Long History of Long-Term Money

14 may 2013 года

The Moscow News
Newspaper № 522(522)
May 14,  00:05

Vladimir Loevetsky


In his interview to the Moscow News Director of Vnesheconombank’s Trust Management Department Alexandr Popov told about long-term investments, prospects for pension money and habits to change the rules of the game

- We can say that Russia is hunting for long-term money. The President, the Prime Minister, ministers and industrialists are all talking about long-term money. Long-term money is associated with prospects for economic growth and above all with infrastructure development. Many other projects are also in need of long-term investments. Besides direct investments from the state’s budget, which is already overloaded with allocations, where can we obtain long-term money? In the countries with advanced financial systems pension, insurance and investment funds have long become sources of long-term money. And what about us?

- Basically we have the same sources - both potential and real ones. Above all, I mean pension money and then companies associated with life insurance. Investment funds and banks hold third-fourth place. Although probably there will be no real long-term money in the banks until irrevocable deposits appear. Of course, theoretically such major banks as for example Sberbank have such resources as it holds half of all deposits. And even if its share of irrevocable deposits diminishes it will still hold a significant amount of these resources. But irrevocable deposits would play a significant role for the banking system as a whole. So far there are no irrevocable deposits, they are not allowed by law. If the Civil Code allows banks to introduce irrevocable deposits it will help them a lot to create long-term financial resources.

- People will probably be afraid of depositing money for a whole period without the right to withdraw their deposits.

Anyway we should try. We can’t force people to do it; they have the right to make a choice. But we know that we can interest them with higher interest rates. Irrevocable deposits will become guaranteed resources. And depositors will have higher interest rates for longer periods. Of course not all people will rush to make such deposits. But the most important thing is to observe the rules of the game. A new source of long-term money will gradually come into being. In general, it takes time to create such a source.

Alexandr Popov
Director of Vnesheconombank’s Trust Management Department


Born in 1970.

Graduated from Social Economic Department of the Institute of Asia and Africa under the Lomonosov Moscow State University.

In 1995 started to work in Vnesheconombank as a trader.

Since April of 2005 – Director of the Trust Management Department

As far as mutual investment funds are concerned the rules of the game play a great role here. Until a certain period of time incomes from selling units of these funds owned for more than three years were exempt from taxes. Then, this tax exemption was abolished, thus eliminating a significant incentive for long-term investors. And now the President ordered to equalize opportunities for those whose deposit in banks, mutual investment funds and other instruments. Without this, it will be difficult for us to create a significant financial base for such funds, nevertheless compared with bank deposits mutual investment funds are much lesser resources because it’s more difficult to deposit in such instruments as people need to have minimal financial literacy.

- What about life insurance?

Compared to investment funds life insurance is of course simpler. The problem here is how to make people deposit in them and what incentives we can use as well as how publicize these insurance products? At present, out of available instruments pension funds are the simplest products and most importantly they have existed since 2002. By the way, this system is developing pretty normally – in any way people become interested in their pension savings. Now 30% are no longer undecideds, they make decisions on their own and choose nongovernment pension funds. If the system didn’t work, people would remain passive. But unfortunately, by our Russian tradition if something starts working our patience runs out and we demand that the system should work in the most efficient way and they start to change the system fundamentally and we lose almost everything that we have achieved.

- Perhaps arguments over pension reform are not over yet. In its original version mandatory contributions for a funded portion of pensions were significantly reduced from 6 to 2%. And there were proposals to move to only voluntary contributions.

- On the one hand we have been talking so long about the need for long-term money. And pension funds gradually became such resources. And on the other hand these resources are being greatly reduced. 2% is already an absolute minimum.

- And then this version was somewhat softened. 2% for those who have never made a choice or written an application, that is for, “undecideds”. And 6% - for those who choose a non-government pension funds.

- This will significantly reduce investment potential of VEB as a state managing company. As far as nongovernment pension funds are concerned we don’t know yet how people will respond to this change. People have just started to get used to the existing system and rules and started to choose the nongovernment sector to a greater extent. Regulators also started to better understand how to better exercise control over the situation with pension savings funds. Initially, supervision was so strict that it was an obstacle to generating incomes rather than a means to secure the protection of pension funds. Only recently state managing companies have become able to work with more various instruments, strenuous efforts are also being made to ease restrictions for nongovernment pension funds. And the most important achievement is that inflation went down. At last, the real value of our pension money became positive - higher than inflation. Unfortunately, credit rates are high; they are also higher than inflation. But this is a normal economic situation when real rates are positive. And in the situation when the investment system started to operate a lot better, all the rules are being changed.

