Our Approach is project-oriented rather than customer-oriented
Vnesheconombank Deputy Chairman Anatoly Ballo’s Interview with Vremya Novostei Newspaper
Origin: VREMYA NOVOSTEI
Number of issue: 172 (2054)
Issued: 18.09. 2008
Author: Interviwed by Julia MIRONOVA
Established on the basis of Vnesheconombank, State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’ carries on increasing its portfolio of investment projects. Some days ago, VEB’s Supervisory Board chaired by Prime Minister Putin approved the Bank’s participation in several projects in the total amount of more than 2 billion dollars. Long-term financing of investment projects is going on even at a time when conditions are worsening on capital markets and private banks are finding it more and more difficult to obtain financial resources, said Vnesheconombank Deputy Chairman Anatoly BALLO. In his interview with Vremya Novostei he said that VEB’s main criteria in selecting projects for financing are their national importance and effect on economic growth.
- Anatoly Borisovich, you are in charge of investment block, this line of activity has come into being pretty recently. What are the Bank’s main lines and scope of activity and what part do investment projects play in your Bank’s activity?
- Each line of our activity is at a different stage of its dynamic development. For example, the Bank has been responsible for managing pension funds since 2003, now 360 billion rubles in pension savings funds are in the Bank’s trust management. The Bank has 65.5 billion dollars in government funds and 4 billion dollars in debt obligations on its balance sheet. The Bank is also responsible for settling Russian borrowers’ problem debts to the federal budget on credits obtained against government guarantees; and the amount of debts being settled is 16.7 billion dollars. One of our lines of activity is associated with financing small business, so far this activityhas been undertaken under our subsidiary Russian Development Bank’s relevant program.
As far as our investment activity is concerned, we had been building our investment portfolio even before the Bank for Development was established in 2007. During the two previous years Vnesheconombank had already been operating as a bank responsible for financing major investment projects and our credit policy was aimed at financing these projects. As a result, now about 70% of the Bank’s credits have been extended for a period in excess of three years and therefore they are long-term credits. In the banking sector the share of such credits is no more than 20%.
As January 1, 2008 our credit portfolio amounted to 197.5 billion rubles. The process of extending new credits and repaying old ones are going on simultaneously and that is why the loan portfolio of prospective projects are more revealing than the current loan portfolio. Since its establishment a little more than a year ago, the Bank for Development has formed prospective portfolio of projects totaling about 1 trillion rubles, with the Bank’s expected participation share being more than 0.5 trillion rubles.
Over the said period we managed to create a methodological basis of the Bank’s investment activity, that is, its credit policy, criteria for selecting and examining investment project, operational procedures and at the same time we were involved in establishing the Bank’s institutional structure and strengthening our human resources.
- What can you tell us about the Bank’s performance in the current year?
Since December 2007 the Bank’s Supervisory Board approved more than 20 projects totaling 602.6 billion rubles, with Vnesheconombank’s participation share in them being 322.6 billion rubles. In most cases we extend long-term credits but in some projects we enter into capital. And we carry on operating despite the fact that the situation is worsening on the capital market and Russian banks are finding it more difficult to obtain long-term credits.
- Formally, the Bank for Development started to operate only a year ago. What objectives does the Bank pursue?
- Our Bank is an enforcer of the state’s investment policy and it promotes the state’s strategic interests in the investment sector. Our activity’s priorities are determined by the Government and were formulated in the memorandum on the Bank’s financial policies designed to support strategically important industries, the export of industrial and high-technology products as well as promote the development of regions. The main idea behind the establishment of the Bank for Development and its mission is to secure investments in the sectors strapped for long-term financial resources and in the projects considered by private capital to be too risky. We have also to take into account the fact that desperate shortages of transport and energy infrastructure prevent many projects from being carried out. Besides infrastructure, the Bank operates in such sectors as power engineering (including nuclear power engineering), aircraft construction, shipbuilding, smelting industry, military industrial complex and electronic industry.
