Interview with Alexander Brindikov,
First Deputy Minister of Industry, Science and Technology of the Russian Federation
A year has passed since the acceptance of a federal target Program for the reform and development of the defense-industrial complex (DIC). What has been done in that time in the framework of realizing the program?
Yes, time is flying. Over the past year, most of the efforts of state agencies were concentrated on the development of a procedural and legislative base for the reform of the defense industry. We have made significant advances in creating normative-procedural documents. For example, together with the Ministry of Property Relations we created very serious documents on the formation of methods and procedures for evaluating intellectual property. This is a very important direction for us, since many problems of DIC reform were linked to increasing the government's share in the capital of joint-stock companies. Where the government experienced a serious and unwarranted loss of shares, these will be recovered specifically through the mechanism of evaluating intellectual property created earlier, with funds from the budget.
The government of the Russian Federation has made the decision to create an interdepartmental commission for the realization of the Program for the reform and development of the DIC. In the near future the committee will enter a new stage of work. In this stage the committee will review prepared projects for the creation of integrated companies. This means that we are ready to begin open and very important work on a problem as complex as the composition of these integrated structures on an interdepartmental level. We will work on the very difficult problem of deciding which enterprises need to be included in the corporations being created, and which do not. A resolution on this commission has been accepted. The commission itself is already operating. In November of this year hearings for the first pilot projects will be held. These will be the "Splav" company, the Vega holding and a number of other corporations. Then, work will be scheduled. Reviews of a number of other companies have also been planned.
As we are developing procedural and normative documents, we have also been working on specific integrated DIC structures. This work gained concrete forms when the large Almaz-Antei holding was established. A presidential decree was published on the creation of a holding based on the foundation of Zvezda-Strela - and this would just be the first stage in the creation of a more powerful holding for the development of missile armaments.
The main problems of constructing integrated holdings are caused by the fact that, often the holding includes enterprises with no government shares. In these conditions, we need to search for technologies and procedures that would create effective, manageable and working corporations. I feel that, in principle, much has been done. We are satisfied with the results of the past year of work. In any case, we are following the schedule of carrying out Program events.
What other work is carried out by the Ministry of Industry, Science and Technology of the Russian Federation in the defense industry?
One of the most important tasks for the ministry is the renovation of the technological and production stock. This is an essential component of the reform Program. The primary focus of the work is outfitting production with modern equipment. We take equipment from some enterprises and transfer it to others. Most of the investment resources from the Program's budget are spent on these operations.
It is clear that questions of renewal on a different technological level have to be solved at the same time. Basic funds have to be renewed. This can either be done through modernizing relatively up-to-date equipment already in place or through purchasing new exclusive equipment. The second option, however, requires serious investment. Sources for this investment include the state budget and the funds of the enterprises themselves; in addition we are searching for other options - leasing schemes, for example. We are planning on creating industry parks under the agencies for the concrete objective of strategically reequipping the industry. We have analyzed the technological and industrial park in the industries and we currently have a clear understanding of the scale and complexity of this goal, the directions of efforts, the resources at our disposal, and the parties that need to be involved in this work. But, in any case, this is also one of the components of the reform and development of the DIC.
What should the result of the fulfillment of the Program be?
Integrated structures must be created that would be stable in market conditions and manufacture competitive products - both civilian and military. At best, 40% of the output of our corporations fulfills state orders. The rest is civilian-use, and it needs to be competitive. When we began working on the problem of DIC production for the fuel and energy complex (TEK), we found out that the consumers were not satisfied with the quality and reliability of the goods. For the first time we are going to demand that domestic enterprises have preference in providing manufacturing equipment for the TEK as long as the quality is high enough. This is all interconnected.
Is the Ministry of Industry, Science and Technology concerned with the quality of production as well?
We give the utmost attention to that. We have instructions from the president and the Russian government and we have objectively concluded that the solution of all DIC problems demands a radical change in the quality of production. There are a number of unique elements in this system, which require, above all, modern production equipment, a proper legislative base, modern business administration technologies and a continuous acquisition and life-cycle support (CALS) strategy. We have concentrated our attention on this aspect of the work within the framework of carrying out the "National Technological Base" program. This is a federal target program that is closely connected with the Program for reform and development.
There are currently six pilot projects for the introduction of CALS technologies. These technologies should be incorporated not only by the top companies, but also by all of the participating enterprises. This presupposes the necessity of developing a legislative base, since, currently, many things are simply not legitimate - electronic signatures, for example. If a legislative base is not created, all of this activity will simply become the hobbies of individual directors. And here we have good working relations with Gosstandart (State Standard Office), which is responsible for a certain agenda, and is successful in carrying it out, despite its extraordinary complexity.
Could you name the projects of introducing CALS-technologies?