- In response to this they say: How come inflation went down but credit rates did not?

- First, inflation didn’t go down that much. And second, credit rates allow for inflationary expectations. This means that market players are not sure that inflation will go down further. Nevertheless, we are now in a position to perform our functions to really ensure the protection of pension savings funds so that yields on pension funds are at least no lower than inflation. And nongovernment pension funds are also in a position now to generate positive yields. But given that the whole funded pension system is changing, we don’t know exactly how people will respond. And it’s not that they might prefer nongovernment pension funds, they can lose interest in the funded pension system as such. And they started to become interested in it. And this interest could form the basis for voluntary pension savings. Behavioral patterns do not come into being fast. In this line of business a ten-year period is not a long period at all. And now the emerging behavioral pattern is being challenged.

- Mandatory pension savings already amount to 700 billion rubles.

- So far, we have no answers even to elementary questions: if you for example you want to remain in the Russian Pension Fund but retain six-percent contributions for a funded portion of your pension or on the contrary you have chosen a nongovernment pension fund but want to reduce contributions for a funded portion where are you supposed to submit your application to? To the Russian Pension Fund? To a nongovernment pension fund? To your employer? I couldn’t make sense of all those points and coefficients in the pension formula under consideration now, which should somehow link length of service, wages and etc. And it doesn’t allow people to understand if it’s better for them to increase insurance portion of their pension hoping that by the time of their retirement state finances will be in order or to rely on funded portion of their pension hoping for investment yields?

- Nevertheless, pension money is already being used in our economy and they plan use it to a greater extent. In this respect, they often talk about infrastructure bonds.

- I don’t like this term very much. They issue corporative bonds all over the world and funds from them are spent in accordance with an issue prospectus. They also issue project bonds the funds from which are used to finance specific projects. Basically, these bonds are in need of qualified investor. We of course can and should invest pension savings funds in infrastructure projects. The question is who should be provided with them and for what purpose. In our country project finance is in its infancy. Project development is not satisfactory as a rule. And it’s common knowledge that there are few specialists in this line of business. The other part of the problem is legislation associated with project finance. We have to improve it. We should for example create special business entities that are better protected against bankruptcy. It will be impossible to levy execution upon a project if a company failed to fulfill its other obligation in full. There are also other risks. And we can’t just say: stay clear of the project, it is of national significance. If the project is so important, it should be backed by a rating or a state guarantee. Then we can use pension funds to finance such a project.

- But if a project is backed by a state guarantee, we have to use funds from the budget.

- You are quite right. Here a lot depends on the quality of analytics and preparation of a project to be backed by state guarantees. Moreover, if the state provides guarantees for a project, it should mean that no obstacles will be raised upon its implementation and it will enjoy the state’s full support at its all stages. And in this case, the Finance Ministry would provide guarantees more readily. As far as pension savings funds are concerned our minimal objective is to manage them on a break-even basis and moreover they should generate incomes.

- In what projects is VEB as a state managing company investing pension money buying out this sort of bonds? What bonds are backed by state guarantees?

- The first projects that we partially funded using pension funds to buy out bonds of project engineering companies were the motorway Moscow – Saint Petersburg from 15th to 58th kilometer, the Odintsovo bypass, the construction of the Western High-Speed Diameter in Saint Petersburg. All these bonds are backed by state guarantees and they generate good incomes. Coupon is inflation rate plus 2-3% or a high fixed rate of more than 9% per annum.

- Are you sure that these projects will pay back the investment?

- Yes, they will. These are toll motorways designed to unclog extremely congested traffic arteries. Toll road tariffs are pegged to inflation. Everything is all right here. There is another problem here. We have so far bought project bonds. But as in this case VEB acts as a state managing company and invests pension funds we buy these bonds only if they are backed by state guarantees. In our capacity of a state managing company we are just investors and we are not in a position to be involved in an expert examination of a great number of projects. Who is supposed to analyze a project? If it has a credit rating, it means that a respected rating agency accredited under the Finance ministry is to study a project and assign a rating to it.

- And you will be able to make a decision based on this rating?

Yes, either guarantees or a rating. But there are various practices in the world. For example, in England there is a governmental institution engaged in project analysis. If it approves a project the state can invest budgetary money in this project, so here we have a sort of quality status stamp.

- Today there are plans to invest pension funds in RZHD, the Federal Grid Company as well as in Transneft and Rosatom. Their bonds are unlikely to be backed by state guarantees. So, you will buy such bonds on the basis of ratings?

