Vnesheconombank Chairman Vladimir Dmitriev about key lines of the Bank’s activity, development of the Far East, conditions for entering into projects and the situation with the construction of Olympic facilities in the first part of his interview to Gazeta.Ru
Chairman of Vnesheconombank Vladimir Dmitriev
Photo: Alexandr Astafjev/RIA Novosti
- What role do you think VEB as a development institution should play in the midterm? Is the current investment strategy optimal?
- If by the midterm we mean a period of up to 2015, we’ll follow a strategy approved by our Supervisory Board. The strategy provides for the Bank’s loan portfolio to amount to 850 billion rubles by late 2015, but according to our preliminary estimates we would exceed this figure. As of today, our loan portfolio has already increased to 720.02 billion rubles.
In the mid and long-term the Bank for Development will retain its positions as a leading institution in funding and expert’s examination of major investment projects of national significance. As of today, VEB is participating in funding 151 projects and the amount of credit resources extended by the Bank exceeds 831 billion rubles.
As of March 1, 2013, 103 projects worth 1.59 trillion rubles were under Vnesheconombank’s expert examination, with Vnesheconombank’s potential participation being 986.3 billion rubles.
These colossal investment resources are being used to fund major and important infrastructure, industrial and innovation projects. We are going to follow this course in the future. Our activity we’ll be based on our top-priority lines of business if nothing extraordinary happens.
Recently, a lot of worrying and alarming circumstances emerged that make us to respond to them adequately. They include reduced economic growth if not economic slump, reduced GDP growth rates, actually reduced production in some sectors, and reduction in investment in fixed capital.
All this makes us worry about the current situation. The Bank for Development could play a significant role in key, breakthrough sectors. Our economy needs long-term money and here the Bank for Development’s role is crucial.
- What role is assigned to VEB?
- The Bank’s mission as a development institution is above all to participate in implementing projects aimed at boosting Russia’s competitive edge in the sectors identified by the Government. The core sectors include IT technologies, supercomputers, nuclear power engineering, telecommunications and space. New lines of activity are added to our financial memorandum. For example, the Bank’s participation in implementing investment projects aimed at developing mono-cities.
The Memorandum on Financial Policies expires this June. I don’t rule out that in our revised memorandum a list of sectoral priorities might be expanded.
Another key line of VEB’s activity is to provide support for small and medium-sized enterprises (SMEs). We give top priority to SMEs involved in implementing innovation projects aimed at modernizing production facilities and improving energy efficiency.
By the end of 2015, the amount of financial support provided by VEB to small and medium-sized enterprises through SME-Bank will reach 150 billion rubles. Other subsidiary commercial banks joined the program of providing financial support for SMEs implemented by VEB.
Now a guarantee mechanism is being launched and we expect that this June the first guarantees will be granted. We expect that with the help of these guarantees we’ll be able to raise about 80 billion rubles to provide support for small and medium-sized enterprises.
- When will you be able to raise the funds?
- It’s hard to say now. Everything depends on how soon we’ll be able to assess risks of individual borrowers and when financial resources will be made available.
VEB is to receive guarantees worth 20 billion rubles from the Finance Ministry and then it is to extend a guarantee worth 40 billion rubles to SME-Bank. SME-Bank in its turn is to select banks for participating in a guarantee program and is to give guarantees to creditors for businessmen.
Whereas SME-Bank is to guarantee 50% of credits to be extended, a guarantee support worth 40 billion rubles will make it possible to extend credits to medium-sized enterprises for an amount of 80 billion rubles.
Another VEB’s important line of activity is to provide support for Russian industrial exports. A national industrial exports comprehensive support system is being established on the basis of Vnesheconombank Group’s institutions (VEB, Roseximbank and EXIAR). To this end, a special subdivision is being set up at VEB, a relevant decision was taken by our Supervisory Board. At its last meeting VEB’s Supervisory Board considered working procedures for supporting industrial exports by VEB itself, Roseximbank and EXIAR.
A time-limit of 90 days has already been approved; this is a period from receiving an application up to extending a relative form of support (pre-export financing, an insurance police and guarantees).
- VEB is also responsible for programs aimed at developing the Far East. It is known they are very expensive. Does VEB have any top-priority lines of activity? And what role will foreign investors play in the development of the region, specifically China and Japan.
- Even before the Far East and the Baikal Region Development Fund was set up (the Fund was established in November of 2011 under the Supervisory Board’s decision) VEB had participated in financing projects in the Far East. As of April 1, 2013, the Bank participated in 16 projects worth 191 billion rubles in the Far East Federal District.
The Bank’s participation is 116.9 billion rubles, 60.9 billion rubles have already been provided.
After establishing the Russian Direct Investment Fund and the Far East and the Baikal Region Development Fund it became a lot easier to support the Far East. Last year, 15 billion rubles were provided for capitalizing the Fund. And this is not a limit. At a meeting in Yakutsk the Prime Minister said the Fund should be capitalized additionally.
