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Support for Innovation Activities by the City Administration: Review of Innovative Firms in Zheleznogorsk

Pavel V.Yakushin

First Deputy Mayor of Zheleznogorsk

INTRODUCTION

I am glad to have the opportunity to participate in this international seminar. The issue of developing new science-intensive businesses and innovation projects is an urgent one these days, especially for closed cities such as ours. Like other closed cities of the Russian Ministry of Atomic Energy (Minatom), Zheleznogorsk has accumulated a great deal of scientific and technical potential backed up by a strong industrial base and enormous experience working in areas requiring highly specific knowledge and skills. Like most of the “science-intensive” cities of Russia, we have faced a serious problem: How can we use this potential effectively? How can we turn the innovative technologies we have developed into successful businesses and provide jobs for highly qualified personnel displaced from the nuclear weapons complex because of cuts in defense orders and the diversification of the defense enterprises around which our cities are based? I think this is a mutual problem, a mutual headache for us, the city authorities, and the management of these enterprises.

I would like to take this opportunity to express my sincere gratitude to the organizers and sponsors of this seminar, including the Russian Ministry of Atomic Energy, the U.S. National Research Council, and the Obninsk team. I hope that during our discussions and meetings at this seminar I will be able both to share my experience and to see different ways of solving the problems I have mentioned. I also think that our dialogue here will become the first step in our cooperation in the area of innovation development.



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Page 114 Support for Innovation Activities by the City Administration: Review of Innovative Firms in Zheleznogorsk Pavel V.Yakushin First Deputy Mayor of Zheleznogorsk INTRODUCTION I am glad to have the opportunity to participate in this international seminar. The issue of developing new science-intensive businesses and innovation projects is an urgent one these days, especially for closed cities such as ours. Like other closed cities of the Russian Ministry of Atomic Energy (Minatom), Zheleznogorsk has accumulated a great deal of scientific and technical potential backed up by a strong industrial base and enormous experience working in areas requiring highly specific knowledge and skills. Like most of the “science-intensive” cities of Russia, we have faced a serious problem: How can we use this potential effectively? How can we turn the innovative technologies we have developed into successful businesses and provide jobs for highly qualified personnel displaced from the nuclear weapons complex because of cuts in defense orders and the diversification of the defense enterprises around which our cities are based? I think this is a mutual problem, a mutual headache for us, the city authorities, and the management of these enterprises. I would like to take this opportunity to express my sincere gratitude to the organizers and sponsors of this seminar, including the Russian Ministry of Atomic Energy, the U.S. National Research Council, and the Obninsk team. I hope that during our discussions and meetings at this seminar I will be able both to share my experience and to see different ways of solving the problems I have mentioned. I also think that our dialogue here will become the first step in our cooperation in the area of innovation development.

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Page 115 I would like to devote my report first to the efforts of the city administration aimed at developing science-intensive industries and the experience we have accumulated in this area. I will then discuss the activities of specific innovative enterprises, including their problems and difficulties, and sum up our experience resolving these problems. BRIEF REVIEW OF THE SOCIOECONOMIC SITUATION OF THE CITY I would like to start with a brief presentation on our city, its current socioeconomic situation, and the role of the defense enterprises around which the city was formed. Like other similar cities, Zheleznogorsk was founded to fulfill important national objectives related to strengthening the defensive capacity of the country. In the late 1940s and early 1950s, the Soviet Union launched the so-called “nuclear project.” An entire system of secret cities was created under the auspices of the USSR Ministry of Medium Machine-Building. They were united in a single research and production complex engaged in mining and processing fissionable materials and manufacturing equipment for the atomic energy industry and the military. Zheleznogorsk grew into a city from its origins as a workers' settlement created for the construction of a defense enterprise, Combine 815 (now called the Mining and Chemical Combine Federal State Unitary Enterprise). Zheleznogorsk is located on the Yenisei River approximately 60 kilometers northeast of Krasnoyarsk. The following main enterprises are located in the city: the Mining and Chemical Combine (MCC), which is under the auspices of Minatom. Its core activities involve reactor production, spent fuel storage, mechanics, and environmental radiation monitoring. the Research and Production Association of Applied Mechanics (NPO PM) of the Russian Aerospace Agency. Its core activities include the design, production, and control of satellites for communications and navigation; the design and production of antenna systems; mechanics; and instrument making. two construction companies, Sibkhimstroi and Atomstroi. Their core activities involve construction and installation work for industrial and civil sites, including MCC facilities. the Chemical Plant, a subsidiary of the State Enterprise Krasnoyarsk Machine-Building Plant. Its activities involve finishing work on jet engines and technologies for reprocessing jet engine fuel. the Sibalko distillery

