Russia Forum Buzz: Can Russia Replicate China’s Infrastructure Miracle?

April 19, 2013

 

In this day and age, it is impossible to imagine an emerging market country speeding along in an attempt to catch up with the most developed global leaders without first creating an advanced infrastructure, which perhaps highlights why investment in this sphere is so vital. Russia’s inheritance from the Soviet Union is largely spent, essentially leaving an infrastructural asset base that needs to be rebuilt from scratch. This will require trillions of rubles of investment over the next 5–10 years.

The sharp spike in infrastructural public-private partnerships (PPPs) in the mid-2000s was made possible thanks to laws allowing concessions, the formation of an investment fund, and state guarantees on private pension fund investments in infrastructure projects. However, the realities imposed by the crisis hindered progress in this arena.

China has a unique experience of superfast construction of highly modern infrastructure projects. China has increased the length of its rail network 50% over the past 20 years and quadrupled the number of roads in 30 years, including more than doubling the length of high-speed roads over 2005–10. The country has built three of the five largest ports in the world and expanded its oil and gas pipelines at an annual rate of 12–14% over the past 5–10 years. In 2012–17 alone, a staggering $157 bln (2.1% of GDP) is slated for 60 new projects in China. The keys to such rampant success are: various forms of state funding, including PPPs; a strong backbone of domestic strategic investors; and infrastructure companies capable of churning out highly ambitious projects in record timeframes.

This poses a number of questions for our panel members to discuss. What is wrong with Russia’s current infrastructure funding system, and what is holding private investors back from more active participation in such projects? How can Russia strike the optimal balance between the interests of the state and private players? Is it even possible for Russia to replicate China’s infrastructure miracle? If yes, then what are the keys to China’s success that Russia can use?

Alexander Bazarov, Moderator. During the panel, two polls were conducted. The first question: Do you expect an infrastructure boom in Russia? All respondents (100%, both speakers and listeners) answered “Yes”. The second question: What is hindering infrastructure development in Russia?

– Inflated infrastructure costs and theft – 51.6%
– Lack of government support – 24.2%

– Shortage of long-term investments – 9.6%
– Shortage of private investors – 4.5%
– Lack of specialists – 1.9% of respondents

Damian Secen: Investors consider infrastructure as a regular investment, taking into account project cash flows, entry barriers, lifecycles, inflation, etc. They also look at factors driving project revenue, ways to control costs, attain an optimal debt/equity structure. Mr Secen pointed out that each dollar invested in infrastructure generate $2–3 of additional GDP and also brings in additional tax revenues for the government. Russia’s gross investments in infrastructure are not very big, but this is because it already has a developed infrastructure; China is investing substantially more as its initial level of infrastructure development was low.

Jonathan Anderson: Mr Anderson compared Russia with China in terms of infrastructure positioning. He said it is incorrect to compare Russian and Chinese infrastructure development directly. Russian total investments account for 21–22% of GDP, close to the global average, while China is the global outlier, with total investment of around 40% of GDP. Despite China’s huge spending, it still lags Russia on infrastructure development on many per capita metrics, with the exception of air and marine freight. Mr Anderson said that only 15% of steel in China is used for infrastructure, as the bulk is used for housing, which is four times Russia’s level.

Alexander Nazarchuk: Underdeveloped legislation is the main problem hindering infrastructure growth in Russia. In areas where legislation is adequate (such as the port industry), there is no capacity deficit and industry has developed rapidly. In the rail industry, the government needs to change the law to allow more private investments (for example, in the locomotive segment). This would allow Russian Railways to redirect its own investments into improving bottlenecks on the railroads. Overall, Mr Nazarchuk believes that Russia should not copy China’s infrastructure strategy due to differences in the countries’ economic models.

Christian Heurtebis: Russia plans to build thousands of kilometers of toll roads by 2020, which is an ambitious target, and Vinci would like to participate. Mr Heurtebis believes that PPP projects have a number of advantages: such projects usually deliver on time and to the initial budget. They are easier to finance than state budget-financed projects. Private investors are responsible for the entire project and are motivated to innovate and improve quality. He suggested that the Russian government needs to improve PPP legislation.

Sergey Kelbakh: An imbalance between land rights, budget law and city legislation are the main problems slowing the development of transport infrastructure. The first road concession project (the Odintsovo bypass near Moscow) will be put into operation this autumn, while the first stage of the Moscow – St Petersburg toll road will start running in 2014. Mr Kelbakh complained that there is no list of priorities for the country’s infrastructure projects. The government is trying to solve all problems simultaneously, but the total length of Russia’s roads has increased just 5% over the past 15 years, and these are only regional roads – the length of federal highways has not increased. Avtodor plans to build 4,000 km by 2020, which would meet its budgeted capacity, but this does not look very ambitious. Mr Kelbakh said that there will be six large road construction tenders, including reconstruction of the M1, further stages of the Moscow – St Petersburg highway and a central ring road in Moscow Region.

Hui Li: The Chinese government pays a lot of attention to infrastructure development. The people should realize that infrastructure is very important for economic development, and people have to pay for toll roads. He expressed confidence that Russian infrastructure will continue to be developed. He said that China is very interested in developing relations with Russia not just in the raw materials sectors, but in infrastructure as well.

Sergei Belyakov: Mr Belyakov agreed that normal and modern legislation is the cornerstone for successful infrastructure development. The ministry has just prepared new PPP legislation that should be approved by the State Duma soon. This will improve the climate for PPP development. Mr Belyakov pointed out that although Russian investments are in line with the global average, its territory is vast and so it needs to invest more in absolute terms. He agreed with the previous speakers that infrastructure should reflect the country’s economic model. It is bad when infrastructure development outpaces economic growth, as this brings falling utilization. The government should ensure matching infrastructure growth and economic development. The Economics Ministry is in talks with Russian Railways on certain projects to coordinate the size of investments and how to optimize them.