Decree of the Federal Antimonopoly Service for the Volgo-Vyatskiy Region as of 02.07.2013, case No. А28- 10757/2012

The Decree of the FAS for the Volgo- Vyatskiy Region as of 02.07.2013 issued for case No. A28-10757/2012 (hereinafter – the "Decree") describes correlation between PPP laws adopted by Russian federal subjects and public procurement laws.

Public Road and Transportation Department for the Kirov District (hereinafter – the "applicant") has applied to the Arbitrazh Court for the Kirov District seeking the invalidation of a judgement issued by the Federal Antimonopoly Service Department for the Kirov District (hereinafter – the "FASD").

The applicant conducted, in accordance with the Kirov District Law No. № 529-ZO "On Participation of the Kirov District in PPP Projects", as of 04.06.2010 (hereinafter – the "Law No. 529-ZO"), a tender for a repair works contract in relation to Kirov District regional and intermunicipal public roads and their engineering structures. Under the law, Kirov District PPP participation options included signing a contract under a long-term special purpose programme or other regulations of the federal subject providing payment by instalments in relation to the real estate owned by the Kirov District. Following the opening of bid envelopes the tender was declared void and the contract was awarded to the sole bidder.

The FASD examined the tender procedure and resolved that there was a breach of the Federal Law 135-FZ "On Protection of Competition", as of 26.07.2006 (hereinafter – the "Competition Law") since, in the opinion of the FASD, the tender should have been conducted under the Federal Law No. 94-FZ "On Placement of Orders to Supply Goods, Carry out Works and Render Services for State and Municipal Needs" as of 21.07.2005 (hereinafter – the "Law No. 94-FZ"). The breach occurred due to restriction of business entities' rights to participate in the tender, to be informed of the tender process and to challenge tender results.

At the moment PPP agreements are not regulated on the federal level, draft Federal Law "On Basic Concepts of a Public Private Partnership in the Russian Federation" that brings some certainty into this field is subject to the second reading by Russian State Duma. Russian Federal Subjects adopt their own laws regulating such relationships, however, their application involves certain legal risks. In connection with the Decree there risks relate to a potential liability to comply with the Law No. 94-FZ.

The current legislation does not contain rules to classify application fileds of the Law No. 94-FZ and PPP laws adopted by the federal subjects. Moreover, the legislation does not provide any difference between application fields of these laws and application fields of the Federal Law № 115-FZ "On Concession Agreements", as of 21.07.2005. In such circumstances federal subjects' laws can contain PPP participation options subject to regulation on the federal level.

There is practically no related court practice. The Decree is one of the most significant court rulings in this sphere. It was issued by the court based on the following:

  1. the tender was a contract tender;
  2. contractual works for state and municipal needs shall be performed under a government contract1;
  3. payments under the contract were made out of the district budget;

Considering this, the applicant shall have organised and conducted the tender under the Law No. 94-FZ. Antimonopoly legislation breach occurred due to the applicant's incompliance with provisions contained in the law while organising and conducting the tender. The applicant was declared having breached point 2, part 1, section 15 of the Competition Law that prohibits adopting rulings and performing actions leading or potentially leading to prevention, restriction or elimination of competition, except where provided by federal laws, in particular, it is prohibited to unreasonably prevent business entities from carrying out their activities, including by setting out requirements to goods or business entities not provided by Russian legislation.

It shall be noted that conflict of federal laws and laws adopted by federal subjects exists only now. Under the law "On Basic Concepts of a Public Private Partnership", provisions of a contract that is subject to court proceedings do not apply to PPP relationships, since, according to section 11 of the draft law, a private partner shall both finance (in whole or in part) and operate, or maintain, the relevant project.

The Decree leads to an important conclusion: the legislation shall not provide a contract subject identical to state and municipal procurement items, since it would restrict PPP participation options for Russian federal subjects. As for contracts other than provided in the Law No. 94-FZ or the Law on Concession Agreements 2, it seems to be too early to state that their invalidation risks have increased. Obviously, a PPP agreement providing performance of contractual works, without any other liabilities for a private partner typical for such relationships, most likely aimed at avoiding procedures provided by public procurement laws.

Decree of Russian Government No. 641 “On Investment and Operational Programmes of Water Supply and Water Disposal Entities”, as of 29.07.2013

Utility entities’ investment and operational programme development, approval and adjustment rules have been approved

Under Russian legislation3, an investment programme shall mean construction, reconstruction and modernisation arrangements for central hot water supply, cold water supply and (or) water disposal system facilities. An operational programme shall mean an entity's day-to-day (operational) activity programme for hot water supply, cold water supply and (or) water disposal, regulated water supply and (or) water disposal activities. Key provisions on investment and operational programmes are provided in the Federal Law No. 416-FZ “On Water Supply and Water Disposal”, as of 07.12.2011 (hereinafter – the “Water Supply Law”). The Law also provides an obligation of Russian Government to adopt “Investment Programme Development, Approval and Adjustment Rules for Hot Water Supply, Cold Water Supply and (or) Water Disposal Entities” (hereinafter – the “Investment Programme Development Rules”) and “Operational Programme Development, Approval and Adjustment Rules for Hot Water Supply, Cold Water Supply and (or) Water Disposal Entities” (hereinafter – the “Operational Programme Development Rules”).

These rules regulate hot water supply, cold water supply and (or) water disposal entities performing their activity through central systems (where investment programmes are being developed, approved and adjusted – except for hot water supply entities performing their activity through open systems) (hereinafter – “regulated entities”).

