Vnesheconombank PPP Center Director Alexander Bazhenov’s Interview to Russian Business Gazeta (RBG)
Conditions for Growth
Infrastructure development is not possible without using cooperation mechanisms between the authorities and business
Russian Business-Gazeta –
Public Private Partnership №805 (23)
Special PPP centers operate in the countries with developed and emerging markets for public private partnership projects. These centers are institutions responsible for upgrading and standardizing PPP instruments, they provide support for regional and local authorities in introducing PPP mechanisms for developing infrastructure. There is Vnesheconombank’s PPP Center in Russia. Vnesheconombank’s PPP Center Director Alexander Bazhenov told RBG about issues the Center is addressing.
RBG: Alexander, tell us the way PPP centers operate in the country.
Bazhenov: Today, there are three categories of PPP centers in Russia. The first ones are consulting companies. As a rule they offer specialized legal and economic services on preparing PPP projects, some companies have this sort of experience – other do not but they are trying to find a business niche on the emerging market. There are non-profit institutions, for example the PPP Development Center. Its objective is to understand as to what hinders PPP development in Russia and what sort of PPP national model we should develop, what distinguishing features it should have and how we should form it. Vnesheconombank is quite experienced in participating in implementing infrastructure projects including those on PPP terms. In order to extend financing for a PPP project the Bank needs a corporate private borrower who has entered into a contract with a government authority for developing infrastructure, with the contract specifying rights, liabilities and risk sharing between the parties. So, PPP project formation depends above all on government authorities’ commitment to organizing PPP projects. For regional and municipal administrations to form such projects they should upgrade applicable legislation and their own development institutions. These institutions should be staffed with highly qualified personnel and be provided with required financing to prepare projects. This sort of authorities’ activity should be of course supported. As a bank for development, Vnesheconombank assumed a responsibility for assisting regions and municipalities and in some cases federal government authorities in formulating long-term policies and practice to plan and apply PPP instruments. This sort of activity is not a Russian invention. Special PPP centers operate in the countries with developed and emerging markets for public private partnership projects. These centers are institutions responsible for upgrading and standardizing PPP instruments, they provide support for regional and local authorities in introducing PPP mechanisms for developing infrastructure. In Great Britain it’s Partnerships UK, in France – the Economics and Finance Ministry, in Germany – Partnerschaften Deutschland, in Russia – Vnesheconombank’s PPP Center.
RBG: Do you believe that each region should have a branch of your Center?
Bazhenov: We are not responsible for setting up branches. We believe that each region should have a development institution within a government authority engaged in non-budgetary financing. For example, in Saint Petersburg they have the Committee on Investments and Strategic Projects. It is responsible for preparing projects, regional laws, by-laws. Factually, the Committee is developing a new instrument of public administration, that is, PPP. We are responsible only for rendering assistance. Administrations turn to the Bank for help if they are interested in preparing a PPP project but the Bank does not seek to fund this project by all means. Financing is to be provided by an institution which is a tender winner turns to, and a tender winner tends to look for the most favorable conditions.
RBG: Regions with competent administrations, highly qualified personnel that follow your recommendations are sure to be lucky. And what should other subsidized regions do? They have no chance for PPP at all?
Bazhenov: If a subsidized region has a strong political leadership, nothing will prevent it from developing public private partnership. And we are ready to help. Obviously, it’s more difficult to form PPP projects in such a region because it has a completely different economy. Principal problems have to be addressed including expert’s examination and cooperation with federal government authorities. PPP assumes that the state and private business implement a specific project aimed at developing public infrastructure through using non-budgetary sources and then the state buys it out. Where do funds to this end come from? Upon implementing infrastructure projects an additional economic activity and additional budget revenues emerge and through using them we can pay for raised funds.
RBG: Do you have this sort of experience?
Bazhenov: Yes, we do. For example, we are forming a comprehensive development project in Tyva. The project is aimed at developing a whole number of mineral deposits and building a railway. It was to have been implemented through using monetary resources of the Investment Fund but now it is being re-launched. We’ve an excellent project in the Kaluga region aimed at creating an auto-cluster. The project demonstrates the efficiency of this approach.
By the way, at present, the Kaluga region is a leader in raising direct foreign investments, developing new industrial production facilities, creating new jobs. Even during the crisis, production facilities located in the auto-cluster had about 20 thousand vacancies and they were looking for ways to build additional hostels for personnel. Very often Russian depressive territories have competitive edge but they can’t take advantage of it as they have to eliminate certain limitations and implement a pilot project to demonstrate that they can develop production facilities in their region. Regions are often underinvested rather than depressive.
