Commercial Banks Are Unable to Accomplish Many of PPP Tasks

Elena Shmeleva
Russian Business Gazeta №831 (2)
17.01.2012, 00:42

Board Member-Vnesheconombank Deputy Chairman Sergei Vasiliev told Russian Business Gazeta about new essential features of Vnesheconombank’s strategy.

-Sergei Alexandrovich, VEB’s Supervisory Board approved Vnesheconombank’s new strategy up to the year 2016. What’s its principal difference from the previous one?

-Working out our new strategy gave top priority to foreign business experience in establishing development institutions. We studied thoroughly practices of Korea’s, China’s and Germany’s development banks and the European Bank for Reconstruction and Development, we learnt a lot from our Brazilian colleagues.

We were also involved in performing a similar kind of work in 2007-2008 when we were determining VEB’s new functions and developing a new strategy. But at that time the global financial crisis intervened. As you know, VEB took an active part in taking the government crisis management measures and in fact, it took the Bank a year and a half to perform this kind of work. Naturally, we were unable to perform our strategy to the full. Nevertheless, during the crisis we got a deeper insight into the problems of the country’s real economy and got a better understanding of its needs. We gained valuable experience and learnt a lot from our foreign partners.

What’s VEB’s role for the coming years? What’s in your opinion the most important thing?

-The important thing is that Vnesheconombank has been assigned a role of the government’s investment policy system-forming element. In the coming five years we should enhance our position as a state financial institution which actually responsible for forming the foundation for economic growth and modernization and for accomplishing objectives vital for our economy the ones that commercial organizations are not capable of accomplishing.

To this end, the Bank for Development should build up its loan portfolio to fund major investment projects. The Bank’s loan portfolio is to reach no less than 850 billion rubles by late 2015. Today, it amounts to 350 billion rubles. This is a very significant increase. To this end, we have to realize the Bank’s potential to the full keeping the charter capital we received from the state in 2007 unchanged: all the money for funding projects are to be raised by Vnesheconombank on open markets on commercial terms. Under the strategy for 2011-2015, for each ruble of our charter capital we are supposed to raise up to four rubles and this is not a ceiling of efficiency,a although foreign development banks have greater raised- to- investment capital ratios.

Goals and objectives set by the Bank would make it possible to provide support for the national economy in 2015 in the amount of no less than 1.9 trillion rubles or 2.4% of GDP. This is a goal for the future. And even now the Bank is becoming a strategically oriented and socially responsible institution.

-You are talking about a threefold increase in the Bank for Development’s loan portfolio. Could you tell us what sectors will be top priority ones?

-We have a target structure of our loan portfolio – it is to be comprised of three large blocks. Industry is to account for 40%, infrastructure – for 50% and agro-industrial complex – for 10%. Under the new strategy the most important objective is to increase the proportion of innovation projects. Now they account for 15% in various sectors in our loan portfolio. We’ll have to increase this indicator to 20%.

It’s very important that we work in close contact with the government and key ministries. And the projects we support fit into sectoral development strategies and the state describes them as top-priority ones. In this regard, our Bank is a key link in the state’s economic policy, a main instrument for its implementation. We developed a plan to implement the new strategy and I hope that it will be approved by the Bank’s Supervisory Board in the near future.

-Won’t you therefore compete with commercial banks increasing your loan portfolio so dramatically? As your projects are profitable they may be of interest for other banks?

-VEB’s most important operating principle is not to compete with commercial banks. There is no doubt that they also fund innovations projects but their amounts of funds and credit periods are quite different. You must admit that few commercial banks would like to have a ten-year credit on their balance. But VEB funds only long-term and large-scale projects that commercial banks find it too difficult to finance.

-Can you give examples of such projects?

- Yes, I can. This is a project aimed at developing and exporting Russian innovative supercomputer technologies and services to international markets. This is also a project on developing and manufacturing Ka-266T helicopter as well as a project to build a new engine plant in Yaroslavl – the first in the past 30 years.

An excellent example of Vnesheconombank’s activity in funding innovation projects is its participation in implementing a project on constructing a modern pharmaceutical integrated production facility “FORT” in the Ryazan region which is in line with the GMP standard. The project is unique and provides for a full-cycle production of original innovative medical biotechnological drugs starting from a substance production stage.

The Bank has also approved an application for creating a production facility to manufacture vision technology systems on the basis of an enterprise of State Corporation ‘Rostechnologies’. Products to be manufactured are intended both for the Russian defense complex and the civil market.

In general, we are giving high priority to innovations and modernization as well as to raising investments and attracting know-how. The Bank acts as an active participant in projects thus reducing substantially risks for Western investors. A good example of this is the project aimed at constructing a propylene manufacturing integrated facility in the Tyumen region. The project’s value is 1.4 billion US dollars and it is almost fully funded by foreign banks with the state’s participation in supporting exports. It is for this reason the lending rate was extremely low. And VEB took all the project risks. It suits foreign investors fine because we can see and understand the situation in Russia better and it’s a lot more difficult for our foreign partners to keep a close watch on the situation in Russia.

