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Regional Bonds as a Tool for Implementing Infrastructure Projects and Improving Quality of Life
14 February 2019
16:15—17:30
KEY CONCLUSIONS
Regional bonds are an effective instrument for attracting investment

Certainly, in recent years, bank debt has been steadily replaced by municipal bonds. In 2016, bonds made up approximately 17% of regions' total debt. Last year, that figure had already risen to 25%. <…> Bonds are <…> an important instrument for achieving a healthier balance between direct subsidies from the centre and economic efficiency on location. <…> We must expand the types of regions entering the market — Ekaterina Trofimova, Independent Analyst; Chief Executive Officer, Analytical Credit Rating Agency ACRA (2015-2019).

On the subject of implementing infrastructure projects, <…> in general, regional utilities are seeing wear and tear of 70% of their water supply networks. In other words, this is a relevant issue for the majority of regions, one that is very difficult to attract investment to. As an investor, we are ready to finance this sector, but we're faced with a number of barriers. <…> Developing and implementing such a mechanism in most of our country's regions could have a sizable impact — Lev Gorilovskiy, Member of the Board of Directors, Polyplastic Group.

The country has the necessary infrastructure for developing the bond market

We have the infrastructure, including a ratings infrastructure, we have the regulatory environment, where we significantly simplified the issuing of bonds, the release of information, and the issuance of time parameters, next we have the repurchase agreement market, which is very important for the bond market — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

ISSUES
Not all regions are using the available investment attraction instruments

Take a good look at our market. Regional bonds make up just 3% of the primary bond market. This is a very small amount. <…> Only 45 regions have entered this market — Denis Shulakov, First Vice President, Bank GPB .

The most effective investment attraction instrument for implementing infrastructure projects is the concession agreement. At the same time, however, this is a complex process that requires high levels of training. The managing companies with that level of training cannot cover the entire gamut of issues that regions face, so many projects do not get implemented — Alexey Lyashchenko, Member of the Committee on Financial Markets, The State Duma of the Federal Assembly of the Russian Federation.

Lack of information on regional bonds for investors

During the Bank of Russia project (the retail investor Marketplace – Ed..), it turned out that not all project participants knew about bonds and getting information about them is fairly difficult. In 2017, the NFA created a club for bond issuers. This club made one of its objectives the development of a methodological foundation to help new issuers that are just entering the market — Vasily Zablotsky, President, Self-regulatory organization «National Finance Association».

Low investment ratings in a number of regions

Ratings play a key role, the factors are all the same: rating agencies evaluate credit quality, thereby evaluating the quality of management and knowledge. The load and structure of individual federal subjects’ debt are also taken into consideration. <…> Clearly, bonds are more accessible to the more economically stable regions — Ekaterina Trofimova, Independent Analyst; Chief Executive Officer, Analytical Credit Rating Agency ACRA (2015-2019).

Right now, this is a cheap, long-term instrument, but it is very dependent on ratings. Only about 38 to 40 federal subjects have a BBB+ rating, which <…> could get you a coupon rate of 8.25% — Anatoly Pakhomov, Mayor of Sochi.

A controversial issue is classifying regions based on the debt sustainability of their budgets. The position of the Ministry of Finance is somewhat unclear, if we forbid regions in the ‘risk zone’ from issuing bonds, then what instruments does the ministry expect to be used for attracting investment? — Alexey Lyashchenko, Member of the Committee on Financial Markets, The State Duma of the Federal Assembly of the Russian Federation.

Lack of large regional investors

Do we have large regional investors to whom we can offer these bonds? Of course not — Denis Shulakov, First Vice President, Bank GPB .

SOLUTIONS
Bond placement towards specific investment projects

We agree with the Ministry of Finance that it is not gaps in the budget that should count against bond issuance, but investment projects. Because the redemption of sub-federal, municipal bonds <…> must stem from economic growth, which is sustained through implementing infrastructure projects — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

We strongly believe that concessionary bonds are the instrument that can and should be implemented. The only thing is <…> we talk about infrastructure all the time, but I rarely hear anything about creating actual manufacturing plants — Anatoly Pakhomov, Mayor of Sochi.

Individuals are ready to turn to local markets. Not just because those markets have proven profitable, but also because they simply want to improve the world around them. This is a very important factor which is not given enough credit — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

Making bonds more accessible and attractive to individuals

The majority of investors on these markets are individual people, who do not need active trading services. <…> The Marketplace (platform — Ed.) should help the public obtain and keep securities until their maturation, without having to rely on the services of a broker or depositary — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

To the regular person, bonds are still an unfamiliar instrument, which is why the Ministry of Finance has come up with individual investment accounts, the simplified OFZ-n (Federal Bonds for Individuals — Ed.) instrument, unlisted bonds that are very similar to a deposit. Really, the first step needs to be the distribution of these bonds — Sergey Shvetsov, First Deputy Governor, Bank of Russia .

The government should play a role, it must create certain regulatory standards that protect the public’s investments. <…> People need to understand who will be responsible in the case of a default or other negative consequences of regional development — Alexander Tsybulskiy, Governor of Nenets Autonomous Area .

Attracting professional management companies

Attracting professional <…> management companies on a regional level. But we need to be able to see the legal framework in which these management companies will be working — Alexander Tsybulskiy, Governor of Nenets Autonomous Area .

Gradually developing the regional bond market

The question is, how do you approach creating an instrument? We believe that the process must be <…> gradual. <…> The country has institutional investors, ratings, <…> a professional investor will know what he is doing. If he buys these bonds, that is a benchmark. Later, working off of this benchmark, we give each region the chance to create their own bonds aimed at the public, small ones, pilot bonds, in order to see whether <…> the public is willing to vote for financial discipline and a particular governor with their money. <…> And then after all of that, you issue public-private partnership, concession, and project bonds — Denis Shulakov, First Vice President, Bank GPB .

The material was prepared by the Russian news agency TASS