Vnesheconombank Chairman V.A. Dmitriev’s OpeningAddress at the Conference “Public Private Partnership: New opportunities for Countries with Transition Economies”
More than 600 people got registered at the Conference. There are many renowned persons among the Conference participants. I would like to greet you all. And I would also like to thank you for your attention to this important line of Vnesheconombank’s activity, that is, the development of the PPP market in Russia. We decided to hold this conference about a year ago. It is well known that the European Economic Commission of the United Nations has been studying and summing up intellectual capital in PPP. International business experience is of especial interest to us. It was for this reason we wanted to discuss with you an issue of PPP development in our country.
Half a year ago Vnesheconombank’s Supervisory Board approved the Bank’s Development Strategy for a period of five years. Under this strategy the share of PPP projects in our loan portfolio is to be no less than 30%. And the Bank is prepared to finance up to 30 % of these projects’ value.
We believe that a PPP mechanism is the only one and the best one in implementing infrastructural projects. In our country, government and municipal authorities are responsible for developing infrastructure, transport, municipal facilities and social services. These infrastructural facilities’ development is always costly. In any case, regional and city budgets do not have sufficient funds to finance infrastructure development. Nevertheless, we have to address these problems because infrastructure development secures economic growth. And there is also a problem associated with the quality of public services offered. So, in order to address their problems authorities draw private business in and establish partnership with it. Businessmen benefit from partnership with the authorities as it results in reduced long-term risks of doing business.
In my opinion, this emphasis on partnership proved to be justifiable. In 2008, Vnesheconombank management bodies made a decision to finance 70 investment projects totaling 720 billion rubles, with he Bank’s participation share being more than 400 billion rubles. About half of them, to be more exact, 42% are infrastructural projects in transport, power engineering and communal services. Judging by our negotiations, business in has a stake in these projects and is ready to integrate into them. Besides infrastructure, Vneshconombank started to implement projects aimed at developing and rebuilding such industries as aircraft construction, shipbuilding, timber-processing industry. All of them are are usually called system forming.
And now I’d like to say a few words about the financial crisis and PPP. Now they talk and write a lot that the current financial crisis forces us to scale down investment programs. But the crisis does not eliminate demand for infrastructure development. And more to it, I am convinced that the need to expand and use PPP is bound to increase in the future. Of course, we can’t rule out the crisis’ impact on PPP projects altogether. We don’t know what form this impact is going to take. Priorities are most likely to change. Projects to reconstruct and upgrade the already existing infrastructural facilities are coming to the foreground. But we can’t meet demand for infrastructure using budgetary funds alone. As a matter of fact, PPP instruments were developed and are now being upgraded in order to raise extrabudgetary funds for financing. I would like to say it once more that in the situation of the crisis sustainable demand of the state is an essential tool for reducing risks of investments and boosting credit institutions’ confidence. Thus, PPP projects prove to be competitive in terms of drawing in private investors. Effective government and municipal authorities may for the first time have a chance to win competition for private business’ investments.
In order to take his chance, we have to optimize PPP instruments. Here I would like to single out three principal objectives:
Upon selecting a PPP project, government and municipal authorities should boost their capabilities and here I mean efforts aimed at developing a project and holding a tender for selecting a reliable private partner.
We have to develop contractual models as well as guarantee and insurance instruments and amend applicable legislation, above all, at a regional level. All these measures should secure acceptable risks of private investments in the public infrastructure. And to this end, the state would have to properly fulfill all its contractual obligations.
We have to use human potential to the full. Top priority should be given to improving professional skills of state workers involved in managing investments. Equally important is to take full advantage of professional PPP market makers’ potential.
In order to participate in all these efforts we established a PPP Center in Vnesheconombank. It acts as an agent for government and municipal authorities in organizing PPP projects. Assisted by the PPP Center local administrations form competent regional management bodies. They are tasked with organizing PPP projects. Vnesheconombank cooperates with colleges and universities in retraining executives responsible for. PPP.
In conclusion, I hope that discussions at this Conference would be meaningful and fruitful. It is important for this Conference to identify problems on the PPP projects market, define objectives of developing this market and show its enormous potential. And we’ll do our utmost to apply best business practices as soon as possible.
Vnesheconombank Chairman Vladimir Dmitriev’s interview with newspaper Handelsblatt
10/11/12 October 2008
Translation from German
If our Bank did not exist now it would have to be established
- Recently Russian stock markets have gone through one crash after another. What’s the reason?
The current situation was caused by psychological factors rather than by any other fundamental ones. There is no doubt that a number of factors play a role here, for example, nervousness associated with putting together an economic aid package in the US and unfavorable news from Europe. But the market conditions and risks are known and they should be taken into account upon appraisal of assets. Psychological factors, above all, are behind sharp movements of exchange rates in Russia.
- Were you surprised that the crisis affected Russian markets so much?
I was surprised, above all, by sharp fluctuations in exchange rates. Economic indicators in Russia are better than in other countries. Let’s take for example financial resources accumulated in our two sovereign funds and our budget surplus. There is no doubt that we are a part of the world economy. But I should state that strategic investors remain in Russia and speculators have left the country.
- Originally, VEB was supposed to be responsible for long-term infrastructural projects. And now it has to rescue problem banks and companies.