- They have a rating. RZHD and the Federal Grid Company have a sovereign-level rating. Of course, it’s one thing if bonds are issued for a period of 5-7 years and it’s quite another thing if we have 15-20-year projects. But if a company is ready to pay inflation rate plus some percent above inflation we can invest pension funds. We can also buy long-term bonds but only from issuers with at least a sovereign-level rating. RZHD has such a rating from three international ratings agencies. And it is experienced enough in issuing long-term eurobonds.

- Nevertheless, if such a company stops paying?

- For this reason, such companies are required to have at least a sovereign-level rating. Such companies won’t disappear and won’t go bankrupt. Here I mean large companies with big capital. They all have a room for maneuver. If a specific project does not yield expected results, then they can transfer money from a successful project and make payments on bonds. There is no doubt that such large-scale projects like BAM (the Baikal-Amur Mainline) do not payback. But RZHD will not build BAM using pension money. It will if it gets budgetary funds. And it can invest pension savings funds in other commercially acceptable projects. And we are going to see if its ratings are not changing. In any case the issuer should have at least a sovereign-level rating.

- Today there pension savings funds worth 1.5 trillion rubles under Vnesheconombank’s management. Is this sum going to increase, diminish, will there be others who will want to receive this long-term money?

- It’s already 1.6 trillion. This sum looks big only at first sight. The fact is that the money has already been invested and not only in government bonds but also in corporate bonds and is already being used to fund the construction of motorways, railways and grid electric facilities. But the amount of money is limited and requirements for developing infrastructure, mortgage lending and for implementing other long-term projects are huge. As a state managing company VEB is the largest investor in mortgage bonds. As to our new investments, we expect to receive financial resources from the Russian Pension Fund. Last year we received 300 billion rubles from it and for various reasons we returned about 125 billion rubles. So, the net inflow was 175 billion rubles. But if mandatory contributions to funded portions of pensions go down to 2%, the situation will change radically. Undoubtedly, we’ll receive yields from investments in bonds already made plus funds from redeeming bonds. But our potential for investments in infrastructure companies, project bonds and mortgage lending will diminish significantly if not disappears.

- You manage long-term money as a state managing company. And what will happen to another source of investments – savings in nongovernment pension funds?

Nongovernment pension funds have more than 700 billion rubles in mandatory pension savings funds and these resources are becoming quite significant. And attitudes to this money are also changing for the better. Once a law on guaranteeing pension savings is enacted, a requirement for pension funds to be managed on a breakeven basis each year must go away, to tell you the truth this requirement is silly. First, it prevents nongovernment funds from making money. And second, given this requirement, it makes no sense to talk of long-term-money. If the law is passed, it will make nongovernment pension funds more attractive and they will be given a chance to make long-term investments. All this will probably require to exercise stricter control over their activities and for this purpose we need a mega regulator being created now whose functions are to be performed by the Bank of Russia.


Bazhenov: PPP is not a legal norm but an economic concept

26 april 2013 года

Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov’s Interview to RIA Novosti News Agency

On April 26, the State Duma is to consider a Draft Law “On Basics of Public Private Partnership in the RF” which will make it possible to form a legal framework for implementing PPP projects. Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov told us about Russia’s experience in implementing PPP projects, the imperfect legal base and the essence of the new draft law.

Quite often essential infrastructure development projects can’t be funded with budgetary funds. A way out is to use public private partnership (PPP) mechanisms which allow us to raise private capital to fund socially significant projects. On Friday, the State Duma is to consider in the first reading a Draft Law “On Basics of Public Private Partnership in the RF” which will make it possible to form a legal framework for implementing PPP projects. Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov told Prime Agency about Russia’s experience in implementing PPP projects, the imperfect legal base and the essence of the new draft law.

- Russian PPP highway projects are familiar to many people. Are there any examples of using PPP mechanisms for developing communal and social infrastructure, implementing projects on territories comprehensive development? How positive is the experience gained?

- Our transport sector is the most advanced one in terms of using PPP. We don’t have as many highway projects as we would like to: two federal highways are being built on the basis of concession model, a number of projects were launched by State Company Avtodor under the procedures set forth by the regional legislation. A project to launch the second stage of the West High-Speed Diameter Road Construction was also launched. In such airports as Pulkovo, Sheremetjevo, Koltsovo, Kurumoch and such ports for example as Ust-Luga federal property assets are financed with budgetary funds and commercial assets are in parallel funded by private investors.

Communal infrastructure is the second important PPP market. Historically first PPP projects were fully completed in Moscow where a private investor, selected on the basis of tenders, designed sewage treatment plants, funded, constructed and maintained them for 12 years, covered its investments and transferred the plants into the ownership of the city. In the communal infrastructure sector about 25 million people are provided with water supply services by private operators which are lessees of municipal water supply and sewage networks. This is more than in Eastern Europe put together. One of the largest by the world’s standards projects aimed at developing water supply and sewage infrastructure of a whole agglomeration is being implemented in the Rostov region.

