Investing in Infrastructure Is the Way to Go in Times of Crisis

During the Great Depression, the United States softened the blow by focusing on building infrastructure, primarily roads. Caught in a financial crisis, Russia decided to take the same path by defining a new transport strategy, a concept outlining the development of the country’s road system until 2030. In a position to work out a long-term infrastructure development project, Russia left the bulk of the project’s financing to non-budget sources. This, experts say, could doom the Kremlin’s latest ambitious plan to fail.

The program targets the woes of the Russian transport system that sting the most. Of these there are plenty, starting from the poor quality of existing roads, which directly or indirectly led to the deaths of over 33,000 people last year, to the inaccessibility of about 50,000 localities that don’t have yearlong access to roads, leaving about five million people without quality transportation. The transport system is also getting worn out, with 29 percent of federal roads overloaded.

While presenting the new strategy in Novosibirsk in October, Prime Minster Vladimir Putin touched upon these aspects, stating that the Russian transport system “wasn’t integrated enough” and that Russia’s transit potential had to be taken advantage of. Logistic expenses will thus be cut from the current 20 percent to 13 percent, according to RBC News.

If everything is put into practice, the number of roads built and repaired in the next six years will be 2.5 times greater than all that was done over the past eight years. Ultimately, passenger turnover will grow more than twofold, and freight turnover by 1.8 times by 2030. Road density will go up almost twice, to ten kilometers of roads per 1,000 people.

The new routes will connect Europe and Western China and allow for the development of new territories and mineral deposits, producing a positive economic effect. Obviously, the project will call for extensive funding. The expenses are estimated to reach over $6 trillion during the next 21 years. “There could be questions whether it would be possible because of the financial crisis, but building roads will help create economic activity where it was not taking place before; investing into infrastructure is always the way to go in times of crisis and the government understands that,” said the General Director of a road construction research institute GiprodorNII Boris Gukailo.

While a large part of the funds will come from the federal and local budgets, almost four trillion would have to be provided by non-budget sources, including private investors within the so-called “public-private partnership” through concession agreements. This is where things get tricky. “I think it’s more like a look past the horizon, the proportion between public and non-budget financing we saw in this strategy is inadequate. Roads and infrastructure should be a purely state project, and the government should cover at least 95 percent of expenses,” said the First Vice President of the International Transport Academy Viktor Dosenko. “We’re talking about long-term money and nobody can be sure they’ll even get that back. Looking at the history I cannot see how private financiers will be participating,” he added.

The first stage of the project will require building and restoring about 8,000 kilometers of federal public roads and 1,900 kilometers of federal toll roads. After 2015, the emphasis on toll roads will increase.

Russia opened its first commercial road at the start of this month, a 5.6 kilometer-long route in St. Petersburg, which is a small part of a 46-kilometer-long eight lane highway with a carrying capacity of almost 100 thousand cars per day. However, the city government found it hard to attract enough funding, and the projected financing could be cut for 2009. Payoff periods for toll roads can reach over 20 years, making it a very questionable investment.

Other transportation projects don’t seem too attractive to private investors, who, according to the Rossiyskaya Gazeta daily, spent just $8 billion in 2006 on transportation, including the investments made by the Russian Railroads. “Even if you look at the first project in St. Petersburg, they’re already struggling with private funding,” said Dosenko. He cites China as an example where road building has been one of the key projects financed by the government. The rate of road building there jumped from 9,000 kilometers in 2000 to as much as 47,000 in 2007, while Russia plans to be building around 18,000 until 2015. “It is the same in European countries where the government always does it all by itself,” said Dosenko.

In this case, businesses have to contribute through using these roads to run new projects, build cities, and use them as transit routes while avoiding investing directly into road construction. “If we think private investment will be heavy, we’re fooling ourselves and we’re fooling the public,” said Dosenko. “I doubt that this project will not fail; this strategy is not exactly right.”

By Sergei Balashov

Source >  Russia Profile | nov 13

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