By Nicholas Trickett
Maxim Oreshkin and Anton Siluanov have a problem: no one knows what’s going on with the administration of infrastructure concessions via Public-Private Partnerships (PPP). Oreshkin has been trying to fold publicly-funded concessions for PPPs under his purview as the Minister of Economic Development. The market for PPPs is anticipated to be worth 2.6 trillion rubles by 2022 and Oreshkin wants a hand in controlling flows of federal money for major projects. But Siluanov has thus far elbowed him out of the way as the Ministry of Finance’s (MinFin) policy portfolio has grown over the last year.
Back in July, the Duma passed a bill obligating reviews of PPPs by regional authorities or the Ministry of Economic Development. A negative review of a project’s financial and socio-economic effectiveness per an unclear set of metrics triggers a cancelation of the concession. The language of the bill covers traditional road and rail projects but makes a point of extending PPPs to projects modernizing information systems. The growing role that Moscow sees for PPPs make it an attractive target for those looking to profit by shoveling the burden of private expenditures onto the state budget. The story around the current impasse began in Ufa.
There’s Always Money in Bashkortostan!
The Republic of Bashkortostan’s Ministry of Transport hoped to build a 170 kilometer toll road from Sterlitamak to Magnitogorsk through Kaga.
Shoehorned into an East-West route linking China and Europe, the project served as a regional test. PPPs are designed to become the new primary mechanism to attract private capital for infrastructure investments. The company Bashkirdorstroy won the tender to construct the route per a 15-year concession with 12 billion rubles of investments, some of which were to be covered by federal budget money collected from the Platon trucking system’s income. But the concession functioned like a procurement contract given to a company. Moscow would cover all expenditures using toll road revenues and regional infrastructure budgets subsidized with federal money for projects of national significance.
The Federal Anti-Monopoly Service (FAS) jumped to action and filed a suit last April seeking to annul the concession on the grounds that if the state provides compensation for all expenditures, the contract is a state procurement. In other words, the concession isn’t a concession unless the private partner actually bears some costs. The conditions of the concession were the first in Russia to cover 100% of expenditures using the federal budget. Thus it was that the case landed in an arbitration court in Moscow.
The suit made an immediate splash. Vice Prime Minister Igor Shuvalov went on record that the concession would not be reviewed or overturned. Were the court to find in favor of FAS, 16 other projects worth 270 billion rubles built on similar concessions would fall apart. Oreshkin’s ability to direct investments would take a hit as well, a notable development given that Bloomberg went as a far as to call him Putin’s “new favorite” in August. In the end, the court overturned a decision in favor of FAS allowing the project to continue as it was originally structured. Had the court gone the other way, another player and his ministry would have unintentionally benefited: Siluanov and MinFin.
A Procurement is not a Procurement is a Procurement
Assuming the projects had proceeded with similar arrangements in rewritten concessions — the federal money was already set aside — they would have been reclassified as state procurements if the funding were to come completely from the state budget. Such was the argument put forward by representatives from FAS. In the past, the Ministry of Economic Development (MinEkonomiki) was responsible for administering state procurements, but jurisdictional responsibility for procurements was signed over to MinFin on 14 April last year. With procurements worth 5.6 trillion rubles in 2016, this dealt a massive blow to MinEkonomiki’s institutional role among Russia’s rent-distributing mechanisms. Siluanov came a step closer to tightening control over the dispersal of state funds.
The court’s decision, intentionally or not, protected Oreshkin and MinEkonomiki’s role. However, Siluanov is pressing for more in hopes of transferring regulatory power and administrative responsibilities over concessions to MinFin regardless of how the latest batch of fully state-backed projects are defined. There’s still no consensus on the model for regulating concessions. FAS is also in the mix as Oreshkin plays defense on his policy turf.
