RISK MANAGEMENT AND INTERNAL CONTROL FRAMEWORK

The Company’s Risk Management and Internal Control (RMIC) framework is governed by the Risk Management and Internal Control Policy of JSC INTECO approved by the Board of Directors on 17 December 2020 and seeks to provide reasonable assurance of delivering on the Company’s goals and exercising adequate control over its financial and operating performance.

The framework’s functioning is based on the three lines of defence principle:

  • 1st line of defence

    Risk management and internal control over business processes (at the level of JSC INTECO’s individual units).

  • 2nd line of defence

    Development of a unified policy and coordination of risk management and internal control activities (by the Internal Control Department).

  • 3rd line of defence

    Internal assessment of the framework’s performance (by the Internal Audit Office).

Distribution of the key powers among the parties involved:

  • Board of Directors

    approves the Company’s Risk Management and Internal Control Policy, approves and reviews its risk appetite, considers reports of the Internal Audit Office

  • President

    ensures effective operation of the framework, approves local regulations and limits on risks of development projects, considers information on significant risks and their management

  • Vice Presidents

    in charge of relevant divisions are responsible for specific areas of internal control and foster a common corporate risk management culture

  • Internal Audit Office

    tests and assesses the framework’s performance

  • Internal Control Department

    develops methodological approaches to risk management and internal control, updates regulations, and coordinates risk management and internal control activities

  • Business units

    ensure the operation of the framework within the scope of their functions

  • Employees

    perform the framework’s control procedures within their competence

The framework’s performance is assessed by the Internal Audit Office.

RISK MANAGEMENT

JSC INTECO’s risk management framework is based on continuous improvement and ongoing efforts to identify risks and improve control and management methods. The Company has a risk management framework in place that has been developed to respond to external challenges, meet shareholder requirements and the principles set out in Russian and international risk management standards. Its purposes are:

  1. 1.

    achievement of the Company’s strategic milestones;

  2. 2.

    effective management of operations and performance;

  3. 3.

    compliance with laws and internal regulations and procedures;

  4. 4.

    timely risk identification and analysis;

  5. 5.

    control over the development of the required local regulations.

Besides organising the operation of the risk management framework, the Internal Control Department ensures the development and revision of local risk management regulations, provides methodological support in risk identification and assessment to other units, and provides recommendations to members of governing bodies and heads of business units.

The Company continues implementing a full-fledged risk management framework. In 2020, the Risk Management and Internal Control Policy was approved and put into effect. To implement it, we have mapped our business processes and developed an implementation roadmap. A major project to design a risk management framework with a focus on development project risks was launched.

KEY RISKS

Risk Description Mitigation
Risk of changes in consumer preferences and market trends

An unexpected change in consumer preferences may have a negative impact on the Company’s business, specifically due to the industry’s long production cycle.

The impact is mitigated by means of regular monitoring of changes in demand and adaptation to consumer preferences.

To this end, we engage third parties for market research, and do research on our own based on customer feedback at all stages of a relationship, including after commissioning

Risk of changes in legislation

The industry is strictly regulated, and any non-compliance with the rules may adversely affect the Company’s operating and financial performance.

Legislative restrictions and requirements for developers, tougher regulation of the industry and an increased complexity of obtaining permits may impair the Company’s overall performance

To mitigate and proactively respond to risks, we constantly monitor legislation for any changes that may affect the Company’s business

Risk of less adequate opportunities to acquire land

Inability to find and purchase land at a reasonable price for future projects may negatively influence the Company’s business, and operating and financial performance

We monitor the land market on an ongoing basis and keep a database of land plots whose parameters (location, layout, and available permits, proposed terms of purchase, etc.) are consistent with the Company’s strategy, required profitability and financial resources

Risk of non-performance of contractual obligations

Delays in performing contractual obligations by counterparties slow down project execution and may entail additional penalties

We ensure compliance with contractual obligations using a strict procedure for selecting general contractors, robust processes of checking the financial health and business reputation of key contractors, both before and after the contracts are awarded, as well as through continuous production and financial planning and factual analysis, constant monitoring of the key contractual dates, creation and revision of roadmaps, and monitoring of regular reports.

There are also processes in place for cooperation between the Company’s units during the performance of contractual obligations.

If a contract is breached, we take prompt steps to seek remedy.

Financial risks

Sources of financial risks are the unpredictability of the market economy, changes in the Bank of Russia’s key rate (affects the cost of mortgage loans for consumers), changes in interest rates on loans, and exchange rate fluctuations.

The Company adheres to a conservative financial policy and seeks to maintain low leverage

The Company successfully employs project financing models based on escrow accounts, while also using bank guarantees and contract works and liability insurance

Liquidity risk

The Company’s failure to meet its financial obligations may lead to operational disruptions, damage its reputation, and trigger an increase in debt servicing costs in the short term and bankruptcy in the long term

We monitor our liquidity position on an ongoing basis using cash flow projections and budgeting.

The purpose of these procedures is to ensure prudent and dynamic use of cash by means of planning

FX risks

As we operate in the high-end segment of the real estate market, our projects rely to a significant extent on materials and equipment that are sensitive to changes in exchange rates.

Rouble depreciation versus the US dollar — euro basket affects the cost of construction

The Company mitigates FX risks by having a clear list of FX-dependent materials and equipment used in its projects and a range of US dollar and euro exchange rates where the price of a general contractor agreement remains unchanged, and by interacting with manufacturers and suppliers in order to find opportunities to replace imported materials and equipment with high-quality domestic alternatives

Risk of accidents and injuries on construction sites

INTECO is part of the construction industry, where workplace accidents affecting the lives and health of employees may cause significant financial and reputational damage

The Company complies with the applicable health and safety regulations.

Employees are provided with personal protective equipment, undergo safety briefings and regular knowledge tests, and comply with work and rest schedules.

We use equipment that has been certified by competent authorities

HR risks

Delays in hiring.

Insufficient employee competences to deliver on the Company’s strategic goals.

Insufficient motivation

Defining job and individual competence profiles to have the most complete picture of how employee competencies and performance should match the employer’s requirements for a position.

Introducing a differentiated incentive framework for various employee categories based on key performance indicators (KPIs)

RISKS THAT MATERIALISED IN 2020

The COVID-19 pandemic affected the timing of construction and installation works for one of the Company’s projects. The works were suspended in April—May 2020 due to temporary restrictions imposed on non-manufacturing businesses by the Moscow government. A labour outflow in March—June 2020 slowed down construction and installation works by 30–50%.

During the peak of the COVID-19 pandemic, the Company had to suspend sales, but deferred demand helped exceed the annual sales plan and deliver on our performance targets.