The government and the private sector agree on the usefulness of PPPs in upgrading Russia’s infrastructure and key hurdles to PPP initiatives

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Moscow, 19 June 2012 – The government and the private sector agree that public/private partnerships (PPP) can help upgrade Russia’s infrastructure, while there is a need for legislative improvements and a clear government policy on PPPs. But they have different views on what the benefits of PPPs are and what can make them attractive to businesses, says EY's report, Building successful PPPs in Russia, which is based on a survey of players in Russia’s PPP market, including government representatives, Russian and foreign investors, banks and development institutions.

Alexander Ivlev, Country Managing Partner for Russia, EY, said, “An efficient dialogue between the government and the private sector is required to strongly promote PPPs that in turn will be key to overcoming infrastructural constraints to the growth and diversification of the Russian economy.”

Benefiting both the government and the public
For the government, access to non-budget financing is the key benefit of a PPP. It also hopes to transfer major project risks to the private sector.

The private sector is prepared to provide value for money throughout the lifecycle of a project; however, they want to see government support and guarantees and higher rates of return on investments than the government would expect. Foreign investors and banks appear to be those most cautious to accept risks (demand risk in particular).

Alexander Yerofeyev, Partner, CIS Project Finance and Infrastructure Leader, EY, said, “Access to non-budget financing per se cannot be the only rationale for PPP initiatives, because the cost of financing is always higher for the private sector than for the government. With the strict control over meeting the schedules, financial discipline, technology and knowhow of the private sector, PPPs must provide greater efficiency compared with government procurement. As for project risks, the investors and banks surveyed support the idea that the government must transfer only those risks that the private sector is able to manage.”

Attractive sectors
Our respondents are unanimous on what sectors are most attractive for PPPs. In the first place, these include transport, housing and utilities. However, views diverge as to community infrastructure, i.e. healthcare, education and culture.

Responses of government representatives suggest that the government appears to be in want of community-oriented PPP initiatives. However, investors pointed to the fact that the government had not created favorable conditions for such initiatives.

Regulatory framework
Respondents concur that legislative improvements are required to promote PPPs. Flexibility and consistency in federal and regional legislation on PPPs should be achieved, and a number of related issues should be addressed in the field of pricing, land allocation, taxation, and budgeting, etc.

Project preparation quality
The quality of project preparation generally remains low. The government lacks experience. Governmental institutions aimed to support and promote PPPs are immature both on the federal and regional levels. According to our respondents, one potential solution is to engage professional consultants on a broader basis for the elaboration of projects.

Investors are also concerned about the poor credit status of many Russia’s regions.

Government policy on PPPs
There are ways to improve the bankability of projects by providing government guarantees, accumulating PPP experience and adequately allocating risks.

The respondents are unanimous that the lack of coordinated government policy on PPPs is an important hurdle to promoting PPP initiatives. The government should articulate its requirements more clearly. Development institutions in turn can and must help prepare and implement projects.

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