Out of 60 billion rubles provided by the Direct Investment Fund last year, 25 billion rubles are supposed to be used by the Fund to make investment in projects in the Far East and the Baikal region. One of such projects has already been supported by the Russian-Chinese Investment Fund established with the participation of CIC (the China Investment Corporation). Here I mean a project in the timber processing sector in the Far East.
Our Chinese and Japanese partners are ready to cooperate and invest in infrastructure and specific industrial projects.
There is a significant pipeline of projects in such sectors as timber processing, fish industry and agriculture, for example soybean production in the Primorsky Territory. We are giving high priority to a project in the Jewish Autonomous Area on the construction of a bridge connecting us with China. We invest in this project together with our Chinese partners.
But many projects that are offered to us are just wishful thinking, they are poorly prepared, there is no money and there are no investors behind these projects.
Unfortunately, we have often to hear the following things including from the heads of constituent entities of the Russian Federation, “We have submitted projects worth hundreds of billions of rubles to consideration by VEB Group’s institutions and none of them have been funded”. They just overlook the fact that there are no specific investors behind 99% of projects.
If there is an investor there is no project. And if there is an investor and a project, the investor doesn’t have any money.
- Aren’t investors supposed by definition to have money?
- Unfortunately, we have this sort of investors. I can give you an example without naming names. A governor comes and says, “We have a good project, it will create new jobs and address social issues. It should be funded”. We ask them to give us the project. They say to us, “No, first take a decision on funding the project and then the project’s initiator will fund design and estimate documentation, feasibility study and pay for structuring financial model”.
But we make a decision on the basis of the listed documents, we need to understand risks and know who we are dealing with. And they start to complain.
They complain to the highest-ranking officials saying how bad VEB is because it refuses to support projects that are of key importance for regions. We face this sort of situations rather often.
- I’d like to clarify the following point: do you enter into a project if besides VEB’s there are some other investors there?
- Basically, we are responsible for project financing and request an investor to share risks with us otherwise it is not motivated in participating in a project and in developing it properly, in this sense we do not differ from commercial banks. Otherwise we risk dealing with a project single-handed.
We received applications for an amount exceeding 10 trillion rubles. I’d like to stress it once more that they are very often divorced from life.
This region could become a large-scale test-ground to test territories comprehensive development approach. This means that infrastructure (railways, power transmission lines) should not be created for their own sake but be instrumental in raising investments in those sectors that can’t develop without infrastructure.
These sectors include production of mineral resources, existing and abandoned construction projects, agriculture and timber processing. This is the only approach to raise large-scale-investments for the region.
- In our country people tend to be careless about state money, it is assumed that it is nobody’s and at the same time everybody’s money. It is suffice to recollect recently revealed case of embezzlement in Rosselkhozbank which is to some extent a state corporation. How do you address this problem?
- Abuses are related to budgetary money’s status. As the saying says “All that belongs to all belongs to me too”.
Mechanisms that VEB uses have a definite advantage - they provide for a co-investor to be a private person which is not interested in stealing from itself.
But we offered to take an inventory of federal target-oriented programs and other programs of national significance that are funded from the budget.
This is a “black box” where money gets into and then disappears, no one knows where. As a result we have incomplete construction projects, absence of facilities despite the fact that money was allocated. So, we tend to say, “Let’s see if we can implement these programs through raising non-budgetary sources”.
In any case all projects of national significance should be subject to technological, financial and economic expert examination. We should use services of independent experts and outside auditors. This is the case at our Bank with regard to all projects including Olympic facilities and projects that have nothing to do with budgetary money.
- You have mentioned an issue of expert financial examination of Olympic facilities but by judging by official statements there are problems there related to repayment of credits extended by VEB?
- It’s a good thing that network schedules are being met according to the program of Olympic facilities construction. Their commissioning dates are with the target dates.
Failure to follow the principle of target use and repayment of credits really worries us.
We made a conclusion that 8 out 19 Olympic projects are estimated unprofitable.
This means that we have serious doubts that borrowers will fulfill their obligations under these credits. It is for these reasons a whole number of projects won’t pay back investments made.
As of today, we funded facilities for an amount of 110 billion rubles and by the end of the year this sum will increase to 220 billon rubles. And we’ll extend credits worth 170 billion rubles by 2014 to fund those 8 projects that are estimated unprofitable by our estimates.
A significant part of risky projects is a result of borrowers’ and investors’ miscalculations. In the course of their implementation additional requirements had to be met that had not been taken into consideration in full before. Here I mean ecological, geological and security requirements as well as purely sports standards. As to a number of projects their budgets increased by two or even more times and this worries us a lot.
And this is the case despite the fact that together with the Government, Olympstroy and the Ministry of Regional Development we exercise a weekly control over the way schedules are met. If an investor doubts that it will be able to fulfill obligations under a credit we address emerging problems by taking urgent measures.
Here we need “hand control”.
These are special construction projects, facilities are to be commissioned in due time. This is bound to be done. But we don’t want any damage to be done to the state’s and VEB’s interests after the Olympics when credits are to be repaid.
- 220 billion rubles to fund the construction of Olympic facilities, are these budgetary funds?
- No, these are VEB’s credits.
