December 05 2007
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?
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?
Issue number: 193 (1835)
A nasty autumn day turned into a real holiday for Moscow small residents who came to the Zereteli art gallery. The name of this festive event was “The Sunny Day.” It was held not for the first time by the Pediatric Oncology and Hematology Research Institute of the Russian Blokhin Cancer Research Center and Vnesheconombank. In attendance were 70 doctors and 250 small patients who were given a terrible diagnosis not long ago. Now, all of them are enjoying good health. And it’s not a miracle. Thanks to specialists’ efforts and VEB’s assistance which it has been rendering to the Center for as long as ten years, regarding this program as a priority, the children’s anxieties and their parents’ fear for their lives were left behind.
Happy faces, smiles and songs to the accompaniment of composer Evgeny Krylatov gave rise to positive emotions. And there were so many children who wanted to go to the stage to say hullo to a real Klepa – actor Sergei Balabanov and Pechkin – Alexandr Vdovin and dance with clowns Vlad Rudenko and David Levitsky who gave children intricate figurines made from balloons. Performances of children, circus artists and adult singers carried children and adults away to a fairy-tale world where everything has a happy end.
According to Pediatric Oncology and Hematology Research Institute Director, Blokhin Cancer Research Center Deputy Director Mamed Aliev this event aims to draw attention of all interested organizations to the problems of cancer diseases in general and to pediatric oncology in particular which were not included in the list of top-priority government programs. “If we look at the child death rate statistics in Russia, traumatism ranks first, cancer diseases rank second,” believes Mamed Aliev. Quite a few new discoveries have been made in the recent decade in cancer diseases treatment. Cancer patients’ therapy has changed; new methods of high-dose treatment with stem cell support came into being. These children’s’ quality of life has changed for the better and this allows to preserve limbs in 90% of sarcoma patients. Every year, 15 children per one thousand population develop cancer in Russia. And 80% of them, in the case that the disease is diagnosed at early stages, recover.
A lot of the Research Institute’s innovations were made due to the VEB’s assistance. According to public relations department head Natalia Salmanov, this assistance is being provided on a comprehensive and long-term basis so that the results of cooperation can be seen clearly. VEB renders assistance to the First Pediatric Hospice for children with cancer and hematological diseases. And furthermore, two years ago VEB gave the Blokhin Research Center equipment for performing endoscopic operations as a gift. Last year, VEB gave multifunctional operating table to the Centre as a gift. Recently VEB helped to purchase equipment for performing operations and for post-operational period when patients are treated in intensive-care units. The equipment includes monitors, and devices to monitor breathing, heartbeat etc.
Every year VEB holds a festive event “The Sunny Day” and invites to it children who underwent a successful course of treatment in the Cancer Center and were able to overcome their disease or were recuperating. In doctors’ opinion such festive events play a great role in a difficult process of patients’ adaptation in the recuperation stage. Communicating with their peers who cancelled their terrible diagnosis they gain valuable experience in coping with their disease.
New Structures Are Designed to Solve Problems Business Does Not Solve
September 24, 2007
This year the Russian authorities have announced the creation of a number of new state-run institutions designed to help solve pressing problems in various fields ranging from encouraging scientific and technical innovations to modernizing housing and utility services. The Bank for Development and Foreign Economic Affairs (Vnesheconombank) was one of the first to obtain state registration. The Bank was established on the basis of Vnesheconombank of the USSR with capital participation of the Russian Development Bank and Roseximbank. In his interview Director of the Institute of Economic Forecasting of the Russian Academy of Sciences, Academician Victor IVANTER gives Vremya Novostei observer Mikhail VOROBJEV his opinion about the Development Bank’s role and position in the Russian economy.
- Victor Victorovich, almost everybody believed that it was necessary to establish an institution similar to the Development Bank. But opinions about its objectives, lines of business and the reasons for its establishment vary.
- First, to put it bluntly, is there any need today to create a special institution to deal with trade networks? No, there isn’t. This is what business is doing and it is doing it quite well. But there are sectors where business is not keen to operate. Has it built during all this time at least one major oil pipeline? Has business forgotten about it? Or it hasn’t seen the need to do and hasn’t been interested in it?
Second, we say that we live on oil and gas exports etc. The assumption that we’ll stop producing oil and gas and start writing software programs and sell them is of course foolish. We’ve got energy resources and it’s quite natural that we’ll go on trading them but we’d also like to sell machine-building products. What’s the difference between selling oil and gas resources and manufacturing products? All raw materials are sold according to “the payment against delivery” system. As to manufacturing industry and machine building, almost everything is sold on credit. So we can’t sell these products without an adequate financial infrastructure.
