United Nations Economic Commission for Europe

Organization for Security and

Co-operation in Europe

UNECE

PUBLIC-PRIVATE COOPERATION IN

INDUSTRIAL RESTRUCTURING

Prepared by Professor Sailau Baizakov, Deputy Director General,

Institute for Economic Research, Almaty, Kazakhstan

UNITED NATIONS New York and Geneva, 2006

The views expressed and the designations employed in this publication are those of the authors and do not necessarily reflect the views of the United Nations Secretariat nor do they express any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. All material may be freely quoted or reprinted, but acknowledgement is requested, together with a copy of the publication containing the quotation or reprint (to be sent to the following address: Industrial Restructuring, Energy and Enterprise Development Division, United Nations Economic Commission for Europe, Palais des Nations, Geneva 10, CH-1211 Switzerland) The UNECE-OSCE Forum “Public – Private Cooperation in Industrial Cooperation” is the fifth and final in a series of meetings organized by UNECE to examine in detail various aspects of industrial restructuring, focusing primarily on transition countries of the UNECE region. The major findings of the meetings preceding the above-mentioned Forum were summarized in UNECE publications ECE/TRADE/291, ECE/TRADE/335 and ECE/TRADE/350. The UNECE publications on industrial restructuring, as well as the full texts of papers presented at the recent UNECE events on industrial restructuring, can be consulted on the UNECE website at the following address: http://www.unece.org/ie/wp8/industres.html.

ECE/TRADE/347

UNITED NATIONS PUBLICATION

Sales No. E.05.II.E.21

ISBN 92-1-116936-4

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CONTENTS

Preface .........................................................................................................v Introduction ................................................................................................1 Chapter I. Recent experience of industrial restructuring......................3 Chapter II. Models of industrial restructuring in transition countries ....................................................................................................11 Chapter III. Reform strategies and objectives of restructuring...........19 Chapter IV. Enterprise restructuring in small towns: local initiatives ...................................................................................................21 Chapter V. The role of central and regional authorities......................25 Chapter VI. Industrial and territorial clustering as a vehicle for restructuring .............................................................................................33 ANNEX I. Recommendations.................................................................39 ANNEX II. Papers presented at the forum ...........................................43

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PREFACE

The present report contains the analytical summary of the discussion and recommendations of the UNECE-OSCE Forum “Public – Private Co-operation in Industrial Restructuring held on 2 and 3 November 2004 in Almaty, Kazakhstan. Over the last fifteen years, the economies of Eastern Europe and the former USSR have made considerable progress along the path of transition to a market economy. While the pace and direction of transformations have varied considerably in different country groups, most of them have achieved a certain degree of economic stabilization, privatization, and price and trade liberalization. The exposure to market signals and international competition, coupled with the drastic fall in real incomes and effective demand, have rendered uncompetitive many enterprises and even branches of industry. The restructuring of these enterprises and modernization of the respective industrial sites and territories dependent on their operation have become a challenging task for both enterprise managers and Governments of transition countries.

A number of Central and Eastern European countries have integrated the objective of restructuring uncompetitive sectors in a broader political context of fast market reforms and accession to the European Union. An important inflow of foreign direct investment into the industrial and service sectors of those economies has facilitated this modernization task. At the same time, an in-depth restructuring is still on the agenda of the industrial sectors of quite a number of countries (for example, Bulgaria, Croatia, Kazakhstan, Romania, Russian Federation, Ukraine), and remains a challenge for the future in several other transition countries of the region. While the immediate objectives of restructuring are relatively straightforward – to restore the competitiveness of enterprises and sectors so that they could contribute to the national wealth and Government revenues – the longer-term impact requires an examination of various

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dimensions of this process, including its cross-sectoral, human development and territorial aspects. Costs that are associated with radical changes in economic structure include employment and family income losses, decline in the standards of living and emergence of new poverty, deterioration in material infrastructure and social services. They turn out to be particularly high in towns and areas, where the incomes of inhabitants and local governments depend on the operation of one or few large enterprises that have lost competitiveness. The incidence of these so called single-industry towns is frequent in the successor republics of the former USSR, the economies of which used to be viewed by the central planners as parts of the single complex. The structural and territorial imbalances inherited from the epoch of central planning thus render the task of restructuring even more difficult. Since the imperatives of central planning have reigned in the successor States of the USSR for more than 70 years, the economic actors have lost institutional memories of both free entrepreneurship and methods of reconciling their diverging interests. Enterprise managers, workers and local inhabitants would expect central and regional administrations to take initiatives to resolve any emerging problem. This tradition of paternalism is still strongly rooted in the minds of both decision makers and those who are supposed to be taken care of. It seems that decades will be needed to generate new responses more appropriate in a developed civil society. Against this backdrop, the accumulated history of radical economic transformations in developed market and transition economies teaches that their success largely depends on the ability of the society to mobilize the creative potential of major stakeholders. Case studies of restructuring presented at various UNECE events prove that at least at the local level, the joint planning, decision-making and implementation of the consensual decisions by the representatives of Governments, enterprises, employees and inhabitants of affected settlements is a key factor in successful transformations, and the results thus achieved prove to be satisfactory to all the parties involved.

For these reasons, the focus of the Almaty Forum - public-private cooperation in the context of industrial restructuring is particularly topical. Practical examples and case studies of transformations at enterprises, towns and areas of transition countries presented at the Forum prove again the practicality and efficiency of public-private cooperation. This is reflected in the Recommendations of the Forum, which were developed for the attention of decision-makers in central and local Governments of transition countries. I would like to thank Professor Sailau Baizakov for the time and effort he has invested into this report. I am confident that it will help the Governments and other stakeholders in their effort to modernize the economy and raise the living standards in transition countries.

Paolo Garonna Acting Executive Secretary United Nations Economic Commission for Europe

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INTRODUCTION

The present publication puts together the major findings of the Forum on Public-Private Cooperation in Industrial Restructuring organized by the Organization for Security and Co-operation in Europe and the United Nations Economic Commission for Europe. The Forum was held in Almaty, Kazakhstan, on 2-3 November 2004. The reports delivered at that event cover a vast panoply of problems of industrial restructuring in transition countries. In particular, the discussion focused on unresolved problems of public-private cooperation in the course of restructuring, challenges encountered by small towns and territories dependent on the activities of one core enterprise, as well as new approaches to the industrial and territorial restructuring emerging in the former Soviet republics. The experience of the Commonwealth of Independent States (CIS) has shown that industrial restructuring has important direct and indirect impact on both enterprises and neighbouring economic space. It influences the social fabric of towns and areas surrounding core enterprises, industries providing inputs and consuming outputs of enterprises under restructuring, as well as the prices for goods and services, labour and capital. The larger the restructured company, the more its effect on the economy of the region and the country at large. Because of these intricate linkages, the restructuring of many enterprises in small and medium-sized towns in CIS has caused ambiguous social and economic consequences. The experience has also shown that restructuring touches upon the interests of many stakeholders (e.g. local and central authorities, companies, labour unions and local population), and an adequate solution to problems can be found only though negotiations and reconciliation of the views of the major parties concerned. The report consists of six sections. The first section reviews the experience of industrial restructuring in some EU and CIS countries, focusing on the role of the State and the regulatory basis. The second and the third sections reflect on the evolution of company restructuring patterns in the CIS, on the one hand, and their relation to national reform strategies, on the other. The

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fourth section examines the problems of industrial restructuring at local (town) level, while the fifth summarizes the opinions expressed at the Forum regarding the role of Governments in restructuring. Finally, the last section highlights the international experience of industrial and territorial clustering. Annex I contains the recommendations of the Forum and Annex II lists the papers presented at that event.

