Cross-border projects require comprehensive quality assessment

13 may 2021 года
WRITTEN BY Svetlana Yachevskaya, Deputy Chairman, Member of the Board, VEB.RF and Roberto Cialone, Managing Director, AECOM

In this blog, Svetlana and Roberto discuss the major cross-border projects currently being planned and delivered with Russia’s involvement, and the importance of comprehensive quality assessment in delivering these projects. Their discussion practically illustrates several elements of successful cross-border project delivery that are detailed in the GI Hub’s cross-border reference guide, Connectivity Across Borders:

Cross-border projects are increasingly essential for global and regional development, both socially and economically. As more countries have become regional transit hubs and begun to rely on an uninterrupted flow of commodities, the demand for and use of connectivity infrastructure has increased. European and Asian countries in particular are developing their overland and maritime trade routes and trying to make them faster and more reliable by implementing cross-border projects. These projects have significant potential to create jobs, provide new business opportunities, foster mobility and improve quality of life throughout the regions they serve. 

Russia’s transit capacity and main cross-border projects 

Being the largest country in Eurasia, Russia has vast transit capacity. It shares a land border with 14 countries in Asia and Europe and considerably impacts Eurasia's economic development. It is participating in various ongoing and planned cross-border projects and has intergovernmental agreements to develop infrastructure with several neighboring countries, including China, Kazakhstan, Poland, Lithuania, Finland and Belarus. Such intergovernmental agreements help translate the political vision and project idea into a sustainable and durable governance model for the project. While the binding power of the agreement varies based on what it includes and specifies, it provides the foundations for project development and delivery. 

One of the most significant railway projects Russia is currently participating in is the Eurasia High-Speed Railway (HSR), part of the Belt Road Initiative (BRI). In 2018, the countries signed a memorandum on the management of high-speed freight rail transportation between China, Russia and Europe through implementation of HSR Eurasia. It involves constructing a 7,200 km cargo-passenger high-speed railway crossing the territory of six countries: China, Kazakhstan, Russia, Belarus, Poland and Germany. The project is expected to consolidate two of the world’s largest high-speed rail networks in China and Europe and increase Eurasian transport mobility. It is estimated that by 2050, passenger traffic will grow by 60% and freight traffic by 92%. The socioeconomic impact on Eurasia will be substantial, with the project expected to improve traffic safety, increase transport mobility of the population, create jobs (370,000 jobs on the Moscow-Kazan section alone) and develop supply chains by competing with air and sea transport and delivering goods in less than 3 days. The unified transit system will also provide economic benefits by developing and transforming remote areas into transport hubs. 

Russia has also signed an intergovernmental agreement with China to construct and operate the Tongjiang-Nizhneleninskoye Railway Bridge over the Amur River (also known as the Heilong Jiang River) between Tongjiang in China’s northeast Heilongjiang Province and Nizhneleninskoye in Russia’s eastern Jewish Autonomous Oblast. It is the first cross-border railway bridge between Russia and China. The total length is 2.21 km and construction is slated to finish in 2021, for an estimated capacity of 21 million tonnes of cargo annually.

This follows completion of the first highway bridge between China and Russia in 2019. Located 450 kilometres northwest of the Tongjiang-Nizhneleninskoye bridge and also over the Amur River, the bridge connects Heihe and Blagoveshchensk. It was initiated in 1995 following the signing of a joint agreement under which the governments of Heilongjiang Province and Amur Region agreed to share the cost of the bridge construction and set up a joint venture to construct and operate the bridge. However, in subsequent years the organisational and financial model of the bridge changed and construction did not commence until 2016. The project involves toll collection, two lanes for passenger vehicles and two lanes for cargo trucks. A temporary border checkpoint has been built on the Russian territory to receive up to 200 cargo trucks per day until a permanent checkpoint is built. As of May 2021, organisational work is ongoing, the toll collection system has been tested and the bridge is ready for operation. However, the bridge will be allowed to open only after COVID-19 restrictions lift. The launch date will be announced by joint decision of Russia and China. The project's transport capacity is expected to be over 300,000 cargo and passenger vehicles per year, offering unique export opportunities for both countries.  

Two more cross-border initiatives involve constructing transport transit corridors that will link the Chinese and European markets. One of them is the Western Europe-Western China (WE-WC) Highway, named the New Silk Highway. It is a transcontinental expressway with a total length of 8,445 km that will pass through China, Russia and Kazakhstan, thus linking China’s port of Lianyungang with St. Petersburg in Russia. It’s estimated that once complete, the WE-WC Highway will allow products to travel between China and Europe in 10 days, instead of the current 30 to 50 days by sea.

The Meridian Tall Highway would be one of the shortest East-West overland connectivity routes. The circa USD9.3 billion highway is planned to span 2,023 km from the Russia-Kazakhstan border to an existing road that connects Minsk in Belarus with Moscow. Plans are for the highway to be built through private investment only. Both projects aim to improve regional connectivity and increase transportation efficiency and availability.

