On the Law on Public-Private Partnership

On 1 January 2016, Federal Law No.224-FZ of 13 July 2015 on Public-Private Partnership and Municipal-Private Partnership in the Russian Federation and Amendment of Individual Statutory Acts of the Russian Federation (hereinafter the PPP Law) became effective.

The law in question is a reaction of federal legislators to advanced lawmaking of regions in that field and pursues the following two main goals:

- first, to ensure unified regulation on the territory of the Russian Federation of investment forms of networking between the state and the private sector;
- second, “to lift the existing limitations and expand the available forms of implementation of projects on the basis of principles of public-private partnership”1. It was mentioned among other things that the approved pattern of concession agreements envisaging public ownership of the investment limits considerably the investor’s capacity to attract borrowed funding (apparently, by virtue of pledging that investment).

In substance, an agreement on public–private partnership (PPP) resembles a concession agreement. They both envisage building or reconstruction by a private partner of projects of transport, industrial and communal infrastructure or social services at its own account, as well as their subsequent operation during the entire term of the agreement. The main difference of PPP fr om a concession consists in the fact that the ownership title to the subject of the agreement belongs to the private partner and not the state. At the same time, a PPP agreement may envisage an obligation of a private partner to transfer the project into public ownership upon the expiry of a certain period, but in case of financial investments by a public partner into the project exceeding those of a private partner this condition is to be provided for. As can be seen, the above norm does not prevent privatization of property in which public funds were invested if the volume of such funds is below 50%.  

Another important difference between the PPP Law and the Law on Concession Agreements consists in the fact that a decision on implementation of a PPP project can be taken only in case the above project has advantages as compared to the project which is to be built (upgraded) at the expense of budget funds. A comparative advantage is determined in the Law as “an advantage in utilization of funds of budgets of the budgetary system of the Russian Federation required for implementation of the project over utilization of funds of budgets … for carrying out of a state contract and municipal contract provided that the price of goods, jobs and services, the quantity of goods, the volume of jobs and services, quality of delivered goods, fulfilled jobs and rendered services and other parameters of goods, jobs and services in implementation of the project are equal to the price of goods, jobs and services, quantity of goods, quality of goods, the volume of jobs and services, quality of delivered goods, fulfilled jobs and rendered services and other parameters of goods, jobs and services in implementation of a state contract and municipal contract”.

There are two fundamental disadvantages in the above wording. Firstly, it is not clear why comparison is to be done with the option of utilization of budget funds “for implementation of a state contract and municipal contract”. If projects in social services are meant here, the state contract is normally concluded only on building, while operation of such projects is carried out by a public entity within the frameworks of the state assignment. It is clear that costs at the stage of operation are to be taken into account, too, in order to get an unbiased idea.   

Secondly, one may conclude from the wording in question that in implementation of a PPP project volumes, prices and quality of services rendered by a private partner should not be inferior to respective indicators when services are rendered by public entities. However, in the law there is not only any mention of instruments which ensure compliance with that condition, but the law clearly excludes such compliance. Among the conditions of a PPP agreement, there are no obligations of a private partner as regards maintenance of a certain level of prices on its services (except for cases wh ere price regulation is provided for by the legislation). In addition to the above, a PPP agreement has a limited validity period upon expiry of which any encumbrances imposed on the project cease to exist and it means that utilization of the project for carrying out public functions beyond the period of validity of the agreement is impossible. So, the very structure of PPP excludes existence of a comparative advantage within the meaning of the Law.

From this point of view, the goal which the state can pursue in entering into a PPP agreement as applied to projects of social services is not quite clear. If ensuring of provision of certain services to people is an obligation of the state, it is not acceptable to the latter that there is a lack of control over the terms of provision of such services and the date of termination of such services is specified.   If ensuring of provision of those services to people is not an obligation of the state, it would be logical to permit the private sector to meet the respective demand without participation of the state. With the above taken into account, it would be expedient to exclude projects of social services from the range of projects of PPP agreements.

Simultaneously, it is believed that the law on concession agreements should be amended as to prevent utilization of concession agreements for scaling down by the state of its social obligations which situation is registered in different regions. For example, in the Novosibirsk Region, a transfer to concession of healthcare projects resulted in a reduction of the number of patients receiving medical services on the basis of the mandatory medical insurance system: in maternity clinics the number of patients decreased from 1780 persons to 48 persons a year2, while in dental clinics – from 130,000 persons to 300 persons a year3. In concessionary Moscow-based kindergartens4, nearly one-third of places is paid by parents at the rate which is equal to that charged for children at state-run kindergartens, while two-thirds of places are paid at the rate of Rb40,000=Rb45,000 a month. A similar practice can be found in other regions, too: in Novosibirsk out of 100 places in a concessionary kindergarten only 10 places are budget-funded ones5; in the Blagoveshchensk District of the Amur Region out of 75 places only 15 places are budget-funded; it is to be noted that investment obligations of a private partner are limited to equipment of the building constructed at the expense of budget funds with simple facilities (beds and slides for children)6.

To prevent such practices, it is expedient to introduce in the law on concession agreements a norm under which implementation of such projects should not entail a reduction of volumes of services which are rendered free of charge to people or paid at rates which do not exceed those applied in the budget-funded sector.  

Anna Zolotareva, PhD, Law, Head of the Center for Legal Research, Gaidar Institute and Head of Legislation Expertise Department of the Institute for Applied Economic Research, RANEPA
1 See Explanatory Note to draft Federal Law On the Principles of Public-Private Partnership in the Russian Federation.
2 Concession agreement No.1-02-z of 30.04.2010.
3 Concession agreement No.2-02-z of 30.04.2010.
4 Tender documentation to open tenders for the right to conclude concession agreements on building of projects of non-state pre-school education at the following addresses: 5 City of Moscow, South-Eastern Administrative District, 7th Kozhukhovskaya Street, 18A; City of Moscow, Southern Administrative District, Varshavskoe Shosse, 60, block 2 // http://dgi.mos.ru/torgi/koncessii/
5 Tender documentation to an open tender for the right to conclude  concession agreements in respect of a building (a kindergarten) with a floorspace of 1726.8 sq. meters and another building (warehouse) with a floorspace of 145.4 sq. meters situated at the following address: Novosibirsk, Oktyabrsky District, Zyryanovskaya Street 119/1 // www.torgi.gov.ru Message No.120315/0149892/05.
6 Tender documentation is approved by Resolution No.1497 of 14 July 2015 of the Administration of the Blagoveshchensk District of the Amur Region // www.torgi.gov.ru Message No. 160715/0487124/03