Money for Infrastructure or Infrastructure for Money

One of investment climate components is financing of infrastructure projects. In Russia the very condition of infrastructure is a reflection of investment climate: there are available sites and resources, but no infrastructure.

Many countries invite participation of private capital in infrastructure development. In Russia as well the given principle has been developed through privatization, power industry reformation, concession agreements. However, there remain quite many problems that limit investment activities in countries of Central and Eastern Europe, Russia among them. Such problems include availability of financing, legal and regulatory framework, political instability that has revealed itself for recent half a year. Market instability and demand contraction risk play an important role. Besides, the investment projects have weak points expressed as faults of risk management of corporate governance.

In the nearest years expenditure on infrastructure in the world will increase, despite slow economic growth. At that, the growth will be driven by countries of the Asian Pacific Region; this market is expected to account for up to 60% of all expenditure.

Infrastructure is one of investment climate components, and its improvement requires favourable investment climate. Often unpredictable rules and bureaucratic barriers are obstacles for investors and engineering and construction firms. For example, the infrastructure projects Russia offers to large co-investors on public-private partnership grounds, even with the minimum share of budgetary money, will depend on the state.

For example, railroad infrastructure or utilities networks are influenced and owned by the state: in both spheres growth of payments and tariffs is strictly regulated. On the international level the concession mechanism as a variety of PPP is used for implementation of such investment projects.

At present, in Russia, in current federal-scale public-private partnership projects, the share of private capital is less than a half, and in future private investment more likely won’t exceed 50%. In most known projects the state undertakes the greater part of expenses. For example, to construct a bridge across the Lena River with the cost of 64 billion rubles Rosavtodor is ready to allocate 54 billion rubles. Financing construction of Moscow-Kazan high-speed railroad will also be provided to the extent of 70% out of the budget, the National Welfare Fund (NWF) and pension savings, which are managed by Vnesheconombank. During construction of the Central ring road the state is expected to allocate 65-95%.

At the beginning of 2014 it was announced that almost 100% of the financial funds for reconstruction of infrastructure projects of the Moscow air cluster will be allocated by the state out of NWF. Taking into account that, according to current rules for sovereign wealth fund investment, money out of NWF cannot exceed 40% of the project cost, the given fact testifies to the critical situation in the field of attracting private investments. Infrastructure investment in Russia is difficult to obtain, has a long payback period and is often associated with a number of barriers. And after the annexation of the Crimea by Russia it became even more difficult to attract private investors, and in such conditions infrastructure development is believed to be one of the best measures of economy support.