In most Russia’s regions, their authorities set special agencies tasked with investments attraction. Our national capital is no exception, even though it appears Moscow is the last in need of that since it is the most attractive national market anyway. Invest Foresight interviewed Leonid Kostroma, Director of Moscow municipal investment management agency, on the ways Moscow authorities deal with investors and strive to improve the investment climate in the metropolis.
– Mr Kostroma, what is your agency all about?
– Moscow City Investment Agency was set by Moscow city government six years ago, and its major function has been supporting investment projects on a one-contact basis, i.e. when coming to Moscow with a view of launching or advancing a project, an investor can get our agency’s assistance in sorting out any issues that may arise in dealing with executive authorities. We act as a connecting link which resolves the matters of interaction between authorities and investors.
On the other hand, one of the key focus points in the agency’s efforts is developing the private-state partnership projects implemented through concession agreements and life cycle contracts. All private-state partnership projects in Moscow are being executed with our assistance.
There are other significant tasks too, such as positioning Moscow as a place to invest in, or facilitating the investment projects the city wants to be funded with private investments. Moreover, a fair share of our efforts is aimed at improving legislation. Since we deal with investors, we comprehend the problems they face, so we reach executive authorities with our legislative initiatives intended to open new prospects for investors in Moscow.
– Russia’s capital is a rather attractive market per se. Why a special agency for attracting investors is required?
– In this regard, Moscow is rather a competitor for investments to other international metropolises. It is competing for international investors, innovation companies, developers, IT corporations, financial players. Hence in this respect we follow the best global practices. We certainly keep our eye on what is happening in nearby regions, too. In competing for investments, Russian regions are on the alert as well, even though we do not stand still either. You may have heard of the Russian regions’ investment attractiveness index made up by the Agency for Strategic Initiatives. Moscow has been gradually improving its position in that rating, being rated the 10th of all Russia’s entities last year and joining the top three leaders this year. I hope we will not get stuck at this point and will put in every effort to reach the very top.
– You have mentioned you support investor’ interests in their dealings with authorities. It is clear the investment attractiveness is primarily about the decision making swiftness, the timing of approvals collection, the costs of utilities connection, etc. These are external circumstances which your agency can hardly influence. Or can it?
– On its part, the agency can certainly help. We maintain several lines of communicating with investors and we thus see the problems they confront. We have a direct line and a thousand applications arrive via it yearly. We carefully categorize the applications and thus learn the problems that emerge on the level of the city. That becomes an incentive for us to come up with legislative initiatives. If a problem is of a certain degree, we may launch an online service at our agency’s portal to simplify and accelerate the proceedings. Our investment portal, https://investmoscow.ru, for example, contains information on all and every piece of real estate put on sale by local authorities. More so, at the very same portal we now offer an option for businesses to submit an online bid for renting premises in technology centers or technological clusters. The option extends to all technological clusters, both private and municipal. An investor can choose a technology center of interest and see, what premises are available there. We will then contact a respective technology center, set a meeting and thus accelerate the overall process while monitoring it to make sure an application does not go amiss. If for whatever reason a technology center is not suitable, we can offer a different site and help negotiating a deal there. By now we have got 14 online services of that kind, all set up over the last 18 months. This year some 30,000 investors and entrepreneurs have used these services. And we make sure the range of such services permanently grows.
– How would an investment project attract your agency’s attention?
– There may be few options. First, we have the https://en.investmoscow.ru/ investment portal where there is an Investment Project Application section. An investor may thus submit an investment project datasheet seeking a support of the municipal authorities (that being a lease of a land plot, taxation benefits or whatever else).
Second, we no doubt actively take part in all sorts of events for investors, such as sectorial conferences, round tables and so on, explaining the possibilities and programs which our city may offer. Third, there are applications by investors to executive authorities in charge of various branches of economy, they are addressed to the mayor, deputy mayors, Economic Policy [and Development of Moscow] Department of Moscow government. They all eventually come to our agency. We employ all sorts of channels, even an informal chat. At the moment, we support 167 projects at various stages of their advancement.
– If one opens a newspaper, then in an article with the words investors and Moscow one will certainly find one more word, construction. A common belief therefore is, a Moscow investor is the one who builds either residential buildings or some business premises. Are there any other interesting investment stories apart from erecting buildings and facilities?
