Aleksandr Khodachek: “Improvement of PPP and concession mechanisms is needed rather than invention of new ones”
A concession is the most widespread mechanism for attraction of private capital to infrastructure projects in Russia. There also appear new forms to involve off-budget resources in large projects: infrastructure bonds and infrastructure mortgage. Aleksandr Khodachek, President of National Research University “Higher School of Economics” in Saint-Petersburg, tells IAA PortNews about financial instruments efficient for construction of roads, ports and icebreakers.
- Mr Khodachek, private-public partnership has appeared in Russia relatively recently. Which PPP mechanisms are the most widespread in our country?
- In Russia, mechanisms of involving private capital in large infrastructure projects are improving but this process is not fast – it is gradual. When there are little resources in the government’s coffers and raising of loans on the foreign markets is hampered by sanctions, PPP mechanisms can contribute to improvement of the projects efficiency and optimization of budget expenses.
Most of Russia’s new port facilities are built through private-public partnership with the state financing the construction of publicly owned facilities (development of water areas, construction of berths and border check points) and investors accounting for terminal facilities. One of the recent projects is the construction of a new port, Sabetta, on the Yamal peninsula completed in 2017. The budget financed the construction of a sea canal and the access canal as well as the development of the port’s water area, onshore facilities, vessel traffic management systems, navigation equipment, ice protection facilities. The investor covered the construction of berths for transshipment of liquefied natural gas (LNG).
The most popular model of PPP in the Russian Federation is a state/private financing of projects on construction of new facilities in the segment of water transport. The principle of joint investments is applicable to a greater extent to ambitious and strategically important projects operation of which is always connected with the state activities.
In 2005, when the law on concessions was signed, Russia obtained a legal framework for a large scale involvement of private capital in different infrastructure projects. First of all, this instrument was applied in transport projects.
There are many variants of concession agreements. They differ in terms of type of activities, capital structure, period of validity, parties to agreements, scope of privileges. A concession agreement can be signed for designing of for construction and operation. The legislation provides a framework for a wide use of concession agreements but this instrument is used in very rare cases, especially when it comes to upgrading and development of infrastructure on inland water ways: clearing of water bodies’ bed and dredging, development of lock facilities, seasonal marine surveys.
- Why is that?
- Let’s begin with the fact that inland water ways of Russia are almost closed following foreign ships. It is among the factors hindering investment of foreign capital in the development of IWW infrastructure through concessions and other forms of PPP.
Domestic investors do not express any interest to new projects either. Cargo traffic on inland water ways has reduced by more than a half over the recent 25 years. For a long time the issues of hydrographic support, maintenance of fairways, berths and locks were left unattended. Due consideration has started being given to those issues only recently but immediate effect cannot be expected amid few potential investors and poor public funding.
Available PPP instruments are quite good but they have to be improved. Calculation of all possible risks is to ensure that neither of the parties loses. A project can deliver zero returns but breakeven result is a key parameter. In practice, we often see a different picture. Therefore, this practice requires improvements.
- Is there a need to improve the existing mechanisms or to introduce new ones? Different ways of involving private capital are known internationally. In China, up to 70% of all infrastructure projects are financed by funds raised from placement of infrastructure bonds. Why isn’t it developed properly in Russia?
- As for the Chinese practice, it should be taken into consideration that an enormous Chinese community lives outside the country – in America, Hong Kong etc. Such bonds are acquired mostly by the Chinese. It is actually a re-export of capital. If we draw an analogy to Russia, the situation is the same with foreign investments. Cyprus is in the first place as well as other offshore territories. Those are investments in ourselves but though a special way with no risks to be afraid of.
Also, it is not necessarily that successful Chinese practice will work here. It should be taken into consideration that, amid the system of planned economy of theirs, bond subscription can be enforced, which is not the same in Russia.
Raising money through bonds is based on trust. For example, no more than several thousand of people subscribe to treasury bonds of Russia’s Finance Ministry. That is because Russian people are not used to trust the state, especially when it comes to projects supposed to deliver the returns after many years.
One more driver for the development of bond market is the efficient mechanism of investing in the “institution” of pension savings. In countries with advanced economy this function is executed by private pension funds.
Foe example, Russell 20-20 Investment Association is one of the largest investors in the USA. The Association invests in construction through concessions, PPP and bonds.
In Russia, infrastructure bonds do not raise high interest so far since potential investors, private pension funds, cannot manage their resources.
- Do you think there is no future for infrastructure bonds in Russia?
- Why? First of all, inventory of projects is needed. I don’t understand why nobody suggested issuing infrastructure bonds under the project on construction of the Crimea Bridge? I believe nobody doubted its completion.
It is logical to issue infrastructure bonds under the projects on construction of icebreakers. I am absolutely sure that icebreakers will be built and such bonds will be in demand in the market.
There are other interesting projects including the Nord Stream, the Gazprom fields, etc. These are projects that can be paid back more efficiently with the issue of infrastructure bonds. This mechanism can be applied to the existing projects which require additional return on investments.
But first, popularization of successful projects is needed, particularly on the regional level. For example, there is a priority development area in the Far East which has already succeeded due to privileges set forth by the federal law. I’m sure that projects based on cross-border cooperation, joint ventures can succeed, their bonds will be in demand among private investors. Besides, popularization of financial mechanisms that have proved to be efficient is also required.
- A possibility of establishing an Infrastructure Development Fund and launching a mechanism of infrastructure mortgage has been under discussion from the previous year. Will this financial instrument be in demand?
- I am skeptical about this idea. It is sufficient to recall problems of the problems of Vnesheconombank (VEB), a key development institution. In 2016, the state had to make considerable allocations to increase the authorized capital of the bank.
If an infrastructure mortgage is an interesting and effective instrument, why is it not widely used in the world? For some reason, most of projects worldwide are implemented through concessions and PPP. Perhaps, that is not an ideal instrument but it works having proved its efficiency. So, improvement of this instrument is needed rather than invention of new ones.
Interviewed by Tatyana Vilde.