MinFin has proposed to allow complete compensation for concessionaires using the federal budget if they do not collect user fees after construction is over, or can’t guarantee a return on investments covering construction expenditures. MinFin proposed allowing budget funds to cover 75% of capital needs during construction and 50% of operational expenses not linked to usage indicators for whatever has been built. The remaining expenditures would be reimbursed to the concessionaire as a grant payment over five years or more, with no more than 75% reimbursed in the first three years. By the first year the project goes into operation, the concessionaire would be able to recover 93.75% of total costs.
MinFin is ostensibly looking to deal with a problem that FAS has identified: there are currently no controls to prevent the reimbursement of expenditures before a project has been completed. A concessionaire can conceivably run up costs to collect from Moscow on a short turnaround. Even crazier, concessions fully covered by budget money are still being treated as a separate category from other PPPs with ongoing fights about how heavily to weigh the prices proposed by companies.
The more heavily the prices are weighted, the closer roads like the route in Bashkortostan are to state procurements regardless of the court ruling. No final decision has been made yet, but it will apply to future vanity projects like sports stadiums as well as hospitals and clinics. The more that MinFin controls, the likelier it is that applications for federal capital grants for PPPs will be rejected. Budget priorities will overtake development proposals, strengthening Moscow’s role in planning through the guise of Siluanov’s budgetary concerns.
No matter the role MinEkonomiki is left with, MinFin will maintain a level of control over procurements around concessions. With less and less room to maneuver, Oreshkin pivoted to a creative solution to keep his seat at the table for final funding commitments on major projects. He proposed creating a 300 billion ruble investment fund for infrastructure to provide capital grants backed by state guarantees, which would come in addition to the 290 billion rubles MinFin has already set aside for project financing. The fund would be financed by bonds, which would then be serviced by revenues generated by projects.
The proposal artfully limits the power MinFin has to head off Oreshkin’s involvement for a few reasons. First, the bonds would be used in conjunction with regional infrastructure budgets – rather than federal budgets – to create more leverage to draw in private investment. The money would therefore operate in a space just beyond MinFin’s direct purview. Second, MinEkonomiki hopes to raise money by selling these bonds to non-government pension funds (NPF). That entails asking the central bank to change the portfolio structure of NPFs, an ask that is unlikely to meet serious resistance given the urgent need to develop sources of capital for infrastructure investment.
However, the capital that could be raised by that route would be unlikely to meet needs. Infrastructure investment as percentage of GDP bottomed out at 2.5% in 2016, and that minimal amount was not spent effectively. Russia’s projected infrastructure investment needs were estimated at $1 trillion last year by the World Bank, roughly 75% of Russia’s 2015 GDP. Annual spending levels must be increased significantly to catch up. Oreshkin’s proposal amounts to another maneuver in the game of Twister the ministries play to feed money into essential projects and does not leave project funding in a strong position.
Having lost control over procurements, Oreshkin’s role has been significantly clipped and no amount of workarounds with regional budgets will make up for lost political weight. Further, MinFin has considerable leeway to slash regional budget allocations to infrastructure by restructuring the financial relationships between the regions and Moscow. All the same, Oreshkin continues to publicly harp on the need for greater federal support for infrastructure investments as he rightly identifies catastrophic underinvestment as a systemic threat to economic growth. Investor interest in concessions has declined as the various issues surrounding concessions remain unresolved.
The Wages of (Sin)tralization
Oreshkin was picked for Minister of Economic Development to replace Alexei Ulyukayev after his shock arrest. Oreshkin and MinEkonomiki’s loss of influence are surely fallout from Rosneft CEO Igor Sechin’s decision to setup Ulyukayev on corruption charges. Many have riddled over exactly why Sechin chose to have a minister who posed little threat arrested, but the institutional role of MinEkonomiki provides some clarity. Igor Sechin had a political reason to pick a seemingly vindictive fight: MinEkonomiki and Ulyukayev technically had oversight power over state procurements, which Rosneft dominates by the numbers.