If we fail to extend credits to purchase our high-technology export products there will be no exports. For example, energy machine building is a sector highly dependent on high technologies. And this business is very expensive. If we fail to offer favorable credit terms to our customers we’ll lose all tenders and we’ll lose them for this reason.
And these products are quite competitive…
Moreover, I think that in a number of cases our products are unique. We built such an energy system that allowed us to live for 15 years without making considerable investment. For all its shortcomings, our energy system is quite effective. Our energy machine building has always been a lot better than machine tool building in terms of all quality standards. But I’d like to say it once again that nobody purchases the most efficient equipment straight away this is not the case. It is purchased exclusively on credit.
We made forecasts for our agricultural machinery building, and it became clear that in terms of prices and quality our harvester combines are quite competitive. But now we’ve got the following situation: for example, a purchase agreement has been made and then purchasers suddenly withdraw from the agreement. And the reason for it is that competitors offer better financial terms, credits and payments by installments etc. Of course, we have commercial banks and the modern banking system is in place but its distinguishing characteristic is that it lacks money. And it is clear why this happens. The bulk of the money comes from our raw materials sector and this money is subdivided into two parts: the first part goes to owners and unfortunately, they keep the greater part of their money abroad. The second part goes to the state and it, to a large extent, keeps the money abroad too. Here I mean financial reserves. Therefore, today, Russian commercial banks do not have enough money for investing in major projects, the more so, in projects with long payoff periods. That is why we need a major state-run institution, which among other things would be responsible for promoting Russian industrial exports.
And the current situation is not unique. Japan experienced exactly the same situation in the late 40s – early 50s. They established two banks there – a development bank operating in the domestic market and a bank that was responsible for supporting foreign trade.
In our country a decision was made to combine all these functions in a single bank. And we can’t call it a bank in the fullest sense of the word. It’s a bank in the sense that it lends money. But doing this, it does not aim to generate commercial profit. Its objective is to prevent money from being lost and ensure effective use of it. And it does not seek to generate earning at high interest rates. And it’s a benefit that Vnesheconombank has a well-known brand so it is not confused with any other brands. And second, there are highly qualified and adequately experienced employees working for the Bank.
If there was a great need for such a bank, why was it established as late as this summer?
- For many years we talked about the need for such an institution mentioning the fact that it won’t compete against commercial banks as it is supposed to operate in a completely different line of business, which is not attractive for free capital. But it was not until now that we gave real substance to all this talk. Factually, we were in a deep crisis and then we made efforts to overcome it. That is to say, we lacked conditions for developing our economy. The current situation is radically different. Our economy is growing even faster than it was forecast to grow by analysts including government, independent, liberal and anti-liberal ones. And hence, at the time when the economy is growing, we should support it.
The Development Bank was established to provide this sort of support. Its priority should be to deal with infrastructure problems. Here we, above all, mean production infrastructure: roads, power grids, ports, aerodromes etc.
For you to grasp the importance of the problem, I’d like to give you the following example. Let us look at the Far East - what we really did was to separate one part of Russia from the other. May I dare use tough words: The Russian Federation is commercially ineffective territory. In terms of commercial considerations we don’t need the Far East at all. And when the Russian emperor was building a railroad from Saint Petersburg to Vladivostok he didn’t pursue any commercial objectives. The railroad was built to connect the country.
The problem we are facing now is that there is a gap. What should we do to strengthen ties? We should consolidate the territory and close the gap. If we double our trains’ speed, the Far East will be twice as close to us. If we double the quality of our interregional roads and our motor transport goes twice as fast and air tariffs are half as much, the Far East will be twice as close to us. To make it happen, we have to upgrade our railway transport, roads and port facilities. As we can see, business is not capable of doing it. And we shouldn’t make business do it. In order to achieve this goal a relevant financial institution, namely the Development Bank, has been established. And I’d like to say it once more that it’s not a bank in the fullest sense of the word and it’s not supposed to compete against commercial banks.
This sort of concern was voiced while the draft law on Development Bank was under discussion…
Of course, it was. But conceptually, the Bank is not supposed to operate the way commercial banks do. Factually, this Bank is designed to promote business. Its task is to create favorable conditions in certain sectors to make them attractive for business. To a certain extent the Development Bank operates in a sort of “reverse direction”. Imagine that we prioritize regions by their investment appeal. Where should the Development Bank go? It should go to regions with low investment activity to create conditions for boosting such investment appeal. In this sense, it operates against the rules. Here I mean against the rules on which business is based.
