23 november 2012

Government meeting


Dmitry Medvedev: Good afternoon, colleagues. We are continuing to discuss major government programmes on socio-economic development. Arguably, this is our primary objective, as I said at our first meeting.

Today, we will consider two programmes. The first is about the transport system development in 2013-2020. The second is about the aviation industry development. Both are extremely important for Russia given its vast territory and the current state of transport lines. Speaking about the first programme, over 1,000 kilometres of new rail tracks and nearly 32,000 kilometres of paved motorways have been built over the past ten years. Freight traffic grew by 36% over the same period. Passenger traffic is up by over 25%. The existing transport infrastructure stifles our country's growth. All types of transport are plagued by insufficient traffic capacity. This hinders economic diversification and prevents us from creating a proper competitive environment and expanding business activities. For example, there are over 7,000 kilometres of rail tracks with insufficient throughput capacity in Russia. What other country has such problems? As little as 8% of federal roads have multiple lanes. The deterioration of the transport fixed assets in certain types of transport reaches 50%.

What should our focus be on? First of all, we must increase the safety of the entire transport system and safeguard people’s lives and the health. Second, we must increase the availability of transport services throughout the country, including remote locations in Siberia and the Far East. Third, we should improve transport efficiency and cut costs which are nothing short of outlandish for certain types of transport. Fourth, we must take advantage of our geographic location that is favourable for transit traffic and increase our transport system's competitiveness on the global services market. By 2020, we plan to launch over 2,500 kilometres of new rail tracks, build and renovate 14,000 kilometres of federal and regional motorways, increase the capacity of ports by 356 million tonnes, bring up to code nearly 100 airport runways, and replace a significant portion of the rolling stock.

With regard to accidents, It is necessary to reduce the number of transport accidents by one third, and to reduce transport costs, depending on the type of transport, by 12%-16%. I think it is possible to achieve even better results in some areas. There are plans to redouble exported transport services and increase the mobility of the population by 50%. The Ministry of Transport has carried out a huge amount of work. The programme is rather complex and must take into consideration not only large plans, at times even huge plans, but also the decisions that we have taken and that are currently being implemented. I am referring, for example, to the decisions on the 2018 FIFA World Cup and on the development of Moscow Region transport – these are very large, and completely self-sufficient projects. 

Our Government meeting is being attended by our colleagues – Mr Mitin, the Governor of the Novgorod Region, and Mr Markelov, the Head of the Republic of Mari El. I will give them the floor to speak on these issues, with respect to the situation in their regions.

The next subject is the programme, The Development of the Aircraft Industry between 2013 and 2025, which is a rather large-scale programme, and is also mostly linked to the transport infrastructure. We have discussed this subject at our meetings in Kazan, Vladivostok and Novosibirsk and at other meetings, and we have agreed to work in various areas, including in the creation of our own national airplane for local and regional airlines, and to replace obsolete airplanes. The programme was discussed by the Governmental Expert Council and in the format of the Open Government. I know that some concerns have been voiced, and they have been mostly remedied. Aircraft construction used to be one of the key sectors in this country. Russia still has good positions on the global aircraft market, including as a result of our recent efforts. Russia is one of three leading aircraft exporting nations, but this position has not been granted to us by God: our goal is to consolidate this position, and of course we should accentuate the segment of civil aviation and preserve this honourable place in the troika, after the US and the EU.  

At the same time, we have very important domestic objectives. Our national aircraft fleet is badly worn out. The average long-range airplane is 17 years old, although this figure has recently been reduced due to the introduction of a certain number of transport aircraft. The age of aircraft for regional aviation is very complicated, already critical: it is nearly 30 years old. According to estimates, Russian airlines will need up to 1,300 new passenger airplanes by 2020. The international aircraft market and the market of aircraft services is rapidly growing. According to an expert estimate, it could reach some 24 trillion roubles by 2025, while in 2011, it amounted to 7.5 trillion roubles. So the main goal of the programme is to increase our possibilities and saturate aircraft markets with competitive Russian airplanes. To achieve this, it is important not only to preserve but also to form a scientific and technical foundation for creating new models, to strengthen the personnel potential of the sector, to attract young specialists – this goal continues to be one of the most complicated. And of course it is necessary to optimise the production line. We need to assess where we can hold onto our leading positions and where we should follow the models that have already been created. That does not mean that we should abandon research and design in this area, yet we should be pragmatics above all, because we should use our competitive advantages and products that should be saleable and should not be produced for storage.    

