Saint Petersburg: 3 lessons in public-private partnership implementation

The enchanting city of Saint Petersburg, Russia, boasts the canals of Venice, the cathedrals of Paris, the architecture of Stockholm, and the non-stop festival atmosphere of white nights in July and August. It is Russia’s second largest city, with around 4 million people and a bustling economy.  Saint Petersburg has also learned hard-won lessons in public-private partnership (PPP) creation and implementation, including:

Lesson 1: Start with the basics
Saint Petersburg started with very big, very bold PPP projects, like a €6 billion toll road and a €1 billion tunnel, followed by a €1 billion light rail line and a €1.2 billion airport expansion. The toll road and tunnel came to bid in late 2008, mid-financial crisis—leading to Lesson 1a: Timing is everything. But rather than get discouraged, the city restructured the tunnel, flipping it around so that the concessionaire finalized the design first, thereby delaying the search for financing until the markets could recover. The toll road bid process was cancelled and the project broken up (more on this later). The light rail project was also restructured to fit with evolving ridership in the city. The airport, the last project to be launched, was the first to reach financial close, so here we simply note that hard currency revenues and an existing asset and revenue stream are convenient advantages when financial markets are lean.  Lesson 1b: Roll with the punches.

Lesson 2: Maintain the vision while remaining practical
While launching the strategic projects mentioned above, the city began creating a large portfolio of additional PPP projects, and started to develop a PPP framework. It passed a municipal law on PPPs and founded a central unit to capture lessons learned. As teams gained experience in transaction procurement and closure, they moved on to the next project. While this is an effective way to use the skills developed among the deal teams, it made it difficult to empower the central PPP unit, which did not have its own transaction-tested validation process.

The city allocated a PPP project to the central PPP unit to implement directly. Although this distracted the central PPP unit from its other functions -- developing standard practices and other commodification – it was an essential capacity building exercise and gave the PPP unit needed gravitas.

Lesson 3: Seek financing where it is most attractive; avoid the myopia of normalcy
As part of the federal government’s effort to encourage PPPs, the Investment Fund was created to provide grants for strategic PPP projects to become more financially viable. When the airport came up for financing, the city looked to allies within IFC and the European Bank for Reconstruction and Development, as well as Russian banks like Vnesheconombank and VTB.
 
When the toll road hit the wall of the financial crisis, the city got creative, using the Investment Fund, issuing city infrastructure bonds backed by federal guarantees to fund part of the road, and looking to Russian banks to finance the PPP portion. Some suggest that the city should have sought international financing, but the continuing soft international financial markets, the bitter pill of foreign exchange risk, and the success of Saint Petersburg’s neighbors in India – who turned to local financing – look to have proven them right.
 
In Saint Petersburg and elsewhere, no PPP program is immediately or fully successful. There are always improvements to be made, lessons to be learned.  In this context, two of my favorite aphorisms come to mind: “It is important to learn from the mistakes of others, because you will never live long enough to make them all yourself.” Or in other words:  “Never say ‘Oops,’ always say, ‘Ah, interesting!’”