Russian Econ Ministry for using windfall oil, gas revenue to create Development Fund
MOSCOW. Jan 30 (Interfax) - The Russian Economic Development Ministry suggests setting up a Development Fund to carry out key investment projects using budgeted funds instead of the defunct Investment Fund.
The government has asked agencies to draft proposals to revamp Investment Fund mechanisms in order to finance large-scale infrastructure projects, it follows from a letter from Economic Development Minister Andrei Belousov to Prime Minister Dmitry Medvedev, dated January 23 and seen by Interfax.
The minister recalls that 100 billion rubles in National Welfare Fund resources could be allocated for these programs, in keeping with the Russian president's address to the Federal Assembly.
However, the Investment Fund mechanism calls for mutual liability of the government and private investors, with all risks - ineffective spending, private investors failing to meet their obligations - carried by the government budget, the letter states. In order to avoid these risks in projects carried out under public-private partnerships and to ensure stable financing for major infrastructure projects, the Economic Development Ministry is proposing to switch to a new mechanism in the form of the Development Fund. It is defined as "separate fund of money within the federal budget used to implement priority investment projects, financed among other things by budget investments included in expenditures of an investment nature, the resources of which are controlled by the Russian Federation or an authorized agency."
The ministry sees a big upside in creating the new mechanism: it would make it possible to isolate sources of financing for special investment expenditures among other government spending, create guarantees for timely and effective concentration of resources, and ensure maneuverability, flexibility, responsiveness, accountability, transparency and effectiveness of governent spending for the timely completion of begun projects and implementation of new ones.
Funds would be accumulated in the fund by carrying over balances to the next financial year.
The fund, the ministry proposes, would be formed with part of the budget money earmarked for federal targeted investment programs and priority federal special programs, 100% of additional oil and gas budget revenues after the Reserve Fund reaches 5% of GDP (which would require amending the budget rule, which targets the Reserve Fund at 7% of GDP), as well as at least half of additional oil and gas revenues.
The ministry is also proposing to allow up to 50% of Development Fund money to be spent on balancing the federal budget if there is a steep drop in budget revenues.
Projects to receive financing from the new fund would be selected according to three criteria: importance, readiness for implementation and short duration.
The ministry is proposing to launch pilot fund projects in 2014, and have the new mechanism operating full-scale in 2015. This would require the adoption of a number of government acts and amendments to the Budget Code by August 2013.
The Finance Ministry has not presented its position on this issue, Belousov said in the letter. A public discussion on changing the budget rule has been going on for months already, and the Finance Ministry is categorically opposed.
Reviving the Investment Fund
The Regional Development Ministry, meanwhile, is proposing to reanimate the mechanism of the Investment Fund, which has not received any government budget funds since 2011. Deputy Minister Vladimir Tokarev said in a letter cited by Finmarket that the regulatory foundation for the Investment Fund is "methodologically worked out and strengthened by the experience of the implementation of concrete projects."
The Regional Development Ministry cites several examples of successful projects that involved the Investment Fund, including the construction of the Kuznetsov tunnel on the Komsomolsk-na-Amure - Sovetskaya Gavan railroad, the rail line to the Bugdainskoye and Bystrinskoye polymetal ore deposits, railroad and pipeline infrastructure to the oil refining center in Nizhnekamsk and toll roads.
The Regional Development Ministry has more than 200 applications from potential investors interested in receiving government co-financing for their projects, the letter states.
Speaking to reporters on Wednesday, Belousov said that studies have shown that "without opening up bottlenecks in transport infrastructure we won't be able to ensure economic growth of more than 3%."
"If in the next 2-3 years we don't increase road completions from the current 2,000 km per year to 4,000 km with subsequent growth, then the throughput capacity of the transport system will undermine our efforts to improve the investment climate and simply won't allow the economy to grow at a rate higher than 3%. Therefore, in order to get two additional percentage points of growth, investments in infrastructure are needed," Belousov said.
He said a number of problems could be solved with long-term repayable investments and "it is possible to use pension money and NWF money there." Russian Railways (RZD) has already presented projects worth 100 billion rubles that have a long payback period with a return of more than 8%, "in other words these are projects that can be tacked with pension money," the minister said.
"But nonetheless most projects related to the development of transport infrastructure are of a non-repayable nature. That's reality, not just here but throughout the whole world. And these projects need to be tackled at the expense of the budget. Therefore we are not proposing to create a special fund within the budget that would be aimed at tackling objectives related to investments," Belousov said.
This is why the ministry, in accordance with instructions, submitted proposals "to transform the Investment Fund to tackle these objectives," he said.
"The Investment Fund played a very positive role in its time. If it wasn't for the Investment Fund, there wouldn't be Nizhny Priargun, Boguchany HPP , the petrochemicals cluster in Tatarstan," Belousov said. However, this fund has not been operational in recent years, he added.
"Certain birth traumas were rooted in the very structure of the Investment Fund, related to the very low liability of the private investor. On a whole number of projects, the government fulfilled its obligations but the private investor didn't, which dramatically reduced the effectiveness of the government spending. It is necessary to solve the problem with the development of the regulatory foundation for public-private partnerships. The relevant bill is already in the government and might be submitted to the State Duma in the middle of March. After this problem is solved, it will again be possible to return to carrying out projects similar to the projects of the Investment Fund," Belousov said.
"Now we're talking about the advisability and mechanisms of using some oil and gas revenues that have accumulated in the Reserve Fund to finance investment programs where they are non-repayable," the minister said.
He also said the Finance Ministry is not fundamentally opposed to the new mechanism. "They are just proposing to do this when the Reserve Fund reaches 7% of GDP, but this will probably happen in 2016 or the end of 2015 if oil prices remain high at a level of $110 per barrel. But this will be a bit late. We'll just lose these three years [2013-2015]. That's the point of our proposal to reduce the prescribed size of the Reserve Fund to 5% - this will simply move up the moment when we'll begin to finance infrastructure projects," Belousov said.
He said calculations show that in this case in 2014 there would be "very small investments, in 2015 in the neighborhood of 100 billion rubles, but subsequently the amount of resources will be as much as 400 billion rubles [per year]."
Asked whether the 100 billion rubles of NWF money that is to be channelled into infrastructure projects might be put into the Development Fund, Belousov said this was possible.
"If a decision is made to direct 100 billion rubles from the NWF there, then in principle such a fund could be launched this year, there's nothing complicated in launching the fund. But there are various options, through which channels to use these NWF funds. It's important that these 100 billion rubles are supposed to be realized on a repayable basis, and that's a different mechanism," the minister said.
He said that for repayable resources, there are another two mechanisms - the financial agency being created by the Finance Ministry and Vnesheconombank (VEB). "I probably lean toward the VEB option in this case, because it already has an established mechanism for selecting investment projects with a long payback period," Belousov said.