And of course a necessary condition is the implementation of the state defence order. Under the state defence programme, there are plans to build over 3,300 airplanes and 5,500 helicopters for civil and defence purposes, and to produce over 33,000 aircraft engines. I think that the ministers can rest. I have implemented your work; you can get down to implementing the programme.

We have some more important points that I want to highlight, including for media outlets. We will discuss the draft federal law introducing amendments to the Budget Code. Now we have a sophisticated concept of the “grant,” which is widespread across the globe. The Budget Code will include additional statutes providing for grants in the form of subsidies to legal bodies and non-profit organisations, excluding public and municipal institutions. Budget institutions, whatever their jurisdiction, can take part in tenders for grants. Grants are known to be a rather widespread practice of supporting various areas of human activity and research. They work not only in science but also in culture, art and education. Therefore improvement of legal framework of such acts is without doubt useful in this country.   

The term “grant” should not be associated only with foreign support and various political activities; this concept is much broader and much more useful in general.

The current agenda includes also a draft government resolution providing for changes in the procedure of vehicle inspection. These are two changes that concern a great number of drivers. The first – official dealers are granted the right to inspect cars of the models that they service. This means that a driver will not need to have his car inspected twice, first by the dealer and then by the vehicle inspectorate. And second, vehicle inspection certificates will be replaced by vehicle test cards that include all key parameters of the car's condition. As I understand the proposals that we will discuss today, it will not be necessary to drive around with this test card in the car, this document will not be something that the driver has to produce at the request of transport police. The driver will need it only when applying for insurance, and the insurance policy will be proof that the driver has this test card. All information should be included in an electronic database that car insurers will have access to. I hope this will create the foundations for a more civilised and transparent car market in this country; and importantly, this will save drivers time and money.

And one more point. This seems to be a small point, but it is very important for rural residents: amendments to the Labour Code, the specifics of the work of doctors and paramedics in rural areas. The possibility to stay by a patient's sickbed at home – in the past, surgeons, intensive therapy doctors and obstetricians used to practice this. In the 1990s, this practice was suspended, but the need has remained, and the medical community and rural residents used to raise this issue repeatedly. The amendments to the Labour Code will make it possible to go back to this form of work and pay for service by a sickbed, that is so necessary for patients.  

Now, the Minister of Transport and the Minister of Industry will take the floor. I think two minutes will suffice. Please go ahead.

Maxim Sokolov (Minister of Transport): Thank you, Mr Medvedev. I’ll be brief. All the same, because the draft state programme The Development of the Transport System, which was developed under the relevant presidential executive order, outlines the future development of our transport system, I will highlight some of the main provisions of this document.

The programme has been developed taking into consideration the role and place of transport in our priorities. The transport system has the following challenges. There is low transport mobility among the population that currently consists of some 7,000 kilometres per inhabitant. Unfortunately, this is three or four times lower than in developed countries. The proportion of transport costs in the cost of production, according to an expert estimate, is 20%-25%, as compared to 7%-8% in developed market economies, which is an insufficient use of the competitive potential of the transport system. According to experts, Russia could have at least a 10%-15% share of the haulage market. Unfortunately, it is currently 6-8 times lower than this.   

And finally this is an insufficient level of security for transportation processes. Road accidents currently kill some 19-20 people per 100,000 residents, while this indicator in the EU is about 8 people. Therefore the state programme aims to solve the aforementioned problems, and to form competitive transport services that meeting the development standards of foreign countries.