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Chapter I

Recent experience of industrial restructuring

The discussion at the Forum showed that Governments of transition countries were interested in comparing the experience of restructuring in the European Union (EU), and countries of Central and Eastern Europe and CIS. The integration of the latter two groups of States in the world economy has its peculiarities: in Central Europe and the Baltic countries (CEB) it has been relatively rapid and successful, while in the other transition economies, CIS in particular, the adjustment has been slow and inconsistent. The participants indicated that the policy areas, which required major effort from Governments, included the diversification of the national economy and its territorial structures; better quality of consumer goods and services; enhanced export potential and growth of export volumes; and fostering of the private sector, including the establishment of new enterprises and SMEs in particular.

In developed market economies, direct Government intervention in the economy was limited, and its regulatory function was performed through indirect methods. In those countries, the economic role of the State consists of:

• Legal regulations determining the “rules of the game” for

companies at the national and local levels; • Fiscal policy, which determines the revenues of the budget on the

one hand, and the capacity of companies to invest and expand their activities, on the other;

• Purchasing of goods and services for public needs.

Over the last ten to fifteen years of market reforms, policy makers of the CIS countries have agreed on the basic regulatory principles conducive to restructuring. These include:

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• Non-discriminatory rules for and facilitation of domestic and foreign investment;

• Good motivation and encouragement for managers to close or downsize unprofitable enterprises and to search for alternative activities, especially in small towns and depressed areas;

• Promotion of managerial culture and training of future managers.

The economic efficiency aspects of restructuring were considered at the Forum with reference to different types of enterprises: large-scale (core enterprises), medium-sized (independent) and small enterprises. The social aspects were discussed mostly by representatives of Government bodies, who presented the views of central authorities, regional administrations and municipalities. Drawing on the Forum’s deliberations and the accumulated restructuring experience one can formulate the following conclusions or lessons to learn for decision-makers.

Lesson 1. Public-private cooperation is the main condition for successful restructuring

Governments have to initiate cooperation with the private sector so as to harmonize the potential of local enterprises with the sectoral and territorial development plans. Given that the economic roles of parties involved in the dialogue differ, the Government′s initiative should not enter in conflict with interests of enterprises and encourage their competitiveness and profitability. “Restructuring is a result of the social consensus that can be built around the major objectives, mechanisms and acceptable costs of such a restructuring”1. In the West, the role of Governments in strengthening enterprise competitiveness increased considerably in the 1990s, when the 1Paolo Garonna. Introduction to “Industrial restructuring in European transition economies. Experience to date and prospects”. New York and Geneva. 2002, p. XII-XIII.

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Organization for Economic Co-operation and Development approved an action plan aimed at creating in member countries the fundamental framework for innovative economy. Along the same lines, at the Lisbon summit of the European Union, which took place in 2000, it was decided to create by 2010 the most competitive economy in the world, based on knowledge, capable to provide the stable economic growth, the best labour conditions and the most favourable social climate2. Mutual confidence between Governments and business is the key factor in this endeavour. For the Government of the United Kingdom, for example, winning the confidence of the entrepreneurs has been the means to encourage companies to invest long-term and raise the efficiency of their operations3. For this, the Government has committed itself to awarding business for the risks taken. This support took several forms:

• Joint investments; • Examination of the business development prospects; • Investment into the scientific research and training of manpower; • Encouragement of collaboration of private companies with

universities and research centres.

Through the regional development agencies, the State supports the sectoral and territorial restructuring in all parts of the United Kingdom. Their activities aim at finding the best practices of efficiency, identifying obstacles and promoting the successful undertakings. At the same time, the Government is supported by the European Union, which establishes the external framework conditions for this work.

Lesson 2. Assessment and monitoring of the efficiency of restructuring need to be introduced

2See S. Sokolenko "World and national experience of forming the network structures (clusters)" - in “Пiдсумки соцiально-економiчних дослiджень з питань формування новых вироботничих систем (кластерiв) в регiонах Украiни”, 3rd issue, Kyiv, 2004, p. 13. 3TASIS Project “Industrial competitiveness in Kazakhstan”, Astana, 2003.

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A number of speakers drew attention to the issue of the managerial aspects of restructuring, which relate to the monitoring of the enterprise productivity and competitiveness gains achieved during transformations. Measuring the efficiency of restructuring becomes feasible when the regulatory and institutional background is in place: e.g. the legal norms are well-defined, basic rights of dismissed employees secured, etc. When measuring the efficiency of restructuring the decision-makers have to answer the following questions: 1) what was the impact of restructuring on company profitability, productivity and competitiveness, and 2) have the managers settled all the related social problems – re-allocated the workforce, retrained the newly unemployed, etc., and have the interests of all the stakeholders (employees, employers and the state) been taken into account? The answer to the first question is crucial for the development of enterprises, while the answer to the second determines the social impact of restructuring. The Government′s restructuring initiatives should entail the participation of business both in the design and implementation of the restructuring programmes. In the United Kingdom, for example, about 200 business leaders have contributed to the outputs of the working groups for the development of competitiveness organized by the Department for Trade and Industry.

Another option is to develope a set of indicators to measure the progress of competitiveness of companies and sectors. One of the functions of the UK Council on Competitiveness and Commission on Productivity, for example, is the monitoring of the competitiveness index and development of respective recommendations for the Government and the private sector. In Ireland, on the other hand, the practical efficiency assessment by the government bodies puts the emphasis on productivity, which is linked to prices, labour cost and infrastructure development.

The increment in productivity is the main criterion of any change in the economy, including industrial restructuring. Factors of efficiency to be taken into account here should include not only factors internal to the company and sector but also external factors, such as economic policy,

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mechanisms and instruments of regulation, education and qualification of workers, status of environment and energy supply, availability of investment capital, and the level of research and development, and innovation.

Lesson 3. Social orientation of restructuring is impossible without active participation of the Government In small and medium-sized towns, where employment opportunities and incomes depend on the operation of a core enterprise, the re-organization of the latter has serious social implications. Here again, transition countries can learn from the best practices in the developed market economies. Western Governments, employee associations and recently the European Commission are showing an increasing interest in minimizing the negative social impact of company restructuring, especially in the area of employment4. In France, for instance, employers are encouraged to invest in underdeveloped regions and protect the employment there through:

• exemptions from local taxes for companies operating in vulnerable areas and state subsidy of EUR 1,000 per job for companies keeping their production capacity in France, up to a limit of EUR 100,000 over three years;

• tax credits for five years for companies moving into certain areas; • encouragement of partnerships between companies, training bodies

and research organizations aimed at strengthening the competitiveness of underdeveloped areas. Companies operating in these areas will benefit from low taxation rates and reductions in social security payments.

Along the same lines, in Italy the Government provides a State wage guarantee fund and a State social welfare scheme for workers who have lost 4A. Broughton "Promoting Socially-Sensitive Industrial Restructuring: an Overview of Practice in Western Europe", paper prepared for the Forum on Public-Private Co-operation in Industrial Restructuring, 2–3 November 2004, Almaty, Kazakhstan, p. 4.

