PPPs in Russian Transportation Sector

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  • 1. TRANSPORT INFRASTRUCTURE IN THE RUSSIAN FEDERATION Is Russia Ready for Public-Private Partnerships?

2. Global projected infrastructure investment needs are massive Canada: closing infrastructure gap requires investment 6-10x the level of current annual government spending. Investment needs for urban roads and bridges are $66B over 10 years United States:infrastructure deficit total $40bn a year in roads sector alone. ASCE estimates total investment needs over next 5 years to be $1.6 trillion Australia and New Zealands infrastructure deficits are estimated at $19B and $4B, respectively Canada: $125B US: $1.6T by 2010 California: $500B by 2026 Latin America & Caribbean: $71B MENA: $28B Ireland:$127B Germany: $843B by 2010 Sub-Saharan Africa: $26B India: $250B by 2010 East Asia/Pacific: $178B Russia: $1T by 2020 Australia: $18B NZ: $3.6B Europe: Infrastructure needs for EU run into trillions of dollars. Energy sector alone requires $1.2T over next 20 years. $90B needed in Germany each year India: spends just 6% of GDP on infrastructure compared to Chinas 20%.Developing economies in E. Asia need to invest $165B per years overnext 5 years for electricity, telecom, inter-urban roads, rail, water, and sanitation. This amounts to nearly 6.2% of the GDP for the region. China will account for 80% of regional infrastructure expenditures Source: Deloitte Research, 2008 3. In developing countries, the private sector has long contributed to public infrastructure investment 2008 US$ billions New projects Source: World Bank and PPIAF, PPI Project Database. 4. This has occurred across a diverse range of sectors and geographies Total: US$797.3 billion (2008 US$) Total: US$843.3 billion (2008 US$) 19902000 200108 Source: World Bank and PPIAF, PPI Project Database. 5. What are public-private partnerships?

  • Contractual agreements formed between a government agency and a private sector entity that allows for greater private participation in the delivery of public infrastructure projects
  • PPPs are used around the world to build and upgrade public facilities such as schools, hospitals, roads, waste and water treatment plants and prisons
  • Compared with traditional procurement, the private sector assumes a greater role in the planning, financing, design, construction, operation, and maintenance of public facilities

6. PPPs are unlikely to fully replace traditional financing of infrastructure, but offer several benefits to governments

  • Allow the costs of investment to be spread over the lifetime of the asset
  • Solid track record of on-time, on-budget delivery
  • Transfer certain risks to private sector and provide incentives for assets to be properly maintained
  • Can lower the cost of infrastructure by reducing construction and overall lifecycle costs
  • Encourage strong customer service orientation
  • Enable the public sector to focus on outcome-based public value

7. Various procurement models are employed for PPPs to allocate specific risks NEW PROJECTS EXISTING SERVICES & FACILITIES Design-Build Design-Build- Maintain Design-Build-Operate Design-Build-Operate-Maintain Build-Own-Operate-Transfer Build-Own-Operate Service Contracts Management Contracts Lease Concession Divestiture The government contracts with a private partner to design and build a facility in accordance with set forth requirements. The government assumes responsibility for operations and maintenance after completion. Also known as Build-Transfer-Operate. The private sector designs and builds a facility. Once completed, the title is transferred to the public sector, while the private sector operates the facility for a specified period. The government transfers an asset, either in part or in full, to the private sector. Generally the government will include certain conditions with the sale of the asset to ensure that improvements are made and citizens continue to be served. The government contracts with a private entity to provide services the government previously performed The government grants a private entity exclusive rights to provide, operate, and maintain an asset over a long period in accordance with performance requirements. The public sector retains ownership of the asset, while the operator owns any improvements to the asset. The government grants the right to finance, design, build, operate, and maintain a project to a private entity, which retains ownership. The private entity is not required to transfer the facility back to the government Source: Deloitte Research; National Council for PPPs Public responsibility Private responsibility 8. PPPs can be implemented across a range of infrastructure sectors, with the most mature models in developed markets Source: Deloitte Research, 2008 Sector Transport Water, waste Education Housing Hospitals Defense Prisons Leading practitioners Australia, Canada, France, Greece, Ireland, Italy, NZ, UK, US Australia, France, Ireland, UK, US, Canada Australia, Netherlands, UK, Ireland Netherlands, UK, Ireland Australia, Canada, Portugal, South Africa, UK Australia, Germany, UK, US Australia, France, Germany, UK, US Main PPP models employed DBOM, BOOT, Divestiture DB, DBO, BOOT, Divestiture DB, DBO, DBOM, BOOT, DBFO/M, Integrator DBFM, Joint venture BOO, BOOT, Integrator DBOM, BOO, BOOT, Alliance, Joint venture DB, DBO, BOO, Management contract Challenges

