High investment demand

One of the main factors limiting the development of the Russian economy is the continuing deterioration of the existing infrastructure. Most of the country's current energy, transport, housing and communal sector, and health care facilities were created in the Soviet Union and have reached the limit of their useful life.

Insufficient investment in infrastructure over the past 20 years has led to the Russian Federation dropping to 95th place in the world in terms of economic development. According to the British auditing company Ernst&Young, only the Russian railway infrastructure is at a relatively high level (33rd place). In other areas, such as road quality (111th), port infrastructure (82nd place), and air transport infrastructure (87th place), improvements are needed.

Today, the demand for quality infrastructure in Russia is much greater than the supply, and lack of respective investment amounts to 50%.

According to the President of the European Bank for Reconstruction and Development Suma Chakrabarti, Russia significantly lags behind other countries both in terms of investments in infrastructure projects as a percentage of GDP, and the level of participation of private capital.

Meanwhile, the potential of the market infrastructure in the country on the scale of Russia is huge.  According to various estimates provided by international organisations, the overall requirement for modernisation and infrastructure development in the Russian Federation (excluding natural monopolies) in the most promising areas is more than USD 500 billion by 2020.

However, public investment is being cut due to falling oil prices and fiscal revenues. According to Gazprombank estimates, by 2020 about RUB 11 trillion will be invested in the transport and energy infrastructure in Russia (an average of RUB 2.2 trillion per year, USD 40 billion), which is comparable with investments in the previous five years.  Taking into account inflation, investment will drop in real terms and the investment to GDP ratio will fall on average from 3.5% to 2.5%.

According to the international consulting company McKinsey, to maintain the infrastructure in an adequate state, the total value of infrastructure assets should be on average 70% of GDP. Russia, where this percentage is lower, needs to increase investment in infrastructure at a faster pace. Today, the reduction of public investment is partially compensated for by the National Welfare Fund (NWF), and the restoration of the pension savings system; and changes to the law on concessions and PPPs have made the sector more appealing to private investors.

The historically underfunded infrastructure in Russia has significant growth potential in the proceeding 20-30 years.

Its implementation is now an economic policy priority. There are not many countries with such a diverse infrastructure - roads, railways, seaports and airports, an extensive pipeline system. Russia is developing fast and its infrastructure needs are growing, not only in transport, but also in social, energy and other fields.  The response to this has been to shift the investment focus of major players in the oil and gas sector to large-scale infrastructure construction projects.

State support

The practice of cooperation between the state and business under concession agreements, investment contracts and, in a more general sense, public-private partnership agreements (PPPs), has become the benchmark in the global market for implementing such projects. In Europe, the PPP instrument has been used for over 45 years, which attests to its effectiveness. The basis of this cooperation is the competent distribution of risk, clear guarantees and an understandable mechanism for the return of funds, which suits investors.

Over the past few years, the Government of Russia has taken specific steps towards establishing the legal and practical framework for public-private partnerships.

According to the Ministry of Economic Development, in Russia today 1,300 PPP projects with a total private investment reaching RUB 640.3 billion are at various stages of implementation.

Legal framework

Federal Law N224-FL on public-private partnerships, dated 13 July 2015

Highlights:

• Simplified public and private sector cooperation mechanisms, allowing investors to independently develop and propose the implementation of socially important projects on mutually beneficial terms.

• Improved competitive conditions and transparency in the selection of infrastructure project contractors, as evidenced by the increasing number of participants in the internal PPP market.

• Possible guarantees for concession agreements and PPP projects, including, but not limited to, the following:

  • guarantees to protect private investments from inflationuities investment;
  • guaranteed minimum income over the life of the facility;
  • guaranteed minimum payment after the completion of the facility;
  • guaranteed minimum traffic for investments in transport infrastructure.

Federal Law N275-FL "On Amendments to the Federal Law ‘On Concession Agreements’", dated 3 July 2016 (enters into force on 1 January 2017)

Highlights:
• Ability to hold a joint tender for the right to enter into a concession agreement.
• Cancellation of the requirement to obtain prior consent of the antimonopoly authority in the event of the postponement of the implementation of certain obligations of the concessionaire.
• Clarification of the specifics of entering into concession agreements without a tender with the tenant of the corresponding facilities.

RUSSIA IN BRIEF

Russia.png

WORLDWIDE CASES

Infrastructure investments are used globally as a stimulus for economic development.

India, the Golden Quadrilateral project

The Golden Quadrilateral is a highway network connecting the four major cities in India: Delhi, Mumbai, Chennai and Calcutta.  The total length of the highway is 5846 km, which made it the fifth longest in the world.

The construction of the highway has facilitated the movement of people and goods, made new areas accessible for manufacturers, reduced losses in the agricultural sector, and reduced transport costs and transport times. After the completion of the project, the state steel mills reported a decrease in transport times by 50% and transport costs by 15%.

Canada, an infrastructure investment programme in Ontario

Through the implementation of a major program of infrastructure investment in Ontario, the volume of production of the region's economy grew by 2.1% compared to the baseline scenario (do not provide for the implementation of the program), and the average income of the population increased by more than $ 1,000. The programme costs 55% was directed to the purchase of machinery and equipment, 45% - for the construction and improvement of facilities.

The program has had a strong positive impact on the living standards of the population and the economy of Ontario.  Direct and indirect effects of the investment put in the annual growth of the regional GDP in the period of investment growth was 11.3 billion dollars a year.  During the execution of the program 167 000 jobs have been involved every year, resulting in population growth due to migration from other provinces. The implementation of the programme has led to an increase in the total average income of individuals by an average of 7.4 billion dollars a year, and corporate profits by USD 2.2 billion.

Not only companies and individuals have benefited from the investment programme, but also the regional and federal governments: as a result of the project the annual proceeds from income tax on individuals increased by USD 1.6 billion, and corporate income tax increased by USD 583 million. In addition, the proceeds from the collection of indirect taxes increased by USD 1.6 billion a year.

China, the development of high-speed railway

China began to plan its high-speed railway network investment programme at the end of the last century, and in the last 20 years, it has created an extensive network of high-speed railway lines with a total length of more than 15,000 km and a maximum speed of 350 km/h.

Through technological cooperation with their European counterparts, Chinese engineers were able to design their own high-speed trains, each of which is based on a train of a particular manufacturer. Chinese development trains carry passengers from Beijing - Shanghai (1463 km) in less than six hours, ie two times faster than conventional trains. High-speed trains have enabled traffic volumes to be increased, which has led to a rise in the capacity of the railway transport system.