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their jobs. This assistance allows trade unions to significantly reduce the number of originally planned redundancies in a restructuring exercise, using measures such as working time reductions, voluntary departures and transfer into these state welfare schemes5. Lesson 4. Enactment and enforcement of adequate laws and norms should become a priority

Adequate legal regulation in Western Europe requires that employers inform employees on any forthcoming restructuring. The trade unions, on their part, provide information on the workers’ rights in case of dismissal. In France, for instance, the law requires enterprise managers to assist the dismissed employees in finding a new job. This and other legal provisions force the employers to envisage the compensatory measures versus the newly unemployed. The European Commission regularly updates the legal and regulatory basis for restructuring, in particular its social dimension. The major EC directives aimed at mitigating social effects of industrial restructuring include [2]:

• Directive regulating the issues of mass dismissal (98/59 EC), which binds the companies with the number of workers 20 and more to notify in writing the employees’ representatives on their intention to dismiss staff. They have to consult with representatives of employees “with the aim to achieve an agreement” on the ways and means of avoiding collective redundancies or reducing the number of workers affected, and mitigating the consequences. Companies are also required to wait 30 days from the date of notification before making the redundancies.

• Transfer of undertakings Directive (2001/23/EC), which requires employee representatives in both the acquiring and the transferred company to be informed and consulted before the transfer takes place.

• European Works Councils Directive (94/45/EC), which aims at improving the information and consultation rights of employees in

5Ibid., p. 9–10.

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companies of 1,000 or more employees with at least 150 employees in each of two member states. It gives the European Works Councils the right to be informed and consulted about transnational questions, which significantly affect workers’ interests.

• Information and consultation of workers Directive (2002/12/EC) is a new Directive, which is expected to be implemented into national legislation by March 2005 and which requires undertakings with at least 50 employees or establishments with at least 20 employees to:

- inform on the recent and probable development of activities and

the business’s economic situation; - inform and consult on the employment situation and any

anticipatory measures envisaged, particularly whether there is a threat to employment; and

- inform and consult on decisions likely to lead to substantial changes in work organisation or in contractual relations, including collective redundancies and transfers of undertakings.

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Chapter II

Models of industrial restructuring in transition countries

Industrial restructuring is generated by changes in demand and supply on the home and foreign markets caused by income growth, introduction of new technologies, changes in input prices, including their growth caused by the depletion of natural resources, as well as restrictions related to environmental protection imposed by Governments. Theoretically speaking, under market economy conditions industrial restructuring should be a continuous process of structural adjustment calling only for limited participation of the public sector. In many of the transition economies, the industrial restructuring has become a burning issue as a result of the “reform shock”. Enterprises have lost their competitiveness at the initial stage of transition owing to rapid liberalization of prices, deregulation of transport and energy tariffs, market opening and increased foreign competition. In Kazakhstan, the loss of competitiveness was particularly abrupt in coal mining, ferrous metallurgy, car manufacture, as well as in the consumer goods sector, such as textiles and shoe manufacture. At various levels of aggregation, the objectives of industrial restructuring are known to vary. At the macroeconomic level, for example, the industrial restructuring aims at improving the sectoral structure of economy. At the sectoral level, it has as a rule specific goals, such as enhancing the share of exports or strengthening import substitution. This often requires ceasing the output of obsolescent products and the use of outdated technologies. In the short run, this is achieved through the entry into the market of new competitive enterprises and the withdrawal of the no longer competitive counterparts. The most daunting task for transition countries remains the restructuring at the enterprise level, at which the already existing enterprises have to change their product mix and technology as well as the management model in order to regain competitiveness.

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In transition countries, especially those of the CIS, the weakness of restructuring strategies often lies in mechanically adapting the solutions and managerial techniques typical of the West to local companies. This emulation has not always been supplemented by an analysis of the historical background of enterprises in question. The whole system of instruments and the extensive use of consultants’ expertise are required to make the restructuring in the CIS both economically and socially effective. At the initial stages of privatization in the CIS countries, the task of enterprise transformation was given to the private sector. At the same time, at regional level local authorities opposed any attempts to restructure enterprises located in “their” areas. Mechanisms of cooperation between the local authorities and the private sector were lacking, which created a major stumbling block to effective restructuring. As a result, the stakeholders in restructuring now face problems, which have been accumulating over many years. Z. Aivazian divides the process of restructuring into three stages (Box 1) (See Annex II [4]). Box 1. Major Stages of Restructuring in CIS Countries • Gradual return to order of the collapsed planned economy thanks to the

stabilization of new patterns of consumer demand, sectoral outputs and value chains. Government policy is disoriented, swinging from complete withdrawal from decision-making to tough administrative action “just to be on the safe side” (approximately until 1999).

• Differentiation and restructuring of the units belonging to the “old economy” and their incorporation into formal and informal associations and partnerships. Enterprises continue to evolve within the framework of newly formed associations, in particular formal associations, that is, industrial groups. The latter have started to optimize their structure through acquisitions, stripping off assets and asset swaps among groups (1999 – 2003).

• Shaping up of the new economy and its agents, growing use by the State of more focused and systemic tools of regulation, including tools to encourage restructuring. While its policy remains disputable, the State

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has developed a certain conceptual basis for its action, in particular in the area of restructuring. There is a growing understanding of the need to involve social partners in decision-making (2003 – present).

Source: Zaven Aivazian. Interaction of the State and the Private Sector in Restructuring Industrial Enterprises of Russia and CIS Countries. Discussion Paper prepared for the Forum on Public-Private Co-operation in Industrial Restructuring, 2–3 November 2004, Almaty, Kazakhstan. At present, industrial restructuring in CIS countries concerns the following three main types of enterprises:

- “core” enterprises and “natural monopolies” under the state control – restructuring is implemented by the State;

- independent private enterprises - restructuring is implemented by enterprise owners (shareholders) or under their control;

- enterprises forming part of industrial groups – restructuring is implemented in a centralized manner by the group management.

(a) Restructuring of “core” enterprises The experience of CIS countries shows that industrial restructuring in a particular town or geographical area becomes a burning issue when industries forming the local economy lose competitiveness. It aggravates further when a town or area lack alternative employment opportunities. In many transition countries, especially those with large territories, this problem has become acute. One of the reasons for biased economic structure in individual areas lies in the history of centrally planned industrialization, which has brought about industrial location decisions unjustified from the point of view of the interests of newly independent successor States of the Soviet Union. In particular, the subsidized transport tariffs and the lack of land prices have enabled the establishment and operation of enterprises, which would have

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otherwise been non-viable under the market pricing of economic resources6. When the core enterprise of a town or area becomes uncompetitive, it has either to recover its market position or to close down. Both options usually lead to job losses. These lost jobs and family incomes through the negative multiplier mechanism cause secondary cuts in incomes, taxation base and revenues of local budgets. This undermines the capacity of local authorities to help the laid-off workers and their families on the one hand, and financially support new enterprises providing new jobs, on the other7. Therefore, from the point of view of the State, the restructuring of large core enterprises has also an important social dimension – its repercussions for local employment, quality of life, and maintenance of local infrastructure, utilities and municipal economy. Enterprises and their investors pursue their clearly defined economic objectives, i.e. increasing the profitability and accelerating the cash flow, cutting production costs, shortening the investment payback period, etc. In the absence of strong government policy, these relatively narrow goals often have resulted in closures of potentially viable enterprises or their parts, and decline of potentially competitive industrial sectors. However, the experience of EC countries shows that there are ways to reconcile the economic and social aspects of restructuring. In the United Kingdom, for example, a special government programme encouraging the relocation of light industry enterprises to the steelmakers’ town of Corby, which have provided jobs to the female population, has supported the family incomes and thus facilitated the restructuring of the uncompetitive

6 See for more detail, Paul Hare. Industrial Restructuring as a Means of Enhancing National Competitiveness: Overview of the Problem. Paper presented at the Round Table on “Industrial Restructuring in European Transition Economies: Experience to Date and Prospects” Geneva, Switzerland, 12-13 February 2002 (TRADE/WP.8/SEM.4/2) 7 Industrial Restructuring in Singe-industry Towns and Areas: Major Issues. Note by the secretariat prepared for the Forum on Public-Private Co-operation in Industrial Restructuring, 2 – 3 November 2004, Almaty, Kazakhstan, p. 2 -3.

