The Public-Private Partnership Law Review: Russia
In Russia, the public-private partnership (PPP) sector is dynamically developing and contains many examples of successful projects in all key areas of the Russian economy, in particular, transport, healthcare and utilities. However, in comparison with some other countries, Russian PPP legislation is relatively new, as it was first introduced in 2005 when Federal Law No. 115-FZ On Concession Agreements, dated 21 July 2005 (Concession Law), was adopted.2 Based on this law, one of the famous first concession agreements in relation to the Moscow–Saint-Petersburg Toll Express Motorway3 (15–58 kilometres) was signed in 2009.
Along with this, at the first stage of developing PPP legislation frameworks some Russian regions started to introduce their own PPP laws. For example, Saint Petersburg was a pioneer in adopting its own law in 2006, which led to many successful infrastructure projects. The most notable projects with foreign investments in this city include the Western High Speed Diameter4 and Pulkovo international airport.5 Saint Petersburg has always been very active in promoting PPPs and developing legislation in this area.
Many other regions have decided to follow this approach and have adopted similar legislation. In 2009, the expert committee on PPP legislation under the Committee on economic policy and entrepreneurship of the State Duma of the Russian Parliament recommended that regional parliaments adopt the Model Regional Law on Participation of the Regional, Municipal Organisations in PPP Projects. This Model Law helped regions to develop their own legislation, and by 2015, more than 70 Russian constituent entities had their own PPP laws. Moreover, an important step in further establishing PPP legislation in Russia was the adoption in 2014 by the Commonwealth of Independent States (CIS) Inter-Parliamentary Assembly of the Model Law on PPPs for CIS Countries.
Until recently, the Concession Law was the main legislative act in Russia governing the procedure for the implementation of PPPs at the federal level. However, concession legislation limits the structuring of PPP projects to a scenario where the right of ownership of a facility remains only with the public authority (the BOT scheme). Regional PPP laws often provided greater flexibility for project participants, although this was not fully supported by federal legislation. This factor, together with a number of controversial provisions of the legislation and practical problems, led to the development of a special federal regulation in respect of PPP projects.
On 1 January 2016, Federal Law No. 224-FZ On Public-Private Partnership, Municipal-Private Partnership in the Russian Federation and Amending Certain Legislative Acts of the Russian Federation (PPP Law) entered into force. The adoption of this Law represented a huge step forward in developing the PPP regulatory framework and market in Russia.
The PPP Law now coexists with the Concession Law, creating the legal framework for a wider use of PPP models that also allow the transfer of the ownership of a facility to an investor (project company). The regional PPP laws have been brought into compliance with this federal law.
However, the PPP Law currently has a number of provisions that are either unclear (and the approach to the application thereof must first be tested in the courts) or too onerous to the business (such as the obligation to demonstrate that a PPP project has better value for money than a conventional state procurement) that are planned to be addressed in the future to make this model more appropriate for investors. This is why the concession model remains the most popular model for investors and public partners.
According to an analytical review of the Russian Ministry of Economy, at the beginning of 2020 there were around 3,100 concession agreements in Russia that were either in force or had been completed after the expiration of the term provided by their concession agreements. The total amount of investment obligations under them is more than 1.7 trillion roubles. Of these, 1.2 trillion roubles (i.e., more than 70 per cent) are off-budget investments and 500 billion roubles are state funds. Since the adoption of the PPP Law only 25 agreements have been concluded (at different administrative levels), providing investments in an amount of approximately 60 billion roubles.6
This chapter will mainly focus on the regulation of concession agreements (CAs) if not specified otherwise.
The year in review
The key trends of 2020 included the continuing focus on the application of PPP tools in different sectors, as well as the further development of the applicable legislation. However, no game-changing legislation was adopted during the year with respect to PPPs or concessions.
The first PPP agreements (PPPAs) were concluded in the healthcare and IT sectors in 2018: the construction of seven polyclinics in the Novosibirsk region (with capex of approximately 4 billion roubles) and the project related to the establishment of the national system of digital marking and monitoring goods (with capex of approximately more than200 billion roubles). A number of IT projects structured under the Concession and PPP laws are planned to be implemented in the future as there is a strong focus on digitalisation of the key areas of the economy in Russia.
It is important to note that there is a strong intention in Russia to boost domestic investors' confidence in the economy. Thus, on 1 April 2020, Russian Federal Law No. 69-FZ On the Protection and Encouragement of Capital Investments in the Russian Federation (Law on Investment Protection Agreements) was signed by the President and entered into force shortly after that date upon its official publication. This Law is aimed at creating 'predictable and favourable conditions' for doing business and therefore provides a number of preferences to organisations implementing investment projects.