These sectors’ shortcomings and their low appeal in terms of private business’ interests are obvious because projects in these sectors tend to be extremely capital intensive with a long payback period, low profitability and high risks. For example, projects with financing periods of 25-30 years. But it is such periods, which were provided for by the projects co-financed by the Investment Fund. They include the project to build a toll motorway Moscow- Saint Petersburg, the Orlov Tunnel in Saint Petersburg. Our another task and a very important function is to involve businesses in implementing such projects, create favorable conditions for an inflow of private investments, combine aggregate resources of all sides involved in a project to produce a synergetic, multiplier effect for promoting a business project.
- Why can’t the state allocate money for development purposes to companies directly, subsidize their investment projects? And why do we need a special state-run institution such as Vnesheconombank?
- There are two ways of implementing nationally meaningful projects:
the first way is to use budgetary funds in the form of gratuitous subsidies, the second way is to raise the Bank for Development’s credits, that is, financial resources on paid and repayable terms. The country followed the fist way for many years and we all, to put it mildly, can see its low efficiency. Budgetary financing tends to corrupt executives – there is a special division in Vnesheconombank responsible for recovering credits extended against government guarantees in the early 1990s. It’s a good thing that the state has stopped using such a scheme when companies’ executives were not responsible for the way they used allocated funds.
- Won’t Vnesheconombank remain to be a single source of financing nationally important sectors, which are not attractive to private business?
- I hope it won’t. We are trying to create favorable conditions for private business to be able to enter into such sectors, to put in place the so-called “signal effect” for private investors. This is like a chain reaction: due to our financing the company starts to get back to life, pay wages, place subcontracts, suppliers start to build up their portfolio of orders and request for financing. As a result, commercial banks start to come to the sector and more and more private companies start to function. And there is one more important thing: by participating in a project and being involved in pre-project work and sometimes making a commitment to monitoring a project later on the Bank minimizes private business’ risks and makes a project more attractive to investors.
- Maybe, there is no need for restoring certain industries; we’ve got the international division of labor and we can purchase from other countries?
- The fact is that industries where we star operating are strategically important for securing our country’s economic independence. Of course, at some point we can allow our companies to purchase, for example, western-made aircraft whose analogues are not manufactured in our country but by refusing to manufacture our own aircraft we are bound to lose superpower status.
- Are there any differences between Vnesheconombank and commercial banks in terms of an investor who wish to get access to credit resources to implement an investment project?
- Yes, there are. And these differences are principal. Above all, as opposed to commercial banks, our approach is project-oriented rather than customer-oriented. As a rule a bank tries to sell a maximum of its services, for example, besides credits the bank offers a company a full banking service. The most important thing for us is that a project should be in line with our investment declaration and the memorandum on the Bank’s financial policies, which defines quantitative and qualitative criteria. It goes without saying that we also evaluate our prospective customers in terms of their capabilities to implement a large-scale investment project.
At a time that the Bank for Development started to operate the Government the Government imposed restrictions on the Bank’s activity and they do not allow us to compete with commercial banks and this is the way it should be. Nevertheless I would like to say that we are interested in organizing co-financing with other banks including regional ones. In this case, we divide spheres of responsibility – we are responsible for extending long-term resources and private banks can co-finance or finance a project’s preliminary stage in which we can’t participate because this stage does not require significant costs. This means that commercial banks will finance pre-project work and then they will offer settlement and cash services to their customers, will be responsible for documentary business and make money on their customers, while Vnesheconombank will be responsible for financing investment costs. So instead of competing with commercial banks we’ll be able to cooperate with them.
- Isn’t it more profitable for customers to turn to Vnesheconombank because your credits are less expensive?