There are sectors where business should not operate. This is, for example, the military-industrial complex. There is a very naпve assumption that dates back to the 19th century that military-industrial complex is “guns instead of butter”. The slogan was in line with reality in the 19th century, it was absolutely wrong in the 20th century and it’s of course wrong at the beginning of the 21st century. Why is Europe lagging behind the US in technological innovations? The only reason for it is its foolishness: Europe does not spend money on military research and development and military R&D gives rise to basic technological breakthroughs. We can’t limit ourselves to fundamental science. As a rule, effective major breakthroughs are made in military R&D. And here the Development Bank could play a role of its own.
There is also a different kind of infrastructure – an intradepartmental infrastructure. If we ay that our agrarian sector should be able to feed us, it’s quite clear that it needs a seed growing infrastructure and a pedigree stockbreeding infrastructure. The idea that all farmers or agroholdings would create their own systems is not realistic.
Maybe, the Development Bank could participate in building this sort of infrastructures.
And there is another problem, here I mean designing business. We had colossal designing and research institutes. This network of institutes was ineffective and excessive. But now we’ve got nothing. You can buy whatever you like. But project purchasing is an obstacle to development. Moreover, it is awfully expensive.
- And what’s the Bank’s role here?
It should play a role in establishing a new, advanced designing infrastructure that embraces all industries all sectors and all regions. Establishing large-scale project institutions is what the state should do. And the Development Bank should have a hand in it. Business won’t do it on its own. It wants to come, order and buy the ready-made. And this chance should be given to it
- How effective are similar development institutions abroad? Have they achieved goals set before them?
Yes, they have. As to the effectiveness of specific projects carried out with the help of development banks, it was the way it has always been. Some of them were super effective but there were ineffective projects too. No one can be secured against failures. But here we’ve got double control. On the one hand we’ve got state control among other things exercised by the Supervisory Council on the other – financial control. The Bank receives budgetary money and it gives it to carry out this or that project. The Bank is supposed to get the money back. If the Bank gets it back, everything is O.K. if it does not; we’ve got a warning signal. In this sense, development institutions are radically different from budget financing. What should we have in mind here? We should have in mind that here we don’t deal with Soviet-type investment. We should avoid at all costs creating any construction trusts or something of the kind. That’s not what we really need. We have to create and fine-tune a normal system: government money, government control and government project assessment. And then business starts to operate, but of course within a relevant framework.
- But we are facing at least one serious problem. What sort of situation are we faced with? Out of the Russian investment fund worth 70 billion rubles we have used only 3 billion rubles and this does not happen by accident. This means that we proved to be unprepared in terms of project quality. And it costs a lot to develop a top quality project. Normally, it is 10% of investment. Who is going to pay for it? Who is going to invest money in designing before a project is approved and funds are allocated to carry it out?
- The Development Bank’s authorized capital is to be at least 70 billion rubles. The Government is determined to hand over 250 billion rubles to the Bank. Are these funds sufficient to achieve formidable objectives set before the Bank?
- In the long term, this money will not be sufficient. But today we are coming up against a different problem: we should be able to make the most efficient use of available funds. There is no limit in terms of money there is a limit in terms of substance. And of course we shouldn’t demand that the newly established development institution start to operate at its full capacity as early as tomorrow. But there ought to be a short, tight time limit during which we should be able to see that allocated money has been spent. If the money is still simply kept in accounts it is as bad as though it was used ineffectively.
This, among other things, makes it necessary for the Bank to establish a branch network. Should the Bank establish its own branch network or work through agent banks? I think the Bank should do both. It should have its own branches in federal districts and also work through commercial agent bank.
To my mind, we’ve got another difficult problem: should the Bank be a direct investor or a creditor of last resort? I think we shouldn’t abide by strict rules here. A flexible approach might be appropriate here to give the Bank room for maneuver.
- Would you specify the above-mentioned short and tight time limit?
- In my opinion, over a period of five years the Development Bank will occupy a place intended for it. In our estimates, we should move along at a growth rate of more than 8% in the coming decade. We can’t see any obstacles to it. We can’t see any obstacles in terms of energy and human resources etc. In the past, they accused me of excessive optimism. And now when I look through statistical data by the Russian Statistics Committee I see that I fall into a category of pessimists. We forecast a growth rate of 8% for GDP rather than for production output. Nevertheless, industrial output is growing significantly.
