Financing for Innovations and Modernization
Magazine DF, July 7 (44),
2010
Objectives set in the programs of support for Vnesheconombank’s innovative projects go in line with the priorities of the government policy
Attention to the activities of Vnesheconombank in investment and innovation policy is well-timed not only because the bank has top rating positions on the market. Today, Vnesheconombank is one of the national development institutions, having received an official acknowledgement a few years ago when pursuant to the Federal Law «On the Bank for Development» it was granted a special status and became the State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’. Programs of support for small and medium-sized enterprises (SMEs) have been carried out for several years through the involvement of the Russian Development Bank (RDB), a subsidiary of Vnesheconombank. Recently, the Bank’s new programs of support for innovative projects have come to light. In addition, the announcement has been made about a new innovation and high-tech department that will operate within Vnesheconombank. The DF editors asked Mikhail Kopeikin, the Management Board Member and Vnesheconombank’s Deputy Chairman, to make a comment on the Bank’s innovation policies.
- Due to its program aimed at supporting small and medium-sized enterprises, Vnesheconombank has actually confirmed its status as a bank for development. VEB is viewed now not only as an institution involved in large-scale investment projects, interstate economic agreements but also as a crisis-management instrument for supporting the domestic economy as a whole including small and medium-sized enterprises. Are you ready to sum up the results of the activity in supporting SMEs for 2009 and specify plans for 2010? What’s the amount of financing already made and scheduled to be made? How many SMEs have received financing through Vnesheconombank’s schemes in cooperation with its subsidiary banks and regional partners?
-We were most active in our traditional work on supporting SMEs through the Russian Development Banks’ partner banks. For a period of one year 91 banks joined our program and as a result agreements were concluded for a total amount of 25.3 billion rubles. Up until now, SMEs have obtained 3 278 credits through banks.
The Russian Development Bank’s new line of activity aimed at supporting SMEs through infrastructure organizations yielded good results: 66 infrastructure organizations have become our partners and the value of agreements made is 8.7 billion rubles. Due to our active joint efforts infrastructure organizations entered into 1 390 agreements with SMEs.
Taking into account the objectives of promoting the development of the innovation sector set by the Russian Government, the Program of providing financial support for SMEs is scheduled to be increased to 100 billion rubles and instruments for providing financial support are also scheduled to be upgraded to transfer the Russian economy to the innovation and modernization path of development.
-As it became known, in its new strategy for 2010-2014 Vnesheconombank is to fundamentally change its attitude to modernization and innovation-oriented projects. Special emphasis is to be placed not only on projects linked to modernization of production facilities and import substitution but also on those, which are directly related to innovations. Do you also mean SMEs operating in the innovation sector? How is VEB going to draw up schemes of financing the said projects – would you like to use the existing channels by working with your subsidiary banks and regional partner-banks or would you like to devise a new scheme?
-This year Vnesheconombank’s subsidiary bank – the Russian Development Bank launched a Program “Financing for Innovations and Modernization”. Under this program, financing will be provided for both innovation projects (projects related to commercialization of SMEs’ own developments) and modernization projects (those providing for upgrading and renewing machinery, equipment and technological processes).
The Program is to be implemented by way of a two-tier scheme – through a network of the Russian Development Bank’s partner-banks. The information about the Program was communicated to all 97 partner-banks. At the moment, we are examining partner-banks’ proposals for implementing concrete projects.
As of today, we have received replies from 40% of banks and only 46% of banks that replied said that they were considering appropriate projects or that they were ready to submit them in the near future. Most of the projects submitted (all in all we received 71 project applications) are modernization projects, for which partner-banks would like to receive preferential terms of refinancing. Only 8 projects were innovation-oriented ones, that is, in line with the selection criteria. This fact reveals a serious problem Russian commercial banks are faced with: so far, they don’t have sufficient customer and credit technologies to finance innovation projects.
-What are the main objectives of the Program “Financing for Innovations and Modernization”? What terms of financing innovation projects do you mean?
-The Program “Financing for Innovations and Modernization” focuses on supporting small and medium-sized enterprises whose activities are in sync with top-priority development lines of science, technologies and machinery or top-priority lines of economic modernization.
In order to avoid financing perpetuum mobiles and various idealistic schemes we should select projects, which are at least moving from a startup stage to an expansion and growth stage. A criterion for innovation here is taken to be the availability of applicable patents, test data proving economic feasibility, ecological properties, energy efficiency and safety of technologies and products.
