Pulkovo airport: public-private financing takes off in Russia

The expansion of the Pulkovo Airport in St Petersburg has become an important milestone in the history of public-private partnership (PPP) in Russia and the involvement of international financial institutions in project financing in this country.

Pulkovo is a large construction project—more than 3,000 people work on the site building a new terminal for international and domestic passengers and installing equipment for better air traffic safety.

“The overall completion status is about 40%, although the terminal is much more advanced, about 70%, since the opening is in a year’s time,” says Andrea Pal, Deputy General Manager and Chief Financial Officer of Northern Capital Gateway, the consortium operating Pulkovo.

When the terminal is launched, Pulkovo will be capable of servicing 17 million passengers a year. As Ms Pal says, the traffic development at Pulkovo is very strong, and the passenger flow is expected to top 11 million by the end of 2012.

“Our actual capacity is much lower than that, consequently the expansion is more than necessary to offer a good service standard to the customers,” she continues.

The project was launched in 2009, when under the PPP agreement, the City of St. Petersburg awarded a 30-year concession to operate Pulkovo to Northern Capital Gateway, a consortium, which includes Russian VTB Group, German Fraport AG (the owner and operator of Frankfurt Airport), and Greek Capelouzos Group.

“This is the one of the largest PPP projects inRussia,” says Ms Pal.

“For a city, an airport is a gate to the world. It is also a sensitive point when it comes to safety and security. So it is natural to choose a PPP model to make sure that the interests of the city are represented in a business developed and operated by a private investor.”

“For the private partner, the business goal is to achieve, over the concession period, a return on investment, created by a traffic-triggered development plan and an efficient operation.”

The investment programme totals EUR 1.19 billion. Debt financing covers up to 60% of the project’s funding needs. In spring 2010, the consortium and a pool of international and Russian lenders signed an agreement on a package of long-term financing. The remainder is the consortium members’ investment in equity.

NIB’s EUR 50 million loan is part of a 15-year maturity structured financing package allocated by a pool of international lenders, including the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), the Black Sea Trade and Development Bank, the Eurasian Development Bank and Russia’s Vneshekonombank, as well as a group of international commercial banks syndicated by the IFC and the EBRD.

In fact, Pulkovo is the first PPP in airport development in Russia and so far the largest one without government guarantees.

“The fact that a project finance package of this size for an infrastructure project in Russia was signed is a great achievement. This wouldn’t have been possible without the IFIs and NIB,” Ms Pal adds.

Commenting on the role the international financial institutions play in the project, she points out that the funds have been received under a project finance contract with limited recourse.

“In this specific financing model, banks have a higher exposure than in the case of classic loans and, therefore, they have very strong decision rights in the business.”

The concession agreement, the finance package and the Engineering-Procurement-Construction contract, all complying with the international standards, are the first of their kind in Russia. Yet being the first one does not necessarily mean just praise and triumph.

“As pioneers in concessions and project finance, we are facing legal hurdles because this type of project was not really foreseen in Russian legislation. Therefore many of the standard requests of lenders and shareholders cannot be easily reflected,” says Ms Pal. She also mentions red tape as a challenge for any private investor in Russia.

Equipped with extensive top management experience from the Frankfurt hub operator Fraport, Ms Pal sees excellent opportunities in this project for the business partners, who invest their know-how, and for individual members of her team.

“Pulkovo is a very demanding project. To guarantee successful completion we all have to learn a great deal. In my case, the two main challenges are gaining construction experience, especially the contractual part, and acquiring the basics of the Russian language!” she says.