December 05 2007
Vremya Novostey (Russia)
223
(c) 2007 Vremya Novostey, DLS. All Rights Reserved.

Whether public-private partnership (PPP) is going to become a realistic instrument, which would contribute to economic growth, increased investment, updated infrastructure and implementing new projects is a theme of a round table discussion in the editorial office of Vremya Novostey. The participants in the discussion were Bank for Development – Vnesheconombank Management Board Deputy Chairman Sergei VASILIEV, Bank of Moscow Center for Strategic Studies Director Alexei VEDEV and Institute for Regional Development Director Bulat STOLYAROV. The round table discussion was hosted by Vremya Novostey Chief Editor Vladimir GUREVICH.

Gurevich:The theme of this round table discussion may seem to be narrow only at first sight. There are trillions of rubles, overwhelming needs and no lesser interests both public and commercial behind it. Not only has the theme matured, it has arisen in all its magnitude. Now, the state has got money and it is pursuing an active policy of economic expansion. This gives rise to a great deal of questions as well as criticism and fears. But at least there is a consensus that there are several key sectors (infrastructure is one of the most apparent sectors) where the state’s active participation is not only desirable but also necessary. In some cases the state enters the market on its own and in others it has to create conditions for the market to develop. How does the state work with market operators and is there any chance for them to establish a partnership? Not a compulsory but mutually beneficial partnership. PPP is not new in the world, in Russia they have already discussed it for more than one year but what has been said about it and what has been done with respect to PPP is completely not in line with the magnitude of the problem. How can the economy and the society benefit from public-private partnership what sort of mechanism is it on the whole and who plays the primary role in it – the state or private business? What’s the role of government money and government institutions to be established by the state, is the Bank for Development, in particular, capable of becoming a sort of driving force for PPP, taking into account its status and expanding resources. Is there any PPP legislation, do we need any special legislation, what existing regulatory acts can we rely upon ad what is lacking? And finally, do we know in what industries and regions public-private partnership appears to be most pressing?

 Mutual Obligations

Stolyarov: I can’t agree with you that PPP hasn’t taken shape in Russia. For a relatively short period of time, we have been able to create an entire range of public-private partnership instruments. Here I mean the investment fund with its algorithms where there are three forms of financing by the state. There are also special economic zones of three types. We’ve also got the Bank for Development and the Russian Venture Company and the venture fund as a subsidiary of the investment fund. There’s also a special venture fund in the communications sector supervised by the Ministry of Communications. There are also state corporations popping up like mushrooms after a rain designed to fulfill specific government tasks. They include such corporations as Olympstroy, Rosnannotech, Rosatom and etc. These are the forms of managing government money and government decisions in specific ways to achieve certain objectives.

Vasiliev: What’s bad is that we failed to start with a definition. For example, raising private investment against government money by itself is not as yet PPP. And lending private borrowers by state-run banks is not a public-private partnership. The Foreign Trade Bank (VTB) extends credits to private borrowers and it’s standard practice on the market. PPP is a special instrument. From my point of view, PPP’s distinguishing feature is that mutual obligations by business and the state are should be set forth in a clear-cut way.

Vedev: I studied a definition given by the ministry of Economic Development and Trade. It reads: PPP is cooperation on a contract basis between government authorities, local governments and business. And in this case, the state retains strict control over the scope and quality of services to be provided.

Vasiliev:In this connection I would like to say a few words about the Bank for Development. Our Bank is not a state-run institution. What we sign is not an obligation by the state. Our money is not guaranteed by the state it is guaranteed by us. And the said definition deals with a government authority. The investment fund is a case in point.

Stolyarov: A key word is “contractuality.” What is important here is a form of making contracts within the Civil Code between the investor and the state as far as mutual interests and obligations with respect to implementing a project are concerned. As early as three-four years ago relations between the state and investors were not regulated by any contract obligations. The state’s obligations were not stipulated in federal target-oriented programs and in federal targeted investment programs. And on the part of the investor it was a sort of special exercise to try to put the state’s interests and obligations on a contract basis. It’s very important that now the investment fund and special economic zones and everything associated with venture investing are regulated on a mandatory basis by investment agreements under which the state and business enter into a sort of contract. On the one hand, this is PPP’s main advantage and on the other this is the main source of risk because so far the state is not a very good negotiator and is not good at compromising, extensive enforcement practice is nonexistent and we are in a situation of certain legal vacuum.

