VTB Capital was the lead equity and lending investor on the recently closed St Petersburg Western High Speed Diameter toll road project with a total investment value of US$6.4bn making this project the largest toll road deal in the world. TFI-News met with Oleg Pankratov, Head of Infrastructure Capital at VTB Capital to discuss the deal and its significance for the Russian PPP market.
INTERVIEWER: The recent financial close of the Saint-Petersburg Western High-Speed Diameter toll road project provides a new benchmark for the Russian PPP market. TFI News met Oleg Pankratov, head of Infrastructure Capital of VTB Capital to discuss the deal and implications for future Russian PPPs. I asked Oleg to give an overview of the project and its financing structure.
OLEG PANKRATOV: Western High-Speed Diameter is actually the world’s largest PPP project in the toll road sector, there hasn’t been anything which is bigger than that so far, the total investment in the project is RUR 206 bn, which is approximately USD 7 bn. The project consists of three sections: the northern, the southern and the central section. The central section is the full responsibility of Northern Capital Highway, the consortium, formed in VTB Capital as the lead investor and Gazprombank, which is another Russian bank and a minority investor in the project. So, as I said, the central sector needs to be built by this consortium, the total investment into the central section will represent RUR 120 billion, which will be funded by the state grant of approximately RUR 51 billion. The rest will be funded by a senior loan of RUR 60 billion, which we signed last week, and RUR 10 billion of equity contribution by the shareholders.
INTERVIEWER: In terms of traffic risk, the concession takes the full traffic risk, base payments for the toll road?
OLEG PANKRATOV: Yes, there is something we call the minimum traffic revenue guarantee, which is provided by the city of Saint-Petersburg. Basically, once the central section is constructed, the consortium will operate all the three sections, the northern, the central and the southern as one toll road and will be collecting the tolls. If the revenue of the project is less than approximately RUR 9,7 billion a year, then the city will pay up the difference. If the revenue exceeds RUR 9,7 billion, then the revenues are shared between the company and the city of Saint-Petersburg, with the city getting 90% of this extra income, and the concession getting 10%. So, essentially, the consortium is to a large extent sheltered from the traffic risk, but does participate in some of the upside.
INTERVIEWER: Looking at the project coming to market, what’s the current activity in terms of new toll roads and airport activity, what investment could be there for investors to invest in?
OLEG PANKRATOV: Well, I think, the most recent development is the announcement at the Saint-Petersburg Forum of the tender to build and operate the northern section of the St. Petersburg-Moscow highway. It’s already started from Moscow side, but now they are starting it from St. Petersburg side and gradually they will be letting out those concessions for various sections of this road with the view of fully reconstructing it to a fully modern toll highway over time. So, that would be quite interesting, that’s something we would as an investor and as a lender would be very interested in to support. Russia is actually embarking on a huge program of the toll road construction and modernization, so this one, the St. Petersburg-Moscow, is just the first one, but there will be more coming, they will come in different forms, some of them will be done as availability payment, the others will be done as direct tolls. Some of them will be done under this minimum revenue guarantee scheme, but we will also be operating contracts, so there will be a variety of the ways the state will interact with the private investors. And in terms of the interest, we see a lot of interest, first of all, of foreign industrial players, who are quite interested to participate, and also domestic financial investors like ourselves, like Russian pension funds, they are quite keen. So, you know, we are seeing the market being born, and we are basically seeing quite a bit of interest.
INTERVIEWER: Looking at the debt market, equity, you see yourselves and funds, such as the Macquarie Renaissance Capital fund, are you seeing more interest now from other infrastructure funds, moving into the Russian market to invest in?
OLEG PANKRATOV: Well, I think the way that the infrastructure funds are set up, normally they’d have some very small allocations dedicated to, maybe, Eastern Europe and emerging markets, and their main investment thesis is to invest into Western-European or other developed markets. So, we don’t see them coming into Russia as much as the special fund you mentioned, Macquarie Renaissance fund, which the fund which is raised specifically to invest in Russia and former Soviet Union countries. Obviously, we are the second largest bank and largest investment bank in the region, so of course, we are very keen to look into infrastructure developments, and while so are the other Russian large financial institutions like Gazprombank, Sberbank increasingly. We are partners with Gazprombank, Sberbank was one of our competitors on the Western High-Speed Diameter at the tender stage. So, certainly, there is quite a bit, quite a lot of interest from the specialized players, I think, from non-specialized players, people who focus on infrastructure, but maybe focus on Western Europe, we don’t see them moving into Russia as much, because these are small allocations, and those deals, they are taking time and they are taking a lot of attention.
