Contract alliancing is not widely used or known in the construction industry in Russia. The Russian regulatory framework is designed for the standard construction relationship between employer and contractor. There have been some attempts to use schemes similar to alliancing in commercial real estate renovation or construction projects. Most civil law rules on contracts as well as related accounting, permitting, real property and other construction-related issues are aimed at traditional contracting. It is considered that it would be difficult for parties to accommodate contract alliancing within the existing legal framework in Russia.
The closest model would be a simple partnership agreement or a mix of an EPC contract with a sale purchase agreement. In this, owners of property – land and/or buildings which require renovation – often require external financing to develop their existing real estate assets but may not be in a position to go to a bank. Bank financing may be too expensive at greenfield or brownfield stage, or simply too burdensome to raise. Thus, owners may want to involve contractors as de facto co-investors, who will invest their works in return for a share in the future property, e.g. part of the building to be constructed or renovated. The owner contributes existing property and funds to the partnership. The contractors contribute works and sometimes funds and they all share profits.
At the same time, the owner may enter into a purchase agreement with contractors regarding their future shares in the property where the owners will pay the contractors with proceeds from using the property or with borrowed funds. At later stages of the project implementation, borrowed funds become cheaper/more accessible since the owner can use newly created property as collateral. The parties which are not intended to be the ultimate owners of the created asset would exit the project on completion by selling their shares to the remaining parties.
This model has been popular as a result of the construction market shrinking in Russia for the past few years. Contractors have therefore been motivated to participate in such projects to avoid the down time in their business by facilitating developments. Also, some contractors have free funds available, which they would like to invest or they have relationships with one or several banks that usually finance their working capital making it easier for contractors to raise some part of the financing on their own.
For such projects to succeed, it is fundamental to properly align all legal aspects and overall payment structure, so that both the owner and the contractor(s) are motivated to hold their end of the bargain and are reasonably protected from risks, in case the project fails to reach completion. This requires a solid exit strategy.
Looking to the future, the alliancing model or any substitutes to it which are more common in Russia would work well if there is a pre-established relationship and trust between parties. Contract alliancing has potential in Russia due to the high demand for infrastructure and management tools for complex projects. It also sits well culturally given the preference in Russian business to settle disputes or issues via informal negotiations to the extent possible. Thus, there is a room for collaborative contracts and behaviour.
The main obstacle for alliancing in Russia is the regulatory framework. There are regulatory patterns embedded in rules on contracts, procedures to obtain permits and rules on land use and the like that are meant to govern traditional contracting. To significantly advance contract alliancing in Russia, legislative change is required. Without this, third parties, courts and authorities would be inclined to apply rules on ordinary contracting to contract alliancing, simply because they are unfamiliar with alliancing concept. As a result, most likely, lack of adequate legal rules will make contract alliancing impractical to use, regardless of its benefits.