OJSC Avtodiesel (the Yaroslavl Engine Plant) incorporated in GAZ Group (The Russian Machines Corporation) is launching a batch production of a new family of medium-class diesel engines in line with ecological standards of Euro-4 and Euro-5 with a life cycle of at least 20-25 years. Vnesheconombank provided credit resources for developing and manufacturing YAMZ-530 engines. In his interview Deputy Chairman of State Corporation ‘Bank for Development and Foreign Economic Affairs (Vnesheconombank)’, Executive Secretary of the Commission on Investments and Technical Retooling of Mechanical Engineering Enterprises and Related Industries of the Union of Russian Machine-Builders told us about specifics of the project and the Bank’s participation in supporting Russian auto engine building.
The project aims to develop a new competitive family of YAMZ-530 diesel engines using the world’s best practice in developing and testing engines as well as to build a new plant as well as to start up a production of YAMZ-530 engines in line with Euro-4 and Euro-5 standards. The project provides for purchasing new imported equipment from leading foreign manufacturers. Medium-class diesel engines of YAMZ-530 family will be manufactured at a new production facility. The engines were developed by the Yaroslavl engine plant’s designers with the participation of the world’s leading engineering company - AVL-List (Austria). The new family is comprised of row diesel engines with four and six cylinders and with a swept volume of 1.1 liters per a cylinder and a capacity from 120 to 315 horse powers with a life cycle of no less than 25 years. The project’s unique feature: the project provides for the construction of the first plant to manufacture engines in the past 30 years. It will be the most technologically advanced engine-building production facility in Russia with an operations automation level of more than 80%. The project’s innovativeness: the project provides for developing and manufacturing a new medium-class diesel engine with the use of the world’s best practice which meets the requirements of Russia’s automotive industry, the engine is in line with ecological euro-4 and euro-5 standards, has an extended mileage of 700-900 thousand kilometers. Socio-economic effect from implementing the project: the number of jobs to be created is 1250.
- Why did VEB decide to fund the Yaroslavl project?
- An answer is pretty simple. At a time that we started to consider this project in 2008 there were few projects in the automotive industry aimed at building new enterprises initiated by automakers themselves. And there is a rationale for this: it makes sense to build plants that manufacture new innovative products but this is rather expensive and requires significant investments in purchasing know-how and licenses. It took a long time for automotive enterprises to understand it but at some point relevant decisions were taken. We started to fund two pretty similar projects almost simultaneously: building an engine manufacturing facility under the license of Cummins Company at KAMAZ plant in Naberezhnye Chelny and creating a new production faculty at the Yaroslavl engine plant to manufacture YAMZ engines. In terms of sectoral priorities these are number one projects. In all mechanical engineering sectors engine manufacturing is the most high technological production and in actual fact engine building and research and development associated with it are a driving force of mechanical engineering; they use the most advanced materials and technologies. The engine is the heart of any machine.
- How are you going to market new engines? What categories of consumers are they intended for?
- All the latest models of KAMAZ vehicles are equipped with Cummins engines manufactured by KAMAZ plant under Cummins’ license. This is a pretty advanced production facility and the whole model line of KAMAZ is to be equipped with Cummins engines. As far as YAM-530 engines are concerned the product line of these engines will be intended for auto models manufactured by GAZ Group (Russian Machines Corporation) and this is a wide range of such trucks as URAL, Sadko, and buses ( PAZ, KAVZ, LiAZ and GolAZ), road building machines and others. By the way, Yaroslavl’s engines can be installed on KAMAZ vehicles.
- Can YAMZ-530 engines compete with its foreign analogs?
- When you praise something or somebody it always looks like advertising. But the Yaroslavl engines are fully in line with the world’s best models in terms of specific horse power, torque and fuel consumption. And the price of these engines is their serious competitive edge over foreign products.
- What’s the project’s value? How much money has been made available? What’s the structure of investments?
- The project’s total budget set forth in the business plan and discussed by Vnesheconombank is almost 10 billion rubles. Vnesheconombank’s participation share is 5.8 billion rubles; this is more than comfortable own/borrowed funds ratio for us. This ratio evolved historically as originally Russian Machines Company planned to implement the project on its own but the crisis changed the situation and when the Company turned to Vnesheconombank, a significant part of funds had been already invested in the project including R&D, which the Company was doing together with Austria’s AVL Company to develop engine models and adapt them to the Russian market.
- What were the tenure and cost of the credit?
- The credit tenure is 10 years; its investment phase is 3 years. The funding was opened up in early 2010 and now the investment phase is coming to an end. As of today, 4 billion rubles out of the credit line worth 5.8 billion rubles were already used up. The production facility is scheduled to be opened till the year-end. But as in the case of any project in the mechanical engineering additional investments will be needed for a pretty long period of time, at best it will take a year to achieve rated capacity.
- What can you tell about the project’s recoupment?
- Project recoupment is one of the key criteria we are guided by when examining investment projects. Unprofitable, money-losing projects can’t be funded under Vnesheconombank’s requirements. By preliminary estimates the project’s payback period for the investor is about 15 years and is naturally longer that our credit’s tenure. We believe that rather comfortable and acceptable conditions were set for this new engine manufacturing project unprecedented for Russia. The project might prove to be very effective.