This Law, and related laws with amendments to the Tax and Budget Codes and further amendments, together are informally called the investment code. Previously there were a lot of different legal acts regulating investments (particularly laws on special economic zones and investment activity in the form of capital investment, etc.), and it is assumed that the new law will become the main regulatory legal act in the field of investment activity aimed at unifying and systematising the current regulations. The Law on Investment Protection Agreements introduces new tools to protect and promote investments. Thus, it introduces the institute of agreements on the protection and promotion of capital investments, which will represent a new type of long-term agreement between public and private sectors. The conclusion of an investment protection agreement will provide a list of advantages to the organisations implementing a project: they will be subject to a stabilisation clause prohibiting the application of legislative provisions that worsen the conditions for conducting activities related to the implementation of the project. In particular, certain tax conditions, land use conditions and urban planning activities are not subject to change for a period of six to 20 years.7 In addition, the Law establishes support measures to reimburse certain costs incurred in order to create or modernise transport, energy, utilities and social infrastructure, at the expense of budget funds. This Law can be seen as an attempt to unify all existing regimes stimulating an investment boost, including PPPs and concessions.8 Although PPPs and concessions are outwith the scope of this Law, it should be noted that various investment projects (including concessions and PPPs in the broad sense) may benefit from this Law, depending on the structure of the project concerned.
Overall, there are plans to undertake a number of legislative changes aimed at attracting more investments, on the one side, and increased control over planned public expenditures under projects with state support, on the other.
i Types of public-private partnership
Broadly speaking, there are different forms of public-private cooperation agreements and PPPs in Russia:
- CAs under the 2005 Concession Law;
- PPPAs under the 2015 PPP Law;
- life-cycle contract based on the state procurement law (Federal Law No. 44-FZ On the Contract System in State and Municipal Procurement of Goods, Works and Services dated 5 April 2013 (Law No. 44-FZ));9
- offset contract for a period of up to 10 years with a minimum investment of 1 billion roubles under Law No. 44-FZ (this type of contract was introduced in 2016);
- leasing agreement with investment conditions; and
- other forms of cooperation between public and private sides.
In a more narrow and practical sense, usually only CAs and PPPAs are referred as PPPs, and we side with this approach.
ii The authorities
In Russian PPP projects, the public side (the grantor) is usually represented by central government, and governments and administrations at the regional and municipal levels.
The key authorities working in the Russian PPP market are the following:
- the central government, which adopts regulations on PPPs and concessions (e.g., Regulation No. 1044, dated 11 October 2014, On the Support Programme of Projects Implemented on the Project Financing Basis, and Regulation No. 300, dated 15 March 2015, On the Approval of the Form of a Proposal to Conclude a Concession Agreement with a Person Initiating the Conclusion of a Concession Agreement). One of its other important functions is that it appoints authorities to oversee private finance initiatives (unsolicited proposals) submitted by private interested parties;
- the Ministry of Economic Development, which takes part in the legislative procedure (it develops guidelines and best practices reviews for PPP projects);
- the Ministry of Finance, which prepares draft budget laws, provides state support, and regulates subsidies and budget investments in accordance with the Budget Code of Russia;
- other line ministries (the Ministry of Transport, the Federal Road Agency under the Ministry of Transport, the Ministry of Healthcare, etc.) are responsible for PPPs in their areas;
- the Federal Antimonopoly Service (FAS) is the authorised government body controlling the compliance of market players and the public side with the competition legislation (and is entitled to challenge tenders and awards); and
- the Accounting Chamber, which controls the expenditure of budget funds, conducts investigations and publishes reports.
iii General requirements for PPP contracts
The requirements of CAs and PPPAs have some common features, but there are also important differences. We briefly summarise some features of both schemes below.
Under a CA, the private party (the concessionaire) may be, in particular, a foreign entity, a Russian entity, or two or more legal entities acting as a simple partnership (under an agreement on mutual activities). Exceptions are IT and military concessions and PPPAs, where a concessionaire must be a local company (also beneficially controlled by a Russian entity or individual). Under a PPPA, the private partner must be a Russian-incorporated legal entity only. However, there are no restrictions on indirect foreign companies' participation in a project company under a PPPA. In comparison to the Concession Law, the PPP Law does not allow state-controlled organisations (including banks) to act as a private partner or on their side.