Central water supply systems are divided into closed systems and open systems. Open systems imply fusion of supplied water and heated water directly in a mixer where heated water is in direct contact with a heat conductor. Closed systems are, on the contrary, based on separation of a heat conductor from heated water. The Decree has the following important novelties: establishment of consent and approval terms for programmes, draft programme amendment procedures, as well as certain aspects of amending approved programmes.

Thus, the Decree has established investment and operational programme approval terms – until 20 December of a year preceding a year when programme implementation has commenced.

Investment programmes

Under the Investment Programme Development Rules, an investment programme shall consist of a number of necessary provisions. The most important ones are provisions on regulated entities' target activity indicators, a list of construction, design, reconstruction arrangements, grounds and technical standards, the amount of financing needed (where a concession agreement is signed sources of finance shall be determined according to the terms and conditions of such agreements), and preliminary tariff calculations. It should be noted that an investment programme shall not contain financially unsecured arrangements. This requirement is new to water supply and water disposal regulation and is not contained in the Water Supply Law.

Investment programmes are developed by regulated entities under specifications, draft investment programmes shall be approved by an authorised executive agency of a Russian federal subject or by a local authority (where powers to approve investment programmes are transferred to a local authority under the laws adopted by the federal subject). If an investment programme is approved by a federal subject of Russia, it is necessary to obtain a consent from local authorities located at the project place.

A local authority may withhold an consent if an investment programme does not comply with specifications, contents requirements, or if a local authority thinks that implementation of programme arrangements will prevent achieving target indicators or that the programme can be implemented with lowers costs.

An approval may be withheld if (а) there are no approved water supply and water disposal diagrams4, and (b) an adjustment index for tariffs established by a regulated entity exceeds a threshold potential adjustment index for average tariffs established for the relevant federal subject of Russia for the succeeding regulatory period (hereinafter – the "availability assessment") and (i) no loans are available for programme (or part of programme) implementation purposes or (ii) the regulated entity cannot impose tariffs exceeding the threshold index and (or) the investment programme cannot be financed out of budget allocations for state property investments

In all of the above cases a consent or approval for an investment programme shall not be finally withheld and a regulated entity may submit an amended draft programme for consent and (or) approval. If parties cannot reach an agreement on a consent and approval procedure for a programme, the parties can decide consider the disagreements at meetings in which independent organisations and a tariff regulatory authority can participate, too, apart from the parties themselves. A resolution issued at such meetings is binding on its participants and shall be generally executed within one month from its date.

The Investment Programme Development Rules also provide an amendment procedure for programmes. Thus, under the Business Centre Rules, an investment programme shall be amended if objective conditions of its implementation have changed. Under the Rules, such cases include:

  1. changes in Russian legislation resulting in an implementation cost increase by more than 10%;
  2. changes in the amount of budget allocations by more than 10%;
  3. additional facilities shall be connected that are not provided in the investment programme as of its approval date, if the connection can't be performed technically due to the lack of available capacities;
  4. a party specified in an investment programme rejects connection;
  5. notification from a state sanitary and epidemiological supervisory authority.

A regulated entity may unilaterally decide to amend the list of programme arrangements by not more than 10%, provided that such amendments will not result in an increase of total programme implementation costs.

It should be noted that, in case of a concession agreement, the amount of investments shall not be amended if there are any amendments to an investment programme.

Another development is inclusion of requirements to water quality in investment programmes. The Rules require regulated entities to (а) bring potable water and hot water quality in compliance with provided requirements, (b) reduce the discharge of pollutants and other materials and microorganisms according to requirements set forth by Russian Government. Arrangement schedules shall be subject to consent of the relevant authorities and institutions specified in the Investment Programme Development Rules. Consent for an arrangement schedule may be withheld if sanitary and epidemiological safety requirements provided in Russian legislation

cannot be met within 7 years from the commencement of arrangement schedule implementation period. Investment programme execution control shall be performed by a federal subject's authorised executive agency or an authorised local authority.

Russian federal subjects' authorised executive agencies and local authorities perform control over the terms of investment programme implementation, financing and target indicators achievement. In performing such control the relevant authorities may conduct an inspection. Moreover, regulated entities shall submit reports:

  1. for a report quarter – not later than 45 days after the report period has expired;
  2. for a report year – not later than 45 days after annual accounts have been submitted.

Operational programmes

Operational programme development procedure is mostly similar to that of investment programmes. The difference is that operational programmes do not require any consent, a draft operational programme shall be developed by a regulated entity and approved by a Russian federal subject's authorised executive agency performing tariff state regulation, or by a local authority (if it is authorised to regulate tariffs under the laws of the federal subject). In addition, no specifications are provided for operational programme development purposes.

An operational programme shall include:

  1. a list of planned facility repair, potable water, hot water and (or) sewage treatment quality improvement arrangements, energy saving and energy efficiency improvement arrangements;
  2. an estimated amount of water supplies;
  3.  financial needs;
  4.  target activity indicators (to be set forth by a Russian federal subject's authorised executive agency for each year separately); 
  5. programme efficiency calculations.  

An operational programme shall be approved by an authority or an agency if:

  1.  the operational programme satisfies contents requirements provided in the Rules;
  2. an adjustment index for tariffs established by a regulated entity is less than or equal to a threshold potential tariff adjustment index.  

Disagreements arising in approval of operational programmes shall be considered under a similar procedure provided for investment programmes.  

Operational programme terms and conditions shall be amended if conditions of its implementation have changed, which resulted in a cost increase. An authorised authority or agency shall consider and may approve programme adjustments under operational programme approval rules.

As in case of the Investment Programme Development Rules, operational programme implementation control shall be performed in relation to terms, target indicators and financing. In addition, operational programme implementation inspections may be conducted, and regulated entities shall submit annual operational programme implementation reports for the previous year.  

The document shall come into effect on 14 August 2013.