The rise of BRICS infrastructure

Infrastructure Investor, 18.07.2014

"Kirill Dmitriev, CEO of the Russian sovereign wealth fund worth $10bn, speaks exclusively to Infrastructure Investor about the future role of the BRICS nations in infrastructure investment.

As the world turns to emerging economies for growth, Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), is looking to its BRICS peers by proposing the creation of a joint infrastructure fund. Kirill Dmitriev, chief executive officer of the fund, explains why joining hands with growth economies is the key to sustainable development.

Q: What kind of infrastructure projects would the fund aim to support? And are the infrastructure demands in Russia similar to those in Brazil or India?

KD: The aim is to create a fund for the accumulation of necessary resources and expertise for the implementation of infrastructure projects throughout the BRICS. Mention of any specific projects is somewhat premature at this stage.

The infrastructure sector was chosen because it is a priority area in the development of the BRICS nations. Such projects are costly but can provide significant improvement in the economy as a whole as well as the business environment and overall quality of life.

The precise mechanism for the selection and approval of projects is yet to be defined but the process must be initiated by the participating countries. We believe that the fund should focus on projects that either involve several participant countries at once, or the application of previously successful initiatives from one country to another.

The Fund may invest in the equity capital of special purpose vehicles (SPVs) that are engaged in roads, ports, aviation and municipal infrastructure development. The authorities from these sectors in each of the BRICS countries have their own achievements and challenges, but all of them (perhaps with the exception of China) have underinvested in infrastructure over the years, which has led to the economy outpacing infrastructure development and consequently strangling growth. This gap needs to be closed if the economies of the BRICS are to grow efficiently. Other similarities include:

- Budgetary constraints in the BRICS leave infrastructure in need of additional private funding;
- BRICS governments are generally less experienced in structuring infrastructure projects alongside private participation;
- BRICS stand to benefit from the application of international technologies and project management techniques;
- Local financial markets in BRICS countries may be not developed enough to support such significant investment and require international collaboration.

Q: Who are RDIF’s international partners you mention in your statement?

KD : We are primarily referring to the sovereign wealth funds of BRICS and other countries. RDIF has previously managed to create more than 10 partnerships, and attracted more than $13 billion.

Depending on which projects make it onto the agenda of the fund, we will be able to bring in different partners with the appropriate expertise for their delivery and financing.

During Russia’s presidency of the “Big Twenty”, an “Investments and Infrastructure” task force was formed. Representatives of both countries and companies from the B20 were active participants in this task force (these included major investment banks, sovereign funds, pension funds, leading global companies, international financial institutions and corporate consultants). We now have an excellent opportunity to develop the agreements reached under this task force and the participating members are interested in this opportunity.

Q: Does RDIF have a range in mind as to the size of the joint fund? What are the current estimated needs for infrastructure within the BRICS union?

KD: Of course it would be difficult for the fund to comprehensively cover all of the infrastructure investment requirements of the BRICS countries. Therefore, our priority is to source projects that will have synergistic and cumulative effects. We plan to develop tools and mechanisms for the implementation of these projects, such that they are structured well enough to make them scalable in future.

Since infrastructure projects are traditionally capital-intensive, the size of the fund needs to be several billion dollars - but the scale of the projects can be much greater. This can be achieved by bringing in third-party debt financing, particularly now, with the upcoming formation of the BRICS Development Bank.

By increasing the efficiency of implementation for infrastructure projects in the BRICS countries, all member states have the opportunity to save hundreds of millions of dollars. With regard to the demand for infrastructure investment going forward, I would say the primary requirement of the BRICS is additional capital. According to various analysts, the BRICS countries need to increase the relative level of infrastructure investment from an estimated 1.5 percent to 5 percent of GDP in the last decade to 4 percent to 7 percent in the next decade (except in China, where investment has actually exceeded GDP by 8 percent in the last decade). Staggeringly, this represents over a trillion dollars each year.

Q: Who has expressed an interest so far?

KD: We have received positive feedback from our colleagues in the BRICS and from other sovereign funds. Currently several of the leading sovereign wealth funds have committed to the effort.

We expect this initiative to progress significantly over the course of the rest of the year. The situation is developing in a very constructive way. Aside from the positive feedback we’ve had from foreign investors, two BRICS countries (other than Russia) have already confirmed their willingness to participate in this fund alongside RDIF.