This means that our economy is in fact market oriented. And a market-oriented economy is more efficient than a centrally planned economy as I wrote about it for many years. And now we can see it. This does not mean that this sort of economy is perfect but it is doing well. And it is doing a good job where it can. But there are market gaps, as they are called by economic theory, where business does not operate. Development banks are meant to close these market gaps. As soon as economy starts to develop in a normal way, development institutions will play a secondary role. But prosperity can’t last forever. We should not forget that as soon as the energy crisis started in the early 70s, authorities of all serious countries became involved in coping with this problem. And they didn’t seek to replace business but cooperated with it.
My stand is as follows: any efficient economy is liberal. There is no need for intervening in the economy if it is doing well. But we failed at least to prove the assumption that liberalism leads to prosperity. And where there is a failure, effective economic intervention is appropriate.
- The former Vnesheconombank was a state-run company responsible for managing pension savings funds of citizens who failed choose a private trust management company. Has this function been transferred to the Development Bank? Do you think the Bank should manage pension funds?
- This is a very difficult problem. We started too soon and devised a funded pension system in the situation where no pension system existed. We have a system of social benefits including old-age benefits. Why? The reason for it is not a malicious intent or the fact that we don’t know how a pension system should operate. The reason is that, given our extremely low wages, no pension system can function. People can save up when they make a decent living already today. In this case, they can think about tomorrow. And if they can barely make ends meet today, everything becomes pointless. That is why there are so many undecideds, that is to say, citizens who failed to choose a private company to manage their pension savings funds. If we press young people to choose a company to invest their pension savings in, given that their pension savings amount to 3 thousand rubles, they are sure to tell us to get lost in the rudest way. But when their pension savings amount to 60 thousand rubles, they will treat this money differently. They would start to show greater interest in this money and are most likely to choose a private trust management company where investment yields on their pension savings are higher.
- What should the Development Bank do with these pension savings funds?
First of all, there’s no need for making a fuss about it. A certain pension system has been created. Whatever this system is, it is in place. And this means that the Bank has another line of business. If the amount of pension savings funds takes completely different dimensions, this segment should be separated from the Bank’s main line of business. Here we’ve got quite a different objective: If we invest pension funds, we pursue commercial goals but the Development Bank does not pursue commercial goals.
- How do you view the Bank’s prospects in today’s economic situation?
- I am optimistic about the Bank’s future provided that it operates in the way we are talking about. Of course there is a danger that it won’t happen, but we should do our best to make it happen. It would be wrong to think that the Development Bank is a smooth well-trodden road. It will have to overcome a number of problems and occupy its position in the economy. On the one hand, it should not hinder business and on the other, it should solve problems that business does not tend to solve. What do I think could pose a danger? It will be wrong if we make it the Bank’s duty to be responsible for solving social problems. It is not designed to do it.
SCO Secretary General B.K. Nurgaliev’s Speech at the SCO Interbank Consortium Council Meeting
(The city of Bishkek, August 15, 2007)
Dear Vladimir Alexandrovich!
Dear heads of delegations! Ladies and gentlemen!
I’m honored to take part in today’s important forum.
One of the Shanghai Cooperation Organization’s top-priority lines of activity is to encourage effective and active economic cooperation between its member states and observer states. We have been able to establish the solid legal framework for the SCO’s activity in this field including such a fundamental document as the Program of Long-term Multilateral Trade and Economic Cooperation.
Our countries identified such high-priority mutually beneficial lines of cooperation as transportation, power engineering, information and telecommunications technologies. We launched the website “Regional Economic Cooperation of the Shanghai Cooperation Organization.” We established a mechanism of holding regular meetings of ministers responsible for foreign-economic and foreign-trade activities. A great deal of work on implementing the decisions made is being done within 16 relevant special working groups in charge of various lines of activity.
The SCO established ties and expands its cooperation with the CIS, EurAzEC, the UNDP, the Asian Development Bank, ESCATO UN. With the two latter organizations’ financial assistance an intergovernmental Agreement on Creating Favorable Conditions for International Motor Transportation is being prepared.
As is generally known, the SCO is fertile ground for developing coordinated approaches of its six founder states and four observer states to ensuring regional integration.