These are borrowed funds for us. We have no other sources. We raise funds on the market to fund our transactions. Moreover, when we extend credits for the construction of Olympic facilities we are limited by interest rates set by our Supervisory Board.
We have another problem with regard to many projects including those with an increased level of risk; we fail to receive project-estimate documentation from investors in full.
- Up till now?
- Yes, hence we can’t check if funds are used in a targeted way and can’t be sure if credits will be repaid. Documentation of a whole number of projects didn’t go through expert examination as it does not exist.
The fact is that we extend credits as soon as problems emerge.
- This means that when projects become very urgent you have to go against principles of mandatory expert examination?
- You are right.
- Do you think that investors will participate in major construction projects in the future or will they reconsider their risks because of the emerging problems?
- You should not forget that as far as Olympic construction projects are concerned we have received guarantees from Olympstroy.
Basically, the federal budget assumes risks that emerge with regard to projects.
For an investor that could participate in complicated projects that carry unforeseen risks it’s very important that the state shares responsibility with it.
Olympic construction projects are unique. There were no analogues in our country.
It’s one thing when you invite a foreign company to design Alpine skiing routes. But it’s quite another thing to perform engineering survey work including on the territory of national parks where seismic prospecting and geological exploration were never conducted and where we come up against landslide, ecological and security risks. And investors have to invest 25 billion rubles instead of 60 billion. Landslide threats necessitate to increase investments in foundations and supporting walls. A whole number of problems emerge as the work advances. And we can’t resolve them without additional funding.
I’d like to give you an example with a cargo side port in the Imereti lowland. Investors were told that the port would handle the bulk of Olympic cargoes but in fact 80% of Olympic cargoes were transported by rail and road. And certain restrictions were imposed on investors – other cargoes were not allowed to be transported through the port.
How can you get credits repaid without cash flow?
Investors should take such things into consideration. Given that we undertook the work of such magnitude, let’s share responsibility and be correct to one another. It’s a serious lesson for all of us to learn.
- Might a similar situation develop with preparations for the 2018 FIFA World Cup?
- I’m sure that we’ll learn all the lessons from the Sochi Olympics by 2018 but we are not involved in preparations for the World Cup and haven’t considered any projects.
Vladimir Dmitriev tells us why the economy does not have enough long-term money, how to reduce credit rates and what new types of cooperation VEB’s subsidiaries are ready to offer to investors
Almost two years ago in his interview to Vedomosti Vladimir Dmitriev said that VEB was ceasing to tackle the crisis and starting to operate on its own as a development institution. He expected that the state corporation would be able to triple its loan portfolio without being funded from the budget. Eventually, the loan portfolio grows at required rates but VEB is again in need of budgetary support “There are grounds for being moody because VEB is being used as a quasi-budgetary instrument”, says Dmitriev and tells what he likes and what he does not like in the way his Bank operates and is being used by the state.
- VEB’s strategy until the year 2015 was approved and provides for its loan portfolio to grow ambitiously. Will you be able to implement these plans and aren’t you going to adjust them, given the current economic situation?
Born in 1953. Graduated from the Moscow Finance Institute, specialty – “International Economic Relations”.
Second, first secretary, Embassy of the USSR, Russia in Sweden.
Deputy Chief Executive Officer, Russian Finance Ministry Department of Credits and Foreign Debt.
Bank for Foreign Trade of the USSR. Deputy Chairman of the Board. In 2002, was appointed as Board Chairman of the Russian Commercial Bank (Cyprus), Vneshtorgbank’s subsidiary bank.
Bank for Foreign Economic Affairs of the USSR, Chairman.
“We didn’t find all its skeletons right away.”
VEB has a bank in Ukraine - Ukraine’s Prominvestbank. According to Dmitriev within a month they’ll additionally capitalize it for an amount of 350 million dollars. The bank needs additional resources to address the problem of bad credits it received from the former management. “The situation in Ukraine is pretty unfavorable including problems with repayment of debts but they manage to get some debts repaid,” says Dmitriev. “Some fail to repay a credit referring to personal connections; others just don’t want to pay. And then some say they are ready to take debts through paying 10% of their par value.” According to Dmitriev a decision to purchase the bank in Ukraine was “political”. “At that time the bank was on its way to bankruptcy, its potential was strong. But unfortunately we didn’t find all its skeletons right away and it proved to have more closets than we thought. In principle we bought this bank to work with major customers that had links with Russia”. Dmitriev says that the bank didn’t participate in making payments for gas. “The fact is that main contracting parties of Russian companies were served in this bank. Moreover deposits started to outflow from the bank, the situation posed a threat to the whole Ukrainian banking system and Russian banks operate there. By the way we bought the bank for 250 million dollars in November of 2008 and as early as in April Italians offered to the bank’s owners to buy it for 2.5 billion dollars. They refused because they thought it cost at least 4 billion dollars. The bank was controlled at the time by the former Chairman of Ukraine’s National Bank who privatized it out of hours”.
Founder – the Government of the Russian Federation.
