The "Coronavirus Crisis" year 2020 was not as hard for the infrastructure of the Far East as it might have been expected. The drop in passenger traffic was compensated by the positive dynamics of freight transportation, the first social bonds in the country were issued to implement projects in the Federal District, budget investments in infrastructure grew, albeit insignificantly, and the territory market of concessions and PPPs showed record growth.
The Far Eastern regions, however, were not able to escape their actual problems. The depreciation of their fixed assets risks crossing the 50% threshold soon, the industry's need for additional investment is slowly increasing, it still receives too little money from the budget, and the inflow of private capital is limited by the shortage of shovel-ready projects and the lack of experience in using of advanced investment instruments.
The Far East's special status at the federal level gives it a small advantage in the struggle for budget investments. Special tax treatments appeared in the District not long ago to make it possible to assess their effectiveness unambiguously. And other development mechanisms are not yet widespread here.
The infrastructure of the Far East is wearing out at a fast pace and risks crossing the 50% threshold for this indicator soon.
According to the Russian Statistics Committee (Rosstat), by early 2020 the depreciation of fixed assets in the FEFD regions reached 44.2%. This is lower than the national average (51.3%) and better than in all other districts, except the Central one (where the figure was 41.7%). However, the Far East is the first in the country in rate of infrastructure aging: since 2010 the wearing out level of its assets has increased by a record 15.3 p.p. against the national average of 5.6 p.p.
A noticeable role in the weak renewal of the Far Eastern infrastructure is played by the transportation and extractive industries, which are among the most important ones for this macroregion. They account for nearly half of the District's total fixed assets — 44.2% in 2019. According to our calculations, more than 10% of the infrastructure of these two industries is completely worn out.
The average depreciation of fixed assets in the FEFD for 2010–2017 is presented without data for Buryatia and Trans-Baikal Territory, which were included in the District in 2018.
■ for Russia ■ for FEFD
Sources: Rosstat data, analysis by InfraOne Research
The "Covid" year 2020 hit the country's transport sector, but the FEFD got over it better than other districts.
In 2020 the passenger traffic in the Far East fell by more than 40% in the aviation industry and by almost 25% in railroads. However, this is less than in another macroregions, and in the freight transportation industry the indicators were even positive unlike in the rest of the country. According to our calculations, in 2020 the volume of freight transported by air in the FEFD increased by more than 4%; by rail — by almost 1%; by roads — by more than 15%, and cargo transshipment in the Far Eastern basin ports increased by almost 5%. The drop in these figures in other districts ranged from 3% to almost 13% depending on the industry.
The infrastructure of the Far East still has little to gain from its priority status.
The Far East is on the list of priority geostrategic territories of the country and has a number of preferences in receiving federal support, it has its "own" strategy and state program, and in 2020 the government adopted a special national program for it — none of the federal districts has the same yet. However, all this has a small impact on the infrastructure. For example, according to our calculations, in 2020 the FEFD received about 17 billion rubles of federal infrastructure subsidies compared, for example, with almost 70 billion rubles that the government allocated to Crimea and Sevastopol.
Territories of Advanced Development (TAD) in the Far East considerably support the projects in resource-based industries, but their impact on the District’s economy as a whole is still ambiguous.
According to our estimates, the TAD residents have invested about 1.5 trillion rubles in their projects, and more than 70% is accounted for by the construction of facilities depend on the gas supply through the Power of Siberia pipeline. In total, investments in initiatives related to the extraction and processing of minerals accumulate 80% of the total investments of the TAD residents.
On the one hand, any project creates jobs, develops related infrastructure (roads, railways, energy facilities) and has other positive effects on the FEFD economy. Large-scale initiatives in the processing sphere also promote technology development in the industry and reduce the exports of raw materials with low added value. On the other hand, in 2018–2020 alone, the FEFD regions lost more than 8 billion rubles of their income, and we can see how small the share of TAD residents in regional budgets income is in comparison with their investments.
It might be too early to estimate the effectiveness of TADs. The first ones were created only six years ago, and their effect will not have been seen until 2025–2030. Moreover, the TAD residents had invested only 35% of the total amount of planned investments by the second half of 2021: many initiatives in different sectors of the economy are only being prepared for launching.
Data are provided on the amounts of corporate property tax and corporate income tax in connection with the application of tax exemptions and reduced tax rates for organizations — TAD residents in 2018–2020.