Gurevich:  This means that there is no legal framework for PPP. Should we establish this legal framework ?

Vaisliev: No, we shouldn’t. PPP, say, is an academic notion.

Gurevich: From what we have heard here it is evident that we can talk about PPP as a partnership in the broad sense. First, government institutions and government money interact with the market and nongovernment institutions in various forms such as extending credits, issue of bonds and etc. Second, we have moved to a more accurate definition of PPP, which provides for such a partnership where we have contract law and appropriate contract legal relations. My question is: Do we have at least one example of such partnership?

For what and why

Vasiliev: Where does a PPP mechanism emerge from? Our country is in great need of infrastructure investments. There are two reasons for involving private sector to meet this need. The first one is that we don’t have enough seemingly abundant budgetary funds to achieve this goal. The second reason is that, private economic interest allows us to carry out projects more effectively. Private owners have to pursue their own interests and their estimates are sure to be more accurate. This, of course, is not a guarantee but an important condition.

Gurevich: The bottom line here is that on the one hand the state lacks money and some market control. That is why it has to establish a partnership with business. And what if we have an opposite situation? A private investor is ready to carry out a project, be it, for example, Deripaska in the Lower Angara Area but he has some problems with infrastructure – there are no roads and in this case it is he who offers partnership.

Vasiliev: In any case in this sort of project there should the so-called external effect. In the case that there are no external effects there is no rationale for PPP. For example, an effect produced by a road is a good visible effect.

Vedev:  I suggest that we should look at a partnership issue from a bit different perspective, from the top. First, in terms of promoting positive economic growth rates. Since the 1998 financial crisis, growth factors of the national economy have changed consecutively. At first, industrial output grew due to a sharp ruble devaluation and import substitution and then economic growth was secured by surging oil and gas and other raw materials prices on the world market. Finally, at present, increased consumer and investment demand is the main factor of economic growth. The current stage of development looks unstable because it is now that we are faced with a strategic choice of our further development – by way of investments and innovations (they produce a fundamentally different quality of economic growth) or by way of natural rent. Possible development scenarios are described in great detail in the program until 2020 by the Ministry of Economic Development and Trade. It’s hard to understand which choice the Ministry of Economic Development makes – is it in favor of an inertial, energy raw materials or innovation path of development. And within these three scenarios PPP assumes a totally different content.

Gurevich: A different content in terms of substance and what about in terms of form? Is it also different in terms of the amount of required resources?

Vedev: We need money in any case. And the second problem is that there is a shortage of domestic savings in the private sector. It’s a wishful thinking to say about excessive consumer savings – they are all known. According to our estimates in the current year this shortage amounts to 25 billion dollars in the banking sector alone. In fact, there are two sources to narrow this deficit. We can do it either through international borrowings or government funds. Factually, for a period of three years our stabilization fund and foreign exchange reserves were kept abroad and we used to make borrowings abroad almost in the same amounts. So money is available either on the foreign market or in our money authorities such as the Finance Ministry and the Central Bank. And if our government decides at last to use funds accumulated from selling raw materials then we’ll need public-private partnership if we are to use them in the most effective way.

Stolyarov:  Both money and ideas are of great importance. We are witness to the state’s increased investment potential which is not supported by any innovative ideas. Nevertheless, business went through quite a big evolution. Now all companies in one way or another have programs, development strategies as well as realistic investment plans, which are to be, implemented under specific investment projects. According to our list of investment projects with investment volume from 50 million dollars scheduled to be carried out on Russia’s territory by more or less noticeable companies – both private and state-owned ones, about 700 billion dollars would be invested in the Russian economy until the year 2015. But there isn’t a single project on this list, which doesn’t have any infrastructure restrictions. Everybody needs something: power facilities, railways, motorways and bridges. We estimate that it would take at least 400 billion dollars to build infrastructure for these projects worth 700 billion dollars. There’s a lot of room for the state’s investment activity.

Gurevich: And what are we supposed to do with a great deal of intentions and the absence of infrastructure?

