Regulatory risks of infrastructure projects

Mainstream

Regulatory risk in an infrastructure project is not just the likelihood of getting a fine or an order. This is the risk of a complete stoppage of construction, freezing of financing or loss of an asset.

The question is not whether all formal procedures are followed today. The question is whether the project will remain legal and feasible in 3, 5 or 10 years.

Effective regulatory risk management begins with three audits:

1. Does the draft comply with mandatory standards right now?
2. What changes in regulation are projected on the project horizon?
3. How to protect your investment if the rules of the game change

If these three issues are not resolved at the start, a developer or concessionaire may successfully pass the examination and obtain a building permit, but face irreversible legal obstacles at the operational stage.

When regulatory risk analysis is needed

A thorough regulatory due diligence is required if:

• construction of a capital construction facility in the new territory is planned;
• a PPP, concession or SPC project is being implemented;
• the object is located within the boundaries of zones with special conditions for the use of territories (ZOUIT);
• a change in the category of land or type of permitted use (LWI) is required;
• the project affects water, forest objects or subsoil;
• foreign funding or participation is provided;
• the project is of strategic importance or sensitive from the point of view of sanctions risks;
• it is necessary to obtain technical conditions and connect to the networks of natural monopolies;
• construction is carried out in a historical settlement or in a neighboring territory;
• the customer is a state or company with state participation;
• urban planning documentation (general plan, PPZ) changes in the process of implementation.

The mistake most project initiators make

Many developers and infrastructure companies start with the question:

How to get a construction permit faster?

That's the wrong first question.

The right question is:

How to ensure the legal sustainability of the project throughout the life cycle: From idea to exit?

Sometimes the best result is an accelerated start with the simultaneous elimination of comments. Sometimes - a complete freeze before making changes to the master plan. Sometimes, a change in jurisdiction or ownership structure. Sometimes, the project is “preserved” until the regulatory environment is stabilized.

Regulatory support of infrastructure requires not thoughtless compliance, but strategic forecasting.

Step 1. Check the land plot and urban planning documentation

The first thing to study is not the financial model, but the legal status of the territory.

Key points for analysis:

• land category and IRI;
• compliance with the master plan and PPZ;
• borders of ZOUIT (sanitary protection zones, security zones of networks, aerodrome territories);
• presence of red lines;
• burdens and easements;
• rights of third parties (tenants, subtenants);
• grounds for the emergence of land rights (privatization, lease agreement, KRT);
• Risks of withdrawal for state needs;
• intersection with the lands of forest or water fund;
• requirements for floors, building density and building coefficient.

If the territorial planning documents are outdated or do not correspond to actual use, the project can be stopped at any time.

Step 2. Assess environmental and environmental aspects

For infrastructure projects, the environmental factor is often a “sleeping” risk that is activated during the public hearing stage or after the facility is commissioned.

Preparation should be made for:

• HBOC category (I-IV category);
• calculation of the sanitary protection zone;
• projects of PDV, VAT, limits on waste disposal;
• data on the presence of water objects, cattle burial grounds, landfills of TKO;
• EIA materials;
• State Environmental Expertise (SEE) or documentation confirming that the SEE is not required;
• information on the red-book types;
• Compensatory landscaping and improvement plans.

The risks associated with I and II categories are particularly critical, since the lack of integrated environmental permit (EPP) or non-connection to automatic emission control systems entails the use of increasing coefficients to the payment for negative impact and the risk of administrative suspension of activities.

Step 3. Checking the permit documentation

It's the project's passport. The absence of any link in the chain of approvals makes the construction self-construction.

Key documents:

• Urban planning plan of the land plot (GPZU);
• results of engineering surveys;
• project documentation and a positive expert opinion (Glavgosexpertiza or non-state);
• construction permit;
• technical conditions for connection to networks;
• technological connection agreements;
• permission for conditionally permitted use or deviation from the limit parameters (if necessary);
• Historical and cultural examination (if necessary).

An error at this stage, for example, the beginning of work before obtaining a positive conclusion of the examination on the survey, can lead not only to a fine, but also to the demolition of the erected structures.

