PPP and Utilities: Combination of Problems

Infrastructure of utilities in the country, according to KPI analysts, is worn out, on average, by 60%, while expenditure on modernization, by preliminary estimates, exceeds 9 trillion rubles. In the nearest eight years the state is going to allocate as little as 40 billion. It is evident that attraction of private investors to this sphere on PPP terms is not just attempting to introduce modern mechanisms for the sake of the mechanisms themselves. But are these processes so smooth, and what does the investor risk?

The number of accidents in utilities sphere, according to public bodies, annually increases by 10%; the implemented technologies haven’t mostly been renewed since Khrushchev’s administration times, while some cities (for example, Saratov or St. Petersburg) still have infrastructure of Tsar Russia. Such conditions make it possible to say that the public sector has indeed “matured” to solve this kind of problems together with business, but not alone. Usually the state offers private business to modernize a facility and then, during 20 years (or another established period), to get respective profits.

Another major advantage for the industry in attracting business is the commercial approach: the investor, who has been developing the project, will take care of energy-efficiency of the system during its operation with the aim of getting more profit, which meets state’s general goals.

However, business enters the public-private partnership in utilities projects with low enthusiasm. Firstly, PPP in itself is a mechanism extremely complicated for implementation, and of great importance here (apart from the legal basis, which even in regions leading in PPP still arouses a number of questions) is the public initiator’s experience and abilities in preparing all the documents, developing the project at the pre-design stage, optimally distributing risks among participants. Secondly, the given market is monopolized, and demand for utilities services is in fact inelastic. Nowadays it is rather difficult to imagine several or at least two freely competing water pipes in a city that consumers could choose and then to change if they are not satisfied with the services. At first sight, it is an advantage for business. However, tariffs of such infrastructure companies are issues of macroeconomic and political regulation, which causes additional risks for the project and makes profit forecasting extremely difficult.

For instance, in the city of Krasnodar, typical for Russia in terms of depreciation degree of utility facilities, the private investor “Yugvodokanal” engaged in the large-scale project on water supply system reconstruction (planned investment for the period of 2010-2039 amounts to 7.82 billion rubles). As early as three years after initiation of the project there arose serious problems associated, primarily, with tariffs. Nowadays representatives of companies protect their interests in court, while the authorities speak of possible changes of the concessioner (which, probably, is more a challenge than actual intentions). The matter is that the return of investment is expected through tariffs for services, the cost of which, since the beginning of the project, has not increased, but decreased in 2013. The company, in its turn, suffers great losses.

To solve such problems on the federal level, on January 1, 2014 a new version of the federal law “On Concession Agreements” was passed, which enables establishing tariffs with account for investor’s expenditure and investment return period (i.e. for duration of the concession agreement). Besides, in that very month the order of the Government “On measures to reduce risks of private investment and development of public-private partnership in the utilities field” was signed, which made it possible to recognize mutual obligations of the parties in the concession agreement. In June at the Forum “Utilities – New Quality” Dmitry Medvedev spoke of his intention to instruct the Government to limit growth of citizens’ utility payments to the level not higher than inflation.

Anyway, the utilities system requires huge investment right now, and public and local authorities have nowhere to take it from. The state and business are forced to conform to each other and look for an equilibrium cost of end services, while PPP projects in utilities sector can become quite attractive for private investors. At present, it is political decisions that lie in the basis of risks.