That’s the Way it is
As of today the market for sea and river vessel leasing accounts for an insignificant percentage in the Russian leasing services market. Its share in the new business of leasing companies was a little more than 1.5% in 2012. This is a bit less than in 2011. The amount of new transactions in the water transport segment was about 20 billion rubles last year and it fell insignificantly.
The reason for this state of affairs is a rather complicated financial situation faced both by customers of water vessels and their manufacturers. This segment is rather narrow and specialized. State support measures are not so far in line with the current needs. We have the Program of Developing Leasing of Russian-Made Sea and River Vessels but the scale of its implementation is far from sufficient. The United Shipbuilding Corporation (USC) is the operator of this Program. Under the Program USC extends funds to leasing companies participating in vessel leasing transactions at a refinancing rate of the Central Bank for a period of up to ten years. But a unique feature of vessel leasing is that a payback period is about 20-30 years and this exceeds significantly leasing contracts duration. In practice, they address this problem in the following way. Throughout a whole validity period of a leasing agreement monthly payments affordable for the customer are made so that a purchase payment in the long run amounts to about a half of a vessel’s value. On expiry of a leasing period a leasing agreement might be restructured or a lessee might raise a bank credit from which a purchase payment is made. Theoretically, after making a purchase payment a vessel which becomes the property of a lessee might be sold under a redemption leasing scheme, that is, a leasing company might repurchase this vessel from a customer and lease it out again to the same lessee.
Text: Elena Shmelava
To enhance the development of PPP projects in our country we must make consistent efforts to promote them into the market.
The main problem of developing PPP projects market in our country is not associated with regulatory difficulties but with the absence of administrations’ project activities in this format believes acting Director General of the Federal Project Finance Center, Director of Vnesheconombank’s PPP Directorate Alexandr Bazhenov. He outlined his point of view to Russian Business Gazeta (RBG).
Do you think that PPP can improve the economic situation in the regions?
PPP is not a panacea and a goal in itself. It’s an instrument with the help of which regions and municipalities can address their objectives more efficiently or more qualitatively or more rapidly. Compared with Great Britain, France and Germany we are about five years behind in terms of institutional development. They were quicker to understand PPP’s role as a systematic instrument for performing the state’s duties to develop regions and cities with engaging private business as a partner. PPP projects’ volume as compared with budgetary government and municipal purchases of products and services accounts for 10-15% on average. In Britain for example it was 20%, now it’s about 10%, the largest proportion of more than 30% is in Italy. Russia has a great potential although PPP projects proportion amounted to 5% in individual years. Only few proposed PPP projects were implemented. At the same time regulations providing for the procedure of regions’ participation in forming and implementing PPP projects were approved in 64 regions. This made it possible to set goals and provide his instrument with necessary resources. But we have to learn to use this instrument. The fact that few PPP initiatives are converted into real results demonstrates that the main problem of developing PPP projects market in our country is not associated with regulatory difficulties but with the absence of administrations’ project activities in this format. PPP is regarded as a magic stick – you just announce a project and wait for private businessmen to come and do everything.
Why does this happen?
-There are two reasons for this. PPP is a very intensive, difficult and risky work. At the local level people run risks when they are putting a PPP initiative into effect. At an initial project stage there is an objective risk that a project won’t reach an implementation stage and this is a risk run by people who occupy high-ranking administrative positions and spend budgetary funds to prepare a project in such a format. They risk being punished in case of failure. And at the state administration level the use of this instrument is not really planned and this demonstrates that few financial resources are centrally invested in preparing PPP projects (except for transport sector) (the recent example is the development of the Far East) – not a penny is budgeted by federal and regional executive authorities for preparing projects and holding appropriate tenders for engaging private investors and for supporting municipal authorities for these purposes. And this process should be structured and managed.
How do projects come from regions?
-For our purpose we can divide them into two categories: projects for which we can raise private investments only through public tenders and projects that can be implemented as part of comprehensive development with private investors. In our aggregate portfolio a third of applications account for transport infrastructure projects. They include building by-pass highways, transport networks inside regions, bridges and airports. Comprehensive territory development projects account for 16% of our portfolio they include cluster industrial parks, agro-parks, projects of the Investment Fund, special economic zones, comprehensive development of tourism infrastructure. We believe that the PPP projects market will grow through the development of social infrastructure especially in the public health sector. Housing and communal services might become a major and important market forming projects in environment protection and energy efficiency but this sector is rather poorly regulated and capabilities of municipal budgets to assume risks are institutionally limited.
How long does it take to prepare an investment project?