Step 4. Review the contract structure and procurement procedures

If the project is implemented with state participation, dispositiveness is minimal. The logic of the FZ-44 or FZ-223 is very strong.

The risks are concentrated in:

• Failure to comply with competitive procedures;
• fragmentation of procurement;
• changes in the essential terms of the contract (price, terms, volumes);
• justification of the initial (maximum) price of the contract;
• the application of national treatment and import bans;
• the procedure for acceptance and hidden work;
• qualification requirements for contractors (experience, tolerances of SROs);
• bank guarantees and security payments;
• unilateral refusal of the contract by the customer;
• inclusion in the register of unfair suppliers (DNP).

In PPP projects and concessions, the risks of contesting the tender by third parties and antimonopoly control of preferences are added.

Step 5. Sanctions and Counter-Sanctions Risks Assessment (Russia & CIS)

In the current reality, this is a through filter that is superimposed on all stages of the project.

It is necessary to check:

• the presence of foreign beneficiaries and PDPs;
• the use of counter-sanctions decrees of the President of the Russian Federation (restrictions on transactions with shares, payments, currency transfer);
• risks of secondary sanctions for co-executors;
• restrictions on the supply of equipment and technology;
• “splitting” contracts to circumvent restrictions;
• special procedure for the calculation and use of special accounts (type "C");
• Regulatory requirements for disclosure of information (up to the complete closure of project data);
• Restrictions on the involvement of Western consultants and auditors.

Sanctions compliance is not a one-time procedure, but continuous monitoring built into project management.

Step 6. Modeling the change of legislation

The hardest part of the analysis is to anticipate how regulation will change tomorrow.

Infrastructure projects in Russia and the CIS are characterized by high dynamics of changes in the following areas:

• taxation (change in cadastral value, rates, benefits);
• urban planning legislation (for example, transition to machine-readable PPZ);
• regulation of energy and tariffs (limited levels of power prices, “altcoal”);
• Environmental legislation (expansion of the list of substances subject to control);
• currency and banking regulation (revenue repatriation, restrictions on dividend withdrawal).

Ignoring this stage turns the project into a legal time bomb.

Step 7. Protecting investments in advance

Better risk management begins before the investment memorandum is signed.

The structure of the transaction and the corporate contract must include:

• Stabilization clauses (grandfather clauses) in agreements with the state;
• mechanisms for compensation for the deterioration of the legal regime;
• Clear algorithms for deadlock situations (deadlock resolution);
• the right to unilateral withdrawal with compensation of investment costs;
• Insurance of political and regulatory risks;
• Multi-level system of arbitration clauses (including investment arbitration for BITs);
• escrow mechanisms and guarantees of the “daughter” of the parent company.

Contracts in infrastructure should not be written for a regulatory sunny day, but for a storm.

Common Mistakes in Regulatory Risk Management

1. Informal arrangements with officials do not protect against criminal proceedings, challenging a deal or changing power. Protects only the right enshrined in a normative act or contract.

2. You can buy land for development and find that it completely falls into the aerodrome area, where housing construction is prohibited.

3. This leads to errors in project documentation, collapses and criminal liability for the GIP and the chief engineer of the project.

4. In projects of RES, housing and communal services and treatment with MSW, the revenue part often depends entirely on the by-laws of regional tariff authorities. Missing the application deadline or an error in the calculation of gross revenue deprives income for the year.

5. To delay the receipt of environmental documentation, Category I objects by 2027 will face a multiple increase in payments and the risk of stopping.

6. Violations when connecting to networks or during bidding are classic complaints in the FAS. Timelines are broken and reputation is damaged.

7. When checking the prosecutor’s office or Rostekhnadzor, the absence of one act of examination of hidden works is the basis for serious sanctions.

