Vnesheconombank PPP Center Director Alexander Bazhenov’s Interview to Russian Business Gazeta (RBG)

Conditions for Growth

Infrastructure development is not possible without using cooperation mechanisms between the authorities and business

Russian Business-Gazeta –
Public Private Partnership №805 (23)

12.07.2011, 00:47

Special PPP centers operate in the countries with developed and emerging markets for public private partnership projects. These centers are institutions responsible for upgrading and standardizing PPP instruments, they provide support for regional and local authorities in introducing PPP mechanisms for developing infrastructure. There is Vnesheconombank’s PPP Center in Russia. Vnesheconombank’s PPP Center Director Alexander Bazhenov told RBG about issues the Center is addressing.

RBG: Alexander, tell us the way PPP centers operate in the country.

Bazhenov: Today, there are three categories of PPP centers in Russia. The first ones are consulting companies. As a rule they offer specialized legal and economic services on preparing PPP projects, some companies have this sort of experience – other do not but they are trying to find a business niche on the emerging market. There are non-profit institutions, for example the PPP Development Center. Its objective is to understand as to what hinders PPP development in Russia and what sort of PPP national model we should develop, what distinguishing features it should have and how we should form it. Vnesheconombank is quite experienced in participating in implementing infrastructure projects including those on PPP terms. In order to extend financing for a PPP project the Bank needs a corporate private borrower who has entered into a contract with a government authority for developing infrastructure, with the contract specifying rights, liabilities and risk sharing between the parties. So, PPP project formation depends above all on government authorities’ commitment to organizing PPP projects. For regional and municipal administrations to form such projects they should upgrade applicable legislation and their own development institutions. These institutions should be staffed with highly qualified personnel and be provided with required financing to prepare projects. This sort of authorities’ activity should be of course supported. As a bank for development, Vnesheconombank assumed a responsibility for assisting regions and municipalities and in some cases federal government authorities in formulating long-term policies and practice to plan and apply PPP instruments. This sort of activity is not a Russian invention. Special PPP centers operate in the countries with developed and emerging markets for public private partnership projects. These centers are institutions responsible for upgrading and standardizing PPP instruments, they provide support for regional and local authorities in introducing PPP mechanisms for developing infrastructure. In Great Britain it’s Partnerships UK, in France – the Economics and Finance Ministry, in Germany – Partnerschaften Deutschland, in Russia – Vnesheconombank’s PPP Center.

RBG: Do you believe that each region should have a branch of your Center?

Bazhenov: We are not responsible for setting up branches. We believe that each region should have a development institution within a government authority engaged in non-budgetary financing. For example, in Saint Petersburg they have the Committee on Investments and Strategic Projects. It is responsible for preparing projects, regional laws, by-laws. Factually, the Committee is developing a new instrument of public administration, that is, PPP. We are responsible only for rendering assistance. Administrations turn to the Bank for help if they are interested in preparing a PPP project but the Bank does not seek to fund this project by all means. Financing is to be provided by an institution which is a tender winner turns to, and a tender winner tends to look for the most favorable conditions.

RBG: Regions with competent administrations, highly qualified personnel that follow your recommendations are sure to be lucky. And what should other subsidized regions do? They have no chance for PPP at all?

Bazhenov: If a subsidized region has a strong political leadership, nothing will prevent it from developing public private partnership. And we are ready to help. Obviously, it’s more difficult to form PPP projects in such a region because it has a completely different economy. Principal problems have to be addressed including expert’s examination and cooperation with federal government authorities. PPP assumes that the state and private business implement a specific project aimed at developing public infrastructure through using non-budgetary sources and then the state buys it out. Where do funds to this end come from? Upon implementing infrastructure projects an additional economic activity and additional budget revenues emerge and through using them we can pay for raised funds.

RBG: Do you have this sort of experience?

Bazhenov: Yes, we do. For example, we are forming a comprehensive development project in Tyva. The project is aimed at developing a whole number of mineral deposits and building a railway. It was to have been implemented through using monetary resources of the Investment Fund but now it is being re-launched. We’ve an excellent project in the Kaluga region aimed at creating an auto-cluster. The project demonstrates the efficiency of this approach.

