Synergetic Effect from Participation
Analytical Banking Journal
12 (151)
December 28, 2007
In the year 2007, (after several failed attempts) the Bank for Development was established on the basis of Vnesheconombank. The Bank was tasked with financing the development of the country’s strategically significant industries and its infrastructure. Lately the Bank has at last received large budgetary funds and can start operating. We asked Deputy Management Board Chairman Sergei Vasiliev to tell us about the Bank’s high-priority plans and its methods.
-Despite lengthy discussions about the need to establish a Bank for Development in our country and even some, although not very successful experience in this field it was in 2007 when the Bank was established on the basis of Vnesheconombank. In many industrialized and developing countries such banks have been in place for a long time. Why are we lagging behind?
Sergei Vasiliev:The Bank for Development’s establishment actually proved to be one of the most important events of the outgoing year in our country. It was in 2007 when our economy reached the pre-crisis level of the 1990 economic development. And this changed dramatically the requirements for economic development conditions. Infrastructure economic growth restrictions are coming to the fore. The infrastructure that was built in the Soviet times was quite sufficient for the country during stagnation followed by gradual recover growth. Investments in infrastructure have been made in limited amounts in the lat 15 years and this limited the economic growth. The Bank for Development was established to meet the challenges of the time.
-What are the sources of financing infrastructure?
Sergei Vasiliev: Infrastructure development can be financed with various funds. Above all, through using budgetary resources. But unfortunately budgetary monetary funds on the one hand are not sufficient to finance all facilities and on the other the current investment mechanisms demonstrated that they are rather cumbersome and ineffective. The decision that has been recently proposed for major investment projects is to create an investment fund. This decision makes a lot of sense but it allows to work simultaneously with a limited number of major investment projects while the he country needs hundreds of such projects. The main reason for establishing the Bank for Development now is the growing need for such an institution as an instrument of a large-sale infrastructure financing.
-What institutions should be our role models and whose mistakes should we learn from?
Sergei Vasiliev: Upon establishing a Bank for Development on the basis of Vnesheconombank the main countries whose best practices were of particular interest to us and where these development banks were very successful were such countries as Germany where such a development institution was established as early as the period of post-war rebuilding; Korea where a similar development institution was highly instrumental in the country’s industrialization; Brazil where such an institution was very efficient and is still very efficient.
As far as CIS countries are concerned, in my opinion, Kazakhstan’s experience is of particular interest. We are learning from its experience. The Bank for Development was established there not long ago but it’s already operating in a pretty successful way. Moreover, upon drafting our own documentation we relied, to a great extent, on Kazakh regulatory documents because this country is very close to us in terms of economic structure and institutional culture.
-What are in your opinion advantages of Russia’s Bank for Development?
Sergei Vasiliev: One of the Bank for Development’s principally important advantages is that it provides a very high multiplier effect from investing budgetary funds. Recently 180 billon rubles have been transferred to our Bank’s charter capital from the budget. With the Bank’s own funds its capital amounts to 200 billion rubles. It’s quite a large sum. But the Bank’s future potential is not limited to the said sum. The Bank’s 200 billion rubles can raise funds in international markets in the amount of about 800 billion rubles. Thus the Bank’s total assets will reach a trillion rubles in the short term (in the coming 3-4 years). Thus one ruble of budgetary investment in the Bank’s charter capital will be able to raise 4 rubles from the market. But there’s still something more to it. As a rule, projects are not financed in the amount of our 100% participation but on the basis of shared participation of the Bank for Development and other investors. Our position is that in the prospect the Bank would finance only 30% of investments in major projects. Another 30% is to be provided by the borrower from its own funds and assets. The remaining amount can come from other sources. We expect that those could be budgetary resources, international financial institutions’ funds and outside investors’ money. The main thing here is a synergetic effect from the participation of several investors in major investment projects: none of these investors can handle such a big project on its own but the Bank for Development’s initiative would minimize risks and make investment more profitable both for regional budgets and private investors. With this approach, gross investment amount per one budgetary ruble ratio proves to be 8:1. In other words one ruble from the budget invested in Vnesheconombank’s charter capital would raise eight rubles of gross investments. It is very good. If we now calculate the total sum of money we can raise to invest in our economy in the midterm through the Bank for Development it would amount to 1.5 trillion rubles. It’s a big sum of money equivalent to about $ 60 billion although it’s clear that it is not sufficient to meet all the needs for infrastructure development.