Checklist of the initiator of the infrastructure project

Before the start of the active phase, you need to answer 15 questions:

1. Are the PPZs currently approved and in force?
2. Is there a GPZU with a term of no more than 3 years?
3. Have you done an industrial safety review (if required)?
4. Are all the technical specifications and TP contracts signed?
5. Are the requirements for membership in the SRO met by the general contractor and the customer-technical customer?
6. Are there any risks of archaeological layers being found at the site?
7. Does the project comply with sanitary regulations and norms (San Pi N)?
8. Are there any intersections with the forest green belts?
9. Are the safety requirements for transport infrastructure taken into account?
10. What property tax regime will be applied to the property?
11. Is the project subject to the legislation on strategic societies (FZ-57)?
12. Are the risks of double taxation taken into account when paying interest on loans?
13. Is the intellectual property protection of the project documentation ensured?
14. Have the key contractors been Due Diligent for the sanctions risks?
15. What are the real prospects of challenging the cadastral value of the site?

What a strong regulatory risk management strategy looks like

A strong strategy usually includes five levels of protection:

1. Legal & Compliance Audit: A comprehensive audit of current status. Identification of red flags (lack of necessary approvals, expiring deadlines, non-compliance with mandatory norms).

2. Regulatory Forecasting: A roadmap for upcoming legislative changes. Analysis of draft laws, law enforcement plans, positions of key ministries and departments.

3. Contractual Shield Development or audit of the contract base (EPC/EPCM-contracts, concession agreements, TP agreements) in order to distribute the risks of changing legislation and delaying the deadlines by government agencies.

4. Government Relations & Advocacy Legally Related to Regulators Not “dealing with issues,” but civilized investment protection through expert councils, ODS (regulatory impact assessment) and formal procedures.

5. Exit & Litigation Readiness Readiness: Preparedness for Involuntary Protection A package of evidence for arbitration, audit of investment protection treatises (IDAs), availability of partners in local jurisdictions for prompt interim measures in court.

Without a fifth level, the first four may not work in a radical shift in regulatory paradigms.

FAQ

Is it possible to insure regulatory risks in Russia and the CIS?

While there are political risk insurance mechanisms (e.g., through government agencies or private MIGA/OPIC depending on the structure of the transaction), they do not cover all types of regulatory changes. The treaty stabilization clause played a key role.

What if the master plan was changed retroactively and our project became illegal?

This is a classic case of investor rights violation. It is necessary to challenge the act on approval of the master plan in court and prepare an investment dispute if the municipality refuses to compensate for losses.

Can I build without permission if the property is owned?

Nope. The right of ownership of land does not give the right to build capital facilities without permits. The object will be recognized as an unauthorized building with all the ensuing consequences (demolition at the expense of the developer).

Does the sanctions affect the implementation of government construction contracts?

They're in. This is reflected in the rise in the cost of materials due to disruption of logistics chains and the need for import substitution. This entails the risk of failure of the terms, which requires immediate fixation as a force majeure circumstance or a reason for changing the price of the contract by the Government Decree.

More importantly: pass the state examination or correctly draw up a land lease agreement?

Both documents are critical. But if the lease agreement is concluded with a defect of will (for example, without bidding), then even successful examination and completion of construction will not protect against the risk of termination of the contract and seizure of the site. The base is more important than the superstructure.

Related services

• International Regulatory Risk & Strategic Advisory
• Infrastructure, PPP & Concessions
• Real Estate, Construction & Zoning
• Sanctions, Export Controls & International Compliance
• International Arbitration, Commercial Litigation & Cross-Border Disputes
• Corporate Investigations, Regulatory Investigations & Business Integrity

Related material

• How to Protect Foreign Infrastructure Investment in the CIS Region
• Concession agreements in Russia: trap
• Land allocation for construction: How not to lose the site due to errors in the PPZ
• Effective protection in disputes with the FAS of Russia on the state defense order and 223-FZ
• How sanctions are changing the structure of EPC contracts
• Judicial challenge of cadastral value: practice of the Supreme Court of the Russian Federation
• International Investment Arbitration: last-line

Conclusion

Managing regulatory risks in infrastructure projects in Russia and the CIS is not about finding holes in laws, but building a strategic security system.

A strong position is based on a deep audit of land and town planning documentation, forecasting changes in the regulatory environment, competent risk allocation in investment and contract contracts and a pre-developed plan of action in case of a radical change in the rules of the game.

In infrastructure projects, the winner is not the one who fills the foundations faster. The winner is the one who knows from day one how to save the asset and exit it with a profit, despite any regulatory fluctuations.