Financial Support of Regional Development

in Russia

Alexander KovalevskiyAstana, May 2011

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CHANNELS FOR FUNDING REGIONAL ACTIVITIES

Intergovernmental grants Equalization grants (dotations) Balancing grants (dotations) Conditional subsidies

Till 2008– Fund for Regional Development Federal “goal-oriented” programs Federal investment program National Projects Sectoral Programs PPP mechanisms Special projects

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Direct public investment into property of other gov’t levels is forbidden

Financial support of investment from higher-level budgets can only come as a subsidy –

Budget Code, Art. 79

Direct federal subsidies to municipalities are not possible

Direct financial support: legal background

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Conditional subsidies

Subsidy - conditional, matching grant

Decision of RF President or RF Government– allocation of subsidies in Federal Investment Program managed by the Ministry of Economy, the Ministry of Regional Development and sectoral ministries

No competitive procedures and formal criteria

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Fund for Regional Development (till 2008)

Federal goal-oriented program “Closing the gaps in social and economic development among Russian Regions”

Evaluation of social and economic development of Russian regions (large number of indicators)

Contest of regional applications (evaluation of efficiency of investment projects offered for federal co-financing)

Sum of grant is proportional to a) population and b) variation in level of social and economic development

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Federal ‘goal-oriented’ programs FGP aim at development of selected (as a rule,

‘specific’ regions) –Chechnya, Ingushetiya, South of Russia, Kaliningrad oblast, Far East and East Baikal Region, Kurily Islands

FGP are managed by Ministry of Regional Development

FGP are inter-agency programs – a large number of federal ministries and agencies are involved in their implementation

No competitive procedures and formal criteria

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National projects and Sectoral Programmes

Investments into regional infrastructure Purchase of equipment for public service

providers Examples:

National Project “Education” – purchase of school buses for regions after closing of small rural schools. Criteria for grants allocations (e.g., number of students in closed small rural schools) were developed

Program “Modernization of Health” – equipment for hospitals.

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PPP Mechanisms State Institutes for Development

As a rule, IfDs are non-for-profit organizations. They are not concerned with maximization of profits. Rather they fund projects that may have important social effect.

The projects aim to support the development of the infrastructure and the human capital, new initiatives and budding technologies.

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State Institutes for DevelopmentRequirements for obtaining IfD funding

1 Co-financing of business

The willingness of business to invest (together with the state) is a criteria of a project’s efficiency; so the budget resources will not be wasted funding the inefficient projects.

2 Value for money Funding of the selected projects with the clear outcomes instead of “support” of an enterprise

3 Consequent «privatization»

As a project is successfully launched, IfD will aim to fully «privatize» it. This is a good stimulus for the project’s successful development.

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State Institutes for Development

IfDs Activities

 

SC Vnesh-econom-bank

SC Ros-techno-logii

JSC Russian venture Company

JSC Rosinfo-com-invest

JSC “Special economic zones”

JSC Rosagro-leasing

Agriculture            Industry            Woodworking            Economical infrastructure            Telecommunications            Environment            Energy sector and energy saving            

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State Institutes for Development

RF Investment Fund (infrastructure development)

SC Rosnanotech (nanotechnologies) SC Foundation for assistance in reform of

Housing and Utilities Sector JSC Agency for mortgage JSC Rosselkhozbank (agriculture)

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MOST VISIBLE PPP MECHANISMS

Special economic zones

Investment fund

Vnesheconombank

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Initially – competition of regions organized by Ministry of Economy. Starting 2009, SEZs can be created without competitive procedures

State support of SEZ Tax and customs

Tax reliefs on profit tax, corporate property tax, land tax, transportation tax

Protection from unfavorable legislative changes Reduced rent rates Reliefs in accounting Free customs zone regime (no custom duties and VAT for

imported goods)

Lower administrative barriers

SEZ could not cover more than part of one municipality

SPESIAL ECONOMIC ZONES

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SEZ creation (Competition) Gov’t regulation Agreement among the federation, the region and the

municipality

Funding Funding needs and property rights are described in the

agreement Funding needs are evaluated in the application JSC “OEZ” is managing company JSC “OEZ” and its subsidiaries build infrastructure

SEZ management SEZ is managed by federal authorities (MinEc)

SEZ CREATION PROCESS

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SEZ - current situation 24 SEZ 4 Industrial 4 innovative 13 recreational 3 ports

About USD 1,5 bln of state investments (USD 0,5 bln invested to industrial SEZ, USD 0,9 bln – innovative SEZ, USD 0,1 bln – recreational SEZ)

About USD 7 bln – investments of business

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INVESTMENT FUND

Investment project

Commercial part Infrastructural part

industry, housing, utilities, mining, tourism, agriculture,

private infrastructure

TransportationUtilitiesEnergy

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Commercialpart

Infrastructure

No less than 50% of total costs

Investment fund100% – Х%

Region and/or municipality -

Х%

For most regions Х is in 20-30% range

INVESTMENT FUND

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Competitive selection of regional projects (contest)

Investment Fund – Selection of Projects

Economic efficiencyReal GRP

Financial efficiencyNPV>0,

IRR>WACC

Budget efficiencyDiscounted tax

revenues > public investment

Social effects

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‘STRONG’ INVESTMENT PROJECTS Strong concept

Good idea Strong investors Relevant to urgent federal issues

Regional factor Support of authorities Serious regional issues involved

Quality of application Financial model and formal issues

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SC Vnesheconombank Vnesheconombank : Funding of business projects if guarantees by

RF subjects’ governments are issued

Period of implementation – about 5 years, investment cost is not less than RUR 2 bln. Vnesheconombank share can not be higher than 85%. The PPP projects have high priority.

Now VEB tries to consolidate small project at the municipal level into inter-municipal (regional) projects.

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Special projects

Sochi-2014, FIFA World Cup 2018

Example: Preparing to World Cup 2018, FIFA requirements

Federal Government– investment to road infrastructure (roads, airports, bridges etc.)

Regions and municipalities – investment to utilities and sport infrastructure

Business – investment to hotels, restaurants etc.

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Special projects

APEC 2012

Huge federal investments to infrastructure

Gambling zones

Closing of gambling industry around the country

4 Gambling zone in border regions

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Single industry towns’ support program

Single industry towns’ support program is managed by Minregion

Towns should develop so called complex investment plan (CIP) and complex modernization plan.

Federal co-financing to investment depends on evaluation of plans

Recommendation on CIPS’ development are available, but there ate no formal criteria of evaluation

There are more than 330 single industry or single enterprise towns in Russia

Most of them were affected by Global financial crisis

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THANK YOU!

Contacts:kovalevskiy@budget-solution.ruhttp://www.budget-solution.ru/