- In fact, another difference from commercial banks is that we give top priority to promoting the state’s interests in implementing a project rather than generating a profit. We are sure that a philosophy of government investments should not be viewed in terms of “yields- collection” but in terms of catalyzing the creation of new production facilities and hence boosting the country’s economic growth and making domestic producers more competitive. But of course a principle of break-evenness is a fundamental principle for our Bank. Our credits are cheaper but this does not mean that they are preferential ones. First, the difference is due to the fact they project greater profits on equity capital in our Bank this indicator is in line with OFZs yields. Second, the cost of our funding is lower both on the domestic and foreign markets. But in any case, our credits are not preferential we have a well-defined credit policy, which regulates the procedure for setting interest rates.
Moreover, we are limited in selecting customers. Criteria for selecting projects to be implemented with the Bank’s participation are set forth in our memorandum.
I’d like to say it again that in our activity we give top priority to expected macroeconomic effects rather than commercial efficiency. To this effect, we have developed special methods for calculating budgetary efficiency, we have also got integral indices to indicate such parameters as, for example, creation of new jobs, social and macroeconomic effects from implementing the projects that we finance.
- A list of top-priority projects is an impassable barrier to projects that are included in this list and they don’t have any chances to be invested by the Bank?
- Yes, they certainly do. We consider all applications that we receive. This list is not closed and the fact that there are top-priority industries does mean that we can’t deal with projects in other sectors. Even if a project does not fit into a top-priority industry but is in conformity with our line of activity, that is, contributes to introducing innovation technologies, import substitution, rational utilization of natural resources, regional development etc, the Bank can consider such a project. Moreover, many industries are interrelated with our top-priority lines of activity. For example, at present the Bank is considering projects to construct building materials factories operating with the use of unique innovation technologies despite the fact that this sector is not among top-priority industries. Or, for example, social housing projects – we can finance infrastructure of housing and communal services, among other things, on a PPP basis. In my opinion, the government can increase the number of industrial priorities but even the current format makes it possible for us to work for many years to come. And in general, the division of projects into high-priority and other categories is in a sense of relative nature we rate projects not in terms of industry attributes but in terms of their national importance.
- At what stage does the Bank start to participate in a project do you participate in pre-project work or get involved when a project has been already launched and there is a need for money alone but not in recommendations.
Originally we assumed that the Bank would consider projects at more advanced stages rather than consider business ideas. This is standard banking practice – we start to process credit applications, given a project concept, business plan, feasibility study, all original licensing, project and contractual documentation, properly executed property rights or a long-term license for plots of land for building capital facilities, licenses for construction. But the problem is that the level and quality of investment projects preparation are very low and do not meet the existing requirements. And this situation is typical of all regions. This, among other things, caused by the loss of industry competences by core design-engineering institutes and the absence of Russian companies experienced enough to design major industrial facilities. Eliminating shortcomings by a project initiator, which takes place simultaneously with considering an application, increases the procedure for making a decision on the possibility of financing a project up to six- nine months. Having faced the lack of well-prepared investment projects, the Bank had to address this problem. We began to offer consulting services to project participants including executive authorities and even got involved in training personnel (training and personnel development) by establishing the so called human resources capitalization centers in the regions of key importance to us.
So, I’d like to say it again – despite the original idea, the Bank has to lend a hand even at a pre-investment stage. In any case, we can’t afford to invest in a “rough”project even if it is hypothetically promising, in line with our sectoral priorities and designed to produce macro effect.
- How does the Bank cooperate with regions and municipal entities in implementing projects and what are the goals and principles of the Bank’s regional policy?
- As I have already mentioned, regional development promotion is one of our strategic goals. In general, the Bank’s regional policy aims to further balance the country’s territorial economic development and remove economic growth infrastructural restrictions in the country’s regions. In order to speed up its efforts to participate in implementing regional programs and projects the Bank needs to work in close contact with regional authorities and companies. And this makes it necessary to make the Bank more accessible to its potential customers. To this end, we should establish a regional network (historically, the Bank didn’t have its representatives offices in the regions). This step is dictated by the magnitude of tasks, the logic and dynamics of the Bank’s business in the regions including the need to search for major promising projects, examine them and exercise control over the proper use of funds to be committed etc. For example, 35 branches of the China State Development Bank are operating in China whose territory is a lot smaller than that of Russia. That is why the Supervisory Board made a decision to open three representative offices of Vnesheconombank in the Far Eastern, Siberian and Southern federal districts, that is, in the regions suffering acute shortages in investment resources.