Financial Indicators (IRFS, 2012):
Assets - 2.9 trillion rubles
Capital – 531.9 billion rubles
Net profit – 17.5 billion rubles
- Yes, we are. But before talking about our strategy we should talk about alarming signals in the economy. The President and the Prime Minister held several meetings on this issue. Key signals are reduction in economic growth rates. A real slump in production in some sectors, reduction in investments in fixed capital make us think hard about what additional measures VEB and its subsidiaries could take to support the state’s efforts to counter such negative trends.
- Have you drawn appropriate conclusions?
- We can see that VEB is not a panacea and the only development institution in the country but the Bank could play a crucial role in breakthrough sectors through its investments in the real economy. I’d like to highlight the following point: economists say that the growth in banks’ loan portfolios is enough to get the economy functioning normally. But if we open these portfolios, we’ll come up against a very interesting circumstance. In 2012, 1.5 trillion rubles were spent on M&A transactions with Russian assets. This is twice the amount of commercial banks’ credits for fixed capital renovation. This means that capital flows from one pocket to the other and investments are not made in the real economy. The economy does not get enough long-term money and this is a problem the state should concentrate on using VEB’s capabilities.
- We’ve just got back to the loan portfolio…
- We hope to bring it to 800 billion rubles by the end of the year and under our strategy it is to amount to 850 billion rubles by 2015. In 2012, our loan portfolio increased by 42%, I believe we’d be able to exceed the target of 850 billion rubles. To tell you the truth, there are two constraining factors in increasing our loan portfolio. The first is capital adequacy ratio of 10%, the second – borrowing limits. To be within the set limits we should either increase our loan portfolio or increase our capital base. As far as our capital base is concerned we are unfortunately limited by our profits. Budgetary funds are used in a targeted way to fund specific programs although we understand that this is caused by budgetary constraints.
- It appears that a question of the Bank’s capitalization will arise soon?
- Sooner or later. We haven’t brought it up so far but it will arise when we come up against the need to meet capital adequacy requirements.
- When might this happen and how much money might you need? And what do you hope for, given substantial budgetary constraints?
- We are working on this issue with the Finance Ministry but it’s too early now to give any specific figures.
- If you don’t give figures one might think that you are asking for a lot of money.
- We have some time till August when we’ll get to know about amendments to the budget. We are sure to discuss them.
- Are you happy with your loan portfolio composition? There are different opinions on this account including those that there are many projects in it which are not closely related to VEB’s objectives?
- There are grounds here for being moody because VEB is being used as a quasi-budgetary instrument.
- As a rescue team?
- In a way, as an emergencies ministry. In the case that something can’t be funded from the budget or problems emerge in some sectors, there is VEB that has to come to the rescue. I’m not naming any names. Commercial banks and other innovation institutions invested in innovative production facilities but their products proved to be in no demand, the global market moved in a different direction. And they are asking the Government to get VEB to replace their investments with its own. We also receive letters from regional leaders: there is a very good project, very important for the region’s development but VEB does not take a positive decision. We offer them to fund an engineering stage, make a model and conduct a feasibility study. They want us to provide them with money. I’m sure that given such an approach any commercial bank wouldn’t agree to fund their projects including banks with state participation.
- How often do you receive such requests?
- We receive them quite often. And those who turn to VEB for money often stress the importance of social issues. For example, a head of a region comes and says, “I have an election coming up and a new plant will employ 1000 people, do you care about national interests? I’ll file complaints against you”. Thankfully, we, the RF government office and the presidential Administration think in the same way, they explain to those who ask for money for what purpose VEB was established.
- Can you name the governors who visit you?
- There aren’t many of them and I’m not going to give their names.
- What do you think should be done to change this sort of approach? Maybe it makes sense to change your organizational and legal form and dilute state capital?
- The only thing we can do here is to educate them in the proper way. Nobody is going to change the Bank’s organizational and legal form. And the world practice shows that the state should be the sole owner of the Bank for Development. But we also should operate in accordance with our Memorandum without expanding our functions endlessly and without having to perform functions that prevent us from carrying out our development mission.
- The Chairman of the Central Bank is to be replaced soon, should a regulator stimulate economic growth and how? What’s your opinion?
- It should and the Central Bank does it but within its powers and competence, that is, through monetary policy. We can feel the effects of its policy, here I mean lending against pledge mechanisms. We are worried a lot about credit rates. They depend not only on the Central Bank although the regulator could influence them in a more active way through inflationary expectations. Elvira Nabiulina also understands this, but I don’t think that she will bring revolutionary changes to the Central Bank’s policy. And do we need them at all?
- Don’t you recommend to change basic rates including refinancing ones?
- Refinancing rates are not main benchmarks for banks. Repo rates are more important for them. On the other hand, bank margins amount to tens of percentage points in consumer lending. Even if we take large banks including those with state participation, their net percentage margin amounts to 7%. This is a problem we have to think over. Any large foreign bank could envy such a margin, with its profits being a lot higher than those in Russian banks. Our margin is about 2%.
- And how does it change from project to project?
- It doesn’t change from 1.5% in one project to 10% in the other, it is about 2% and it changes within this range. As far as Olympic projects are concerned our benchmark is refinancing rate plus 0.4-1.6%.