The list of the types of property that can be objects of a CA or PPPA (i.e., facilities or underlying assets) is quite broad and includes all key infrastructure objects (with some exceptions). A PPPA facility cannot be property that is exclusively owned by the state and that cannot be provided to a private owner. Thus, unlike CA facilities, the following property in particular may not be considered as PPPA facilities: highways (except where privately owned), subways, heat, gas, electricity or water supply, water treatment facilities, and seaport infrastructure facilities that can only be in federal ownership. Immovable property, or immovable property and movable property technologically related to each other and intended for carrying out activities stipulated in a contract, can only be facilities under a CA or PPPA. However, one exception to this rule is if the IT infrastructure is an object under a CA or PPPA (which could be represented depending on the project as just movable property).
Significant amendments were introduced to the PPP and concessions legislation in 2018 with respect to IT infrastructure projects (which could include just movable property). The underlying law on amendments extends the list of objects of CAs and PPPAs with IT facilities (in particular, software, databases, information systems, including with regard to states, and internet websites that include software and databases).
The law also sets forth a special regime for implementation of IT infrastructure projects and provides in both the Concession Law and PPP Law separate chapters with the rights and obligations of the parties to such facilities, and the specifics of the drafting, execution and performance of the relevant agreements.
According to the Concession Law, the concessionaire undertakes at its own expense to create or reconstruct certain facilities and carry out activities using the facility (i.e., to operate it). The ownership right to the facility belongs (or will belong) to the public party (the grantor).
The grantor undertakes to grant to the concessionaire the rights of possession and use of the facility under the CA for the implementation of the respective activity during the term established by the agreement. As a general rule, the concessionaire is obliged to maintain the object of the CA in good order, to carry out (at its own expense) renovations and to bear the maintenance costs.
The concessionaire is obliged to provide security for ensuring the performance of its obligations under the CA. The following types of security are available: irrevocable bank guarantee, pledge of the concessionaire's rights under a bank deposit contract in favour of the grantor, or insurance of the risk of the concessionaire's liability for a breach of the obligations under the CA. However, the right to choose the type of security is the authority of the grantor, if not stipulated otherwise in the concession agreement.
The minimum term for a PPPA is three years; the Concession Law does not provide a minimum term, but instead requires that this should correspond to the project payback period.
Provision of land plots
The public side is obliged to provide the investor with the required land plots for the whole term of the contract without conducting any separate tender procedures. Usually land plots are provided based on lease agreements, although it is possible to provide land on any other legal basis.
Participation of third parties
The concessionaire or private partner is entitled to engage third parties to perform its obligations (both at the construction and operation stages) provided that the concessionaire will be fully responsible to the public side for the third parties' actions. The PPP Law explicitly states that the investor can be responsible only for technical operation and maintenance (which may be relevant for investors in, for example, the healthcare sector if they do not plan to provide medical services or if the public side prefers to leave medical services within the state budget enterprises). The Concession Law assumes that the concessionaire will be fully responsible for both the technical and designated use of the facility (i.e., its full operation). That said, we expect this to be revisited in the draft bill currently undergoing public hearings that permits concessions for technical operation.
Right of assignment
Rights under a CA may be assigned at any stage of the implementation of a project with the prior consent of the grantor. Rights under a PPPA may not be assigned, except in certain cases.
Subjecting PPP disputes to the Russian state courts is common. Generally, dispute resolution under CAs via international arbitration is possible, although the venue of arbitration shall be in Russia. The PPP Law does not contain any special provisions in relation to dispute resolution, but our reading of the arbitration law is such that disputes under the PPP Law are non-arbitrable.
Bidding and award procedure
i Expressions of interest
There are two main ways of entering into a project: a tender procedure10 and unsolicited proposals, the latter being available since 2015. The competitive dialogue procedure is not used in Russia.
The bidding procedure starts from the procurement notice and comprises two subsequent phases: the pre-qualification phase (submitting and evaluation of the tender applications); and the submission and evaluation of the proposals (bids).
Notably, the PPP Law obliges authorised bodies prior to entering into a PPPA to analyse the project in the context of value for money and comparing the effectiveness of agreeing the PPPA using traditional government procurement contracts. There is a detailed and quite complex regulation of the value-for-money testing. At present there is no such requirement under the Concession Law, which simplifies the procedure for launching the project (although applying the same approach to concessions has been discussed).
ii Requests for proposals and unsolicited proposals
The legislation provides detailed requirements for submitting both tender applications and bids. Generally, the tender requirements are similar to tender requirements in other CIS countries, although they have their own peculiarities. Tender documentation and other documents related to the tender must be published on a special official website (torgi.gov.ru) to ensure the transparency of the process.
