The enchanting city of Saint Petersburg, Russia, boasts the canals of Venice, the cathedrals of Paris, the architecture of Stockholm, and the non-stop festival atmosphere of white nights in July and August. As Russia’s second city, with around 4 million people and a bustling economy, it is also becoming a global business leader, and many have watched with great interest during the past several years as the federal government started efforts to implement PPPs. Saint Petersburg has now closed five projects, and several more are in process. It has not been easy; the city has learned hard-won lessons along the way, including:
Lesson 1: Start with the basics.
The city started with projects—very big, very bold projects, like a €6 billion toll road and a €1 billion tunnel, followed by a €1 billion light rail line and a €1.2 billion airport expansion. The toll road and tunnel came to bid in late 2008—leading to Lesson 1a: Timing is everything. But rather than get discouraged, the city restructured the tunnel, flipping it around so that the concessionaire finalized the design first, thereby delaying the search for financing until the markets could recover. The toll road bid process was cancelled and the project broken up (more on this later). The light rail project was also restructured to fit with evolving ridership in the city. The airport, the last project to be launched, was the first to reach financial close, so here we simply note that hard currency revenues and an existing asset and revenue stream are convenient advantages when financial markets are lean.
Lesson 1b: Roll with the punches.
Lesson 2: Maintain the vision while remaining practical.
Without distracting from these strategic projects, the city looked forward, to a large portfolio of PPP projects, and began creating a PPP framework. It passed a municipal law on PPPs and created a central unit to capture lessons learned. As teams gained experience in transaction procurement and closure, they were moved on to the next project. While this is an effective way to use the skills developed among the deal teams, it made it difficult to empower the central PPP unit, which did not have its own transaction-tested validation.
The city allocated a PPP project to the central PPP unit to implement directly. This distracted the central PPP unit from its other functions of developing standard practices and other commodification. But it was an essential capacity building exercise and gave the PPP unit needed gravitas.
Lesson 3: Seek financing where it is most attractive; avoid the myopia of normalcy.
As part of the federal government’s effort to encourage PPPs, the Investment Fund was created, providing grants for strategic PPP projects to make them more financially viable. (This mechanism is similar to India’s viability gap fund and the U.K.’s PFI credits). The city is one of the few entities to access the Investment Fund (for the toll road and the tunnel), due to its proactive approach. When the airport came up for financing, the city looked to allies in IFC and the European Bank for Reconstruction and Development, as well as Russian banks like Vnesheconombank (VEB) and VTB.
When the toll road hit the wall of the financial crisis, the city got creative, using the Investment Fund, issuing city infrastructure bonds backed by federal guarantees to fund part of the road, and looking to Russian banks to finance the PPP portion. Some suggest that the city should have sought international financing, but the continuing soft international financial markets, the bitter pill of foreign exchange risk, and the success of Saint Petersburg’s neighbors in India with local financing look to have proven them right.