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ScienceDirect Procedia Engineering 165 (2016) 1380 – 1387

15th International scientific conference “Underground Urbanisation as a Prerequisite for Sustainable Development”

Benefits of public-and-private partnership for the creation of the infrastructure of the urbanized territories in Russia Irina Polyakova a,*, Elena Vasilyeva a a

Moscow State University of Civil Engineering, Yaroslavskoye sh. 26, Moscow, 129337, Russia

Abstract The implementation of infrastructure projects is the task which any state is not allowed to refuse, no matter what is the current condition of its economy. Insufficiently developed infrastructure reduces investment appeal of the urbanized territory, the region and the country as whole, it also reduces their competitiveness in the international markets. Undeveloped infrastructure is also the reason of low-quality life of the population, the high illness rate and death rate. However all the infrastructure projects are so expensive, and the matters of their financing will be the sharpest. In the article the comparative benefits of the mechanism of public-and-private partnership and those of the system of the state order as the alternative options of financing of infrastructure projects in Russia are considered. © 2016Published The Authors. Published by Elsevier Ltd. © 2016 by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license Peer-review under responsibility of the scientific committee of the 15th International scientific conference “Underground (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under scientific committee of the 15th International scientific conference “Underground Urbanisation as a Urbanisation as aresponsibility Prerequisite of forthe Sustainable Development. Prerequisite for Sustainable Development Keywords: urbanized territories, city infrastructure, infrastructure projects, infrastructure facilities, public-and-private partnership, project risks.

1. Introduction The high capital intensity and the long payback periods require the consolidation of forces and resources in the case of implementation of infrastructure projects in the urbanized territories. It is the essence of public-and-private partnership to complete the implementation of a large project by the forces of the single team. The state by the

* Corresponding author. Tel.: +7-499-651-81-82 E-mail address: [email protected]

1877-7058 © 2016 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license

(http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer-review under responsibility of the scientific committee of the 15th International scientific conference “Underground Urbanisation as a Prerequisite for Sustainable Development

doi:10.1016/j.proeng.2016.11.868

Irina Polyakova and Elena Vasilyeva / Procedia Engineering 165 (2016) 1380 – 1387

means of public-and-private partnership can not only successfully realize programmes of the infrastructure modernization of the country, but also noticeably reduce the burden for the budget [6]. The implementation of the Federal Law on public-and-private partnership on the January 1, 2016 allows to choose this scheme of project financing taking into account its opportunities and benefits. While choosing the project implementation option on the principles of public-and-private partnership it is necessary to compare it to the other schemes of financing, first of all to the possibility of implementation by the means of the contractual system which is hereinafter referred to as the state order. 2. Methodology The term "public-and-private partnership" is used in this article in the most extended sense and means any contractual or legal relations between the government and private institutions for the purpose of the improvement and/or expansion of the city infrastructure. That is excepting the contracts concerned the state order (public procurements). The term "state" is used for the designation of a certain level of the public power, responsible for the reforming processes, whether it is the national, regional or municipal level of governing. For the convenience of designation the two parties of the basic project contract is called "concessor" (it is the public sector which includes the central and regional executive bodies, local government bodies and so called "public" bodies and organizations authorized by them) and the project company (it is the private sector). The public-and-private partnership as the approach to the provision of the infrastructure services, is connected with the realities of time and significantly differs from the traditional public procurements [4]. 3. Results The Centre of the development of public-and-private partnership, which is responsible for the standard-and-legal and methodical support of the implementation of the mechanism of public-and-private partnership in the Russian practice, offers the following technique of the assessment of the comparative advantages (Table #1). Table 1. Assessment of comparative advantages of public-and-private partnership and state orders. Principles of the assessment of the budget expenses

Principles of the assessment of risks

The total amount of the project expenses does not depend on the chosen form of financing. That means that the expenses for the creation and maintenance of the facility in the case of public-andprivate partnership and those in the case of public procurement are accepted to be equal according to the data of the financial model. Just the budget share in the financing of these expenses differs.

Risks on the project (probability of the approach of risk events) are estimated in the relation to the project and do not depend on the chosen form of the project development.

When calculating the budgetary funds, expenses during the operational stage are not considered: tax payments for the project, depreciation charges, interest payments for the debt liabilities (return of the credits and loans).

Risks are estimated within the primary integrated groups, these groups of risks and probabilities (ranges) appropriated to them are set standardly.