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steel enterprises in that area. Similar projects are being implemented in CIS countries, particularly in Kazakhstan.

(b) Restructuring of independent enterprises in the post-privatization period

Restructuring of enterprises by their new owners was typical at the early stage of economic reforms in the CIS countries. In Russia, the restructuring decisions were primarily ad hoc and “anti-crisis”, and did not form part of any long-term strategy. During that period the industrial restructuring boiled down to splitting the related business units. Through this operation, the economic benefit of one separate business unit translated into a loss for another business unit. For instance, Murmansk fish factory – one of the largest in industry – has been split and privatized by business units, each of which has become an independent company. The decision to do this assumed that as a result of hiving off unproductive assets, the loss-making activities would stop influencing the financial status of potentially profitable enterprise parts. But instead, all production units have become hostages of each other: incompetent managerial decisions at one business unit, especially of those at the initial stages of the value chain have had a detrimental impact on the whole system. The detachment of unprofitable production units usually concerned the auxiliary structures of an enterprise, such as repair, construction and transportation operations. In some cases, the decision to hive off such operations has brought about short-term profitability gains at the core enterprise. However, in the long run the core enterprises have often experienced losses because of inefficient construction, repair and transportation services that they had to contract to the detached units, which continued to enjoy a monopoly position on the local market. Attempts to re-utilize and re-profile unused capacities in order to cover the fixed costs of their maintenance have not produced sustainable results, because at the initial stages of privatization business operators faced a rapidly aggravating crisis of liquidity.

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In individual cases of restructuring, the objectives have been achieved with the help of foreign investors. As an example, the «Motovilikhinskiye Zavody» - an enterprise belonging to the armaments producing complex of Russia, has created a joint venture with the Canadian corporation “Enterra” to produce centring scrapers. The foreign partner invested modern technological equipment, technology, “know-how” and raw materials. The Russian partners contributed the production site and office space, built the communications networks and participated in the equipment assembly. [4] While a number of joint ventures at the early stages of transition were successful, generally the post-Soviet economies remained unattractive for foreign investors. For this reason, the latter could not contribute to solving the problems of restructuring on a massive scale. During the 1990s the restructuring carried out by independent enterprises had solved the major problem of staving off bankruptcy. At that time, the restructuring was usually understood as a financial restructuring of enterprise liabilities. Having been successful in the financial recovery, managers often abstained from further longer-term action. More recently, a number of enterprises not belonging to industrial groups have continued to restructure through their own efforts. (c) Restructuring of enterprises belonging to the sectoral industrial groups The restructuring of enterprises within the framework of industrial groups has become a massive phenomenon. It is characterized by the establishment of service companies on the basis of auxiliary units of the restructured enterprise. In Russia, for example, the “Russian Aluminium” company has consolidated the repair arms of its plants under a single affiliate company “Service Centre”. In the Ukraine the same company has established a new “Service Centre - Metallurgist” company on the basis of the repair unit of the Nikolaevsky alumina plant. Similarly, Lukoil has restructured its oil-processing plant “Oilchem-Burgas” in Bulgaria. The non-performing units are turned over to the external companies that have similar profile. “Russian Aluminium”, for instance, has commissioned the Dutch company “Hencon” specializing in the production and

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maintenance of special mobile equipment for aluminium industry to manage one of its service departments. Similar business models are used to hive off the non-productive assets, which are the public service institutions - childcare, housing, medical care, sometimes health and rehabilitation centres. These institutions have been detached and contracted to be managed by specialized companies created for that purpose or attracted from outside. This newly accumulated experience of restructuring within the industrial groups provides good points of reference for government bodies that are dealing with the impact of industrial restructuring at the local level.

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Chapter III

Reform strategies and objectives of restructuring

The participants put forward different ideas regarding the industrial policy and industrial restructuring in the post-privatization period. Most of these related to the modernization, diversification and innovation strategies for the industrial sector. Kazakhstan, for example, mainly used the innovation model, while Uzbekistan put the modernization strategies at the head of the angle. In the same way, in Kazakhstan, the government initiative of diversifying the economy of small towns meets with the initiatives of local authorities seeking ways out for complements single industry towns and areas. In that country foreign investors were often a key success factor of local undertakings. They actively participate in the design and implementation of local government programs and provide financial support when the municipal and regional budgets are insufficient for their financing. Some CIS countries have taken a gradual approach to economic transformation. In Uzbekistan for example, the re-organization of the economic structure has started with the agrarian sector, thus creating pre-conditions for more ambitious reforms and ownership changes in agriculture and industry. The land and property laws, as well as other norm-setting texts have been tailored to this slower model of transition to a market economy. As opposed to the other cotton-growing republics of the former USSR, the gradual approach enabled Uzbekistan to avoid steep falls in agricultural production volumes. [18]

In Kazakhstan, the key objective of restructuring is the enhanced competitiveness and diversification of the industrial sector, including the rapid development of high value-added and research-based industries. Given the size of the country, the Government pays also due attention to the territorial aspects of economic development and revival of decaying towns and areas.[1] The decision makers in Kazakhstan and other CIS States examine attentively the experience of industrial policy in countries

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of South-east Asia, on the one hand, and of developed countries of Europe and America, on the other.

In a post-industrial economy, the determining factor of economic growth is an improved quality of the intellectual capital: the creative potential and skills of people working in industries based on advanced technologies. To achieve this improved quality, the CIS countries should endeavour to create networks of small and medium-sized enterprises around the flagships of industry, taking into consideration both the potential of individual sectors and requirements of territories. A balanced approach to industrial development not only will raise the technological level of industry but will also guarantee local employment, contribute to the infrastructure of regions and increase the standards of living therein. Eventually, such an approach will favour the urbanization within a new system of human settlements, improving the structure of regional economy.

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Chapter IV

Enterprise restructuring in small towns: local initiatives

Most of the CIS countries have many “single-industry” towns, the living conditions in which depend on the economic health of one core enterprise. Under central planning, the main sources of support for most of these towns used to be large mining and manufacturing plants. With many of those becoming uncompetitive as a result of market liberalization, these towns have lost the sources of employment and income, for which there were no alternatives in a given geographical area. Single-industry towns suffer from the lack of private initiative. They tend to have few small enterprises and inadequate infrastructure. In particular, speakers from Kazakhstan singled out the following constraints to the development of small towns in their country:

• Lack of qualified labour and inadequate labour training • Massive inflow of unqualified rural population to small towns • Outmoded equipment and technologies at core enterprises • Absence of markets for their products • Obsolete infrastructure • Worn out and often uninhabited housing facilities, the maintenance

of which requires additional investment • Inadequate transport facilities • Environmental problems.