- What projects are you interested in? What are your priorities now? For example, the Far East?
- In terms of development of territories there are three lines of activity: the Far East, the North Caucasus and Kaliningrad. And we are also going to go ahead vigorously with our core projects, which can bring about a technological breakthrough. These projects are in such sectors as space, information technologies, biomedicine and aviation industry.
- The Government places great hopes on TIF investment mechanism which provides for a return of investments through future taxes. What role will VEB play in this mechanism?
- The idea is that a private investor creating infrastructure synchronizes its action with an industrial investor which builds a production facility on this infrastructure. Additional taxes received from the project and comprehensive development of territories are to be then returned to investors. Here VEB can act as an investment consultant, prepare documents for lenders, raise funds to finance a project and help pay for pre-project work. There are many options for participating in such projects but it’s important to analyze and assess them properly.
- What projects are they? And why is it important to analyze them properly?
- The problem is that sometimes they tell us about projects worth 10 trillion rubles and 90% of them are not even applications but just ideas. And this is not the only problem. So far we have failed to understand how to synchronize functioning of local, regional and federal budgets with regard to TIF. For example, a comprehensive housing development project in the city of Kirov: 80% of expenses on infrastructure is incurred by the municipality but the local budget and the region receive only 20% of new tax revenues. So, as Alexandr Livshits said, the federal budget here should share taxes with local budget and regions.
- I know that another new investment mechanism is under discussion. Under this mechanism an investor entering into a complicated project together with the Russian Direct Investment Fund can receive debt financing from VEB to pay its share.
- So far the Russian Direct Investment Fund (RDIF) have participated in implementing projects with financial investors, for example, in the field of medicine, they took part in the “Mother and Baby” project. If RDIF comes to us and says it has an industrial investor in the greenfield, let’s work out a scheme together to provide a project both with share and borrowed capital and this doesn’t run counter to our Memorandum at all. I know that RDIF has several such greenfield investors in its pipeline and we’ll work together on searching attractive transactions for them.
- VEB is a main creditor of Olympic facilities construction. Will they be built in due time? Do you expect credits to be repaid?
- We have already extended credits worth 110 billion rubles till the end of the year the amount of credits will be about 220 billion rubles. As far as construction periods are concerned construction schedules are realistic, the construction will be completed by the Olympics. It’s also no secret that according to our estimates a significant part of projects is estimated to be unprofitable. Given the current model and market conditions we have serious problems with recoupment of investments. For example, in the Imereti Lowland one million square meters of hotels are being built. When the hotels are put on the market after the Olympics, it will be difficult to bring occupancy rate even to 60%. Many projects got a lot more expensive in the course of their implementation because of technological changes or strict environmental standards. We have no full project documentation on many projects, there are no confirmed cost estimates – all this confirms our doubts.
- Are there any projects that pose no problems?
- We have no doubts about the future of the Sochi thermal power station; the airport doesn’t pose any serious problems. But the situation is pretty tense with sports projects. As far as repayment of credits is concerned we received guarantees from all investors that in the case that problems emerged after the Olympics they would resolve them using their own funds. We have received guarantees from Olympstroy but these are budgetary funds and we really care about their future.
- You are the Board Chairman of the United Aircraft Construction Corporation (UACC), how do you size up the Corporation development strategy?
- At our last meeting of the Board of Directors we discussed the management’s report on the Corporation’s performance for 2012, the dynamics is positive. We – I mean the Board of Directors expect the Corporation to operate on a breakeven basis by 2015. Of course here government defense orders and advance payments on supplies play a very important role but not only they play such a role. The proportion of civil aircraft in UACC total sales in 2012 tripled and amounted for the first time to 10%. Governance of the Corporation’s structures is consolidated according to “one window” principle. This is not the case now when individual plants took unsecured credits at enormous interest rates from poorly known banks. And the strategy remains the same – it is aimed at creating a range of aircraft that are competitive not only in Russia but also abroad, above all in the countries where we haven’t lost our positions.
- To what extent is it true that you can surrender your position as Board Director to Sergei Chemezov and that Mikhail Pogosyan might resign?
- There is much talk. Sergei Chemezov and I as an independent director were nominated by the state to the Board of Directors, voting is to be held at the upcoming shareholders’ meeting. As to a position of director general a decision on it is to be taken in a collegial way. I for one and I think my colleagues have no reasons to question Mikhail Pogosyan competence. I haven’t heard about other candidates for a position of director general.
- The crisis left VEB with three banks. Are you going to sell or develop them?
- We are just finishing work on formulating a strategy, above all, with regard to Globex and Svyaz-Bank. 80% of work has been already done. A sale of banks to a strategic partner or through IPO is a distant prospect. We should prepare the banks’ assets for sale as we took the banks on our balance sheet. They have god assets for example Globex has Novinsky Passage and a shopping center in Novosibirsk.
- So, you are going to develop them?