By the way, at present, the Kaluga region is a leader in raising direct foreign investments, developing new industrial production facilities, creating new jobs. Even during the crisis, production facilities located in the auto-cluster had about 20 thousand vacancies and they were looking for ways to build additional hostels for personnel. Very often Russian depressive territories have competitive edge but they can’t take advantage of it as they have to eliminate certain limitations and implement a pilot project to demonstrate that they can develop production facilities in their region. Regions are often underinvested rather than depressive.

RBG: VEB’s Supervisory Board approved a program of rendering financial assistance for preparing regional and urban development projects. What does this program include?

Bazhenov: The program includes not only communal services infrastructure. We are not focusing on communal and housing services alone – it is important for projects to be in line with main objectives of the country’s modernization. We have to address ecological problems. Ecology includes waste management infrastructure, sewage treatment and to some extent water supply systems. Municipalities give high priority to housing communal services and regions - to environment protection. We help to address issues of energy efficiency – these are the projects in the field of heat supply and renovation of buildings owned by regions and municipalities. Our third objective is to address an issue of affordable housing and economic growth; we provide support for projects aimed at building infrastructure for residential and industrial development sites. Our fourth task is to address transport issues. The fifth issue is social infrastructure: education, public health services, culture, sports. And finally, the sixth issue deals with public administration infrastructure. In order to provide quality public services we have to set up multi-functional administrative centers, e-Government based on wideband Internet access. For administrations to prepare top-quality projects and raise investments, they need funds. And they don’t have money for preparing projects in their budgets. They can do it through using non-budgetary funds but what are we supposed to do to secure transparency of tenders? So, we are ready to support administrations initiatives on preparing projects. VEB’s Supervisory Board made a decision to commit 10 billion rubles for preparing projects within a 5-year period – 2 billion rubles per year. And this is an investment rather than a grant and it provides for cash return on it. Now we are completing the formation of mechanisms for using these funds. As part of the recent Petersburg International Economic Forum, the Bank signed agreements on preparing this sort of projects with a number of administrations. These agreements include our intentions. Administrations are to be responsible for taking concrete steps, for example, arrangements for preparing pilot concession tenders in heat, water supply and water drainage sectors in the Saratov region, Krasnoyarsk Territory and the Sverldlovsk region. Although a concession model in the Russian conditions is not evident in terms of raising investments it won’t get better if we don’t try to improve it. We also signed an agreement with the Chechen Republic on preparing a project to modernize the engineering infrastructure in the city of Grozny. We are also making efforts to prepare a project on the construction of a trunk railway Belkomur - a railway line to connect the North of the Urals with the ports in Murmansk and Archangel through the Republic of Komi. This railway would make it possible to distribute freight flows and increase track capacity. As of today, we have about 30-35 requests from administrations and we are working on them.

Bazhenov: We are giving a fishing rod instead of fish. The Bank’s funds under the program will be used to purchase consulting services on forming a project. But it does not mean that we are going to give money as a present and see what is going to come out of it. Both sides should understand what they are supposed to do, within what periods and for what purposes. These services are purchased not just to spend money but to form an attractive investment project. That is why we are responsible for exercising control over expenses on consulting services. Our idea is as follows: if you want to change your water-supply system by way of raising private investments let’s agree as to what kind of technical examination should be conducted and we are ready to pay for it if we can get our money back in 2-3 years or after conducting tenders.

RBG: Have you already received such proposals?

Bazhenov: We receive this sort of requests from municipal and regional administrations and then we start agreeing upon technical specifications and terms and conditions. Our country is very big. In view of the fact that for twenty years nothing has been done to develop infrastructure, the more so, by way of raising non-budgetary investments we have, of course, a great deal of problems. But our today’s problem is not so much money as the lack of projects capable of accepting this money, using it, producing tangible results, paying back investments and borrowed funds.

By the way, in France an institution similar to ours, namely, the France Development Bank provides annually about 180 million euros to regional and municipal administrations for similar purposes. Our two billion rubles are equal to about 60 million euros, twice as less as in France although France’s needs for infrastructure development are much smaller. According Saint Petersburg’s the France Development Bank’s experience pre-project preparations cost 1-2% of a project’s value. So, when we say two billion - it’s 1% of projects’ value and this means that we are rendering assistance in preparing projects worth 200 billion rubles per year. Given that these funds are reimbursable and the program is of a revolving character, the amount of financial assistance is going to be greater. These funds are quite sufficient to a give a significant impetus to regional and urban development. That is why this new PPP instrument is forming a new market for regional and urban development, which was previously based only on budgetary financing.