The role of State institutions in improving the quality of infrastructure

Session "Quality Infrastructure Projects: How Are Investor Attitudes Changing?" at Petersburg International Economic Forum 2021

The expert opinion provides an overview of the key factors for the development of high-quality infrastructure and bridging the infrastructure gap. The experience of successful countries shows that goal requires the implementation of effective economic policies and the development of an institutional environment. It is important for attracting private players to the industry, who, along with financial capital, can bring project management experience and innovations.

Keywords. Public-private partnerships, investment climate, infrastructure development, economic growth

The importance of quality infrastructure for ensuring sustainable economic growth has been justified both at the theoretical level and in the process of empirical research (as example, the following applied research can be mentioned: Revoltella D., Brutscher P., Tsiotras A., Weiss C. Infrastructure Investment in Europe and International Competitiveness. European Investment Bank, 2016). Quality infrastructure is one of the UN Sustainable Development Goals (approved by the UN General Assembly in 2015 as part of "The 2030 Agenda for Sustainable Development"). The level of infrastructure development is included in the leading ratings of global competitiveness (for example, the World Economic Forum's Global Competitiveness Report and the Institute of Management Development, IMD World Competitiveness Rankings).

In recent decades, in most countries, due to deregulation and the opening of borders, international trade has grown at a pace that is significantly faster than the development of infrastructure complex. In many countries that remained closed no internal resources for upgrading infrastructure facilities are available. As a result, the infrastructure gap has grown significantly in countries belonging to completely different blocs.

These problems of infrastructure development force us to return to the question that has worried many generations of economists and is associated with understanding the main success factors for stable infrastructure development, which in turn is one of the critical factors that ensure sustainable economic growth. In our times, in the context of the Sustainable Development Goals, the role of the State and State institutions is gaining new importance.

Key factors for infrastructure development

The results of the study conducted by the author, which is devoted to a comparative analysis of various models of infrastructure development using public-private partnerships in advanced countries where the infrastructure gap is insignificant (Great Britain, France, Canada, etc.), allow us to state that the successful infrastructure development of countries is based on three key elements:

1.?????Balanced State infrastructure policy

2.?????Effective public institutions

3.?????High professionalism of infrastructure market participants, both public and private

All these elements are directly or indirectly related to the fact that the infrastructure complex is a complicated open technical and economic system in which various parties, both public and private, participate. Currently, for objective reasons, in most countries there is no possibility of financing infrastructure projects only from public sources. In the last 20 years many countries have adopted the New Public Management policy, which has increased the importance of various public-private partnership (PPP) instruments in the development of the infrastructure complex. Such development, on the one hand, allowed to attract significant private capital to the public infrastructure sector, and on the other hand, had a positive impact on the development of the institutional environment.

During the session "Quality Infrastructure Projects: How Are Investor Attitudes Changing?" within the St. Petersburg International Economic Forum held from 2nd to 5th June 2021 S. V. Yachevskaya, Deputy Chairman, member of the Management Board of VEB, presented the IRIIS project quality assessment / certification system aimed at increasing the number of high-quality infrastructure projects in Russia. The IRIIS methodology is based on a comprehensive project assessment based on the ESG components (Ecology. Social. Governance), which is a global trend, especially when it comes to "green" and "sustainable" investments. As a rule, this assessment is carried out when the project claims to be a "green" or "sustainable" project. Such projects can attract financing on more favorable terms-either due to the availability of State support, or due to objectively lower risks. The initiative of the State development institute aimed at developing and implementing a methodology for evaluating projects taking into account the best international practices, as well as at expanding the practice of sustainable investments in Russia through the mechanism of their evaluation according to ESG standards, deserves praise. At the same time, this is just one of many issues related to the development of infrastructure, without which it is impossible to achieve stated goals.