- Yes, we are. In terms of strategy these banks are universal but each with its niche. Globex gives high priority to corporate customers although it also works with natural entities and is even involved in mortgage lending. Svyaz-Bank works with communications companies and with the Post of Russia on pension accounts. It’s also involved in military mortgage lending which is in the focus of our attention. The Bank accounts for the fourth of military mortgage lending market and is going to retain its position. We’ll capitalize both banks through entering into their capital directly and subordinated loans.
- We’ve just moved to the post. What happened to the idea of establishing a Postal Bank? They say that Alexandr Kiselev was against the idea but he’s left now.
- I don’t know to what extent he was against the idea. But necessary conditions for establishing a Postal Bank have not been created. They include transforming the Post of Russia into a joint stock company and agreeing upon a question of how the Post of Russia should be funded to purchase shares of a new bank.
- What stake can be sold to the Post of Russia?
- It’s a matter of independent valuation that nobody hasn’t made yet. The Post of Russia has made its own valuation and announced an unacceptably high price. And in the course of the discussion the Post of Russia stepped up its financial activity and entered into agreements with almost 30 banks. And it became possible to offer credit services to people through post offices. The idea is now put in cold storage. I don’t think that it is dead but there are no necessary conditions for pushing it forward and such investors as Nomos-Bank and Russky Standard appear to have become indifferent to the idea.
- Do you personally support the idea?
- I don’t see anything bad in pushing it forward.
- Alexandr Lebedev told you that he could buy out real property of Globex. Do you favor his proposal?
- We have never considered it seriously. We do not regard newspaper publications as offers. Lebedev has never made a real proposal.
- There is another “crisis bank” – Ukraine’s Prominvestbank. What do you plan to do with it?
- We plan to further develop it. Within a month we’ll additionally capitalize it for an amount of 350 million dollars. The bank needs additional resources to address the problem of bad credits it received from the former management. The situation in Ukraine is pretty unfavorable including problems with repayment of debts but we manage to get some debts repaid. Some fail to repay credits referring to personal connections; others just don’t want to pay. And then some say they are ready to take debts through paying 10% of their par value. The bank is among the largest six banks in Ukraine and is one of the most reliable banks. We have no complaints against its management. Now we are developing a mechanism for transferring to making regional payments in rubles.
- What did you purchase this bank for?
- A political decision was made. At that time the bank was on its way to bankruptcy, its potential was strong. But unfortunately we didn’t find all its skeletons right away and it proved to have more closets than we thought. In principle we bought this bank to work with major customers that had links with Russia.
- Some say the bank participated in making payments for gas.
- This is not the case. The fact is that main contracting parties of Russian companies were served in this bank. Moreover, deposits started to outflow from the bank, the situation posed a threat to the whole Ukrainian banking system and Russian banks operate there. By the way we bought the bank for 250 million dollars in November of 2008 and as early as in April Italians offered to the bank’s owners to buy it for 2.5 billion dollars. They refused because they thought it cost at least 4 billion dollars. The bank was controlled at the time by the former Chairman of Ukraine’s National Bank who privatized it out of hours.
- Did you discuss an idea that VEB would take Rosselkhozbank’s problem assets worth 150 billion rubles on its balance sheet? Are you still discussing this idea?
- No, we are not.
- In 2010-2011, VEB bought from E.On ADR 2.7% of Gazprom’s capital for an amount of more than 100 billion rubles. Now the stake got a lot cheaper. What do you propose to the Government to do with it?
- Since its purchase its price fell 30%. So, we didn’t make any proposals leading to losses (that is about a sale) to the Government. We’ll wait until its price grows. But it’s not only a matter of price. VEB’s 3.6% stake allows the state to control the company.
- At some point the stake’s price was higher, were you offered to sell it then?
- Yes, we were. If we had sold the stake in April of 2012, we would have made a profit of 30 billion rubles. But at that time VEB’s Supervisory Board believed that it made no sense to lose the asset.
- Are you interested in buying the BAT-Yava factory? If you are, what are your plans for the plant?
- Yes, we are but only in connection with Slava facility which we received in the course of rehabilitating Globex. BAT-Yava is next door to Slava. We are going to build hotel-office buildings there including living apartments and there is a tobacco factory nearby and it smokes. So, it’s easier to buy out the asset and develop the territory in a comprehensive way.
- How much are you ready to pay? Have you already made a proposal?
- I for one haven’t discussed this issue with BAT-Yava’s owners.
- VEB approved a credit worth 60 billion rubles up to the year 2020 to AvtoVAZ. Has the plant started to use the funds and what projects are they going to fund with them?
- So far, we have a decision concerning limits. Now we are examining individual projects comprehensively, these are modernization designed to produce a new rage of cars, expansion of production including a purchase of equipment and retooling of shops.
- What other projects do you have in the automotive industry, are you to extend credits to other players?
- We have quite a few projects in the automotive sector. To some extent we cooperate with Russian key players. Our key partner is FordSollers and Sollers’ projects in the Far East. As to them we are funding three production facilities including assembly, manufacturing of engines and components. We are also working with GAZ Group specifically on a project in Yaroslavl (the Yaroslavl engine plant). But these are not new credits, all the decisions were already made.
- Did the crisis in Cyprus affect VEB or your customers?