A two-tier financing scheme provides for funds to be made available to SMEs through partner-banks, which receive financial resources from the Russian Development Bank at an interest rate which is equivalent to ѕ of the Russian Central Bank’s refinancing rate (now it’s a bit less than 6% per annum) for a period of up to seven years. And pilot innovation projects could even be financed at an interest rate, which is equivalent to Ѕ of a refinancing rate.
Financial ratios of a project are as follows: the Russian Development Bank fully refinances a partner-bank’s credit to an SME provided that co-financing of the project through using the SME’s own funds should be no less than 15% thus being a guarantee that the borrower is serious in its intentions.
And in this situation, the Russian Development Bank works for the future: Russian banks, which are accustomed to taking real estate as security will gradually get used to working with more complex security for loans, for example, such as intellectual property.
Bank lending is of great importance for SMEs because it enables them to market their products faster, and given a significantly reduced new products development cycle in the world, it might prove to be critically important not only for identifying priorities but also for ensuring an enterprise’s survival.
-Another initiative by the Russian Development Bank is to set up a Fund of Direct Investments, which would enable the Bank to be directly involved in SMEs’ projects in the innovation sector thus minimizing risks and making these projects more attractive for investors. What resources are you going to raise for this Fund and how do you plan to operate this Fund?
-The Russian Development Bank’s strategy provided for establishing the said Fund of Direct Investments in order to provide non-credit support for innovation SMEs. This Fund’s competitive edge is in its close contacts with the Russian Development Bank’s partner banks in search for and monitoring investment projects. The Fund will be responsible for making long-term investments in innovation and modernization projects for a period of 5-7 years and as part of its current business among other things it will be also responsible for forming tier 2 capital. Under the existing terms, a partner-bank is to provide debt financing to the Fund’s customer throughout a period of investments (until the Fund exits from the capital of an innovation SME) in the amount of up to 60%of a project’s value. Financial ratios of a project also include the Fund’s investments in the amount of up to 25% of a project’s value. The amount of funds to be invested by a project’s initiator should be no less than 15%. The Russian Development Bank may consider participating in the capital and at the same time providing a partner-bank with financial resources to extend a long-term credit to an innovation SME.
The Fund’s size is scheduled to amount to 600 million rubles including 260 million to be invested by the Russian Development Bank. Organizational arrangements are to be completed and the Fund is to be launched till the end of 2010.
-What innovation fields does the Russian Development Bank regard as the most important ones? What requirements for projects does the Bank make when applying a credit financing scheme and upon financing through the Fund of Direct Investments?
-At the current stage of the Program’s implementation we are not planning to impose any strict sectoral restrictions. The main criterion for classifying a project as innovative is, as I’ve said before, the fact that an enterprise has applicable patents on the basis of which a batch production is planned to be launched. As far as modernization projects are concerned, top priority is to be given to projects designed to bring technological processes and equipment in line with the world’s standards and quality indexes for example ISO and GMP (Good Manufacturing Practice) standards.
Lending is designed to finance the set-up of batch production, purchase of new equipment, technologies as well as certification of products to bring them in line with the said standards.
A preferable stage of a project’s implementation is its transfer from a startup stage to an expansion and growth stage. An average amount of financing a project is 70-100 million rubles, given that the project’s initiator should invest no less than 15% of the project’s total value using its own funds.
As of today, the Russian Development Bank got down to implementing the first pilot projects of a number of mid-sized regional banks’ innovation and modernization customers in Voronezh, Chuvashia, Yakutia, Togliatti, Bashkortostan and Tatarstan. At present three first projects have approved for financing and another 16 projects are under consideration.
-What interest rate can we expect for final borrowers?
-We expect an interest rate for final borrowers to be no higher than 10% per annum in rubles. But to achieve this goal we have to resolve an issue of funding transactions within the Program. The Program “Financing for Innovations and Modernization” creates favorable conditions for improving quality of labor and productivity in the real SME sector. Thus, SMEs start to compete against foreign producers – importers. In order to encourage projects the Russian Development Bank should provide credit resources at minimum interest rates because innovation projects are very sensitive to the cost of funding.
-It’s also known that in its activity to support the innovation sector Vnesheconombank cooperates with other development institutions both financial and industrial ones. They include Rosnano, the Russian Venture Company, the Fund to Support Small Enterprises in the Scientific and Technological Sphere, the Federal Agency for the Youth Affairs, the Moscow Interbank Currency Exchange and OPORA Rossii – they are all in one form or the other involved in supporting small and medium-sized enterprises in the innovation sector. What is the agreement they signed aimed at? What objectives are they supposed to achieve at their working group’s meetings, the first of which was held this May?
