Russia PIK mulls infrastructure spin-off

By Simon Shuster

MOSCOW (Reuters) - Russian real estate developer PIK Group (PKGPq.L: Quote, Profile, Research, Stock Buzz) is considering a spin-off next year to handle infrastructure projects as the state has been slow to take on the necessary work, its chief executive said on Monday.

Russia's roads, power grids and other basics inherited from the Soviet Union are falling apart, threatening to stall the economy's growth.

But fears of pushing up inflation has made the state wary of funding a top-to-bottom renewal.

"The biggest problem facing our government right now is infrastructure," Kirill Pisarev, chief executive and co-owner of PIK Group, Russia's largest developer, said in an interview at the Reuters Russia Investment Summit.

"The laws on this have been written, but we don't yet see how they would work," he said at the event, held at the Reuters office in Moscow.

This problem obliges PIK to spend around 15 percent of the cost of its projects on infrastructure, including the construction of power grids, electricity sub-stations and roads, often from scratch, Pisarev said.

The most effective way of lowering these costs would be to spin off an engineering firm, controlled by PIK, which could handle this work, Pisarev said, adding that such a firm could be created in 2009.

'SERIOUS DILEMMA' IN INFRASTRUCTURE

PIK raised $1.8 billion in an initial public offering in June of last year, allowing it to amass a land bank that will provide for 7-8 years of development, he said.

As of January 1, 2008, PIK's property portfolio amounted to 14.2 million square meters of unsold net sellable space which was valued at $12.3 billion.

"Russia has a lot of land, but what it doesn't have is a lot of land with infrastructure, land where you can build housing, where you have power grids, roads and so on," he said.

"This is of course a question for the government, but for our projects we are ready to invest in infrastructure projects ourselves... We would like to split this off into a separate business."

He explained that PIK would be the main investor in the company, but not the manager, and that the move could increase the profitability of the company's projects by dozens of percentage points.

Public-private mechanisms resolving the crisis are just now in the "embryonic phase", Pisarev said, but they could mature in as little as a year.

Experts have warned that further delays could hinder the economy's growth, and that housing and transport infrastructure could collapse in as little as three years if nothing is done. ID:nL4493589  Continued...