On the regulatory side, the following external factors play an inhibiting role:

• Unclear criteria for settlements to qualify as ‘small towns’ and ‘small towns with a depressed economy’

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• Limited rights of municipal authorities to establish local tax rates, electricity and freight tariffs, shape and spend the local budget, borrow funds and make investments

• Dependence of municipal economy on monetary transfers from the regional and national budgets

• Lack of flexibility in interaction of the town with the core enterprise • Obsolete local development plans.

One of the mechanisms to promote local initiative is free trade zones or special economic zones. In Kazakhstan a pilot project in this area was implemented in the town of Lisakovsk in 1992-1998. A number of observers believe that this experience could usefully be emulated in other towns with a depressed economy. [9,17].

Another example of a successful recovery is the history of the town of Aksu, situated in the Pavlodar region of Kazakhstan. In the 1980s, iron industry, electric power generation and construction determined the economic profile of Aksu. But the loss of competitiveness of the local ferroalloys factory at the outset of the transition undermined the town’s prosperity.

However, the restructuring effort, which started in 1992 helped to preserve the two core enterprises of the area – the Aksu factory of ferroalloys and the Aksu power station «Eurasian Power Corporation». The survival plan for Aksu was based on several factors: the attraction of an external investor to support the core enterprise, unleashing of the local initiative and fostering of private enterprises, and development and implementation of new technologies in cooperation with a local research institution. The ferroalloy plant has become an affiliate of the large ‘TNK Kazkhrom’ corporation, which has assured the plant’s current operation. At the same time, at the beginning of 2000, the Aksu plant of ferroalloys cooperated with 45 small local companies, and ‘Eurasian Power Corporation’ - with 35. These companies have been subcontracted to deliver intermediate goods and services.

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In cooperation with the enterprise management, the local authorities have established a business-incubator and innovation centre. Jointly with the Pavlodar University they have initiated a training, research and production centre focused on commercializing new technologies and training engineering workers for the local enterprises.

The importance of public-private cooperation in restructuring a local economy is demonstrated further by the story of the Fort Shevchenko town situated on the northwestern coast of the Caspian. In the 1960s, the town developed around the oil and gas exploration at the Mangyshlak peninsula and subsequently serviced the fisheries in the Bautino seaport, which traded with Astrakhan in Russia. After the independence of Kazakhstan the fishing enterprise at Mangyshlak lost its markets in Russia. Simultaneously it lost competitiveness on the local market due to escalating transportation tariffs, ageing of the fishing vessels and processing equipment, and the resultant outflow of qualified labour. The halt to the fishing enterprise brought the unemployment rate in the second half of the 1990s to almost 40 per cent, while the lack of local tax revenues meant that public utilities (boilers, water and electricity supply, public housing facilities etc) could no longer be maintained. [9] The economic situation took a turn for the better when the AGIP oil and gas company decided to explore for oil and gas in the area of Fort Shevchenko. The foreign investor brought in a number of servicing and subcontracting companies, which have in the meantime become established in the area. In collaboration with foreign investors the local administration has designed a development programme for the town, which is being consistently implemented. It emphasizes the diversification of the local economy, and to this end enterprises of agriculture and food processing are being set up. Foreign investors have financed the construction of a mini waste-processing factory. The factory has become highly profitable and has expanded its range of services to local companies. The favourable business climate has enabled the establishment of small enterprises: as many as 10 local-based SMEs are included into the value chain of foreign investors. The municipal authorities cooperate closely with the private sector in redesigning the training and retraining schemes for redundant

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fishermen (to become oil and gas operators, and construction workers). For young people they offer language and computer classes. In their turn, foreign companies have assisted the local authorities in restoring the local infrastructure and have financed the construction of schools, boiler houses, stadiums and museums. The participants emphasized the valuable cooperation of the private sector with local research institutions and establishment of technological and scientific parks, business incubators and similar integrated market structures. Such structures, often sponsored by the State, have proved their efficiency, as seen in the experience of ‘Orion SRS’ association in Russia. In some cases, countries with transition economies aspire to use these business models for a breakthrough in the sphere of advanced technologies. This is the objective of a recently founded park for information technologies ‘Ala-Tau IT Sector’ and other regional science and industry parks in Kazakhstan.

Assistance from the central budget can play a strong supporting role during the most difficult stages of territorial restructuring. However, a sustainable basis for reviving underdeveloped and decaying areas is provided by preferential taxation regimes for locally based enterprises and mechanisms of special economic zones. The role of foreign direct investment and its spillover effects on the local economy were also emphasized. At the same time, the Forum agreed that the government support for local entrepreneurs should not deter competition between region-based enterprises and their counterparts penetrating the local market from other regions of the country and from abroad.

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Chapter V

The role of central and regional authorities

The best practice in restructuring shows that reforms are best implemented through the dialogue and participation in decision-making by the major stakeholders. At the same time, the extent of government participation in restructuring may vary – there are known examples in countries of CIS and in some countries of Eastern Europe, when the restructuring had been carried out by the State itself before the enterprises have been privatized. During the transition, industrial restructuring, along with the development of entrepreneurship has been a major tool for enhancing enterprise competitiveness and strengthening the competitive advantages of a country. The role of the state, in particular the role of well-defined and transparent industrial policy increases: without it, under the conditions of rapid structural changes enterprises are tempted to sacrifice their long-term interests for immediate goals. Therefore, on the one hand, I share Paul Hare’s opinion that the market model of restructuring with the limited participation of Governments is the most appropriate one for transition countries8. On the other, the limited and well-defined participation of the Government in restructuring is of paramount importance. To a large extent the outstanding problems of effective restructuring, such as, for example, underdeveloped market infrastructure or unattractiveness of regions for external investors, could not be solved within enterprises, and possible solutions to those problems are beyond their control. At the same time, handicaps to competitiveness can be gradually removed through consolidated efforts of companies on the one hand, and their support given to them by territorial and central authorities, on the other.

8 Paul G. Hare. Industrial restructuring in the European countries with transition economy. Accumulated experience and prospects. New York, Geneva. 2002. p.28-40 http://www.unece.org/ie/industry/papers.htm

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The Forum reflected on possible strategies of authorities in the process of restructuring. The participants agreed that the Government administration of the restructuring projects might be favourable in the short run, providing uncompetitive enterprises protection from import competition, access to State supply and purchases, and financial subsidies. However, in the longer run, direct government intervention becomes an obstacle to the effective development of enterprises. In contrast, holding companies supervised by the State can be an efficient restructuring tool, suggesting more promising management models. In regions where there are no government-owned enterprises, holding companies could be established by private investors and local authorities as platforms for exploring new market opportunities, attracting finance and promoting new undertakings at national level and abroad.

Some participants feared that any direct intervention by Governments in enterprise restructuring could become a major deterrent to progress. Among the negative aspects of government control over restructuring the participants pointed out that administrative bodies:

• Cannot develop and implement detailed restructuring programmes • Can block private-sector initiatives • Do not encourage innovation • Cannot efficiently control costs and expenses • Do not flexibly adjust to market signals received during

restructuring • Cannot reconcile diverging interests of stakeholders and organize

coordinated programme implementation • Cannot resist the temptation of rent seeking and are prone to

lobbying and corruption.

As a result of their controlling activity government bodies are likely to enhance the detrimental influence of individual stakeholders, which are interested only in their own short-term profits.