-The agreement signed aims to set up an organizational mechanism that would make it possible to promptly exchange information on the projects being implemented and chose a support instrument for each project that is best suited for a given stage of an innovation company’s development.
This sort of cooperation is underway now – many parties to the agreement cooperate with each other on a bilateral basis. The agreement would enable us to systematize this work, establish optimal procedures for cooperation and develop unified approaches to selecting, examining and structuring innovation projects.
The working group was formed from representatives of the parties to the agreement to promptly coordinate the parties’ efforts. The working group’s first meeting discussed issues of ensuring a prompt exchange of information between the organizations, which are parties to the agreement. The meeting’s participants reached an understanding on making a list of pilot projects that would be supported financially as part of implementing the agreement.
We plan to hold the working group’s meetings on a monthly basis. We are going to discuss issues of “transferring” specific projects from one development institution to the other, given the available support instruments, and we are also going to discuss issues of joint participation in implementing projects.
Vnesheconombank’s Chairman V.A. Dmitriev’s Interview to TV Channel Russia-24 (the Petersburg International Economic Forum)
HOST: We continue telling you about the Petersburg Economic Forum’s events and introducing its participants to you. Dmitry Shchugorev is on direct line with the studio. He is ready to introduce his next interviewee.
CORR: Good morning. We continue our discussions at Russia-24’s booth and right now in these morning hours before the start of the Forum’s regular sessions we are welcoming Vnesheconombank Chairman Vladimir Dmitriev.
Good morning, how are you doing on the Forum’s second day?
Vladimir Dmitriev, Vnesheconombank Chairman: I’m fine.
CORR: Did you enter into any agreements and take any principal decisions on the previous day?
Vladimir DMITRIEV: Yes, as always, because a Forum provides us with a unique opportunity not only to meet and discuss numerous current problems but also agrees upon concrete issues. And the current Forum is not an exception. We are close to signing several agreements and some agreements were signed yesterday. We are to formalize a number of agreements today, so we are happy about the results Vnesheconombank achieved at this Forum.
CORR: It must be said that in general the banking sector’s operation would greatly enhance innovation and modernization process that was launched in Russia. Vnesheconombank is known to have signed a number of agreements with state-run companies, non-government organizations on providing support for innovation projects. But the law does not give a definition of innovations. And how should you select appropriate projects in this uncertain situation and how should you support them?
Vladimir DMITRIEV: Things are easier for us because heads of such line ministries as the Economic Development Ministry, the Ministry of Industry and Trade, the Transport Industry are members of our Bank’s Supervisory Board. So, all innovation-oriented projects submitted to our Bank for expert examination are examined by experts in line ministries and it’s up to them to decide whether these projects are innovation ones or not. And on the basis of their recommendations we deal with purely financial aspects of various deals.
But on the other hand, it’s of course important to have a general idea as to what category a specific project falls into. I am aware that this is a very difficult task, but it was not by accident that Vnesheconombank proposed to join efforts of key companies and institutions involved in innovation activities. We have signed agreements with 9 companies including Rusnanotech and the Fund for the Promotion of Small Enterprises in the Science and Technology Sector, the Russian Venture Company and others. Under the signed agreements these companies make decisions as to what projects should be accepted for financing and to what extent they are in line with innovation line of business. And of course Vnesheconombank’s decisions to open financing are of primary importance.
CORR: So, now companies that submit their business plans to Vnesheconombank should prove that their business plans are innovation-oriented?
Vladimir DMITRIEV: Yes, of course, if we mean innovation projects. This is the task that was set before us by Vnesheconombank’s Supervisory Board Chairman Vladimir Putin when he said that a certain quota in Vnesheconombank’s loan portfolio should be allowed for innovation projects. Even now, 15 percent of our loan portfolio accounts for the innovation sector with its advanced breakthrough technologies.
CORR: We know that or about a year Vnesheconombank has been implementing the program aimed at supporting small and medium-sized enterprises. Am I right?
Vladimir DMITRIEV: The program has been under way for about a year, although it was launched at the last year’s start but actually the money was made available only in August. Here I mean 30 billion rubles we received from the National Wealth Fund. These funds were provided to the Russian Development Bank, our subsidiary bank, on a repayable but interest-free basis. The Russian Development Bank is responsible for implementing the program of supporting small and medium-sized enterprises through extending credits to regional banks, which in their turn provide credit resources to small and medium-sized enterprises. To this end, 40 billion rubles have been already committed, 30 billion rubles of which have already reached their final recipients, that is, small and medium-sized enterprises and we are constantly controlling and monitoring the situation. We are working in 72 constituent entities of the Russian Federation and this year we are going to expand this program to all constituent entities of the Russian Federation. More than 150 regional banks are involved in this project. In our opinion, the program is progressing successfully.