We have to hear rather often an unpleasant argument that the SCO’s economic development is lagging behind the dynamics of political cooperation. To my mind, the problem is not that the number of coordinating and planning bodies is not sufficient. We’ve got 17 bodies. The legal framework for cooperation in economic and investment sectors is also solid: 33 major documents have been signed during a period of six years; this is a period of the SCO’s existence. Another 8 documents are about to be signed soon. The problem is how to implement agreements on promoting economic integration. This of course depends on the countries involved and on the availability of financial and other resources needed to carry out specific projects. The SCO needs a solid investment portfolio.
It’s quite natural that high expectations for expanding the economic development in the SCO”s activity are associated with the Interbank Consortium and the Business Council. The SCO Secretariat seeks to maintain close ties with the Interbank Consortium and the Business Council. On the whole the SCO’s economic cooperation plans and projects are, to tell you the truth, at the stage of legal, organizational and financial coordination. The problem is that until now we have failed to create an efficient system to fund economic projects proposed by SCO member states.
That is why we are glad that the Interbank Consortium adopted the Action Program to promote regional economic cooperation within the SCO and that a number of agreement on extending credit lines and joint financing of investment projects have been signed. The total amount of them should exceed 740 million US dollars.
There are plans to sign an Agreement on Cooperation between the Interbank Consortium and the SCO Business Council tomorrow and everyone hopes that it would create favorable conditions for raising funds to carry out “pilot” projects.
In this respect there are considerable expectations that the Interbank Consortium will take an active part in raising credits to fund specific projects in large, small and medium-sized business on the territories of SCO member states.
The Interbank Consortium cooperation with observer states and Afghanistan has considerable and so far untapped potential.
We are convinced that steps being taken within the Interbank Consortium and agreements being worked out today would yield tangible results in the trade and economic sphere in the near future and bring about SCO member states’ sustainable welfare growth. In order to make it possible we should fully use such advantages of our organization as vast joint geographical space, huge natural and human recourses, complementarity of our economies, high educational, scientific and technological potential.
Taking this chance, I would like to present my best wishes to all the participants in the SCO Interbank Consortium Council meeting for continued successful activity and success in all endeavors, good health and happiness!
“Everything Located Behind the Urals Is Of Great Importance To Us,” said Vladimir Dmitriev in his interview with newspaper Kommersant
Development Bank Chairman Vladimir Dmitriev talks about the way he is going to spend money.
Newspaper Kommersant № 114 (3690) of 03.07.2007
“We are planning to choose promising regional banks for working together, become these banks’ shareholders, capitalize them and develop their core business.”
The reform of Vnesheconombank (VEB) of the USSR operating in the past 16 years within a dubious legal framework has at last started. VEB has succeeded in lobbying for establishing a Development Bank on its basis with an authorized capital of 70 billion rubles and gigantic powers, which are codified in the Law “On the Bank for Development and Foreign Economic Affairs (Vnesheconombank)”. This Law came into force in mid May and two weeks ago VLADIMIR DMITRIEV, former Chairman of Vnesheconombank of the USSR, was appointed as Management Board Chairman of the new state bank. He gave the first interview in his new post to Kommersant’s special correspondent ELENA KISELEVA.
- Besides the Law “On Development Bank”, the new Bank’s powers will be specified in the Memorandum of its financial policy. When will it be ready?
- According to the plan approved by the Government, the Memorandum is to be ready till mid July. So far Government departments have had varying approaches but it’s pretty safe to say that an agreed version will be submitted to the Government next week.
- What are the main provisions of the Memorandum?
- First, the Memorandum will set forth main criteria of the Bank’s financial stability. We believe that they should be specified despite the fact that VEB is not accountable to the Central Bank of Russia: the Bank has been assigned a task to become a maximally open and transparent institution. In this respect, we propose to specify in the Memorandum such criterion as capital adequacy in the amount of 8%. It makes sense specifying assets yield, that is, anything we need to assess the Bank’s performance. While these criteria are perhaps less representative because generating profits is not the Bank’s main objective, and for this reason our indicators will differ from average statistical indicators for the baking system as a whole.
Second, the Memorandum will specify VEB’s main core businesses such as transport infrastructure, power engineering (including nuclear power engineering), aircraft construction, shipbuilding, high technology, promotion of small and medium business, nanotechnologies.
- And what about capitalizing regional banks using VEB’s funds? Have you also identified this line of business as a top-priority?
- We think that it makes sense doing it. Specifically, we have already purchased a stake in the Togliatti National Trade Bank that will be responsible for monitoring our projects in the Volga region.
