The cost of Russian roads

By bne IntelliNews October 6, 2010

Ben Aris in Moscow -

Ria Novosti ran a comparison of how much it costs to build a road in Moscow, Russia, the EU, the US and China. The differences are pretty stark.

China has the cheapest cost at $2.2m per kilometre, with the US and the EU coming in about the same at between $6m and $7m respectively. However, the cost of building a road in Russia is amongst the highest in Europe, with a kilometre of road coming in at $17.6m in Russia and a massive $51.7m in Moscow, according to an official at the Russian Transport Ministry.

Prime Minister Vladimir Putin told delegates at a United Russia party congress in the middle of September that the state intends to build 14,000 km over the next five years and that all federally controlled roads would be repaired and upgraded to modern standards by 2020.

So why is road building in Russia so expensive? The short answer is that adding to Russia's infrastructure is still beleaguered by the legacy of the Soviet Union: while construction companies in the West are often given a clean piece of land and simply have to put down gravel and asphalt to make a road, the Russian companies have to obtain the land in the first place, clean off everything that is on the land (including what is under it) and then often reconstruct some of the buildings elsewhere. And that's not to mention the time and bureaucratic nightmare much of this involves - especially if you are in Moscow. "Much of the cost issue reflects the historic approach used from Soviet times," says Maxim Bakshinsky, deputy general director for development for Mostotrest. "In the West, they calculate the cost on the cost of the materials and labour that actually goes into building the road, but in Russia the cost includes things like buying the land, rebuilding any infrastructure or utilities items that are on that land - you have to rebuild or move these by law."

The clients that want a new road built - in Moscow this is usually the city government - hire a contractor not only to do the actual building, but pay them sort this mess out on a "turnkey" basis, says Bakshinsky. "The contract value includes costs of land, buildings, courts, utilities, infrastructure. We had a contract to build part of fourth ring [road in Moscow] just 10 km from the Kremlin. The general contractor, according to the contract, has to not only make the construction works, but also fully prepare the site for construction: to carry out land buyout, relocation of various communications - sewage, telephone lines and the rest. All this involves huge costs as we speak about the construction in the centre of Moscow where the land value is high. And all these costs, in accordance with the Russian practice, are included in the contract value. There were dozens of owners, buildings, private garage boxes, complicated utilities, and sewage, gas and telephone lines 20 metres under the ground. The cost was RUB66bn ($2.2bn) for five kilometres of road - and sometimes those who don't understand the industry specifics compare these costs to Hadron collider value."

Long talks

The process is long drawn out and difficult. The first job is to get hold of the land over which the road will run. Moscow is a huge city, but as many of the buildings are protected and as all construction is heavily regulated by the city government, there is a dearth of modern office and apartment space in what is the biggest city in Europe. Real estate prices took off in about 2003, rising to make Moscow one of the top three most expensive cities in the world (although it has since slipped back to number 56, according to Swiss bank UBS).

While the city government will support the contractor to keep land purchase prices reasonable, the contractor still has to do the negotiations with the owner as well as the Kafkaesque paperwork associated with transfers of ownership to City Hall. Then there is the job of clearing off everything that is standing on the land. By law, any infrastructure or utility objects have to be removed and rebuilt elsewhere (including buying more land to put it on), which is included in the price. But maybe the most complicated problem is dealing with what is under the land. Moscow has changed out of all recognition over the last 20 years and much of the growth has not been planned, but buildings and their supporting infrastructure have been added piecemeal as money became available. The upshot is the city is a tangle of pipes, power lines and telephone lines, most of which have different owners.

The land itself could be privately owned; the sewage pipes belong to the municipal government; and if you are unlucky, then there might be a federally owned telephone line (like those connecting the Kremlin to the other government buildings dotted around town) in which case the contractor has to apply to the Federal Security Service (FSB) for permission to move the lines - even if it is only a few metres. Russia's bureaucracy is never easy to manage even for the most simple projects - and it doesn't get much complicated than this.

The contractor's job is to wade through this morass and the faster it can get the work down the more the company earns. "If you compare the actual cost of just building the roads in Russia, then this cost is about the same as in Germany," says Bakshinsky. "Our labour costs are lower, but we have been investing heavily into state-of-the-art equipment to improve our productivity."

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