- What other advantages for the Russian automotive industry the Avtodiesel project can give?
- I think it should be noted that another result from implementing the new project of GAZ Group is that it can accelerate the creation of Russia’s component base which is an objective of the Russian Automotive industry development strategy for a period of up to 2020. The strategy was approved by the Russian Government. The project’s implementation will make it possible to bring localization level to 60-70% set forth in the business plan upon achieving a rated capacity of up to 50 thousand engines per year.
- Recently, the Government announced that it would put off dates for moving to euro-3 and euro-4 fuels on a mandatory basis. To what extent is this decision painful for automakers that invested in the development of new generation engines?
- There is no doubt that the decision to allow using fuels that do not meet the current ecological requirements is detrimental to the interests of those automakers who invested significant funds in the development of new engines designed to consume more qualitative types of fuel and it has a negative impact on the economics of relevant projects. But taking into account the structure of new engines’ potential consumers I wouldn’t overestimate potential damage from putting off dates for moving to Euro-4. According to Vice Premier Sergei Ivanov, oil industry’s interests and lobbying capabilities took the upper hand this time. But progress has always to beat its way through barriers. But I am hopeful because history shows that the triumph of progress is inevitable.
-Are there any other projects in the engine building sector besides the Yaroslavl project in VEB’s portfolio?
- Yes there are. Providing support for engine building is our priority number one. The auto engine building sector’s distinguishing feature is that investment cycles are very long and regrettably these cycles in the Russian mechanical engineering were interrupted for certain reasons. No investments have been made in the sector in the past 15-20 years, during these years we have lost personnel and competences and only now companies are starting making investments. We are working with almost all machine-building holdings in the aircraft construction sector, automotive industry, shipbuilding and of course in the fuel and energy sector (because engines are the heart of not only machines but also of oil and gas pipelines). We are cooperating actively with the United Engine Building Corporation, which incorporates all the surviving enterprises operating in the engine building sector in aviation, helicopter building and those working for Gazprom. For example, this July we have started to fund the project aimed at building a plant for the Klimov Company worth 6.2 billion rubles. The Company is a well-known design bureau in Saint- Petersburg. It’s a designer and manufacturer of several types of helicopter engines. A credit line opened by the Bank worth 4.95 billion rubles is intended for funding the startup of production of a new type of helicopter engines. By the way, a spillover effect of our investments is that we are addressing a task important for Saint-Petersburg as well as for other “old” Russian cities, above all, Moscow, here I mean a task of relocating production facilities from historical centers where many defense enterprises are located. The new production facility is located in the suburbs of Saint-Petersburg in the shore area far away from residential quarters thus vacating areas in the city’s center, which will be used to implement projects Saint-Petersburg needs badly as a cultural capital.
I hope that in the near future we’ll have new projects with the United Engine Building Corporation.
Vnesheconombank Chairman Vladimir Dmitriev’s Interview to the Grozny Inform News Agency
Vnesheconombank Chairman Vladimir Dmitriev told journalists about projects being implemented in the North Caucasus Federal District (NCFD) specifically in the Chechen Republic
- Vladimir Alexandrovich, Vnesheconombank is actively participating in the Development of the North Caucasus, will you tell us in detail about the Bank’s activity in the region?
- In fact, VEB started to energetically support investment projects being generated in the the North Caucasus Federal District (NCFD). And in order to fulfill the task set by our country’s leadership aimed at raising large-scale investments for this region, the Bank established the North Caucasus Development Corporation. The Corporation’s main objective is to provide consulting assistance to investors for them to be able to make a balanced analysis of the economic situation in various regions, form projects and prepare appropriate documentation. All this is needed by banks to feel confident in funding investment projects. The Corporation started to operate at the end of the last year but it already has a whole number of projects in its portfolio.
We do not limit our activity in the North Caucasus Federal District to the North Caucasus Development Corporation. Vnesheconombank’s Representative Office has been operating for about a year in Pyatigorsk. The Office helped to prepare and submit to consideration by VEB documents on 7 projects with a projected amount of financing being more than 38 billion rubles. The Representative Office is working now on another 45 projects worth more than 226 billion rubles and these projects’ initiators are being provided with consulting and methodological assistance.
Moreover, our Representative Office is included in the working groups responsible for selecting top-priority investment projects on the territory of each region of the District.
Additional effective mechanisms for enhancing VEB’s cooperation with Russian regions are agreements on cooperation. Their subject-matter is to establish strategic partnership, promote long-term and effective cooperation in the investment activity. At present, Vnesheconombank have entered into such agreements with all constituent entities of the NCFD. To build on these agreements we sign protocols on cooperation in supporting public private partnership, small and medium-sized enterprises as well as agreements aimed at implementing specific investment projects in the region.
- What projects in your opinion are the most important in the North Caucasus Federal District?