RBG: VEB’s Supervisory Board approved a program of rendering financial assistance for preparing regional and urban development projects. What does this program include?
Bazhenov: The program includes not only communal services infrastructure. We are not focusing on communal and housing services alone – it is important for projects to be in line with main objectives of the country’s modernization. We have to address ecological problems. Ecology includes waste management infrastructure, sewage treatment and to some extent water supply systems. Municipalities give high priority to housing communal services and regions - to environment protection. We help to address issues of energy efficiency – these are the projects in the field of heat supply and renovation of buildings owned by regions and municipalities. Our third objective is to address an issue of affordable housing and economic growth; we provide support for projects aimed at building infrastructure for residential and industrial development sites. Our fourth task is to address transport issues. The fifth issue is social infrastructure: education, public health services, culture, sports. And finally, the sixth issue deals with public administration infrastructure. In order to provide quality public services we have to set up multi-functional administrative centers, e-Government based on wideband Internet access. For administrations to prepare top-quality projects and raise investments, they need funds. And they don’t have money for preparing projects in their budgets. They can do it through using non-budgetary funds but what are we supposed to do to secure transparency of tenders? So, we are ready to support administrations initiatives on preparing projects. VEB’s Supervisory Board made a decision to commit 10 billion rubles for preparing projects within a 5-year period – 2 billion rubles per year. And this is an investment rather than a grant and it provides for cash return on it. Now we are completing the formation of mechanisms for using these funds. As part of the recent Petersburg International Economic Forum, the Bank signed agreements on preparing this sort of projects with a number of administrations. These agreements include our intentions. Administrations are to be responsible for taking concrete steps, for example, arrangements for preparing pilot concession tenders in heat, water supply and water drainage sectors in the Saratov region, Krasnoyarsk Territory and the Sverldlovsk region. Although a concession model in the Russian conditions is not evident in terms of raising investments it won’t get better if we don’t try to improve it. We also signed an agreement with the Chechen Republic on preparing a project to modernize the engineering infrastructure in the city of Grozny. We are also making efforts to prepare a project on the construction of a trunk railway Belkomur - a railway line to connect the North of the Urals with the ports in Murmansk and Archangel through the Republic of Komi. This railway would make it possible to distribute freight flows and increase track capacity. As of today, we have about 30-35 requests from administrations and we are working on them.
Bazhenov: We are giving a fishing rod instead of fish. The Bank’s funds under the program will be used to purchase consulting services on forming a project. But it does not mean that we are going to give money as a present and see what is going to come out of it. Both sides should understand what they are supposed to do, within what periods and for what purposes. These services are purchased not just to spend money but to form an attractive investment project. That is why we are responsible for exercising control over expenses on consulting services. Our idea is as follows: if you want to change your water-supply system by way of raising private investments let’s agree as to what kind of technical examination should be conducted and we are ready to pay for it if we can get our money back in 2-3 years or after conducting tenders.
RBG: Have you already received such proposals?
Bazhenov: We receive this sort of requests from municipal and regional administrations and then we start agreeing upon technical specifications and terms and conditions. Our country is very big. In view of the fact that for twenty years nothing has been done to develop infrastructure, the more so, by way of raising non-budgetary investments we have, of course, a great deal of problems. But our today’s problem is not so much money as the lack of projects capable of accepting this money, using it, producing tangible results, paying back investments and borrowed funds.
By the way, in France an institution similar to ours, namely, the France Development Bank provides annually about 180 million euros to regional and municipal administrations for similar purposes. Our two billion rubles are equal to about 60 million euros, twice as less as in France although France’s needs for infrastructure development are much smaller. According Saint Petersburg’s the France Development Bank’s experience pre-project preparations cost 1-2% of a project’s value. So, when we say two billion - it’s 1% of projects’ value and this means that we are rendering assistance in preparing projects worth 200 billion rubles per year. Given that these funds are reimbursable and the program is of a revolving character, the amount of financial assistance is going to be greater. These funds are quite sufficient to a give a significant impetus to regional and urban development. That is why this new PPP instrument is forming a new market for regional and urban development, which was previously based only on budgetary financing.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the News Agency RIA Novosti
The Northern Caucasus is expecting large-scale investment projects – VEB’s Chairman
State Corporation ‘Vnesheconombank (VEB)’ got down to funding projects in the Northern Caucasus in 2010 by setting up the Northern Caucasus Development Corporation. Since that time VEB has already started implementing projects worth several tens of billions of rubles in Kabardino-Balkaria, Karachaeyvo-Cherkessia, Dagestan and Chechnya. In his interview to RIA Novosti, VEB Chairman Vladimir Dmitriev told about business outlook and plans for improving and expanding the investment environment in this federal district.