If the project assumes rendering any paid services to the population in the case of implementation of the agreement, during the procurements it is also necessary to consider the receipt of revenue by the public sector. For both public-and-private partnership and for procurements the cost of financing attraction for the project, depending on the sources and the structure of such financing differ (concerning the discount rate).

In the case of the comparative risks assessment only the distribution of risks between the parties matters, in procurements all the revealed risks are born by the public sector.

Ranges of probabilities were appropriated to the integrated groups according to the following principle – the less operated and predictable the risk event the higher the applied probability of risk is. The ranges of probabilistic deviations received on the basis of data on the actual levels of different types of risk are presented in Table # 2.

The appropriated probable deviations for the types of risks according to the Centre of development of public-andprivate partnership are given further.

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Irina Polyakova and Elena Vasilyeva / Procedia Engineering 165 (2016) 1380 – 1387 Table 2. Appropriated probable deviations. №

Types of risks

The corresponding items of the project expenditure (receipts)

Probable deviations

1

Risks of the creation of the facility

Cost of construction, reconstruction, modernization of the facility, etc.

[5%; 12%]

2

Risks of design and preparatory activities

Expenses of the preinvestment project stage, including: expenses on preparation, redemption of the construction site, etc.

[7%; 15%]

3

Risks of the facility maintenance

Expenses on the maintenance of the facility

[15%; 25%]

4

Risks of obtaining income from the use of the facility

Revenue from the paid services for the population equal to the revenue from sales of paid services (goods, works) for the population within the project in the form of public-and-private partnership according to the forecast report on the financial result.

[20%; 40%]

5

Other risks

Other risks including those connected with the loss of the facility, political events which have not been considered as the defined types of risks and so on.

[5%; 10%]

4. Discussion In our opinion, the principle of equality of the total amount of project costs regardless to the chosen scheme of financing is not true. In the case when the project is developed through the state order, the project expenses will consist of the discounted costs of the budget funds without the receipts for the implementation of the public (municipal) contract (Eso), as well as of the liabilities of public body during the implementation of the public (municipal) contract in case of risks (Dso). If the project is developed on the principles of public-and-private partnership, we should consider the similar discounted costs of the budgetary funds without the receipts in the case of public-and-private partnership (municipal-and-private partnership) - Eppp, as well as the liabilities of the public party of the project of public-andprivate partnership (municipal-and-private partnership) in the case of risks of - Eppp. The comparison of the two options of financing should be completed by the means of coefficient К: ‫ ܭ‬ൌͳെ

ா௣ೞ೛೛ ା஽೛೛೛ ாೞ೚ ା஽ೞ೚

൒ ͲǤ

(1)

Components Dppp and Dso being equal, that does not contradict the offered methodology, expenses of the budgetary funds of Eso is a priory larger, than Eppp expenses. The impossibility of providing the single discount rate during projects financing also raises some doubts. According to the world practice of public-and-private partnership and according to the recommendations of the leading experts in this field, the financial intermediation is necessary for the development of projects of public-andprivate partnership, especially during the initial stage, keeping in mind that the practice of public-and-private partnership in the Russian economy is still at this stage. The financial intermediation can be considered as one of the measures which the state can undertake for the improvement of the financial climate. The adoption of law on public-and-private partnership at the federal level has expanded the possibilities of application of the regional laws on public-and-private partnership which were developed and are used to some extent in all the territorial subjects of the Russian Federation [8]. The possibilities of the use of public-and-private partnership are significantly expanded: from their traditional application in the sphere of transport infrastructure (first of all the highway construction), the regional authorities and enterprises have pass to the health sector [9; 10; 11]. The authors of the article are reviewing the specific example – the project of the creation and maintenance of the Leningrad regional medical Center of rehabilitation. That project is supposed to be realized on the principles of the concessionary agreement. The Leningrad region acts as the concessor, and the special project commission acts as the concessionary. The reconstruction will be