We have accepted some pilot projects with large export components: ships being built for India by companies supervised by the Russian Shipbuilding Agency; tanks built by the system of the Russian Conventional Arms Agency; Tu214 and Tu-334 planes in the aircraft industry. Similar work is conducted at AVPK Sukhoi and RAC "MiG". Analogous project are carried out in civilian industries, in particular KamAZ.
We are basically talking about establishing a system of quality in production, consisting of four elements: basic foundations, a normative base, the introduction of new technologies, and the provision of cadres. This is also about using the old system - for example the system of military quality inspections - a unique system that was created in Soviet times and continues to function to this day. We are supporting the efforts of the Russian Defense Ministry to raise the effectiveness of this system. It is very important for military inspections to be more stable in the market conditions, when state orders will not always dominate in production. This system could be very useful for providing the necessary quality of civilian production - and any enterprise benefits from the effective work of military inspections, since then the directors of the enterprise can be assured of the quality of production.
Interestingly enough, when we look closer at the problem of quality assurance, we see that serious difficulties arise in connection with the need for the effective quality control of materials and components, since metals and materials received by enterprises are often of unsatisfactory quality. The component base is a colossal problem - it's a sensitive issue for us. There are two sub-programs within the "National Technological Base" program - one dedicated to electronic components and the other to materials used in the space and aviation industry.
The interdepartmental program developed by our Ministry and other ministries and state bodies aims to solve the entire range of production quality problems.
Some in the industry are suggesting that mobilized resources maintained in working condition need to be reduced. What is the position of the government on this question?
This is a very delicate topic. One thing is clear: from one side, the volume of mobilized resources must correspond to the needs of the government and to the level of military-political risks, but from the other side, the volume must be compatible with the national economic potential. The Ministry of Industry, the Ministry of Economic Development and other agencies are currently working on this problem. The Soviet-era scale and the present-day potential do not match. Everything needs to correspond.
Certain entrepreneurs are advocating the liberalization of the policy on foreign investment in the defense industry and the Russian machine-building complex. In particular, they recommend the cancellation or the lowering of the 25% threshold for the permission for foreign capital in defense-industrial joint-stock companies.
We used to be told that if we open the doors of our enterprises to foreign owners, investment will flood the industry and we simply won't know what to do with the money. We opened the doors, and we have foreign investors, but we don't see the flood of investment. I think that the volume of investment depends not only on the nationality of the owner. We need to improve the investment climate in Russia as a whole and raise the level of management.
The topic of attracting foreign partners demands separate analysis in individual cases. We need to see who the investor is, what his goals are, and what he plans on doing. These questions are especially critical for the DIC, and especially for enterprises that are key in various technological hierarchies. Another matter is that we currently cannot control all of the processes. Let's take the bankruptcy program, for instance. Unfortunately the law on bankruptcy in defense enterprises is such that any creditor can bankrupt any enterprise, even if the debt is as low as 100,000 rubles (about $3,000 - ed.).
What do you think of the presence of foreign capital in the Russian DIC in general?
It is too early to make a general judgment, but we are systematically analyzing this presence and its consequences. It can, however be noted that there is no direct relation between the level of investment and the appearance of foreign investors.
Can the Ministry of Industry, Science and Technology influence regional officials when they block the creation of corporate structures or create an unbearable business climate? I am talking about cases such as the Khabarovsk Territory or the Ulyanovsk Region.
Our goal is, first of all, to create clear rules of the game. We are not supposed to influence anyone - we must know how to negotiate, how to distribute zones of influence, and thus affect the process. We have a good relationship with the regions. There are problems, of course, which is natural when reforms are involved. Many enterprises should be left outside the DIC system - then social and economic problems arise. And here we are not shifting all of the weight to the regions, and we are not saying: "these are your problems, you decide the fate of the abandoned enterprises." Objective work with the regions is incorporated in the framework of the working organs of the commission.
As for the AVPK Sukhoi or Aviastar-SP problems you are referring to, these are problems of a different nature. These are struggles over financial flows, or, more precisely, over the control of financial flows. Our position on this is clear. There are integrated structures, and they must speak for all of the corporations and all of the companies that are part of the structure. At the same time it is not important which enterprise serves as the foundation for the administration as long as it functions. We cannot announce that we have a vertically-integrated structure that acts as one entity, but at the same time let state purchasers and all others work as they please, with any enterprise of this company, without the agreement and participation of the administrative company. In this way we are beginning to destroy that structure.
It's not just that we want to gather enterprises into a single structure, reducing the number of economic entities in the DIC. We aim to make the corporations a base for bringing the DIC to an entirely new level. This is a totally different capital process with completely different options for investing into development and technical refurnishing. These corporations should not see the state as its only partner and customer. If an investor sees that the system is working, how stable and effective it is, he will not need to come and demand state guarantees, as it's happening today. We should not forget that the state budget is quite limited.
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