75869 May 2012 PPIAF Assistance in the Russian Federation At 17 million square kilometers, the Russian Federation (Russia) is the largest country in the world, covering more than one-eighth of the earth‗s inhabited land area, and spanning nine time zones and a wide range of landforms. It is exceptionally rich in mineral, energy, forest, and water resources. Russia accounts for almost a quarter of the world gas market, is one of the two largest oil producers, and is the fourth largest producer of electricity. Because of its rich resource base, Russia plays a crucial role in global energy and resource markets. Nowadays, Russia counts 142.9 million people and is the world‗s ninth most populous nation. In early 2000s, the government of Russia recognized the importance of public-private partnerships (PPPs) in infrastructure for its development strategy, and requested PPIAF‘s technical assistance for the first time in 2003. Technical Assistance for Russia’s Telecommunications Sector In January 2003 the government requested PPIAF‘s assistance to develop a strategy for universal access to communications services in rural areas, specifically for locations that were then unserved and unlikely to attract private investment. At that time, universal access was central to the competitiveness of the economy in general and particularly important in the rural context, where more than 51,000 rural localities were without even a single telephone. The PPIAF-funded technical assistance consisted of providing a strategic analysis and recommendations for the development of universal access to communications services in terms of zoning methodology, Universal Service Fund (USF) strategic options, and tender lot design and assembly. A zoning methodology that categorized all of Russia‘s regions—oblasts, territories, and republics—into various identifiable types from the perspective of telecommunications and universal service provision was developed. A total of four zones were identified to describe the geography, population distribution, existing telecommunications networks and service coverage, the distribution of the currently unserved communities, and the potential or likelihood of service providers to compete with one another for universal access and USF subsidies. A set of strategic options for the supply and funding of universal access services in the various zones and situations of rural Russia was also prepared. The options considered both the technological and commercial aspects of service provision; the amount of subsidy required to reach the targeted unserved areas; the likely competition that may exist for rural service provision from region to region and zone to zone; and the amount of financial resources that could be accumulated by the USF under various strategic scenarios. The expected subsidies to meet the requirements of the program, in relation to the size of the rapidly growing Russian telecommunications market, led to the recommendation that the USF should set its operator levy at between 1–2% of revenues. It was recommended that the allocation of regions according to zones should be made primarily according to the geographical penetration of each region‘s cellular mobile networks. Above 70% penetration, regions were designated as ―Zone 1,‖ where competition to meet the universal service obligations of complete regions would likely draw tenders from both the incumbent fixed-line operator and mobile operators. In Zones 2, 3, and 4, where mobile penetration was lower and the interest of mobile operators to reach remote rural areas may be diminished, the use of an additional rural population density index was recommended to decide strategically how many sub-regional competitions should be used by the USF to maximize the level of competition between operators and thus minimize the level of subsidy required. PPIAF assistance was completed in January 2005 and led to rapid results. On April 22, 2005 Prime Minister Mikhail Fradkov signed an associated ordinance to establish universal access to communications services. This associated ordinance largely reflected recommendations provided through the PPIAF- funded technical assistance. PPIAF assistance contributed to the further development of the telecommunications sector in Russia, which attracted more than $6.3 billion in investment commitments since the completion of the PPIAF engagement in 2005. 1 Results of PPIAF’s Activity in Russia’s Telecommunications Sector Category Outputs Enabling environment reform  Strategic analysis and recommendations for the development of Analyses/assessments prepared universal access to communications services, 2005 Category Outcomes Enabling environment reform Policies adopted, legislation  Associated ordinance to establish universal access to passed/amended, or regulation communications services, signed by Prime Minister Mikhail issued/revised Fradkov on April 22, 2005 Technical Assistance for Russia’s PPP strategy In 2005 the government of Russia had identified PPPs as a central component of the strategy for reaching its central development goal of doubling GDP over the 2005 –2015 period. In this context the government requested PPIAF assistance to fund advisory work on the development of its PPP strategy. The PPIAF-funded technical assistance was completed in September 2006 and resulted in two briefing notes:  One note reviewing the draft of a new concessions law (which would allow for the first time long- term contracts to be drawn up between public and private partners) that had gone through its third reading in the Duma and that was awaiting final ratification by the President  One note providing key recommendations on the design and effectiveness of an investment fund for PPPs, including on the: i) mission and goal of the fund; ii) risk allocation principles under PPP projects; iii) fund's objectives; iv) eligibility criteria for projects to be supported by the fund; v) financial products; and vi) governance structure of the fund. The study recommendations aimed to strengthen the effectiveness and governance of the investment fund to leverage financing of infrastructure projects in Russia. Russia's concessions law was amended in June 2008 to allow parties from having a tender and negotiation procedure and a concession agreement fully in line with international standards. Furthermore, through its recommendations, PPIAF contributed to operationalize the investment fund, which was established by the federal government in August 2005. On March 22, 2007, a government commission approved partial financing of three projects from the investment fund: 1) the construction of the 460- kilometer Kyzyl–Kuragino railroad line in the constituent republic of Tuva; 2) the construction and renovation of water supply systems in the city of Rostov-on-Don and in the southwest of the Rostov Region (Oblast); and 3) the construction of a multi-purpose trans-shipment complex called Yug-2 (South- 2) at the Baltic Sea port Ust-Luga. Results of PPIAF’s Activity for Russia’s enabling environment reform Category Outputs Enabling environment reform  Note providing recommendations to strengthen the design and Analyses/assessments prepared effectiveness of an investment fund to finance PPPs, 2006 2 Policies prepared or legal or  Note reviewing draft concessions law with amendments to the regulatory changes legal framework to support the use of concession contracts as a recommended basis for PPPs, 2006 Category Outcomes Enabling environment reform Institutions created or  Investment Facility operationalized by the federal government strengthened in August 2005 Policies adopted, legislation  Russia's concessions law amended to allow parties from passed/amended, or regulations having a tender and negotiation procedure and a concession issued/revised agreement fully in line with international standards, June 2008 3