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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 Development
Requirements for obtaining IfD funding1 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 fund
100% – 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 efficiency
Real GRP
Financial efficiency
NPV>0, IRR>WACC
Budget efficiency
Discounted 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
