Effectiveness of governance• legal/institutional frameworks, clear parameters for choosing projects, effective and capable government institutions
• Track record in execution •Business plans that identify main risks, strong tender process, feedback mechanisms
The barriers to PPP implementation are numerous
Source: World Bank, 2007
Russia is still at an early stage of PPP development, but can learn from the pioneers
Source: Deloitte Research, 2008
•Establish policy & legislative framework•Initiate central PPP policy unit to guide implementation•Develop deal structure•Get transactions right and develop public sector comparator model•Begin to build marketplace•Apply early lessons from transport to other sector
• Establish dedicated PPP units in agencies•Begin developing new hybrid delivery models•Expand and help shape PPP marketplace•Leverage new sources of funds from capital markets•Use PPPs to drive service innovation•PPP market gains depth – use is expanded to multiple projects and sectors
•Refine new innovative models•More creative, flexible approaches applied to roles of public and private sectors•Use of more sophisticated risk models•Grater focus on total lifecycle of project•Sophisticated infrastructure market with pension funds and private equity funds•Public sector learns from private partner methods as competition changes the way government operations function•Underutilized assets leveraged into financial assets•Organizational and skill set changes in government implemented to support greater role of PPPs
Stage One
Stage Two
Stage Three
The financial crisis has adversely affected PPPs around the world and exposed Russian
institutional weakness Most of the high-profile pipeline projects in Russia have
been put on hold Perverse effect – right as government’s finances are
strained the most is the willingness of the private sector to invest at its lowest level
Source: IMF, 2009
Topics to address in paper/further research
Why so relatively little private investment in transport sector?
What role will PPPs play in context of recent government pronouncements on need for modernization and reduced state involvement?
What are the most critical barriers to PPP implementation?
What is needed to develop a sustainable project pipeline?