Dear colleagues!
The draft law on large-scale amendments to PPP legislation was developed by the Russian Ministry of Economic Development and first began to be discussed by the professional community back in 2018, after which its adoption was repeatedly postponed. As Ilya Torosov, Deputy Minister of Economic Development of Russia, explained at the time, the draft law absorbed the analysis of the market, law enforcement and judicial practice, the positions of the authorities and the expert community[1].
In March 2022, the bill was submitted to the State Duma, in June 2023 it was adopted, and on July 10, 2023, Federal Law No. 296-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" was published.
The law provides for major amendments to the following two laws:
With some exceptions, which we will mention in the review, the texts of the amendments to the above laws are identical, in these cases we will refer to the PPP legislation, which includes the above two laws. In cases where amendments are made to one of the laws, we will directly refer to them - the Law on Concession Agreements or the PPP Law.
We do not have the task of describing all the amendments - some of them are not fundamental or related to legal technicalities. Instead, we focus on the issues that should be of primary interest to investors and financing organizations. We tell you what has changed and how the amendments will affect the PPP market in Russia.
Enjoy your reading!
1.Conditions on the financial participation of the “concedent” (public party) in concession projects have been supplemented
Forms of financial participation of the concedent are singled out and its maximum amount is limited.
The Law on Concession Agreements introduces the concept of financial participation of the concedent and singles out forms of such participation - capital grant, payment of the concedent and minimum guaranteed income (see Table 1 below for details).
Table 1. Forms of financial participation of the concedent
The draft law on large-scale amendments to PPP legislation was developed by the Russian Ministry of Economic Development and first began to be discussed by the professional community back in 2018, after which its adoption was repeatedly postponed. As Ilya Torosov, Deputy Minister of Economic Development of Russia, explained at the time, the draft law absorbed the analysis of the market, law enforcement and judicial practice, the positions of the authorities and the expert community[1].
In March 2022, the bill was submitted to the State Duma, in June 2023 it was adopted, and on July 10, 2023, Federal Law No. 296-FZ "On Amendments to Certain Legislative Acts of the Russian Federation" was published.
The law provides for major amendments to the following two laws:
- Federal Law No. 115-FZ dated July 21, 2005 "On Concession Agreements" (hereinafter, the "Concession Agreements Law"),
- Federal Law No. 224-FZ dated July 13, 2015 "On Public-Private Partnership, Municipal-Private Partnership in the Russian Federation and Amendments to Certain Legislative Acts of the Russian Federation" (hereinafter - the PPP Law).
With some exceptions, which we will mention in the review, the texts of the amendments to the above laws are identical, in these cases we will refer to the PPP legislation, which includes the above two laws. In cases where amendments are made to one of the laws, we will directly refer to them - the Law on Concession Agreements or the PPP Law.
We do not have the task of describing all the amendments - some of them are not fundamental or related to legal technicalities. Instead, we focus on the issues that should be of primary interest to investors and financing organizations. We tell you what has changed and how the amendments will affect the PPP market in Russia.
Enjoy your reading!
1.Conditions on the financial participation of the “concedent” (public party) in concession projects have been supplemented
Forms of financial participation of the concedent are singled out and its maximum amount is limited.
The Law on Concession Agreements introduces the concept of financial participation of the concedent and singles out forms of such participation - capital grant, payment of the concedent and minimum guaranteed income (see Table 1 below for details).
Table 1. Forms of financial participation of the concedent
It should be noted that in fact the legislation had previously allowed structuring the financial participation of the concedent in such forms. However, now that they are expressly mentioned in the legislation as separate instruments, it will help to reduce the grounds for disputes that previously arose in court practice.
With regard to the concedent payment, disputes were related to the terms of the so-called "availability fee" and the risks of reclassification of projects as government contracts, when the concessionaire's investment and operating expenses are fully compensated from the budget (Case No. A40-23141/17). Disputes about the terms and conditions of IHD mainly concerned the possibility of including them in projects with a tariff element (e.g., Case No. A76- 31705/2016) and issues of legal qualification of IHD (Case No. 40-93716/17-151-865).
We assess these amendments as positive and aimed at reducing disputes over the legal qualification of a particular instrument of budget financing in a project - those instruments that were used in practice are now explicitly enshrined in the concession legislation.