- It didn’t affect our bank at all, we are not working with the Bank of Cyprus and Laiki. We make interbank payments with the Russian Commercial Bank, we didn’t have any problems with it. Now we are conducting inventory auditing to see how the Cypriot crisis affected our customers. We haven’t seen any worrying signals so far.
- How do you feel about accusations against Anatoly Ballo over the alleged abuse of office in connection with a 14 million dollar credit to Eurasian?
- Recently the Presidium of the Moscow City Court made a ruling that a criminal case against Anatoly Ballo had been opened illegally and sent the case materials for a new consideration. This says a lot about the case. No damage was caused to the Bank, the credit was repaid. Criminal cases were closed with regard to two suspects.
- Can you comment the situation with Zarechye-2?
- In 2006, Vnesheconombank extended a credit to LLC Zarechye-2 for the construction of a residential compound in the Odintsovo district of the Moscow region. At present, the project has not been carried out and there is a threat that the credit will not be repaid. Vnesheconombank informed LLC Zarechye-2 repeatedly that it must fulfill its obligations under the credit agreement. Considering that the borrower failed to fulfill a number of obligations under the credit agreement Vnesheconombank demanded the borrower to repay the credit worth 170 million dollars. Later on Vnesheconombank appealed to an arbitration court to protect its interests. Moreover, as a result of conducting construction and financial-accounting examinations on the Bank’s initiative, facts of credit funds embezzlement were revealed. In relation to this Vnesheconombank appealed to law enforcement authorities requesting them to check if the credit was used properly and open a criminal case against officials of Zarechye-2 and its beneficiaries over the facts of monetary funds embezzlement. The State Corporation intends to take all legal actions to protect its interests.
- Why did you decide to rebrand VEB?
- We decided to rebrand not only Vnesheconombank but also the whole of Vnesheconombank Group being aware that we’ll be together for a long time. So, visual representation should not be associated with old symbols and be in line with an image of the National Bank for Development. The current brand is outdated. Moreover, Vnesheconombank Group is composed of various companies; they have different stylistics and position themselves differently. All this creates obstacles to communication and makes it difficult to get a realistic picture about VEB Group’s activity as a whole and opportunities our subsidiaries open up for Russian business. We hope to use synergy of all participants in Vnesheconombank Group in order to create strong brand – VEB. As to transferring to laconic abbreviation – VEB, its new graphic presentation and its new company style will be recognizable, modern and dynamic. And abbreviation VEB has been used for many years by us and the mass media.
The Moscow News
Newspaper № 522(522)
May 14, 00:05
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.
Born in 1970.
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.
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.
Vnesheconombank Chairman V.A. Dmitriev’s Interview to the TV Channel Russia 24
TV Channel Russia 24,
HOST: Vladimir Alexandrovich, good afternoon.
Vladimir DMITRIEV, Vnesheconombank Chairman: Good afternoon.
HOST: We are seeing each other in Washington in the course of the G20 meeting. Russia is a chairman of the G20 and one of its main tasks is to fund investments. I know that now VEB is opening its subdivision in Hong-Kong to raise Asian investments to fund Russian projects. Could you tell about your Asian subsidiary’s functions, are there any preliminary agreements, projects, key lines of activity?
Vladimir DMITRIEV: In fact, Vnesheconombank’s Supervisory Board made a decision to open a financial and investment company in Hong-Kong. This Vnesheconombank’s company is designed to both raise investments and safeguard Russian companies’ interests on the Hon-Kong stock exchange, provide consulting services, help Russian companies to tap international financial markets and raise foreign investments for Russia. This is one of its main missions. We also have other priorities related to a growing trade turnover between Russia and China and using Hong-Kong as a sort of bridge for raising investments for Russia. But this is not the only institution designed to raise investments as part of Vnesheconombank. And we talked about it with our colleagues from national development finance institutions as well as with the leadership of such international development finance institutions as the World Bank, international finance corporations, the European Investment Bank and others. They of course want investments for Russia to be channeled through institutions controlled by the state and they regard these institutions as an instrument for guaranteeing and sharing risks with them and securing success of their investment transactions in Russia. I would also like to highlight the Russian Direct Investment Fund’s successful activity as an institution included in Vnesheconombank Group and responsible for raising investments. My high opinion about this Fund is shared by our county’s leadership.
HOST: What projects were implemented successfully?
Vladimir Dmitriev: The Fund’s financial resources in the amount of 500 million dollars made it possible to raise foreign investments worth 2 billion dollars. Sectors that are most attractive for foreign investors are those associated with our country’s dynamically developing middle class. Here I mean our financial sector, the Moscow Interbank Currency Exchange, public health services, medical industry, pharmaceutical industry, timber processing industry and a number of other sectors which are attractive for foreign investors who wouldn’t invest in Russia in the absence of a reliable mechanism represented by the Russian Direct Investment Fund. The Fund’s objective is to identify projects that could be of interest for foreign investors.