Stolyarov: In the industrialized world, above all, in Western Europe PPP is associated with the  state’s ambition to raise private capital to build infrastructure. And so there is a need in the first place in concession instruments. But in our country concessions are most likely to be a failure. Look at the statistics of the investment fund’s project selection bodies. There are more than 20 approved projects and a certain idea of applications being prepared. These are for the most part comprehensive projects aimed at comprehensive development of  territories where investments in infrastructure development make it possible to carry out projects in various industries. In the projects the state tend to be responsible for infrastructure, that is, transport, power engineering facilities. And once the state signs its infrastructure obligations business is in a position to start building industrial facilities. this is the main principal vector of PPP, according to the investment fund’s statistics more than 80% of projects are this kind of projects. And this is extremely significant.

How much is a kilometer

Vasiliev: And what about roads? Don’t we need to build roads?

Stolyarov: Yes, we need.

Vasiliev: Without private money?

Stolyarov:We have to build roads in Russia now only for government money. Any western investment consultant is sure to write in his opinion about a motorway construction project, given such fare tariff rates and such a roadside development concept and such a price for a kilometer of road, that a concession business won’t be able to operate.

Vasiliev: Is this also the case with ordinary highways? Don’t we have a scheme for involving private investors in road construction business in Russia?

Stolyarov: In our country the price for building a kilometer of motorway is 50 times as much as that in the West. What fare tariffs and roadside services should be to allow a private investor to compensate for his investment in road construction?

Gurevich: Only if we build a casino on the right side of the road and something else on the left side of it.

Vasiliev:Why do we find ourselves in such a situation? It’s a question to people in construction business and their construction standards and rules.

Gurevich: As road construction is a typical example of PPP and concession business is the most common form of it, how do all these unrealistic prices, conditions and tariffs emerge? Who is involved in the negotiation process on the part of the state?

Stolyarov:In order to show that a project is profitable or at least break even, given overrated prices, private investors have to artificially increase tariffs. In any case, business is sure to deceive the state.

Gurevich: Thank you. But you’ve said before that if the state would invest budgetary funds losses will be inevitable. And that’s why we need a private owner because he pursues his interests and is better at making estimates. And now even in business’ presence the situation proves to be rather unfavorable. Maybe, it’s a problem of partner selection?

Vasiliev: There is no doubt that in any case business is sure to deceive the state. But if this business acts as a contractor in a construction project financed by the state it will deflect a lot more government money than if it deals with a private project operator.

Gurevich:  OK, Is your Bank in a position to act in the capacity of such a partner?

Vasiliev: For the Bank for Development a PPP issue is of key importance. This is the case because our task is to invest in infrastructure. But entering into such projects we are bound to see that our and the state’s participation in them is not sufficient. Let’s assume that we have allocated our money and the state has allocated money from the budget – this is a way to nowhere. All the money will be stolen. That is why we have to rely on a trilateral scheme providing for our Bank to allocate its money and for the state allocate some part of the money but of course there should be a private borrower. In this case, PPP emerges automatically. And this applies to ports, roads, to any infrastructure, be it public utility services, water channels, we simply can’t do without PPP. It’s inevitable and should be put into effect.

Instruments and institutions

Stolyarov:  Can you tell us what instruments the Bank for Development plans to use to enter into a partnership, what’s the Bank’s “product line”? One can well understand that it should be lending.

Vasiliev:Entering into capital.

Stolyarov; Project financing…

Vasiliev: Yes, you are right. The Bank’s guarantees… To tell you the truth, as far as investment and infrastructure projects are concerned we are not going to come up against any serious problems. As to venture financing, this issue is now under discussion. I think that the Bank’s activity in the innovation sector would be also associated with infrastructure in the innovation sector, namely, investments in the basic infrastructure of technoparks.

Gurevich: As things stand now, the Bank in a form it is developing now appears to be factually the only institution…

Stolyarov: And what about the investment fund?

Gurevich:  The investment fund is not an institution. It’s a purse. And the Bank combines both a purse and methods to replenish the purse apart from the money received initially and a mechanism, which, in any event, is expected to be developed. Such an institution is capable of operating on the market. And the investment fund is, above all, the availability of money.

Stlyarov; It’s not true. There is a product line in the investment fund there are rules f access to the fund’s money, there is a decision making mechanism. Everything is quite transparent although there are certain difficulties…

Gurevich: This is what I mean. The Ministry of Economic Development and Trade is not authorized to extend credits and participate in PPP. They can identify priorities and work out regulatory standards and no more than that. This Ministry is not a market institution.