The limit on the financial participation of the concedent should be less than the total amount of the concessionaire's expenditures shown in Table 2 below.
Table 2. Concessionaire's costs to be taken into account in calculating the limit on the financial participation of the concedent
With regard to the concedent payment, disputes were related to the terms of the so-called "availability fee" and the risks of reclassification of projects as government contracts, when the concessionaire's investment and operating expenses are fully compensated from the budget (Case No. A40-23141/17). Disputes about the terms and conditions of IHD mainly concerned the possibility of including them in projects with a tariff element (e.g., Case No. A76- 31705/2016) and issues of legal qualification of IHD (Case No. 40-93716/17-151-865).
We assess these amendments as positive and aimed at reducing disputes over the legal qualification of a particular instrument of budget financing in a project - those instruments that were used in practice are now explicitly enshrined in the concession legislation.
The limit on the financial participation of the concedent should be less than the total amount of the concessionaire's expenditures shown in Table 2 below.
Table 2. Concessionaire's costs to be taken into account in calculating the limit on the financial participation of the concedent
The list of the concessionaire's costs is open and may include other costs incurred by the concessionaire in connection with the execution of the concession agreement. We recommend that when forming the financial model of the project and determining the amount of the financial participation of the concedent, all costs incurred by the concessionaire during the term of the project should be taken into account, including a provision for unforeseen costs that the concessionaire may incur due to the occurrence of any risks.
For us, the requirement to limit the amount of the concedent's expenses to be less than the concessionaire's expenses remains ambiguous - in fact, a number of projects in which the return on investment is made at the expense of the budget (e.g., socially oriented industries, free roads) remain blocked in this way.
The solution to this issue will lie in the structuring of concession agreements - either through a minimum ratio of the parties' expenses in the project, or through the division of the commercial component of a particular project between the concessionaire and the concessionaire, or by using another approach formed by the market.
Provision is made for the possibility of financial participation of the concedent in the operation of other property
Previously, the concedent at the operation stage could co-finance the concessionaire's expenses only with respect to the object of the concession agreement. Now, when transferring other property to the concessionaire, the concessionaire will be able to accept expenses, for example, for current and capital repairs that are carried out during the operation phase.
2.Special circumstances clauses have been introduced
The key principle of PPP is that risks are borne by the party that can better manage them. The structuring of conditions on the distribution of risks in projects between the parties is carried out through the so-called special circumstances - conditions that fix what risk is borne by one of the parties.
Adequate risk allocation is a prerequisite for the provision of project financing.
Now PPP legislation explicitly provides for the possibility of including special circumstances in projects and establishes the consequences of their occurrence.
For us, the requirement to limit the amount of the concedent's expenses to be less than the concessionaire's expenses remains ambiguous - in fact, a number of projects in which the return on investment is made at the expense of the budget (e.g., socially oriented industries, free roads) remain blocked in this way.
The solution to this issue will lie in the structuring of concession agreements - either through a minimum ratio of the parties' expenses in the project, or through the division of the commercial component of a particular project between the concessionaire and the concessionaire, or by using another approach formed by the market.
Provision is made for the possibility of financial participation of the concedent in the operation of other property
Previously, the concedent at the operation stage could co-finance the concessionaire's expenses only with respect to the object of the concession agreement. Now, when transferring other property to the concessionaire, the concessionaire will be able to accept expenses, for example, for current and capital repairs that are carried out during the operation phase.
2.Special circumstances clauses have been introduced
The key principle of PPP is that risks are borne by the party that can better manage them. The structuring of conditions on the distribution of risks in projects between the parties is carried out through the so-called special circumstances - conditions that fix what risk is borne by one of the parties.
Adequate risk allocation is a prerequisite for the provision of project financing.
Now PPP legislation explicitly provides for the possibility of including special circumstances in projects and establishes the consequences of their occurrence.
The list of consequences of special circumstances is open and can be regulated in the project agreement. For example, in practice, such consequences also include the suspension of the project implementation period. In this case, the concessionaire/private partner, in the absence of the ability to manage the risk, is not liable for delayed fulfillment of obligations under the agreement.
We assess this amendment as positive, aimed at reducing misunderstandings regarding the qualification of special circumstances, which, among other things, arise at the stage of project approval.
