Transport Ministry names obstacles to infrastructure development in Russia

28 February 2017

Large-scale projects are risky and take too long to break even

Lack of funds and quality projects, as well as an obsession with large-scale developments, are hindering infrastructure development in Russia, according to participants in the Financing Infrastructure Projects conference that took place as part of the Russian Investment Forum in Sochi.

“We need new projects but, to carry them out, we need a different sort of funding, from both the government and banks”, Russia’s Transport Minister Maxim Sokolov said. He added that there was no good “budget leverage” these days, while existing sources of funding, such as investment funds, were no longer used because of budget cuts. According to him, only construction of terminals and ports can make do without public funds: “We have been able to raise finance for quality projects – Pulkovo and Nizhny Novgorod airport, the port of Taman, etc.”

The scarcity of “long money” and structured projects “results in a very slow infrastructure development”, said Sergei Kelbakh, Chairman of the Board of Russian Highways. He added that large-scale projects enjoy disproportionate attention, while in fact it is small projects, which are easier to calculate and find investors for, that create the bulk of the infrastructure.

President of the Association of Non-State Pension Funds Sergei Belyakov agreed. According to him, that is why “we remain a country with an underdeveloped infrastructure”. In his opinion, the system is skewed towards mega-projects: “Pension funds are interested in smaller projects. Ones that can change the appearance of territories are so large that pension fund money is not sufficient. Large-scale projects carry risks because they also take a while to break even.” At the same time, in public-private partnership projects, the government is trying so hard to protect the public interest that private investors find it unfeasible to participate.

Transport projects account for four-fifths of all infrastructure spending in Russia, VTB Bank President Andrey Kostin said. The government funded half of the USD 10.5 billion recently spent on such construction, with VTB’s own investments reaching 20%. He added that banks face two major problems: infrastructure projects cannot be collateralized or depreciated. As a result, banks shoulder all the risks of contractor default: if a project is not completed, the bank will be forced to honour the guarantee. In addition, parties to a contract often fail to settle invoices for completed work. For instance, during the construction of a tunnel in Sochi, the general contractor disagreed with the contractor about the value of the work performed. In this situation, the bank has to honour the guarantee and then sue the contractor for reimbursement, Andrey Kostin said. That is why, according to him, bankers “were happy to abandon the banking guarantee as a source of revenue, even though it could yield up to 5%. That wasn’t enough to justify the risks and costs we were incurring.”

Source: Vedomosti

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