-Nevertheless, the Bank for Development is a state bank? What is its official status?
Sergei Vasiliev: The Bank for Development was established as an institution with a special status. It is a state corporation that operates on the basis of the special Federal Law and its operation is not to be regulated by the Bank of Russia, we don’t have mandatory reserves and we don’t have profit tax. All financial regulation is made on the basis of the Memorandum on the Bank’s Financial Policy, which sets regulatory standards for its operation.
-What is the Bank for Development’s management structure?
Sergei Vasiliev: The Prime Minister heads the Bank’s Supervisory Board comprised of key ministers. This is the Bank’s supreme collective body, which formulates main rules of the Bank’s operation. Day-to-day operational management is the responsibility of Vnesheconombank Chairman and its Management Board. Russia’s President is to appoint Chairman of the Bank’s Management Board and Management Board members are approved by a decision of the Supervisory Board. The Memorandum on the Bank's Financial Policy sets forth that for the most part the Bank is to finance long-term projects the payback period of which is at least five years. Another significant indicator is that a project’s value should be no less than 2 billion rubles and this means that the Bank doesn’t have to participate in small projects.
-You’ve said that the Bank’s profit is not taxed. What financial results do you expect to achieve?
Sergei Vasiliev: The Memorandum formulated the principle of the Bank’s break-even operation. Taking this principle into account, the Bank for Development should see that a project is sure to pay back although the Law regulating our activity states directly that “the Bank for Development’s objective is not to generate profits”. At the same, time we do not give high priority to generating maximum profits. This means that our rate of interest would be a lot lower than a market rate of interest. It would be equal to the cost of borrowing funds plus the Bank’s margin determined by our overhead costs.
-What are the Bank’s main lines of activity?
Sergei Vasiliev: Infrastructure, innovations, rational use of natural resources, small and medium-sized business development and support for industrial exports. These are traditional lines of business for most national development banks. In addition to this, certain industrial priorities have been assigned to us. These are for the most part sectors of heavy industry such as aviation, space industry, shipbuilding, energy and transport mechanical engineering, atomic industry, nuclear power engineering, woodworking and pulp-and- paper industries. It should be said that Vnesheconombank has been traditionally working with these industries. In a way, these industries pose a problem to private investors.
At present, on the Supervisory Board’s instructions the Bank’s strategy is under development where the Bank’s industrial lines of business are being worked out in more detail, not just transport but its specific sectors, for example, building federal roads within public private partnership, reconstruction and building of sea ports and port facilities, development of internal waterways. Here we mean almost all major industries, which need large investments. The same is true of power engineering industry and housing and communal services.
-Hence, the Investment Fund is responsible for financing major projects. The Bank for Development is also responsible for financing major projects but of lesser scale, that is, those the federal center can’t finance from the federal budget – projects of regional level. At the same time the Bank would start to participate in financing projects on the competitive market on the terms of co-investing with private business including banking business as well. In this case such a partnership would boost competition and would bring about the redistribution of market forces.
Sergei Vasiliev: The Memorandum officially bars us from competing against private business. In the case that a project even in the infrastructure sector can be funded by market makers for example by commercial banks we won’t participate in principle in this sort of projects. In other words, we are not supposed to go into competition with banks. By contrast, as Vnesheconombank does not have branches many projects in the regions would be carried out through regional commercial banks, which would assume the responsibility for making funds available to borrowers as well as for exercising control over the way the funds are spent. Vnesheconombank would not perform these banking functions. Its task is to examine and fund projects. As regional problems are coming to the fore a special department for regional development was established in the Bank. In the near future representative offices are to be established in the regions. The task of Vnesheconombank’s representative offices is to study distinguishing features and details of the projects locally and assess risks associated with them and propose projects to the management.