- As of today, VEB has a number of serious projects in each of Caucasian republics. Out of them I’d like to single out tourist recreational business developing in line with the decisions taken by the country’s leadership. To this end, a special company, namely, the North Caucasus Resorts was established to develop major tourist centers and clusters. We started our work with discussing mountain-climatic and alpine ski resorts. One of our first projects is Arkhyz, which is generated by the Sinara Group. Vnesheconombank started to make arrangements to fund this project even before the crisis and it is now included in the list of projects to be implemented by the North Caucasus Resorts Company. The total amount of investments with regard to all resorts and the alpine ski cluster of the North Caucasus is to be 400 billion rubles plus investments in the coastland of Dagestan where we have unique opportunities to develop tourist and resort business.
In doing all this, we do not forget to develop industrial sector North Caucasus republics and we should develop and support traditional regional sectors such as agro-industrial business, light industry, manufacturing of construction materials in the Caucasus, that is, in the North Caucasus republics and in the Stavropol Territory
Another line of our Bank’s activity deals with projects aimed at supporting small and medium-sized enterprises that are very important in terms of addressing employment issues in the region. Here we are going to operate through our subsidiary SME Bank specializing in funding SMEs. In this respect, I’d like to say that last year the North Caucasus as a whole and the Chechen Republic in particular were leaders among Russian regions in terms of implementing programs of providing support for small and medium-sized enterprises.
As I have already mentioned we have a number of serious projects almost in each of Republics in the North Caucasus Federal District. Now the Chehenagroholding project is being actively implemented in the Chechen Republic. We are also involved in supporting the construction materials manufacturing sector in Kabardino-Balkaria, Dagestan and in Karachaevo-Cherkesia. As I’ve already said we started to implement the Arkhyz project. We are exploring the possibility of forming a large-scale agro-industrial cluster in the Stavropol Territory using the business experience we gained in the Rostov region where the largest Russian turkey meat production facility is being built with our participation. Now we are planning to replicate and expand these projects in other regions, specifically, in the North Caucasus.
- You’ve mentioned the project aimed at building an agro-industrial holding which is not only the first VEB’s large-scale project in the Chechen Republic but also the only large-scale federal investment project in Chechnya. How did the Bank approach the problem of high regional risks?
- While there is a certain regional risk you shouldn’t first overestimate it and second, if you don’t implement investment projects risks do not diminish for this reason. But as we must operate on a break-even basis we take up only break-even projects. And there are such projects in the Chechen Republic. We deem it necessary to support thoroughly prepared projects such as for example the Chechenagroholding project. It is a profitable project and it will create local competences and new jobs (we believe that more than a thousand and a half people will work in this agro-industrial integrated facility). This is the Bank’s most important pilot project whose initiator is the Government of the Chechen Republic. This is a very large production facility - about 20 thousand cattle heads, a poultry farm for 200 thousand birds, a meat processing factory, unique greenhouses operating on thermal springs and a whole number of other production facilities which are badly needed for developing food industry in the region.
We started to deal with this project in 2009 and hoped to receive a state guarantee. But the documentation process was so slow that the project was on the verge of collapse although the construction work had already started and some equipment had been ordered in hope of receiving funds from the Bank. So, in order not to shelve the project for a long time and not to run additional risks and having found out that the project was financially sustainable we found it possible to fund it. We had to use a favorable summer period for performing construction work. If we had failed to do it in May we would have lost a whole year.
As of today, about 2 billion rubles have been invested in the project’s implementation. All the facilities are in an active construction stage and are to be put into operation next year.
We still hope that the decisions on providing support for investment projects in the Chechen Republic and on the whole territory of the North Caucasus Federal District made at the highest government level will be carried out. Specifically, the Russian Government’s Decree on granting first state guarantees worth 42.5 billion rubles to implement 20 projects in the North Caucasus including granting a guarantee for the second stage of the project to build an agro-industrial complex in Chechnya aimed at developing winegrowing. Having entered into the agro-industrial complex construction project in Chechnya and having supported other projects not only in Chechnya but in the North Caucasus Federal district as a whole, Vnesheconombank is giving an example to commercial banks to participate in implementing projects in the region.
- Is there a possibility to implement any other projects besides Chechenagroholding in the Chechen Republic?
- Undoubtedly, it’s not the only project in the Republic. For example, at present, VEB is studying in detail the Veduchi project – an alpine ski complex in the mountains in the South of the Chechen Republic. The Bank is also conducting an expert examination of a project on building the Kazbek major construction materials manufacturing cluster. The North Caucasus Development Corporation will participate in it. The project aims to construct a complex of production facilities to manufacture advanced construction materials: aerated concrete, fiber cement plates, lime, dry construction mixes. This project is needed to provide not only the Chechen Republic but also other constituent entities of the North Caucasus Federal District with quality construction materials, given increasing rates of construction in the region. Moreover, we are cooperating with the Government of the Chechen Republic and the Grozny City Hall in reconstructing the city’s community facilities, which requires significant investments. We are going to offer schemes for investing these projects based on public private partnership. There are a lot of such examples in all other republics of the north Caucasus. I believe that state banks and above all VEB as a bank for development should create a normal investment climate and favorable conditions for raising capital for this region by leading the way in assessing risks adequately and participating in regional projects.