The end of Russian roulette in water

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A new EBRD loan to Rosvodokanal marks a turning point in the way Russian private water contracts are structured. It will force foreign operators to take the Russian market seriously.

The EBRD has agreed to lend RUB1.5 billion (€41 million) to Rosvodokanal (RVK), one of Russia’s largest private water operators.

The loan, extended over 13 years, is the first stage of a two-part financing package which will help fund RUB17 billion (€465 million) of capital expenditure over the next five years in six cities and one region, under existing long-term contracts serving around four million people. The loan is significant because disbursement is contingent on each of the contracts being re-balanced to include service targets and penalties for non- performance, as well as clear dispute resolution clauses. RVK’s existing contracts in Kaluga (covering the cities of Kaluga, Borovsk and Medyn’), Omsk and Tver’ have already been amended to the EBRD’s satisfaction, and the remaining contracts in Barnaul, Orenburg and Tyumen’ are expected to be re-balanced as soon as next month, according to Katya Miroshnik, the EBRD project leader.

Although the EBRD loan is destined for priority investments, Miroshnik told GWI that around 50% of the total capital programme is expected to focus on the rehabilitation of existing infrastructure, with the remainder to be spent on network expansion. The unique dynamic of Russia’s new demography is as apparent in these outlying regions as anywhere in the country – with the population in decline, the construction of new housing stock is driven by the rationalisation of accommodation priorities as families become more affluent. Whereas three generations of the same family might currently share one flat, the demand for more housing will naturally increase in line with levels of disposable income.

The initial RUB1.5 billion tranche is expected to be followed by a second facility later this year. “We envisage the second loan will be a syndicated loan facility based on strengthened contracts,” Thomas Maier, the EBRD’s business group director for infrastructure, told GWI. The deal, which was worked on by law firm White & Case, as well as by consultants from the Urban Institute in Moscow, mirrors that struck with Russian Communal Systems (RKS) earlier this year. In both cases, the re-balancing of contracts not only affects existing arrangements, but all future contracts signed by the two private operators.

“If you have fair and balanced contracts that are enforceable, it makes them much more bankable,” Maier said. “I think we are making a huge difference to the industry, because the two key players [now] play by international rules, and it will make it much more difficult for others to continue with contracts that may not be balanced.”

“Re-balanced and bankable contracts are the sine qua non for banks to commit to supporting operators, and also it’s very important as a signal to the outside world that the Russian operator community wants to run contracts in a way that resembles international practice,” Maier told us.

The flow of new contract signings has been relatively low over the past year, partly due to the big operators consolidating existing portfolios. This will change. “The government has a big investment grant support programme, and they have made the availability of such funding dependent on the various regions broadening PPP penetration,” Maier said.

“Our long-term goal is to foster competition. In particular, we have pushed very hard that the old practice of awarding leases in a non-competitive way is stopped. In a monopoly service such as water, the only way you can generate public good is by competition for contracts, and this is very much why we wanted not only to support private operators and re-balance contracts, but also help the federal authorities to encourage competition.” The EBRD has been working closely with the Federal Anti- Monopoly Service, which has now issued guidelines that require municipalities to tender new contracts competitively.

Local regulators will clearly have a significant role to play in ensuring that contracts are awarded and run properly, but the fact that two of the major players have adopted international standards will inevitably mean that foreign private operators will now take a much closer look at Russia. “The fact that contracts are now led on a competitive basis is not in itself a condition for success, but it’s a contributing factor,” says Maier. “In an ideal world, EBRD would like to see a higher level of foreign operator engagement in the Russian utility sector.”