The procedure for entering into a CA by way of private initiative (unsolicited proposal) may take up to 150 days (approximately) if there are no other applicants; under the PPP Law it is approximately 300 days (because of the value-for-money test procedure).
Tender procedures often take around one year from the announcement of the tender up to the signing of the CA or PPPA.
Please note that the Concession Law also provides an opportunity to enter a concession agreement without tender and unsolicited proposal procedures in cases where there is a decree issued by the government.
iii Evaluation and grant
The following tender criteria, in particular, may be set for the evaluation of bids:
- time for construction or reconstruction of the object of the CA;
- technical–economic characteristics of the object of the CA;
- volume of output of goods, execution of work and provision of services in the course of the planned activity under the CA;
- amount of the concessionaire's payment;
- maximum prices (tariffs) for goods to be produced, work to be executed and services to be rendered, or long-term parameters of regulation of the concessionaire's activities; and
- amount of the capital grant and the grantor's payment (if these are provided).
Bids are assessed in accordance with the procedure stipulated in the tender documentation. After the preferred bidder is announced, there may be negotiations before entering into the CA or PPPA.
If a contract is awarded through an unsolicited proposal mechanism, the applicant initiating the conclusion of a CA only needs to show that it has or is capable of raising at least 5 per cent of the amount of investments provided in the draft CA (confirmation may take different forms). This approach differs from the PPP Law regulation providing an obligation of the initiator to submit the independent guarantee (or bank guarantee) in an amount of 5 per cent of the forecast amount of financing under the PPP project. The phrase forecast amount of financing is not specified in the law, but our interpretation is that this refers both to the capex and opex of a project.
The Concession Law provides for two opportunities for co-financing of a project by the public side:
- the grantor is entitled to assume part of the costs for the creation or reconstruction of the facility and its operation (capital grant). The amount of the costs being covered by the grantor should be specified in the grantor's decision in respect of signing the CA, in the tender documentation and in the CA itself; or
- there is the possibility of providing a 'grantor's payment' (which can be used along with the capital grant in the same project). The Concession Law does not include any detail on this form of state support, but in practice, this refers to what is well known in international practice as an 'availability payment'. The absence of a legal definition of the grantor's payment or a more detailed regulation governing this type of payment raise a number of legal questions (including the procedure and timing of the payment, how it relates to the capital grant, etc.) and may cause disputes in practice. The Bashkir case (see Section VII) demonstrates this problem.
At present, the Concession Law prohibits full financing of the costs of the concessionaire using a capital grant, but it does not contain any restrictions on the size of the grantor's payment. Compensation of the minimum guaranteed revenue is also possible and is being carried out in practice.
The grantor may require from the concessionaire the provision of a concession payment, which should be provided during the operation stage. The amount and type of the payment (e.g., money or property) should be set out in the grantor's project kick-off decision, which is taken prior to the tender procedure.
Russian concession law provides different options for investment return (direct toll and availability payments). However, the availability model is more popular in Russia at present. The direct toll model was used in some projects (for example, in M11 Moscow–Saint-Petersburg, 7–8 section), but its use is now quite limited.
ii State guarantees
Russian legislation gives the option to provide state guarantees under CAs and PPPAs. The Concession Law explicitly states that the grantor is entitled to provide the concessionaire with state or municipal guarantees in accordance with the budget legislation of the Russian Federation; the size, procedure and conditions for granting state or municipal guarantees to the concessionaire should be specified in the formal decision in respect of signing the CA, the tender documentation and in the CA. However, in practice, the public side does not grant such guarantees because of a lack of budget financing. Nevertheless, the state often provides contractual guarantees, which are formalised as relevant payment obligations envisaged in the CA or PPPA. They are equally enforceable and bankable as confirmed by numerous financial closes.
iii Distribution of risk
The regulatory framework does not involve an extensive risk allocation mechanism, so in practice, while there are certain market approaches to risk allocation, ultimately it will depend on the contractual agreements between the parties, the type of project and regional practice. Like in many other countries, in Russia there are special guidelines and recommendations on how to distribute risks: this is issued by the Ministry of Economic Development together with the National PPP Development Centre (a non-commercial organisation promoting PPPs and monitoring developments in this area), as well as by other line ministries and public authorities at the regional level. The general principle of risk allocation is in line with standard international practice: the party that is best able to manage the risk (influence the occurrence of any risk and deal with the consequences) should bear it. Some examples of risk allocation in Russia are:
- the inflation risk is usually shared between parties or taken by the public side;
- risks of project delays, as well as construction risks, are generally borne by the private party, except if otherwise agreed;
- land provision, political risks as well as discriminatory legislation change risks are within the public side;
- foreign exchange risks in Russian projects are often not taken by the public side;
- social risks (including protests) can be borne by the public side or jointly; and
- risks from force majeure are generally jointly distributed.