CORR: Vladimir Alexandrovich, its’ quite obvious that after a year and a half it’s too early to talk about any intermediate results and yet I’d like to ask you about intermediate results. Final results will be available years from now.
Vladimir DMITRIEV: If we are talking about small and medium-sized enterprises, the results speak for themselves. This program involves 72 constituent entities of the Russian Federation, the enterprises’ turnover worth 100 billion rubles, 10 billion rubles in taxes, more than 100 thousand workers are employed by small and medium-sized enterprises that enjoy Vnesheconombank’s support through a network of regional banks I mentioned earlier. We hope that by the year-end this program could be brought to 100 billion rubles, which is in line with an obligation we assumed. So, even our intermediate results show that the program is effective in terms of funds availability and a high demand for it.
CORR: I’d like to ask you whether Vnesheconombank is implementing any projects within the BRIC countries: Brazil, Russia, India and China. Have any practical decisions been taken in this respect?
Vladimir DMITRIEV: In fact, we made a proposal to establish a consortium of development banks within the BRIC countries and signed an agreement on cooperation at a BRIC summit in Brazil with the China State Development Bank, Brazilian bank BINDES and the India Eximbank. It’s too early to talk about concrete results; nevertheless, we take advantage of our experience in cooperating with banks of Shanghai Cooperation Organization member countries. It was our initiative to establish an Interbank Consortium. We made the most significant progress on a bilateral basis. We maintain constant and stable relations with the China State Development Bank. We are active in cooperating with the Kazakhstan Development Bank. As far as interbank cooperation is concerned in the BRIC countries, we are going to place great emphasis on developing bilateral ties. I’ve already mentioned our Chinese colleagues. We have long-time and already formalized relations with the Brazil Development Bank. We are sure to use this bank’s business experience in financing development projects in key industrial sectors. It’s not a secret that the Brazilian aviation industry developed successfully due to the Brazil Development Bank’s support. Now it’s a highly competitive industry on a global scale.
CORR: At present, the Long-Term Investors’ Club is quite a promising institution judging by the recent remarks about it. You’ve been elected to this Club’s Organizing Committee lately. What sort of institution is it? How does it help to enhance the innovation process?
Vladimir DMITRIEV: Nobody should be afraid of our participation in various international institutions. It’s not mere pro-forma participation. We view this sort of participation as an important instrument for raising foreign investments for the Russian economy. By the way, it was our initiative to join this elite institution - the Long-Term Investors’ Club. Among the initiators to establish this Club were also such prestigious institutions as KfW in Germany, and perhaps the largest development bank – the European Investment Bank, Caisse des Depots, one of the oldest financial institutions in France, it is 150 years old. They have a similar institution in Italy too. It is these four key national and international financial institutions that initiated the establishment of the Long-Term Investors’ Club. It incorporates representatives of 10 countries. For the most part, its members are development institutions including our Bank that represents Russia’s interests in this Club. This is the third international banking institution where we work together with the China State Development Bank. The Club’s main objective is for its members to join efforts to finance infrastructure projects, above all, projects in the innovation sector and this is undoubtedly an alternative to raising venture capital that to some extent brought about the global economic and financial crisis. So, this Club’s motto is to invest money in the real economy, in infrastructure projects in those sectors that could be of great interest to international investors.
CORR: We are now talking about long-term investments. Is this a promising line of business? And the most important thing is to what extent our Western partners are willing to make such investments?
Vladimir DMITRIEV: This is a very important and pressing issue because there is a lot of free money on the world financial and capital markets but it’s very important for investors to match their wishes with risks they assume and in this sense, the involvement of state banks, banks with state participation in funding projects, serves as a sort of guarantee to Western investors for the success of projects and repayment of funds.
It was for this reason that we decided to participate in implementing an ambitious but quite a realistic project aimed at building a major recreation and tourism cluster in the Northern Caucasus. The Russian President spoke at a plenary session yesterday and in fact backed this project politically. And this political backing is of great importance to Russian and foreign investors. It was not by accident that German Gref, I and foreign investors participated in the panel discussion. Foreign investors confirmed their intention to financially support this project in their letters of comfort that they gave to Akhmed Belalov. And in their conversations on the sidelines they stressed their intention to participate in the project because they are aware that it is backed by the country’s leaders and that such banks with state participation as Sberbank and Vnesheconombank will participate in the project and this is a serious guarantee for them.
CORR: Akhmed Belalov participated in our live broadcast telling about the prospects for this project. This sounds really fascinating. Thank you for answering our questions.