3.Concession fee - an optional condition in the project
Previously, the concession fee was necessarily stipulated in the concession agreement, which did not make sense for a number of projects, so its amount was set as a minimum.
For example, in tariff projects in which the return on investment is made at the expense of the population's fee, the concession fee is included in the population's fee by virtue of the legislation, which actually deprives it of its meaning (as a revenue part of the budget).
In the new version of the Law on Concession Agreements, concession fee has become an optional element, which we assess as a positive amendment.
4.Material terms of the concession agreement may be changed if they do not change the parameters of the financial participation of the concessionaire
Previously, for all regional and municipal projects, changes to the material terms of the concession agreement were subject to agreement with the antimonopoly authority. In order to change them, it was necessary to prove the occurrence of a certain condition from a closed list, which is very limited, so the adjustment of material terms under the agreement was actually unavailable to the parties.
For example, the wording of an material term on the land plot specifying the coordinates of the land plot to be transferred when its unsuitability was revealed in the course of surveys did not allow the parties to change the land plot in the concession agreement, which stopped further implementation of the project.
Now, the Law on Concession Agreements stipulates that it is not required to obtain the consent of the antimonopoly authority to change material terms for municipal and regional concession projects. A change must be agreed only in cases where the changes will result in:
We assess this change as positive - it has become more convenient to manage risks in concession projects and the terms of agreements have become more flexible.
5.The possibility of compensating the initiator's expenses for preparation of documents within the framework of filing a private concession initiative (PCI) has been introduced
The Law on Concession Agreements now provides for the possibility to reimburse the original initiator for the costs of preparing a proposal to conclude a concession agreement if there are alternative applications within the framework of a Private Concession Initiative (PCI) and concluding a concession agreement with an alternative applicant. Such expenses must be reasonable and documented.
The maximum amount of such expenses must be established by the Government of the Russian Federation. The amount, procedure and term of reimbursement of expenses to the initiator shall be established by the tender documentation and the concession agreement.
We assess this amendment as positive with the following reservations:
Nevertheless, the market expected that compensation of expenses for the preparation of the PCI would be mandatory for the concedent or alternative applicant. In the adopted wording of the law, compensation of costs is left at the discretion of the concessionaire, and the proponent has no leverage over it.
6.The region participates in direct agreements with financing organizations for utilities projects
When attracting financing for municipal projects in the utilities sector (water supply and wastewater disposal, heat supply and hot water supply), the constituent entity of the Russian Federation where the project is implemented now also participates in direct agreements with the financing organization.
We assess this amendment as positive for the market - this approach will strengthen the creditworthiness of municipal projects in the utilities sector and provide more guarantees to financing organizations, since the constituent entity of the Russian Federation sets the concessionaire's tariff, approves its investment program and reimburses the concessionaire's lost income and economically justified expenses in accordance with the tariff legislation.
7.Other point amendments
The Law on Concession Agreements introduces the concept of "maintenance" of a facility
This concept is introduced by analogy with the PPP Law, which contains it since the law was adopted in 2015. Maintenance of an object of a concession agreement includes activities aimed at:
The list of activities must be established by the concession agreement.
A register of concession projects has appeared
The Ministry of Economic Development of Russia will maintain such a register on its website. The register will contain information on concession agreements being implemented and realized, as well as other information provided for by the Ministry of Economic Development of Russia in the procedure for keeping the register.
Electronic tenders will be possible
The possibility of holding open tenders in electronic form will be introduced into PPP legislation from March 1, 2024. From January 1, 2026 all open tenders must be held in electronic form.
It is now possible to provide a bank guarantee to secure an application for participation in a tender
Previously, an application for participation in a tender could be secured only by providing a deposit. This approach is not always convenient for investors, as it requires freezing a part of own funds for their placement on the bank account of the tender organizer.
Now PPP legislation provides for the possibility of providing a bank guarantee as an alternative way of securing a tender bid (together with a deposit).
We assess this amendment as positive, aimed at reducing misunderstandings regarding the qualification of special circumstances, which, among other things, arise at the stage of project approval.
3.Concession fee - an optional condition in the project
Previously, the concession fee was necessarily stipulated in the concession agreement, which did not make sense for a number of projects, so its amount was set as a minimum.