complete in 4 years (from 2016 to 2020), and the maintenance and services rendering is supposed to continue till 2042. The comparison of the expenses of budgetary funds under the particular items for the project actions, the expenses on reconstruction and maintenance of the facilities during comparison of the two options of the development (public-and-private partnership and state order), is not of any interest as the share of budgetary funds in the second option will be naturally higher. But as for the comparison of risks, it is worth closer consideration. It is about the risks accepted by public partners. Among all the known risks, which are possible in the case of projects development on the base of public-and-private partnership and the state order, we will exclude political, currency, legal risks as not presenting any essential value for the project. For the projects of the regional level the most important risks are: x - risks of the construction incomplete in time; x - operational risk; x - financial risk; x - risk of demand [1; 5]; x - environmental and social risk [3]. Risk of the construction incomplete in time is the most expensive among the project risks. The risk of failure to complete the construction in time includes: x - the completion of the requirements for the proper quality of project works; x - nature of the used technology and the availability of the equipment and materials, including transportation, import restrictions, pricing, the services necessary for the construction, financing costs and administrative costs; x - unforeseen events or conditions, such as atmospheric and tectonic ones; x - the availability of labor force and materials, possibility of providing the skilled labor force and materials, the degree of the need for invitation of foreign specialists and the need of import of materials, visas and permissions for such import, and also the restrictions set by the local labour law (including – working hours and duration of vacation); x - the availability of infrastructure, for example, water supply, sewerage and electric power, and also the availability of roads, railways and air traffic; x - the prospect of completion of works considering adaptation of the construction technologies to the climatic conditions, time required coordination, coordination of subcontractors and commissioning. The risk of failure to complete the construction in time is usually assigned by the project company to the civil engineering contractor. The risk of default on liabilities is the probability of approach of the event, when the created facility appears to be incapable to provide services of the stipulated quality within the fixed terms. The following reasons can exist for that: x - mistakes in the facility design; x - the environmental problems interfering maintenance of the facility; x - the use of inappropriate technology; x - inadequate maintenance of the facility; x - inappropriate quality of the used raw materials, any inadequate method of production, shipment of finished goods or the use of services within the project. In the conditions of the operational risk the project company should manage the project properly for the observance of requirements of the legislation, permissions and coordination, it also should avoid causing damage to the projector, to the location of the project development, to the infrastructure structures situated nearby the real estate assets connected with the project. The operational risk includes: x - the risk of detection of defects of designing of the equipment or materials after the termination of the warranty period, provided by the civil engineering contractor; x - the availability of labor force and materials, their cost, the opportunity to involve skilled stuff from the local market of work, the degree of need in foreign labour power and materials, receipt of visas and licenses to such import and restrictions, set by the local labour law;

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x

- the adjustments of operational requirements owing to changes of the legislation, standards or other conditions; x - proper maintenance of the project and the cost of replacement of the failing assets and carrying out capital repairs; x - the presence of the experienced managers interested in the work within the project during all the term of its development; x - the plan of maintenance and in this aspect the corresponding accounting of the buyer of future products, features of the country, in which the project is being developed, the labour law, operational and technical requirements to the project; x - creditors can demand that the project company signed separate contracts on the supply of raw materials, for example, of fuel, electric power, chemical reagents or other resources or services, for example, such as removal of slime or ashes. It is necessary, when works within the project are require some raw materials, and the market of such materials is insufficiently flexible, or its future stability causes concern. The financial risk includes the reliability of sources of financing. attracted for the project development, nature of creditors and borrowers and the restrictions, imposed by the financial markets during the financial transactions being completed and during the project lifecycle. This risk can lead to the value addition of financing and exert fundamental impact on financial viability of the project. The projects of public-and-private partnership are sensitive to the following factors: x - loan repayment period (large projects require usually the credit for 12-20 years), and also the existence of an opportunity to refinance the short-term loans; x - the opportunity not to make interest payment during the grace period (adding them to the main amount of debt), sufficient to solve the problem of deficit of the income during the construction period; x - interest rates; x - exchange rate fluctuations (if the currency of the income differs from the debt currency – than the risk of changes of currency rates arises); x - hedging cost (if interest, currency and other risks are eliminated by hedging); x - the availability of possibilities of financing of working capital for covering of short-term requirements; x - credit risk of the key participants, including any available guarantees of the third parties, bonds and the liabilities. The risk of the project financing is mostly managed by the project company together with the creditors. Financing cost will probably remain rather uncertain till the financial closing as the project company will hardly manage to implement some funding mechanism by that moment. As a rule, the risk of the change in price of the project between the date of submission of the tender offer and the date of financial closing is shared between the project company and the concessor. The risk of demand is meant to be the danger of the situation when the services or products made by the infrastructure facility will not be demanded in the planned volume. The forecast level of demand can be unachieved: for example, less people will use the paid highway, the energy made by power plant will be consumed in smaller amount, the airport will serve smaller number of planes and passengers. That can be caused, for example, by the decrease in demand, by the buyers' inability to pay for services and products, by technical or practical difficulties with the delivery of products, and also by the public reaction leading to the boycott of products. Forecasts of the future demand are important for the investors who are able: x - to review the demand pattern on the future products of the project concerning the degree of the project risk, which the project company can undertake, and the company's capability to influence the demand; x - to study demand forecasts and information on whether consumers were ready to pay in the past on certain rates and how timely they did it; x - to analyze the prospects of growth, demographic changes, applicable fares and forecasts of the relation of consumers for payment of the increased rates; x - to estimate the forecasts of future fluctuations of indexes and their ratio with real costs, including operating expenses, finance costs, the needs for investments and other similar costs (if the rates are based on any indexes);