The most important quality of the programme is its comprehensive nature, since it sets common goals for all types of transport. The aims of the programme include the acceleration of commodity haulage and the reduction of transport costs in the economy, the expansion of accessible transport services for the population, the improvement of competitiveness of the transport system and the improvement of comprehensive security and sustainability.

The events envisaged by the programme fall into three groups: these are investment events, current events and measures of state regulation. These events are implemented under two current federal targeted programmes (The Development of Russia's Transport System and The Modernisation of the Unified System of the Organisation of Air Traffic), as well as under the comprehensive programme of transport security and eight subprogrammes that jointly make up the state programme.

The first group of the programme's events are the investment events. They are all practically being implemented under the federal targeted programmes. As you mentioned, we plan to build over 2,500 kilometres of rail tracks and reduce the number of throughput and freight bottlenecks to 5%. Our railway construction priorities include improving infrastructure on the approaches to the ports and border crossings, building rail tracks in the newly developed areas of Russia’s northern territories, the Russian Far East and the Baikal region, developing major Moscow, St Petersburg and the Urals railway junctions, promoting high-speed passenger service and providing safe and reliable rail transport operations. By 2020, we will build and renovate over 7,000 federal motorways, of which approximately 1,000 are toll roads and motorways. Over 85% of federal motorways will be fully compliant with design standards as compared with 40% now.  Almost 7,000 kilometres of regional and inter-city roads will be built and renovated under this programme to provide year-round transport access to about 2,500 towns and villages.

Ninety-six runways will be built under the civil aviation development programme. This is almost a third of the existing airfields. Plans are in place to build international airport hubs in Russian regions. We will create a modern air traffic control system which will help boost inbound/outbound air traffic by almost 80%. With regard to inland waterways, we plan to remove water transport throughput limitations on waterway sections that currently affect 75% of waterways and bring that down to 14%. In addition, we’ll make all waterways, including all the stations, fully safe for navigation. Russian ports will see a capacity increase of over 1.5 times and thus fully meet economic needs and create reserves for peak loads. Major seaports will be more competitive as they become more specialised with purpose-specific ports and logistic centres.

Routine work is being performed as part of various sub-programmes and includes primarily maintenance and repair of the transport infrastructure, federal roads and inland waterways with almost 76% of current government spending to be used for these purposes, namely, ensuring transport security and subsidising socially important transport services. It is expected that the programme will help double passenger traffic on regional and local airlines, while railway passenger traffic will increase by 30% primarily due to an increase in commuter traffic in major transport hubs. The programme will boost labour productivity in the transport sector by about 1.6-1.7 times as compared with 2011 across all transport types and industries.

This programme includes government regulation measures, such as drafting and adopting federal laws on promoting competitive markets and accessible transport services, structural reforming and developing mass transit, particularly commuter rail services, as well as regional air transport, urban public transport and inland waterways, and creating an effective state property management system.

These transport industry improvements will be funded with various investment tools, such as long-term contracts, including service life contracts (to be used from this year) for designing, building and maintaining transport infrastructure; a phased-in transition to network contracting whereby railway construction and maintenance requirements and state tariff policies will be tied in with available budget allocations; promoting public-private partnership across all industries and using project financing, including that guaranteed by the government, as well as bonded loans, funds from the Pension Fund and the National Welfare Fund.

Once completed, the programme will significantly improve key performance indicators. We expect the mobility of the population to increase by 50% by 2020 to over 10,000 kilometres per resident. In addition, the increased availability, not only in terms of space, but also in terms of transport rates will be beneficial for priority agricultural, healthcare, education and housing construction projects.

The integrated development of infrastructure and the combined use of logistics, multimodal transport services and productivity growth will reduce transport costs in the price of finished goods by an average of 12%, perhaps slightly more. We hope that this will help improve Russia’s ranking in the World Bank’s competitiveness ratings.

