Mikhail Poluboyarinov: Russia Must Become the World’s Transport Center
Air transportation market is inextricably linked to airport infrastructure modernization – a sector which does not generate great interest among private investors due to immensity of investments and long pay off periods of such projects. Vnesheconombank as a national development bank participates actively in upgrading this sector. In his interview to Industrial Weekly VEB Deputy Chairman Mikhail Poluboyarinov told about specifics of funding such projects, their current status and prospects.
Mikhail Igorevich, would you tell us about the Bank’s role in modernizing Russian airports? How many such projects does the Bank have?
- All over the world, airports and companies related to them have a significant influence on the economy and employment creating almost 1% of global GDP. Unfortunately, the current condition of Russian airports’ land air transport infrastructure facilities and their capacity are unsatisfactory and badly worn-out. They fail to meet economic and flight safety standards. Underdeveloped airport infrastructure hinders the development of air transportation services and realization of the country’s transit potential.
Russian airports are lagging behind in terms of service quality, related services, the level of business processes, flight frequency and regularity, service efficiency, the level of aviation technologies and interaction with airlines and logistics operators. Airport infrastructure fails to achieve objectives of accelerating the transit of goods and people, reducing transportation costs, increasing availability of services and competitiveness, realizing transport potential, increasing safety and sustainability of transport system, improving people’s mobility and increasing freight flows.
Russia’s airport sector is in great need of financing. By various experts’ estimates, up to 80% of air terminal infrastructure has to be modernized. At the same time, preconditions are not yet ripe in Russia for implementing projects in the airport infrastructure sector through using private investments alone. It’s very difficult to raise capital for development because investors can’t be fully confident that their investments are protected and they don’t risk participating in capital-intensive projects. So, it’s quite evident that without the state’s active involvement there is no chance to dynamically reconstruct, upgrade and develop airport infrastructure. That is why many projects, for example, Sheremetjevo-3 would have never been implemented without the state’s support including the state represented by Vnesheconombank.
VEB’s priorities as a bank for development are to remove economic growth infrastructure restrictions and develop the most important industrial sectors. One of the Bank’s lines of activity is to fund projects aimed at modernizing and reconstructing airports. Aviation transport projects, that is, projects that are directly or indirectly related to aviation (infrastructure of airports, aircraft construction and air transportation) account for about 15 % of the Bank’s total portfolio. And our investments are made in line with a definite strategy agreed upon with the government and line ministries.
VEB’s goal is to maximally help transform Russia into one of the largest global transport centers, increase qualitatively domestic passenger traffic and freight air transportation, establish effective mechanisms for interaction between the state and investors, hedge risks of private investors investing in transport infrastructure. It is for this reason a number of projects with Vnesheconombank’s participation are being implemented in several regions of the country. These projects are aimed at renovating airport infrastructure. Their total value is as much as 95 billion rubles and Vnesheconombank is to provide about half of the funds.
If we look at the map of airport projects, which have been completed, are being implemented at present or are only under consideration at the Bank, we can easily see that these are all hallmark places. Sheremetjevo-3 is Moscow and it speaks for itself. Pulkovo is Saint Petersburg, the second capital. Khrabrovo is Kaliningrad – the westernmost point of our country, an enclave. Yekaterinburg is factually the country’s geographical center. It will host the 2020 World Expo and perhaps group tournament of the 2018 Soccer World Cup. Vladivostok is our country’s far eastern outpost where the 2012 Asia-Pacific Economic Cooperation Summit is to take place. Sochi is not only Russia’s largest resort but also a place to host the 2014 Winter Olympic Games.
- On what terms does VEB extend credits?
- Although we have a mixed funding structure, almost any project is funded through using borrowed money. But as VEB is a state corporation, in fact, a large state bank with a country rating we have a chance to borrow at a cheaper rate on markets including international ones than other banking institutions and lend on more favorable terms than commercial banks.