Among the lines of particular importance for regional development I would single out small-and –medium-sized business infrastructure development, creation of techno parks and business incubators. In terms of financing technology we are going to select regional banks on a competitive basis and these banks are going to become operators of a number of projects. These banks would extend credit to small and medium-sized business using Vnesheconombank’s credit lines. But as to techno parks and business incubators the Bank will finance them directly.
The second line of business also associated with regional development is to build infrastructure of special economic zones, this line of business is the Bank’s top priority. But I think that we would make investments in regional infrastructure and development of the regions, which are not special economic zones. Facilities to invest in would, for the most part, depend on what kind of projects regional administration can offer to us. If there are interesting, well-prepared projects then I am sure there would be no limitations in those regions in which the Bank would invest money.
Vnesheconombank Chairman Vladimir Dmitriev. “Bank for Development is not a Guarantee but a Chance”
Izvestia
December 24, 2007, the city of Moscow
ANDREI REUT
“Infrastructure is the most vulnerable sector of the economy,” said Vnesheconombank Chairman Vladimir Dmitriev to Izvestia
Russia’s newly established Bank for Development would allow to revive what was once called “projects of the century”. In their scale they would surpass the BAM construction and the 1930s industrialization. In various Russian regions there would emerge zones of mineral deposits development, new plants, transport infrastructure and etc. Vnesheconombank Chairman Vladimir Dmitriev told Izvestia’s correspondent Andrei Reut about his brainchild’s ambitious plans.
Question: How come Vnesheconombank was transformed into Bank for Development but managed to retain its historic brand?
Answer: This happens only in exceptional cases. Half a year ago Vnesheconombank acquired status of State Corporation ‘Bank for Development and Foreign Economic Affairs’. Passing the Law On Bank for Development, the State Duma didn’t fail to see Vnesheconombank’s multiyear experience, its international image and high investment rating. You can’t help agreeing with me that if the Bank has 83 years of experience behind it, this is worth a lot. And that is exactly why our brand was retained.
Q: Why did you become a Bank for Development?
A: For a period of three years we have been pushing an idea of establishing a development bank and trying on a role of such a bank. We raised inexpensive credits abroad, financed infrastructure projects and high-technology exports in Russia. Three thirds of credits extended by our Bank are long-term ones. Vnesheconombank was one of the first banks that started to implement public private partnership by participating in the Lower Angara Area Development Project.
Q: What hopes does the state entertain having established a new financial institution?
A: Having provided the Bank with a charter capital of 180 billion rubles, the state played for high stakes. It expects that each ruble of our investment would raise a flow of capital from businessmen. It also expects that our economy would overcome its raw materials dependence, that innovations would become a pivot of economic growth and that Russia would compete on a par with world leaders and would be among the top five in terms of GDP.
Q: What tasks is the Bank charged with?
A: Above all, it’s infrastructure, which hasn’t been financed by the state on a large scale for about twenty years. Business is ready to develop a whole range of mineral deposits, build factories, ore processing plants and thermal and hydro power stations. In the companies’ plans till 2015, these projects are worth 700 billion dollars. For the most part, they are concentrated in Siberia and the Far East. But in order to get access to mineral wealth and industrial sites we have to invest in railways, pipelines, power transmission lines, public utility networks. Without investments in infrastructure, 90% of these projects would be left on paper. But additional costs in the amount of tens of billions of rubles would make projects unprofitable and discourage private companies from investing in them. The way out is clear: the Investment Fund would invest in infrastructure, as would Vnesheconombank on commercial terms. So the interests of the state and business, their projects and investments intersect. Our Bank is a bridge between them.
Q: What advantages does your Bank have over commercial banks?