The Concession Law states that in the event that new legislation leads to an increase in the aggregate tax burden on the concessionaire or deterioration of its position in such a way that it is largely deprived of what it expected to receive when entering into the CA, the grantor is obliged to take measures to ensure the return of the concessionaire's investments and the receipt by the concessionaire of the gross proceeds in a volume no less than that originally set out in the CA.
In many projects, the parties usually provide a list of special events (which is a combination of relief and compensation events known to many other jurisdictions) within the CA or the PPPA. In the case of the occurrence of such events, the concessionaire has the right to extend the terms under the agreement, compensate any additional expenses and – in the event of a prolonged special event – terminate the agreement early.
iv Adjustment and revision
Subject to the following exceptions, parties to a CA or a PPPA are free to amend it. Changing the material conditions of the CA requires the prior consent of the FAS. The list of material conditions is laid out in the Concession Law and includes, inter alia, the amounts payable by the grantor, construction completion date and provisions governing compensation upon early termination. Changes to the material conditions should be carried out in accordance with Resolution of the Government of 24 April 2014 No. 368 On Approval of the Rules for the Provision by the Antimonopoly Authority of Consent to Amend the Terms of the Concession Agreement. This Resolution provides an exhaustive list of events under which the CA can be changed (e.g., force majeure or significant deterioration of the position of the concessionaire). Amendments to the CA that lead to changes in the revenues of the budgets of the budget system can be taken in accordance with the requirements established by the budget legislation (which may have provisions requiring amendments to the budget laws, which could be a tricky process). Changes in the terms and conditions of the CA that were determined on the basis of a decision on signing a CA and a bid proposal may only be changed on the basis of a decision of the respective public side and in some other exceptional cases. Therefore, generally we would say that in many projects parties are attempting to cover, as much as possible, important provisions in the CA upon signing, because after that the process of introducing amendments (except for non-material provisions in the sense of the Concession Law) is quite restricted. Amendments to PPPAs can be done in basically the same manner as with CAs.
v Ownership of underlying assets
As previously mentioned, under a CA there is only public ownership of underlying assets, which is different to PPPAs, where the investor acquires the right of ownership. However, if the amount of financing by the public partner and the market value of the property contributed by the public partner (or rights thereto) totally exceed the amount of expenses of the private partner, the right of ownership of the object should be transferred to the public partner upon the expiration of the term of the PPPA. The facility itself cannot be pledged under the Concession Law, although rights under the CA may be pledged in favour of financial providers. The private partner under the PPPA may pledge both the facility and the rights to the facility in favour of the financing organisations on the basis of a direct agreement.
vi Early termination
According to the Concession Law, the CA can be terminated in the following key situations:
- upon the expiration of the CA;
- upon the agreement of the parties;
- in the case of early termination of the CA on the basis of a court decision;
- upon the decision of the public side if the failure to perform or the improper performance of the concessionaire's obligations under the CA causes harm to life or to the health of people; and
- in some other exceptional cases provided by the Concession Law.
The CA can be terminated on the basis of a court decision following a significant violation of the agreement by one of the parties (the law stipulates which violations are deemed significant, although this list can be supplemented for in CAs), a significant change in circumstances, non-compliance with the CA of a reorganised concessionaire or other grounds provided in the laws or in the CA.
In the case of early termination of the CA, the concessionaire has the right to demand from the grantor the reimbursement of expenses for the construction and (or) reconstruction of the facility. The amount of compensation ultimately depends on the parties' agreement and the judge's discretion (if it is claimed in court).
In practice, parties often provide a detailed regime for early termination (providing a list of grounds for termination without the court's intervention on the initiative of the grantor or the concessionaire, or by mutual agreement) and the amount of compensation based on the ground for termination. In any case, the private party attempts to include the sum of the senior debt and some other components in the compensation to be provided upon termination. Russian legislation includes the possibility of entering into lender direct agreements (between grantor, concessionaire or private partner, and financial institutions) to secure the interests of financial institutions (return of provided loans, step-in rights, etc.).