I’d like to stress that even this is not the most important thing: you won’t get much if you just compare our interest rates with those of commercial banks, this comparison is not correct because we operate in quite different investment fields. It’s a lot more important that VEB lends to projects that commercial banks have no interest in as they are not ready to assume project risks and extend credit resources and for longer periods than commercial banks. At present, there are not many commercial banks in Russia capable of funding infrastructure projects with a horizon of 10-15 years. This is an objective reality. As far as our terms of credits are concerned, credit tenors vary from 7 to 15 years and interest rates depending on a project’s economics are a lot lower than market rates used to finance even the best Russian corporate borrowers.
It goes without saying that it is the government that makes a decision as to which project must be implemented, it’s not up to a bank to decide as to which airport is needed. But we are responsible for analyzing a project, we look at passenger flows, calculate cash flow, determine real needs and the amount of bank credits – otherwise funds would be irretrievably lost. Of course, it’s not only return on money that matters; the government is also guided by social needs. If necessary, it can somewhat subsidize a project but in any case expert examination has a sobering effect. An airport is always a growth point but the budget is not limitless and the government starts to determine as to what extent this growth point is important in this place. And our main goal as a consultant is to tell the truth to the government as to what can be done on the principles of recoverability and as to what should not be done. So, we concluded an agreement with the Ministry of Transport on investment consulting.
The abovementioned does not rule out the fact that we also take into account social aspects in our activity. Perhaps what I’ll say now will seem to run counter to what I’ve said before but despite the fact that we act on the principle of break-even condition when we make a decision on financing a project, our state institution status obliges us to take into account social factors although they are not determinant. Nevertheless, they are important and in each case we try to determine the number of jobs to be created as a result of implementing a project as well as its importance in terms of a region’s socio-economic policy. For example, upon considering the project to build a new terminal in Vladivostok we took into considerations not only its economic cost efficiency but also the fact that the city would host the 2012 Asia-Pacific Economic Cooperation Summit as well as the region’s economic development and ensuring transport availability to people. So, despite the project’s complicated economics we made a decision to finance the it.
In this respect, I would like to stress that it is crucially important for the Bank what cumulative effect a project is going to have. And it is safe to say that VEB acts as a catalyst of the whole process aimed at creating a new terminal in the course of which new related businesses are being developed, new jobs are being created for small and medium businessmen and various companies are being engaged in the project, for example, construction materials and equipment suppliers, service businesses and etc.
- What’s the current status of the most significant projects?
- As you know, terminal “D” in Sheremetjevo is already being operated. This is the first Russia’s transport interchange hub with a capacity of 12 million passengers per year. The project’s implementation made it possible to bring minimum connection time to the best global airport hubs’ standards halving passengers’ transit time. Main prospects for Sheremetjevo are to further increase the terminal’s capacity and build the third runway. The Ministry of Transport sets such a task. So, there is a need now to engage a managing company in the Sheremetjevo airport that would assume all investment obligations for the construction of a new large complex.
The Sochi airport was also put into operation. At some point, the Sochi project required to make significant technical changes and rehabilitate financial situation but later on the project was coming pretty well. The project’s distinguishing feature is that during the Sochi Olympics the airport is required to handle such peak capacities that will not be needed during its normal operation. By the way, I’d like to say that the Gelendzhik airport also draws the Bank’s attention because government insinuations regard it as a backup for the Sochi airport.
The Koltsovo international airport was funded by the Bank in the amount of 2.25 billion rubles and was put into operation by the SOC summit in 2009. We view the Koltsovo airport as a Russian hub where large passenger flows including transit ones are concentrated so we see favorable prospects for the project’s further development.
I’d like to single out the project aimed at building the Vladivostok airport’s international terminal. The airport is to service participants in the 2012 Asia-Pacific Economic Cooperation summit so the terminal must be put into operation till the third quarter end in 2011. But I’d like to say that the project’s main objective is to provide the Primorsky Territory with a top-quality, comfortable modern airport. The project’s total value is 5 billion 813 million rubles, with Vnesheconombank’s participation share being 2.3 billion rubles. The terminal is to be put into operation in a few months’ time. The terminal with a total area of about 50 thousand square meters and a capacity of 3.5 million passengers per year will be in line with international standards and requirements and will completely replace the current international and domestic flights service facilities.
