Modernisation in Belarus: the Process is More Important than the Result?

On 20 December, Deputy Prime Minister Piotr Prakapovich announced the need to accelerate the modernisation of Belarus. 

According to him, it was necessary to carry out not only its technical modernisation, but also its economic modernisation, including improving public administration system. 

But what Prakapovich's speech actually proved was that modernisation of Belarusian enterprises has failed. The state invested over $1bn in the cement and woodworking industries, but businesses are still generating only losses.

At the same time some Belarusian companies cooperate with developed countries and update new technologies in their enterprises successfully. These examples serve as a good lesson for today's leaders of Belarus.

The authorities have adopted a number of modernisation programmes over the past 19 years, though they started talking about it much more since 2012. Belarusian economist Leanid Zlotnikau links it with the reduction in revenues from the export of solvents.

Although the authorities state that modernisation goes beyond simply modernising equipment, in reality they are not ready to change their management style. On the one hand, they waste valuable resources on huge projects, yet they do not even try to prepare adequate business plans. 

Many Belarusian officials are interested in the process of modernisation, rather than in its results. 

Plenty of Expensive Cement

Over the past years, the authorities have modernised four cement plants in Belarus with a price tag of about $1.2bn. China gave a conditional loan to finance new equipment and specialists who carried out the modernisation of the enterprises. Despite all of this, the introduction of the actual usage of these new capacities at cement factories has been postponed for two years, which in effect has led to a $0.5bn loss for Belarus.

Before investing money, the authorities failed to take into account any possible market changes and how competitive their own products would be. As it turns out, the cost of Belarusian cement, unfortunately, has remained too high. Belarusian officials wanted to make these plants were export-oriented, but Belarusian cement appeared to be more expensive than its Russian counterpart.

The authorities have to sell their cement at lower prices to offload their stockpiles and thus, all of thews recently modernised cement plants remain unprofitable.

Other Challenges of Modernisation

The defeat of a programme of modernisation in the woodworking industry has become a part of many anecdotes in Belarus. Over six years, the state invested more than $1.3bn to modernise the woodworking industry. Last year, Lukashenka even introduced compulsory work at woodworking enterprises. No employee of the nine companies in the industry could resign without the permission of their superiors.

A month ago, Alexander Lukashenka once again visited Barysaudreu, a woodworking company in the Minsk region. He was shocked by the lack of results. Barysaudreu, as with most other enterprises in the sector, not only failed to become more competitive, but did not even begin to undertake the first steps towards its own modernisation. Mastydreu, another enterprise in the industry, has been unable to produce anything since 2010.

Many other firms have similar problems. Mikhail Miasnikovich, Prime Minister of Belarus, said that "20 percent of companies cannot cope with the modernisation and another 37% are modernising with a lag." And still, Lukashenka's regime continues to waste money on other major projects. 

Integral, the largest manufacturer of microelectronic components in Central and Eastern Europe, is also in decline, as the authorities failed to modernise the enterprise. Alexander Abukhovich, an economist who worked at Integral, explains that the company needed about $2bn to modernise, but the state allocated only $284m: “That is not enough to even reduce the backlog as competitors modernise even faster.”

This January, the Belarusian Ministry of Finance published financial reports of Belarusian enterprises for the first three quarters of 2013. According to their data, Belarusian companies succeed primarily in areas related to raw materials.

Most Profitable Open Joint Stock Companies of Belarus Most Losing Open Joint Stock Companies of Belarus
Navapolatsk Oil Refinery Barysau Meat Processing Plant
Mazyr Oil Refinery Slutsk Meat Processing Plant
Belshyna (tire producer) Svetlahorsk Pulp & Board Plant
Belaruskali (potash producer) Vityas (TV set plant)
Homeltransoil Druzhba (oil transit) Krychau Cement Plant

Why the Process is More Important than Result

The failure of these and other modernisation projects have their roots an economy dominated by the public sector. Responsibility for improving enterprises' capacities remain divided between many officials who try to pass it on to someone else, usually the directors of the companies.

But directors have little interest in the long-term success of state firms. Thus, the government have no tools to motivate the directors of these enterprises, except criminal liability for failing to modernise their operations.

Siarhiei Chaly, a Belarusian economist, explains that nobody cares about the final result of these modernisation projects, but many people want to earn money from the modernisation process: suppliers, builders, or as Chaly states, "there is a large number of people who do not earn on a project's profitability, but on its expensiveness."

The more expensive the project, the better for its implementers.

Opportunities for Belarusian Enterprises

Many Belarusian officials are surprised that major modernisation projects have failed to yield the desired results. They believe that the purchase of new equipment immediately would translate into revenue growth. The result indicates that Belarusian enterprises still require specialists who are good in strategic planning, marketing, quality control and other areas not related to the equipment itself.

However, not all Belarusian companies have gone this way. Horizont, a manufacturer of TV sets and household appliances, invited Japanese engineers to modernise the enterprise. The engineers are still in Minsk introducing new technologies. As a result, Horizont produced 530,000 TV sets last year, and most of them are not under their own brand, but rather Toshiba or Sharp.

The Belarusian Automobile Plant, one of the world's largest manufacturers of dump trucks, established a subsidiary company in Germany to build outside contacts with producers from the European Union. For its part, the company is seeking new technologies and opportunities to modernise Belarusian mechanical engineering.

Looking at these examples, Belarusian officials understand the need to have links with more developed countries to reform. In such conditions, cooperation with the West and initiatives such as the European Dialogue on Modernisation with Belarus has become precisely the kind of thing the country's leaders need today.

The authorities often try to reinvent the wheel and find their own unique methods to modernise the country.  But sooner or later they will be forced to initiate a real modernisation programme, one which should go far beyond simply buying new equipment.  

Ryhor Astapenia is a Development Director at the Ostrogorski Centre, and editor-in-chief of Belarusian internet magazine Idea.

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