I went to a conference on PPP yesterday organized by Vnesheconombank (VEB). OK, that’s an inauspicious opening sentence, but stick with me, it was actually very interesting. I came away with two conclusions. Firstly, the Kremlin intends to use PPP as the cornerstone of its very ambitious programme to rebuild Russian infrastructure. Secondly, no one is quite sure what is going on, but everyone is pretending they know.

What is PPP? It’s a fairly new, rather confusing concept, but here’s the basics. It was pioneered by the Conservative government of John Major in Britain in the early 1990s, as a way of introducing private sector efficiency into the public sector. It was sort of the second wave of privatizations, after the first wave of state sell-offs in the 1980s.

With PPPs, local and national government bodies would take services from the state sector and contract them out to private sector companies. A classic example would be a large infrastructure project like a motorway, or a hospital, or a prison. The government would hold a tender for the contract, and the winning private sector bidder would then build the new facility, operate it, and provide it to the state for cash. Thus, for example, a private company would build and maintain a new motorway, then make back its money via tolls.

Typically, the state would hire a financial advisor to hold the tender, then consortia of construction companies and private banks would bid for the tender. For financial advisors, commercial banks and construction companies, it has meant billions of dollars in profits.

The argument in favour of PPPs was firstly, that it introduced private sector efficiency and cost-savings into the public sector, thus saving the state money. Secondly, it meant more public facilities could get built, because you weren’t just using state money, but billions of pounds in private capital as well. Thirdly, it was a better solution than just using private sector money, because the state kept control of nationally strategic assets like prisons, motorways etc. If the private sector companies failed to provide the services stipulated in the contract, they would lose the contract and another private firm would win it.

PPPs were also a better way of securing long-term financing than using purely private money, because private money tended to be short-term and subject to fluctuating business cycles. With PPP, the state provided guarantees to private companies’ debt, thereby enabling the private companies to get longer-term financing than they usually could, which helped support long-term infrastructure projects.

The argument against PPPs was firstly, that private sector companies should not be allowed to run important public services like schools or prisons, because they were only interested in maximizing profit and cutting costs. Secondly, critics argued that the state was a better provider of these services, because it could get cheaper financing. Thirdly, PPP could lead to over-cosy relationships between bureaucrats and private companies (ie bribes) which meant that tender processes were untransparent, and the best company did not always win the contract. Fourthly, critics claimed the government was just using PPPs as a way of hiding the actual cost of its public services programme, as PPP debt did not appear on the state budget sheet, but off balance sheet.

PPP was an invention of the Conservative government, but it was even more enthusiastically taken up by the Labour government, particularly by Gordon Brown at the Treasury. It now provides around 10-15% of Britain’s public services. The treasury claims it has allowed the biggest increase in public services for decades. Critics point to certain high profile failures, such as Railtrack, which went bankrupt and had to be nationalized; the Channel Tunnel, which also went bankrupt; and Wembley Stadium, which looks to be heading into bankruptcy.

Despite the controversy about PPP, it has been exported as a state financing technique all over the world, often by the British private companies which have made the most money through it, such as British financial advisors Ernst & Young and KPMG, and construction companies like Jarvis and Balfour Beatty. In the last ten years, it has been widely used in South Korea, where 149 PPP infrastructure projects have been done; in Chile to build motorways; in the US to build and run prisons and schools; in Germany, Hungary, Japan – all over the world, in fact.

Which brings us to Russia. You can see why PPP would make sense to the Putin government. PPP seems a pragmatic middle way between the full state ownership of the USSR, and the wild privatizations of the 1990s.

The government is very fired up about using it. It passed a PPP law – the law on concessions – last year, and wants to make this year the ‘year of the PPP’.  Yesterday, minister after minister pledged their allegiance to the PPP cause. Alexander Misharin, the deputy minister of transport, said: “One of our main objectives is to promote PPP as a tool to re-build our roads.” The transport ministry has already come up with 12 projects, for which it wants to do tenders in the next three months. As Erik Bugulov, general director of state transport agency RosTransModernizatsia, says: “We don’t have much time.”

