Project finance mechanism for investment projects in Russia’s priority industries

Context

The Factory is a project finance mechanism for investment projects in Russia’s priority industries, which include manufacturing, heavy engineering, nuclear industries, infrastructure, agriculture, healthcare, and information and communication technology. The mechanism allows borrowers to obtain financing under syndicated loan (credit) agreements to deliver state-backed infrastructure projects.

Problem

• The Factory is a project finance mechanism for investment projects in Russia’s priority industries, which include manufacturing, heavy engineering, nuclear industries, infrastructure, agriculture, healthcare, and information and communication technology.
• The mechanism allows borrowers to obtain financing under syndicated loan (credit) agreements to deliver state-backed infrastructure projects.

Innovation

• National development institutions provided administrative and financial support.
• Government subsidies were provided to borrowers and lenders for interest risk hedging.
• A government targeted guarantee was used to reduce financing costs and mitigate risks of investors in bonds issued to finance infrastructure projects.
• Special procedures were developed to calculate Russian credit institutions’ capital adequacy ratio, and to establish reserves for loans and credits.

Stakeholders involved

• VEB.RF: Factory operator
• Economy Ministry: Factory supervisor and chief manager of the government subsidy
• PFF SPV1: Issuer of government-backed bonds
• Ministry of Finance: Issuer of a government guarantee and grantor of the subsidy
• Factory participants: Lenders, project initiators and direct investment funds
• Central Bank: A special procedure to govern commercial banks related to Factory project lending.

Timeline

Results and impact

• For the state, the Factory helped stimulate economic growth through the implementation of new projects, increases in the availability of debt financing for organisations implementing investment projects, and introduction of best practices in financing investment projects.
• For borrowers, the Factory allowed for lengthening financing terms and increasing the volume of lending at a floating rate, as well as reducing the total cost of financing and securing the key rate due to government subsidies throughout the entire loan term.
• For banks, the Factory allowed for reducing risks by attracting additional participants to finance projects and develop the institution of syndicated lending based on Russian law.
• For investors in bonds, the Factory offered a reliable and liquid instrument for investing funds with the possibility of indirect investments in infrastructure.
• A project that has benefitted from the Project Finance Factory is the circa USD450 million Ufa Eastern Toll Road connecting the city of Ufa with the M-5 federal highway. Debt financing of USD150 million was provided under the Factory.

Key lessons learnt

• It is necessary to make project financing a broadly available and widely used investment instrument yet take into consideration the fact that the requirements to obtain the financing should be set at a reasonably high level to avoid extreme exposure to contingent liabilities
• Applying government support mechanisms required for a specific project (e.g. umbrella state guarantees) can provide protection against a deteriorating macroeconomic environment
• The launch of a Project Finance Factory provides for expertise and monitoring to reduce risks during the implementation phase.