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Page 116 It should be noted that even today, these city-forming enterprises continue to play a defining role in the socioeconomic life of the city. Following are several pieces of evidence in this regard. The current population of the city is 103,000, with 52 percent of the working residents being employed by the main enterprises as of the first half of 2001. By the way, the number of people employed by the city-forming enterprises has decreased from 30,000 in 1992 to 20,000 in 2000. During first six months of 2001, the volume of goods and services produced by the main enterprises comprised 80 percent of total output volume in the city. The greatest share comes from MCC and NPO PM, as shown in Table 1. This ratio has been maintained over the past several years, though it should be mentioned that NPO PM's share has increased slightly. It is interesting that the picture for tax proceeds is somewhat different. During the past six months, about 52 percent of all tax revenues received by all levels of government came from the city-forming enterprises, as shown in Figure 1. The main taxpayers are still MCC and NPO PM, but Sibalko is beginning to play a significant role in providing tax income for government budgets. Thus, it is becoming clear that economic and social stability and the further development of the city are directly connected with the situation at the city-forming enterprises. I would like to note that the city has created all prerequisites for the development of innovative businesses. The city's enterprises have accumulated great scientific and technical potential due to their highly qualified personnel and well-organized production base. In addition to their core activities, the enterprises have conducted scientific research in related and completely new areas. Fundamentally new technologies and products have been developed, with some of them having no analogues in Russia or abroad. TABLE 1 Output Volume by Main Zheleznogorsk Enterprises

Enterprise Percentage of Total Output Volume for City MCC 25 NPO PM 26 Sibkhimstroi 9 Atomstroi 10 Chemical Plant 4 Sibalko 6 Other enterprises 19

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Page 117 Image: jpg ~ enlarge ~ FIGURE 1 Breakdown of tax revenues for the first half of 2001. Besides its scientific potential, the city also has other necessary conditions for the development of innovative businesses, including the following: a well-developed system of human resource training. There are four branch campuses of Krasnoyarsk state higher educational institutions: the Krasnoyarsk Technical University, the Siberian Aerospace Academy, the Krasnoyarsk Pedagogical University, and the Krasnoyarsk Academy of Nonferrous Metals and Gold. About 1,310 students are currently enrolled at these institutions, 835 of whom attend regular daytime classes. Specialized secondary educational institutions (trade schools and an industrial college, with a total of 2,180 students enrolled) prepare specialists for work in the city-forming enterprises. a well-developed financial infrastructure. There are six lending institutions in the city, which have a great deal of experience in interacting with the city-forming enterprises. They provide credit for the ongoing activities of the enterprises and are implementing programs to provide credit to their employees. a good social support structure for citizens. The amount of public funds spent per citizen is several times higher here than in neighboring regions. The social support system is functioning. acceptable living conditions. The city economy is maintained at a good level. Work is constantly under way to repair and upgrade public utilities, beautify the city, and maintain green spaces. There is a good system for intra- and intercity freight transport and a well-developed telephone system. Residents of the city have never encountered problems with shutdowns of the local water and power supply systems. Thus, to my mind, the task of the city administration and the enterprises is to use this potential and create successful businesses on the basis of innovative technologies and products.

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Page 118 I would like to say that we have devoted no small amount of effort to conversion projects. Quite a lot of experience has been amassed, and I would like to share some highlights with you now. I would like to start with the experience of two city-forming enterprises, MCC and NPO PM, since they are the main sources of innovation ideas and projects. MCC: EXPERIENCE IN DEVELOPING INNOVATION PROJECTS As you know, MCC is the main city-forming enterprise of federal significance located in the closed city of Zheleznogorsk. Key radiochemical production facilities are situated deep in the Siberian rock and are without analogue in the world. For many decades, MCC produced weapons plutonium from natural uranium. Plutonium was supplied to other enterprises, where it was used to manufacture nuclear warheads. At the same time, the rest of the uranium was recovered to be reused in reactors. This objective was pursued through the operation of two graphite-moderated, light-water-cooled reactors, which were shut down one by one in 1992 because of changes in the world situation. A third reactor with a closed-loop cooling system continues to live and “breathe” at present. An underground nuclear heat and power plant has been built around this reactor, and it now provides heat to practically all parts of the city. According to a U.S.-Russian intergovernmental agreement signed in March 1992, Russia was to have shut down all reactors of this type by 2000. This deadline was later extended to 2006. MCC currently employs about 9,300 people, almost half of them being specialists with university or vocational school degrees. The present core activities of the enterprise are as follows: MCC carries out radiochemical reprocessing of irradiated fuel from the ADE-2 reactor. The extracted plutonium is stored at the enterprise and, in accordance with the intergovernmental agreement, is not used for weapons production. Compliance on this point is monitored by American observers. The enterprise is also involved in the “wet” storage of irradiated nuclear fuel from VVER-1000 reactors (the capacity of the storage facility is about 6,000 metric tons). The facility is currently 35 percent full, and work is under way to expand capacity to 9,000 tons. Sites related to the production of weapons plutonium are being shut down in accordance with the Program for the Decommissioning of Defense Facilities and Eliminating the Consequences of Defense Activities at MCC. A plant is being built to produce silicon for the semiconductor industry. This major conversion project includes the creation of an indus