Russian PPPs are usually implemented on the basis of project finance with senior debt and equity provided by investors. However, there are of course different financial structures depending on the project. The current economic situation in Russia contributed to the state and investors searching for new financial solutions. In many federal and large-scale regional projects, the governments co-finance construction, as well as provide availability payments during operation. Many large-scale projects provide co-financing mechanisms in relation to capital expenditure (capex): the state covers 60 to 70 per cent of capex, and the outstanding 30 to 40 per cent is split between creditors and sponsors. Infrastructure bond financing is also used in certain projects for both the development and operation stages. This type of financing has potential for growth; however, this has not yet featured prominently in the Russian market. Some new mechanisms are also currently under development (e.g., infrastructure mortgages).
Below, we discuss a number of important cases that directly deal with aspects of PPPs. Although some of the cases date back to 2017, they still remain relevant in terms of better understanding the Russian PPP practice and landscape.
i Blagoveschensk airport case11
On 3 December 2019, the regional ministry of transport (Amur region) published a tender for the reconstruction, modernisation and management of Blagoveshchensk Airport (Ignatyevo) under a 30 year concession agreement. According to tender documentation, the investor was required to construct a new international terminal with capacity for a minimum of 300 passengers per hour, modernise the existing domestic terminal and ensure a minimum capacity of 300 domestic passengers per hour, open a new cargo terminal with capacity for a minimum 6,000 tonnes of cargo per year and expand the area near the terminal to offer up to 600 vehicle parking spaces.
Applications for participation in the tender were submitted by ABS LLC (a joint venture of the Novaport Holdings of Roman Trotsenko and Airports of the Regions of Viktor Vekselberg), KrasInvest LLC (according to the press, the company relates to another Russian oligarch) and Far Eastern Concession Company LLC. At the end of September 2020, it became known that ABS LLC won the tender The starting amount of investments under the tender was set at 2.756 billion roubles. LLC ABC offered to invest a minimum 7 billion roubles into airport development.
The other tender participants did not agree with the results of the tender and challenged the decision of the tender organiser at the FAS. The FAS found the application of KrasInvest LLC was justified in part, which led to the actual cancellation of the tender results.
Among a number of arguments that were considered, the case is especially important for the following legal conclusions:
- establishing the amount of investments as a tender criterion should be treated as a violation of competition;
- the list of potential tender criteria is established in Paragraph 2 of Article 24 of the Concession Law. Thus, according to Article 24, such criteria include the technical and economic parameters of the concession agreement. Paragraph 6 of Article 24 prohibits the application of other criteria;
- the FAS decided that the amount of investments criterion cannot be used as a tender criteria and should be treated as a term of the concession agreement in accordance with the Concession Law (and it does not refer to the technical and economic parameters of the infrastructure facility); and
- consolidation of the resources of several companies for participation in a tender should not be directly treated as a violation of the antimonopoly legislation.
The applicant used the argument that ABS LLC participated in the tender by way of consolidating efforts and pooling the resources of its founders, Novaport Holding LLC and JSC UK Airports of Regions, which refused to compete and acted in a coordinated manner.
The FAS found this argument unreasonable because:
- the founders of LLC ABS were not participants in the tender; therefore, it is not possible to conclude that the tender proposal of LLC ABS does not comply with the provisions of the tender documentation, including in terms of concert (cartel) with other participants in the tender; and
- there is no prohibition in the tender documentation on the consolidation of the resources of several companies to take part in the tender.
ii Tuvin case12
In February 2020, the Arbitrazh Court of the East Siberian District ruled on a dispute between the Republic of Tyva and the regional department of the FAS related to the conclusion of concession agreements for the construction of schools and kindergartens in the region. This case relates to the re-qualification of concession agreements into public procurement contracts (under Federal Law No. 44-FZ).
In April 2019, the Ministry of Land and Property Relations of Tyva announced the tender in relation to the conclusion of concession agreements for educational facilities. The government of Tuva, represented by the regional ministry of education and science, was to act as the grantor. In May, the regional office of the FAS received complaints from an interested person and, after reviewing the concession agreement, issued a warning to the ministry of education of the republic requiring it to terminate the concluded agreements. However, the public side did not agree with this decision and tried to challenge the FAS warning in court. As a result, the courts of three instances upheld the position of the antimonopoly body and refused to allow the ministry to satisfy its appeal.