Top of the list for projects is the new Moscow-St Petersburg high-speed motorway. Ernst & Young won the contract to advise on the deal. Evgeni Sidorenko, partner at the firm, says the 760km motorway will cost around $15 billion to build. That’s five times the cost of the BTC pipeline. Clearly, it’s a huge project, but the government wants to hold the tender for construction in the next few months, to start building this year. E&Y says they have to rush – the present road is already seriously clogged.  

Other huge infrastructure projects for which the government wants to use PPP this year include a new road to link St Petersburg port with the nearby motorway (at the moment the road goes through the city); a new ring road for Moscow; a new port for St Petersburg; and new ports for Murmansk and Novorissisk.

Then there are the planned PPP energy projects – a new hydroelectric plant built with Russian Aluminium in Krasnoyarsk; and the multi-billion-dollar planned oil pipeline to the Pacific coast.

In fact, everyone was queuing up at the conference for a piece of the PPP action – the deputy chairman of Sberbank invoked PPP in a plea for the state to inject some capital into his bank. We even saw the deputy minister of culture, Dmitry Amunts, saying that PPP should be used to save the Tolstoy estate at Yasnaya Poliana. “PPP is our only hope to protect the cultural heritage of this country”, he said.

It appears PPP has become a catch-all phrase in the Kremlin to describe any public-private partnership. As one visiting PPP banker from London said: “A lot of bureaucrats are name-dropping it, but I don’t think they know what it is. They just want to seem in the know.”

There’s nothing wrong with that, each country uses PPP in a different way. But if the government is serious about attracting large amounts of foreign capital to get these huge infrastructure projects completed, it needs to slow down a little and get the legal framework right. David Webster, head of infrastructure financing at Royal Bank of Scotland, says: “The worst thing would be for the first deals to be bad deals, because then you’ve set a bad precedent.”

PPP seems to have been a success in many countries, but there’ve been many project failures as well. People with experience of PPP projects say success depends on several things – a strong legal environment, transparent tender processes, developed local capital markets, informed bureaucrats, and realistic expectations of the profitability of projects.

The government, they say, need to work on the concessions law a bit longer , train up bureaucrats in PPP (the government says it is already starting special PPP courses at universities, which is encouraging), and make absolutely sure tender processes are transparent. If they’re not, then the coming wave of PPP deals will be as discredited in ten years as the 1990s privatizations are now. And the government needs to be realistic in its time-line. These deals won’t all get done in the next few months. It will take time to get private companies comfortable with working with the state, even on projects in the Moscow region, let alone in Siberia.

At the moment, one of the confusing things about the PPP environment here is the profusion of government bodies claiming responsibility for it. The big sub-text of yesterday’s conference was the organizer VEB’s bid to become the main state development bank, with the Russian Bank of Development and the Russian Export-Import Bank merged into it. Vnesheconombank flexed its powerful connections yesterday, as each state speaker stepped up to pledge his support for VEB’s bid. The deputy central bank governor, Alexei Ulukaev, says its capitalization should be at least $5 billion. Vnesheconombank’s chairman, Vladimir Dmitriev, says that Gref and Kudrin support VEB’s bid too. Putin will decide on the matter in May, but it looks like VEB will be holding a big purse in the coming years.

But then there’s also the investment fund, which has a $2 billion budget, which also plans to be a main organizer of PPP projects. And there’s the special economic zones, the head of which yesterday said new zones would be set up for PPPs all over Russia. Then there’s the special PPP state bodies for transport and other areas. Then there are regional development bodies being set up all over Russia, which also want to work on PPP projects.

What seems to be happening is the very top of the government has said it wants to spend billions of dollars on PPP, and now every bureaucrat down below is lining up to try and get involved. No one is quite sure who will be in charge of the money-flow, or who to apply to for projects. Even the foreign advisors working on some of the biggest PPP projects say they are not quite sure who they should be schmoozing right now. 

Personally, PPP seems a good idea to me, and it has helped a lot more public sector projects get built around the world than would have been built otherwise. But it is a very new technique, that can easily fail if not handled carefully. Russia never likes to do anything slowly, but this is one area where a little prudence, clarity and carefulness at the beginning will make a big difference later on.  

Julian Evans, a British freelance journalist based in Moscow.

April 7, 2006