A: We can extend credits for infrastructure projects for many years. For example, for roads M4 “Don” or the Western Speed diameter for a period of 25-30 years. The most important thing for investors and borrowers here is that maximum profit is not Bank for Development’s objective at all. Vnesheconombank’s main line of business and its advantage are to extend large credits for a long period of time at relatively low interest rates.
Q: Besides infrastructure Vnesheconombank has quite a few other top priorities.
A: That’s it. They also include aircraft construction, missile and space complex, atomic industry, shipbuilding, defense industry, mechanical engineering, and wood working industry. Basically, we get automatically involved in innovation projects in these industries. For example, in the aviation industry the Bank is to finance the creation of the fifth generation fighter plane in the shipbuilding – the construction of ships to develop northern mineral deposits. Standing by itself is the Bank’s support for small- and medium-sized business and insurance of high-technology exports.
Q: Besides the Law On Bank for Development, the Government approved the Memorandum on the Bank’s Financial Policy. What does the Bank need this Memorandum for?
A: In this Memorandum the Government set forth our priorities. The Memorandum is a sort of guidebook for the Bank. The Memorandum states that the projects we participate in are to be worth at least 2 billion rubles and pay back in the sixth year. Mid-and long-term projects in the Bank’s portfolio would account for at least 80%. To put it differently, the Bank is not allowed to dissipate its energies.
The Memorandum established a system of controls to monitor the Bank’s operation, that is, the Supervisory Board headed by the Prime Minister, financial reporting in accordance with international accounting standards, internal and external audit.
While drafting the Memorandum, the Bank and the Government were seeking a fragile and appropriate balance between the Bank’s autonomous management and required control on the part of the state between bankers’ determination to select “the most palatable” projects and the state’s interest in long-term sometimes marginally profitable investments in infrastructure and innovations. The Memorandum also established a minimally acceptable risk threshold, which the Bank is not allowed to cross.
Q: The Memorandum has been approved. What next?
A: Our next move is our Bank’s strategy till the year 2012. At present, we are discussing its main provisions with the Government. We are going to state in greater detail our Bank’s role for the national economy. Over a period of five years our Bank would transform, figuratively speaking, into a pump designed to raise financial resources in international and domestic markets for Russia’s economy. Eventually, our loan portfolio would increase from 200 billion rubles to 750 billion rubles.
Q: Is this sum too small for our economy?
A: Actually, the investment shortage is huge. But look at the other side of the medal. For Vnesheconombank to increase its credit portfolio almost fourfold and at the same time maintain its financial stability it should raise from the market an average of 8 billion dollars a year. How many Russian banks are capable of raising such funds for consecutive five years?
Q: What’s the total volume of investments inflow?
A: In terms of plain figures, at least 30% percent of projects to be financed by the Bank would be implemented within public private partnership. And in this case, investments by private companies and other investors would account for 70%. So in our projects we can expect outside capital inflow to double as a minimum.
Q: Private investors are above all after profits and you are after promoting the state’s interests.
A: Actually, as a nonprofit organization we do not give high priority to generating profits. But nobody will understand us if most of our projects are unprofitable and in this case the Bank will simply start using up its capital. Hence, the bank’s mandatory criterion is its breakeven. This is required from us by the Law, the Memorandum and the Supervisory Board. So we should use our heads not only while we work on each individual project but also keep in mind all the Bank’s business deals in order not to allow any losses in general.
Q: What is the central pivot of the Bank’s investment policy?
A: Of course territories development projects. The comprehensive development of Southern Yakutia, the Trans-Baikal area, the program “Ural Industrial – Ural Polar” are entirely based on PPP and supported by the Investment Fund. For us it is like the state’s go-ahead to move forward. An in one form or the other we are already becoming integrated into these projects. Their total value is over 1.2 trillion rubles, with the state’s share being 239 billion rubles. From our experience in participating in the Lower Angara development project we can see that it is these development projects that can change the regions’ economy and speed up its growth. The construction of the Boguchan hydropower station, metallurgical and wood working production facilities and a cement plant would not only create additional 12 650 new jobs but would provide people with modern professions at the most advanced production facilities. They would allow people to gain a new perception of their life in Russia.