- Is capitalization of banks recommended by the state or is it VEB’s way of establishing its own network of branches?
- Of course, this, above all, is associated with a kind of business we’ll have to do in the regions. Here I mean major infrastructure projects where we have to exercise control over the proper use of funds. On the other hand, we’ll be also dealing with supporting small and medium business, which fulfils a task of bank capitalization. We are planning to choose promising regional banks for working together, become these banks’ shareholders, capitalize them and develop their core business. Our Supervisory Board will be responsible for decision-making and this is standard banking practice. To be more precise, development institutions’ practice: these institutions enter banks’ and companies’ capital to create a growth potential and then withdraw having ensured required profitability. By the way, the European Bank for Reconstruction and Development is involved in this sort of business (EBRD) and IFC (the International Finance Corporation is incorporated in the World Bank).
- How much money is VEB ready to spend to support the Russian banking system?
- We’ve got our own opinion about this issue. But I would not like to make any figures public because it’s too early. These figures are to be agreed upon with the Government. At least, we don’t propose to include any specific figures in the Memorandum. The document is designed for three years and it can specify our portfolio structure (long-term, mid-term credits, sectoral division). If the state thinks it fit to include these parameters in the Memorandum, we’ll do it. Furthermore, we can modify parameters of the Memorandum.
- Are you interested in majority stakes alone?
- I don’t think we should limit ourselves to majority stakes. We should rely on independent and well-established banks in need of capitalization. So we can also acquire blocking minority holdings and even lesser stakes but they should ensure our participation in management process.
- In what regions are you going to buy banks?
- We would like to buy something in the Krasnoyarsk region, given the fact that we are active participants in the Lower Angara Area development project. And, of course, in the Far East. Together with the China State Development Bank we are getting involved in a number of projects to be soon carried out in Sakhalin. For example, the construction of a cement factory expected to be built with the use of Chinese technology and equipment. I would also like to mention gasochemical and petrochemical industries in Sakhalin. There are several related production facilities there and we can use the Bank’s resources to build plants and factories there. We are discussing this issue with the Sakhalin region administration.
There is another region, namely, the Urals where we have a number of large customers, for example, Uralvagonzavod and its related companies. We are also planning to participate in the development program “The Industrial Urals – The Polar Urals”. Nowadays we are discussing ways of giving real substance to our agreement on cooperation with Ekaterenburg SKB-Bank. SKB-Bank is a large regional bank, which cooperates closely with the Pipe Metallurgical Company (TMK). But the bank’s business is not limited to servicing TMK, it also participates in a number of national projects such as affordable and comfortable housing, tourist and recreational zones, deep processing of mineral resources, high technologies and etc. The bank is interested in cooperating with us and now we are making efforts to cooperate in certain lines of business.
- Is VEB going to enter SKB-Bank’s capital?
- We haven’t discussed this issue yet. But to enter the capital of companies, which are of common interest to this bank and us is pretty realistic.
- Will all these projects be carried out within Private Public Partnership?
- That’s right. That is why the Development Bank participates in the projects. It will raise investment to fund infrastructure projects in distant regions to ensure the participation of private capital. Our interests include Lower Yakutian coal deposits, in view of the fact that they are covered by the co-investment program with the use of investment fund resources and carried out by the South Yakutia Development Corporation. We hope that we’ll be able to participate in a joint project with the United Industrial Corporation for Elegestskoe Coal Deposit where they plan to build about 400 kilometers of railway. In short, everything located behind the Urals is of great importance to us.
- Are you going to enter capital of such corporations?
- I think so. At least, we gained some good experience in the Krasnoyarsk region where we established a region development corporation (each participant has a stake of 25%) jointly with the regional administration, Rusalom and GidroOGK. We are going to act as an investor in the construction of pulp and paper and housing construction integrated plants. It’s already evident that the Krasnoyarsk corporation is making progress. A number of regional administrations offer us to set up similar corporations, and there are investors interested in carrying out such projects together with administrations and the Development Bank.
- Are you going to follow this practice in other regions?
- In general, we are. In my opinion we can carry out similar projects in West Siberia, Transbaikalia, the Far East. I do not rule out that their configuration might be different, for example, there could emerge a major investor and in this case we would establish a triangle, which will include an administration, our Bank and a private investor. We can work without entering capital, acting as a creditor and financial consultant on the terms of project financing.