-Vladimir Alexandrovich, would you tell us about the projects Vnesheconombank is implementing in the Northern Caucasian Federal District. What is the status of these projects and when can we see real results of the state’s efforts to develop the region?
-Vnesheconombank’s primary objective in the Northern Caucasus is to be a major source of financing the most promising and the most needed projects and assist in raising large-scale investments for the region. Factually, we are responsible for the government strategy of developing the Northern Caucasian Federal District aimed at boosting local production facilities, encouraging socio-economic development and integrating the region into the country’s economic and humanitarian space and in the long run at improving the people’s quality of life in the region.
To achieve these objectives we have several instruments. I’d like to single out three key instruments. In pursuance of the Russian Government’s instruction we created a subsidiary institution – the Northern Caucasus Development Corporation designed to undertake active practical activity in the region. Second, we opened Vnesheconombank’s representative office in the city of Pyatigorsk. It operates in all constituent entities of the Northern Caucasian Federal District. And finally, the Bank acted as a co-founder of the Northern Caucasian Resorts Company that was set up to build a tourist cluster.
VEB’s regional institutions are focusing on establishing close cooperation with local administrations and investors, evaluating socio-economic effect of implementing investment projects as well as monitoring them by using the Bank’s financial and expert potential.
I’d like to give you several examples of projects that are being implemented with the use of Vnesheconombank’s resources: In the city of Tyrnyauz (Kabardino-Balkaria) VEB is funding the transformation of the silex brick factory into a factory to manufacture gypsum binders and products based on them. The project’s value is 6.8 billion rubles, with Vnesheconombank’s participation share being 4.6 billion rubles. In Karachaevo-Cherkessia we are funding a project to retool the sugar mill. We have a very interesting project in Dagestan. This project is aimed at building a float-glass plant. This glass is used to manufacture quality double-pane units for modern buildings and etc. Products to be manufactures will have better characteristics including good energy saving qualities. There are plans to sell these products in the future not only inside Russia but on foreign markets as well. Vnesheconombank’s participation share in this project is 6.9 billion rubles. We have started financing a project to build a large-scale agro-industrial complex in the Chechen Republic. The project is being implemented by OJSC Chechenagroholding. 2.25 billion rubles will be provided to implement this project. The project provides for developing meat stock farming, crop rising, agricultural products processing. This is a very important project for the Republic as it is designed to ensure food security and combat unemployment in Chechnya.
-Not long ago Vnesheconombank opened its representative office in the city of Pyatigorsk. What are its objectives and plans?
-We opened our representative office for it to help to look for and select quality investment projects in line with the Bank’s Memorandum on Financial Policies in the Northern Caucasian Federal District. We also believe that the representative office should provide consulting services to projects’ potential participants in preparing a package of documents required to conduct expert’s examination and evaluate socio-economic effect of projects. We often come up against the following problem: there is a potentially very interesting, important and needed project but unfortunately it is not prepared properly. Our representative office will help project initiators to bring their projects up to the mark.
Despite the fact that the representative office has been operating for less than a year it has done a lot. It has set up working groups responsible for selecting high-priority projects. These groups are working together with administrations of all constituent entities of the Federal District. Vnesheconombank holds conferences, workshops and meetings with government executive authorities to boost the efficiency of preparing investment projects and form human resources.
Here’s one of the latest examples. A meeting in Kislovodsk held in April of 2011 was devoted to studying potential investment projects in the Northern Caucasian Federal District as well as to mechanisms for preparing projects in line with Vnesheconombank’s requirements.
The Federal District’s representatives made presentations of investment projects. They presented projects in tourist infrastructure, agro-industrial complex and construction materials manufacturing. Vnesheconombank’s specialists conducted consultations on preparing business-plans and project financial models with due regard to the specifics of the region and the said sectors.
At present, the representative office is rendering assistance in preparing documents to about 60 initiators of investment projects. Their total value is 350 billion rubles and Vnesheconombank’s expected participation share is 300 billion rubles.
