To enhance efficiency of economy management, the state should make conditions of big business's existence tougher, reckons Viktor Makushin, a head of the MAIR industrial group.

By Vasily Auzan

In 1992, MAIR was a small company trading in scrap metal. The company set to actively expanding its business in 1995, when it acquired several enterprises engaged in processing iron-and-steel scrap and waste. The owners of MAIR didn't make it by the time privatization set off and had to acquire the enterprises gradually, at their full cost. Nevertheless, by the end of 1990s, MAIR, with its production output of around 4 mln tons, entered the league of the world top 5 companies engaged in processing recyclable ferrous metals. The group's make-up includes several tens of regional enterprises engaged in processing scrap metal and in manufacturing iron-cast, metal ware and steel pipes.

About a year ago, MAIR began its expansion into other industries. Enterprises of chemical, microbiological, forest products and machine-building industries joined the group. Many of them were on the verge of stoppage. Now, not a single plant is operating at a loss; their volumes of production have grown by several times.

Viktor Makushin accounts his success for efficiency of the management methods, which he practices within his company. The methods, we must say straight, are tough. An employee has a simple choice: either to work super effectively and, as a reward, to quickly advance to senior positions, or to find oneself in the street, should he/she happen to be at the bottom of a monthly efficiency rating. This system cultivates competition among the company's workforce and enables it to rapidly build up speed. Revealing the fact that the Russian economy is not efficient enough, Viktor Makushin suggests that the principles, under which his empire is governed, should be extended to the entire economic system.

Economy is under inefficient management

- You are coming out with a radical idea that it is necessary to replace the current business elite. At the present moment, when re-distribution of property has subsided and the economic situation has stabilized, this suggestion sounds especially provocative.

- It's all a matter of memory. Even metal has its own memory. One and the same metal that has undergone different treatment behaves in completely a different manner - it has different properties. The same is true with respect to a society. I consider the assertion that it does not matter how people have become rich or which ways they used in reaching the commanding heights in the economy as absolutely wrong. Why? Because those people who wormed their ways to the top through all sorts of gerrymander, connections and bribes are utterly futile in the situation when it is necessary to professionally manage economy. The business elite that has formed in our country is not capable of driving the economy ahead. The country could have developed far more rapidly if it had had a business elite that had passed the right selection.

- And where was the right selection?

- In America, for example. The country of emigrants, the country where the best, the most vigorous and intelligent could rise in the world. That was the reason why America made a spurt ahead. There is the example of Germany, where after the war, all suddenly happened to be approximately in equal conditions and where enterprises were sold for one mark. While the people, who had got on at the time, were young and vigorous, Germany's economy was the most robust and dynamic in Europe. There are more examples in the modern history.

It's time to understand that neither natural resources nor production capacities are important for development of the country. It is intellectual level and innovative abilities of the entrepreneur class that determine the strength of economy. Where such a resource is available, there occurs economic development.

I think that Russia, to my regret, has lost its chance to create a class of entrepreneurs that would be as much efficient for the country as possible. During the years of reforms, a business elite of totally different type has formed in our country. And today, even if we do want to create a class of entrepreneurs, it will face a strong adversary in the person of already established groups. Under these circumstances, the cheapest way to lead the country to the path of sustained development is to replace the current business elite. That's the seditious idea.

- It's not quite clear what reason you, a big capitalist, have to talk about it.

- I believe that a group of businessmen, who have risen in the world over the last years due to efficient management of exactly industrial assets, share this idea. They realize that if there is really a competitive and civilized environment in the country, then they will be able quite easily to re-distribute to their benefits the assets, which are currently owned by those people who have seized them through all sorts of gerrymander rather than honest competition.

- You are convinced that at the moment, the most attractive assets in the country are being managed inefficiently?

- Yes, the main assets of the country are being managed inefficiently. Taking my own enterprises, over 50 in number, as an example, I can assert that today, just efficient management is able to ensure the growth of Russia's GDP in the range of 20 per cent based on the available resources.

- But there is such a problem as insufficiency of managerial skills. There is a banal shortage of effective managers.

- I studied in a university in the times of socialism, and we were taught, according to Marx, that existence determines consciousness. Should the environment be changed, consciousness of a business elite will also change, and managers' consciousness will change accordingly. If appropriate environment is established, then effective managers will appear. It should be noted that they already exist, and in one, two and three years, there will be much more of them.

- And how, in your opinion, should the environment be changed?