The role of economic policy in the development of quality infrastructure

International practice and recommendations of international financial institutions, including such reputable institutions as the World Bank, the European Bank for Reconstruction and Development, suggest that for the successful development of the infrastructure complex in modern conditions, an effective economic policy aimed at attracting private funds and innovations to the public infrastructure sector should be implemented. Taking into account the diametrically different nature of these actors and the objective complexity of their interaction, strategic questions about the role, place and relationship of State institutions and private parties in the infrastructure management process should be considered. The current state of affairs in this area in Russia suggests that these issues have not yet been fully resolved:

·????????there is no strategy for the development of public-private partnerships;

·????????a model of optimal risk distribution that takes into account the State interests has not been established;

there is no application of the model of intersectoral balances, which could show the effect of the development of infrastructure projects and thus improve the quality of their assessment; it deserves mentioning that the origins of this area of economic thought were created by Russian scientists (for example, V. K. Dmitriev, V. V. Leontiev, etc.) and this methodology found application in many foreign countries, including those that profess the principles of free market economy and" non-interference " of the state in economic life.

Effective institutions as an important component of the successful development of infrastructure complex

The second important set of issues that have a significant impact on the development of the infrastructure complex, regardless of the use of PPP mechanisms, is related to the effectiveness of market institutions in general. These issues are directly related to economic policy issues, are derived from them, but can be separated into a separate group, taking into account their applied nature and direct practical connection with the implemented infrastructure projects. The dependence of the level of economic well-being of countries from the quality of functioning of institutions was demonstrated in the work of another delegate of St. Petersburg International Economic Forum held in 2021, the world-famous American economist Daron Acemoglu "Why nations fail". Conclusions of D. Acemoglu are confirmed in practice in many countries, both rich and poor. This research can also be applied to the analysis of success factors for the development of an infrastructure complex using private investment. As the analysis of the data collected by the Global Infrastructure Hub portal shows (https://www.gihub.org/), the level of infrastructure development is higher in those countries where State regulation is more effective, the quality of planning is higher, the efficiency of procurement activities is higher, the level of development of financial markets as channels for cash flows to infrastructure is higher, the judicial system works better. Together, all these factors affects the activity of private investors and the quality of infrastructure. The infrastructure complex, being the basis for the development of the economy, cannot be separated from it.

The same applies to the public-private partnership program. Without strong and effective State institutions private investors will not invest in infrastructure, which is confirmed by the experience of Russia. As of the beginning of 2020 the volume of obligations under PPP projects in Russia (mainly in the form of concessions) amounted to 1.6% of GDP (for comparison - in the UK – 6.6%, in Australia and New Zealand – 6.9%, in Canada – 8.1%) (source - the Ministry of Economic Development of the Russian Federation. On the development of public-private partnership in the Russian Federation. Information and Analytical review, 2020, p. 2). Despite the seemingly huge number of such projects, more than 3000, the volume of investments associated with private investments is still not large. Thus, according to the Global Infra Hub portal, for the 5 years preceding 2018, the average share of private investment in economic infrastructure was around 2% (taking into account the fact that the lion's share of funds invested through PPP projects is provided by three major State-controlled banks). Majority of large PPP projects (over 1 billion rubles) is implemented in four leading economic regions, in 20 regions such projects are not implemented in principle, and in the rest of regions they are implemented on a one-time basis. 20 largest projects by value account for around 60% of investments in all PPP projects.?These results do not allow us to highly evaluate neither the State policy in the field of infrastructure development nor the effectiveness of the functioning of State institutions that should have carried it out.

Despite already impressive experience in PPP developments in Russia (in part related to the concession model), no strong institutions that are engaged in the development of PPP in Russia on a regular basis were established. For example, the National PPP Center, despite its integration into the VEB.RF, does not have all the necessary powers to actively influence all related processes, including the selection of priority national projects. This differs from the experience of countries where private investments are actively attracted or have been attracted to infrastructure complex development (examples include activities of FIN INFRA center in France and Infrastructure and Projects Authority, IPA, the special division of the Treasury in the UK). Activity of PPP Center in Russia, despite the fairly high level of specialists who work there, is mainly aimed at popularizing the ideas of PPP through holding bright events, as well as working out individual legislative initiatives that do not always find their implementation and are drowned in the bureaucratic intricacies of various State departments. For instance, it took more than four years for proposed amendments to the legislation, which are regularly discussed in the expert community, and in fact are quite banal and simple, to be brought to a state of readiness for being adopted this fall (what was announced during the last St. Petersburg International Economic Forum by Deputy Minister of Economic Development of the Russian Federation I. E. Torosov, and before him was told several times by his predecessors).

