Result first, numbers second
The key word is “result”, not “numbers”, Igor Zhilin, chairman of the Belneftekhim group of companies, says. He believes the major task of the incorporated enterprises to be primarily a higher efficiency, not just a higher volume of production.
Oil-processing and petrochemistry are key industries in Belarus. They account for up to one third of national GDP, and about half of exports. In fact, the Belneftekhim companies are among the most powerful sources of hard currency flow to the budget. Therefore, oil industry for the country is not only part of its industrial potential. Directly or indirectly, it very much affects virtually all macro-economic processes in the state. In April, Belneftekhim turns 15 years old. Over the years there have been ups, there have also been problems, but the industry continued to develop dynamically, despite all external risks. Moreover, today it is experiencing a new and interesting phase of rethinking its activities. If in the 1990s and 2000s the main concern was to load the existing production capacity, today the main objective is not just to increase volumes of production, but to achieve economic efficiency. Belneftekhim’s chairman Igor Zhilin requires from the CEOs to attain both certain figures and concrete results. On the eve of the concern’s red-letter day he granted an interview to our newspaper.
- Igor Fedorovich, the Belneftekhim companies are the biggest consumers of foreign currency in Belarus, but they also account for the lion`s share of exports. Their stability and profitability are directly dependent on the investment activities and the quality of implemented projects. In what areas do the company-members of the concern invest today?
- About 50% of exports of Belarusian goods fall on the Belneftekhim companies - 49,6%, to be exact. That`s about $ 20 billion in terms of money in 2011. In 2010 it was $ 11 billion. Balance amounted to 5 billion, three times the 2010-year figure, though the volume of commodity output increased only by 104 %. Such financial results appeared due to improved production efficiency: materials output ratio has decreased by 12 %, energy consumption - by 6 % (planned target - 5 %). Foreign trade accounts receivable decreased from 10 to 7 % of a nationwide figure. In analyzing the companies operation we focused not on the growth of volume but on that of efficiency in the first place. Indeed, sometimes, to increase the «weight of the commodity», directors would increase the amount of output of certain goods, say, by 40 %, disregarding its minus 7 % profitability.
Now we are analyzing the effectiveness of investments in modernization of production and innovation projects. Many enterprise directors tried to increase investment in fixed assets by 15 - 20 % every year. But given the specificity of oil-processing and petrochemical industries, such «soft» approach is not always justified. This industry sector is conservative in nature, continuous technologies are used, therefore an increase in productivity of one of its components can not produce either any significant increase in performance, or significant increase in production or economic efficiency. As a rule, to lead a company to the next level you have to almost completely dismantle the old equipment and install a new one, having new conceptual solutions. Therefore, in terms of financing, major investment projects have an uneven implementation cycle.
For example, design work usually takes about a year and 5-7 % of the total sum, cost-conscious use of resources provided. In the second year construction work begins, equipment production is advanced - the most capital-intensive phase, that is, which takes 40-80 % of the funds. The third year is spent on completion of construction and final installation of equipment, and the volume of investments is sharply reduced. There remains only balancing and commissioning work, to get it all operate at full capacity, which needs a few months and only 1—2 % of the total amount. If you break up financing for all of these stages equally, excess funds will accumulate in the beginning. This will push for a more expensive design to be ordered, and equipment to be bought before time. In short, you’ll have to go to the various tricks that add cost, but does not give any economic effect.
Therefore, higher management of Belneftekhim made a compulsory decision: enterprises are to make up their own, individual schedule of investments in fixed capital, conduct an audit of it, look for the ways to reduce the cost of the projects as well. The task of Belneftekhim is to ensure the achievement of socio-economic performance indicators, defined by the leadership of the country. 19 well-known parameters of the socio-economic development are related to macroeconomics. No doubt, such planning is necessary, in one form or another it takes place in every country.
But the achievement of these indicators should be responsibility of the branch departments, for they have sufficient authority and tools. It is their task to create an incentive for the quantitative and especially qualitative development of the subordinated and supervised plants and factories. The CEOs of the companies, in my opinion, should take care of microeconomics - about their enterprises, about enhancing their effectiveness and development. And not just try to achieve those indicators set for the whole country.