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Page 119 trial complex for the production of silicon semiconductors, beginning with the raw material, trichlorosilane, and ending with silicon wafers. Now that the military production activities of MCC have been reduced, the combine is developing other types of activities. Some of them are based on the enterprise's experience working with fissionable materials. These include unique technologies developed by combine specialists that can be characterized as innovations: a dry (air-cooled) storage facility for spent nuclear fuel with a capacity of 30 tons a demonstration center for the extraction of liquid radioactive wastes and the decommissioning of storage tanks for such wastes demonstration of a remote-controlled system for monitoring leaks of salt solutions from tanks of highly radioactive waste pulps a center for the chemical analysis and assessment of problems connected with various liquid wastes, including vitrification a demonstration center for decontamination and recycling of metals technically advanced facilities for the temporary storage of plutonium dioxide All of these projects are undoubtedly interesting and promising. However, all of them are directly related to the former core activities of MCC and cannot be implemented as independent projects. I would also like to discuss a number of projects aimed at creating and developing the production of nonmilitary items, projects that can provide new jobs for MCC specialists dismissed because of defense cutbacks. These projects are innovative to a greater or lesser extent; that is, MCC specialists developed them either directly or by improving on ideas borrowed from other sources. Some of these projects have currently ceased operation, while others involve separate units and facilities within the combine itself. I will briefly discuss the essence and aims of these projects and attempt to summarize their experience and illustrate the basic difficulties and problems confronted by specialists. Finally, I would like to cite the results of an analysis of these problems and indicate possible ways of resolving them. I shall begin with the projects that are either partially or completely inoperative at present: Production of artificial crystals. At one time, MCC acquired and developed a technology for growing artificial emerald crystals and brushes. These materials are widely used in jewelry manufacturing and are in rather great demand because natural emeralds are very rare and expensive. The production of these materials was organized at a separate enterprise staffed by MCC specialists. Equipment was purchased, the technology was per

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Page 120 fected, and several pilot batches were produced. The new enterprise established contacts with Russkie Samotsvety [Russian Jewels], a major St. Petersburg jewelry manufacturer, and sold the company several lots of emeralds. Production of super pure materials (tellurium, gallium). The technology developed by MCC specialists made it possible to achieve an admixture content of 10−4 percent. Gallium is used in microelectronics, optoelectronics, and semiconductor equipment in preparing compounds for large and super-large integrated circuits, lasers, and photodetectors. Tellurium is used in electronics and semiconductor equipment for manufacturing highly efficient thermoelectric generators and refrigerators. Production of thermoelectric modules and materials (TEMO). TEMO is a compact solid-state thermocompressor that circulates thermal energy during the transmission of direct current. A unique feature of this module is the simplicity with which it shifts back and forth from cooling to heating modes by changing current polarity. The difference in temperature between the hot and cold sides of TEMO is about 70 degrees C. These characteristics allow TEMO to be used in machines and equipment requiring cooling, heating, or maintenance of a stable temperature under widely varied operating conditions. Therefore, the uses for this device are practically limitless, covering a wide range of products: all types of refrigeration equipment—domestic and automotive systems, air conditioners space technologies, laboratory equipment, industrial equipment medical devices (thermocontainers and isolation chambers) electronic and computer systems (processor cooling systems), and so forth A pilot site for TEMO production was created at MCC, with modules being assembled manually in small lots. A pilot consignment of modules was purchased by the Miass Machine-Building Factory. All documents required for product certification were prepared. Using funds from the federal targeted program for the development of the closed city of Zheleznogorsk, the city administration allocated about 6 million rubles in 2000 to create a manufacturing unit (automated assembly line) to produce thermoelectric modules. However, despite the fact that the project was moving along rather well, MCC management decided to terminate the activity and dismiss the personnel involved. And now I would like to briefly discuss MCC conversion projects that are still functioning.

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Page 121 Production of biologically active preparations, namely CO2 extracts from Siberia's renewable plant resources. Currently MCC has a pilot unit for the production of plant extracts using liquid carbon dioxide. The extracts can be used in medicine, perfumes, cosmetics, and foods. Plans call for launching production of a new generation of plant growth stimulators, pesticides, and herbicides. In addition, the extracts are being constantly studied to find new properties for expanded applications. It should be noted that the project is supported by the Russian-American Nuclear Cities Initiative. Recycling of mercury-containing lightbulbs. MCC has a pilot unit for recycling old luminescent bulbs and other mercury-containing articles. This helps to resolve certain environmental problems in the city and the region. Development of a machine-building complex for producing equipment and spare parts for the aluminum industry. This project is being implemented by the Mechanical Repair Plant (MRP), a structural subunit of MCC. MRP ensures the safe operation of the main technological equipment involved in nuclear power production at MCC. With the cutbacks in core activities at MCC, a decision was made to start producing aluminum electrodes for the aluminum plants of the Krasnoyarsk region. A unique technology developed by the Krasnoyarsk Scientific-Research Institute of Physical Engineering is being used, namely alloying heterogeneous metals by means of explosion. A special chamber in which dozens of articles can be alloyed at once was built especially for this purpose in the underground facilities of MCC. This project can today be called one of the most successful conversion projects implemented by MCC. MRP is continually expanding the range of its products and markets. In 2000 the sales volume for this product line was about 30 million rubles (almost 15 percent of the entire sales volume for MRP on the whole). The project has also received financial support from the Program for the Development of the Closed City of Zheleznogorsk in the amount of 30 million rubles. MCC Radiation Technology Center (RTC). Like MRP, RTC is a subunit of MCC, but its activities are not related to the operations of the combine itself. RTC facilitates the development of the production complex by manufacturing medical products. Solid concentrated radon, radon generators, and the nonwoven bandage material Algipor are currently being produced successfully. I will discuss this enterprise in greater detail in the second part of my report, which covers the innovation activities of certain enterprises.