■ Kamchatka Territory ■ Khabarovsk Territory ■ Primorye Territory ■ Amur Region ■ Republic of Sakha (Yakutia) ■ Chukotka Autonomous Area ■ Trans-Baikal Territory ■ Sakhalin Region ■ Jewish Autonomous Region ■ Buryatia
Sources: Ministry of Finance data, calculations by InfraOne Research
Investment Protection and Promotion Agreements (IPPAs) have not become widespread in the Far East yet. Investors are used to TAD and Free Port of Vladivostok regimes.
The IPPA register published on the budget.gov.ru portal contains information about the only agreement signed in the Far East — regarding the construction of a methanol plant in Skovorodino, Amur Region, with an investment volume of 55 billion rubles. It was signed by the Ministry of Economic Development, the regional authorities and Technoleasing (the ESN group) in December 2020.
Probably there is at least one more Far Eastern IPPA on the market — regarding the construction of the multimodal transport corridor "Eastern Grain Gate" in Primorye Territory for 16.8 billion rubles. It is not in the IPPA register but according to open sources an agreement with the company "Morskoy port v buhte Troitsi" was signed in December 2020 as well.
There are a lot of other investment instruments in the District therefore we do not expect a substantial growth in the number of IPPAs there in the next few years. Investors will likely continue to use more “traditional” ways of getting benefits mainly within the TAD and Free Port of Vladivostok regimes. Moreover, the instrument itself still requires a fine-tuning that holds back its spread not only in the FEFD but also in the whole country.
Remarkably the Technoleasing company which signed the IPPA is a resident of the Svobodny TAD.
Bonds to finance infrastructure projects are not very common in the FEFD yet but some classes of securities may become more actively used in the next few years.
There is a chance that in the next few years projects with concession bonds emissions will appear in the FEFD but there are a few prerequisites for this: so far, this instrument has been rarely used even in the European part of the country where concession projects are more widespread.
ESG-bonds may become more popular within the next three to five years. But in our opinion, they will likely be issued by the most financially sustainable regions or by the investors that have already had experience in green and social bonds emissions.
The FEFD has great potential to raise funds from the placement of DOM.RF infrastructure bonds in housing construction projects. Sakhalin Region has already become one of the pilot regions where the mechanism will be tested: it will receive 11.6 billion rubles to create infrastructure in two new residential areas.
According to our calculations, the minimum additional requirement of the FEFD for infrastructure investments exceeds 230 billion rubles in 2021.
These funds might prevent the FEFD fixed assets from further deterioration. The least amount of investments — about 16 billion rubles in all — is required by the Jewish Autonomous Region, the Chukotka Autonomous District and Buryatia. The greatest needs are in Yakutia (over 50 billion rubles), the Sakhalin Region and Primorye Territory (about 40 billion rubles for each of the regions). The Khabarovsk, Trans-Baikal and Kamchatka Territories as well as the Amur and Magadan Regions have "medium" requirements of about 80 billion rubles in all.
The minimum additional need is an indicator that includes our estimate of investments that are necessary to meet the basic infrastructure needs of the population (without taking into account the infrastructure needs of industrial enterprises). The calculations are based on the assumption that for the development of the country's economy in 2021 additional investments in the public infrastructure should be about 5.8%–6% of GDP.
These investments will help the regions of the Far East turn around the trend of their infrastructure accelerated depreciation. But it is unlikely that the regions will be able to attract such an amount of funds and apply them in a short time. According to our estimates, they will not manage to attract a large amount of extrabudgetary capital, so it will cover up to 50% of regions’ demand. There is also a little opportunity to increase budget infrastructure investments: in particular, the budget loans — a new measure of industry support — might cover less than 4% of the annual needs of the District.
The figure shows the results of our estimation of the minimum additional infrastructure financing requirement for Russian regions. The calculations are based on the regions’ GRP data and their current expenditures on the industry. The needs of those regions that have a sufficiently developed economy and the infrastructure demand are estimated higher.
■ Minimum additional infrastructure financing requirement, RUB bln
Sources: analysis and calculations by InfraOne Research
In 2020 the Far East was the only macroregion whose infrastructure investments were declining even in nominal terms (i.e., excluding inflation). But it seems to be related not only to the COVID-19 pandemic.
The District's economy is still relatively small and depends on large industrial projects including those in the oil and gas sector. The life cycle of such initiatives has a significant impact on the dynamics of infrastructure investment in the District.
In 2020 infrastructure investments in the Far East declined more than in other districts.
Capital investments of the FEFD from all the sources in 2020 amounted to 1.55 trillion rubles. It was the only District whose spending fell even in nominal terms, down 6.6% from 2019 (adjusted for inflation the drop reached 12.6%).
