State support for engineering unlikely to boost profits

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August 14, 2017 11:57

In the next four years, the Belarusian government aims to spend USD 3.5 billion to support machine building. Recently, the industry has been financially unsustainable with constantly decreasing employees. Due to the state support programme, some quantitative indicators could be achieved, however due to high risks the industry’s financial health is unlikely to improve. Meanwhile, the state budged is likely to face additional problems in future.

The state programme aimed to support the machine-building complex has been approved with a total budget BYN 7.3 billion or more than USD 3.5 billion. At the time the programme was approved, the industry had BYN 4.9 billion worth of investment projects, of which BYN 0.7 billion would be spent to compensate banks’ losses from granting export credits to buyers of domestic equipment. Enterprises are envisaged to spend BYN 0.7 billion on modernisation from own funds, the remaining funds would be provided by banks and the state budget. Projected results include growth in exports of machine-building products by 70%, reduction of production costs by 1% annually, and profits from sales at some 7% to 9%.

The authorities plan to support mechanical engineering in an attempt to preserve this industry in Belarus. In 2014-2015, net losses of machine building exceeded BYN 660 million. The industry started to recover only in 2016 due to the recovery of the Russian economy and the write-off of currency exchange differences. The employment in the industry is declining. In 2016, vehicle manufacturers laid off more than 3 200 people, manufacturers of machines and equipment - 3900 people, metallurgists - more than 2 000 people. Most of the products were exported to Russia: more than 90% of exported cars and 70% of trucks. That said, MAZ, despite increased exports to Russia has dropped to 6th rank from the 3rd in sales in Russia.

The productivity of the proposed program is questionable. One of its key parameters is profitability of sales within 7%-9%. In 2015, this figure was 8.8% in the industry, however overall profitability of the industry did not improve. Investment projects for BYN 2.4 billion have not been envisaged, which could lead to poor development of new projects and inefficient allocation of funds. The programme lacks measures to improve services, which is a key obstacle to entering new markets. One of the support mechanisms envisages purchase of equipment by domestic enterprises through leasing schemes, which was practiced before, however without any effect on the industry’s performance. Many factors are beyond the influence of Belarusian producers, such as prices for raw materials and energy resources, their dynamics, and administrative barriers on foreign markets.

To sum up all of the above, the state programme is likely to repeat the fate of the modernisation programme in wood processing and the cement industry. Public funds are likely to be spent inefficiently, and instead of economic growth, the economy would receive businesses that require constant financial support from the state to repay loans and borrowings. The only beneficiaries in this programme would be public officials who control procurement of equipment for modernisation.

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