How to make PPP work in Russia: 2012 Overview
Allocation of risks
Balanced allocation of risks between the private and public sectors plays a key role in enhancing bankability.
There is a lack of consensus between domestic market players on the optimal way of allocating key commercial and financial risks in PPP projects.
The survey showed a lack of consensus between domestic market players on the optimal way of allocating key commercial and financial risks in PPP projects. Generally, the state’s expectations are much higher than what the market can offer, especially considering that foreign investors and credit institutions view Russia as a risky investment destination.
How should liability for the be allocated between the public and private sectors?
Other market players do not share the optimism of state bodies regarding the transfer of demand risk to a private partner.
Only 6% of surveyed private investors are prepared to assume the entire demand risk, and just 39% agree to partially assume this risk. Projects with an availability payment mechanism are therefore still perceived by investors as preferable.
Risk of regulated prices/tariffs
All market players agree that the risk of regulated prices/tariffs should be borne by the state.
Russian law does not envisage any mechanisms that would allow regional authorities and industry regulators to keep tariffs at an attractive level for the duration of PPP agreements.
The surveyed investors are generally ready to collect project revenues directly from users, provided that they are able to enforce penalties for non-payment and have the respective guarantees from the state.
Risk of cost inflation and currency risk
Equity and debt investors are more willing to assume the risk of cost inflation during the investment stage than the state would expect them to be.
State bodies, however, are too optimistic about the ability of market players to manage the inflation risk in the long term.
Interest rate risk and refinancing risk
The majority of surveyed Russian market players believe it appropriate to transfer the interest rate risk (whether before or after the project’s financial close) to the private partner.
The respondents had mixed views on refinancing risk (where the borrower is unable to raise debt financing for a term commensurate with that of the project). The prevailing view, however, is that this risk should be shared between the private sector and the state.
Perception of risks by foreign investors
The survey revealed that foreign investors are highly sensitive to commercial and financial risks.
This factor should not be overlooked by state bodies if they want to expand the list of potential participants in PPP projects and spur competition, primarily by providing wider access for major international PPP players.