OREANDA-NEWS. November 05, 2009. In order to construct a facility, the more so, significant for the economy, whether it be a hydropower station, a pulp and paper mill or an Olympic complex, it’s not enough to simply commit a lot of money and hire highly skilled builders. The more multilayer a project, especially if it provides for building not only industrial facilities but also related infrastructure, the more complex organizational and production links between customers and those responsible for implementing a project. And the more difficult it is for a bank responsible for financing to assess how efficiently funds made available by it are spent: whether construction periods are optimal, whether the most advanced technologies are used and the more so whether products to be manufactured by a facility under construction will find their market outlets.

A bank is not competent enough to make this sort of assessments. Engineering companies are designed to make the said assessments all over the world. As a rule, banks get them to comprehensively assess projects being financed by them. Vnesheconombank decided to do it differently by establishing its own engineering company. Vnesheconombank First Deputy Chairman Anatoly Tikhonov is telling us about the way they see this new company and about objectives it is supposed to achieve.

-Anatoly Vladimirovich, how did the idea of setting up Vnesheconombank’s own engineering company emerge?

-Our Bank for Development has a very large loan portfolio. Almost all projects financed by the Bank are very significant for our economy: microelectronics, deep timber processing and infrastructure. As a case in point I can cite the construction of a timber processing complex in the Krasnoyarsk territory and a new integrated ammonia manufacturing complex under construction in Tatarstan.

Moreover, on the Government’s instructions our Bank acts as a main creditor of Olympic facilities: traditionally, development banks participate in financing such projects. Since Vnesheconombank is responsible for financing Olympic facilities, the Government instructed it to act not only as a main creditor of Olympic facilities but also be responsible for monitoring the physical scope of work. This function used to be performed by Promstroibank of the USSR. This was not an idle decision. In fact, there is an Olympic calendar and there are certain dates. And we must be confident that for our money a project will be built qualitatively and in due time.

Having received such instruction from the Government, we analyzed how this sort of activity could be undertaken. As a matter of fact, I’d like to mention that it is widespread world practice that banks participate in managing project risks, monitoring and supervision while organizing project financing. In fact, we are dealing here with project due diligence, with projects’ technical, budgetary and construction audit that is, with procedures enabling us to get an objective picture of a facility to be financed including investment risks. In general, we exercise this sort of control too by engaging companies on the market through outsourcing.

But Russian companies’ business experience is not sufficient. And there are objective reasons for it: there was no demand for such services. For example, pulp-and-paper mills designed for deep timber processing have not been built in our country for about 30 years. The largest paper machine manufacturers in Izhevsk and Petrozavodsk stopped producing them long ago – there were no orders. There are many such examples in other sectors too. And upon building any large-scale facilities, for example, such as the Boguchan Hydropower Station and Transneft’s pipeline, Russia’s famous companies usually hire foreign engineers for conducting comprehensive expert’s examinations.

And we tried to decide if we should hire somebody to this end. And then we arrived at a conclusion that we as the Bank for Development should establish our own company. By doing so, we can fulfill another task: if we are establishing such a company, a level of responsibility is rising. We can hold our subsidiary company responsible in a stricter way not only on a civil contract basis as we do with regard to outside companies, on which we can impose penalties for violations in construction within their fee earnings.

-You might as well dismiss your employees. But nevertheless it’s not quite evident that setting up a subsidiary company is an unconditional plus.

-There are only two options – we can either hire specialists or set up our own company. And we should establish our own company with a foreign partner’s participation; I’d like to say it once more that we don’t have this sort of expertise in our country. And in our opinion there are no institutions capable of establishing such a company with the exception of the Bank for Development. But we are not sure that we would need this company during our life-time. We do not rule out that once we have established such a company and incorporated training programs in it and gained required experience we might sell it in five years. In any case, we have discussed this option.

-Is this engineering company conceived as a universal one or are you going to establish it to implement certain specific projects? Or is it going to be an evaluation company?

-No, it’s not a matter of setting up an evaluation company; we are going to set up an engineering company. The main functions of such a company under the Bank are to exercise control over the quality of R&D and construction work financed by the Bank as well as to manage project risks (including control over the use of the committed funds, over their targeted use), exercise control over the compliance with project solutions and dates.

Your question concerning sectoral specialization is quite relevant. Almost all basic sectors are represented in our loan portfolio. And of course, one of criteria for selecting our foreign partner is its potentially wider competence. Another criterion is its experience in participating in Olympic projects. I wouldn’t like to name our potential partners now. The tender is still under way.

-More often a different approach is used. Having identified a project to implement, major companies tend to search for a highly specialized engineering leader.

