Investment Forum: RUSSIA CALLING by xld14276


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									                       Investment Forum: RUSSIA CALLING
                       Russian Infrastructure Projects: An International Comparative View
                       Tony Humphrey
                       1 October 2009
MS-#1138999-v3-        Allen & Overy Legal Services
       Russian successes
       Why the international perspective matters
       Our perspective

  Russian Legal Framework

  Comparative Risk Allocation
     Selected current topics
     International trends
     Russian developments

  Concluding Remarks

Russian Successes:

•     Top level political support for public-private infrastructure development
•     Vast pipeline of potential projects: US$1,000 billion over 10 years
•     Development of Federal and Regional legislation and institutional framework
•     Strong foreign investor interest demonstrated by response to existing projects
      (leading investors, contractors and financiers)
•     Active support from EBRD and the World Bank Group (including IFC) and
      other development institutions and ECAs
•     Successful Tenders:

       •   Moscow - St. Petersburg Highway (15 – 58 km): signed 27July 2009
       •   "M-1 "Belarus“, a section of the Moscow-Minsk Highway (18 km): signed 17 July 2009
       •   Pulkovo Airport: Winning bidder: awarded 25 June 2009

    “We [the Government] cannot allocate budget funds to all the projects that
     need our support, that is why we need public-private partnerships”:
     President Dmitry Medvedev (18 September 2009)

Why the international perspective matters:
  Currently 594 projects announced internationally, including 185 PPP/PFI
  projects e.g.
      69 roads in Europe, Americas and Africa
      17 airports / 38 ports
      50 social infrastructure projects (schools, hospitals)

  International investors, contractors and financiers have to choose which
  projects to focus on

  Project non-financial selection criteria include comparative measures of:
      legal system risks / uncertainties            complexity / credibility
      fair and transparent selection process        probable lead times
      jurisdictional track record                   risk allocation

 Competition is in the heart of all successful PPP programmes: competition
 between bidders but also between projects

Our Perspective: Balanced Russian and international experience
and views
  Deep involvement in Russian projects include:
      St. Petersburg Nadex – for City
      Pulkovo – “fatal flaws” analysis
      Roads – various
      Social infrastructure - schools, healthcare, cultural facilities, etc
      Power and Petrochemical - including co-investment projects with support from the
      Investment Fund of the RF
      Participation in State Duma Committees on PPP and infrastructure bonds

  Very extensive international experience:
      top legal adviser on projects every year 2002 – 2008
      adviser on 35 transactions winning “Projects of Year” award in 2007-2008
             11 power / petrochemical deals
             11 transport deals
             6 infrastructure deals
      adviser on 74 projects completed in 28 jurisdictions in 2008
      extensive list of innovative “firsts” (e.g. “first PPP project” in jurisdiction or sector - 64
      “firsts” in 2001 – 2008)

Russian Legal Framework: Strengths
Widely embedded recognition of importance of PPP approach:

   PPP concept reflected in:
      Governmental Programme for Modernization of the Russian
      Transport System 2002 – 2010
      Federal Transport Development Programme 2010-2015
      Strategy for Development of Russian Railways Network until 2030
      Concept for Development of Russian Airport Network 2008-2020
      Regional development programmes
   Establishment of an institutional and legislative framework both at the
   federal and regional levels

Legislative and Institutional Framework
  Expert Council on PPP acting under the auspices of the State Duma, STBT
  Advisory Council on PPP development set up by the Russian Ministry of

  RF Investment Fund created in 2006 to provide state co-financing for large
  projects of federal importance (RF Investment Fund budget 2006: $3 billion
  was available; 2007: $4.3 billion was available; 2008: $5 billion was available;
  2009: $3 billion is available; 2010-2012: $4.3 billion will be available)

  Vnesheconombank (VEB) has the leading role in promoting and financing
  (debt and guarantees) for PPP projects in Russia: including “VEB PPP Centre”
  to support PPP projects

  Special Economic Zones (e.g. Krasnodar, Irkutsk and Kaliningrad regions)
  were established to provide infrastructure development in special areas for e.g.
  tourism, technical innovation and industrial manufacturing

  Other initiatives: Russian Highways (Rosavtodor), Russian Roads Company,
  Russian Venture Company, Regional Venture Funds, Regional Investment

Legislative and Institutional Framework

  Legislative framework has been established at federal and some
  regional levels by adopting the federal law “On Concession
  Agreements”, local PPP laws (e.g. in St. Petersburg, Altai, Tomsk,
  Dagestan) and investment legislation

  New legislation on infrastructure bonds and model PPP Law for
  Russian Regions is being developed

  BUT there is not just one single Russian legislative act for public-
  private infrastructure developments……

Russian Legal Framework
 Federal Law on “Concession Agreements” (2005)-amended 17 July 2009
 RF Government Regulation “On Investment Fund of Russian Federation”
 (2005 and 2008)
 Standard concession agreements have been developed and adopted by the
 RF Government for a number of asset types (2006)
 Other Related Laws and Regulations:
     Roads and Road Activities Law (2007); Sea Ports Law (2007)
     Local PPP laws (St. Petersburg; Altay; Dagestan; Tomsk)
     Civil Code; Laws on Investment Activities (1991), Capital Investments
     (1999) and Foreign Investments (1999)
     Budget Code (1998)
     Public Procurement Law (2005)
     Law on State Registration of Real Estate Rights (1997)
     Law On Special Economic Zones (2005)

Legal Framework
 Should there be a Specific PPP law?

          Yes                        No

                Czech Republic            Hungary
                Latvia                    The Netherlands
                Poland                    United Kingdom

    Depends on sophistication of the general law in force
    General PPP law or sector specific?
    Russia – somewhere in the middle? – BTO etc.

