PPP in road construction: how to save private investors’ money in case of a project suspension

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PPP in road construction: how to save private investors’ money in case of a project suspension
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Recently we started publication of a series of articles on the problems of public-private partnership mechanisms application in the construction of transport infrastructure objects. We continue this acute topic. Our conversation partner is Nikolai Polyakov, Ph.D. in Economics, A.P., member of Research and development economics chair of St. Petersburg state university.

— Nikolai, not all projects connected with PPP mechanisms are implemented during the construction of transport infrastructure objects. What’s the reason for that?
— I cannot but remember a really dramatic case with Orlovsky tunnel under the Neva, which was to connect Smolnaya and Sverdlovskaya embankments. The decision on the cancellation of its construction was taken when a private company – JSC “Nevskaya concessionary company”, had already spent a lot of money for the implementation of the project. By that time, the company had bought very complex unique equipment: a driving shield, which differed significantly from standard ones used in the construction of metro. And when such an expensive thing had been bought the decision on closing the project was taken. For a private company it was a real tragedy. Besides, this decision hit the whole system of PPP. And I do not know the further fate of the shield.

— But why was the construction of Orlovsky tunnel cancelled?
— The project was cancelled because of its expensive costs. At that time there was Governor’s inspection of all large-scale projects, particularly in the field of construction. The aim of the inspection was to find the ways of optimization for the budget expenses. And the bigger part was financed by the private investor, city funding was also significant. Such inspections as a rule result in reconsideration of the project cost and even its cancellation. So it happened with the tunnel.
The object relevance for the city’s needs must have also played its role. In this sense the Western highspeed diameter is not cheaper than Orlovsky tunnel, and it is also built in the framework of PPP, but it wasn’t cancelled due to its importance for the traffic system of the Northern capital. The PPP system worked here perfectly.

— Perhaps, the thing is that there is no alternative for the Western highspeed diameter which is extremely significant for the transportation system of St. Petersburg. And as far as Orlovsky tunnel is concerned, there is an alternative to building a bridge?
— I agree. The bridge is much cheaper. That’s why such a decision was taken. So, the cost is a very important criterion, but not the only one, defining the sustainability of PPP. Much depends on a current economic situation.
It’s not surprising, that the municipal budget refuses such large-scale expenses during a crisis. But business representatives do not want to take risks investing in such long-term projects. For example, the pay-back term of Orlovsky tunnel and the Western highspeed diameter is about 20 — 30 years.

— Does the PPP system have future in such conditions?
— Of course it does! This mechanism works all over the world very efficiently. The first concessionary projects were implemented in our country in Tsarist times. A number of railroads were built then at the expense of concession agreements.
Today the main hardships for PPP are created by project expenses, their economic constituent. For the system to work it is necessary that all projects should be considered from the point of view of different industries’ development (for example, transportation industry), so that they could get systematic support. And I think it’s better to refuse sole projects as right now.
But when the crisis is over, and the economic conditions are favorable, we’ll return to these projects, including probable participation of western partners.

— What should be done to help businesses not worry about the fate of their money when they enter the projects with PPP?
— Let us consider, who is currently the state’s partner from the part of private business in PPP-projects? As a rule, these are quasi-state-owned structures, organizations in this or that way connected with the authorities and affiliated with their representatives.
For example, a new terminal of “Pulkovo” airport was built in PPP-scheme together with quasi-state bank VTB. This bank’s structures also take part in financing of the Western high speed diameter construction. Such are private partners at present. Others are afraid of entering PPP, being afraid of losing the money they invested if the object is “frozen”, as it was with Orlovsky tunnel.
To overcome this quite understandable fear of potential private partners it is necessary to document more disclosed state and business representatives’ interaction patterns in the new federal law. Not only the responsibility of a private partner should be defined but the possibility of returning the invested money in case the project is cancelled as well.
If these two items are thoroughly spelt out in law and there are precedents of their application, it will be a serious jump start for the whole PPP system development, it will promote successful completion of temporarily-ceased objects and bring about the construction of new ones.

Stanislav Donin