Kremlin to launch massive infrastructure projects in 2018

Kremlin to launch massive infrastructure projects in 2018
By Vladimir Kozlov in Moscow September 21, 2017

The Russian government plans to launch a series of massive infrastructure projects after the 2018 presidential election, addressing a significant shortfall the country is facing, Vedomosti reported on September 21.

Russia’s economic development ministry prepared a road map for an "infrastructure mortgage" system that includes 18 measures aimed at lowering risks of potential investors in infrastructure projects.

In effect the government is returning to a previous plan launched at the start of 2008. Those were the golden days for Russia. Inflation had just fallen into single figures for the first time since the fall of the Soviet Union and with oil prices over $100 per barrel the state was swimming in money. At the start of that year the Kremlin announced a $1 trillion infrastructure investment programme that would have transformed the country. The collapse of Lehman Brothers later the same year scuppered the dream.

Today the government has been forced to run a very tight ship and cut budgetary expenses to the bone. To raise the necessary investment capital it aims to attract private capital to infrastructure projects and provided state guarantees, although the specifics are not known yet.

Russia is in dire need of infrastructure investment and the bad state of its road network is having a negative impact on the economy, but the implementation of mooted major projects would boost a number of industries. The total length of high-quality roads in Russia is a pitiful 5,000 km, compared with 125,000 km in China. A US study conducted some years ago found that each dollar invested in roads can add as much as $6 to GDP. The number for Russia must be very different as the cost of building a kilometre of road in Moscow is ten times higher than building the same in Germany, but new roads remain an economic multiplier at any cost.

Meanwhile, the government's own spending on infrastructure has been declining. In 2012, it accounted for 3.7% of GDP, but in 2016 that figure was reduced to 2.5%, according to the government.

Independent sources paint an even grimmer picture.

According to the World Bank, public expenditure on infrastructure amounted to less than 1.0% of GDP per year in 2012-2014, compared to investment needs of around $1 trillion or 75% of Russia’s 2015 GDP.

“Depreciation of capital stock, particularly in transport, energy, public utilities, and social infrastructure, is the main driver of the need for major infrastructure investment,” says the January 2017 report. It stresses that “inadequate infrastructure poses major challenges to economic growth”, dragging down firms’ profits because higher transport costs, as well as limiting labour mobility and the population’s access to services.

At the same time, private investment in the sector has fallen short of expectations. According to consulting firm Infraonе, investors could pump between RUB2.3 trillion ($39.6bn) and RUB2.4 trillion into infrastructure projects, but, because of various obstacles, the actual investment figure will be between RUB527bn and RUB545bn. The estimated value of needed investment is about RUB5.8 trillion ($100bn).

One of the main obstacles is high interest rates charged by banks on loans for infrastructure projects – something that the road map is expected to address.

Another idea is the introduction of TIF (Tax Increment Financing), which would allow investors to compensate their spending by taxes collected from infrastructure objects.

The government also expects to lure investors by easing of control procedures and facilitating VAT return.

Building information modelling (BIM) is to be used to ensure transparency, allowing very participant in a specific project to obtain full information about it.

Although the proposed measures look good enough, they are unlikely to immediately bring huge amounts of cash into infrastructure projects. Many obstacles still lie ahead, such as an insufficient number of professional capable of running projects and poor investment climate in a number of regions.