– Moscow is a huge postindustrial metropolis. If we look at the structure of the gross regional product, we will see that a great share thereof is services, finances, education, medicine and so forth. It is true though, that construction is an essential sector and despite the crisis environment our construction industry has not lost its momentum. In the overall picture of investments, including foreign investments, a big portion thereof is in finance, IT, services. As for the activities of the agency, our priority is the infrastructure which is to be developed through private-state partnership. We now are in the process of implementing a big project of building the first pay highway within Moscow, a backup for Kutuzovsky Avenue. The project only involves private investments and the resources of the Pension Fund of the Russian Federation. Local authorities undertake to have the land vacated for construction and ensure relocation of supply lines there.
There are projects where we attract money into social infrastructure. For example, an investor gets an option of renting premises intended to open private medical clinics, at a 1 ruble per square meter per month rate – within our program Doctor Next Door. Besides, the local government still owns former kindergartens which are currently out of use and require repair and renovation. We attract private financing for such projects too. Investors may refurbish the facilities, equip them properly and be granted a preferential rental charge of 1 ruble per square meter, subject to involvement in educational activities. We have a similar program for the cultural heritage sites.
– Is the Kutuzovsky Avenue backup construction underway already?
– Not yet. We are at a stage of active design works and vacating the lands. We hope the investor will start construction next year. One of the indices showing the project has been successful, is, by the way, the interest of foreign investors. So far, the only investor of the project has been the Pension Fund, but the project manager Leader Invest is now actively negotiating participation in the project of the Russian Direct Investment Fund and of various foundations from the Arab East. We therefore do see interest of foreign investors toward Moscow infrastructure projects. We are considering a few more similar projects relating to road construction and I hope to eyewitness their implementation within years.
– We will get pay highways in Moscow, right?
– Over 70% of targeted investment program in Moscow are aimed at transportation infrastructure development. We build hundreds of miles of new roads per annum. Still, in addition to such roads local authorities develop alternate roads as well. We, leastways, discuss the projects involving private investors’ resources.
– What was the investment history of such a well portrayed investment project as Zaryadye Park?
– There are not too many projects comparable to Zaryadye Park. That was a rare example of the municipal government intending to use a very expensive land in the very center of the city for educational and recreational purposes. Besides, the city government has invested quire sizeable money into the Park’s development. An immediate investment potential of such projects is not evident as such, but we do consider the long-run prospects and the overall economic effect which may result. Such a project may be called an anchor which will attract tourists from all over the world. We create such anchors by investing in municipal improvements and in various festivals such as Christmas Trip or Moscow Jam and so on. Between 16 and 17 million tourists visited Moscow last year which was a benefit for hotels, catering establishments, airports. The money tourists spend is an indirect repayment of Moscow’s investments. Within merely a month Zaryadye Park was visited by a million people. That is a huge figure. In Zaryadye, there are several businesses, a restaurant, for example, which ensure recovery of the costs incurred by the city. But first and foremost, it is an anchor which attract tourists.
– Are you interested in developing industries?
– No doubt. Last year, Ministry of Economic Development of the Russian Federationpassed special economic zone in Zelenograd over to Moscow authorities. We have expanded the territory of that special economic zone and improved the selection of the incentives offered to investors there. We have by now made the first offset agreement. Under that offset agreement, the local government will buy some product on a long term basis, while the investor will in turn have to have the manufacture of the said product in the city. So the first big project is about purchasing oncology medicines and immune modulators. Over ten years the purchase amount will reach RUR 14 billion ($ 250 million). Still, within three years the investor will have to allocate production of 22 medicines in Moscow, and to within a further year launch production of the medical substances. Last year, we, I mean Moscow government and the Ministry of Economic Development, succeeded in amending respective legislation, namely Federal Law № 44-FZ of January 1, 2014 On the Contract System in State and Municipal Procurement of Goods, Works and Services. Now we deal with the first project which is aimed at production localization. I am certain that the offset agreements make up an extremely important mechanism when an industrial investor has guaranteed procurements while local authorities get manufacture allocation, reduced prices, new jobs and expanded taxation base. Moscow is among the major purchases both on the national and the global levesl. Municipal purchases in Moscow reach over RUR 500 billion ($ 9 billion), so given such resources, we will further expand the offset agreements practices. That will be a further incentive for an industrial investor to come to Moscow.
– In your view, which are Moscow’s weakest points in its investment appeal?