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Page 122 I would now like to summarize the experience accumulated by specialists during the implementation of various projects and try to categorize the general problems they faced. I would like to subdivide these problems into two groups. The first category includes reasons of a macroeconomic nature: The unstable economic and political situation in Russia and the Russian economic crisis. Most of the projects I have mentioned began in the early or mid-1990s. At that time, established relationships between producers and consumers were destroyed, and some enterprises went bankrupt. It might be said that there was no domestic market as such for some of MCC's products. For example, this seriously impacted the production of super pure materials and plant extracts. Nevertheless, specialists at the enterprise who were interested in implementation of projects and creation of successful businesses tried to establish contacts with potential exporters of products. However, existing export restrictions (including those related to the core activities of MCC) made it impossible to forge long-term relationships with potential consumers. On the other hand, the Russian economic crisis limited opportunities for MCC to develop its various conversion projects because of a lack of funding and the primary need to maintain its core activities. Lack of stable targeted sources of funding for innovation projects and conversion activities. This problem is directly concerned with the spinning off of innovative technologies into separate businesses. Today these projects are funded individually, basically from targeted Minatom funding sources, and this funding is of a one-time, unsystematic character. That is why most MCC projects stall at the R&D or product sample stage. I would say that because of the lack of an investment market, we lack the mechanism for commercializing projects and subsequently creating effectively functioning enterprises. Undeveloped market infrastructure; lack of constant sources of marketing information. While implementing almost every project, MCC specialists have faced the serious problem of finding information on market conditions regarding both the raw materials needed for production and the finished products to be manufactured. In some cases they literally had to piece together nuggets of information by themselves. Unstable laws and regulations; bureaucratization of the economy, duplication of authorities of governmental and regulatory agencies. For example, RTC faced the problem of renewing their license for the production of concentrated radon. Besides the fact that the licensing procedure

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Page 123 includes many stages, the rules for obtaining licenses change constantly. This requires additional studies of a product that already has a license, which in turn substantially impacts the financial status of the project. Furthermore, the procedure is complicated by the excessive bureaucratization of state agencies responsible for issuing various permits. As a result, the license renewal process for the radon dragged on for a year and a half. Low level of the technologies used; equipment used in industries nationwide is worn out and obsolete. To initiate even pilot production units, many of the above-mentioned projects required unique, highly reliable, and highly efficient industrial and laboratory equipment. In the majority of cases the enterprises had to produce such equipment themselves or purchase it abroad, which substantially affected project costs and, consequently, project effectiveness on the whole. The second group of problems includes those connected with MCC activities and the relations of the combine with Minatom. Lack of specialists meeting the requirements of the modern market economy. The essence of this problem is as follows: Although MCC has highly qualified technical specialists, in view of the specific nature of its activities, the combine does not have specialists in such areas as marketing (market research and analysis, development of marketing strategies for various types of business activity), sales, or middle management. Economic dependence of innovation activities. As you have probably already noticed, almost all MCC innovation projects were implemented and developed not as independent entities, but as MCC divisions. At best, they were set off in separate structural subunits of the combine. On the one hand, this is quite understandable and justified, especially in the initial stage of project development, namely the stage of R&D and experimental sample creation. However, at later stages, when these units had begun to operate and produce products, problems appeared. These problems were connected with the units' lack of economic independence and their inability to influence policies regarding the distribution and reinvestment of income earned through their activities. This hindered further development of these business activities. It should be noted that the organizational structure of the enterprise itself did not contribute to successful development of these projects within MCC. For example, both procurement of raw materials needed for production and sales of goods produced are centralized. In a number of cases, this situation has led to losses of strategically important partners and decreases in sales volumes. Partly for this reason, many innovation

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Page 124 projects have stalled at the pilot production stage (as happened with TEMO production, for example), and some of them have shut down completely. As another reason for MCC's unwillingness to rid itself of unnecessary types of activities, I would cite the complicated procedures for transferring (leasing, selling) state property. Minatom's policy on MCC conversion projects. This problem is directly concerned with Minatom's policy on the development of MCC conversion projects. It is aimed at supporting further conversion and restructuring of the enterprise and reducing and subsequently terminating the defense-related activities of MCC. However, Minatom and MCC itself have focused their efforts on major projects and areas, such as the construction of the silicon plant and the spent nuclear fuel storage facilities. I think that, on the one hand, this policy is justified. To achieve results in a short period of time, the combine, in cooperation with Minatom, should focus on implementing such large projects, including those that are purely conversion-oriented and those that are somehow related to the core activities of MCC. However, I also think that insufficient attention is being paid to conversion projects that are not on the scale of the silicon plant but could still become very successful businesses based on cutting-edge technologies developed at MCC. Thus, in conclusion, I would suggest that Minatom and MCC join forces to achieve the following goals: A well-considered program must be developed to support and fund “small” conversion projects. For this purpose, MCC management should be given incentives to spin off these projects as separate entities, perhaps as subsidiaries at the initial stage. A program should be created to restructure the enterprise by detaching some of its business units as separate self-sustained entities. Using funds from the federal (Minatom) budget, targeted investment funds should be created to develop small conversion and innovation projects. Procedures for obtaining money from these funds should be considerably simplified. Funds should be strictly targeted in order to preclude opportunities for the combine itself to use them for other purposes. The results of investments should be strictly monitored. The making of decisions on the allocation of funds should be based not only on the timeliness and prospects of the project but also on the organizational structure proposed for implementation of the project as an independent entity. Procedures for the transfer of state property must be simplified to provide an opportunity for reducing the price of the property when it is sold or leased when the project is concerned with MCC innovation activi