For example, in tariff projects in which the return on investment is made at the expense of the population's fee, the concession fee is included in the population's fee by virtue of the legislation, which actually deprives it of its meaning (as a revenue part of the budget).
In the new version of the Law on Concession Agreements, concession fee has become an optional element, which we assess as a positive amendment.
4.Material terms of the concession agreement may be changed if they do not change the parameters of the financial participation of the concessionaire
Previously, for all regional and municipal projects, changes to the material terms of the concession agreement were subject to agreement with the antimonopoly authority. In order to change them, it was necessary to prove the occurrence of a certain condition from a closed list, which is very limited, so the adjustment of material terms under the agreement was actually unavailable to the parties.
For example, the wording of an material term on the land plot specifying the coordinates of the land plot to be transferred when its unsuitability was revealed in the course of surveys did not allow the parties to change the land plot in the concession agreement, which stopped further implementation of the project.
Now, the Law on Concession Agreements stipulates that it is not required to obtain the consent of the antimonopoly authority to change material terms for municipal and regional concession projects. A change must be agreed only in cases where the changes will result in:
- a change in the terms of the financial participation of the concessionaire, and (or)
- a change in the total amount of monetary obligations of the concessionaire, and (or)
- postponing the terms of the financial participation of the concessionaire to an earlier date.
We assess this change as positive - it has become more convenient to manage risks in concession projects and the terms of agreements have become more flexible.
5.The possibility of compensating the initiator's expenses for preparation of documents within the framework of filing a private concession initiative (PCI) has been introduced
The Law on Concession Agreements now provides for the possibility to reimburse the original initiator for the costs of preparing a proposal to conclude a concession agreement if there are alternative applications within the framework of a Private Concession Initiative (PCI) and concluding a concession agreement with an alternative applicant. Such expenses must be reasonable and documented.
The maximum amount of such expenses must be established by the Government of the Russian Federation. The amount, procedure and term of reimbursement of expenses to the initiator shall be established by the tender documentation and the concession agreement.
We assess this amendment as positive with the following reservations:
- the limit on the amount of expenses established by the Government of the Russian Federation will be adequate to the current market practice;
- the criteria for the reasonableness of expenses will also be set by the Russian Government.
Nevertheless, the market expected that compensation of expenses for the preparation of the PCI would be mandatory for the concedent or alternative applicant. In the adopted wording of the law, compensation of costs is left at the discretion of the concessionaire, and the proponent has no leverage over it.
6.The region participates in direct agreements with financing organizations for utilities projects
When attracting financing for municipal projects in the utilities sector (water supply and wastewater disposal, heat supply and hot water supply), the constituent entity of the Russian Federation where the project is implemented now also participates in direct agreements with the financing organization.
We assess this amendment as positive for the market - this approach will strengthen the creditworthiness of municipal projects in the utilities sector and provide more guarantees to financing organizations, since the constituent entity of the Russian Federation sets the concessionaire's tariff, approves its investment program and reimburses the concessionaire's lost income and economically justified expenses in accordance with the tariff legislation.
7.Other point amendments
The Law on Concession Agreements introduces the concept of "maintenance" of a facility
This concept is introduced by analogy with the PPP Law, which contains it since the law was adopted in 2015. Maintenance of an object of a concession agreement includes activities aimed at:
- maintaining the object in a serviceable, safe, suitable for its operation condition,
- realization of current and (or) capital repair of the object.
The list of activities must be established by the concession agreement.
A register of concession projects has appeared
The Ministry of Economic Development of Russia will maintain such a register on its website. The register will contain information on concession agreements being implemented and realized, as well as other information provided for by the Ministry of Economic Development of Russia in the procedure for keeping the register.
Electronic tenders will be possible
The possibility of holding open tenders in electronic form will be introduced into PPP legislation from March 1, 2024. From January 1, 2026 all open tenders must be held in electronic form.
It is now possible to provide a bank guarantee to secure an application for participation in a tender
Previously, an application for participation in a tender could be secured only by providing a deposit. This approach is not always convenient for investors, as it requires freezing a part of own funds for their placement on the bank account of the tender organizer.
Now PPP legislation provides for the possibility of providing a bank guarantee as an alternative way of securing a tender bid (together with a deposit).