These initiatives have significant socioeconomic potential but face multiple challenges, including: social and environmental risks; dependence on private investment; increased reliance on environmental, social, and corporate governance (ESG) performance; and technical complexity. One of the solutions to respond to these challenges is following a holistic approach for infrastructure quality assessment.

Comprehensive tool for cross-border project assessment and development

Assessment of costs and benefits is a prerequisite to understand the viability of any project, but even more so for cross-border projects, given the commonly low visibility countries often have of their neighbor’s internal plans, processes and markets. Low viability might be a barrier to project development, implementation and completion – particularly for projects seeking commercial financing. 

Cross-border projects therefore require innovative assessment approaches based on best global practices and standards, as recognised by stakeholders from investors and financial institutions to government authorities and citizens. The assessment approach should serve as a rating tool based on the principles of transparency, versatility and comprehensiveness and should give investors a holistic understanding of a project's benefits, financial efficiency and lifecycle risks – including ESG. 

Russia is developing an infrastructure project assessment and certification tool called IRIIS (Impact and Responsible Investing for Infrastructure Sustainability). IRIIS considers the economic, governance, social and environmental aspects of project implementation, including their cross-border effects. The G20 Quality Infrastructure Investment (QII) principles and UN Sustainable Development Goals are the basis of IRIIS. It is also being developed in line with leading international rating schemes like Envision (USA), CEEQUAL (Great Britain) and Infrastructure Sustainability (Australia). It applies to most infrastructure categories: transport, social, utility, power generation and telecommunications. 

IRIIS allows assessment at different stages of the project lifecycle and offers practical solutions for the main challenges faced by cross-border projects. It:

  • Embodies best international standards and practices of infrastructure quality and sustainability 
  • Provides comprehensive assessment, covering economic, social, and environmental aspects
  • Facilitates quality and sustainable infrastructure practices in countries involved
  • Sets modern standards for infrastructure construction, design, engineering, operation and decommissioning
  • Provides transparency and evidence of a project’s ESG performance, including as required for informed investment decisionmaking.

IRIIS is currently being used to assess the Russia-Scandinavia Link highway. The road is the only transport link between the Russian north-west and Northern Europe and is part of the route through Finland, Sweden and Norway. The highway construction length is 43.4 km, with four traffic lanes that will increase the region’s transit capacity and improve the accident record. The Asian Infrastructure Investment Bank is participating in project financing and implementation. IRIIS assessment will help the project mitigate risks, avoid possible negative impact on the territories involved and improve quality.

There are plans to scale up the IRIIS system to Russia’s neighboring partner countries of the EAEU (Eastern Europe and Asia), to allow consistent assessment of cross-border projects and foster their effective and successful implementation, including the ability to attract necessary financing. 

About the authors 

Svetlana Yachevskaya is a Deputy Chairman, Member of the Board at VEB.RF with more than 20 years' experience in the legal sphere. Prior, Svetlana was a Director of the Legal Department in the Russian Ministry of Finance and received gratitude for merits in financial and economic activities. At VEB.RF Svetlana is responsible for public debt and sovereign guarantees management, IFIs’ projects monitoring and implementing best practices related to infrastructure investment and PPPs. 

Roberto Cialone has 25 years of experience in Construction Management in high profile, high investments, critical and technical complex industrial, high-rise, commercial office buildings, mixed-use developments and other infrastructure projects. He joined AECOM in 2006 and has covered different leading roles in Continental Europe. Roberto is currently leading the operations in East Europe as Managing Director, based in the Russian Federation. 



Nikolay Tsekhomsky: Islamic Banking to become Source of Investment in Russia

16 february 2017 года

RIA Novosti,
16.02.2017 13:00

While a phrase such as “Islamic banking” sounds quite foreign to the majority of Russians, this concept is well-known in the East. It implies a closer relationship between banks financing projects and companies that implement them. In Russia, there are no regulatory standards enabling the development of this kind of business, but the Bank of Russia and the market players are working on filling this void.

What benefit does Islamic financing bring to the Russian economy, and how can VEB use this tool to help exporters? Moreover, what is the difference between “murabahah” and “ijarah”? The First Deputy Chairman of Vnesheconombank Nikolay Tsekhomsky sat down with RIA Novosti to answer these and other burning questions.

— How does VEB view the potential for Islamic banking to develop in Russia? Does VEB consider the development of this type of banking important and necessary, and if so, why? How can this influence the development of the Russian financial system?

— During the 2008-2009 crisis, Islamic partnership banking received the close attention of investors from all over the world, making clear the advantages of this model against the traditional one, with the former being more resistant to external shocks.

In particular, from 2008 the key segment of the Islamic financing market, the “sukuk” (Islamic bonds) market demonstrated high growth rates. By 2013, the sukuk market value increased more than fivefold.

