Investing in Black Hole

The government and experts believe that private investments are able to drive development of the housing and utilities sector. To achieve this, some legislative changes are implemented on the federal level. But investors are still discouraged by the lack of essential guarantees of return on investment provided by the state.

According to the estimates by the Ministry of Construction, Housing and Utilities of the Russian Federation, the amount of investments in public utilities in 2015 will reach 130 bln rubles, whereof 25 bln rubles will be borrowed. At the same time, according to Olga Storozhenko, acting head of consulting department at the Institute for Enterprise Issues, from 70% to 85% of all housing and utility objects are under the economic jurisdiction of state and municipal unitary enterprises. "Their performance is mostly low and is characterized by cost increases and loss of service quality. The average depreciation level of fixed assets in the housing and utility industry in Russia exceeds 60%," explained the expert. She added that, according to the estimates by the Ministry of Construction, the annually required costs for modernization of utility infrastructure are around 500 bln rubles. Attraction of the necessary financing via private investments will help to increase both the efficiency of the invested capital usage and the quality of services provided to population.
Among other factors obstructing investments into the housing and utilities sector, Olga Storozhenko named crude rates calculation scheme, high wear level of fixed assets and subsequently high level of investments needed, long payback period for investment capital, poor payment discipline of consumers, etc.
It has to be said that in the last 18 months the Russian government took a number of steps to increase the rate of private investments to the housing and utilities sector. For example, since January 1, 2014, amendments to the federal law "On Concession Agreements" came into effect. They established new rules of tendering for conclusion of concession agreements concerning water, sanitation and heat supply facilities. Changes to the pricing procedure in different housing and utility sectors followed.  
A significant change was the launch by the Russian government of two new tools to support the housing and utilities sector: co-funding of projects in small towns and interest rate subsidies for loans taken in order to modernize housing and utility objects. Andrey Chibis, Deputy Minister for Construction, Housing and Utilities of the Russian Federation, says that housing and utilities industry is a market with an annual turnover of more than 4 bln rubles. The subsidy mechanism for interest rates up to 12 pct. p.a. on loans, obtained by resource supplying organizations, will let them cut borrowing costs and expenses of private investors during implementation of investment projects. As Mr. Chibis assures, the new subsidy mechanism will help to increase the number of utility facilities granted a concession. More importantly, according to him, some amendments to the law were introduced, which let the government start funding a part of concession costs in municipalities with population up to 250,000 people.
For his part, Andrey Lebedev, CEO of GC "Krikunov & Partners", believes that rates and government support (subsidies) are an investor's basis of income. "Lack of investors' interest for small towns is driven by low paying capacity of their population and long payback period. Rates increase can get investors interested in a number of regions, but the low level of consumer paying capacity scales up the risks. A significant increase of rates will reduce payment collection. This is why rates should be balanced with due account for each region's specifics, as well as investors must have long-term payback guarantees, including at the expense of municipal budgets," said the expert.
He believes that the measures elaborated by the government of the Russian Federation, particularly the changes in the subsidy mechanism, appear to be quite effective, though they do not fully eliminate the above risks. "At the same time, the legislative changes securing the opportunity of granting a concession for unprofitable and ineffective business, are disputable: there won't be any real interest from investors' side in such companies without serious payback guarantees, provided by the government," concluded Andrey Lebedev.

Opinion

Olga Storozhenko, acting head of consulting department at the Institute for Enterprise Issues:

- The subsidy mechanism for interest rates up to 12 pct. p.a. on loans, obtained by resource supplying organizations, will decrease investors' expenses, thus helping to attract not only big corporations, but also smaller companies to invest in the housing and utilities industry.
The changes, which allow the Russian government to compensate a part of concession costs in municipalities with population up to 250,000 people, will motivate investors to take part in the development of this sector in small and medium-sized towns. Today lack of investors' interest in such towns is the major problem that we face in attraction of investments to the housing and utilities industry. It is mainly caused by significant risks of investments non-repayment.