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About the project

InfraOne Research prepared the following analytical review, "Infrastructure – 2025: Challenges and Prospects" for the XXIV St. Petersburg International Economic Forum. The paper deals with different developmental scenarios for industry within the next four years as well as possible obstacles. InfraOne Research has also analyzed current federal and regional governmental infrastructural plans.

About InfraOne Research

InfraOne Research is the research team of InfraOne investment company. The team provides independent analysis of all significant investment plans, projects, and events related to different types of infrastructure. This includes projects in which InfraOne acts as an organizer, investment agent, and investment counsel for any state or private party, as well as investor. The research includes only project information that is available to the public.

All materials published by InfraOne Research comply with the independence principle for analytical judgments. InfraOne Research's opinion may differ from that of InfraOne.

The company publishes its research to inform the market on topical infrastructure investment issues. This represents neither an advertisement nor offer.

Authors

Alexandra Galaktionova
Alexey Zhundrikov
Ekaterina Yakunina
Marina Fomina
Galina Bartseva
Anastasia Yakovlevskaya

InfraOne Research | the research team of Group InfraOne

Acknowledgements

The authors wish to express their gratitude to the experts working for federal and regional authorities; the investment, banking and financial community, project participants; and everyone else who contributed to this review or its parts by sharing their professional experience and opinions through interviews, surveys, and brainstorming sessions.

Design and code by Yaroslav Bragin and Igor Ukharov

Data collection by Dmitry Arsenievich

Production by Darina Badmaeva

You can find additional analytical materials from the research team of InfraOne Research at infraone.ru in the Analytics section.

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Русская версия
EXCLUSIVELY FOR XXIV ST. PETERSBURG INTERNATIONAL ECONOMIC FORUM
Infrastructure
2025
Challenges and Prospects
How will
‍infrastructure
develop in the next
four years?
What projects do
the state and private investors plan
to launch?
What
challenges
can
the industry face?

The COVID-19 pandemic has affected not only the lives and welfare of millions of people around the world but also the economy and its infrastructure sector. For example, telecommunications, IT and renewable energy received a major boost. Air transportation, on the contrary, had a tough time so its pace of development will probably slow down in the next few years.

We analyzed how these processes had affected Russian infrastructure projects and whether the state has revised its pre-pandemic plans. Finally we predicted what situation will be in the industry by 2025 and what projects can help its development.

Transport infrastructure

During the pandemic

We think that road transport gains the most from the new order out of all transportation sectors. Budget investments in the road sector grew both at the regional and federal levels increasing by 12% to 846 billion rubles in 2020.

Almost 69% of road investments in 2020 (580.5 billion rubles) were made at the regional level, and their volume grew the most over the year – by 13.1%. Federal investments increased by 8.7%, to 264.7 billion rubles.

Actual and planned budget expenditures for the Safe and High-Quality Roads national project in 2019-2024

* Expenditures for the national project in accordance with its plan, dated 24 December 2018.

** Expenditures for the national project in accordance with the federal budget law for 2020 and the planning period 2021-2022.

*** Expenditures for the national project in accordance with the federal budget law for 2021 and the planning period 2022‑2023.

Sources: Integrated Portal for Budget System of Russia, plan of the national project Safe and High-Quality Roads, federal budget data, analysis and calculations by InfraOne Research

The company Russian Railways planned to invest 821 billion rubles in its development program. However, the pandemic forced to cut down the initial budget by 90 billion rubles.

According to the Federal Air Transport Agency, in 2020 passenger traffic dropped by 41% to 129.6 million people at domestic airports.

Meanwhile, railways investment program was forced to be reduced by almost 11% and funds had to be raised via perpetual bonds. Although air transportation suffered the most from the restrictions only several airport projects were postponed. Private investors actively support the building of new seaports. However the government is concerned about the investors’ interest swings that are sometimes caused by the need to develop other infrastructure sectors.

Concerning urban transport only major cities and regions (or those that receive federal subsidies) can afford renewal and development of this type of infrastructure as was the case before the pandemic.

Expected progress by 2025

Federal and regional governments alone can invest from 3.75 to 4.15 trillion rubles in road transport by 2025. Air and port sectors are likely to be hit by the negative impact of the crisis. In the first case, renovation of fewer airports (58 instead of 66) will be financed from the federal budget. Seaports can expect no reduction in investment (cargo tonnage will reach 1.3 million by 2023 as planned) though some issues with its facilities loading may occur.

Traffic at Russian seaports in 2015-2020

Sources: Association of Sea Trade Ports of Russia,The Federal Agency for Maritime and River Transport, analysis by InfraOne Research

The government plans to invest 780 billion rubles in public transport in the next four years. By comparison, the first stage of Baikal-Amur Mainline and the Trans-Siberian Railway modernization (during 2013-2021) costs 520 billion rubles.

In the railway sector, the government will focus on the second stage of the Baikal-Amur Mainline and the Trans-Siberian Railway modernization. But the required rate of budget expenditures (160-180 billion rubles annually) is twice the normal rate and may be limited by construction capacity shortage. The government is also considering large-scale plans to upgrade public transport, but federal investments have not been sufficient enough so far (up to 5 billion rubles per year).

Energy infrastructure

During the pandemic

In 2020 electricity consumption in Russia decreased by 2.3% to 1.034 trillion kWh. This turned out to be even less than the Ministry of Energy had expected. In April 2020 it predicted a decrease at the level of 3.6% in the optimistic scenario for stressful events.

