1. Financial Support of Regional Development in Russia Alexander Kovalevskiy Astana, May 2011

2. 2 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

3. 3  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

4. 4 Conditional subsidies  Subsidy - c onditional, 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

5. 5 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

6. 6 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

7. 7 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.

8. 8 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.

9. 9 State Institutes for Development Requirements 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 moneyFunding 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.

10. 10 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

11. 11 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)

12. 12 MOST VISIBLE PPP MECHANISMS Special economic zones Investment fund Vnesheconombank

13. 13 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

14. 14  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

15. 15 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

16. 16 INVESTMENT FUND Investment project Commercial part industry, housing, utilities, mining, tourism, agriculture, private infrastructure Infrastructural part Transportation Utilities Energy

17. 17 Commercial part 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

18. 18 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

19. 19 ‘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

20. 20 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.

21. 21 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.

22. 22 Special projects  APEC 2012  Huge federal investments to infrastructure  Gambling zones  Closing of gambling industry around the country  4 Gambling zone in border regions

23. 23 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

24. 24 THANK YOU! Contacts: kovalevskiy@budget-solution.ru http://www.budget-solution.ru/