By Moisey Furschik, Financial and Organisational Consulting managing partner
Tourism and agriculture are the subjects that spring to mind first when the North Caucasus economy is referred to. True, these two industries are of prime significance to the area, but its transportation sector is most promising as well, especially as its progress is vital for the dynamic advancement of the said industries, not per se only.
First and foremost, the weak transit capacities of North Caucasus should be noted. The area is a segment of the North-South transnational transport corridor that links Northern Europe and North-Western/Central Russia to Iran and India, and in the years to come the cargo flow there is expected to keep growing fuelled by both the drop of a fair share of the anti-Iran sanctions and a skyrocketing Indian economy. The above circumstances open up exceptional business opportunities but the advantage of the situation must be taken in the immediate future, otherwise most of the freight traffic will shift to Kazakhstan and other routs. Therefore, a key factor here is an accelerated development of the transportation and logistics infrastructure within Russia.
Apart from the North-South transnational transport corridor itself, North Caucasus can offer a broad range of other promising and weighty investment projects such as a longstanding idea of Kislovodsk-Sochi highway construction, passby roads in populated areas, high speed trains within Caucasian Spas cluster, short distance airlines and airfields reviviscence, advanced multimodal logistics hubs development, etc. Many of the listed projects are most essential for the tourism industry development.
Despite all of the geographical advantages, political significance and apparent market potential, transportation projects in North Caucasus are slow to mature due to a set of compelling reasons. In the first instance, the key importance of critical infrastructure sites is to be stressed. Such infrastructure sites should be state assets, the existing ones should be renovated and the new ones should be built, otherwise major private investments in the regional transport system will turn inefficient being cloistered in their implementation localities. The budgets of most entities in North Caucasus are meanwhile quite thin with budget deficits at times exceeding 10% and thus rendering a large-scale infrastructure construction absolutely impossible. Securing required investments through federal funding at the moment appears quite unrealistic either.
North Caucasus-specific risks make up another problem, even though the real risks are often much lower than the subjective perception of the same by external investors. Still, in present-day circumstances it is a personal perception that dominates investment decision-making the most.
Reliance on concessions in the North Caucasus Federal District transport system development could dramatically reduce the impact of the above problems with the concessions mechanism allowing to direct private capital in construction and overhaul of critical infrastructure sites which will nevertheless remain government assets. Besides, concessions drastically lower investment risks, primarily through sovereign guarantees and sophisticated legal remedies of concessionary protection.
In North Caucasus, the assets for concession deals can be not merely highways and berthing facilities, as through the concessions mechanism launch of airfields for regional jets in Daghestan, Karachayevo-Circassia and Stavropol Territory can be accelerated, since hardly anything is really done now about that much discussed subject.
It should be appreciated though that concessions as such do not produce investment miracles and a sizeable government involvement will be required anyway, including its financial support in forms of sovereign guarantees granted to concessionaries, and a state co-investment covering 20 to 40% of overall costs, reasonably required for certain projects. For that, direct funding from the federal budget is inevitable too, since the entities of North Caucasus Federal District are unable to provide acceptable financial terms and warranties all by themselves to attract private businesses to major infrastructure projects. Still, for the federal government that will be more advantageous than covering entire construction costs through budget funding, and besides, launching concession projects will improve the investment image of North Caucasus and manifest feasibility of long-term investments in the regional infrastructure.
For a successful development of concessions in transportation industry of North Caucasus, another critical component is required along with the federal authorities’ involvement, which is setting a portfolio of feasible projects, in contrast to the current array of outlines and splendid generalities. Here, the initiative must be taken by the entities themselves and their authorities must appreciate that in order to attract major investments in infrastructure development, they will first have to face certain expenses to professionally draft, dress and promote their projects while ensuring efficient interaction with the federal authorities (aiming to secure a certain co-investment) and respective businesses (for proper understanding of realistic terms for private investments attraction).
Should the above prerequisites be met, it is quite realistic to see transportation projects (including the most cost-intensive Kislovodsk-Sochi or Cherkessk-Adler highways) worth RUR 200 bln to RUR 300 bln ($3.5 bln to $5.3 bln) lunched in North Caucasus within next 10 years.