In fact, it’s a serious challenge to us. The Bank was not designed to perform this function but it had to. Nevertheless, our current role will not differ significantly from the original one. Now we’ll be responsible not only for developing infrastructure, for example, motorways and airports but also for the financial sector, which is essentially a blood supply system for our economy.
- Earlier when problems emerged in the financial sector such large state banks as Sberbank and VTB were the first to come to rescue. This is no longer the case because they are publicly listed banks?
You are absolutely right. During the 2004 financial crisis VTB purchased a private bank – Gutabank. Now it has to deal more with its obligations associated with the bank’s listing on the stock market. So when it became known that the demand for financing was so high so as to affect its balance sheet, the bank refused to conduct a transaction to rescue Svyaz-Bank. That was why we stepped in and, to tell you the truth, not only on a grant basis. Now, our capital is to be increased by 75 billion rubles.
- Why did the state have to support Svyaz-Bank?
The Government and the Central Bank attached great importance to this bank: more than 13 million pensioners received their money through this bank. About 400000 employees from the Post of Russia received their salaries through Svyaz-Bank. A lot of large companies are the bank’s customers. The bank had to be saved.
- Is VEB going to benefit from purchasing Svyaz-Bank?
We can see a potential: a great deal of the bank’s branches would help us to finance small and medium-sized businesses. On the other hand, solid customers, for example, telecommunications companies would be our prospective partners in building infrastructure – a task, which was assigned to us by the state. So, this transaction is beneficial for us. Today we don’t know if Svyaz-Bank will be a part of VEB, an independent bank, or if we’ll sell it later to an investor.
- After the Bank of Russia committed 50 billion dollars in financial aid to VEB to refinance foreign credits obtained by Russian bank sand companies, do companies turn to you for financial aid?
With these 50 billions dollars we are going to manage, banks and major corporations are displaying keen interest in us. Some of them are on Russia’s Forbes list and some are state-run companies. In such a situation the state had to take measures and this aid package would be sufficient to enable Russian companies to fulfill their short-term financial obligations.
- But these are going to be not only problem banks?
We may find ourselves in a situation where we’ll be purchasing not only banks but also businesses or at least we’ll manage risks with regard to their doubtful credits. But, of course, banks will remain our core customers.
- What sectors have been hit hardest?
Of course the construction sector was hard hit. We’ll focus our attention on road construction, logistic facilities, transport and etc, where the demand for financial resources is huge as before. Another problem sector is retail. Soon the Government is to take a decision on identifying our role in supporting the sectors that were hardest hit by the financial crisis not excluding curing of troubled businesses.
- Does VEB have enough financial resources to achieve these objectives?
Today, we already have a department in charge of managing problem credits. Their total amount of problem credits is about 14 billion dollars. We are in a position to settle about one billion dollars in debts per year: we commit funds and restructure debts in order to rehabilitate businesses.
- Did the risk management system let Russian companies and banks down?
This is not the only reason, the real problem and not only in Russia is poor regulation. I can safely say that nowadays various financial authorities and institutions are engaged in developing a package of measures to correct the existing laws and standards to upgrade the risk management system.
- Consolidation of banks is sure to speed up. Who is going to manage the process? The state or investors such as billionaire Mikhail Prokhorov who purchased Renaissance Capital and for a very pretty sum of money?
Above all, the state with its institutions. At present we don’t have enough billionaires with sufficient financial resources to buy banks.
- What banks are to be supported by the state?
First of all, these are banks, which have social commitments and play a system-forming role. The Government and the Central Bank are of course worried about the current situation but I can assure you that they know what they should be doing.
- The construction sector is in crisis and other sectors are in crisis too. Are you still planning to implement long-term projects?
Frankly speaking, we, of course, must check certain projects in terms of risk management and conformity with specific industrial standards and our borrowers’ financial standing. But the projects that have already been launched are sure to be implemented. Moreover, a few weeks ago our Supervisory Board earmarked 2.5 billion dollars in long-term credits to finance such projects as the construction of a petrochemical plant in Tatarstan. And all this is a part of our routine activity.
- Observers are critical of the fact that VEB does not have a clear-cut organizational structure. The Russian Development Bank and Roseximbank exist under one roof. Is this situation going to remain intact?
All parts of VEB will go on operating as they did before. Of course, the Russian Development Bank will be given a new name because it is still unclear in what way it differs from VEB. Its objective is still to finance small and medium-sized businesses. Roseximbank will assist the Government in raising funds against sovereign guarantees. VEB, of course, will continue to act as an instrument of export financing. Nevertheless, VEB or an institution to be established on its basis would act as an agent for insuring transactions like, for example, Hermes in Germany.
- When you communicate with Western investors today, what do you usually tell them?
I would like to quote Prime Minister Vladimir Putin’s words. He was very brief saying that investors should ask critical questions but our role is to calm them down. This does not mean we should indulge in wishful thinking. But we are sure that the Russian economy is strong enough to withstand the current critical situation. For example, our budget is rather robust. And even if oil prices fall to 50 dollars we will be able to fulfill our budgetary spending obligations for three years.
- Was it Russia’s objective not to reform the financial sector on a large scale during trouble-free years?
Crisis is always a chance to introduce changes. It’s a time for reforms. I can’t recall a time when the State Duma passed laws as fast as it did now and here I mean pension, tax and banking laws.
- When will these promptly taken measures yield results?
It will take some time before laws passed and measures taken give tangible results. I think that the situation will get normal not earlier than in early 2010.