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Without intervening directly, through their regulatory policies, Governments should ensure a secure environment conducive to private entrepreneurship so that managers could conduct reconstruction of enterprises. This is a central economic function of the State, which is not specific to individual sectors or geographical areas. The role of laws and regulations related to entrepreneurship (establishment of new companies, their registration, taxation, supervision of their activities by government agencies and accounting etc.) is of particular importance. In transition economies, new enterprises, most of which are small, are known to be more productive and growing faster than large companies. At the same time, the regulations governing the establishment of new enterprises still incorporate a lot of red tape. More liberal rules of establishment and enterprise operation will facilitate the emergence of new off-springs, capable of taking over the “non-core” production lines as well as absorbing the employees made redundant by downsizing core enterprises in single-industry towns and areas. The laws enabling the operation of the real estate market, including the legal basis for the mortgage finance, are equally important. These laws could permit the redundant workers to sell their property and acquire a new property in areas where employment is available. Central Governments could thus encourage significantly the worker’s mobility. Creating framework conditions for restructuring by central Governments should not belittle the role of regional and local authorities. Many countries have seen that programmes by local administrations can effectively alleviate the hardships of restructuring. For example in 2001, in Tambov region of Russia the regional authorities initiated extraordinary public works and arranged for temporary employment in an agro-industrial enterprise for redundant workers of the Uvarovo Chemical Plant, which was being restructured. Simultaneously, the regional business incubator organized training courses in business management tailored to the needs of local SMEs. In the second half of the 1990s, the local administration in Lisakovsk, a town built around the iron ore mining enterprise in Kazakhstan, successfully managed to organize the training and retraining of

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laid off miners, and to combine the income support measures with extraordinary public works as a social safety net measure. In transition economies local initiatives are often limited by the financial weakness of regional and municipal authorities. For example, due to lack of financing, local administrations and municipalities cannot take over the public services previously provided by core enterprises. For the same reason, local authorities cannot contribute to adequate retraining of laid-off workers and improve the information flow on vacancies and housing available in other towns and areas.

While the issue is controversial and opinions thereon diverge, many experts think that to remedy the situation and to enhance the local capacity in industrial restructuring the redistribution of revenues among different levels of government is required. As suggested by Paul Hare, for example, the reform of local and regional government finance should break the excessive dependence of local budgets on tax receipts from one or several big local enterprises9. The re-allocation of revenues collected at national or regional levels would enable the financing of local programmes supportive of restructuring, in particular the rendering of public services cut off the “core” enterprise, retraining of laid-off workers, information services for the unemployed and others. Preferential tax regimes for enterprises located in underdeveloped and depressed areas would work to the same effect. As a whole, upon discussion the Forum participants concluded, that the role of Governments in the restructuring process should be limited to the following functions:

- involving private sector, workers’ unions and other stakeholders in the design and implementation of regional development plans,

- facilitating alternative investment and employment opportunities, including through foreign investment,

- supplying information on restructuring plans and their implementation, including information on available employment and

9 Paul Hare. Industrial restructuring as a means of enhancing national competitiveness: overview of the problem, p. 28-40. http://www.unece.org/ie/industry/papers.htm.

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housing opportunities for dismissed employees and local population as a whole,

- organizing extraordinary public works to provide temporary employment for the dismissed,

- cooperating with the private sector and co-financing the retraining of the redundant workers,

- establishing rules for and co-financing the early retirement schemes as well as aid to laid off workers’ families,

- facilitating the establishment of private companies capable of providing the discontinue public services, which used to be rendered by uncompetitive ‘core’ enterprises,

- establishing the adequate legal basis for the housing market.

As the most important step, Governments can undertake to create a framework mechanism for cooperation of stakeholders, thanks to which the latter would be capable of finding solutions and jointly implementing decisions. The accumulated experience suggests the following key parameters of such a framework mechanism:

• The stakeholders jointly develop an industrial restructuring plan of a “core” enterprise, which would take into account the interests, potential and limitations of every party involved;

• The criteria of effectiveness of the plan implementation are agreed upon and satisfy all the participants; the agreed criteria translate into the set of indicators measuring the performance of each of the stakeholders;

• The participants coordinate the activities by the parties involved and discuss the intermediate results achieved; and

• The participants organize the monitoring of restructuring process, assess the post-restructuring efficiency of the enterprise, and adjust their plans to strengthen the enterprise competitiveness for the future.

I conclude this section with a step-by-step procedure for assessing the enterprise operation and ranking of objectives, which could contribute to developing the above-mentioned restructuring plan (Table 1).

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Table 1. Step-by-step analysis of enterprise operation and stages of restructuring

Steps Analysis Policy action 1 Analysis of the enterprise

cash flow from sales and other sources of income in the accounting period «1» (Q1) Increase «+» or decrease «–» of Q1 is compared with the volume in period «0» (Q0)

If the cash flow increases, decision-makers pass to step 5, otherwise to step 2

2 Analysis of the composite indicator Q1=τ·Q11 where τ is a quality factor and Q11 – potential output Growth of τ represents the improvement of quality and decline the deterioration of quality of output

If the quality factor increases, decision-makers pass to step 4, otherwise to step 3

3 Analysis of causes for low quality (as compared with the benchmark)

Recommendations to improve the quality of goods and services

4 Analysis of external factors decreasing the volume of cash flow Q1 (price changes, falling demand , etc)

Recommendations regarding new markets or new products

5 Analysis of material costs (MZ1) per unit of output in the reporting period as compared with MZ0 in period «0»

If material costs increase, decision-makers pass to step 6, otherwise to step 7

6 Analysis of material costs (MZ) by item

Recommendation to cut individual material cost components

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7 Analysis of labour remuneration V =γ·L, where (γ) represents the average annual remuneration per employee and L – the number of employees

If the average labour remuneration increases, decision-makers pass to step 8, otherwise to step 9

8 Analysis of the reasons for remuneration increase (growth in qualification, etc.)

Recommendations on pay according to qualification of personnel

9 Check of condition L1 ≥ L0 If the labour force has grown, decision-makers pass to step 10, otherwise to step 11

10 Analysis of labour conditions, labour force composition, turnover, and other relevant circumstances

Recommendations on labour conditions and personnel cuts

11 Quantitative analysis of tax burden per unit of output (increase/decrease)

If the tax burden increases, decision-makers pass to step 12, otherwise to step 13

12 Examination of reasons for increased tax burden

Recommendation on improved tax legislation

13 Overall results of analysis of the enterprise operation

General conclusions and recommendations regarding the reorganization or bankruptcy of the enterprise

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Chapter VI

Industrial and territorial clustering as a vehicle for restructuring

Over the last 20 years, the industrial and territorial clustering has moved to the forefront of economic policies of developed market and developing economies. The hierarchical and network models of industrial structures (clusters) emerge at local, regional, and national levels, and are increasingly recognized as part of the global integration processes.

Traditionally, the term ‘cluster’ relates to the industrial and production system, the core of which is formed by one or a limited number of enterprises. Groups of closely located companies pool the available resources, such as technology, information, inputs, customers and supply channels allowing them to operate more productively. In this context it is to mention an on-going project named "Orion SRS" that was initiated by the managers of a number of Siberian enterprises from Omsk, Yekaterinburg and Barnaul. The long-term objective of this project is to create a range of multi-purpose equipment to be used for double (military and non-military) and civil purposes. While the members of this business structure remain independent, a common nucleus uniting both technological and financial resources and performing a coordinating function has been formed. At the initial stage of integration, it is planned to convert the participating enterprises into joint stock companies controlled and guaranteed by the state. Subsequently, the state-owned stock is intended to be sold to the public. Similar methods of market integration have been used by quite a number of Russian enterprises in St. Petersburg, Sarapul, Tambov and Voronezh [16]. The benefits that companies derive from being a part of a cluster include wider market opportunities, lower operational costs related to marketing, administration and rent, improved rating with the financial institutions and a better access to investment finance. Among the participating companies

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can be oil and gas extractors, coal basin developers, manufacturers of nonferrous metals or agricultural producers and similar. While the objectives of clusters may differ, there is a condition, which forms a foundation of cluster operation in all countries: the support and cooperation of companies with the public sector.

