Synergetic Effect from Participation

Analytical Banking Journal
12 (151)
December 28, 2007

In the year 2007, (after several failed attempts) the Bank for Development was established on the basis of Vnesheconombank. The Bank was tasked with financing the development of the country’s strategically significant industries and its infrastructure. Lately the Bank has at last received large budgetary funds and can start operating. We asked Deputy Management Board Chairman Sergei Vasiliev to tell us about the Bank’s high-priority plans and its methods.

-Despite lengthy discussions about the need to establish a Bank for Development in our country and even some, although not very successful experience in this field it was in 2007 when the Bank was established on the basis of Vnesheconombank. In many industrialized and developing countries such banks have been in place for a long time. Why are we lagging behind?

Sergei Vasiliev:The Bank for Development’s establishment actually proved to be one of the most important events of the outgoing year in our country. It was in 2007 when our economy reached the pre-crisis level of the 1990 economic development. And this changed dramatically the requirements for economic development conditions. Infrastructure economic growth restrictions are coming to the fore. The infrastructure that was built in the Soviet times was quite sufficient for the country during stagnation followed by gradual recover growth. Investments in infrastructure have been made in limited amounts in the lat 15 years and this limited the economic growth. The Bank for Development was established to meet the challenges of the time.

 -What are the sources of financing infrastructure?

Sergei Vasiliev: Infrastructure development can be financed with various funds. Above all, through using budgetary resources. But unfortunately budgetary monetary funds on the one hand are not sufficient to finance all facilities and on the other the current investment mechanisms demonstrated that they are rather cumbersome and ineffective. The decision that has been recently proposed for major investment projects is to create an investment fund. This decision makes a lot of sense but it allows to work simultaneously with a limited number of major investment projects while the he country needs hundreds of such projects. The main reason for establishing the Bank for Development now is the growing need for such an institution as an instrument of a large-sale infrastructure financing.

-What institutions should be our role models and whose mistakes should we learn from?

Sergei Vasiliev: Upon establishing a Bank for Development on the basis of Vnesheconombank the main countries whose best practices were of particular interest to us and where these development banks were very successful were such countries as Germany where such a development institution was established as early as the period of post-war rebuilding; Korea where a similar development institution was highly instrumental in the country’s industrialization; Brazil where such an institution was very efficient and is still very efficient.

As far as CIS countries are concerned, in my opinion, Kazakhstan’s experience is of particular interest. We are learning from its experience. The Bank for Development was established there not long ago but it’s already operating in a pretty successful way. Moreover, upon drafting our own documentation we relied, to a great extent, on Kazakh regulatory documents because this country is very close to us in terms of economic structure and institutional culture.

-What are in your opinion advantages of Russia’s Bank for Development?

Sergei Vasiliev: One of the Bank for Development’s principally important advantages is that it provides a very high multiplier effect from investing budgetary funds. Recently 180 billon rubles have been transferred to our Bank’s charter capital from the budget. With the Bank’s own funds its capital amounts to 200 billion rubles. It’s quite a large sum. But the Bank’s future potential is not limited to the said sum. The Bank’s 200 billion rubles can raise funds in international markets in the amount of about 800 billion rubles. Thus the Bank’s total assets will reach a trillion rubles in the short term (in the coming 3-4 years). Thus one ruble of budgetary investment in the Bank’s charter capital will be able to raise 4 rubles from the market. But there’s still something more to it. As a rule, projects are not financed in the amount of our 100% participation but on the basis of shared participation of the Bank for Development and other investors. Our position is that in the prospect the Bank would finance only 30% of investments in major projects. Another 30% is to be provided by the borrower from its own funds and assets. The remaining amount can come from other sources. We expect that those could be budgetary resources, international financial institutions’ funds and outside investors’ money. The main thing here is a synergetic effect from the participation of several investors in major investment projects: none of these investors can handle such a big project on its own but the Bank for Development’s initiative would minimize risks and make investment more profitable both for regional budgets and private investors. With this approach, gross investment amount per one budgetary ruble ratio proves to be 8:1. In other words one ruble from the budget invested in Vnesheconombank’s charter capital would raise eight rubles of gross investments. It is very good. If we now calculate the total sum of money we can raise to invest in our economy in the midterm through the Bank for Development it would amount to 1.5 trillion rubles. It’s a big sum of money equivalent to about $ 60 billion although it’s clear that it is not sufficient to meet all the needs for infrastructure development.