Despite a general drop in energy consumption the energy sector still had its 'ups' in 2020. The year set a new record for commissioning of renewable energy sources (RES) with total capacity of solar, wind and small hydroelectric power plants reaching 1.2 GW. Their power generation almost doubled to 2.3 billion kWh. The economic crisis did not disrupt programs for repairing power plants. As for distribution networks the plans were even exceeded.

Expected progress by 2025

Total RES capacity could increase by 2.5-2.6% to 6.5 GW by 2025. Thermal power plants are in a complicated situation with generation decreasing and facilities rapidly growing obsolete. Given the opportunity less than 8% of facilities will be replaced and renovated (up to 13 GW) til 2025.

Dynamics of RES power generation in Russia from 2014-2020

Sources: Ministry of Energy of Russia, NP Market Council

Social infrastructure

During the pandemic

Federal and regional investments in social infrastructure increased significantly during the pandemic: for example, in healthcare — growing by over 42% (to 162 billion rubles in 2020), in education — by almost 12% (to 345 billion rubles), in the cultural sphere – by 17.4% (up to 66.6 billion rubles), and in sports — by 12.5% ​​(up to 88.3 billion rubles). In 2020 the authorities continued to implement public-private partnerships for social (mainly sports and education) facilities.

Expected progress by 2025

The government has ambitious plans for the sector in the next few years. It aims to modernize primary health care infrastructure, eliminate kindergartens shortages and create nearly 1.2 million new places in schools, and build new campuses for universities, sports and cultural facilities. Although budget social infrastructure expenditures could reach about 2.2-2.7 trillion rubles by 2025, we believe that the state will not be able to successfully implement projects without mobilizing private funds.

The Ministry of Education intends to build more than 1,900 new schools to accomodate 1.2 million students by 2025. According to our estimates, this may require investments of at least 1.2 trillion rubles. However, total investment in the "Education" national project, which is not limited to spending on school infrastructure alone, will not exceed 500-560 billion rubles in the next three years. Even if the federal government delegates this task to regional authorities, it will take 6-7 years to build the schools at current rate of expenditure.

Federal and regional budget expenditures dynamics in the social infrastructure in 2015-2020

Sources: The Federal Treasury, analysis by InfraOne Research

Utilities infrastructure

During the pandemic

The volume of federal and regional budget investments in utilities infrastructure in 2020 increased by 7.7 % to 292.8 billion rubles. Despite the fact that this level has been rising for two years in a row, investments are still lower than in 2015 and 2016 (298.6 billion rubles and 305.8 billion rubles, respectively).

Although investments in utilities infrastructure did not decrease over the year (about 300 billion rubles from the federal and regional budgets), they are still lower than real need for investments (over 550 billion rubles annually). PPP-projects have not solved this problem completely. Investments reached 70-75 billion rubles in the best years that were not enough to cover the investment gap. Utility companies cannot invest in the sector's development due to low profitability.

Expected progress by 2025

About 46% of networks exceeded their service life and fail to meet standards. While the minimal network renovation rate should be 3% the real rate is only slightly more than 1%, and for wastewater disposal systems it is less than 0.5%.

For infrastructure modernization  the rate of utility networks replacement must be increased: central heating requires modernization at twice its current rate (about 4% of its current volume), while water supply and wastewater disposal systems require modernization at five times their current rate (about 3%). We believe that the situation will not improve significantly by 2025 unless systemic steps are undertaken, tariff policies are changed to promote infrastructure modernization in remote areas.

According to the draft of the development strategy through 2035, the rate of replacement of central heating networks, which are currently worn out by more than 58%, amounted to just 2% of the total network length over the past few years. In other words, it will take 50 years to fully replace them, while in developed countries they are replaced in 25-30 years after launch.

Federal and regional budget expenditures dynamics in utility sector between 2015-2020

Sources: The Federal Treasury, analysis by InfraOne Research

Telecommunication
and IT infrastructure

During the pandemic

As with social infrastructure, telecommunication technology received increased attention from authorities in 2020. Despite repeated anti-crisis budgetary reconsiderations in 2020 the government invested 60% more in federal projects related to digitalization than the year before (around 149 billion rubles). In this context companies in this sector got nearly 380 billion rubles of additional revenues, more than 10% of their annual returns.

Expected progress by 2025

In the next three years the annual “digital budget” will remain high – from 195 billion rubles to nearly 230 billion rubles; this will primarily go towards funding governmental systems, digital security and general infrastructure. Therefore, the industry will continue to require private investments in cross-sector projects (e.g. transportation, healthcare, and smart urban improvement) until at least 2025.

In total, a sum of 194.8 billion rubles is planned to invest in eleven "digital" federal projects in 2021, including 157 billion rubles as part of the Digital Economy national project. That is 30% higher than the respective actual costs sustained in 2020.

It is expected that the industry will continue to receive increased public funding in the coming years: in 2022 and 2023 it should reach 228 billion rubles and 208 billion rubles, respectively. Nearly half of the sum (111 billion rubles and 96.5 billion rubles) should be invested in the federal project on Digital Public Management.

Federal expenditures distribution for "digital" initiatives according to the May Decree (2019-2023)

Funding of the federal 'digital' initiatives allocated in the three-year budget law.

Sources: Integrated Portal for Budget System of Russia, Federal Budget, calculations and analysis by InfraOne Research