In the heat supply sector the situation is more intricate because local heat supply markets are formed on the basis of generating companies’ private assets and private owners of boiler houses as well as municipal boiler houses and networks. It is typical that where territorial generating companies manage to integrate local markets efficiency of operating infrastructure and quality of services improve. In this respect, PPP might give this sector a chance to speedily address problems associated with securing risks of long-term investing in infrastructure.

This is also the case in household solid waste management sector. There are examples of projects in household solid waste treatment in the Nizhny Novgorod region and the Volgograd region on concession terms. A project on the construction of a rubbish recycling complex in Saint Petersburg is coming up against a lot of problems. Given great demand from territories for creating an industrial base for waste collection and processing, implementation of investment projects on a commercial basis creates insurmountable difficulties: poor institutional regulation of this sector, an investor is not in a position to cover expenses on the construction of a rubbish processing plant because there are no recyclable waste processing plants, no tariffs for waste utilization, municipalities are not responsible for volumes and morphological composition of wastes sent for recycling because waste collection and removal activity is classified as a competitive line of business.

There are also successful projects aimed at developing engineering infrastructure for deploying new production facilities. For example, a project in the Kaluga region on the construction of auto cluster in which Vnesheconombank participates. More than 60 projects on the comprehensive development of territories are being implemented with parallel funding of infrastructure with financial resources from the Russian Investment Fund (the budget) and private funding of production facilities.

Social infrastructure is now being formed as the most actively developing market for PPP projects. In the Nizhny Novgorod region they built sport and fitness complexes on the concession terms, an Ice Palace - in Ulyanovsk, schools in Saint Petersburg. They have just conducted a tender in the Astrakhan region for the construction of 31 pre-school education institutions in 17 small population centers. Demand is being formed for such projects in the public healthcare sector. Of course if budgetary funding of federal education and healthcare programs is increased the authorities could reduce a level of activity on forming PPP projects. As far as regional and municipal authorities’ initiatives on using PPP are concerned, the situation has changed radically. The said PPP pilot projects on the construction of waste processing facilities in Moscow remained to be as such at that time and nobody followed this experience in the regions. But the current situation has changed for the better. The monitoring found more than 700 initiatives on launching PPP projects in various sectors controlled by the state and municipalities. In 64 Russian regions they followed Petersburg’s example passing regional laws on conditions for regions’ participation in PPP projects. This is undoubtedly a positive signal demonstrating that many authorities are actively involved in developing their territories rather than queuing humbly for budgetary funding.

As a whole we can say that expectations for using PPP actively, given quality regulatory and legal framework, have been formed. A Draft Law “On Basics of PPP in the Russian Federation” should support these expectations

- Can we say that PPP on the basis of concession agreements has been recognized as having no prospects?

- No, we can’t. Concession is a form of PPP which under applicable legislation provides for private investments in government or municipal assets and their recoupment through providing commercial services to consumers by a private investor.

About 500 concession agreements were registered in the country for the most part at a municipal level.

As far as the use of concessions for the construction of motorways is concerned the financial sector refused to give a vote of confidence to such model asking for significant amounts of government guarantees and capital grants to fund the Moscow-Petersburg Motorway project and the Odintsovo Bypass project. After that, transport workers initiated amendments that made it possible to form concession agreements based on accessibility payment model when the concessor pays to the concessionaire. For this model to be implemented, road funds have been resumed and are being used now. These funds’ formation depends on the transport activity.

Now the Regional Development Ministry wants to learn lessons from the Transport Ministry.  They are introducing a regulation in the law on water supply that provides for a possibility to engage private investors on concession terms only. So, recoupment is expected to be secured by tariff receipts, the growth of which is limited by consumers’ paying capacity. We can boost efficiency on a massive scale only through renewing fixed assets on a massive scale but it would be difficult to find investors who could assume commercial and institutional risks of housing and public utilities.

And how should we launch this model for public education and healthcare services infrastructure? And in the depth of the country? Even in Moscow with its great potential to cover non-budgetary investments, concessions are not developing. And in the depth of the country consumer demand is limited and electorate size is not big enough to prioritize budgetary financing.

In fact, all countries that started to use PPP actively followed the path of transport ministries.  Economic science shows that infrastructure development results in economic growth and increased incomes in the budgetary system. So countries that experimented with concessions through commercial recoupment took advantage of another model: the budget pays but private business is responsible for a project, construction, operation and maintenance.

