Saint Petersburg: 3 lessons in public-private partnership implementation

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St. Petersburg, Russia
Credit: https://www.flickr.com/photos/kishjar/

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!’”

Authors

Jeff Delmon

Senior PPP Specialist

Join the Conversation

Rene Lavanchy
December 11, 2015

This is a remarkably glib account (it doesn't really stretch to an analysis). It's also unhelpful in that it doesn't actually name the projects mentioned.
So let's see. The airport is Pulkovo Airport. It got financed because of the hard currency revenues, support from the IFC and the PPP law being in place. The financial crisis is not that relevant. An international financing would be impossible even without a financial crisis, had hard currency revenues not been there.
As to "the tunnel" (Orlovsky). It still hasn't happened. In fact, what is happening with it? Because I read about some tunnel boring machine being ordered in 2011 but since then - nothing. Neither has the light rail project (Nadex). That's not rolling with the punches, that's falling over.
Actually, lesson 1 should be 'start small'. That's part of the reason why Western High-Speed Diameter (the "toll road") didn't get done the first time around. It has now, though not without some trouble over the EPC contract. I don't see that mentioned above.
You make no mention of the huge amounts of capital grant on offer for these projects, or whether the guarantee on the WHSD bonds really makes a PPP worthwhile.
And finally, what does PPP stand for in Russia? Is it public private partnership or public public partnership? Because IFC is not a commercial bank, neither is EBRD, neither is Vnesheconombank and both VTB Capital and Sberbank are majority state owned. And given the current political situation, international banks are more remote than ever. So where's the private exactly? And does the Russian government want it?

Jeff
December 16, 2015

Thanks for the comment, couldn't agree more on the glibness! Hard to do the program real justice in a blog. "Start small" is generally good advice. It is hard to balance the desire to keep projects small enough to finance easily and structure well, against the need to respond to economic and political requirements and to achieve the size often needed to ensure traction with the Government. Most countries start with the latter, though this creates challenges.
Also very true that in an ideal world the financing for these projects would be purely private in nature, with no need for guarantees or development banks. But for most developing countries, and those in the early stages of adopting PPP, they are critical. The financing may not be entirely private, but it is a shift from the purely public financing dynamic, and moves toward performance orientation. It is a dynamic process in most countries, a evolutionary shift in Government approach and priorities. And of course, one of the most important benefits of PPP is private efficiency, including maintenance which the private involvement and equity helps to ensure. It is certainly not a perfect example, but we hoped it would be an interesting story with a few lessons learned.

Margarita Lutova
December 22, 2015

Thanks for the comment. A few more words about the Orlovsky tunnel. Two weeks ago the сourt of Saint Petersburg refused to order the city to pay a $4,6 mln to the concessionaire as a compensation for the company's expenses made before the project was cancelled.
The concessionaire previously won the case in arbitration, but the court of Saint Petersburg refused to enforce the decision of the arbitration stating that the decision of the arbitration "contradicts the terms of the concession agreement" (quote from the ruling).
This is not just an example of an unhappy ending of a single PPP project, it's about the poor quality of institutions and the lack of rule of law in Russia. And the question is: is it possible to ensure good governance of PPPs in a country with poor institutions? To my mind, the answer is no.

Chris Shugart
February 16, 2016

There’s an argument that the true benefits of a PPP come from private-sector involvement in, and the bundling together of, design, construction, operation, and maintenance – all subjected to performance-based incentives. I have yet to see a study (empirical or theoretical) that makes a convincing case that private-sector (as opposed to public-sector) financing gives any additional economic benefit. If someone knows of such a study, please let us all know.

StPete
December 07, 2015

What is the current status of the tunnel and the light railway projects? Any lessons to be drawn from those deals?

sylla
December 20, 2015

Bonsoir

Aibek Amanbaev
January 04, 2016

"Step by step" - my favorite aphorism. Despite of some problems in Western High-Speed Diameter (the "toll road") and Pulkovo Airport projects, most of government and private business people in Russia estimate they as successful. And these examples were an argument to develop PPP projects further. Besides transport constructions industry, I know, the similar program has started in portable and waste water industry. Most of enterprises in this industry are small.

jan.van.schoonhoven
February 07, 2016

Dear Jeff
Thank for your blog. Most interesting. The St Petersburg University is panning a masterclass on PPP and Infrastructure. Could we get in contact about the content.
Jan van Schoonhoven
PPP Advisor The Netherlands

Li Lou
February 08, 2016

Dear Jan,
You may email Jeff at [email protected].
Li