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Page 128 Activities Involving the Investment Zone To begin with, I must acknowledge the fact that the city authorities had no purposeful policy for developing innovation projects. Several years ago, as a result of the deterioration of the socioeconomic situation in the city, the weak business environment existing at that time, and the underdeveloped market infrastructure, the more or less successful businesses “migrated” to the territorial capital, Krasnoyarsk. At that time, the city administration launched a program aimed at supporting the development of new investment projects and the reorganization and financial revival of existing production enterprises. The objective of this program was to increase our budgetary (tax) incomes, curtail the need for subsidies from the federal budget, and thus make our budget self-sufficient. And we managed to achieve rather good results. Figure 3 illustrates the structure of our budget in the past few years. As the figure shows, our incomes increased substantially, peaking in 1999. This occurred thanks to the increase in tax revenues owing to activities in the investment zone. The investment zone provides for a special
Image: jpg ~ enlarge ~ FIGURE 3 Structure of budget revenues for the closed city of Zheleznogorsk.

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Page 129 economic status stipulating the participation of enterprises in the socioeconomic development of the city. This special status program was established to attract additional investments to develop for the city's economy, promote conversion projects, create new jobs, and aid in the implementation of social programs. For the purpose of supporting the city-forming enterprises and saving jobs, in 1998–1999 the city governing bodies and enterprises entered into taxation agreements according to which the enterprises were to be granted tax privileges if they preserved jobs and paid their current taxes. This became possible, as you know, thanks to Article 5 of the Russian Federation Law on Closed Administrative-Territorial Zones, according to which all taxes and other revenues within these zones go directly into local government budgets. Moreover, the establishment of the investment zone has energized the business environment in the city and attracted new enterprises and plants. Revenues from investment zone participants made it possible to establish an internal source of support for investment projects, the nonbudgetary City Fund, which provides funds on preferential terms to top-priority investment projects. These have included no small number of innovation projects carried out by the city-forming enterprises. For example, during its existence the fund has supported the following activities: development of production of bandaging materials (MCC) creation of a pilot facility for producing biologically pure substances (MCC) creation of a unit for producing the SILK plant growth stimulator (MCC) construction of a rare-earth metals plant (MCC) production of new construction materials (vermiculite, peat blocks) and improvement of construction technologies (Sibkhimstroi) production of Versa Module Europa (VME) —standard modules (NPO PM) production of power-saving equipment (heat exchangers) (NPO PM-EnergyDevice) creation of cable television and radio broadcasting networks (NPO PM-Development) The total amount of financing is about 106.2 million rubles, while the amount of funds allocated for the support of innovation projects totaled only 8.3 million rubles (or 7.9 percent). Of the remaining funds, 84.7 percent were allocated to investment projects and 7.4 percent were used as floating assets.

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Page 130 Program for the Development of the Closed Administrative-Territorial Zone ofZheleznogorsk: Support for Conversion and Other Major City Projects In 2000 the government of the Russian Federation decided to allocate 475 million rubles in targeted funds to the city budget to support the Program for the Development of the Closed Administrative-Territorial Zone of Zheleznogorsk. This was done as compensation for federal taxes normally paid to the federal treasury. During debate over this program in Minatom, it was noted that the Zheleznogorsk program was characterized by its orientation toward the development of new industries that would ultimately bring in additional tax revenues. The funds destined to support the closed city development program for the year 2000 were allocated according to the following priorities: reconstruction of heating supply systems (MCC boilers): 112 million rubles MCC conversion projects: 70.7 million rubles city projects aimed at developing and creating new manufacturing facilities and repairing and reconstructing the heating and water supply systems: 284.7 million rubles Among the conversion projects carried out by MCC, I have already mentioned the following innovation-oriented activities: creation of a complex of facilities for manufacturing medical supplies, gel-based bandages and dressings, and isotopic materials and providing radiation-based materials processing services development of a machine-building complex to produce equipment and spare parts for the aluminum industry creation of a facility that manufactures automated security and fire alarm systems and development of technologies for producing new fire protection equipment creation of a plant for manufacturing thermoelectric materials and modules, developing and improving TEMO automated assembly technologies, and manufacturing a wide variety of TEMO-based refrigeration and heating units One city project that merits special mention is entitled Creation and Development of a Request-Response Data Transmission System for the Needs of Airlines. The project is of national significance and is intended to integrate Russia into the global Aircraft Communications and Reporting System (ACARS), which transmits data on the in-flight status of aircraft. The project is described later in this paper.