The Bank is interested in long-term cooperation (large-scale projects’ implementation periods are as a rule more than ten years) and in raising quality investments : while working with large-scale investment projects the Bank places great emphasis not only on attracting investors but also on working with them at later stages of project implementation. From our point of view, this approach is highly instrumental in securing regional economic growth.
Taking into account the need for regions’ socio-economic development and for speeding up investment activity on their territory the Bank agrees with constituent entities to make joint efforts to raise funds to finance investment projects in real sectors of the economy. We have entered into agreements on cooperation with 29 regions. This cooperation resulted in involving private companies and international financial institutions into participating in a number of promising investment projects. Regional development corporations being established with the Bank’s participation became one of the main instruments. These corporations are tasked with forming a pool of prospective investment projects providing for Vnesheconombank’s participation. The Krasnoyarsk Territory Development Corporation and the Kaluga Region Development Corporation are already implementing specific projects. Regional administrations and Vnesheconombank were active in establishing them and now they are actively participating in their operation.
Pursuing its regional investment policies the Bank is carrying out a whole range of various programs. To give just one example, because of differences in geographical location, availability of infrastructure, labor natural and financial resources, each federal constituent entity has a set of its own unique competitive advantages. If we idetitify these advantages correctly it would help us to choose an investment strategy for a given region and later on a set of instruments to implement it. The Bank is prepared to assist regions in formulating individual approaches to raising investments on the basis of their competitive advantages and in pursuing a policy of attracting investors. This would help to fulfill tasks of removing regional development infrastructural restrictions, sustaining economic growth rates, increasing personal incomes and receipts of budgets of all levels, developing and diversifying production facilities including new and competitive ones. And these are not empty words. For example the project “Ural Industrial – Ural Polar” provides for each ruble invested in infrastructure by the state to generate 3.5 rubles in private business investments in industrial facilities.
- Most of these projects will be implemented on the terms of public private partnership?
- Yes, they will. The Bank uses and advances various forms of public private partnership (PPP) for using private business’ capital and expertise in implementing development projects carried out by government and municipal authorities. PPP instruments allow the state to give private business directions to top priority investment sectors.
In order to make PPP instruments and mechanisms more efficient, the Bank established its PPP Center which is tasked with offering investment consulting services to government and municipal authorities to assist them in selecting a proper public private partnership form, preparing a PPP contract, attracting private partners, monitoring a project.
- How active is private business?
- With the exception of military industrial complex, most projects are initiated by private business. But as we give top priority to nationally meaningful projects we are also going to work with state corporations. We have already signed an agreement with Rostechnologies, we can see that this corporation’s potential is huge. We cooperate both with the United Shipbuilding Corporation and the United Aircraft Construction Corporation. The reason for this is that despite the privatization, major private investments haven’t been made in these sectors.
-What projects are already under way and what projects are on the way?
- The Supervisory Board approved a financing limit for the United Aircraft Construction Corporation in the amount of about 25 billion rubles. Even before the Bank For Development was established Vnesheconombank financed the work on building a Su-34 fighter plane, supported the export of Russian aircraft to Cuba. From the very outset we have been participating in the Superjet-100 construction project. This is a project that demonstrates clearly the need for government institutions, which help to restore specific sectors to create favorable conditions for private business. Without the state’s support this project, to my mind, wouldn’t have been launched.
We’ve got plans to sign an agreement on cooperation with the United Shipbuilding Corporation. Now, the Corporation is just being formed and we are active in providing it with consulting and organizational support, we help it to cope with its problems and carry out audit work. In particular, we are developing leasing which were not used in shipbuilding before.
Over 30 years, no pulp-and –paper mills have been built in the country. We started the first pulp-and-paper mill construction project in the Lower Angara Area.
- How do you size up the investment climate in the country, does it make it possible to implement long-term projects?