 -That’s a different matter. You mean a construction organizer. And we are after establishing an engineering company that would enable us to conduct a technical and financial audit of projects. We don’t have any problems with a financial audit but it is not the case with a technical audit. Money is spent but for what purposes? What does this money produce?

-Could you tell us about technical aspects of setting up this company? It’s clear that you can’t name your potential partner until the tender is completed. When is the company supposed to be formed? What sort of role is Vnesheconombank going to play in establishing this company? Is it going to form the company’s charter capital?

-As far as our potential partner is concerned, I can add that most companies participating in the tender are global ones and they are operating in many countries. Vnesheconombank is expected to have a majority stake in this project. As to the Bank’s financial expenses, it would only make a contribution to the company’s charter capital. This is not going to be big money because the company would start generating profits right away by forming its backlog of orders. We expect this company to service not only Vnesheconombank’s projects but it is also sure to participate in other projects on market-oriented terms: it would compete against foreign companies on our market and offer its services as a construction organizer.

-How are you going to address personnel matters, given the absence of specialists in this field?

-In fact, the most important thing is to train personnel. Our people are intelligent. But engineering is about technologies. Maybe these technologies are pretty simple. But unfortunately, we have lost our Russian engineering school. And the recent technological accidents have been caused by engineering mistakes alone. You can manage a project only if you are well-versed in technical aspects of it. We saw the products that could be used for managing a project. Generally speaking, we can buy them. But it’s important to rebuild our own engineering school and to train our engineers to work using modern technologies and models.

-It will take a lot of time to achieve this objective and deadlines in particular for Olympic facilities are strict. Will you be able to make it on time?

-We’ll have to, we’ll try to do our best. In fact, during the first year we’ll have engineering teams operating in specific sectors. At the initial stage, the teams will be headed by foreigners. But there will be our specialists in them and they will train on the job. We are well aware that at the initial stage most employees will be foreigners. But we’ll launch a training program for Russian specialists immediately with practical training.

-To what extent is an emerging servicing company going to increase the cost of credit for the borrower?

-To no extent. At the moment, borrowers pay for similar services. Upon financing any bank imposes a condition under which a company responsible for conducting a comprehensive audit is to be hired.

-But you don’t tend to trust outside auditors, do you?

-We have very peculiar and high-tech projects. We receive a project with a conclusion from Glavgosexpertiza. What does this conclusion tell us about? It states that the institution looked through the project and confirms that a certain industrial building will be built and that its roof won’t collapse and water will be supplied and that a machine tool installed there won’t disappear. This sort of expert’s examination is of course necessary. But we would like to know what products this machine tool will manufacture and whether an appropriate technology has been chosen and whether proposed equipment is relevant. We should have a document confirming the soundness of our decision.

-And in this case you’ll be in a position not only to finance but also to build.

-Exactly. Therefore our logic is ‘trust, but verify’.

-But this logic will result in emerging a sort of State Planning Committee (Gosplan). And this would complicate the procedure.

-Many have been wanting for a long time to set up an institution similar to the former State Planning Committee (Gosplan). To be honest, I see nothing bad in planning. The Soviet planning system was not that bad especially in terms of distribution of production facilities. For example, let’s assume that two applicants for the construction of a cement plant from neighboring regions are turning to us. In which of the two regions should this plant be built? There is no doubt that cement is always in demand. But two cement plants in the immediate neighborhood would be too many. How should we find out which of the two applicants offers more advanced and efficient technologies and more optimal terms of construction? Whose technologies are better? These are the matters of planning, designing and engineering.

This is also a matter of exercising adequate control over spending funds. Nowadays, many construction companies are behind schedules represented in their business plans. Of course, the crisis changed the situation. But we should be fully aware of what caused the backlog of work: was it caused by objective reasons or by wrong managerial decisions. This is one more argument for the logic ‘trust but verify’. For example, in some cases our large companies had to hire construction organizers in the process of construction and sometimes they ended up changing already approved projects.

-Our objective is not to complicate the procedure. Generally speaking, but for our fear of overbureacratizing and complicating something, we should conduct a comprehensive audit of projects. But it will take a lot of time. Ant this means that we should assume functions non-inherent for us.

-Once a new engineering company you can trust comes into being, the Bank should reasonably feel more confident. Is the amount of financing going to increase?

-At the moment we have a very busy schedule. We have a lot of projects under consideration. We have a lot of tasks that we are already fulfilling. It would be irresponsible to say that we’ll have even more tasks. The establishment of a new engineering company would enable us to better understand what we are financing. But no more than that.