Articles / Rubric: Companies and Markets

You Cant Pump Up a Flat Tire Until Youve Patched It First
July - August 2013 | Companies and Markets

Gleb Nikitin, Russian Deputy Minister of Industry and Trade, talked with World Economic Journal about the new state industrial policies, programs, and challenges the Ministry is facing.

Mr. Nikitin, what is Russia’s current industrial policy? What are the programs of the Ministry of Industry and Trade?
Let’s start with a definition of industrial policy. In short, industrial policy can be defined as a set of interventions that lead to specific goals. In our current state programs, there are key indicators that we should achieve over the next couple of years. And if we are able to additionally systematize tools in what we call our “industrial matrix” approach, then these indicators could be not only successfully achieved, but even increased by a large amount.

In general, working with the Russian government’s existing software tools, we expect to increase production in the Ministry-supervised manufacturing industries by 70% by 2020. Adjustments to this figure are possible in the event additional decisions are adopted aimed at supporting a number of new projects like greenfield projects, industrial parks, machine-tool construction, and engineering.

You mentioned an “industrial matrix” – what does this mean?
An “industrial matrix” isn’t an official name, but it captures the essence of this method, which we expect to implement. In short, it involves the application of all possible industrial policy tools the State has in its arsenal to meet its priorities.

What kinds of priorities? Priorities could be industry-specific, inter-industrial, and/or functional. We should be able to answer the questions: “What has the higher priority: developing biotechnology, for example, or light industry?” It’s important to break down industries and sectors by group, which are then segmented by priorities. And then with regards to these priorities, to offer the most effective tools of industrial policy, tools specific to the priority. This is what an “industrial matrix” is.

What industrial policy tools do you mean?
Traditional industrial policy tools that the Ministry of Industry and Trade has in its arsenal are: 1) The Ministry can order research and development work; 2) subsidies, primarily through interest rates on investment projects; and 3) state capital investments in projects.

Could you first talk more in detail about the research and development work? What should be changed?
We believe that direct R&D orders should be gradually transformed into subsidized expenditures by private investors for R&D, with the potential for later reimbursement to the state budget of part or even all of the subsidy, if the results are not implemented. That means hedging the state budget more from inefficient spending.

Today, there are a number of industries in which research and development don’t have the character of a venture nature that R&D usually does. We have to create the conditions for the full return of subsidies in case the investors implement the results of R&D poorly. In other words, if we want to plant a seed, in a short time a fruit-bearing tree should grow out of it. If the seed doesn’t grow, the funds for its purchase should be completely or at least partially returned to the state.

What changes should there be in subsidies?
In subsidizing interest payments, from 2013-2015, according to the current version of the budget, the Ministry should be directing 40 billion rubles to subsidies.

We believe that today the problem at which this tool is aimed, is one of the biggest barriers to economic growth and the growth of manufacturing. I mean access to capital. Indeed, our jurisdiction is losing to other jurisdictions according to such parameters as the cost of resources and borrowed capital. As long as macroeconomic conditions haven’t changed, a tool such as subsidies for interest could be justified and effective. And we are going to put them in place, but these subsidies should only be for the purpose of stimulation and not to cover the costs of already existing projects.

So far we have been able to get subsidies for completed projects where bank loans had already been taken out under the appropriate conditions, and in the long run, the state simply made it more economical. This was definitely justified during the 2008-2010 crisis. But now the situation has changed and we must shape policy in such a way that subsidies are given at the start of a project, and not the other way around. In the absence of subsidies, the investor doesn’t go to the bank and doesn’t get a loan.

In other words, we are improving the economics of the project to the point where it can make its own investment decisions.

What about state capital investments? What changes are expected in this area?
As for the third tool, state capital investments, we believe that this should be minimized and we should gradually move away from it. We won’t abandon it in all industries, of course – in some areas it isn’t possible to do without it.

State capital investments will most certainly be present in those sectors in which the state plays a large role. That includes, for example, shipbuilding and aircraft manufacturing. But subsequently we must move away from this kind of investment and move towards subsidizing costs: possibly by purchasing equipment or subsidizing items that make our jurisdiction in various segments more competitive. Meanwhile, it should be understood that direct state investments don’t encourage overall economically efficient resource use.

First of all, there should be a focus on private initiative and aid in making investment decisions, where only slight stimulation is needed, i.e., minimal state involvement.

At the beginning of the interview, you mentioned the need to reduce costs as an essential condition for implementing the “industrial matrix” and improving the efficient of industrial policy in Russia…
That’s correct – without minimizing costs, we won’t achieve our objectives. The problem today is that not all state-owned companies have assigned so-called cost managers, i.e., managers whose job is exclusively to control costs. In our view, it would be very appropriate to do this, since so often resources are used ineffectively. Today, mismanagement or shortcomings in management often lead to bigger losses than from corrupt practices. And we need to persistently fight this. You can’t pump up and maintain pressure in a flat tire until you have patched it up first.

For example, R&D subsidies should lead to increased demand for engineering, for services in innovation, for services at R&D universities, though we don’t limit the performance of research and development to research centers. On the contrary, we want to de-monopolize this sector, because right now the work is done predominantly by state institutions and research centers.

The same can be said for subsidizing interest. Stopping subsidies a posteriori for making decisions about subsidies a priori will lead to the implementation of projects that would not have been realized without these measures and solutions.

Direct investments are a somewhat different situation. It is clear that the military-industrial complex would develop more effectively with the use of these tools. But the possible release of funds that were previously intended for public investments in other sectors, could allow them to be used more effectively.

What manufacturing industries is the Ministry banking on?
On those sectors where Russia has traditionally been strong, like the military-industrial complex, aerospace, and others, as well as on the new and interdisciplinary areas like the production of composite materials, rare metals, biotechnology, and machine-tool construction.

Text: Tatyana Ryzhkova

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