- One of Vnesheconombank’s objectives is to help create favorable investment climate in the country. Over the past years the investment climate has significantly changed for the better. The tax environment has improved; our market’s potential is enormous. The Kaluga region is an obvious example of large-scale long-term projects, we are forming an infrastructure for an automobile cluster there. In the future there will several factories there built by foreign companies. This is the way to produce a real multiplier effect when the ruble invested by the state generates 15 rubles in private investments; automotive giants are going to Russia rather than China or Eastern European countries.
There is no doubt that macroeconomic conditions in Russia and in the world influence us too, but the vector of development remains unchanged. We have made a great stride in the past three-four years – such development institutions as the Investment Fund, the Russian Venture Company, Vnesheconombank have been established, the law on concessions has also been passed. They are all components of the single system and are designed to pursue the state’s comprehensive investment policy. A revolution in the investment process is taking place and it is bound to bear rich fruit in several years.
Vnesheconombank Chairman V.A. Dmitriev Speaks Live in the Bloomberg TV Programme “Emerging Markets”
Text of the interview:
Correspondent Ellen Pinchuk
Good afternoon, Vladimir Dmitriev is now in our studio, he is the Chairman of Vnesheconombank, Russia’s Bank for Development. We’ve got a lot of things to discuss. Let’s start with the hot news – TNK-BP. How important in your opinion is this story for industrial companies in Russia?
I think that it is the right step in the right direction in terms of improving corporate governance of Russian corporations and joint stock companies. And this is proof that balanced decisions and prudence are gaining the upper hand over emotions and emotional approaches. I welcome this decision, a compromise settlement, which shareholders managed to make and enshrined in their agreement.
E.P. A period of differences lasted for about four months. What do you think about the extent of damage done to Russia’s business reputation taking into account the fact that the government was involved in the dispute with all these problems with visas, tax inspection and etc?
V.D. I don’t believe that either of the sides took some artificial action to confuse the situation and complicate the problem. I think that it’s quite natural when differences emerge among shareholders within a corporate entity. And I am completely happy that in the long run both sides reached a relevant and quite a friendly settlement.
E.P. Over the current year we have seen that Russian business suffered numerous losses, namely, a 30% percent reduction in business activity as a result of the military conflict between Russia and Georgia and BNP Paribas information that about 30 billion dollars in the form of capital investment have fled the country since the beginning of the conflict with Georgia. How would you comment on the fact that investors are scared and fleeing the country?
V.D. In general, I didn’t say that there were serious problems with Western investors in Russia in terms of hypothetical investors. And as far as capital outflow from the Russian market is concerned, it involves short-term deposits. But long-term, strategic investors are still here and I don’t see any problems associated with their work in our country as well as with their increased presence in our country.
E.P. Prime Minister Vladimir Putin has said lately that there would be no serious consequences for the Russian economy as a result of the military conflict with Georgia. Do you think that the government should intensify its efforts to persuade investors that their money is in safety?
V.D. I think that actions taken by our government, our economic and financial institutions not only but also in the past are quite adequate to convince Western investors that Russia is a very stable, steady and reliable partner for their business. As far as our government is concerned it is doing its best to create a relevant legal environment to convince investors that Investment climate in Russia is favorable. And we can see that a lot of new, strategic capital is coming into Russia, into its various economic sectors.
E.P. Let’s talk a little about the ruble. Now, the ruble exchange rate to the dollar has almost reached this year’s low, yesterday we witnessed the biggest ruble’s decline against the dollar-euro basket since 2005. What’s your long-term forecast for the ruble’s value?
V.D. A far as I can see, our financial authorities haven’t taken any special measures in this respect, as both the Central Bank and the Finance Ministry have been saying for several months that we should move to a planned inflation within which we should have a freely fluctuating exchange rate of the ruble. As to the recent trend, it can have a positive impact on Russia’s exports.
E.P. Thank you very much. Our guest was Vnesheconombank Chairman Vladimir Dmitriev.