Leveraging Private Investment in St. Petersburg's Infrastructure

The first impression many air travelers have of St. Petersburg is Terminal 1 of Pulkovo International Airport. Built in 1973, it looks as if it hasn't been touched since—and it hasn't. Yet if the airport is to handle increasing numbers of visitors who can contribute to the city's prosperity, it needs to be expanded. In 2010, private investment started pouring in to transform the aging airport into a modern one.

It is the result of the first international public private partnership (PPP) in Russia to close without government guarantees or financial contribution since the global financial crisis hit. St. Petersburg invited the World Bank to contribute strategic advice over several years as this complex deal between city administration and private sector was shepherded to fruition. It was awarded the title of European and Global PPP deal of the year in 2011 by Infrastructure Investor magazine.

Expanding and upgrading the airport was a long term aim of St. Petersburg as part of its ambitious plan to invest massively in improving roads, seaport, and airport to foster competitiveness, improve economic growth, and increase jobs. Planning started when the city was flushed with funds, but the financial crisis hit hard here, and it became increasingly difficult for the city to finance upgrades alone.

"It was growing so slowly that we would not have been able to build a modern international hub. By bringing in 1.2 billion Euro of investments, we promptly get a hub in the northwest. We can improve service, increase the number of airlines, and as a consequence, profits," says Alexei Chichkanov, St. Petersburg Investment and Strategic Projects Committee Chair.

The International Finance Corporation, part of the World Bank Group, is among those investors.

Passenger traffic is already up from 6 million in 2010 to 8 million in 2011, and is projected to reach 20 million a year by 2025.

At the helm of the plan to build a new terminal, improve runways and service, and increase aircraft parking spaces from 47 to 100, is the Northern Capital Gateway, a consortium that includes the operator of Frankfurt Airport and VTB investment bank. It won a thirty year concession to operate the airport in a competitive bid.

The road to this successful public private partnership was long—and the World Bank team gave city officials financial and strategic advice each step of the way, in a fee for service arrangement. First, a legal framework had to be in place for the partnership to be established, and concessions to become possible.

Legal precedents were decades old, predating the Soviet Union. Few books, none in Russian, detailed how to update the laws.

In addition, the World Bank team guided city officials through all stages of project preparation for this—one of the most ambitious Russian public private partnerships to date. With other prominent international experts, the World Bank was advising the city as they advertised the project internationally, and until private sector financing was secured and construction was ready to begin.

The team also advised on monitoring the airport consortium's operations. It remains involved in other public private partnerships, including the Western High-Speed Diameter, a ring road bypassing the city to reduce congestion, and the Orlovski Tunnel under the Neva River.

Through the process, St. Petersburg has developed expertise in putting together public private partnerships for infrastructure improvements. And it is eager to share its experience with other provinces and regions in Russia.

"We have a team of our own, a team of highly qualified young people who are expert professionals in areas like project financing, legal, and engineering support. We have our own modus operandi, our own style. We have a unique way of packaging projects," says Molchanov.

The World Bank's partnership with St. Petersburg laid the foundation for similar advisory services on public private partnerships in the Russian Federation, and support to St. Petersburg on its transport strategy.