No lack of ambition(2)

You can’t accuse the Russian government of thinking small. Quite the opposite, in fact: in these austerity-driven times, some of its proposed spending in its transportation network – even for a country as downright enormous as Russia – is so massive that it carries an air of faint unreality about it.

Take the government’s proposed 660-kilometre high-speed rail line between its two premier cities – Moscow and St. Petersburg (see boxed item p. 39). At a whopping RUB626 billion (€15 billion; $19 billion) in capex, you won’t find many countries out there nowadays undertaking such an enormous public-private partnership (PPP) project.

The only other country flogging a similar PPP is Brazil, with its long-planned $21 billion bullet train linking Rio de Janeiro and Sao Paulo, a project which has had to go back to the drawing board several times. The latest setback occurred around this time last year, when the private sector, riddled with doubts about the 511-kilometre line’s cost and profitability, deserted a state auction for the project.

Not encouraging news, but it’s in this climate that Russia proposes to launch a tender for the Moscow-St.Petersburg link, with a shortlist of bidders tentatively earmarked for the autumn. Nor is the
Moscow-St. Petersburg line the sum total of the country’s ambitious transport plans.

PIPELINE

Roads agency Avtodor is currently working on a pipeline of some 1,336 kilometres of roads, to be tendered between this year and 2015, costing a not-insignificant €9.6 billion. And all of these projects, to a greater or lesser extent, are banking on the private sector to fund between 20 percent
and 50 percent of their investment cost.

There is, however, an important difference between the Russia of today, with its multi-billion euro PPP ambitions, and the Russia of yesteryear: 

“If you go back five years, before the global financial crisis, people kept saying there was a huge pipeline of projects coming out of Russia, that Russia was booming, that it was going to explode very
soon,” says Alex Moroz, executive director, infrastructure capital, at Russia’s VTB Capital.

“But at that point in time nothing had happened yet, it was all still pretty much theoretical.”

“Now,” Moroz continues, “five years on, we can actually say that a lot of things have already materialised. There are a number of projects that have closed and are either under construction or at the operational phase.”

He’s right. Just before going to press, another important milestone was reached in the country’s roads sector with the financial close of St. Petersburg’s RUB120 billion Western High Speed Diameter toll
road. The project was backed by a syndicate of banks including VTB Capital (also the majority shareholder in the winning consortium), OJSC Gazprombank, Vnesheconombank, the European Bank for Reconstruction and Development and the Eurasian Development Bank.

That’s certainly good news for Avtodor’s upcoming road projects, many of which, like the WHSD, do not expose sponsors and lenders to direct traffic risk, opting instead for an availability payment structure that remunerates the private sector for delivering and maintaining the assets in good condition. And unlike several of Russia’s regional projects, Avtodor’s roads have the Russian federation’s credit
rating backing them.

But it still won’t be easy to get funding for what are essentially long-term, ruble-denominated
contracts.

“The long-term financing for ruble at fixed rate does not exist in the market and even Russian banks would struggle with it. Therefore, it’s much harder to raise substantial, long-term financing for
ruble-denominated projects, especially in international markets. You have to think about hedging and swapping, and hedging becomes very expensive for five-plus years,” Moroz points out.

CAPITAL FLIGHT

It should also be noted that Avtodor will start tapping the market at a time of record capital outflows.

Last year, over $80 billion of capital flowed out of Russia, with some $46 billion in capital outflows recorded during the first four months of 2012 – a phenomenon which the Russian central bank partly blames on a lack of investment opportunities across the country.

In that sense, Russia needs to build the sort of investment momentum that will bring capital back in significant numbers, if it wants to stand a chance of funding its infrastructure needs. A good starting point could be the country’s much vaunted $100 billion privatisation programme.

“The government has been thinking about it for some time now, but they are getting more and more serious about it and hopefully something good will come out of it,” Moroz remarks.

The Russian state certainly has its fair share of desirable assets. Infrastructure investors in particular can look forward to the sale of 25 percent of pipeline monopoly Transneft, valued at $10 billion; the state’s 32.9 percent holding in hydroelectricity company RusHydro, worth $8.5 billion; or the 29.1 percent of $7.6 billion electricity transmission firm Federal Grid.

But most of these deals are not coming to market in the near future.

This year, the government announced some $9.3 billion of privatisation deals, including stake sales in Russian bank Sberbank and the Novorossiysk Sea Port, the country’s main Black Sea port.

Moroz also believes there will be deal flow coming out of the airports sector: “There will be some opportunities, but if you look at Russian airports, most of them are already privatised. Even the three
Moscow airports, which are the largest in Russia: Domodedovo is private, Vnukovo is semi-private, and only Sheremetyevo is state-owned. The authorities are now thinking hard about how to combine these airports under single ownership, but it still hasn’t come to fruition.”

CLASSICAL PROBLEMS

No discussion on the Russian market would be complete, though, without mentioning what could be called Russia’s ‘classical’ obstacles to foreign investment.

“Investors are cautious about political risk, especially over the last few months, with the elections. We will see how things develop now with the new government. But there are signs that the new administration will move forward in a progressive way,” Moroz points out.

He continues: “There are other things. If you look at international indicators like ease of doing business, Russia definitely doesn’t score highly on that. And that’s something that makes investors stay away from the country – and something the new government is completely determined to turn around.”

Time will tell if Vladimir Putin’s third presidency lives up to that promise.

MOSCOW-ST.PETERSBURG: READY IN TIME FOR KICK-OFF?

“There is a strong political will to make high-speed rail (HSR) deals happen,” Alex Moroz, executive director, infrastructure capital, at VTB Capital says, referring to planned HSR links between Moscow and St. Petersburg and Moscow and Yekaterinburg.

“I have no doubt these projects will happen, but Russian Railways will have to think properly on how to structure them.

Right now, these projects look so large that there is simply no capacity in the market to fund them,” he adds.

Large is, indeed, an appropriate moniker. At an estimated RUB626 billion (€15 billion; $19 billion), the 660-kilometre link between Russia’s two premier cities, to be built in time for Russia’s hosting of
the 2018 football World Cup tournament, almost certainly counts as one of the most ambitious HSR public-private partnerships (PPP) anywhere on the globe.

Once built, the line would cut travel time between Moscow and St. Petersburg to two-and-a-half hours, thanks to a daily flux of 42 pairs of trains running at a maximum speed of 400 kilometres per hour. If forecasts prove accurate, the line could transport up to 14 million passangers each year.

Encouragingly, international players seem to be interested in participating in the HSR project, with Yelena Shebunina, deputy head of OAO High-Speed Rail Lines, telling Bloomberg Businessweek in a recent interview that Alstom, Bouygues, Finmeccanica, Siemens and Samsung, to name just a few, have all shown interest in the project.

Shebunina also said the government was looking for ways to cut the project’s cost to RUB512 billion, with half of it to be paid by the private sector. “The project is to be carried out in the midst of a crisis, so it’s important to see how costs can be lowered,” Shebunina explained