Stolyarov:OK. But in Kazakhstan, for example, the investment fund is a legal entity in the form of open joint-stock company. Does this mean that the investment fund there is not a PPP instrument?

Vasiliev: It is in the case that it has contract obligations of the state. As far as we are concerned, I’d like to say it once more that we’ll have to make strenuous efforts to enter into public-private partnerships while carrying out our projects. We’ll have to ask the government to change laws provided that there is no regulatory framework. Without it we won’t be able to address the problems of establishing public-private partnerships and without establishing them we won’t be able to finance infrastructure.

Gurevich; In Norway, the state, to a large extent, excises control over the oil and gas sector they’ve got a mechanism of the state’s direct economic participation in projects. The state shares a portion of shares, a portion of profit and a portion of investments and financial liabilitied with a private investor. This form of partnership is quite clear. But it is not suitable for us.

Stolyarov: Why? This form of partnership exists nominally – a contribution to charter capital when business contributes its share to establishing a business and the state contributes its share and as a result of their efforts they share this business’ capital. But judging by the investment fund’s half-year experience there is no need in this form of partnership, none of the applicants except for those in a project with the participation of JSFC Sistema didn’t use it Why? Because private investors’ logic is simple: the state is to be responsible for developing infrastructure and we, business, are responsible for businesses, and God preserve us from having the state as a partner in the company’s capital or its board of directors. Let the state enjoy owning infrastructure.

Gurevich: My question is who and how is going to provide infrastructure? How will this infrastructure pay back? There are a lot of external effects in this infrastructure. Why are budgetary funds are spent on infrastructure? Because this yields high returns only on a scale of national economy as a whole but not on a scale of a specific project.

Stolyarov: In the financial model of the Lower Angara Area Comprehensive Development Project, 34 billion rubles are earmarked for government investments in infrastructure alone. How does the state benefit from it? Through taxes from a new industrial area.

Vasiliev: As far as the state is concerned everything is O.K.. But the Bank does not collect taxes. By financing infrastructure the Bank should pay back project costs through a cash flow but not through a tax flow. If it’s a port, it’s O.K. We build a port and its operation generates profits, not only a tax flow. Thus, the bank pays back its investment.

Vedev: This raises a question of recoupment and non-recoupment and a rate of recoupment.

Vasiliev: We have to pay back investments. And it is written in our documents that it’s not the Bank’s goal to generate profits. Nevertheless, we have to generate them. If we fail to generate profits the Bank’s capital will be used up. In fact, we have at least to replenish our capital base. The problem is that the Bank will be hard pressed to reduce its rate of interest. Maintaining low interest margins is a serious challenge to the Bank. The second challenge is borrowings. As to borrowings, everything was O.K. till 2007. And how is the situation going to develop in 2008-2009? We’ll start with government money. But then we’ll have to borrow on the international capital markets.

Gurevich: When you enter the international market you’ll be able to raise financial resources at a low rate of interest.

Vasiliev: We can’t get a rate of interest higher than the sovereign rating. And the sovereign rating has already been assigned to our Bank. Money will be cheap.

Gurevich:So you can lend cheaply?

Vasiliev: Yes, of course. But we won’t lend very cheaply. I think no less than at LIBOR+1.5-2%. But we’ll borrow in dollars and lend in rubles. This is a different theme. Another one is debt-equity- ratio.

Stolyarov:What in your opinion is a reasonable ratio?

Vasiliev: This ratio is 2:1 for the development bank in Kazkhstan. To my mind, a ratio of 3:1 is reasonable.

Stolyarov:What returns should government capital generate through various instruments. In his time, German Greff was convinced that in the investment fund each ruble of government investment should generate five rubles at a project level. But in actual fact, government project obligations excluded the entire social and public utility infrastructure, all regional level investments. Kazakhstan’s ratio of 1:2 appears to be correct.

Vasiliev; There are two different “efficiencies”, two multipliers. The fist thing is how much we can borrow on the financial market per one ruble in our authorized fund. I think that in terms borrowing 5:1 is a limit or even 4:1. That is, we can borrow 1 trillion rubles per 250 billion rubles in the authorized fund. Probably, it’s a limit in the five coming years. The second thing is that we are not going to finance projects 100%. The main thing is how much other investments we can raise per one ruble of ours and maybe, not necessarily private ones. It may be money from international financial institutions. The most important thing is how much foreign investment for our economy we can raise per our ruble. I think 25% of ours and 75% of not ours. This is a maximum and this maximum will be very difficult to achieve.