- Do you have plans to withdraw from projects carried out by VEB of the USSR, for example, such as NOVATEK or the Sheremetjevo-3 construction project?
- We don’t have any stake in NOVATEK and so far we are not planning to withdraw from the Sheremetjevo international airport construction project. To fund the Sheremetjevo-3 construction project we have raised $230 million for a period of 13 years from a syndicate of Japanese banks. As far as the Russian banking system is concerned this project is unique both in terms of its time frame and amount.
- Last autumn VEB purchased a 20% stake in the Eurasian Company, one of the private operators in the housing and communal services sector. Do you have any plans to purchase new stakes in this sector?
- The Eurasian Company’s business is not limited to housing and communal services, it also deals with infrastructure. It includes water channels and drainage systems. By the way the Eurasian Company won the tender in the Rostov region for the use of investment fund resources. So this project is in line with the Development Bank’s core business. And as to housing and communal services, we have another project in the Kurgan region within the framework of the agreement with the local administration on reequipping heat systems and modernizing electricity and heat supply systems. A special company has been already established and we signed an agreement on cooperation with it and reached an understanding to enter capital of the project’s operator Toboloenergo.
- Is VEB ready to work out project financing schemes in housing and communal services sector and in the real estate market where VEB is not too active?
- We can’t deal with real estate by definition. It’s not our core business; otherwise we’ll be stealing the bread out of commercial banks’ mouths. There is no doubt that we’ll participate in national projects in the context of implementing the program “Affordable and Comfortable Housing”. We are not going to fund housing construction in the interests of developer’s business but we can finance complex development of a city district, for example in Chuvashia. In my opinion, we should give high priority to housing construction, construction materials industry, for example we can build a housing construction integrated factory, build other production facilities that could contribute to the development of communal construction and help small and medium business.
- We know that this year VEB helped Airbridge buy Hungarian airline Malev. Why? Isn’t the Bank planning to become a co-owner AirUnion to be established in Russia, with AirUnion being friendly to Airbridge?
- I’d like to answer you in the following way. The Abramovich Malev project (Boris Abramovich is the general director of KrasAir) was backed at the highest political level, as it was instrumental in supporting Russian business’ interests abroad. But this support is not an end in itself, we entered this project because we believed that it was possible to synergize KrasAir’s and Airbridge’s business with an eye to establishing AirUnion in the future.
- Are you going to have a share in this project?
- This is out of question. It’s just our support because the Bank’s top-priority line of business is to provide support for Russian industrial exports and Russian export of services. In this case we provide support for a Russian airline offering services abroad. We also cooperate with Zarubezhneft and its subsidiary Neftegazinkor to help them with their plans to purchase petrochemical assets in Serb Kraine in Bosnia for Russian specialists to reconstruct and modernize the production facility in the future. I was in Bosnia a week ago. We examined the facilities and held talks about structuring business. I’d like to tell you that we are not going to purchase any equity capital.
- When will by your estimates the Development Bank run out of capital?
- Our capital hasn’t been formed yet. VEB of the USSR has so far transferred its assets into the state corporation’s ownership. By Russian accounting standards our capital amounts to about $650 million as of today and by International Accounting Standards (IAS) it is more than $1 billion. By law, our capital is to be formed in the amount of at least 70 billion till the year-end, to be more precise, within six months after the Bank’s registration, that is, on December 8.
- Will it be formed at the cost of budget funds?
- I assume that capital formation will go through a budget process and this would require amendments to the 2007 budget.
- Somehow you said in public that stabilization fund resources would be used to form the Bank’s capital?
- It wasn’t me who said that. Alexey Kudrin said that (the Russian Finance Minister). The case in point was that some 300 billion rubles would be spent on development institutions in the near future. According to Kudrin, 250 million would be spent on the Development Bank’s capitalization. The Russian President said that these funds would be allocated from the National Welfare Fund. But this Fund will be formed no later than February 1 and this means that some other sources should be found. There was talk of incomes from the sale of Yukos assets but Kudrin said the stabilization fund could be used, with the funds being compensated for from other sources later on.
- Does this sound realistic?
- It’s up to the Government to make a decision. Let’s take into account the fact that by law, stabilization fund resources can be used for the following two purposes: early repayment of foreign debt and compensating for budget deficit of the pension fund. Other options are ruled out.
- Market makers who filed applications for receiving resources from the investment fund believe that it is VEB that should be responsible for managing this fund as an agent for the Government rather than officials?