  • Demand uncertainty
  • Supply market constraints
  • Opposition to tolls
  • Transportation network impacts
  • Competing facilities
  • Upgrading costs and flexibility
  • Technological uncertainty
  • High procurement costs
  • Political sensitivity
  • High cost due to uncertainty about alternative revenue streams
  • High procurement costs for small project
  • Uncertainty about future demographic or policy changes
  • Refurbishment costs and flexibility
  • Uncertainty about future demand and revenue streams
  • Joint delivery
  • Uncertainty about future public health care needs
  • High transaction costs in small-scale projects
  • Political sensitivity around privatization concerns
  • Uncertainty about future defense needs
  • Rate of technological change
  • High upfront costs in small-scale projects
  • Securing value for money in noncompetitive situations
  • Political sensitivity
  • Public purpose issues
  • Specifying outcomes

9. Public transportation projects account for a significant share of the worlds projected infrastructure investment needs

  • McKinsey estimated in 2007 that private sector opportunities to invest in public transportation through PPP from 2005-2010 were worth more than $330B
  • Banks, pension funds, and private equity funds are increasingly attracted by the combination of growth, predictable cash flows, and income streams uncorrelated with public equity markets. The value of funds dedicated to infrastructure jumped from $5B in 2004 to $45B in 2007.

Source: McKinsey Quarterly, 2007 10. In developing markets, private investment in transport infrastructure has been at historically high levels, driven by India and China Source: World Bank and PPIAF, PPI Project Database.2008 US$ billions New projects 2008 US$ billions Investment commitments to transport projects with private participation, by country income group, 19902008 Investment commitments to transport projects with private participation in developing countries, by subsector, 19902008 11. Russia has been a leading destination for PPI in the developing world Top 10 by investment in infrastructure projects with private participation in 200108 * Includes investment in projects reaching financial closure in 19902008. Top 10 by new infrastructure projects with private participation in 200108 Note: China and India are classified as lower-middle-income countries by the World Bank, and Brazil and the Russian Federation as upper-middle-income countries. Source: World Bank and PPIAF, PPI Project Database.Country Investment* (2008 US$ billions) Share of total (%) Brazil 111.913.3India 110.213.1Russian Federation 74.78.9China 57.26.8Mexico 49.35.9Turkey 32.03.8Poland 24.82.9Indonesia 22.92.7Nigeria 22.22.6South Africa 21.42.5Total 526.762.5 Country New projects Share of total (%) China 602 30.6 India 232 11.8 Brazil 141 7.2 Russian Federation 56 2.8 Mexico 54 2.7 Nigeria 45 2.3 Colombia 43 2.2 Chile 35 1.8 Indonesia 32 1.6 Malaysia 32 1.6 Total 1,272 64.6 12. But there has been a lack of PPI in Russias transport sector relative to other countries and to other sectors within Russia Source: Primary analysis basedon data from World Bank and PPIAF, PPI Project Database. 13. Russias transport infrastructure, which has suffered from relative neglect over the past twenty years, is being upgraded only slowly

  • Non-pipeline freight turnover was 2,100B ton-km in 2006, of which 90% was by rail
  • Structure of transport system has changed since Soviet times reflecting reduced subsidies and more private cars
    • Public transport carried 21B passengers in 2006 vs. 44B in 2000
  • Railways: 87,000km of track in 2006 (2 ndhighest in world), half of which is electrified
  • Roads: 870,000km (738,000km paved) in 2005
    • Safety record is poor; mortality from road accidents in 2005, 24 per 100,000 people