INTERVIEWER: And do you see the role of IFI, such as the EBRD, IFC, NIB as essential to the Russian market?
OLEG PANKRATOV: It’s certainly very helpful. Western High-Speed Diameter is our second large infrastructure investment after the Pulkovo airport, which is the airport of Saint-Petersburg and third largest airport in Russia. In both those transactions we had EBRD participating on the lending side, with the airport we also have the support of IFC and the other multinationals. So yes, they are very helpful. The big issue which will be facing Russian infrastructure, and I would not say it’s a big issue, it’s just the nature of the market. The international airports obviously have a lot of foreign currency revenues, so we can attract international lenders to lend to us, because we can easily afford repaying in foreign currency, because we collect from the foreign airlines. With the internal toll roads, for example, like the Western High-Speed Diameter, being the toll road in the city of Saint-Petersburg, the tolls will be collected in roubles, so naturally the revenues of the project are in roubles. Actually, rouble financing is the best possible financing you can get, and then you come across a situation where rouble liquidity of the foreign banks is very much limited, and then you do have to work more with the Russian financial institutions. But Vnesheconombank, the Russian development bank, has been instrumental in both of our large transactions. They’ve taken RUR 25 bn take in the debt of the Western High-Speed Diameter, and obviously they have large rouble liquidity, and they dedicate it to invest in the sector. So, we certainly would see them being very actively involved. The multinationals- yes, of course, we value their contribution, not only as the lender but also in their know-how, in their environmental standards, environmental reports they do. But I think, what the limiting factor is, it’s obviously the foreign currency risk.
INTERVIEWER: In terms of international bidders looking into Russian market, do you still see high interest from the Spanish project sponsors and the French and German construction companies?
OLEG PANKRATOV: Yes, we do. We do see a lot from that side, the international, certainly, construction companies are very interested. The toll road operators are quite interested to participate, and that interest would continue. Pretty much all of them, I think, would be quite interested to come into the Russian market. I think the big issue for the international operators would be to actually learn how to operate in the Russian environment. What is very interesting for the Western High-Speed Diameter, we’ve actually spoken to various international operators, but at the end of the day we’ve decided that actually we’d be better off operating this toll road ourselves. And it’s not, you know, it’s 46 kilometers, it’s not large. The reason we came to that conclusion is because the, kind of, sharing the risk with an international operator, who hasn’t actually operated in the Russian environment, would cost you quite a lot of money. And we’ve decided that we’d be better off spending that differential by essentially purchasing that expertise, by hiring the right consultants, by creating the right structure. For example, with the Western High-Speed there will be, we will be building our own, what we call, mechanical bases, where we would park the trucks, park the machinery, necessary, for example, for cleaning the snow from the road, we will be building the snow melters in addition to the snow melters which exist in the city. So we will have our own capacity to melt the excess snow. And that’s to a certain extent unique, that’s not something a Spanish operator or a Portuguese operator are used to dealing with, and whilst it’s not a new technology, and to a certain extent it’s quite basic, but we would need to operate to the Russian standards, and those standards are established for a long time, and they need to be adhered to.
INTERVIEWER: And looking ahead, do you see the main area for investors being in the greenfield sector, or do you see state assets being privatized?
OLEG PANKRATOV: Both would be happening, I think. I agree, there will be quite a lot of new construction, that’s for sure, but you know, for example, if you talk about Moscow or St. Petersburg, there is an existing road, so we are talking about expanding it, to turn it into a toll road. So to a certain extent it is sort of a brownfield transaction. Russia does need new roads, Russia needs the widening of the roads, so I think yes, it will be a combination. In terms of the state assets, in the airport sector, actually, if you look at the top-10 airports, while some of them are still in the state’s hands, but quite a few have gone through either PPP route or have been privatized. So in that sense yes, there is still room to see more privatizations, more reconstructions there for the PPP, but not as much in the top-10, but probably in the top-20. But in any case, I think, all those airports will be interesting both for international and domestic Russian investors. The growth is phenomenal, the propensity to fly is growing, it’s a big country and we do need great infrastructure both in airport and in toll road sector. So I think, to answer your question, yes, it will be a combination and we will see both.
INTERVIEWER: All right, thank you very much.
OLEG PANKRATOV: Thank you.