- The main thing for the government to do is to ensure competitive and transparent economic environment where civilized re-distribution of property will be facilitated as much as possible. It is necessary to have the procedure of fast, effective and by all means civilized re-distribution of property in place. There must be bankruptcies, but they should be genuine.

I can tell you how competition and selection work at my place, within MAIR's enterprises. I keep up the bar of requirements for managers at such a level that from 10 to 15% of them could cope with their tasks excellently; from 10 to 20%, who have happened to be at the bottom, would be severed, and the great mass of employees are constantly strained and struggle for the opportunity to be advanced to the top. Everyone knows that at our place, within MAIR, an employee holds one and the same position for not more than a year on average and then, he or she either rises in the scale of ranks or sinks, ending in dismissal. It's due to this system that MAIR have grown so rapidly, and besides, I beg your pardon, without sponging raw materials received for nothing. By the way, the voucher privatization, when everything could be bought up for a trifle, passed by us. In 1994, we managed to buy two small blocks of shares.

- Why did you fail so miserably?

- I was a post-graduate student and joined the ranks of business community late; I started late. But I don't feel sorry for that - I was put straight away in the conditions, which forced me to fight, and that made me realize at once that I ought to be better than others.

State and its functionaries

- It's not clear how your proposals aimed at establishing competitive environment can be implemented on the scale of the national economy.

- Competent and civilized selection of the most effective owners can be implemented by means of exclusively economic methods.

Here, there are a number of directions. For example, I consider insufficient development of medium and small businesses as ruinous to the country and as a strategic mistake. In order to work effectively, big entrepreneurs must feel that rivals are breathing down their necks. The first and foremost reason why we don't have this broad class of owners, who would act as a support, is that the bureaucratic apparatus is extremely strong. Today, and I know this from my experience of working in a range of industries, each more or less notable business, in any region, can operate only if a high-rank official has an income from it.

To establish competitive environment, it is necessary to lift this bureaucratic pressure from the business, i.e. to reduce transaction costs. There are a lot of talks nowadays as to what should be done to this end, but given the pace at which our government is going, it will take at least three years to resolve problems of the small business. By that time, there will be no one around to rescue.

- And what do you propose to do?

- Several things should be done lest bureaucrats feed on business. First of all, it is necessary to raise their salaries by several times and to cut their numbers by ditto. I am fairly aware of what, say, the Ministry of Industrial Science is doing, and I believe that the amount of work fifty people are doing there could be done with a better quality by five. But these five people must be specialists of the same class as, say, the specialists in the analysis group of my company. Naturally, they should be paid as much as in the private business. I can assure you they will do their work with high quality.

Secondly, it is necessary to significantly facilitate a legal struggle against bureaucracy. An official should know that he might lose his post if he illegally revokes a license. And thirdly, laws' wording should be such that they could not be construed by officials as they think fit. I can enumerate many more measures; I have named just what is lying on the surface.

State and big business

- And due to what will the environment in the big business become more competitive?

- If the situation is such that competitors are not breathing down our largest entrepreneurs' necks, then the pressure should be exerted from the state. It ought to control a situation in the economy in such a way that profitable would be the industries, which are requisite for development of the country. Today, we don't have such a mechanism in place.

In my opinion, profitability in monopoly businesses must be significantly lower, by 2 to 3 times. The state should implement such tax, tariff and fiscal policies that entrepreneurs, working in monopoly industries, would earn much less than they are doing now. Take oil companies, for example: probably, it is necessary to impose such taxes that one of the largest oil companies, better two, would go bankrupt approximately once in a year. Of course, the procedure of bankruptcy should be carried out according to the model we are observing in the West, when a business has not been stripped of assets yet, but it has just lost its solvency.

- As far as taxes are concerned, your proposal is very debatable. Given the current degree of fixed assets depreciation, in general, and in the oil industry, in particular, huge investments are needed. The made investments have a cumulative effect on the whole economy. If, as you propose, taxes are to be raised, then it's not clear what will be left for making investments.

- The main trend in development of the world economy is such that raw material industries have a smaller and smaller share in the global profit. I am not at all convinced that investments into other industries, for instance, process industries, will be spent with less effect on the country's economy. And I reckon that re-distribution of capital into the sectors, where a degree of processing is higher, should become one of the priorities of the state policy.

- Yes, but representatives of the super profitable industries themselves begin to invest into other industries, including machine building.