In Russia, a keen interest in using partnership banking tools arose in 2014 in the light of the sectoral sanctions imposed by Western countries, which limited the access to the capital market for many Russian companies, including Vnesheconombank. Due to this, the strengthening of ties with Islamic countries in the trade, economy and investment sectors has become one of the more important directions for the development of our country, home to more than 20 million Muslims.

For Vnesheconombank, Islamic banking opens up new opportunities both for the funding of investment activities and for the support of Russian industrial exports.

We believe that the development of ethical finance practices will contribute to better development of the Russian economy and financial system. A new source of investment will give rise to the emergence of new financial institutions specializing in Islamic banking, which will promote the competition and rehabilitation of the banking sphere while offering new financial instruments to the market actors.

— Is VEB working on any Islamic banking projects? What are they and with which financial institutions is VEB cooperating?

— Our evaluation of funding certain projects depends on the requests we receive from our clients and are looking for investors in the Islamic financial market. We rapidly develop our contacts with financial institutions in the Organization of Islamic Cooperation (OIC) member countries and are in constant search for mutually beneficial cooperation.

This not only means the use of traditional Islamic financing instruments but also the solicitation of investors for collective investment funds, development of educational programs and sharing experience in the partnership finance sphere.

This is the path that we follow in the development of our liaisons with the key international financial institution in the Islamic world - the Islamic Development Bank group. Last May we signed a memorandum with this bank and agreed to further promote cooperation in the areas of consolidated financing of investment projects, support of export and import operations between our countries and the exchange of best practices.

One of our priority tasks now is to form a product matrix meeting the needs of our clients and investors from the OIC countries. In the near future we plan to use it to attract funding upon guarantee of Vnesheconombank and to explore the options for investor participation and co-investment of VEB projects.

— Does VEB intend to raise funds for new investment projects through Islamic banking?

— Certainly, that is one of our goals. We are making efforts to secure funds for new investment projects from financial institutions and OIC country investors using both traditional instruments and instruments of Islamic banking. VEB has numerous contacts with sovereign wealth funding and the largest banks of the UAE, Bahrain, Saudi Arabia, Malaysia and other countries.

— In the opinion of VEB, what has prevented the development of Islamic banking in Russia?

— The development of Islamic banking in Russia is to a large extent hindered by law and the absence of the necessary infrastructure and trained personnel. The Parliament and the Bank of Russia are already engaged in the improvement of the legal aspects.

We hope that all together we will be able to galvanize the developmental process. It is important that the laws (banking laws, tax laws and the Civil Code) make it possible to use the instruments of Islamic banking to the full measure. The present-day regulatory and legal framework is effective enough only for certain elements of sharia-compliant transactions.

Certainly, fund raising from investors based in the OIC countries is complicated by the imposed sectoral sanctions and the currently low level of the trade and economic cooperation between Russia and the OIC countries.

— Does VEB take part in the Bank of Russia's workgroup for the development of Islamic banking in Russia? What results can VEB expect from the establishment of this workgroup in 2017? Are there any consultations between VEB and the Central Bank regarding the development of such banking?

— VEB’s experts are included in the CB workgroup for partnership banking and the workgroup of the Federation Council. For example, Vnesheconombank took part in designing the road map for the development of Islamic finance in Russia.

The main result that is expected from the workgroup is bringing forward specific proposals and recommendations for the required legal changes. The idea is not to adopt new laws or regulations but to adjust the existing ones in such a way that the partnership banking instruments are, in essence, established as equal to traditional banking instruments, from the point of view of taxation as well.

— Earlier, VEB Chairman Sergey Gorkov said that the Islamic banking products related to the financing of investment projects have yet to be tested in Russia. What Islamic banking projects could be realized in partnership with VEB in 2017? Will VEB have any common projects with Sberbank in this area?

— We coordinate our work with Sberbank. We have a lot of common goals, including those connected with our legislative improvement efforts. In December 2016 in Bahrain, Sberbank and Vnesheconombank, together with its subsidiary VEB Leasing, represented Russia at the 23d World Islamic Banking Conference. The partnership of such high-profile financial institutions underscores the importance of the development of Islamic banking in Russia for our partners from the OIC countries.

Nevertheless, Vnesheconombank and Sberbank, as financial institutions, have different strategic goals, which helps explain our lack of competition in this area of business. Our goals imply, first of all, raising funds for the development of the bank’s investment activities and support of Russian industrial exports.

— Which Islamic banking products may find demand in Russia?

— Vnesheconombank, as a development institution, is focused primarily on the support of the Russian export industry and promotes the implementation of investment projects in Russia.

We consider using in our work those Islamic banking instruments that may be effectively integrated in the task structure of project financing (musharakah, mudarabah, istisna), trade financing (murabahah) and hire purchase (ijarah).


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