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x - to study the degree in which consumer rates cover production costs and depreciation, etc. As a rule, the private sector renders retail infrastructure services to the consumers better. Therefore, the concessor can demand that the project company should bore some part of risk of demand to stimulate the project company to the implementation of innovations and to the improvement of quality of services rendered [1; 5]. Ecological and social risks arise because the nature protection and the existing social laws and standards impose certain restrictions for the project. Costs for their observance can be essential and they should be distributed between the project company and the concessor. So, for the involvement of any international creditors, in particular the international financial institutions, the project should observe the minimum ecological and social requirements, which in some cases are more strict than those, established by the local legislation. [3]. Usually, the infrastructure projects make important impact on local communities and quality of life, particularly in the case of provision of utilities, for example, water-, power- projects and projects which are intensively using land resources, as paid highways do. The impact of the project on the consumers and civil society in general can lead to the protests from local population, which are capable to delay the project development, to increase the realization value and to affect the negatively viability of the project [3]. This social risk should be one of the priorities in the bank project appraisal which is carried out by the creditor though it happens infrequently. Creditors and the project company often address the concessor. The concessor, in turn, can underestimate its value, as the danger of emergence of social risk for the state-owned companies is less painful, than for private ones. (Usually it is easier for consumers to make claims to the private companies, than to the public ones. Therefore the last are probably not so sensitive to the social risk). The concessor can have no experience in the determination of the impact of social risk on private investors, and all the parties can be not ready to the consequences of this risk. According to the methodology offered by the Centre of public-and-private partnership and also taking into account the probable deviations (Table # 2) during the development of the project on the principles of public-andprivate partnership (PPP) and on the base of the state order (SO), the risks look as follows (Table # 3): Table 3. Calculation of indicators of the comparative advantage according to risks. №

The indicators compared

1

Risks of design and preparatory activities:

2

3

Deviations

PPP

SO

- risk of the cost rise;

10%

7

7

- risk of the cost acceptance.

-

0

7

-

7

0

Risks of the facility creation:

10%

0

357

- risk of rise of the cost of the facility creation.

-

0

357

Risks of the facility maintenance:

15%

184

2668

- general risks of rise in price of maintenance;

-

0

2668

-

184

-

Risk of obtaining income from the facility:

25%

3976

5301

- general downside risks of the income from the facility (incl.uding rate, amount of services).

-

3976

5301

4167

8333

963

2107

- risk of growth of tax assignments (for 20% of the plan on average).

4

5

The value of the risks accepted by the public partner

6

The discounted value of the risks accepted by the public partner.

Thus, the comparison of risks for the two schemes of financing obviously testifies the benefit of the mechanism of public-and-private partnership [12; 13].