The geography of cluster development is quite broad. As examples of successful clustering, one can refer to the textile companies in Northern and South Carolina and a group of wine-makers in California (USA), the automobile companies in the southern part of Germany, manufacture of model footwear in Italy, as well as timber and woodworking industries in Portugal and Sweden. Of particular interest to transition countries is probably the experience of clustering at regional level, enabling the underdeveloped and decaying areas to regain competitiveness. The regional industrial policy based on the introduction of the cluster model has proved its efficiency in economies as different as China, India, Japan, Malaysia, Republic of Korea and Singapore. In all these countries the success of clustering has been determined by the enabling regulatory basis as well as the focus of participating companies on innovation and new managerial solutions.

The various groups of stakeholders in clustering, which include enterprises, financial institutions, local authorities, research and development institutions, and non-governmental organizations pursue objectives that reflect a panoply of often diverging interests. At the same time, the strategies of cluster development are designed both by government bodies and non-governmental organizations and groups, so that the latter reflect the interests of enterprises and the public at large. Whereas the government bodies endeavour first of all to develop the rules of behaviour for clusters – for example the standards for disclosing information and rights of participants, the business associations and other non-governmental bodies focus on setting the procedures for integrated structures that would correspond to international standards and would be voluntarily accepted by the participating business and research establishments.

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Practical experience has shown that industrial clusters first, increase the efficiency of cooperating firms; second, help to keep the momentum of innovative activity in the region; and third, facilitate the establishment of new enterprises and growth of new markets. The involvement of various stakeholders in the creation and operation of clusters produces economic efficiency gains, which eventually translate into social benefits for the local population. In the CIS countries clustering had permitted the development of new technologies, substitute locally-produced goods and raw materials for a number of imported counterparts, and have enabled important spillover effects in the local economy. The Forum emphasized that the majority of successful clusters have emerged and developed as a grassroots initiative without any ‘pushing and pulling’ by government bodies. In Ukraine, for example, which is a regional leader in cluster technologies, first sectoral clusters in Khmel’nitski region were formed in 1997 by local entrepreneurs and authorities. These clusters have already functioned for several years and their results have been impressive. The construction cluster, for example, has created as many as 5,000 new jobs, and the sewing cluster up to 3,000. While in the beginning of the 1990s, more than 90 per cent of garments in the Khmel’nitski region were imported from Poland, Turkey and Arab Emirates, ten years later as many as 75 per cent of fashionable clothes were produced by the enterprises of the cluster. The development of the tourism cluster in Kamenets-Podolsky during 1999–2003 enabled a tripling in the number of tourists coming to that town. Simultaneously, private tourist accommodation facilities have started growing - at the end of that period, these numbered 100. In its turn, the development of the tourist business has activated the local construction and food-processing clusters. The first positive results of clustering in the indicated region have triggered interest in emulating this experience in the other regions and towns of Ukraine (e.g. Prikarpat’e, Poles’e, Crimea). The application of new business models in that country is supported by both governmental and non-governmental business promotion agencies, which organize information sessions and training seminars for companies and local administrations.

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In Kazakhstan, the first attempts at territorial and sectoral planning date back to the epoch of central planning, when a number of the so-called ‘territorial and production complexes’ – such as Pavlodar-Ekibastuz, Mangystau and Zhambyl-Karatau were developed. Under the market economy, the territorial and sectoral planning has been given a new start in the context of the government ‘Strategy for the Development of Industry and Innovation’, which envisages the establishment of a network of technological business incubators. In the autumn of 2005, the first such incubator will have been established in cooperation with the Austin technological incubator (Texas, USA) 10.

The Forum agreed that clustering more than other methods and tools of reorganizing industrial enterprises meets tasks of effective restructuring and its social orientation. The efficiency of territorial and sectoral clustering is stipulated by the cooperation of the three major stakeholders – Governments, private companies and research institutions. This method of industrial development might prove particularly promising at the stage of developing a new economy crucially dependent on knowledge and commercialization of new technologies. The participants advised the UNECE Governments and international organizations active in this area to continue raising the awareness of decision makers at national and local levels of the positive effects of clustering. For this purpose more training courses, round tables and seminars should be organized. Box 3 below describes the sequence of stakeholder actions aimed at developing the local enterprise competitiveness through their clustering11. Box 3. Actions aimed at developing local competitiveness through clustering

1 Examine issues and assess local enterprise competitiveness 2 Create focal group of stakeholders on matters of

10 PANORAMA, 2005, № 12, p. 3 11 Based on S. Sokolenko. Principles of evaluation of regions competitiveness, Kyev, 2004. p. 5. As one of the possible criteria for assessing clustering efficiency, S. Sokolenko proposes the indicator of tax revenues accruing as a result of clustering.

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competitiveness 3 Analyse local economic structure, specialization of enterprises,

labour force quality, and investment potential 4 Identify "benchmarking" towns or areas to have points of

reference 5 Analyse local social fabric, including the peculiarities of

geographical location, available infrastructure, conditions for leisure and entertainments

6 Identify strengths and weaknesses of the local economy 7 Assess external factors influencing the economy of the region or

town 8 Develop a competitiveness strategy 9 Identify criteria for comparison against bookmarks and major

policy actions 10 Develop a monitoring mechanism

The Forum agreed that given the accumulated positive experience, Governments should strengthen support to clustering in the CIS countries at both national and regional levels. This would include, inter alia, the establishment of the legislative and regulatory basis, participative development of strategic directions for a territory by the stakeholders, improved information and training for government officials, private company managers and research workers involved in cluster development.

At the same time, while the role of regional and central authorities is especially important at the initial stages of cluster formation, at the subsequent stage the market factors become determinant. Here, the role of regional authorities and the contents of the regional policies change dramatically, focusing on the facilitation of relationships among the cluster participants. The development of clusters should be linked with the government objectives in the area of new technologies and high value-added sectors. Local clusters should include the technological parks and development structures in small towns. The regional and inter-regional integrated

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structures should enjoy priority in the government investment and technological policy. The financial institutions should play a more active role in clusters assuring the financing of the whole cycle of "Research and Development - Manufacture - Marketing ".

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ANNEX I

Recommendations

OSCE-UNECE FORUM “PUBLIC – PRIVATE COOPERATION IN INDUSTRIAL

RESTRUCTURING”

2–3 November 2004 in Almaty, Kazakhstan

The participants in the OSCE-UNECE Forum on “Public-Private Cooperation in Industrial Restructuring”, held on 2–3 November 2004 in Almaty, Kazakhstan Recognizing that: At the present stage of transition, the restructuring of economic sectors and enterprises remains an important means of raising national competitiveness, revitalizing the economies of decaying towns and territories, and upgrading people’s educational level and skills, that the social problems associated with restructuring are particularly painful in single-industry towns and areas, where scaling down and closures of uncompetitive production sites endanger the employment, income opportunities and the quality of life of thousands of people, and That the preconditions for resolving the economic and social problems of single industry towns and areas are:

• Clear and transparent laws and regulations relating to entrepreneurship

• Fully developed property rights and their consistent enforcement • Simple and predictable taxation • Local government support to the establishment of new enterprises • Adequate financing and combined efforts of central and local

authorities in designing social rescue measures.