Among other things, while making a decision the courts took into consideration that any measures provided by state programmes represent a state need and therefore must be implemented on the basis of state contracts in accordance with Law No, 44-FZ. The courts also pointed out that the conclusion of concession agreements was commenced after the failed procurement procedures in accordance with Law No. 44-FZ, which, in their opinion, also indicated the need to conclude state contracts and not concession agreements. Generally speaking, in their decisions, the courts consider that the payment mechanism under contested concession agreements is similar to the payment mechanism used in a state contract, and therefore the concluded agreements cannot be treated as concession agreements.
This case is especially important in terms of the need to further develop approaches to distinct concession agreements arising from public procurement contracts.
iii Bashkir case13
In 2017, the State Committee of the Republic of Bashkortostan for Transport and Roads (the organiser of the tender) and LLC Bashkirdorstroy (the winner of the tender) brought a claim against the FAS to invalidate the FAS' order to annul the results of the concession tender in relation to the Sterlitamak–Magnitogorsk road. The FAS and the court of first instance came to the conclusion that this project should have been implemented under the public procurement law (Federal Law No. 44-FZ) because the tender documentation provided that all the concessionaire's costs for the construction and operation of the road are to be paid entirely out of the regional budget (via the capital grant and the grantor's payment). The total cost of the project was around 12 billion roubles.
However, the appeal court overturned the judgment of the court of first instance and said that full budget financing of the concessionaire's expenses is allowed, but only if different financing instruments are used – namely, both the capital grant and the grantor's payment. The appeal court said that, unlike the capital grant, the grantor's payment is not made for a particular purpose and may be used for purposes other than the compensation of the costs of construction or reconstruction of the facility.
In this case the courts, literally interpreting the law, only analysed the situation where the investor's expenses are fully compensated by the state. Therefore, the model, which presumes that the costs are partially offset from the budget and partially from the revenues generated by the project itself, was not examined.
At the same time, the following question remains unresolved: if not completely, which part of the revenue (if not all of it) can be compensated for by the budget? There is no answer to this question in the law, and such uncertainty creates risks for investors. Although the private party won this case, to ensure future investment in infrastructure, the FAS and the government decided to reform the current regulatory framework and prepare amendments to the law to minimise the risk of challenging PPP projects that provide for full coverage of investor's costs.
This case is also notable because the courts also considered other issues in relation to PPPs, for example, with respect to the requirements for the financing experience, as well as the peculiarities in relation to providing a bank guarantee as a bid bond.
iv Glavnaya Doroga case14
Another famous dispute was JSC Glavnaya Doroga v. State Company Avtodor (2017).
The appeal court overruled the decision of the first instance, stating that disputes in respect of CAs are arbitrable, as is stipulated in Article 17 of the Federal Law On Concession Agreements. Further, the fact that Russia is a party to the CA does not mean that any related dispute has a public nature and is of public interest. It was identified that the dispute in question was one of private interest to the plaintiff, and that there were no grounds for recognising arbitration clauses as null and void. On the issue of equating the nature of CAs to contracts on state procurement, it was indicated that the Federal Law On Concession Agreements provides for a special competition process, which is not analogous to the procedure for entering into state contracts; and the Federal Law On Concession Agreements itself is not part of Russian procurement legislation. This case led to a number of appeals, but finally, in October 2020, the Moscow Region Arbitrazh Court confirmed the above-mentioned approach on the arbitrability of disputes arising from CAs.
v Compensation upon termination cases
In 2018 there were several similar cases where the Russian Supreme Court addressed the imperative and dispositive issues of the legislative provision on the right of the concessionaire to require compensation upon early termination from the grantor.15
All three cases were based on a common background. Between 2013 and 2015 in Buryatia, the Regional Management Company of Housing and Communal Services entered as a concessionaire into a series of concession agreements with municipalities regarding housing and utilities facilities. Under the terms of the agreements, the concessionaire undertook to reconstruct and modernise the facilities of communal infrastructure and carry out further operations to provide consumers with heat and water supply services, and in return receive the right to collect payment for utility bills from consumers. In February 2017, a petition was filed against the concessionaire to declare it bankrupt. Shortly after, the concession agreements were terminated out of court by agreement of the parties. Upon termination, compensation was paid to the concessionaire at a strictly limited amount stipulated by the agreement. The amount of compensation was determined by the sum of payments for housing and communal services that the concessionaire would collect from consumers for three months from the date of early termination. Subsequently, the bankrupt concessionaire in the person of a bankruptcy trustee appealed to the courts with claims against municipalities to pay compensation on the basis of calculating the costs of the concessionaire for the reconstruction of facilities, referring to Part 5 of Article 15 of the Concession Law. In all three cases, the courts of all instances defended the municipalities (ex-concessors), saying that the parties to the concession agreement had agreed to limit the concessionaire's right to receive compensation upon termination. In one of the cases, the courts also indicated that Part 5 of Article 15 of the Concession Law applies only in cases where the concession agreement is terminated based on a court decision.