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5. Conclusion Considering public-and-private partnership in the context of the Russian economy development as well as the current macroeconomic tendencies it is possible to summarize the following. Most of concessionaries (and since 2016 the private partners as well) are waiting for some comfortable conditions for financing on the one hand, and for the regulatory policy which will allow "to play" with the state according to any clear rules on the other hand. This process is taking place against the background of general decrease in the public investments in the infrastructure field of at least 10% and in the conditions of the reducing access to investments because of the imposition of sanctions concerning the leading Russian financial institutions [7]. In this regard, in the conditions of limited budget resources the public-and-private partnership becomes one of the tools which allows to find the balance of interests of private and public partners in the sake of the implementation of investments in the field of infrastructure of the urbanized territories at the expense of some internal allowances That provides some growth of the Russian economy in the current conditions. It is necessary to find any points of the use of the mechanism of public-and-private partnership in the Russian market, so that after the stabilization of the country’s economy it will allow to provide the essential increase in the number of projects, the increase in the foreign investors' interest in the Russian infrastructure and the infrastructure companies. That in turn will allow to provide the following favorable consequences: the increase in productivity of labour at the created infrastructure facilities, the development of the competition in the infrastructure market, the expansion of the access to labour force (the creation of new workplaces), the growth of the share of investments in national and regional GDP, the forward development of the territories and the increase in level of living of the population of the urbanized territories due to the high-quality services rendered by the infrastructure facilities being created. References [1] Andres, Foster, Guasch and Haven, The Impact of Private Sector Participation in Infrastructure: Lights, Shadows, and the Road Ahead. World Bank, 2009. [2] Calderon and Server, “The Effects of Infrastructure Development on Growth and Income Distribution”. Policy Research Working Paper. World Bank. 2004. [3] Delmon, Implementing Social Policy into Contracts for the Provision of Utility Services, in Dani, Kessler and Sclar eds., Making Connections: Putting Social Policy at the Heart of Infrastructure Development, 2007. [4] Delmon, Understanding options for private participation in infrastructure: Seeing the forest for the trees: PPP, PSP, DBFO, concession, lease,World Bank, 2010. [5] Gassner, Popov and Pushak, “Does the Private Sector Deliver on its Promises? Evidence from a global study in water and electricity distribution”, World Bank, 2007. Information on www.ppiafdev.org [6] Infrastructure at the Crossroads: Lessons learned from 20 years of World Bank experience, World Bank, 200 6; Infrastructure and the World Bank, 2005. [7] Infrastructure in Russia, Investments can’t be increased, Gasprombank company review, 2015. [8] I.S. Polyakova, E.Yu Chibisova. Implementation of the projects of public-and-private partnership in the field of infrastructure, Journal of Economy and Interpreneurship. 5(70) (2016) 579-582. [9] I.S. Polyakova Projects of public-and-private partnership: what will be the yield in the sphere? The best examples of the infrastructure projects development in the public transport sphere, Transport in Russia, 13.08.2015. Information on http://www.transportrussia.ru/finansy.investitsii.-nalogi/gchp-proekty-chto-prorastet-na-pole-vzaimodeystviya.html [10] I.S. Polyakova, Innovation and public-and-private partnership – the key factors of the development of the transport industry, Transport in Russia, 13.12.2013. Information on http://www.transportrussia.ru/finansy.-investitsii.-nalogi/bazovyy-element.html [11] I.S. Polyakova, The formation of the public-and-private partnership mechanism during the infrastructure projects development, MSUCE Bulletin. 6 (2011) 86-89. [12] Sustainable Infrastructure Action Plan FY 09-111. World Bank, 2008. [13] Willoughby, Infrastructure and the Millennium Development Goals, 2, October 2004. Information on http://www.world.worldbank.org [14] N.G. Verstina, E.M. Akimova, T.N. Kisel, N.N. Taskaeva, Organizational and Economic Mechanism of Integration Restructurization of State-Owned Enterprises in Russia, Asian Social Science, 2015. [15] N.G. Verstina, T.N. Kisel, N.N. Taskaeva, E.Y. Chibisova, Integration of the state-owned enterprises in Russia, Life Science Journal. 8 (2014) 326-330. [16] N.G. Verstina, N.N. Taskaeva, T.N. Kissel, E.M., Akimova, A.V. Fedosina, Managing to provide the building industry of a megalopolis with material resources on the basis of balance method, International Journal of Applied Engineering Research. 10(20) (2015 ) 41156 – 41163.

Irina Polyakova and Elena Vasilyeva / Procedia Engineering 165 (2016) 1380 – 1387 [17] V.S. Morozov, N.N. Taskaeva, Basic market factors affecting innovative activities, Journal of Internet Banking and Commerce. 21(S4) (2016) 20. [18] V.S. Morozov, N.N. Taskaeva, Innovative solutions in the social sector of the Russian Federation, Man in India. 96 (7) (2016) 2009-2023. [19] T.K. Miroshnikov, N.N. Taskaeva, Economic Efficiency of Innovative Materials for Sectors of Economy, MATEC Web of Conferences. 73 (2016).

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