Gurevich: I’d like to talk about borrowings. If I am not mistaken, not long ago at the meeting of the State Council in Krasnoyarsk they discussed an issue of transport and infrastructure as a whole, they also talked about issuing “infrastructure bonds”. What are the prospects for such an instrument?

Vasiliev: The main thing again is how a project itself is structured. A project’s engineering and financial feasibility is of crucial importance for bonds. In general, bonds are very good instruments of raising funds for infrastructure. But the state should assume a part of risks under a project. If risks are not closed bonds will not be purchased. I would start with regional municipal bonds designed for a specific project. And we should develop proper techniques. A number of budgets in the regions are in good condition. Conditions for raising funds are sure to be favorable there.

Vedev: I’d like to remind you that over several recent years the share of securities in the banking assets (including bonds) has been going down (now it stands at 10%). Russian people have maybe 10 billion dollars in cash currency, 20 billion at most. As we can see there’s no money inside the country.

Vasiliev: There is money on the international market. But in principle, such long bonds are very well suited for the pension system. So investments in infrastructure bonds may be a good option of investing pension savings funds. In sort, it is a very realistic option. This instrument would be also very attractive to foreign investors. The experience of other developing countries issuing such bonds also testifies to this.

Gurevich: And what about development institutions’ bonds?

Vasiliev: There’s also a chance that the Bank for Development would issue bonds. In doing so, we can issue bonds to finance a specific project. This could be also of interest to investors. But to tell the truth, we would prefer to issue general-purpose bonds for financing and make 20-25% of our own money available for a specific project for the remaining amount to come from private customers because in this case, a multipler effect would increase significantly.

Bank and banks

Gurevich : Have you got any idea if there are any existing institutions and those to be established in the future which are capable of engaging in PPP?

Vasiliev: What about the Municipal Infrastructure Development Fund?

Stolyarov: We don’t know much about it.

Vasiliev: Maybe, Rosnanotech is capable…

Gurevich: And what, for example, about the Municipal Bank of Moscow, say, at a regional level?

Vedev: The Bank of Moscow is seeking actively to work with regions and cooperate with the Bank for Development. We are doing business in 65 regions. Our strategic goal is to step up our efforts in the regions, above all, in the Central Federal District. This district is not rich in natural resources. At the same time, its manufacturing industry is rather well developed. If Russia takes a path of innovation development, the region’s businesses are likely to achieve sustainable growth. Moreover, the implementation of natural monopolies’ programs generates a real demand for their products. However, an enormous task of reviving the national industry makes it absolutely necessary for businesses to cooperate with government authorities and development institutions. Moreover, infrastructure restrictions pose a natural obstacle for them. We’ve got here a whole range of problems and they can’t be resolved by a large bank alone and by the state on its own.

Vasiliev: In principle, large banks such as the Foreign Trade Bank (VTB) and the Savings Bank (Sberbank) find it difficult to handle many projects. This is a very difficult task for commercial banks. They start to fall short of standards at once. On the other hand, there is a clear-cut criterion that the Bank for Development can’t handle projects that commercial banks can handle. The problem is how to understand and prove who is capable of doing what. As a whole, there is an idea that the Bank for Development will be able to cooperate with commercial banks in carrying out projects. We, say, could be responsible for examining credits and commercial banks could be responsible for doing technical work. For example, the Brazilian Development Bank carries out virtually all its projects through commercial banks. That is, agent banks are responsible doing technical work. And the Bank for Development is responsible for doing a feasibility study and addressing global problems. Project management can be delegated to a commercial bank. This question is yet to be decided and it is likely to be decided in the affirmative as this will secure cost cutting.

Vedev: To my mind, it’s inevitable.

Society is principal partner

Gurevich: Let’s try to move back from main details to principal things. Nevertheless, does the state or private business take priority in PPP?

