_ Alexey Lazarev, expert, Eurasian Development Bank. Moscow, 8 December 2017.
Infrastructural mortgage will galvanize the economy and attract investors. Over the last several months, this opinion has become almost axiomatic. How will this be implemented in practical terms? For the time being, the business community has more questions than answers.
In July, at the Saint-Petersburg International Economic Forum, the Russian President Vladimir Putin spoke of the need to boost economic growth, among other things, by creating new investment tools, and infrastructural mortgage is to become one of such tools. Initially, it may focus on transport and power infrastructure facilities.
This was followed by expert commentary and attempts to surmise what exactly is going to make this thing tick. One of the possible arrangements is a “quasi public-private partnership (PPP),” where the “facility is actually purchased with the proceeds of a loan extended by private investors, and the operator gradually repays that loan.” How should the financial community treat this piece of news? Probably, it should hail it, as the matter of designing new ways to invest into socially-significant infrastructural facilities will be resolved at the highest possible level – which could be construed as a signal to market players that the state is ready to strike a dialog with potential investors and implement such projects in principle.
The adverse side of this exercise is the risk that time will be wasted on reinventing the bicycle. The thing is, PPP forms already implemented in Russia (albeit on a still imperfect legal basis) with reference to international best practices and models used in the countries that pioneered the tool (Great Britain, France, Canada, etc.) are already good enough to deal with the tasks at hand.
Pending official disclosure of detailed information as to how infrastructural mortgage will operate, the business community keeps staffing its “piggy bank” with more and more questions, trying to analyze a thing unto itself locked up in a black box.
Question No. 1. Would it not be better to legislatively enhance the existing arrangements, thereby creating more favorable conditions for ongoing business development? This will certainly take less time that creating a new arrangement from scratch.
Question No. 2. Subject to the current level of market development, the tool can be efficient if the state offers additional support. Will government guarantee, an already announced support option, operate efficiently? This is a rather controversial security measure: it may take a lot of time and effort to obtain such guarantee, while its enforcement may prove problematic as compensations are to be paid straight from the state budget of the Russian Federation.
Question No. 3. Will security in the form of the facility covered by infrastructural mortgage (where it is possible to implement such option) give sufficient additional margin of safety to the project creditor? More likely than not, the pledged asset will hardly be liquid, as its rapid sale will only be possible to a public entity.
Question No. 4. What are the target market segment and anticipated capital intensity level of infrastructural mortgage? The question is relevant in the light of establishment of a VEB Project Finance Factory where project admission threshold is set at RUB 3 billion.
Question No. 5. Will financing contributors be offered special conditions on which they may provide credit products at prices supported by the financial model which underpins project economics?
It is important for the novelties not to be used only to deal with budget funding shortages. Otherwise, the fundamental PPP principle, as described in all books and manuals, will be compromised: a PPP should be perceived at a deeper level than, for example, a garden-variety project financing deal, first and foremost, in terms of informed allocation and management of project risks and stakeholder interests – which eventually makes the project economically feasible.
What needs to be done to make infrastructural mortgage an efficient tool capable of really aiding the economy? The answer is evident: when joining a “long-winded” project where a public entity is involved as a stakeholder, the investor must be confident about its future – and about its ability to rely on continued transparency of the rules of the game. What should be done to achieve this? Stability of the project must be legislatively guaranteed throughout its duration, and its sensitivity to changes in extraneous factors (macroeconomic, tax-related, fiscal, etc.) must be minimized. Another important condition is that financing contributors should be provided with earmarked funds to enable extension of project loans, and that Central Bank provisioning rules for such credit products should be relaxed.
Only concerted action along the lines described above will make it possible to complete the tasks at hand, while the ability of the idea to be converted into a full-scale project based on the new arrangement will provide a measure of efficiency of that action.