It is not a lack of sources of funding that is hindering the development of infrastructure projects, but instead the shortcomings of the regulatory legal framework and the existing models used to attract investment. This is the conclusion reached by experts at the Russian Investment Forum.

InfraONE Chairman of the Board and discussion moderator Albert Eganyan invited the participants to answer the question: what is the biggest problem when it comes to financing infrastructure construction projects: the quality of the projects or the actual investments?

RISE Capital Investment Group Managing Partner Sergei Romanov said a key problem is the convenience of the forms of support for such projects. He was supported in this opinion by Russian Railways First Vice President Alexander Misharin, who noted that the development transport infrastructure suffers from a lack of long-term money. He said this problem could be resolved by launching projects that are clearly structured and straightforward for investors as well as optimizing the regulatory framework as regards attracting investment.

For his part, VTB Bank President and Chairman of the Management Board Andrey Kostin offered a rather harsh description of the situation with financing for infrastructure projects. He believes the government is not allocating enough money for transport infrastructure, while the regulatory framework, in particular for public-private partnerships, is simply “poor”. “As a result, we are around the level of Gabon in terms of the development level of transport infrastructure”, Kostin said. Kostin said there is not a single country in which private investment would play the decisive role in infrastructure.

Clarifying his position later, Kostin cited the introduction of restrictions on state-owned banks from taking part in public-private partnerships as one such negative factor. Nevertheless, Kostin said VTB remains interested in participating in infrastructure projects, both in the transport sector as well as utilities, waste processing and energy.

Sergei Belyakov, President of the Association of Non-State Pension Funds (ANPF), argued that non-state financial institutions (banks, pension funds and insurance companies) have sufficient funds, but are specifically constrained in choosing projects due to the absence of an established investment model. He pointed out that Central Bank Resolution No. 451 categorizes concession agreements as risky projects and limits investments by private pension funds (to 10% of the overall portfolio). This creates a paradoxical situation in which the financial appeal of concessions runs into tough restrictions when joining a project. “The government protects the interests of the public side so strongly that it becomes a constraint on investment opportunities”. Belyakov believes there is an enormous layer of smaller-scale projects in which private money should be invested in order to concentrate public investments in major projects. In terms of investment for private pension funds, the most attractive areas for investment right now are the housing and utility sector, social and sports infrastructure and other projects in which investments are protected not only against concessional legislation but tariff guarantees.

Russian Minister of Transport Maxim Sokolov noted that the lack of public financing has a greater effect on the speed and quality of infrastructure projects: budget involvement should start from 50%, he said. At the same time, Sokolov said some projects (e.g. airports and seaports) have learned how to attract a sufficient amount of private investment.

Continuing the theme of government involvement in infrastructure projects, Alexander Misharin said that in the current conditions Russian Railways would establish a development strategy based on a public-private partnership, infrastructure bonds and concession agreements in which the actual company acts as the concessionaire. Misharin said RUB 2.5 trillion is needed just to increase the capacity of the Russian Railways railway network, however raising this amount without concessions would be an extremely difficult task. At the same time, a company of this level can minimize costs and take on part of the public obligations for guarantees, Misharin said.

For his part, Russian Highways Chairman of the Board Sergei Kelbakh suggested prioritizing a solution to the problem of contradictions between regulatory acts in different parts of legislation: land, urban development and forestry. He said this could be achieved through establishing a single analytical centre, which would make it possible to prevent legal, financial and social risks when implementing major and complex projects.

Concluding the session, Emerging Asia Capital Partners Senior Partner Hans Hyun shared his expert opinion regarding the foreign experience of financing infrastructure construction projects as well as the perception of Russian projects by foreign investors. Hyun called attention to Asia’s experience of attracting investment for infrastructure through issuing bonds. He said USD 40 billion worth of corporate bonds are issued each day in South Korea, while in China and Japan this figure is USD 100 billion.

Foreigners feel uncomfortable on the Russian market in such conditions. Asian funds see the potential of Russian projects, however they also want to see risk controllability for which the government must serve as a guarantor, he said.