Per the United Information System (EIS), Rosneft leads the pack in the top five buyers for state procurements by a huge margin: 2.76 trillion rubles followed by the runner-up Podol’skiy City Dental Clinic (an odd runner-up to be sure) at 471 billion rubles for the first half of 2017. Bashneft was number five at 146 billion rubles, technically giving Rosneft two top five spots after Bashneft’s “privatization” by the state-owned oil giant. Whether or not Ulyukayev was actually a threat of any kind, MinEkonomiki had means of making life more annoying for Sechin’s fiefdom. All told, Rosneft accounted for about 30.6% of state procurements the first half of 2017.
Oreshkin was given his post right after Ulyukayev’s arrest under the impression that he was one of the up-and-coming generation of younger technocrats in Putin’s favor, or at least enjoying his endorsement. But Oreshkin has seen his ministry sidelined steadily and is losing means to work around MinFin and Siluanov, shown up as a lightweight by his older, more experienced counterpart. Siluanov’s statements and moves to cut budgetary support to regions — the raiding of Sakhalin’s coffers stands out — will have knock-on effects for regional infrastructure budgets.
Reforms to increase the budgetary independence of regions are, in fact, increasing dependence on federal money at the project level as regional debts rise. Budget reforms are providing cover for a tightening of control where projects can be funded up to 100% by federal funds. Regions may be able to better cover their deficits if they cede yet more power over infrastructure development to the federal center.
As of now, MinFin is looking to bail out regions only if their debts exceed 140% of gross regional product (GRP). But cutting federal support for the regions will likelier incur local debts that will then have to be written off with federal money later on if economic growth is lacking. It most likely will be since having better infrastructure access does nothing for the bevy of corruption, governance, and regulatory issues that plague businesses, assuming the roads and railways are built in the first place.
This back and forth between Oreshkin and Siluanov is a masterclass in Russia’s trouble with sintralization: the centralization of rent-seeking powers by individuals unconstrained by weak institutions lacking clear divisions of power or responsibility and far too subject to personalities. Policy is maddeningly incoherent as federal money becomes more and more necessary to build infrastructure.
The FAS lawsuit in Bashkortostan laid bare the diminution of MinEkonomiki’s institutional responsibilities, Oreshkin’s declining political footprint, and Siluanov’s freedom for maneuver. There is as yet no consensus on how concessions will be identified and regulated, nor is it likely that a final decision will be reached until after the presidential election in March. Projects will be allowed to go ahead, if at least to create the impression that work is being done for the regions, and money will change hands to keep people happy as other sanctions concerns hover in the background.
All the same, Siluanov has had the initiative for the last year and accumulated considerably more power of the purse to pursue his own agenda. That Yakutia has largely been spared budget cuts speaks to that given Siluanov’s interest in diamond giant Alrosa and its holdings there. It seems unlikely that Putin 4.0 will have any interest in getting involved once he claims another mandate despite the importance of these projects to divvy up national wealth.
Oreshkin himself has acknowledged that he must make development plans for the second half of 2018 without knowing who will implement them in the next cabinet. Oreshkin is pushing ahead with hopes of creating a mechanism to allow regions to transfer money from their respective budgets to each other. Doing so would circumvent MinFin’s role as mediator for federal transfers and wedge MinEkonomiki into more projects as Oreshkin decries the heavy burden unfairly placed on regional governments by the center. Unfortunately, no one benefits from rational concessions reform except the average Russian or international investors who will never receive much in the way of federal wealth, lest the national looting machine be smashed by reform or grabbed by outside actors like China.
Oreshkin’s development dreams — unrealistic and self-serving as they are — were arrested along with Ulyukayev as his hand clings ever more wearily to a till he barely commands. No one should underestimate the power that seemingly trivial developments in the regions can play in fights for power over Russia’s rents while figures like Sechin seek further expansion and Siluanov acts as Putin’s budget enforcer.
Nicholas Trickett received a B.A. in Comparative Literature and Philosophy from Haverford College and a M.A. in Russia and Eurasian Studies from the European University in St. Petersburg. He focuses on Russia’s political economy through the lens of oil, gas, and infrastructure with a particular interest in the impact of Sino-Russian relations on political economy across the Post-Soviet space. He likes trains too much.