Q: The above-mentioned projects are well-known. And what new projects are in the pipeline?
A: In the said projects Vnesheconombank is playing what is called the second number by joining the projects that have already reached the federal level and are tied to the Investment Fund. But we are not marking time. The Bank is determined to initiate a project to develop the North-Siberian Railway territory, which will have a dramatic impact on the economy of the Khanty-Mansi area, the Tomsk and Irkutsk regions, the Krasnoyarsk territory. This project involves the construction of a 2 thousand kilometer long railway and the implementation of at least 20 investment projects in the adjoining territories, that is, gas production and processing, ferrous and nonferrous metallurgy, nuclear and hydro power engineering, chemistry and timber industrial complex. The value of the North-Siberian Railway territory development project under various schemes ranges from 30 to 50 billion dollars. The very substance of the project necessitates public private partnership.
The North-Siberian Railway territory development project was discussed in Krasnoyarsk a month ago. They discussed how to further develop transport infrastructure at a meeting of the State Council chaired by President Vladimir Putin.
As far as the North-Siberian railway territory development project is concerned, Vnesheconombank is ready to finance the earliest stage, namely, project structuring in order to coordinate efforts by RZHD Bank and administration of four regions across which territory the railway will run. Primarily, this would deal with the financing needed to prepare industrial enterprises’ business plans and appraise the value of infrastructure facilities construction.
Q: When are we supposed to know the names of the projects Vnesheconombank is going to support?
A: I think that during the coming three months Vnesheconombank will be able to agree upon with ministries a list of projects in such sectors as power engineering, metallurgy, missile and space industry, aviation industry, shipbuilding, transport and energy machine-building, wood working and defense industry. I believe that we’ll be able to raise funds to finance a number of projects without any delay. We have already gained this sort of experience and at present, for example, we have open credit lines of foreign banks for the amount of 2.4 billion dollars. We’ll also agree upon a list of companies manufacturing high-technology products whose export ambitions will benefit the state and Vnesheconombank.
Q: Is public private partnership possible in infrastructure alone?
A: I am sure that in industrial projects there will also a proper place for PPP and this place won’t be the last one. The simple fact is that today infrastructure is the most vulnerable sector in our economy. The more private and state banks’ capitals come here the better. There will be enough room for all – for private companies and banks and foreign development institutions.
We have a plan to establish a National Public-Private Partnership Center. There is no doubt that we should make efforts to upgrade public-private partnership legislation. For the partnership to operate at its full capacity we have to introduce amendments based on experts’ opinions into the existing regulatory acts and approve another 128. The Center would propose models for raising Russian and foreign capital for PPP projects.
Q: When will the money invested in Bank for Development yield tangible results?
A: Nowadays a national system of development institutions is coming into being. This system embraces the Investment Fund, special economic zones, state corporations including Vnsheconombank. The state has already invested more than 1 trillion rubles in development institutions. And this is not a charitable activity. This is a sober consideration and our understanding of what each project can benefit us in terms of thousands of kilometers of roads and power transmission lines, new production facilities, new jobs and GDP percentage growth and an atmosphere in which the country lives, given its transformed economy.
As far as Bank for Development is concerned a number of experts complain about the loss of property that was transferred to its charter capital. But is this property really lost? The state can’t lose it because a state corporation can neither be privatized nor artificially bankrupted. This property works and increases.
I think that those who are skeptical about Bank for Development’s prospects have no grounds for their skepticism. It remains to be seen who is right and who is not. But to my mind, it’s even worse to be indulged in wishful thinking and hope for immediate results. We should clearly understand that Bank for Development is not a short-term but a strategic instrument. Over the first years of its operation the Bank, for the most part, will invest in “long” projects. It will take several years for tangible results from its activity to appear. Bank for Development is not a guarantee but a chance.