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Page 131 The Role of International Programs in Supporting Innovation Activities The main objective of the city's policy is to provide favorable conditions for business development and to facilitate the creation of new enterprises and the expansion of existing ones. It should be noted that international programs play a substantial role in this regard. One such international program is the Nuclear Cities Initiative (NCI). In September 1998 the Russian Federation and the United States entered into an intergovernmental agreement on the implementation of NCI, with the activities carried out under the program being financed by the American side. The primary goal of cooperation between Minatom and the U.S. Department of Energy under the NCI program is to create new jobs in the civilian manufacturing and services spheres, as well as to develop the necessary infrastructure and create a climate favorable for business growth in the closed nuclear cities. To carry out these tasks, the International Development Center-Zheleznogorsk (IDC) Fund was established in November 1999. Its primary tasks are as follows: render services for conversion-oriented enterprises, entrepreneurs, and municipal projects promote the development of the city by assisting in the preparation of business plans for local enterprises; provide expert review and analysis of business plans that will serve as a basis for elaboration of city development programs. IDC specialists have reviewed all investment projects included in the city development program. provide information and technical support for various projects and programs (Internet) arrange educational activities. In 2000–2001, IDC trained 38 students under the Presidential Program for the Training of Management Specialists. Those activities are of great importance, as the city is encountering a shortage of management specialists. arrange activities in the area of social programs coordinate activities within the framework of the Technopark project The city administration and the Mining and Chemical Combine have recently developed a project to create a technological incubator (the Technopark project) within the framework of the NCI program, which will make it possible to provide office and industrial space for MCC innovation projects. The project will facilitate efforts on a number of important city objectives, including the following: creation of additional jobs for highly qualified MCC specialists

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Page 132 development and improvement of new technologies developed under MCC's conversion programs creation of new production enterprises using innovative technologies to provide innovative products or services or to commercialize innovative projects attraction of investments for the establishment of production facilities promotion of innovative technologies and products on the market The first stage of the Technopark project has already been completed, including preparation of a package of documents outlining the strategy and nature of proposed technopark activities, procedures for the selection of innovative projects to be based on the site, and technical and economic background information on the feasibility of the project's operations. The site for the technopark has been selected, and several MCC pilot innovation projects have been chosen for initial placement at the site. The next stage will involve the actual “transplantation” of those projects from MCC along with the necessary personnel and equipment. To sum up activities conducted by the city administration in support of innovation and investment work, I would like to focus your attention on two important points. 1. Direct financial support from internal and external city resources. As you have probably noticed, the majority of investment projects supported by the administration cannot be considered as innovative. The initial policy of the administration was aimed at supporting the undertakings that could provide the quickest returns to the budget in the form of increased tax revenues (as with the distillery) or that were of great social importance for the city (for instance, construction of the Red October candy plant, which provided jobs for about 500 people, mostly women). We should mention that this policy proved to be correct. The distillery is now considered one of the main enterprises in the city, as the volume of tax revenues it produces is comparable with the volume of revenues derived from the city's traditional main entities, MCC and NPO PM. I would like to note that the financing of innovation projects entails a high risk for whether the investments will be recouped or whether the project itself will ever be carried out, because such projects, as a rule, involve lengthy payback terms and great difficulties in market demand evaluation. Therefore, I believe that at a time when free financial resources are in short supply, the local authorities must focus mainly on creating a favorable environment for innovation projects. 2. Creation of a comfortable infrastructure for business development. I think that this activity is no less important than direct financial

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Page 133 support. Experience gained over the course of many projects shows that without the necessary infrastructure—qualified managers, information technology, business support systems—many projects that had seemed promising will not meet expectations. This is particularly true with regard to innovation projects. After all, their founders are frequently scientists and highly qualified engineers without the skills needed to work in rapidly changing market conditions and create and organize effectively operating businesses. Hence, the Techopark project has been developed to bring scientists and qualified managers together. Concluding the issue of support for innovation activities by the local authorities, I would like to note that, in my opinion, support for such projects should be based on well-considered policies of the federal government. This means not only financing, but also the creation of favorable conditions for project implementation. EXPERIENCE OF SMALL INNOVATIVE ENTERPRISES I would now like to discuss the experience of small innovative firms in the city. Applied Mechanics Telecom Open Joint-Stock Company: The Successful Spin-off of a Project from a City-forming Enterprise In June 1998 Applied Mechanics Telecom (Prima Telecom) was established as an affiliate of NPO PM, which was established in September 1992. The founders of the closed joint-stock company NPO PM are approximately 10,000 employees of the Academician M.F. Reshetnyov Federal State-owned Unitary Enterprise NPO PM. From its founding, Prima Telecom has pursued two main areas of activity: finance and investments and manufacturing. As a production entity, Prima Telecom specializes in providing equipment for professional satellite television reception, manufacturing and supplying antennas, feeder devices, and equipment for television and radio broadcasting and communications, and creating and operating cable television networks that meet all modern requirements. Since 1994, in order to outfit satellite television reception stations with state-of-the-art electronic equipment, Prima Telecom has maintained direct contacts with leading foreign equipment manufacturers and major domestic suppliers (Universal Communications Corporation of Moscow, General Satellite Corporation of St. Petersburg, etc.). This has made it possible not only to reduce the cost of the equipment but also to provide high-quality performance, which was confirmed in certification testing in 1996. With the growing demand in the regions for capabilities of broadcasting their own programs to a wider audience, Prima Telecom used its