-What role is public private partnership going to play in the Bank’s strategy?

-PPP is one of the most important lines of the Bank’s activity. We have a special department within our Bank namely the PPP Center. The Center is responsible for helping municipalities to work with various PPP projects.

There aren’t many federal PPP projects; for the most part these projects are regional. I would even say that the whole municipal infrastructure must be preferably funded on PPP principles. I’d like to show these principles’ efficiency on the following specific example.

Now the largest PPP project in the social infrastructure is at a final preparation stage. The project is aimed at building 61 schools and kindergartens in the Khanty-Mansi autonomous district. VEB is responsible for providing investment consulting services to the Ugra Government on this project. This project provides for creating 19 thousand places in schools and kindergartens for a period of two years. This project is based on the following PPP model “Build-Own-Lease Out-Transfer into Property”. A private investor using its own and borrowed funds constructs and renovates buildings, education authorities offer educational services and once educational institutions have been commissioned, municipal authorities assisted by local governments make lease payments to a private investor during 12 years and at the end of this period educational institutions are transferred into municipal property. This means that the state delegates some of its functions to business on favorable terms.

In fact, it’s a very efficient system. Unfortunately, it took a lot of time in the regions to form a legislative basis and adapt to the PPP system. At present, Vnesheconombank is making strenuous efforts to remove administrative, regulatory and financial barriers faced by authorities in order to put PPP projects into effect. For example, taking into account that a PPP project’s preparation is quite expensive for authorities, Vnesheconombank is carrying out a program of providing financial assistance to prepare regional and urban development projects. This program’s concept is to provide financial resources for a period of 2-3 years to those responsible for implementing contracts associated with preparing investment infrastructure projects (investment consulting, technical examination, performing work on registering property and performing other kinds of project work). Qualitative project preparation is sure to set the stage for competing for a project thus allowing authorities to implement it in the most efficient way.

We’ll be responsible for funding projects and once they have been launched the Bank will get its money back. The amount of funds needed to finance such projects’ preparation is to be no less than 2 billion rubles per year in 2011-2015.

-What’s the Bank’s policy on small and medium-sized enterprises?

-Our subsidiary bank that formerly bore the name of the Russian Development Bank and now –SME Bank is exclusively involved in providing support for small and medium-sized enterprises. To my mind, this line of activity is making great progress. Undoubtedly, this is a good instrument for securing employment in the regions. SME Bank has created a system of operating in all the regions in the country through its authorized banks as well as an efficient system of recording spending of funds. Further development is limited only by SME Bank’s capitalization potential. A decision was taken to annually transfer 10% of Vnesheconombank’s profit to SME Bank for it to provide support for small and medium-sized enterprises. And we expect the total amount of assistance rendered to SMEs by Vnesheconombank Group to reach 300 billion rubles by the end of this year. You must admit that it is a very impressive amount of funds.

-You’ve mentioned Vnesheconombank Group. Could you tell us about it in more detail?

-Vnesheconombank has a great number of massive tasks and it’s not always good to concentrate them in a single bank. So, we delegated the tasks of supporting SME s to our subsidiary bank.

Another function is to insure export credits. Of course, VEB can’t perform this function on its own, so we set up a subsidiary Export Credit and Investment Insurance Agency. A total amount of its assistance to exporters by 2015 will be 90 billion rubles. The Agency is to issue insurance policies to exporters and assume some of their commercial and political risks. This will allow our enterprises to compete on a more level playground with foreign companies. Applying to banks for credits our exporters will be able to obtain credits at comparable interest rates.

VEB-Leasing is another subsidiary that is supposed to become a center of leasing transactions designed to support our national industry. The company is responsible for leasing out high technology equipment, automobiles and special machinery. This will allow our companies operating in the defense industrial complex and civil mechanical engineering to upgrade their production facilities and make their products more competitive. Transactions to be conducted by VEB-Leasing to support the national economy would amount to no less than 180 billion rubles by late 2015.

Our special company VEB-Engineering is designed to ensure that all technical solutions included in a project are strictly followed and yield maximum effect. The company performs other functions too. Now it is working with the Olympic projects, eight of which are funded by Vnesheconombank. These include complex infrastructure facilities, sports complexes and the construction of the main Olympic village in Sochi for three thousand athletes. VEB-Engineering is to exercise control over target use of funds as well as over observance of construction cost sheets and schedules.

Thus, a pretty advanced group of Vnesheconombank is being set up. It also includes banks we received during the crisis for us to rehabilitate them. We engage them in our projects too. To work at the local level in close contact with investors, we established the North Caucasus Development Corporation and a similar corporation in the Far East. As you can see this is a multifaceted group but all its participants are involved in accomplishing our main objective to further develop Russia’s economy. I’d like to stress that Vnesheconombank’s strategy is to form the basis for the operation of all companies incorporated in Vnesheconombank Group.