by Elliot Wilson
|Oleg Pankratov, VTB Capital|
Infrastructure has at times been an overlooked aspect of Russia’s vast and open economy. No longer. Moscow is channelling more investment capital into much-needed new central and regional highways, toll roads, hospitals, airports and special economic zones.
Laws have been written and amended to guarantee the rights of funds and institutional investors, both local and foreign, keen to invest in a slew of new public-private partnerships (PPPs).
In short, this is the beginning of a major push into infrastructure lending and spending, which will drive Russia’s economy ahead for decades to come.
It’s hard to underestimate the potential in Russia’s infrastructure and project finance space. The opportunities in PPPs alone are, says Oleg Pankratov, head of infrastructure capital and project finance at VTB Capital, “simply enormous. Russia needs to invest $1 trillion in infrastructure in the years to come, and obviously state budgets alone cannot finance that amount.”
Pragmatic and systematic
Moscow has taken a series of pragmatic and systematic steps to boost infrastructure investment. In July 2015, parliament passed a federal law that allows private investors to initiate a new PPP project, and then to drive it forward.
The law, which comes into effect on January 1, 2016, regulates the basis of legal relationships, grants security rights over infrastructure and PPP projects to bond holders, defines the status of financial parties, and governs the mechanisms that oversee a project from inception to conclusion.
It is also a pan-national piece of legislation: what works in Moscow or St Petersburg, is also legally binding in cities from Novosibirsk to Omsk, and Samara to Rostov-on-Don. Around 130 PPPs are expected to get the green light in the near future, channelling $30 billion into major new projects.
VTB Capital’s Pankratov says the new rules are “similar to international regulatory norms, guaranteeing a long-term investment in a Russian PPP project”.
The most visible projects are being undertaken in the great cities in the west of the country. Take the Moscow-St Petersburg M11 toll road, a major stretch of top-quality motorway split into several sections. Some are state-funded and others are PPP invested, while a few are based on long-term investment contracts, a little like a concession model, but with a smaller portion of the invested funds being privately managed.
For the PPP aspect of the motorway, VTB Capital helped to raise R14 billion ($215 million) via bonds to fund two key sections, with much of the capital sourced from local pension funds keen to be involved in longer-dated and inflation-linked assets.
|[International financial institutions are] welcome to participate in any project, so long as they have access to rouble financing|
Oleg Pankratov, VTB Capital
“The bonds were issued in an inflation-linked contract offering a rate of Russian inflation plus a spread of 2.5-3% depending on the tranche,” notes Pankratov. “This shows that deals can be done – this is the first deal involving a combination of bank loans and bonds distributed in the market. It demonstrates that the market is active, and that deals are happening.”
Moreover, it underlines the rude health of Russia’s PPP model: successful funding of a key stretch of the country’s biggest toll road proves that the PPP model still works onshore. It also shows that the domestic bond and pension fund sectors are now at a stage of development where they can match the sort of capital demands needed to complete very large infrastructure projects.
Over the years ahead, much of the capital needed for new projects will be sourced from domestic non-state pension funds, which invested $2.7 billion – or 11% of their total assets – in non-financial corporates in the second quarter of 2015 alone, according to Russia’s finance ministry.
Of that total, R15.5 billion ($240 million) was used to help finance the PPP sections of the M11, with capital also channelled into major housing projects, and oil and gas pipelines.
Russia is taking a national view of its vast infrastructure needs. This will let the regions set their own agenda, allowing local officials to decide which projects most need new investment, and then encouraging them to tap local and international institutions for capital.
For instance, plans are being set in place to tax heavy-goods vehicles based on the distance they travel, with revenues then recycled back into regional PPP projects.
“The regions are very interested in this,” says Pankratov. “There are already bridges being built over the Buy and Kama rivers, which are progressing very well. These are the first major PPP projects outside the ‘central’ Russian regions: they were closed last year and construction is progressing very well.”
There is also plenty of life beyond the transportation space. Airports are set to be a major source of new infrastructure and project financing and investment. VTB Capital is the owner of Pulkovo Airport in St Petersburg, which recently opened a bustling new second terminal.
Authorities in the city also recently launched a tender to construct and operate a new public hospital. And investors are expected to begin bidding on stages three and four of the Moscow ring road in the last three months of 2015, a project that should see a new influx of rouble-denominated funding by domestic banks and bond investors.
Many if not most local infrastructure projects are expected to remain denominated in Russia’s currency for the foreseeable future, notes Pankratov: after all, when you have a project like a toll road that earns money in roubles, it makes sense to fund it in roubles.
And, of course, he notes, international financial institutions are “welcome to participate in any project, so long as they have access to rouble financing. The European Bank for Reconstruction and Development is a key lender to St Petersburg’s landmark Western High-Speed Diameter toll road.”
Investors are expected to continue to commit to major long-term Russian infrastructure projects in the years to come. New laws, better protection for local and international investors, and a slew of new projects stretching the length and breadth of the country: no wonder Pankratov describes the PPP market as being “alive” and bursting with health.
“There are new projects being rolled out all the time,” he says. “And with interest rates normalising, we are starting to see more new projects entering the initial bidding stages.”