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Page 134 experience to begin designing and creating regional satellite TV systems. Major deliveries of satellite TV equipment have been made to Yakutia and Buryatia and to TV centers in Primorye and Khabarovsk territories. Also, large-diameter TV receiving-transmitting stations have been installed in the cities of Chita and Khabarovsk. Prima Telecom has been actively involved in upgrading the Yenisei satellite TV receiving system in Krasnoyarsk by providing automated satellite tracking capabilities. The company has also upgraded receiving stations of the Moscow and Ekran systems for the All-Russia State Television and Radio Company. In 1997 Prima Telecom successfully fulfilled a prestigious order for installing a satellite TV receiving system at the Sosna presidential residence in Udachny, Krasnoyarsk Territory. During the meeting of the Russian president with the Japanese prime minister, this system provided reception of 17 satellite channels as well as a pool feed to the head receiving station WISI (Germany) that was distributed to 100 subscriber stations in and around the residence. In 1999 and 2000 the major central television companies began transmitting their programs via satellite in digital format. At the request of these companies, Prima Telecom measured the digit signal level and then, for the first time in the region, began supplying and servicing equipment for receiving programming in the MPEG-2 DVB-S digital standard. The establishment of close contacts with the majority of regional television transmitting centers in Siberia, the Baikal area, and the Russian Far East, as well as practically all the newly established independent broadcasting companies, revealed several problems. The then-existing radio and television towers were overloaded; antennas were worn and technically obsolete. There was no possibility of installing antennas for transmitting new channels, and indeed there were no antennas available at an acceptable cost with characteristics that would satisfy the increased demands of customers. In 1994 Prima Telecom established its own facility to manufacture tracking filters and transmission antennas for radio and television broadcasting. The use of tracking filters eliminates the need for installing costly additional feeders and antennas while broadcasting in one frequency band and even in adjacent bands, which substantially cuts the cost of modernizing and expanding broadcasting centers. Prima Telecom entered the international market in 2000, when it supplied a $72,000 antenna-feeder complex to the Turkmenistan Radio and Television Production Association. A new contract for $80,000 has recently been signed, and there are good prospects for future cooperation. To increase production output and cut production time, Prima Telecom acquired additional facilities in late 1999, which are now being renovated to provide space for a pilot plant.

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Page 135 In July 2001 Prima Telecom won an open competition to supply 16 million rubles worth of equipment to be used for projects under the regional targeted Program for Modernization and Development of Radio and Television Broadcasting in Krasnoyarsk Territory in 2001–2005. Having begun creating its own cable television systems in various cities of Krasnoyarsk Territory in 1998, Prima Telecom is now one of the largest cable television operators in Siberia. As of August 1, 2001, Prima Telecom and its five affiliates had 29,924 cable subscribers. Cross-polar Flight Development Project The next enterprise I would like to cover is the Northern Air Bridge Management Company, an open joint-stock company. This enterprise has developed a federal-level project for creating a fundamentally new infrastructure for regular flights along cross-polar air routes from North America to South and Southeast Asia by way of the North Pole and Siberia. Geographically the territory of Russia (and specifically Krasnoyarsk Territory) is optimally located along the shortest international air routes, including cross-polar routes from North America to the countries of southern and southeastern Asia via the North Pole. Modern equipment and technologies provide for the necessary safety conditions for regular passenger flights over the North Pole along the shortest possible routes. I would like to outline the history of the project and the idea behind it. 1. The initiative on opening the shortest routes from North America to Southeast Asia was proclaimed at the Second International Economic Congress in St. Petersburg in 1997. In August the Krasnoyarsk-based airline Sibaviatrans made a demonstration flight along the following route: Krasnoyarsk—Dikson—Spitsbergen—Greenland—Montreal—Washington on the outbound leg and Washington—Montreal—Edmonton—Cape Barrow— Khatanga—Krasnoyarsk on the return. The official delegation on board the flight included V.M.Zubov, deputy chair of the Federation Council and governor of Krasnoyarsk Territory, and G.N.Zaitsev, director of the Russian Federal Aviation Service. 2. August 1997. Talks were held at the headquarters of the International Civil Aviation Organization (ICAO) in Montreal. During the negotiations, which included G.N.Zaitsev, ICAO President Assad Kotaite, and representatives of Canadian and U.S. airlines, the project received ICAO approval, and working groups were created to handle various aspects. 3. October 1997. By decree of Russian President B.N.Yeltsin, activities associated with creation of the cross-polar routes were initiated. 4. April 1998. A high-level coordinating group chaired by the ICAO president held a meeting in Moscow.