This conception of effective «separation» of macro- and microeconomics we are now trying to realize in our concern, including its investment activity. Indeed, sometimes directors, in order to «produce» an indicator, undertake a petty upgrade, which «eats» a lot of money, and yields virtually no effect. Therefore, the concern had a detailed audit of all investment plans, selected 60 most significant and important investment projects, which we are going to implement in this five-year period.
For example, Grodno Nitrogen has used its nitrogen production equipment for several decades. It should be dismantled and replaced with a more modern and efficient, having twice as high productivity. This will lead to the possibility of increasing carbide-ammonia mixtures (CAM) output at once. These are liquid fertilizers with high nitrogen content, which are marked as an advanced technology production and therefore profitable to produce. There is no need to waste energy on drying, granulation, caking treatment and packing. There are also better transportation conditions: fluid is simply pumped from large storage tanks into truck cisterns, it’s delivered directly to consumers or to ports, where it can be easily pumped too… Losses are virtually absent. But to master the production of such a promising product, we need time to perform the complete cycle of modernization. Similarly, we will approach to the modernization of other enterprises.
- What are the main lines of activity to increase profits and avoid unreasonable costs?
- First of all, we try to optimize the trade-conducting network and to switch it to operation on a prepayment basis. Retail structures should have their own working capital. But most of them try to get the maximum delay of payment from the producers and live on this commodity credit. But it`s not quite right, because we can’t see the performance of each business entity. The delay of payment is actually a free loan to the wholesale retail. If financial resources cost nothing for them, how can we evaluate their work? The profit is shown on paper, but if they had been credited on the financial market on general terms, the balance sheet could have been quite different. We try to cancel the deferment of payments within the concern, as well as an unjustified reduction in raw material prices.
Our experts have found one interesting thing. Domestic producers of chemical fibers cannot objectively be profitable under existing energy rates. Our companies have to pay 14.5 cents for a kilowatt-hour on average, while the tariffs for the Russian producers are twice lower. Small power plants could solve this problem. Many Belneftekhim’s companies are ready to build those at their own expense. A large positive experience has already been accumulated. The total installed capacity of electricity generation throughout the concern is 225 MW. About 25 percent of the energy needed for our companies is produced by our own facilities, with a net cost of 4-7 cents per 1 kW / h. It’s significantly below the base rate of Belenergo. Economic benefits of using your own power are obvious. But we are facing strong opposition on the part of the large power plants management, who do not wish to lose customers.
- Recently it has been much spoken about the indispensability of increasing the labor productivity, in order to be able to compete in the labor market with the nearest neighbours...
- Labor productivity in the concern is one of the highest in the country. Last year it was about 260 thousand dollars for each employee. This allows to support the average salary at a rather high level – up to 1000 dollars in Belaruskaly, near 500-700 dollars in other enterprises. Still there is a risk of outflow of skilled personnel to other countries of the Common Economic Space. So it is necessary to care about the incomes of the population.
Efforts to reduce material and energy intensity of production are undoubtedly important, but they provide only 3-4% productivity gains. The salary in our enterprises depends in many respects on the price for finished goods. For a number of positions they need to be raised. The prices for automobile fuel in Belarus are the lowest in the region. In Europe petrol and diesel oil cost twice as much. In Ukraine, the prices are more than 1,5-1,8 times higher. Even in Russia they are more than 20 % so. Deliveries of fuel to the domestic market are unprofitable for the Belarus oil refining enterprises. The losses have to be compensated by export. But the most insulting thing is that our low prices are subsidizing not only the Belarusian consumers but speculators who are involved in illegal deliveries as well. Unprofitable operations in the domestic market reduces our companies’ capability to modernize at our own cost, we have to take out loans, which is far less efficient. In any case, producing fuel inside the country, even with a minimal profit, is better for consumers than to purchase it on the world market.
I am sure that the highly skilled professionals, responsible and initiative workers of the concern are able to solve problems of any complexity. In 15 years the annual foreign trade turnover of our companies has increased by 6.7 times and reached 21,7 billion dollars in 2011. The Belarusian petrochemical products are known in 126 countries of the world. Last year, the concern has achieved the greatest progress in financial and economic activities in comparison with all other sectors in the country. I would like to congratulate all the employees on the 15-year anniversary. I wish everybody good health and well-being.