Vladivostok is located near the countries of the Asia-Pacific region and these countries have shown high economic growth rate in the last years. The Vladivostok international airport is also favorably located between several main long haul routes from Northeast Asia to North America and in comparison with Moscow it is better placed for servicing flights from Russia’s central and eastern parts. Once the terminal’s construction has been completed, Vladivostok will be able to compete with the largest Asian transport hubs in Japan, China and South Korea. For the most part, profit is expected to be gained from transit. Airlines carrying passengers from one continent to another will find it easier and more profitable to refuel in the Russian airport.
As far as Pulkovo is concerned, the first stage of implementing the project has started there after the completion of preparatory work.
- Could you tell us in more detail about funding Pulkovo’s modernization since foreign investors showed great interest in the project?
- Pulkovo is a unique project. Here, for the first time in the history of projects to create airport infrastructure in Russia, international financial institutions have shown considerable interest. Such creditors as the EBRD together with the European Investment Bank are acting as leaders of foreign creditors pool including commercial banks, the Russian side is represented by VEB. Credit resources to fund the first stage of the project were made available in approximately equal parts by VEB in rubles and foreigners in foreign currency. Due to the scheme chosen we managed to substantially reduce foreign exchange risks. We are very optimistic about the project believing that it will become an exemplary one. It was not by accident that this transaction was declared The Best Deal of 2010 in the airport infrastructure development by the British Journal Project Finance.
- Mikhail Igorevich, what new projects are you planning to participate in? Is the Bank going to be as active in the future as it has been before?
- As to our plans for the future, we are now holding talks on our possible participation in the reconstruction of the airports in Nizhny Novgorod and Samara (Kurumoch). We have also received other requests, so there will be a lot of work to do for a long time.
Projects with Vnesheconombank’s participation:
Reconstruction and operation of the Pulkovo International Airport (the first stage).
The project’s total financing amount is 1.2 billion euros. The Bank’s participation share is 10 billion rubles.
Initiator: LLC The Air Gates of the Northern Capital.
The project’s advantages:
International safety and technical standards.
Capacity: up to 14 million passengers per year.
2. The Sochi Airport
Completing the construction of the air terminal complex in Sochi.
The project’s total financing amount is 8.17 billion rubles.
The Bank’s participation share is 7.3 billion rubles.
Initiator: LLC Basel Aero.
The project’s advantages:
Servicing the 2014 Sochi Winter Olympic Games.
Increasing the terminal’s capacity to 2500 passengers per hour.
3. The Koltsovo Airport
The Koltsovo Airport Development.
The project’s total financing amount is 3.37 billion rubles.
The Bank’s participation share is 2.25 billion rubles.
Initiator: OJSC The Koltsovo Airport
The project’s advantages:
Increasing the international terminal’s capacity to 4000 passengers per hour.
The project is in line with Russia’s transport strategy up to the year 2030.
The project was put into operation by the time of the Shanghai Cooperation Organization Summit.
4. The Vladivostok Airport
Construction of a new passenger terminal in the Vladivostok International Airport.
The project’s total financing amount is $0.19 billion
The Bank’s participation share is 2.32 billion rubles.
Initriator: OJSC The Sheremetjevo International Airport
The project’s advantages:
Increasing capacity and air transportation availability to the public.
Creating favorable conditions for participants in the 2012 APEC summit.
Construction of the Sheremetjevo-3 (D) air terminal complex.
The project’s total financing amount is $1.1 billion.
The Bank’s participation share is $900 million.
Initiator: OJSC Terminal
The project’s advantages:
Russia’s first transport interchange hub with a capacity of 12 million passengers per year.
Bringing minimum connection time to the world’s best airports statndards.
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.