-Nevertheless, the Bank for Development is a state bank? What is its official status?

Sergei Vasiliev: The Bank for Development was established as an institution with a special status. It is a state corporation that operates on the basis of the special Federal Law and its operation is not to be regulated by the Bank of Russia, we don’t have mandatory reserves and we don’t have profit tax. All financial regulation is made on the basis of the Memorandum on the Bank’s Financial Policy, which sets regulatory standards for its operation.

-What is the Bank for Development’s management structure?

Sergei Vasiliev: The Prime Minister heads the Bank’s Supervisory Board comprised of key ministers. This is the Bank’s supreme collective body, which formulates main rules of the Bank’s operation. Day-to-day operational management is the responsibility of Vnesheconombank Chairman and its Management Board. Russia’s President is to appoint Chairman of the Bank’s Management Board and Management Board members are approved by a decision of the Supervisory Board. The Memorandum on the Bank's Financial Policy sets forth that for the most part the Bank is to finance long-term projects the payback period of which is at least five years. Another significant indicator is that a project’s value should be no less than 2 billion rubles and this means that the Bank doesn’t have to participate in small projects.

-You’ve said that the Bank’s profit is not taxed. What financial results do you expect to achieve?

Sergei Vasiliev: The Memorandum formulated the principle of the Bank’s break-even operation. Taking this principle into account, the Bank for Development should see that a project is sure to pay back although the Law regulating our activity states directly that “the Bank for Development’s objective is not to generate profits”. At the same, time we do not give high priority to generating maximum profits. This means that our rate of interest would be a lot lower than a market rate of interest. It would be equal to the cost of borrowing funds plus the Bank’s margin determined by our overhead costs.

-What are the Bank’s main lines of activity?

Sergei Vasiliev: Infrastructure, innovations, rational use of natural resources, small and medium-sized business development and support for industrial exports. These are traditional lines of business for most national development banks. In addition to this, certain industrial priorities have been assigned to us. These are for the most part sectors of heavy industry such as aviation, space industry, shipbuilding, energy and transport mechanical engineering, atomic industry, nuclear power engineering, woodworking and pulp-and- paper industries. It should be said that Vnesheconombank has been traditionally working with these industries. In a way, these industries pose a problem to private investors.

At present, on the Supervisory Board’s instructions the Bank’s strategy is under development where the Bank’s industrial lines of business are being worked out in more detail, not just transport but its specific sectors, for example, building federal roads within public private partnership, reconstruction and building of sea ports and port facilities, development of internal waterways. Here we mean almost all major industries, which need large investments. The same is true of power engineering industry and housing and communal services.

-Hence, the Investment Fund is responsible for financing major projects. The Bank for Development is also responsible for financing major projects but of lesser scale, that is, those the federal center can’t finance from the federal budget – projects of regional level. At the same time the Bank would start to participate in financing projects on the competitive market on the terms of co-investing with private business including banking business as well. In this case such a partnership would boost competition and would bring about the redistribution of market forces.

Sergei Vasiliev: The Memorandum officially bars us from competing against private business. In the case that a project even in the infrastructure sector can be funded by market makers for example by commercial banks we won’t participate in principle in this sort of projects. In other words, we are not supposed to go into competition with banks. By contrast, as Vnesheconombank does not have branches many projects in the regions would be carried out through regional commercial banks, which would assume the responsibility for making funds available to borrowers as well as for exercising control over the way the funds are spent. Vnesheconombank would not perform these banking functions. Its task is to examine and fund projects. As regional problems are coming to the fore a special department for regional development was established in the Bank. In the near future representative offices are to be established in the regions. The task of Vnesheconombank’s representative offices is to study distinguishing features and details of the projects locally and assess risks associated with them and propose projects to the management.

Among the lines of particular importance for regional development I would single out small-and –medium-sized business infrastructure development, creation of techno parks and business incubators. In terms of financing technology we are going to select regional banks on a competitive basis and these banks are going to become operators of a number of projects. These banks would extend credit to small and medium-sized business using Vnesheconombank’s credit lines. But as to techno parks and business incubators the Bank will finance them directly.

The second line of business also associated with regional development is to build infrastructure of special economic zones, this line of business is the Bank’s top priority. But I think that we would make investments in regional infrastructure and development of the regions, which are not special economic zones. Facilities to invest in would, for the most part, depend on what kind of projects regional administration can offer to us. If there are interesting, well-prepared projects then I am sure there would be no limitations in those regions in which the Bank would invest money.