Although those cases relate to municipal concessions and have their own specifics, they are important in terms of the Supreme Court's position in relation to compensation upon termination under concession agreements.
Within the current lack of budget financing, there is high demand for investments, and the public side has shown its willingness to implement a wide range of projects and create opportunities for efficient cooperation with investors. There is good evidence that parties to PPP projects in Russia are coming to a compromise to ensure, on the one hand, successful implementation of projects, and on the other, the return of investments.
Generally, we believe that in Russia, the greenfield market will continue to be attractive to investors. The transport and healthcare sector will also see development. According to Order of the Government of Russia No. 1734-P, dated 22 October 2008, On the Russian Transport Development Strategy up to 2030, the use of PPP mechanisms was named as a priority tool for attracting investment. Based on Presidential Decree of 7 May 2018 No. 204, On the National Goals and Strategic Tasks of the Development of the Russian Federation up to 2024, the government adopted a complex plan for the modernisation and extension of the main infrastructure. It is reported that there are plans to spend more than 6 trillion roubles on such developments up to 2024. We also see the growing interest and readiness of the public side to modernise healthcare infrastructure by using PPPs.
Notably, the secondary (brownfield) market has also started to develop (e.g., the acquisition of the shares in the project company under the Pulkovo project by a foreign investor) and we expect new M&A deals in the infrastructure sector in the future.
The number of unsolicited proposals will increase in the years to come as market players are eager to suggest new ideas for projects to the public side.
The Russian PPP regulatory framework is expected to develop further. There is also currently a draft law undergoing public hearings that proposes substantial amendments to the PPP legislation to make the market and the regulatory framework more favourable for investors. For instance, among other changes, in relation to the Concession Law, the draft law provides for a more detailed description of possible means for the public side's financial participation in projects, elaborates on the prequalification criteria and includes a provision for compensation of the reasonable expenses incurred by the initiator of a private concession initiative.
1 Olga Revzina is a partner, Roman Churakov is of counsel and Lola Shamirzayeva is a business development lead at Herbert Smith Freehills.
2 Prior to its adoption, the sphere was regulated by general regulation, such as Federal Law No. 160 on Foreign Investments, Federal Law No. 178 on Privatisation of State and Municipal Property and Federal Law No. 135 on Protection of Competition.
3 Total construction cost was estimated in 2009 at approximately 152.8 billion roubles. The project involves European investors.
4 This project was one of the largest PPP projects in Europe and was awarded numerous internationally recognised awards as the PPP deal of the year. The project cost is approximately 109 billion roubles. The PPP agreement was signed in 2012.
5 The project cost is approximately 74.3 billion roubles.
6 See 'On the Development of PPPs in the Russian Federation' in Information Analytical Review, issued by the Ministry of Economic Development in February 2020.
7 The fixing period cannot be more than six years for projects with investments of up to 5 billion roubles, 15 years for investments of 5 to 10 billion roubles, and 20 years for investments above 10 billion roubles.
8 According to Deputy Finance Minister Andrei Ivanov, it is anticipated that this Law will create conditions for attracting investment projects worth at least 30 trillion roubles into the Russian economy. Annually, 100 to 150 agreements are planned to be concluded in an amount of 7 to 10 trillion roubles: https://www.forbes.ru/newsroom/finansy-i-investicii/396663-putin-podpisal-zakon-o-zashchite-i-pooshchrenii-investiciy.
9 Law No. 44-FZ regulates, among other things, life-cycle contracts, which allow for the establishment by the government of a contract providing for the procurement of goods or works covering different stages of the life cycle of the object (design, construction, subsequent maintenance, operation, etc.). Under the previous regulation it was impossible to enter into one contract covering different types of works, and it was necessary to conduct a separate tender for each different type of works.
10 In exceptional cases the CA can be signed without a tender (e.g., if there is a special government decision to implement a project without a tender).
11 FAS decision as of 23 October 2020 under case No. 04/10/18.1 – 163/2020).
12 No. A69-2242/2019.
13 No. A40-23141/17.
14 No. A40-93716/17.
15 Part 5, Article 15 of the Concession Law.