- There’s no doubt that VEB and its specialists are in a position to fulfill serious tasks associated with managing government resources. And it makes sense to involve major professional institutions in managing such funds. Here we should keep in mind that Vnesheconombank is only one of them.
- How long are you going to act as an agent for the government in managing Russia’s foreign debt and operate as the state trust management company in charge of managing undecideds’ pension savings?
- To my best knowledge, the Government doesn’t have any plans to release us from our status as the agent for the government in managing foreign debt and as the state trust management company responsible for managing funded portion of pension funds. In fact, I don’t think that it makes sense doing it. Conventional wisdom has it that the best is the enemy of good. At present, 270 billion rubles of would-be pensioners are under VEB’s management. As early as last year, we offered to increase the number of investment instruments and enable us to invest these funds in Russian and foreign issuers’ bonds and may be in their shares in order to diversify our investments. To all appearances, this offer was supported by the Government and key ministries. We still believe that we can use pension funds to fulfill investment tasks.
- Do you mean they can be used to fund infrastructure projects?
- That’s right, here I mean infrastructure projects that are carried out within public and private partnership and can be implemented through issuing securities guaranteed by the state. So, we won’t have to introduce any amendments to regulatory documents, we’ll be able to purchase these securities using pension funds. I’d like to stress that it’s not a matter of direct lending of any projects. We also proposed to lift restrictions on investing in mortgage securities because in accordance with our investment declaration we are limited to buying only those mortgage securities that are guaranteed by the state. But in view of the fact that mortgage securities are pledge-backed securities we believe that government guarantees are excessive. With restrictions lifted, we’ll be able on the one hand to diversify our investments and on the other to raise liquidity of the Russian banking system through securitising these assets. By the way, this is quite a topical issue today and the President speaking at the meeting of the State Council set a task of using pension funds for the construction of affordable and comfortable housing.
- Do you agree that compared to your colleagues from other development banks, the EBRD and the World Bank you are in a unique situation in terms of the number of functions?
- The situation is unique. In fact, none of development banks, to say nothing, about international development institutions have so many functions: the Bank is the state trust management company; it is responsible for managing foreign debt and domestic debt as well (we are authorized to recover bad debts from debtor companies). Historically, this is the way things worked out. And in so far as a well-functioning system has been put in place to my mind it’s hard to cut the ties that bind in order to just ensure the validity of the experiment. Our agent’s functions provide us with additional opportunities to achieve the Bank’s core objectives. For example, the fact that the Bank is involved in managing foreign debt and financial assets enables it to advance Russian companies’ interests abroad and encourage Russian industrial exports in the case that we are making efforts to redeem foreign debt through goods deliveries. On the other hand, Indian and Syrian debts can be used to help Russian companies to achieve their investment objectives in these countries.
- Are there any Russian companies that are interested in using Syria’s debt, as was the case with AFK Sistema and India’s debt?
- There are quite a few companies for example the said AFK Sistema is interested in the tourist infrastructure in Syria, Pumpyansky (Dmitry Pumpyansky, TMK General Director) is both interested in tourism and his core business in Syria. And I can also mention Zarubezhvodstroy, Stroytransgaz, and LUKOIL. A great number of companies would be willing to use Syrian assets for their investments, with subsequent payments to the budget being made at a later date. It should be taken into account that here we deal with the government debt, which is accounted for by Vnesheconombank and in this context we can start to build a system of Russian industrial exports promotion.
- Is the Bank going to operate in the securities market?
- Yes, it is. This activity will not be our core business but it is important in terms of maintaining the Bank’s own liquidity. VEB operates in the securities market on a daily basis both with Russian and foreign issuers. Of course, we stay away from conducting risky transactions in second- third-rate securities. But I believe we’ll be a noticeable player in the securities market and of course we will coordinate our policy with the Supervisory Board. Our capital would amount to 250 billion rubles but this does not mean that all these funds will be used to implement various projects. Our capital will be invested in liquid assets. We insisted that the Bank’s authorized capital should not be used to finance its day-to-day operation. These funds should, above all, serve as the basis for raising financial resources.
- Will it enable you to raise cheap money?
- There’s no doubt about it. You need cheap money where yields are a priori minimal, project payoff periods – longer, the amount of resources - a lot larger and where commercial banks are not interested in doing their business. This is our mission and the fact that we are exempt from profit tax would help us accomplish it.
- Do you pay any other taxes?
- Of course, we do. We are a national development bank; we even have our own individual taxpayer number (ITN). VEB is a Russian resident.