-One-two years to organize a process of project preparation, the period to prepare a project and up to a year for financial closing. All in all from three to five years. During this period of time authorities, market and budgetary conditions might change and a cycle might be delayed. It also takes a lot of time to agree upon changes in budgetary and tariff policy, allocate and register plots of land and ensure property registration. If government and municipal authorities work like a clockwork, a period from a project conceptual stage to an implementation stage might be reduced to 1.5 years, that is, by two-three times.
What’s the mission and specifics of the Federal Project Finance Center (FPFC)?
-As an operator of Vnesheconombank’s program “Funding Assistance for Urban and Regional Development Projects” FPFC is designed to provide financial support for the most vulnerable stage of investment projects – a concept design stage. We should share risks of forming a project with regional and municipal authorities and be a systemic institution as the Bank for Development. Our mandate covers six sectors within the competence of government authorities: comprehensive development of territories, transport and social infrastructures, energy efficiency, state administration infrastructure. Factually, during the first year of the Program’s implementation our experience in working with regional and urban PPP projects was limited and therefore our capabilities of what risks we could assume were limited too. So, FPFC pursued an extremely conservative policy: it extended loans against security and formed a portfolio of projects to be financed against assignment of rights of claim to constituent entities of the Russian Federation and state corporations. But the main objective was to participate in preparing projects sharing risks with regional and municipal authorities. If a region wants to ensure more efficient, rapid and qualitative economic growth to be able to address social problems than we are supposed to be a welcome partner. For PPP projects to be successful we need expertise and this expertise does not accumulate inside a region. An administration takes a decision on a concession for the largest water channel once in 25 years. This sort of expertise accumulates from region to region within the whole market. So, we must such partners that assume risks associated with feasibility of decisions on addressing issues of regional and urban development. To assume this risk we need a developed market for investors that participate in a project. Now PPP projects categories of investors have formed only in road projects but this is not the case in the housing and communal services and social infrastructure: although many are interested in such projects there are no clear-cut business models that could be replicated from region to region.
There’s a lot of talk about PPP but there are few PPP projects themselves. I’m getting an impression that this mechanism is being imposed from above.
This mechanism is being offered to business but in a bad way. If a PPP project is offered, business can always assess its acceptability in terms of sharing risks and profitability. Business makes money and it has certain target profitability on invested capital. We rely on our expertise when we form and structure projects, optimize risks, chose an appropriate project funding model. And this plays a decisive role. Without addressing this matter we have a fork of the two wrong roads. If you follow the left path you’ll get a private partner without obligations, without competences and without non-budgetary and non-tariff investments. This is similar to the way concessions are developing – there are more than 800 projects but nobody knows who raised what. If you follow the right path you’ll get PPP in form but without obligations on the part of authorities, that is, imposing a burden of social obligations on business without any compensations and perspectives.
What should you do?
To enhance the development of PPP projects in our country we must make consistent efforts to promote them into the market. If a project is profitable investors will be interested to participate. And we should structure it in the right way for it not to prove to be too expensive. Studies show that in case of launching a stable proposal the cost of a risk of participating in funding projects starts to diminish in time. For example, in China development plans provide for putting 25-30 projects on the market per year in certain sectors. And expected profitability on invested capital is pretty high at the beginning, and then in the ensuing years it starts to go down. So, it’s not a matter of money and cost of resources it’s a matter of government infrastructure development policy duration.
The draft federal law on PPP is not clear-cut. Can it really change the situation?
-You might be right. I have a feeling that all separate parts are quite right but in its entirety it’s difficult to understand how it works. There is no doubt a law on PPP will be able to work if it will be based on a certain economic ideology. This law should be considered together with other initiatives of the Economic Development Ministry and Vnesheconombank in particular those on disseminating a model of payment for accessibility to all potential objects of concession agreements and on forming a budgetary source of this payment or payments under PPP agreement s as part of additional incomes of the budgetary system from comprehensive development of territories through a mechanism of the Investment Fund. Then both PPP (greenfield) and concession (brownfield) will be applicable both to commercial projects (with payments from commercial activities) to projects on ensuring universal access to infrastructure (with payments from the budget given linkage with projects on ensuring economic growth) as well as to pension funds and banks. The quality of this activity should be guaranteed by centralized expert examination of proposals made by regional and municipal authorities for justification of using PPP (concessions) compared with state purchases according to a budgetary efficiency criterion as well as proposals for selecting tender criteria to maximize budgetary effect and for justification that a project should be funded by institutional investors on the terms of sharing risks. Centralization of such expert examination should ensure risk management of the budgetary system’s uncontrolled off-balance obligations, given mass use of PPP. Expenses on such expert examination, its quality and mobile adaptation to new regulatory conditions should be jointly guaranteed by institutional investors as part of non-budgetary development of infrastructure.