Vasiliev: I think the state does. Because there are external effects. A key notion is external social effect, a general effect for the society, and this sphere tends to be a sphere of state regulation. Let’s put it this way, if the state had enough money and if we had an effective implementation mechanism the state would be able to handle all these projects. But first, that’s not the case in reality and second, not necessarily the state but also private business can initiate a project. That’s why they call this sort of partnership public private partnership. They say public private partnership rather than state private…. In PPP top priority is given to the society.

Stolyarov: As far as the origin of projects is concerned, projects originate for various motives of various initiators. For example, the Lower Angara Area Development Project grew from Putin’s decree on the completion of the Boguchan hydropower station in the situation of the corporate conflict between Base Element and RAO UES. Originally, we didn’t’ think of a new industrial area but only of potential users of the Boguchan hydropower station’s electric power. This resulted in a concept of the area’s comprehensive development and a two-stage format of its implementation. The South Yakutia Comprehensive Development Project was conceived on the state’s initiative. Today, South Yakutia is the largest industrial area. President of the Republic of Sakha (Yakutia)Vyacheslav Shtyrov entrusted the Institute of regional Policy with preparing this territory development program with the use of PPP instruments. We explored all opportunities and made a long list of potential businesses, assessed industrial investors and drew up a short list. Half a year later our efforts resulted in business plans and infrastructure schemes of a new industrial area, with the state and private business obligations being determined. The Trans-Baikal area comprehensive development project was initiated by the METROPOL group of companies, the owner of mineral deposits, which failed to evolve into businesses without the state support. The territory to be developed is, in fact, an economic desert, there is nothing there in terms of infrastructure. That was the way a new economic area came into being as a result of the private investor’s plans aimed at implementing specific projects. Each project comes into being in its own way. But in my opinion it is critically important to have the state’s and private investors before making an initial project assessment. And a company’s capitalization should be in line with obligations it is going to assume.

Gurevich: In the case that we have a certain company or at least a license for developing a mineral deposit we can conduct a feasibility study. But if we have only an idea that we “should develop a region,” how can we make estimates?

Stolyarov: There are two options here. The first one is when we have an investment plan, which cannot be implemented without government investments in infrastructure. We have to build infrastructure for businesses to appear and everything is going to be O.K. Another option is to build large large-scale connecting infrastructure facilities like, for example, the Trans-Siberian Railway (Transsib). Now they are developing connecting infrastructure facilities from the Irkutsk region through Yakutia to Far East ports including an oil pipeline, a gas pipeline, an energy bridge, motorways and railways. In this case, there will be no immediate effects such as many newly appearing businesses at a level of project preparation and investment agreements, and we won’t get a multiplier of government private investment ratio of 1:5. At a structuring level the multiplier will be 1:2 or even 1:1. But in the long run, it will rise to 1:20, 1:30 and even higher. We are talking here about a fundamentally different level of the country’s development. There is an entire range of PPP instruments between these two extremes.

From project to dawn

Gurevich: On the one hand there is a great scarcity of investment and on the other, a lot of people wishing to invest their money complain that there is a huge shortage of acceptable investment projects.

Vasiliev: Yes, there is. This is a real problem for us.

Vedev: I participated in the World Bank’s project aimed at studying Russia’s regions in 1990-1991. We conducted detailed questionnaire polls among businesses to identify their potential for revival, growth and adaptation to market conditions. And I am under the impression that we didn’t have industrial projects in the past and that we don’t have them now.

Gurevich: It is also becoming evident that a major problem we are going to face in building infrastructure, among other things, in the form of PPP, will be our outdated construction standards and rules. As these standards and rules make projects a lot more expensive we won’t have enough government and private money and international investors won’t come either. How are we going to pay back investments in projects? Hence, there is a threat that, for example, highly promising road building concessions won’t be put into effect. They might build two-three facilities at most. We’ll simply go broke while talking about infrastructure. Probably, the state should assume responsibility for changing these standards, who else can do it?

Vasiliev: It would be extremely difficult to change constructions standards and rules. We are going to come up against colossal resistance. Roads are being built across the country. All contractors will be hard hit. An entire class of producers will be put out of business if construction standards and rules are changed.