– Many investors believe it is expensive to run a business in Moscow. To some degree, that is reasoned since salaries are high in Moscow. Still, an investor will in turn have well qualified labor force and may find specialists of any sort with no need to train or bring such specialists to some other location. As a rule, they will require no accommodation. It is no secret that many investors have poured their money in some special economic zones of Russia and then faced a lack of qualified labor force and a need to train their potential personnel. On the other hand, it is clear that costs of running a business, including infrastructure costs, may be higher in Moscow than in other regions. It may be more expensive to have an industrial facility connected to engineering lines in Moscow, as due to abundance of service lines it is always hard to lay a new pipe or build a new road in Moscow, given the urban environment. So we all, both the agency and the government of Moscow, monitor pricing competitiveness of our city as compared to other areas, and we stimulate the industries here. We subsidize purchase of equipment, offset interest rates on borrowed funds intended for purchasing new machinery. Not long ago, the mayor of Moscow made a decision on indemnification of 50 percent of costs on connecting new industrial facilities to water, electricity and natural gas supply lines. That means lower costs and stimulating manufacturers. Besides, the local government offers maximum taxation benefits on profit tax, property and land charges, for efficient Moscow enterprises. Even at a project’s design stage, Moscow government is disposed to grant it maximum benefits allowed by the federal laws.
We thus further stimulate investment inflow to production sectors. We have some successes here already with 65 companies being granted a status of industrial complexes, technological clusters, and anchor residents and thus enjoying taxation advantages. We now actively work with several companies aiming to make agreements on greenfield projects. At the project implementation stage, an investor is granted maximum taxation benefits and additional subventions, but undertakes to start manufacture, make investments and ensure certain average salaries for the company employees.
– In furtherance of the subject, over the past ten to twenty years industrial facilities have been moving out of the urban areas and hence the lands they used to occupy were gradually put into development. Do manufacturing projects have any future within city limits?
– Moscow is now actively auditing all industrial areas, manufacturing facilities and land plots within its territory. The recently passed municipal land use and development regulations set exactly that purpose for most of manufacturing areas. Therefore, a land owner is perfectly aware that only industrial production may be arranged at the property. The municipal authorities are most scrupulous about functional division of municipal lands since Moscow should by no means ever become a huge bedroom district. There must be a proper balance of business, industrial and residential construction. Moscow authorities therefore actively pursue the policies of stimulating industries’ development, of a long term anchoring of a land plot functionality. Many industrial enterprises used to wait for a long time before they could effectuate a promising development project at the lands they own. Currently, the municipal authorities actively send signals that they intend to support industries by various means. They, for example, set key performance indicators which allow an investor to commission 15 or more thousand square meters of industrial facilities on a land plot of one hectare. More so, the taxation policies of Moscow authorities are aimed at stimulating proper use of lands. It is growing less and less advantageous to hold a land plot without using it. The city employs various mechanisms, tax incentives first of all, to encourage enterprises to put their lands into economic turnover. Lands are possibly second most essential resource, immediately following labor force, since it is limited and expensive. The city therefore employs economic, taxation and administrative means to encourage the commercialization of lands to the maximum.
– One of the agency’s functions you named is its participation in arranging financing for investment projects, in negotiations with major financial institutions. Have the anti-Russian economic sanctions had any impact on this domain of your activities? What institutions are the main sources for your projects funding?
– As far as the economic sanctions are concerned, we do not see any impact thereof on lending dynamics. Over the first half of 2017, lending to legal entities grew at about 11 percent faster, than in the first half of 2016. Direct foreign investments do not miss Moscow either. According to the Central Bank data, over half of foreign investments pouring into Russia end up in Moscow. In our view, the banking sector has adapted itself to the economic sanctions environment. We in turn actively exploit various development institutions, federal agencies in the first instance, since they help businesses in attracting borrowed resources. As I have mentioned, we actively collaborate with the Russian Direct Investment Fund and major Russian banks including Bank for Development and Foreign Economic Affairs (Vnesheconombank) and Savings Bank (Sberbank). Moscow has a guarantee fund of its own which helps small and medium businesses to attract borrowed resources. We also actively assist investment projects in being structured according to the requirements of financial institutions. For a financial institution, dealing with our agency, or the government of Moscow, is sort of a project’s quality assurance and an extra argument in its favor.