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Page 136 5. June 1998. The first nonstop demonstration flight with passengers on board was made by Cathay Pacific Airlines on the New York-Hong Kong route. 6. The Russian government officially opened international cross-polar routes. 7. 1998–1999. Approximately 60 test flights were made on cross-polar routes. The project consists of the following stages: creation of an aircraft tracking system using shortwave and ultra-shortwave frequency bands in the interests of the airlines (creation of the ACARS system) creation of a space-based communications system using satellites in highly elliptical orbit (HEO). Russia still maintains the necessary scientific-technical potential in this branch of the space industry and is presently the only country that uses HEO. creation of navigational, information, service infrastructure at airports and related facilities to serve the cross-polar flight traffic and ensure appropriate distribution of cargo shipments within Russia and abroad creation of Russian and joint airlines to implement regularly scheduled flights along cross-polar routes by aircraft based at Siberian airports creation of an infrastructure for airline operations (including modernization and construction of additional facilities for jet fuel production at refineries in Angarsk, Achinsk, and Omsk for refueling planes at Siberian airports) Notwithstanding that the project is strategically important for Russia and has received support at all levels, its implementation began only in late 2000 because of a lack of real financing. The first part of the project, Creation and Subsequent Operation of the Russian Network for the Global ACARS System, began with the allocation of 15 million rubles from the Program for the Development of the Closed Administrative-Territorial Zone of Zheleznogorsk, which I mentioned earlier. Northern Air Bridge has recently entered into contracts with the American company ARINC, which operates the global system. Activities associated with equipment delivery are currently under way. Plans call for creating a segment of 8 stations (out of 40) with a central satellite communications station and a data processing and control center to be located in Zheleznogorsk. From there, information will be transmitted to the ARINC data processing center in Annapolis, Maryland. I would like to reemphasize that the project is very important for Russia, since it facilitates the development of international services for the

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Page 137 use of airspace. Without the coordinated support of federal organizations, especially financial support, the project will be unable to proceed. Russia could then lose this market for aerospace industry services related to supporting cross-polar flights. Next, I would like to review the most widespread problems encountered by the enterprises I have mentioned while carrying out their innovation projects. access to investments in the necessary amounts and for the necessary length of time (for the overwhelming majority of the innovation projects) the unstable economic and political situation in Russia and its regions the unstable nature of laws and regulations, especially with regard to taxation, and the frequently changing tax rates and collection procedures, which make it difficult to forecast expenses the extremely unfavorable conditions for obtaining loans for innovation projects in the Russian banking system: high interest rates lack of a system of investment bank lending on a long-term low-collateral basis impossible collateral requirements for loans unattractiveness of Russia and its regions from an investment standpoint, which makes foreign investors extremely unwilling to invest in new spheres of activity, especially in the regions bureaucratization of the economy and resulting duplication and confusion regarding the authorities of the federal and regional executive-branch agencies, as well as the frequent changes that are made in their organizational structures. The need to obtain varied and numerous permits causes substantial difficulties in carrying out high-tech innovation projects, especially those that are new for Russia. Moreover, existing laws and regulations on these matters are often conflicting and ambiguous. Various federal agencies can be assigned the same authorities. imperfection (or practical absence) of laws and regulations that would facilitate prompt and efficient development and implementation of joint targeted programs at various levels (federal, regional, interregional, and local, especially in closed zones) undeveloped public utility infrastructure (particularly with regard to communications), especially in Siberia and the Russian north In summary I would like to share my thoughts on the steps that must be taken to create a favorable climate for the development of innovation projects.

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Page 138 Support for innovation activity must come primarily from the federal government at the state policy level. I am referring to the passage of the federal law and appropriate regulatory acts regarding innovation processes. Furthermore, I believe that such a package of legislation must not be of a merely declaratory character; it must create a real mechanism for implementing this policy. A targeted policy must be pursued to maintain and stimulate development of innovative technologies and products developed at city-forming enterprises. These projects must be developed individually but with the active participation of the base enterprises, including the provision of the necessary space, equipment, and specialists. I believe that this work must be done with the focused support and incentives of the industry's ministry (Minatom). As a start, Minatom could propose that specialists from the city-forming enterprises develop their ideas and mechanisms by spinning off innovative projects into separate independent businesses that could then form the basis for the appropriate legal acts and targeted programs. Support is needed from various structures—technoparks, technology incubators, science cities—to develop and promote linkages among innovation projects. Special preferential tax advantages need to be created for such structures. My next recommendation concerns sources of financing for innovation projects. I would suggest creating special innovation funds that would have rights as investors to participate in the implementation of projects. This plan should include a system of incentives and benefits for such financing organizations. Furthermore, existing resources could be used, namely the federal Program for the Development of Closed Administrative-Territorial Zones. Existing budget legislation places strict limits on the use of these funds, which makes it impossible to use them to finance innovation projects with long recoupment terms and increased risks regarding completion. In conclusion I would like to note that despite the lack of favorable conditions for harnessing innovation potential, this process is beginning to gain momentum, as directly confirmed by the examples I have cited. A great deal depends on our efforts and on initiatives at the local level.