Belarus is set to modernise unprofitable factories even if investments do not payback

May 15, 2017 12:12

The Orsha tool factory modernisation requires some USD 65 million. Due to chronic unprofitability, the factory has no own resources for modernisation. Amid the lack of interest from foreign investors, the state is set to modernise the factory at own cost in order to ensure workplaces for workers in the region. Meanwhile, even after modernisation, the factory is unlikely to repay.

According to an estimate, modernisation of the Orsha Tool Plant would require some USD 65 million with a payback within 12.8 years. After modernisation, 70% of the enterprise's products would be sold on the Russian market, and 30% on the domestic market – in order to reduce imports currently worth some USD 30 million. The initial modernisation plan envisaged that USD 46 million would come from a foreign investor and the rest from the state.

The Orsha Tool Plant requires modernisation due to its financial performance. For several years the plant has been loss-making. In 2016, losses totalled BYN 1.3 million. In 2016, the plant employed 384 workers, which was 88 workers less than in 2015. The plant’s accounts have been arrested due to overdue accounts payable. Laid off workers face difficulties in finding new jobs due to the fact that almost one third of enterprises in the region are loss-making. Overall, Orsha region is the most loss-making in the Vitebsk Oblast.

The Orsha Tool Plant modernisation project is aiming to solve the most acute problem for the government – ensuring full employment in the regions. Most investors are put off the project due to its narrow market-orientation (only Russia and Belarus) and the long payback period. The investment climate in Belarus is unstable and project investment rules could change during the implementation process. In addition, in the long run, the BYN exchange rate could fluctuate due to the instability of currencies on the main prospective sales markets, which could significantly increase the payback period and make the entire project unprofitable. In the given circumstances, the state is likely to carry out the modernisation at own cost. In addition, due to automatization of production, the Orsha Plant is unlikely to offer a significant number of new jobs, and retraining would be required for employees. Moreover, such an approach could lead to an increase in the tax burden on successful enterprises and deteriorate their competitiveness.

Overall, the Belarusian state continues to fund modernisation of non-competitive enterprises. Such projects are unlikely to find investors abroad due to their low commercial appeal. The state would allocate budgetary funds for such modernisation and in the meanwhile is likely to step up the tax burden on successful enterprises or lower social obligations vis-à-vis the population.

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