It caused not only a coronavirus pandemic but the life cycle of some large-scale projects primarily in the oil and gas sector. For example, the completed construction of the Power of Siberia gas pipeline in 2020 resulted in plummeting of the capital expenditures by 50% in Yakutia which used to be a leader in infrastructure investment in recent years.
In current prices ■ Central ■ Ural ■ Volga ■ Northwestern ■ Siberian ■ Far Eastern ■ Southern ■ North Caucasian ― In 2015 prices, %
Sources: Rosstat data, analysis and calculations by InfraOne Research
Budget expenditures of the FEFD regions on infrastructure have barely exceeded 150 billion rubles in 2020.
This is nine times less than what the private sector invested in the industry and one and a half times less than the minimum additional investment needs of the District we have calculated (about 230 billion rubles for 2021). Moreover, the share of infrastructure did not exceed 10% of government spending in the FEFD. Some other districts had the same level of capital public expenditure but it is not enough even to maintain the current state of fixed assets.
The Far East has a chance to increase investments in the coming years but it will depend on decisions with respect to major infrastructure initiatives, the distribution of budget infrastructure loans, the activity of the authorities and investors in the segment of public-private partnerships and in the use of other investment instruments.
Infrastructure expenditures of consolidated regional budgets, RUB bln
■ Central ■ Ural ■ Volga ■ Northwestern ■ Siberian ■ Far Eastern ■ Southern ■ North Caucasian
Share of regional budget infrastructure expenditures in capital investments from all sources, % ― national average ― Far Eastern Federal District
Share of regional budget infrastructure expenditures in total budget expenditures, % -- national average -- Far Eastern Federal District
Sources: Treasury data, Rosstat data, analysis and calculations by InfraOne Research
The FEFD could attract additional funds through budget loans. But the District will not receive more than 30 billion rubles.
Such budget limits have been approved for the Far Eastern regions until 2023. They will be able to get these funds if regional authorities have time to prepare their projects by October 2021. But for many of them it may not be enough time because of the shortage of initiatives ready for launching. Those regions that have such projects may not meet the selection requirements: in our opinion, they are quite confusing and sophisticated.
■ Volume of infrastructure loans ● % of the total volume
Sources: Ministry of Finance data, calculations by InfraOne Research
While infrastructure investments in the Far East have sufficiently declined in 2020 the number of signed agreements in its market of concessions and PPPs and the volume of investments in them have significantly increased.
The District is able to maintain the high rate of projects launching, and the new mechanism of investment accelerator may help to do it. But, in our opinion, the District is unlikely to show the same results as in 2020 at least in the next few years.
Despite the pandemic the previous year turned out to be a "boom" period for Far Eastern concessions and PPPs.
At the end of the year the FEFD set a personal record for the number and volume of investments in signed concessions and PPPs: 16 projects for 102.3 billion rubles. In total, since the beginning of 2020 this market has increased one and a half times in number and 2.5 times in volume of investments in such projects. According to our estimates, as of the end of August 2021 there were almost 70 initiatives totalling 260 billion rubles launched in the segment of 100 million rubles and above.
The Far Eastern market of concessions and PPPs can maintain its growth rate as well as by using the investment accelerator. The new mechanism was launched in June 2021 by the Ministry for the Development of the Russian Far East and the Far East Development Corporation (FEDC). It is designed to "bring together" projects at the initial stage of development, investors, investment agents and federal and regional authorities. In our opinion, this is a positive example of support for the seed stage: similar mechanisms are relevant for other regions too because the problem of shovel-ready projects shortage still remains.
Data are presented on the agreements with investments of more than 100 million rubles concluded under Federal Law 115 or Federal Law 224 by the end of August 2021. Terminated agreements are not taken into account.
■ Investment volume ● Number of agreements
Sources: authorities’ data, media, analysis and calculations by InfraOne Research
By the end of 2021 about ten concessions and PPPs may be launched in the FEFD with total investments of nearly 100 billion rubles.
According to our estimations as of August 2021, the Far East accounts for 19 initiatives in the top 100 National Infrastructure Projects Pipeline for a total of 243.2 billion rubles. Ten of them totalling 95.3 billion rubles have the greatest launch potential. There is a high chance that these agreements will be signed by the end of the year.
In May 2021 the top 100 National Pipeline projects included 17 Far Eastern initiatives totalling 160.7 billion rubles. Thus, the FEFD has strengthened its position relative to other districts.
The data are as of August 2021.
■ Investment volume ● Number of agreements
Sources: analysis and calculations by InfraOne Research
* The estimated budget of the first stage of construction is 70 billion rubles.
Sources: torgi.gov.ru, governmental portals, analysis by InfraOne Research