Gurevich: Nevertheless, it’s absolutely clear that we can’t ensure our normal development and competitiveness in the international division of labor without addressing infrastructure problems however enormous they might seem due to our vast territory and construction standards and rules. In fact, we are already faced with a problem of economic growth caused by infrastructure restrictions. And our country’s development will depend on what sort mechanism for addressing infrastructure problems we’ll manage to put in place. In my view, the biggest problem of the Russian economy is its low efficiency. And as long as we were able to achieve good results due to favorable market conditions abroad we didn’t suffer from our economy’s low efficiency. But as soon as these sources of economic growth fizzle out the future of country with its vast territory will be put on the line. And it’s quite clear that the problem can be resolved only through the state’s and private business’ joint efforts. It’s a good thing that now we’ve got some resources to start this process. How should we start this process on the basis of available resources and institutions that are just coming into being? This should be the responsibility of institutions or expert groups at the junction of the state and market interests even if these groups and institutions compete against each other. When we start carrying out specific projects we are sure to face all the mismatches in the PPP mechanism. But if a public-private partnership does not emerge we are bound to be faced with lower development rates and increased costs. And this probability is quite real not for the next 20 years but for the coming 5-7 years.

Vedev: In the Ministry of Economic Development and Trade’s program till the year 2020, increased costs are programmed even in its innovation scenario. Real wages will rise faster than labor productivity. It turns out that low efficiency is provided for even in the innovation scenario.

Vasiliev: The problem is that the current foreign trade conditions account for the fact that wages grow faster than labor productivity and there is no doubt that these conditions won’t be in place in the future. So this parameter can’t be forecasted.

Vedev: There is no doubt that today we have both infrastructure restrictions and the modernization problem. Now we can’t grow economically by increasing capacity utilization of production facilities. Even if these facilities are available, they do not suit us in terms of their quality. It’s not quite clear how we should implement our natural monopolies’ large-scale programs – the demand for upgrading equipment within the investment programs already approved is a lot higher than the available industrial capabilities (and there are also import limitations). So we have also to invest in suppliers. That is why we are destined to engage in public private partnership and not only in infrastructure but also in the manufacturing industry. 

Stolyarov: I’d like to get back to the issue of PPP itself. According to formal characteristics Russia is one of the best-equipped country in terms of PPP instruments. All mechanisms are well known, algorithms of access are published, tenders are held and pilot projects are selected. Nevertheless, we have no real investments and we haven’t started any PPP construction projects. The situation is exacerbated by risks associated with the lack of legal framework for an entire PPP. According to experts’ estimates, 124 laws are to be amended for the available PPP instruments to become more or less legal. In addition, we’ve got the said engineering risks and there are no cement plants and construction materials industry to service PPP construction projects. We have also demographic risks: where can we get labor force to carry out planned projects? Moreover, our government’s fiscal policy often runs counter to its investment policy. And later on we’ll come up against more systemic risks associated with a huge pause in implementing major investment projects in the country. In our country nobody is simply capable of doing this ranging from designing project organization to government officials.

Vasiliev: I’d like to be more optimistic. Over the recent years I’ve been dealing with many managers who handle both state and private projects. We have to admit that a new generation of managers has arrived. Western-educated people have come. Quite a different governance culture is emerging. If a PPP issue had been brought up in 1995 I would have said that I was unrealistic and there were no conditions for a development bank to function because we didn’t have specialists. We’ve got them now. It’s a good thing that we have knowledgeable people who can make proper estimates and who know management techniques. And there are many such people. And this helps to launch rather elaborate projects. We’ve got western-educated people, with a systemic way of thinking and Russian experience who can launch elaborately structured projects.

Gurevich: If somebody listens to us now he could get a idea that in our country we are doomed to failure and please give us another country and then we might try. But 10-15 years ago nobody could have imagined our today’s scale of construction, banks, vehicle fleet and even domestic electronics. We are simply stuck at a different stage of development and if we refuse to admit it, we won’t move forward or, even worse, move backward. As to the theme of our round table we can’t think of any better option than cooperation between the state and private business. On the one hand we should gradually resolve macro problems including efforts aimed at bringing applicable legislation in line with today’s requirements. On the other hand, we should move towards specific PPP projects, which can serve as models to follow in the future. At the same time they will help us identify problems we are still not aware of. Now we have qualified personnel capable of at least approaching these problems and there emerged institutions charged with addressing these problems and it’s something we can start with. Let’s not indulge in wishful thinking. Let’s not commit ourselves again to fulfill a five-year plan for three years, let’s not hope that our one ruble will generate ten rubles although we expect only five. Or two?