Russian Legal Framework: Challenges
 Legislative framework untested and unclear: eg

    Concession Law: covers BTO but not BOT schemes
    Federal and Regional Laws: inter-relationship
    Application of wider Federal laws: eg
        Federal budgeting laws impact on:
             long-term availability payments
             state guarantees
        Public Procurement Law (2005) impact on procurement of goods, works
        and services: compulsory tender process very restrictive and unsuitable
        for PPP projects
        Competition Law (2006) impact on grant of land rights under non-
        concession PPP projects
    No central “PPP Unit” to evaluate value for money (VfM) and set
    priorities for projects
    Joint grantor schemes: concerns re competence of multiple
    authorities to act jointly

Russian Legal Framework: Challenges
 Legislative framework is overly regulated and restrictive:

     Standard forms of concession agreements: there is limited scope
     to deviate
     Tender procedures prescribed by Concession Law are restrictive
     (including as to selection criteria and timing)
     Concession Law and standard forms of concession agreement
     contain terms and restrictions inconsistent with international
     norms on such matters as:
         termination payment
         grantor obligations
         no recognition of change of law and force majeure protection by
         assignment of concessionaire’s rights
         direct agreements and “step-in” rights
         dispute resolution and choice of law

Russian Legal Framework: Proposals
PPP Expert Council* has proposed useful amendments to Concession Law
and to other Federal Laws, including**:
     Clarification of scope of Concession Law to exclude BOTs and other non-
     concession PPP schemes
     Standard forms of concession agreements to be advisory not compulsory
     Concessionaires to have right to create security over rights under Concession
     Scope for greater grantor (and State) financial support and stronger termination
     Recognition of importance of direct agreements between grantors and
     Reduction of obligation on concessionaire to provide security to grantor
     More flexibility re tender procedures including selection criteria and ability to
     amend concession agreement after award
     Changes to other Federal Laws to avoid unnecessary overlap

* PPP Expert Council of the Committee for Economic Policy and Business of the RF State Duma
** This list is not comprehensive

Comparative Risk Analysis: Selected current topics

Financing / Re-financing risks:
   Current financial market conditions coupled with policy priority to
   stimulate infrastructure development leads some European and
   Middle Eastern governments to consider:

        absorbing refinancing risk (eg by debt buy-out or reimbursing excess
        margin) in return for usual sharing of any refinancing gain;
        partially underwriting bidders’ debt finance (eg by State guarantee or
        reimbursing excess margin ).

   Indications that Russia would be prepared to offer similar support
   would be welcomed.

Comparative Risk Analysis: Selected current topics

Foreign Exchange Risks
   Exchange rates: for projects with RUR revenues but USD/Euro
   funding and/or contractor costs. Possible mitigants:
       Some revenues in USD/Euro (eg airports)
       State or VEB guaranteed RUR infrastructure bonds to reduce USD/Euro
       Availability payments adjusted to reflect FX rate movements (common in
       eg Middle Eastern projects): perhaps adjust only if rate moves beyond
       agreed tolerance?
       Availability payments adjusted to reflect increases in assumed hedging
   Conversion and remittance: should be covered by change of Law
   provisions in Concession Agreement and Lenders’ Direct Agreement

Comparative Risk Analysis: Selected current topics

Termination payments
International lenders look to be paid out in full on termination including on
termination for project company default (eg breach of concession
        Standard in emerging markets projects (especially for jurisdiction without
        established record for successful PPP projects)
        In “boom time” some CEE precedent for pay-out on project company
        default being limited to percentage of asset value (investment): but
        market has hardened
        Some examples of no termination payment for project company default
        but only in markets:
            with long-established PPP track-record;
            robust “step-in” rights for lenders; and
            settled and predictable legal system.

Comparative Risk Analysis: Selected current topics

Third Party Risks
   Positive Russian development: some protections for:
       certain acts of Federal and Regional authorities
       changes of law
   International practice would commonly provide protections for actions
   and inactions of authorities resulting in
       prejudice to revenues (eg tariff or toll setting)
       delays, non-issue or cancellation of permits, licences etc (unless project
       company breach)
       breach by authority as lessor of project land
       unavailability of required utilities
       requisition or interference in normal operations

Comparative Risk Analysis: Selected current topics

Security: Step-in Rights
   Security: International practice shows that is not critical for project
   company to own and create security over project tangible assets

        Project company’s rights to use and exploit the assets is assured and
        can’t be interfered with; and
        Lenders have ability to remedy project company failures eg by taking
        over management of project or arranging for another operator to do so;
        Lenders have good security over project company revenues and over all
        its contract rights including Concession agreement

   Step-in Rights: Grantors now recognise that lenders can be their
   allies in policing project company’s performance of its concession
   obligations. Direct agreement should help reinforce this alliance.

Comparative Risk Analysis: Selected current topics

Law and Dispute Resolution
International practice would indicate that Concession Agreement
governed by Russian law is acceptable but strong preference for:
        International arbitration
        Lenders’ direct agreement (and all other finance documents) to
        be under English law

Concluding Remarks

 Very significant progress in Russian PPP infrastructure

 Continuing modifications to law and practice are welcomed

 Opportunities are very substantial: including Regional PPP
 projects, particularly with Federal or VEB credit support

 Russian PPP infrastructure projects are competing in global
 market place: other jurisdiction have been very successful by
 being “generous” initially and tightening terms once track
 record established.

Allen & Overy– 31 offices in 22 countries

                       These are presentation slides only. The information within these slides does not
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                       advice without checking the primary sources.

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