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Roads need speed and investments

The RF Ministry of Transport welcomes private invetros to take part in unprecedented russian projects.

“Transport may bring more money than oil,” – states Igor Levitin, the Russian Minister of Transport. Whatever strange this statement could sound, Mr. Levitin does not exaggerate at all. According to estimation made by analysts, Russia could draw at least $ 10 billion USD in annual profit from rendering transportation services to foreign partners. However, only 5 – 7% of this transit potential is really used.

The weakest link of Russia` s transport infrastructure is its motor roads. Suffice it to say that none of the 16 major Russian sea ports has a direct access to the network of federal motor roads.

The total length of federal motor roads in Russia amounts to 57 thousand km, i.e. about 5% of the motor road network currently existing in Russia. It is the federal motor roads which ensure about 50% of the entire Russia` s cargo turnover. In spite of the federal status, quality of these motor roads is pretty poor. According to data of the RF Ministry of Transport about 60% of the federal roads fail to meet requirements of modern technical standards, while one third of them need urgent reconstruction and major repair.

Today the motor road network in Russia expands at a very slow pace, with the annual overall road length increment not exceeding a basis point of its current mileage. In the mean time, annual growth in the number of cars appearing on the roads exceeds the worst forecasts. Thus, in Moscow since 1998 the number of cars has tripled. On the national scale the fleet of cars expands pretty quickly as well at a rate of 7-10% a year. As a result traffic frequency along Russia` s major highways has more than doubled. Key motor road junctions are constantly clogged with many kilometers long traffic jams. Drivers waste their time while consignees and freight forwarders incur significant losses. The total sum of losses and missed profits due to poor development of Russia` s motor road network and its poor technical conditions is estimated at $ 15-18 billion USD.

“If a country relaxes its attention to the condition of its roads it will inevitably be faced with a crisis,” – states Nikolai Seregin, the Chairman of the Board of Directors of RusTechConsulting company operating in the field of attracting private investments to new road construction projects. In his opinion a crisis caused by poor quality of motor roads occurs every 5 – 7 years and one of these moments is now looming again.

In Mr. Seregin` s opinion one of the key reasons for a new road crisis is the abortive decision to abolish starting from the year 2000 regional road funds, which used to accumulate target oriented money held specifically for the purpose of repair and construction of motor roads. Now all road construction and repair works are financed from the federal budget as general costs. In 2000 only $4 billion USD were allotted for this purpose, with other $6 billion USD budgeted for 2006. However, with the stronger Ruble and higher inflation in 2006 actual investments into motor road maintenance will remain at the previous level.

Apparently, Russia will keep on suffering from lack of funds required to maintain normal functioning of its motor road network. According to Oleg Belozerov, the head of the RF Federal Road Department, repair and maintenance operations required for federal roads alone are now estimated at $ 6.5 billion USD. As the same time Alexander Misharin, deputy minister of the RF Transport Minister, has to remind that now there are more than 8 thousand kilometers of uncompleted roads in Russia. At the offered level of financing these objects could be completed not earlier than in five years.

Martin Shakkum, the chairman of the RF parliamentary committee on industry, notes a lower share of road facilities in the Russia` s DGP. Thus, in 2000 this share totaled 2.9 % while in 2004 it did not exceed 1.4 %. According to Mr. Shakkum` s data, today new sections of motor roads are put into operation half as much as in 1990.

The recent estimation of Russia` s actual demand for motor roads shows that assuming the same road completion rate Russia will be able to construct a well-developed motor road network not earlier than in the beginning of the XXII century.

Nobody wants to wait for another century. Therefore, today while reconsidering priorities the RF Transport Ministry has come up with a conceptual program on “Development of Transport Service Export in Russia in 2006-2010”. According to this program, the main preference is given to the projects which can provide maximum system effect. First of all it deals with junctions of maximum cargo traffic concentration and road sections where routs of main international transport corridors coincide. It is these areas, where the program implies to arrange modern logistics complexes, to develop sea port infrastructures and to construct highways, bridges and tunnels.

In Mr. Misharin` s opinion implementation of the projects can be pushed on by way of attracting private investments. According to him a special law has been drafted with the main focus on construction of toll motorways in Russia. This law distinguishes three groups of objects, namely:

  • high traffic concentration highways;
  • “development motorways” to be build specifically to animate economy of the regions and for the purpose of development of remote deposits;
  • highways to bypass “bottlenecks” of the motorway network.