I’d like also to mention regional funds and corporations established specially for raising investments, for example the Kaluga Development Corporation. Just seven years ago the suburbs of Kaluga were nothing more than marshy lands no one wanted. Nowadays a unique industrial cluster was set up on these territories due to developing infrastructure by this corporation whose shareholders are Vnesheconombank and the Government of the Kaluga region. In this industrial cluster they manufacture Volkswagen cars, localized spare parts production, develop small and medium-sized enterprises and cooperate with other giants of automotive industry and electronics. This is an example showing that through infrastructure development and support provided by the regional authorities and the national bank for development Russia’s economy and regions became attractive for investors. Similar activities are undertaken by the North Caucasus Development Corporation implementing a whole number of interesting projects in the Caucasus as well as by the Far East and the Baikal Region Development Corporation whose mission is likely to be expanded and it will be able to participate in structuring projects based on concessions and principles of public private partnership. As far as raising investments for Russia is concerned, our contacts with national development institutions and international development institutions showed that Russia is attractive in terms of investments. Statements by Elvira Nabiulina and the current head of the Central Bank suggest that the state is obviously interested in looking for opportunities to co-invest in projects which are of interest for foreigners.
HOST: You’ve mentioned Elvira Nabiulina’s initiatives, do you mean her latest statement that we can invest revenues from oil and gas exports, that is, from the National Wealth Fund in projects with the participation of the Russian Direct Investment Fund?
Vladimir DMITRIEV: We should talk about projects that could be attractive for foreign investors. It’s not a matter above all of investing financial resources of the National Wealth Fund at a good profit rate, although it’s an important goal in itself. Our objective above all is to broaden Russia’s investment appeal, for foreign investors to believe in the state’s readiness to co-invest in projects that are of interest for foreign investors in the context of activities undertaken by the Finance Ministry, G20 financial institutions and our presidency in this prestigious international association. Vnesheconombank put forward an initiative to hold a conference or a meeting of national and international development institutions’ on the sidelines of G20 countries finance ministers’ meeting in July of this year. Here I mean above all such our partners as the China State Development Bank, Germany’s Development Bank – KfW, development banks of BRICS countries and a number of European development institutions. Moreover, international financing institutions and international finance corporation showed interest in participating in this forum, for example the European Investment Bank and the European Bank of Reconstruction and Development. They are interested in discussing how national and international development institutions can achieve an objective on the agenda of a G20 meeting to be held in Saint Petersburg in autumn – this objective is to secure economic growth to create new jobs and increase employment.
HOST: How in general VEB and the Russian Direct Investment Fund cooperate with other international financing institutions and foreign national development banks?
Vladimir DMITRIEV: So far the Russian Direct Investment Fund has been working with private and sovereign direct investment funds rather than banks. And in this respect, the Fund has achieved a lot: it set up a joint fund with the China Investment Corporation, engaged Kuwait’s sovereign fund in the amount of half a billion dollars for co-financing projects proposed by the Russian Direct Investment Fund. Today we can see that both European national banks and international financing institutions such as for example the European Investment Bank are interested in discussing their potential participation in projects to be co-financed with the use of the Russian Direct Investment Fund’s financial resources. Our foreign partners trust Russia and are ready to invest in it and this is confirmed by the fact that Vnesheconombank together with Germany’s development bank established a major fund to provide support for small and medium-sized enterprises in Russia. The Fund is designed to enter into capital of companies operating in the high-technology sector. We have preliminary arrangements with other international financing organizations and private investors, private investment funds for them to enter the Fund or to co-invest projects to be identified by us with our German partners. This Fund is already functioning. It was created jointly by Vnesheconombank, the International Finance Corporation and the Russian Finance Ministry – the Fund to Support Regional Banks. It has already conducted two transactions where the Fund entered into capital of regional banks thus increasing their capitalization and ensuring that these banks’ loan portfolio is in the first place used to support small and medium-sized enterprises in the high-technology sector.
HOST: If we talk about BRICS, this subject is also being discussed and recently they have been voicing an opinion that the abbreviation itself has become outdated. Do you think that BRICS has a potential in particular with regard to a BRICS Development Bank project which has been hindered lately.
Vladimir DMITRIEV: To tell you the truth, I’m among those financiers who have a conservative approach to this idea. Neither Vnesheconombank nor BRICS countries’ development banks have been engaged for this project. An association of BRICS countries’ development banks has been set up in our country. This activity is being undertaken at a political level, at a level of finance ministries. But the states could instruct their national financial development institutions to participate in this sort of activity and instead of contributing 50 billion to capital of a BRICS Development Bank it would be better to contribute 2 billion to each of national development banks and each bank would be able to raise at least 15 and may be 20 billion on the market taking into capital adequacy ratio thus forming a significant capital base that would make it possible to fund appropriate infrastructure projects. The most important thing is to identify these projects but this is not our responsibility. If we mean projects that are of interest for all BRICS member countries, appropriate ministries of transportation, economics and industry should be involved in identifying these projects, set a task for us and we’ll be responsible for structuring these projects financially, searching for financial resources to fund them and for financing them. Nobody has answered this question so far. So, I don’t think that this bank will be established in the near future.
HOST: Vladimir Alexandrovich, thank you very much for answering our questions.
Vladimir DMITRIEV: Thank you for interesting questions.