The largest Russian banks are at the same time the market leaders in financing PPP projects. Most times, Gazprombank, VTB and, to a lesser extent, Sberbank (opinion of PPP.team) compete for a project finance. In the first term, this is not due to low rates, but to professional teams who have seen the market perspectives earlier than other participants. A separate significance, especially in extra-large projects, is attached to GR capabilities of team leaders. The key question - is there a place for participants not from the group of top three banks? A short answer is YES ...
A PPP project financing status.
The situation on the PPP financing market, according to the expert opinion of PPP.team, is alarming. We should keep in mind that the market rules and the first large projects were launched when the Central Bank’s rate was two-digit (and this was in respect of long-term projects, 10 years +). The market leaders have created an ultra-comfortable environment in respect of other project participants, both grantor (public party) and concessionaire (investor). The facility provisions terms have started to change, but the number of players is still extremely limited. Each bank wishing to enter the market has the following questions: is there a free space (market niche)? What volume and type of projects can I expect? What sectors are the most promising?
Concession financing. Market niches and perspectives for middle and new state-owned banks.
This section is structured exclusively in accordance with PPP.team evaluation, formed during PPP projects implementation with market participants (including PPP.team project participants). It isn’t based on scientific researches, surveys and strategic data. But it is an interior view of the market that constitutes value and honesty of the section…
So, is there free space?
In general, there is. Moreover, there is some space for new state-owned banks (PSB, Otkritye) and for large and medium-sized banks. But free space isn’t available in extra-large (70 million USD +) projects, but it is available in medium and small (up to 10 million USD) projects. What stands for the opinion?
- The top 3 banks are not interested in PPP projects that cost less than 70 million USD, or insignificant projects. Accordingly, both attention and speed of decision makers decrease. For mid-level bank, such projects are serious and pay enough attention to such projects.
- Top 3 banks terms in respect of sovereign guarantees under agreements (contracts) are often extremely exaggerated. Regions have faced with unsuccessful agreements of the times of two-digit rates often do not want at all to sign an agreement with the bank, offering concessionaire to solve the problem on its own.
- Special purpose vehicle (the SPV) incorporated for a project doesn’t have any assets. It seems that a bank should be satisfied with state guarantees (direct agreement). However, more often banks demand serious security to be provided from a parent company as well as SPV owners. This often leads to long and conflict negotiations between banks and investors.
- In addition to above mentioned, the top 3 banks do not always have impeccable legal structure in respect of concessionaire, especially, project management transfer in case of unsatisfying concessionaire condition. Such fact also may provoke significant problems.
- Finally, the most important is that state owned banks can’t handle or hardly can handle only in respect of mega projects, amendments to guarantee, loan and other concessionaire or grantor covenants. Thus, the banks can’t amend current terms of loans and hold internal proceedings hereto in a permissible by negotiations timeline, despite understating the necessity of amending abovementioned covenants.
How shall mid-level banks enter the market?
- 1.Take a look at regional and large municipal projects.
- 2.Form (or buy) PPP skills.
- 3.Form correct mechanisms for financing approval of state supported projects.
- 4.Form simple and comfortable terms of direct agreement.
- 5.Form and test an accelerated internal procedure for approving a PPP project within a bank.
- 6.Form PPP projects on your own (try looking at projects that previously failed to launch under investment schemes).
- 7.Understand and sell a competitive advantage - for example, rates (for state-owned banks), decision-making speed, security, loan terms, etc.; for private banks, funds, etc.
What do you get?
Finally, an investor will agree with an additional 2 or 3% rate proposed by the Top 3. At the same time, large concessionaires who failed to pass a super-strict filter of the Top-3 state banks may also address to mid-level banks.