Investment Profit

Civil servants may be required to continuously educate ourselves

According to the agency RIA Novosti this initiative was proposed by the Ministry of Labor. Dmitry Akopov, CEO of Jacobson Partners discussed this with Kommersant FM anchor Oksana Barykina. |  June 10, 2015

Transitional period

One of the most important indicators of the economy is the demand for automotive products. According to experts, by September car sales in Russia fell by 12.7% in the first eight months of the year. Hard times came both for the automakers and related sectors related to the automobile industry. Under these conditions, the larger the company the harder it is to change for it in a short time. Experts point out that many companies are focused on improving the efficiency of the management. Active changes are taking place at AvtoVAZ, the largest automaker not only in Russia but also in Europe. Its production is the best-selling in Russia: about 250,000 cars were sold within eight months of this year, accounting for about 17% market share in Russia. Sales of Renault over the same period were half less. |  October 02, 2014

The Bonus Component

In early 2014, the amendment to the law on the Central Bank has come into effect giving it the right to assess remunerations of bank employees in terms of their compliance with the scope and nature of the bank's activities and risks it takes.

Dmitry Akopov |  March 13, 2014 |  March 25, 2014

Investment Profit

Forestry enterprises face a difficult situation. On the one hand, the Soviet-era model of forest management requires extensive investments in the development of new territories. On the other hand, it is necessary to change the obsolete equipment and introduce foreign technologies. In addition, electricity tariffs are going up and services of competent professionals are expensive. We need to change the system, but not to cut costs, experts say.

The fall of its share in the GDP is a sign of the difficult situation in the forestry sector. In 2013, it amounted to 1.6%, whereas 10 years earlier, in 2003 it was 2.3%.

Among the main problems of the industry are: inefficient use of forest resources the stock of which make Russia rank first in the world. However, the extensive model of development — cutting of new forests instead of restoring the old ones — not only leads to a deficiency of wood at the domestic market, but also it is unprofitable for businesses. While developing new areas, timber merchants have to invest heavily in new roads and infrastructure. Evgeny Schwartz, Director of Conservation Policy for WWF Russia explains that as a result intensive forest management in the earlier developed regions (the European part of Russia, a number of clusters in Central Siberia and the Far East) is not formed. Meanwhile, the preference for intensive forest management model is recognized not only by environmentalists, but also by market players, who could reduce costs if they used the existing infrastructure, rather than creating a new one.

However, it requires changes of the legislation. "Business performance of any sector of the economy is directly related to staff and constructive dialogue between government and business. The dialogue in the forestry sector is gradually built up, and possibly the results of understanding between business and authorities will appear much faster than the personnel issue will be resolved”, says Dmitry Akopov, CEO of Jacobson Partners, “Experts of the market repeatedly point out to the shortage of highly qualified personnel in a number of industries. This has happened for various reasons, including because of the lack of proper education. In the forest industry, this problem is very evident. The network of educational institutions developed earlier, including forest schools, colleges and universities, today is practically not functioning. The system of further training is broken. Those programs that exist now are far from current realities of the market and the industry and do not take into account the actual needs of the business." On the other hand, graduates with specialized education are not ready to join the forest industry either. For these reasons, forestry enterprises face the challenge of recruitment of young professionals. According to the expert, companies face the choice of either wait until the professions they need become popular again and young professionals will start joining the forestry, or to start doing something now to bridge the gap between the opportunities of the contemporary education and real needs of the business. It is necessary to take into account that certain objectives of modernization of the sector set by the government urgently require a new generation of professionals.

Let us note that in Russia the right to lease the land, which companies win through an auction, is limited to 49 years. Under such a restriction it is difficult to implement the model of intensive forest management planning, which involves effective reforestation (including quality care for seedlings and young trees, commercial thinning and clear cutting). Therefore, today Russian owners are not interested in working for the future. Since the plot of land after the expiration of its lease will be again put up for auction, most companies prefer to get the maximum profit now and not worry about the future.

Timber merchants have to challenge the issue of how to ensure return on investment. First of all, investments in construction of new roads and infrastructure. Because the forest along existing highways is already cut down, you have to go deeper for quality coniferous sawlogs. "Companies have to build roads and necessary infrastructure themselves to have access to resources", says Artem Savko, PR Manager for the Ilim Group

The second largest item of operating costs is transportation of finished products. "Since 2009, the cost of transportation of, for example pulp to China has doubled, and time of delivery has increased, that is, in addition to direct increase in the cost of transport the current assets have also increased," explains Mr Artem.

In addition to transportation the cost of the fiber is another item of major operating expenses. "We harvest more than half of the necessary wood to guarantee an uninterrupted supply of raw materials," they say in Ilim Group. To reduce these costs, a program of continuous improvement of logging and reforestation efficiency is used.

"The equipment and technology for the wood industry are outdated and depreciation of fixed assets operated since Soviet times, has exceeded 60%," says Larissa Irshinskaya, Manager of Special Projects for Cornerstone. According to her, Russian technologies introduced over 40 years ago, are inferior to the Western ones in the world markets due to high costs of production."

Improvement of production in the face of competition is necessary. Older plants using inefficient technologies experience difficulties. Because of very high costs and congestion of production in 2013 the crisis was faced by Kondrovskaya Paper Company, Selenginsky CCC, JSC, Yeniseisky CBK, JSC, according to Andrey Guryanov, President of the League of Waste Paper Processors RAO Bumprom.

"Upgrading of the technical equipment of enterprises requires significant costs as machinery and equipment are imported and are expensive, and the payback period is 5 to 10 years", says Ms Irshinskaya. As a result the growth of production costs reduces profitability thus retaining the technological gap.

Among the most expensive projects are greenfield projects, i.e. enterprises created from scratch. They require major investments in both preparation of the external infrastructure and in technology itself. This greatly complicates the project and increases risks making it more expensive and delaying completion. Based on these conditions, it is difficult to expect a rapid return on new projects.

The payback period of major investment projects in the industry, including construction of pulp mills, major paper mills and large tonnage paper and board machines is very long — up to 10 years or more, confirms Anton Zavalkovsky, CEO of Investlesprom holding company.

It is hard for market players to find investors willing to invest on such terms. Projects implemented on the basis of existing enterprises look much cheaper and easier in terms of search for investors rather than those to be completed from scratch (greenfield projects). Reconstruction of existing plants can help save both on construction of transport infrastructure, and on existing energy resources. Plus, time and money is saved on recruitment as qualified personnel are already available and familiar with all the subtleties of production.

There is no surprise, that reconstruction of enterprises in Russia is preferred to building new ones. "This is how almost all the projects in the pulp and paper industry in Russia have been implemented or are being implemented now", says Ilim Group.

The equipment and facilities are local but technologies are brought from abroad. So, Ilim group uses the technological expertise of International Paper. With the help of foreign experience and a partner, the Step project was implemented in Syktyvkar and a mill was renovated in Svetogorsk. Among successful examples of Russian use of foreign technologies is the Kama project for production of LWC paper, the launch of the machine for production of testliner (flat layers of corrugated cardboard) by SFT, the construction of a semi-chemical plant in the Arkhangelsk Pulp and Paper Mill, and others.

According to experts the introduction of the intensive forest management technology is the most effective way to improve profitability of the industry. Moreover, the authorities came to the same conclusion. As confirmed by the Federal Forestry Agency establishment of an interdepartmental working group is underway which will be tasked to finalize the regulations with participation of representatives of the forestry industry and environmentalists. Under the new rules, those companies that agree to the voluntary international certification will be able to renew the lease without an auction.

Maria Karnaukh

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