-It means that in the near future new large-scale projects could be launched in the Northern Caucasian District? Which of them could be started before the end of the year?
-Above all, these are the projects on creating a large-scale tourist cluster in the Northern Caucasian Federal District, the Krasnodar Territory and the Republic of Adygeya. In the most immediate future Vnesheconombank’s corporate governance bodies are to consider financing the Arkhyz All-Season Alpine Ressort Construction Project in the amount of 5.1 billion rubles. This project has in fact been already launched through using funds provided by investor – Arkhyz-Sinara and we can participate in it.
Having signed an inter-shareholder’s agreement, Vnesheconombanks acts a co-founder of the company ‘Resorts of the Northern Caucasus’. Our stake is worth 300 million rubles.
I would also like to mention another project in the Chechen Republic which is now under consideration at Vnesheconombank. This is a project on creating the first innovation construction technopark Kazbek in the Republic. The project provides for building a number of plants to manufacture the most advanced construction materials for housing construction such as building blocks and slabs from autoclaved aerated concrete, fiber-reinforced cement slabs and etc.
The Bank’s projected participation share in the project is 4.5 billion rubles. The project’s implementation would make it possible not only to increase housing construction volumes in the Republic but also provide the whole Northern Caucasus with quality and affordable construction materials manufactured on the basis of the region’s own mineral raw materials.
As far as other projects are concerned, Vnesheconombank might participate in funding OJSC RusHydro’s investment program that provides for constructing a reservoired power station on the Avarskoe Koisu river in Dagestan as well as a cascade of Zaramag hydroelectric power stations and Zelenchuk hydroelectric power stations in Karachaevo-Cherkessia.
-What are the plans of the Northern Caucasus Development Corporation established by VEB? How is it going to participate in investment projects in the Northern Caucasian Federal District?
In April of 2011, the Corporation’s Board of Directors approved the Action Strategy of the Northern Caucasus Development Corporation up to the Year 2016. At the moment, more than 30 projects are under consideration at the Corporation. Some of them are seeking financing, others – consulting services on engaging private co-investors, debt financing from banks or the state’s support. The best prepared projects seeking the Corporation’s financing were considered by its Board of Directors this April. Now, the Corporation is preparing transactions for signing. These projects’ total budget is about 63 billion rubles, with the Corporation’s participation share being 7 billion rubles. They include the Arkhyz project I’ve already mentioned, the development of the Kizil Dere sulfide- copper deposit in Dagestan, the construction of an alpine ski resort in Chechnya. I would also like to mention the project on setting up a national aerosol cluster in Nevinnomyssk in cooperation with OJSC Arnest to manufacture aerosol packages that are now exported from abroad. Moreover, the Corporation is now preparing a project to develop the resort area of the Caucasian Mineral Waters with the participation of a major investor.
Until the end of the third quarter, the Northern Caucasian Development Corporation plans to submit another 4-6 projects to consideration by its Board of Directors, with the Corporation’s participation share being 5 billion rubles. They include the project to set up an innovation construction technopark Kazbek I’ve already mentioned. The project is fully in line with objectives of the Northern Caucasus Development Strategy and is a unique one in terms of introducing the most advanced housing construction world technologies. So, the Corporation’s participation in its implementation together with the Bank would not only in my opinion give the project a high status but, given the Corporation’s rather insignificant financial investments worth no more than 50 million rubles, expand the Corporation’s practical participation in addressing the most important issues of the Northern Caucasian socio-economic development.
-It is known that the Federal District’s regions tend to under-use funds earmarked for supporting small and medium-sized enterprises. What are the reasons for it?
-The scale of credit resources under-use in the Northern Caucasian District is in my opinion overstated. Our subsidiary MSP Bank (the former Russian Development Bank (OJSC)), which is now our main instrument for supporting small and medium-sized enterprises is renewing financing limits for regions on a regular basis. At present, the established limits for the regions of the Northern Caucasian Federal District are 6 billion rubles out of which our partner banks have already distributed 68%. And the distribution ratio in the developed North Western Federal district is 61%. In the Far East the limit distribution ratio is 48%. So, I’d like to say it once more that the problem does of course exists and the reason for it is the District’s underdeveloped banking system and the small number of large federal banks in the Northern Caucasus.
In order to address this problem and encourage banks to increase lending to small and medium-sized enterprises we have developed a credit product ‘ Refinancing – Region’ which provides for extending financing at rates that are significantly lower than the ones under the program on average .