Structure of final entities remains unclear (860 words)

Published: 6/1/2001

Having announced, in mid-May, the restructuring of the aerospace industry under the Federal Programme of Aviation Development for 2002-2010 and through to 2015, the Russian aerospace agency (RAKA), along with the Ministries of Economics and Industry and Science, has unveiled further plans for the restructuring for other parts of the industry. Three specialized holdings have been added to the aerospace holdings SVSK-1 and SVSK-2. These are: I. Aviation Engines and Parts (33 companies) including: MMPP Salyut, UMPO, GNPP Motor, OAO Lyulka-Saturn, MKB Granit, MPP Rumyantsev, NPP EGA, Perm Motors, OAO Aviadvigatel, FPG Dvigateli NK and OAO Rybinsk Motors. II. Aviation Arms (eight companies) including: GNPTs Zvezda-Strela, GMKB Vympel, RNPP Region, MKB Iskra, TMKB Soyuz, GMKB Raduga, OAO Duks and OAO DMZ. III. Avionics (37 companies) including: Airspace Equipment Corporation, OAO KhK Aviapribor-Holding and OAO Avionics Concern. According to Koptev, General Director of RAKA, the restructuring will allow the industry to pass from “ the strategy of survival to the strategy of changes of quality”, by countering the lack of focus on designs, through the rational allocation of financial resources. The goal is to reduce production costs, increase investment attractiveness as well as to develop greater flexibility in the industry, in order to realize its potential. As with the aerospace holdings, the restructuring will be in two stages, gradually merging the holdings into the new structures at the second stage, after 2003. What exactly is included and at what stage still remains to be settled, according to Vladimir Mitkin, Head of the Ministry of Industry and Science, who says that “the disagreements between RAKA and his ministry mainly concern which company should be included into this or that structure. This issue still has to be resolved”. The government has instructed RAKA and the two ministries to complete the Aviation programme and submit its proposals before 15th June 2001 and, in the third quarter of 2001, develop proposals on “creating conditions to attract investments into the aviation industry, while preserving the tax revenues of the regions after the creation of the integrated companies”. According to sources from the Ministry of Industry and Science, there are no preliminary plans even for the first stage of bringing the entities together for consolidation, and no plans as yet from the state as to how to resolve the issue of private shareholder participation in the new structures. According to reports, some of the new groupings, particularly AVPK Sukhoi that, in many ways, has some of the biggest problems, particularly given the location of its fighter plants, have already started to consider steps to reconcile the restructuring plans with the regions. The Independent Military Review, on 1st June, said that AVPK Sukhoi is ready to come up with a proposal of social and economic partnerships with regional authorities (notably, the Khabarovsk region) in an effort to ameliorate the effects of what inevitably would be substantial restructuring, if ageement is reached. It is encouraging to see that Sukhoi may actually be considering some rationalisation of its production capacity, assuming that “social and economic partnerships” is a cipher for restructuring and represents the early stages of preparation for plant rationalisation or closure. However, the government's focus in its development brief on the preservation of the “ tax revenues of the regions after the creation of the integrated companies “ gives some indication of the importance it places on persuading the regional governments to cooperate in having aerospace activities curtailed or closed. Discussions of the role of the non-state investor in restructuring have so far received scant regard. The new entities are to be produced out of an amalgam of state enterprises and joint stock companies, in some cases, with little or no state ownership such as IAPO, and others, such as OAO Tupolev, where the state holds a controlling share. If the plan, which has not been revealed in detail, if it exists at all, is to create single state-controlled joint stock entities with the state as controlling shareholder, it is unclear exactly how that control would be achieved. Whether the state will simply create a financial holding, consolidating its various holdings to give it a controlling stake in most of the enterprises, or whether it plans a more dramatic change, with the creation of a single joint stock entity in which shareholders in the constituent companies swap their shares for holdings in the new entities is not known. As some of the entities that will be incorporated will be state enterprises, the interminable question of whether a state entity can be merged with a joint stock company without first passing through joint stock status reappears. The frequency with which the government repeats phrases such as “attractive to investment “ suggests that the intention will be to integrate those investors such as Kaskol into the new structure, on a basis that will encourage it and other industrial and financial groups to make further funding commitments. At present, however, the path ahead remains unclear, but it does appear to be close to the top of the agenda for those at the ministries and RAKA, who are currently developing the ongoing plan.

Article ID: 2570