- What can you say about Russian applicable legislation on PPP? Why is it imperfect? What complaints are being voiced?

- PPP is not a legal norm but an economic concept. So, strictly speaking there is no law on PPP as such. One of contractual form of PPP is regulated by the Federal Law “On Concession Agreements”. PPP development in the regions is based on contractual arrangements being formed as part of the Civil Code. Public partners assume obligations under the Budget Code, the Federal Law “On Competition”, the Land Code. So, PPP agreements are regulated by various laws and this results in certain contradictions with the new reality where the state becomes an investee in order to fulfill its obligations more efficiently. A new law should specify a single tender procedure that provides for the investor to assume obligations on investing in an asset, for the state to provide the investor with a plot of land for operation and for the investor to receive payments from authorities.  There is also a need to differentiate PPP projects from projects on the terms of government purchases. There is also a need to regulate relations between Russian constituent entities and municipalities.

- What problems are typical for the regional legal framework regulating PPP?

- In response to frequent complaints I would like to stress that regional laws do not specify  any new contractual arrangements instead of federal legislation, they specify conditions for RF regions’ participation in PPP projects associated with the aim of PPP projects, obligations to be assumed with established powers, tenders to select investors provided that a procedure for a specific contract is not set forth by a special law.

Saint Petersburg is the leader in best practices in PPP. Several years ago they passed a regional law on the city’s participation in PPP projects. They launched a whole portfolio of projects that created an absolutely new image of the city’s investment appeal.

Today, another 63 Russian regions passed laws on PPP. Their quality is quite different even if they originated from one and the same source. These laws are often of declarative nature. But this shouldn’t frighten us. We can improve the quality of a regional law upon preparing a specific project.

In order to improve regional legislation we need to regulate various parts of federal legislation as applied to PPP.

- What’s new in the draft law on PPP?  What limitations related to the imperfect legal framework does it remove?

- The draft law sets forth principles and criteria for classifying a project as a PPP one. It also specifies the scope of authority of the RF, a constituent entity and a municipality. The draft law determines the procedure for a tender to select a private investor. It also introduces necessary changes in the land, tax, budget codes and the law on competition.

- Are there any issues in the draft law needed to be finalized?

- The Federal Antimonopoly Service offers to add requirements for tender selection procedures and differentiate PPP subject matter from relations regulated by the law on government purchases. The Finance Ministry proposes to determine a procedure for forming spending obligations on PPP projects. The Russian Union of Industrialists and Entrepreneurs proposes to determine a procedure for initiating PPP projects by private investors. These are very constructive proposals. As far as the draft law is concerned, we are also interested in determining Vnesheconombank’s role in enhancing the PPP projects market (the authorities’ support for forming qualitative proposals concerning PPP projects).

- Does the draft law address the absence of the state’s long-term guarantees for private partners? What sort of mechanism could it be (insurance, guarantees from the budget)?

- The draft law stipulates that a public partner can assume obligations under a long-term agreement.  Fulfillment of a number of these obligations is specified by the budgetary code. In the case that a public partner fails to fulfill its obligations a private partner can to seek judicial decision and obtain appropriate compensation.

A number of obligations are designed to take certain actions to enable a private investor to fulfill its obligations. In the case that a public partner fails to act, it’s not possible at the moment to secure judicial decision to force it to fulfill such obligations.

- The Federal Antimonopoly Service (FAS) fears that if the state’s and municipal assets are not distributed by way conducting auctions, it is bound to eliminate equal opportunities for gaining access to these assets and limit competition. FAS also believes that the fact that PPP agreements are not regulated by the law on placement of orders and that budgetary funds can be spent under appropriate agreements would make it a lot more difficult for  natural and legal entities  to participate in legal relations under consideration and would create advantages for some economic entities acting as private partners and generate a potential for corruption. How high are these risks for investors?

- PPP is not privatization because a private partner creates assets in the interests of a public partner.  As far as PPP projects are concerned, property is not expected to be transferred from a public partner to a private one.

PPP is not a procurement because a risk of raising financing and creating an asset through using non-budgetary funds rests with a private partner. Procurement provides for making payments to a contractor (seller) using budgetary funds and in case of creating an asset – advance payments prior to construction. Tenders for the right to conclude PPP agreements do not limit private sector’s opportunity to participate in them as these procedures do not provide for any limitations or discriminatory factors. All algorithms will be specified in detail in regional laws. Closed tenders can be conducted only in cases provided for by the law on state secrets. This is in line with established practice in the country and regarded as being absolutely normal.


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