The heating sector has a low level of investment attractiveness

29 march 2018

"On the whole the issue of how effective state spending is when it comes to the modernization of the energy infrastructure is a topic in which few people are interested because the sector mostly gets money from other sources, while the projects that get some of their funding form the federal treasury need to be closely monitored," believes Victoria Gimadi, the Head of the Department for the Fuel and Energy Sector of the Analytical Center.

During the round table on the economic effect of investing state money in the modernization of the energy infrastructure of the Russian regions, experts talked about the amount, changes in and prospects of the state investments in the regional energy infrastructure, as well as looked at the problems and risks of this type of financing.

According to Analytical Center expert Irina Pominova, the energy infrastructure needs huge investments. "If we are talking about state money, it is important to note that the bulk of it comes from the federal government. Recently, the amounts being provided by the federal center have declined somewhat because of the tough situation in the economy but the role of the regional and local governments has begun to increase. Due to strict budgetary constraints, we need to look into ways to boost the efficiency of government spending in this area," the analyst said.

The mechanisms for the state fianacing of infrastructure projects, which the expert highlighted, include state procurement, state private and municipal privat partnership, concessions and investment agreements. Ms Pominova noted that each of these mechanisms has its own methods for assessing efficiency.

"All the problems of price regulation stem from the fact that we need to find a compromise between the public's ability to pay utility bills and the ability of utility companies to survive on this money," believes the professor of the Department of Urban Economics and Municipal Governance of the Higher School of Economics Sergey Sivaev. Unfortunately, this compromise still has not been found from the point of view of methodology. The country mostly uses the policy of raising prices. "At the moment the main principle of price regulation has to do with driving the inflation into the negative. This means that the actual revenue of heating utilities must increase at a rate lower than inflation, or in effect, it must be allowed to decline," Mr Sivaev explained. And that is one of the biggest problems the sector is facing.

Another problem has to do with the transition to long term price regulation, the expert explained. "We have long been talking about this transition but it still is not happening because taking into account the expenses that utilities have no control over does not automatically translate into different prices for their services. As a result the heating sector has very low investment attractiveness," Mr Sivaev summed up. The expert is of the opinion that in order to make the sector more attractive to potential investors, better regulations are needed as well as partial compensation of the losses by the government.

"The most effective mechanism for investing state money is the creation of a development institute that would get this money and then use it to encourage modernization of the energy infrastructure. That is what boosting the efficiency of state investments is all about," according to Vitaly Badmaev, advisor with the energy efficiency unit of the Fund for Promotion of the Housing and Public Utilities Sector Reforms.

The discussion participants also noted taht one of the best mechanisms for state financing of infrastructure projects are concession agreements.