Partnership of State and Private Businesses Opens up New Opportunities

This complex task directly results from the Strategy for Social and Economic Development of the Far East and Baikal Region for the Period of up to 2025 adopted in December 2009.

The source of Dalnevostochny CAPITAL: Gennady Alekseyev, General Manager, OJSC “The Far East and Baikal Region Development Fund”

“Gennady Feodorovitch, you have reviewed investment proposals of the Russian Federation subjects over a very short period of time. What does a single-step profile of the expected development projects represent? What is the level of their elaboration? Does general picture make the cohesiveness of intentions and actions of regions visible?”

“Fund employees together with independent experts have analyzed about 3,000 investment offers of 12 regions that fall with our area of responsibility. The main conclusion is that practically all investment initiatives including those that are positioned as complex territory development projects, are of delinked nature and require serious finalization in order to ensure for alignment of objectives and interests of territories, businesses and population.

“Nevertheless, at present the Fund has signed several memoranda, agreements and protocols on cooperation with regional authorities and private investors. To mention specific projects where we have just started to work is too early, I believe.

“The Fund Board has entrusted us with the following task: by the end of this year and in the first half of 2013 to prepare applications and organize practical work related to participation of the Fund and Vnesheconombank (VEB) in the investment projects of high readiness. They relate to construction in the transportation sector, complex housing development including establishment of engineering, transport and social infrastructure. Several dozens of projects on agriculture development, foundation of advanced processing factories in fishing and wood industries and innovation companies are at a developing stage. There are projects in the area of housing and utilities infrastructure, heat supply, disposal of household rubbish and etc. The possibility of Fund’s participation in the programs of RAO ES Vostoka and RusGidro are being considered. These programs are related to development and implementation of unified energy efficiency and energy resource saving programs implying construction of power generation objects in the Russian Far East.”

“If we mention infrastructure projects is it possible to say that power people are more than others willing to collaborate with the Fund under its conditions?”

“The power sector has more advanced investment projects from the point of view of project and budget documents preparation. However, from the perspective of bank financing they still need more detailed elaboration.

“Definitely, the most attractive investor is the budget, but its potential will simply not be enough for financing of the infrastructure development, which is extremely needed for the macroregion, if we mean its priority development. At the same time, the majority of the Far Eastern Regions are highly subsidized by the State, their budgets are socially oriented and therefore, it is impossible to count on their possibility to independently invest adequate resources into infrastructure. Thus, it is required to attract out-of-budget funds and to find motives for future consumers of the capital intensive infrastructure, so that they participate in its creation with their own moneys and could count on their return in foreseeable future.

“Basic principles of Fund’s operations are as follows: provision of investments under condition of their term structure, collectability and profitability. As to energy sector, this is a business regulated by the Federal Tariff Service. If we place our stake on investment component in tariffs, neither economy of the Far East, nor its population will stand such burden. That means we need mechanisms of non-tariff repayment of investments. State and private partnership instrument shall be applied as effectively as possible. To achieve that we need an appropriate legislative base. The Fund actively participates in preparation of such proposals.”

“Since we touched upon mechanisms of investments repayment, what in your view is in question, for example?”

“In general, many different methods of mutually beneficial cooperation of the business and state based on principles of state and private partnership are used worldwide. We are talking about repayment of private investments from future revenue of the budget system which will be provided for by investment projects implementation. It is necessary to improve regulatory and legal framework regulating project realization on the basis of “life cycle” contract conditions stipulated by the law On Concession Agreements. In such projects repayment of the investments to a concessioner may be made in a form of payment for project availability, which in reality is applied at road construction. This practice may be expanded to energy generating facilities, housing and utilities objects, etc.”

“Recently the Board of Directors has approved the Memorandum on the Fund Investment Policy. What principal provisions does the document set?”

“The Memorandum is published on the site www.fondvostok.ru and any investor interested in the cooperation with the Fund may get familiar with it. Conceptually, the Memorandum defines key focus areas and performance indicators of Fund’s activities. I will tell straight off that projects on extraction of mineral resources are last in the list of our priorities. We reckon that implementation of such projects is a task for private investors. The scope of our participation first of all covers infrastructure objects, which will allow effective exploring of the Far Eastern mineral depots, modernization and construction of processing facilities, creation of new production capacity in agriculture (including fishing), development of the tourist industry and innovations. First of all the Fund will support the projects implementation of which will improve economic integration of the Far Eastern districts with other Russian regions and foreign partners. These are key priorities for our activities.

“The Fund may participate in the projects with total amount of financing of at least RUB 500M. I would like to note that this bar is several times lower in comparison with the one set a year ago when the Fund was established. Such decision was taken exactly upon analysis of the investment proposals of the regions and it offers opportunities for cooperation with the Fund for more project initiators. (The limit for direct participation of VEB is at least RUB 2 billion - Note of Dalnevostochny CAPITAL). The payback should be at least 5 years.

“The condition of regional interest in the project remains unchanged (the project should be recognized as a priority for the region), and at least 20% of initiator’s equity should be financed. These are definite guarantees that the private investor is really interested in full project implementation.

“As to the procedures, these are not only provision of financing on the repayment basis (with minimum profitability level for the Fund), but also equity investments into enterprises that are being created or have been created for processing and realization of projects. The Fund may participate in investment partnerships and funds, and may also provide services: consulting, management, marketing and other stipulated by our charter.

“Did you manage to alter initial expectations of the regional authorities that the Development Fund is just an additional budget wallet?”

“I try not to create groundless expectations and at all meetings and discussions I underline that the Fund is not a charity organization investing without expecting repayment of funds. Together with the region and private investors we need to assure for implementation of the projects under such conditions that each party understands its benefit. For the regions that is not only direct commercial effectiveness, but also budgetary, social and ecological favors, in the end these are the issues related to stable development and safety of people. Investment enhancement and improvement of regional attractiveness are in the interests both of the business and population. The most important condition for the private capital is a strict planning horizon and guarantees for investments repayment.”

“The results of the project express analysis which the Fund made during the period may for sure be useful in the course of complex Program for Development of the Far East and Baikal Region formation.Right?”

“We really expect that the State Program, which draft is under development now, will fully take into account tools and mechanisms proposed by VEB and Fund and formed on the basis of principles of state and private business partnership. Having fairly split risks the state should delegate its responsibility on development and operation of the infrastructure to the private investors.

“In this connection adoption of the special law On Social and Economic Development of the Russian Far East that should have a chapter On State Support of Macroregion Complex Development Projects stipulating for specific investment promoting conditions becomes urgent. The Fund does not have power to initiate legislation; however we are proactive in making our proposals for legislation improvements.”