Importantly, the increased competitiveness of the transport system will boost the export of transport services. We expect it to almost double, including at the expense of transit traffic and the newly formed common space from the Atlantic to the Pacific and the development of the Northern Sea Route. The traffic volume will be about 20 times greater in 2020 than in 2011. The share of transport sector in the total exports of goods and services will increase by about 30% as well.

In closing, a few words about security. This is also a priority area which includes improving the reliability of the infrastructure, the safety of navigation and the development of a common air traffic control system. The number of traffic accidents will drop by 30% in relative terms as compared with 2011. Improving roads and road safety will reduce the number of road fatalities to 13-14 per 100,000 by 2020.

The draft programme has been approved by the Ministry of Economic Development and the other parties involved in its implementation. It has also been broadly discussed by the public and the Russian Government E[pert Council. Many suggestions from the expert community have also been included in the programme.

We also plan to continue the joint work to supplement the state programme with measures designed to address the issues that you, Mr Medvedev, outlined in your opening remarks.

There are, indeed, several outstanding issues regarding funding the programme and uneven financing in some areas. In accordance with the established rules, we have held a reconciliation meeting and reached an agreement on supplementing the programme with various financing options depending on the economic situation at the time of programme implementation. We expect that the steps to achieve these goals will be submitted in the first half of 2013 after the FIFA World Cup master plan has been approved and the Moscow transport hub expansion programme updated. We will also take into account the provisions of the updated national transport strategy to 2030, which we hope to be able to submit to the Government in the first quarter of 2013. Corresponding proposals are included in the minutes of our meeting. Please second this motion. Thank you.

Dmitry Medvedev: Mr Sokolov, Russia is a vast country, and there will never be enough budget funds to completely develop our transport system. Are we going to use any innovative financial instruments in order to achieve the programme goals?

Maxim Sokolov: Yes, Mr Medvedev, as I mentioned earlier, it is primarily the use of long-term service life contracts and public-private partnerships. The total amount of extra-budgetary resources under the government programme is over 5 trillion roubles. The total size of the programme is 12.5 trillion roubles, of which 7.3 trillion are budget funds and a little less than 50%, or more than 5 trillion roubles, is private investment.

Dmitry Medvedev: Are we going to issue infrastructure bonds?

Maxim Sokolov: We have until the end of this year to make the appropriate legislative changes to make this tool the first choice in implementing the project…

Dmitry Medvedev: Do you believe this is the right approach for these projects? I’m just trying to understand.

Maxim Sokolov: It’s essential Mr Medvedev.

Dmitry Medvedev: All right, thank you. Please take a seat.

Colleagues, does anyone have any comments or questions? Mr Siluanov, please go ahead.

Anton Siluanov: Thank you, Mr Medvedev. You were absolutely right when you said that we need to make broader use of extrabudgetary resources to expand this sector.

Dmitry Medvedev: That was my way of passing the ball to you.

Anton Siluanov: I picked it up just in time. Indeed our differences (not really substantial) with the Transport Ministry mainly revolve around the increased funding of the programme, including from the budget. Our views of the budget capabilities differ by 400 billion roubles for the entire programme implementation period. This is not a lot, and these funds can be obtained during the programme period to 2020 primarily through attracting increased extra budgetary resources in the railway industry. We believe that Russian Railways can issue additional bonds or additional shares which will bring in even more than 400 billion roubles. This is a good source of extrabudgetary financing. Therefore, I absolutely agree that public-private partnership is not always an option for road construction, because there must be alternatives (not always available) to using toll roads, whereas Russian Railways has rates and infrastructure fees that can be used for replenishing the industry’s coffers and it can use bonded loans or an additional issue of shares to raise extra-budgetary funds. As a matter of fact, we have agreed to work on additional funding measures with the Transport Ministry. Thank you.

Dmitry Medvedev: Thank you, Mr Siluanov. Please, anyone else? Mr Dvorkovich, please go ahead.