The first group of the objects features high profitability, while the second one is very important in terms of national economy development. The third group combines both high profitability and a social and economic effect and is therefore considered the most promising one.

Debottlenecking of gateways and airport access roads is of great importance for big cities including Moscow while regions are mostly interested in building new bridges and tunnels. Thus, for example there are still only few bridges to cross the Volga River.

The RF Transport Ministry has formed a list of 150 major investment projects of high profitability to offer them to attention of private investors.  Specialists note that a new law “On Concessions” may significantly help involve private investors, including foreign ones, into implementation of such projects. It is this law which will permit the state not only to attract private business but also to offer preferences for participants of such activity.

The RF Transport Ministry co-jointly with the RF Ministry for Economic Development and Trade are developing standard concession agreements specifically for objects relating to different infrastructures. It is supposed that there will be thirty standard concession agreements offered in the field of transport. To date some pilot projects have been outlined, including construction of a new Sr. Petersburg-Moscow highway (design length is 650 km at an average traffic speed of 150 km/h), construction of the Central Ring Road in the Moscow Area (design length is 443 km) and a number of big bridges Рё river crossings.

It is supposed that most projects in the field of motor way construction should be financed through mechanisms of partnership between the state and the private business. It is very possible that many roads to be constructed in such a way will become toll roads to provide return on investments not only for private companies but for the federal budget as well.

In the opinion of RusTechConsulting` s specialists 60-70% of investments in such projects should be provided by the state. To represent state interests in these projects an Investment Fund is being established now. It is also supposed that this fund will become a surety for loans to be arranged by commercial banks. Leadership of RusTechConsulting assures that major foreign banks like Deutsche Bank have already expressed their willingness to work on such conditions.

It is very likely that a consortium of concessionaires can be established to unite major construction companies, banks, financial and industrial groups, etc. However, attraction of private investments only is not enough as infrastructural objects feature a very long payback period (based on international experience it is about 20-30 years). Therefore, state investments will be crucial for such projects. It looks like at the initial stage the state will have to take an active part in financing not only construction but also maintenance of such toll roads. The matter is that as a rule immediately after putting a newly build road section into operation traffic frequency and, consequently, profits from this traffic prove very low so that private investors will incur very high losses.

In principle leadership of the RF Ministry of Transport supports this opinion. Alexander Misharin, deputy minister of the RF Transport Minister cited several scenarios of cooperation between the state and private businesses:

  • co-joint financing of especially important transport infrastructure projects (in the form of direct financing and warranties), including participation in shareholder equities of managing companies;
  • issue of target oriented bonds secured by state guaranties;
  • providing investors with the right to lease lands adjacent to transport infrastructure objects under construction.

Moreover, Mr. Misharin emphasizes his ministry` s intention to facilitate in every possible way mitigation of private investors` risks. According to Mr. Misharin, the state may guarantee servicing of the debt during the entire construction period, given profitability of the project, and subsidize interest rates until 100% redemption, if it deals with projects which are of great socially importance.

Sergey Aristov, another deputy minister, believes that there is nothing more attractive in the world practice than the concession mechanism. “Right now we have got a number of very interesting projects in the field of transport where we can apply a mechanism of partnership between the state and the private business”. However, there is one thing the RF Ministry of Transport is not satisfied with for the moment that is unclear wording of the law itself. According to Mr. Aristov, the law leaves too much free-play for commitments between partners. On one hand, freedom is good on the other hand it is not quite clear how this freedom can be used in reality. “Sure, this law will be perfected, – says Mr. Aristov, – Today our main task in to set up clear landmarks for the market, to clarify the stand of the state and to show which protection can be provided for private investments”.

Michael Fradkov, Russian Prime Minister, also supports the idea of the state – business partnership in the field of road construction. “Though this idea can not be considered a remedy against all problems of the transport infrastructure, however, if used properly, this approach can help increase an inflow of private investments into this sector of Russia` s economy,” – says Prime Minster.

Today business is ready to support new initiatives of the state. Igor Levitin, the Russian Minister of Transport, is absolutely confident that there will be no end to investors. Currently independent analysts estimate the potential demand for investments in this sector at an imposing sum of $ 10–12 billion USD a year.

By Vladimir Shlyomin

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