- Indeed, perhaps, only fuel-and-energy complex and non-ferrous metallurgy have investment resources nowadays; the rest industries practically do not have working capital. But this situation is vicious in many respects. Firstly, managers, who are working in the fuel-and-energy complex, prefer to make investments into the business that they are already familiar with; that is why, for example, LUKoil opens petrol stations in the West. Secondly, attempts made by representatives of the raw material industry to invest into domestic industry (metallurgists have made investments into machine-building, and gas companies have made investments into chemical industry) have not taken a positive effect so far. And they can hardly achieve such success as businessmen, who have been working in those industries for long, could do. Just because the raw material business, in my view, much simpler than machine building.

If we really want investments go into process industries, it is necessary to achieve the situation when labour costs per dollar earned in the oil industry would be roughly equal or even higher than they are in the process industry. It's already obvious now that it's not correct when the raw material industries have profitability of 40% and the process industries - 5%. The state ought to reduce profitability in one industries and to give preferences to the others.

Industrial policy

In the span of ten years, the MAIR industrial group became the 5th in the world among the companies engaged in processing recyclable ferrous metals. The group includes several tens of processing factories and metallurgic enterprises such as Sulin metallurgic plant, "Staks", Volgograd pipe plant, Saratov metal ware plant and Verkhesinyachikhin metallurgic plant. MAIR's production output is about 4 mln tons. With regard to some products, the group controls up to 25% of the Russian market. In 2001, the leadership of MAIR took a decision to extend the scope of the group's activities beyond the boundaries of the metallurgic business. That was the time when the following acquisitions were made: a large machine-building plant, "Belinskselmash"; chemical productions such as Zagorsk lacquer factory, "Kriz" plant that manufactures special latex-based coatings, "Tekhnokhimprom" plant in the town of Stavropol and Volzhsk hydrolysis-yeast plant, the largest Russian manufacturer of fodder yeast.

- In your view, which industries ought to be developed? What should industrial policy be?

- We have made a mathematical model of the Russian economy: we have analyzed a pattern of production cost, labour productivity and physical ratios in all more or less notable industries and compared them with the same indices in the developed countries. As a result, we have got the possibility to assess a situation from the point of view of competitiveness of individual industries and to forecast as to what will happen when we join WTO or what will happen should tomorrow we have the same prices for raw materials as they are abroad. Neither our calculations nor common sense give grounds to say that Russia should refuse from development of the fuel-and-energy complex, non-ferrous metallurgy and forest industry. Another matter is that today, prospects are better when making investments into process industries associated with raw material industries rather than directly into the latter, since with respect to process industries Russia has competitive advantages in the global division of labour. These very industries should be granted such preferences that would attract capital. This point, in my view, must be in the foundations of the industrial policy.

There is one more direction, which the industrial policy should cover, viz. high technologies. At present, Russia holds a unique position from the point of view of the international division of labour. We should by no means compare ourselves with China, nor should we compare ourselves with India and any other third countries. Because only the West and Russia possess both high technologies and a potential to master them. Besides, labour of highly qualified people in Russia costs far cheaper than in the developed countries, and this is our colossal advantage.

- All this sounds very well, but most of our developments are absolutely of no interest to investments. Do you yourselves invest into high technologies?

- No, we don't. But I'm sure that investments will go into high technologies, including investments from MAIR, only when there is no easy money in other industries. High technologies are long-term investments. Nowadays, on one hand, the situation in the country is not stable and the risks are very high; on the other hand, there are areas where one can earn quickly. Therefore, today's task is, God granting, to force entrepreneurial potential into process industries. I think that given the government pursues competent industrial policy, we'll see the same effect on the high technologies as after the bank crisis. As soon as the banks became no longer able to earn on GKOs, they started crediting the real sector. The same will be with respect to high technologies.

- There are no those banks left. Their owners are working in the raw material industries now.

- That's right. The same thing can also be done now, and they will move there where there is an opportunity to earn. Another issue is that the state should identify the industries, which prospect well, and concentrate on them giving up its efforts in other industries where the prospects are worse. But once the selection is done, we must strive for the world leadership in those industries or for the first places in the league, at least.

- So, you stand up for establishing a new, tougher competitive environment in the Russian economy. Why do you as a businessman need it?

- We are deeply convinced of our superiority in the ability to manage. We reckon that our management system, from the accounting and control system to the system that enables to quickly take efficient industrial solutions, is more efficient than at many others'. Therefore, we will be able to manage far larger assets in the environment I am talking about; we will be able to grow by times. And if we can manage better, then why should we be placed somewhere at the bottom? We are interested in open competition.