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Successful industrial restructuring, including that in single-industry towns and depressed regions, crucially depends on the close cooperation between the major stakeholders: central, regional and municipal Governments, entrepreneurs, trade unions, employees and local inhabitants. Cooperation with the social partners provides Governments with essential feedback, helping them to establish a regulatory and institutional environment that should create incentives for entrepreneurship, thus encouraging technological change and promoting local economic development, Regional and municipal authorities often underutilize their potential for transforming the local industrial fabric and revitalizing towns and areas. The experience of many countries shows that local initiative can be instrumental in supplying the laid-off workers with information on alternative employment opportunities, organizing extraordinary public works, advising the unemployed on career development prospects and designing re-training schemes. Local potential for supporting the new entrepreneurs, SMEs in particular, should be also encouraged. At the same time, when delegating the relevant decision-making power to lower-level administrations, central Governments should re-allocate to them a sufficient amount of resources, Recommend to central, regional and municipal Governments to:

• Use the synergies emerging from the cooperation of Governments, enterprises, employees and local inhabitants to facilitate the industrial restructuring and resolve the associated problems, including those of declining towns and areas;

• Establish clear regional development goals and priorities well coordinated with measures promoting local enterprises. These goals should be based on an honest assessment of the commercial prospects of “core” companies;

• Collect and disseminate information on best practices in industrial restructuring in developed market and transition economies, synthesizing the accumulated experience of its successful organization, management and financing. The databases containing

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such information could be developed in the regions and should be available to decision-makers from the public and private sectors on-line. On this basis, and in cooperation with interested private companies or entrepreneurs’ associations, regional administrations should initiate training courses for managers of public and private companies that require restructuring;

• Initiate and sponsor the establishment of regional marketing databases containing the information on the supply of products and services by newly established enterprises, SMEs in particular. Such regional databases could eventually be linked to form a national database;

• Consider (a) measures breaking the excessive dependence of local budgets on tax receipts from one or several large local enterprises, and (b) alternative mechanisms for financing the social services hived off by “core” enterprises to municipalities, including those relating to the communal infrastructure. One such measure could be the re-allocation of revenues collected at national level to enable the financing of local programmes supportive of restructuring;

• Favour a regulatory and institutional environment conducive to industrial and territorial clustering;

• Set up stable and predictable local taxation schemes conducive to new enterprise formation; where appropriate and, in particular, in economically depressed areas, to use the special economic zones mechanisms for regional development purposes;

• Consider setting up a network of regional Government-sponsored public-private financial institutions (banks) focusing on financing the restructuring and modernization projects; loans from such institutions and financial support from central and regional administrations should be conditional on the private sector’s commitment to contributing to the goals of regional development programmes.

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Annex II

Papers Presented at the Forum

SESSION 1. COOPERATION OF GOVERNMENTS AND PRIVATE

SECTOR: OUTSTANDING ISSUES 1. Asset Issekeshev - Vice-Minister, Ministry of Industry and Trade,

Kazakhstan “Industrial and Innovation Policy in the Republic of Kazakhstan:

Cooperation of the Public and Private Sectors” 2. Andrea Broughton - Editor, European Industrial Relations Review,

United Kingdom “Promoting Socially-sensitive Industrial Restructuring: an Overview

of Practice in Western Europe” 3. Claude Potelle - Chairman, Corporate Resources International Inc,

Belgium “Holding Companies as a Support for Regional Development” SESSION 2. NEW BUSINESS MODELS OF RESTRUCTURING:

EXPERIENCE FROM DEVELOPED MARKET AND TRANSITION ECONOMIES

4. Zaven Aivazian - Project Director, PACC Consulting i Audit,

Russian Federation “Interaction of the State and the Private Sector in Restructuring

Industrial Enterprises of Russia and CIS Countries”

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5. Chris Walker - CEO, Chris Walker & Associates, United Kingdom “Restructuring in Transition Countries: Aims, Roles, Options, and Experience”

6. Tolondu Toichubaev - Chairman, Corporate Technologies Center, Kyrgyzstan

“Objectives and Mechanisms of Industrial Restructuring in Kyrgyzstan”

7. Askar Sembin - First Vice-President, Kazakhstan Development Bank,

Kazakhstan “The Textile Clusters in Kazakhstan: Problems and Prospects” SESSION 3. DEALING WITH PROBLEMS OF SINGLE-

INDUSTRY TOWNS AND AREAS

8. Alexander Yerofeyev - Senior Manager, KPMG – Moscow, Russian Federation

"The Role of the State and the Private Sector in Rescuing "Core" Enterprises: a Restructuring Professional's Perspective"

9. Aicumis Dossanova - Deputy Akim, Tupkaranag District, Mangystau

Region “Public-Private Cooperation in Resolving the Problems of a Ural

Branch of RAN, Russian Federation – “Industrial Policy as an Small Town: the Case of Fort Shevchenko”

10. Andrey Shelomentzev - Head of Department, Institute of Economy “Instrument of Socially-sensitive Restructuring of a Regional

Economy” 11. Boris Rudman - Director General, Kaztsink Production Complex,

Kazakhstan “Enterprise Restructuring in a Small Town: the Case of Kaztsink”

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SESSION 4. INDUSTRIAL AND TERRITORIAL CLUSTERING AS A VEHICLE FOR INDUSTRIAL RESTRUCTURING

12. Stanislav Sokolenko - President, International Foundation for Market

Promotion, Ukraine “Clustering Model: International Experience and its Reference

to Transition Economies" 13. Kuandyk Beshimbaev - Deputy-Chairman of the Board, for

Marketing Analytical Research, Kazakhstan “The Perspectives of Clustering in Kazakhstan” 14. Roger Cloes - Deputy Chief of Section, Bundestag Research

Services, Germany “Clustering in the Industrial Restructuring Process of Transition

Countries: Options and Limitations” 15. Temirlan Kusaiyn - Vice-President, Director, Almaty Branch,

Engineering and Technology Transfer Centre, Kazakhstan “Development of National and Regional Technoparks in

Kazakhstan” 16. Yaroslav Kroukovsky - Dean of Faculty, Russian State University of

Trade and Economics (RSUTE), Russian Federation “Development of Integrated Structures in the Russian Industrial

Sector: Regional Aspects” 17. Ilyubai Orazalinov - Akim of the town of Aksu, Aksu, Kazakhstan

“Industrial and Territorial Clustering as a Mechanism of Industrial Restructuring”

18. B. Berkinov and R. Ubaidullaev – Uzbekistan “Restructuring the Agro-Industrial Enterprises in Uzbekistan”

The Forum agreed that the effective industrial restructuring should foster the competitive advantages of a country, which may relate to the extraction

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and exports of natural resources. At the same time, it should encourage innovation, valorisation of human capital, introduction of energy and resource saving technologies, and nature preservation. With this in mind, local authorities should promote the consulting capacity of business-centres, organize and sponsor training of their officers so that the latter could use modern methods of enterprise development and facilitate the establishment of new companies.

Papers presented at the at the OSCE-UNECE Forum are available on-line on the UNECE web site at the following address:

http://www.unece.org/ie/wp8/ industres.html