The importance of improving the professional level of market participants

Finally, speaking about the development of the infrastructure complex, it is impossible not to draw attention to the need for a high professional level of the key participants in this process, both on the side of the State and among private individuals. The experience of countries that have successfully implemented public policies in the field of infrastructure development shows that much attention is paid to the question of training and retraining of personnel. Taking into account the complexity and novelty of many processes, especially for civil servants, experienced specialists who have experience in private organizations (investment banks, consulting firms, engineering companies) and are professionally engaged in investment process, are often attracted. This ensures the transfer of project management knowledge and best practices from successful organizations. In Russia this is also happening, but mainly at the federal level and not on the scale that could provide a breakthrough in this direction. On the contrary, when preparing regulatory legal acts, the legislator is driven by desire to standardize everything to the maximum in order to "simplify" the work of officials, especially at the regional level, assuming their low professional level.

It seems that in such an area as infrastructure project management, especially when it comes to risk assessment, excessive "standardization" does not allow us to take into account all the nuances of the projects being implemented. The work turns into a routine filling out of forms assigned by the higher level, and not into a conscious process aimed at achieving the best result. The detrimental nature of such policy can be demonstrated by the example of the poorly developed law №224-FZ of 13.07.2015 "On Public-Private Partnerships agreements, Municipal-Private Partnership agreements in the Russian Federation...", which involves calculating the comparative advantage for making a decision on the need to implement a project using the PPP model. The important Value for Money (VfM) tool, which is the basis for evaluating projects in terms of the added value they bring compared to the usual procurement of construction works, has been turned into a formal exercise that prevents the widespread use of PPP forms provided for by law. Moreover, as a result of this approach and under the influence of market participants, the legislator is in no hurry to introduce the VfM mechanism into the legislation on concession agreements, rightly fearing that this may have a negative impact on the already established market for concession agreements. In this regard, the society does not know how profitable it is for the State to use this PPP model in the implementation of infrastructure projects.

It is worth noting that in countries such as Canada and France, the calculation of the VfM is mandatory when deciding on the implementation of PPP projects. Neglect of these issues led the English model of PFI (Private Finance Initiative) to be canceled after a comprehensive analysis, despite the large volume of attracted private investment. In Russia the analysis of the profitability of concession agreements in comparison with the procurement of works was carried out only once by the Accounting Chamber in relation to the "pilot" projects of the State Corporation Rosavtodor (Accounting Chamber of the Russian Federation. Report on the results of the control event "Verification of the effectiveness of the application and implementation by the State Company "Russian Highways" of the concession agreements " Construction of the Moscow – Saint Petersburg high-speed highway?St. Petersburg on the section km 15-km 58" and "Construction of a new exit to the MKAD from the federal highway M-1 "Belarus" Moscow-Minsk (bypass of Odintsovo) in 2015-2019 and the expired period of 2020"). ?Many experts assessed conclusions of this report incomplete and biased. It can be concluded that there is obvious need to improve the level of professionalism of civil servants who are responsible for various issues of management and infrastructure complex.

To ensure the development of infrastructure at a new quality level it is not enough to limit ourselves to separate solutions, even if they expand the horizons of officials and market participants. It is necessary to address issues in a systematic manner, starting with the development of effective public policies and strategies aimed at achieving tangible results. In the field of infrastructure development, such results should be a reduction in the infrastructure gap and an improvement in the quality of infrastructure. In the current environment, when the level of the infrastructure gap is estimated to be one and a half times higher than the volume of all infrastructure investments (see, for example, the analysis of InfraONE on this issue), it is difficult to say that the introduction of a new verification system, even if it is progressive, will solve the strategic problems in these areas in a fundamental way. The effect may even be the opposite, since it aims to certify projects that meet the criteria set out in this methodology, which, despite the stated "voluntary nature", will mean the desire of different authorities to use this tool for all projects, taking into account the status of VEB.RF. As a result, with an already small number of infrastructure projects, there may be even less or it will take longer to launch them due to the need to meet the established criteria. As noted by the General Director of VTB Infrastructure Holding O. V. Pankratov, whose project was selected as a pilot for passing the IRIIS certification, the principles laid down in the methodology were previously applied by the bank in the evaluation and implementation of infrastructure projects. Whether those players who have not previously used these principles will be able to start using them is a big question related to their skill level.

These reflections lead to the realization of the need for systemic solutions of the State, without which calls for improving the quality of infrastructure and sustainable development will remain unfulfilled.