Arkady Dvorkovich: Thank you, Mr Medvedev. Mr Siluanov got the ball and took a fairly good shot at the goal but failed to score, I think. Indeed there is a possibility to raise additional extrabudgetary funds and, of course...

Dmitry Medvedev: Importantly, he didn’t toss any flares on the field. We want him to keep the ball under control.

Arkady Dvorkovich: That’s true. There are ways to raise additional extrabudgetary funds, including from Russia’s pension savings and sovereign wealth funds from other countries that are willing to invest in long-term co-financed infrastructure projects. However, we should not underestimate or overstate Russian Railways’ ability to attract debt financing. There are certain financial indicators that must be considered. If threshold debt levels are exceeded, it could affect the cost of financing and the ability to attract additional loans and to service existing loans. These figures for the next three years have been calculated in great detail. Yes, there are ways to increase extrabudgetary financing in the future, but everything will depend on the success of the first phase of the programme.

I would like to bring two points to your attention. The first one has to do with the uneven nature of the funding. The current budget scenario specifies extremely slow growth until 2017, or to be more precise practically no growth, and then a sharp increase in 2018. Of course, it is impossible to believe that we will have modestly funded programmes for five years, and then a sudden increase in funding for one year. One way or another over the coming weeks we will have to find a well-balanced scenario that inspires more confidence and will make it possible to provide the transport sector with a more even balance of contracts and workload. High-speed and express railway services are the second issue, and this is not even mentioned in the state programme currently.

Dmitry Medvedev: Transport links.

Arkady Dvorkovich: Yes. These projects are currently being assessed in line with the presidential directive and your directive. I chaired a meeting with Russian Railways on this issue only today. It’s feasible to implement these projects, but the relevant financing schemes have not been completely worked through. We should finalise these schemes in the first six months of the year, just like those for the 2018 FIFA World Cup and the Moscow transport hub, and then we need to make a final decision on whether we will do this or not. These projects are partially linked to the 2018 FIFA World Cup and any one of them could be implemented by 2018. We can’t implement all of them, but we can complete one project, if the funding is available, and if there is an acceptable financial model. I suggest that this be included in the resolution of today’s meeting. Thank you.

Dmitry Medvedev: Thank you, Mr Dvorkovich. Does anyone else have any comments? Mr Khloponin (Addressing Alexander Khloponin), over to you.

Alexander Khloponin: Mr Medvedev, I have a proposal regarding point three of the protocol decision. The Transport Ministry should coordinate the tasks that have been assigned for the North Caucasus together with the Ministry of Regional Development. This includes developing an aviation hub in Dagestan, as well as other issues. Many questions have yet to be included here. Therefore, they will need to be finalised and coordinated with the Ministry of Regional Development.

Dmitry Medvedev: Are there any objections? All right, let’s do as you suggested. Any other proposals? Go ahead, please.

Igor Slyunyaev: Mr Medvedev, colleagues, I believe that it is extremely important to ensure that the programme activities and each facility are analysed in the regional context. We do a great amount of work on territorial planning and adopting master plans. This regional component helps us provide geographic connectivity and transport accessibility.

The second problem concerns the fact that we almost completely disregard drafting a coherent tariff policy. I am talking about a through rate for all transport modes. Russia has a unique transit potential, but freight owners still have no understanding of the pricing policy or all transport tariffs. This is one factor inhibiting Russia's transit potential.

Another problem concerns the fact that we urgently need to address pricing policy legal and technical regulation issues in the design and construction fields. This is important, as the existing practice will prevent us from implementing our plans, and the present trend is that the cost of the engineering projects and the cost of the transport infrastructure facilities continue to increase on an annual basis.

The final point concerns the fact that despite relying on public-private partnerships and seeking to attract private investment, transport infrastructure remains the government’s area of responsibility. Without significant capital investment from all levels of the budget system, we will not be able to resolve the issue of transport accessibility and develop the country’s transit potential.

As an example, under the programme for transport system modernisation, we need to build about 500,000 km of public roads to create a public road network. However, the construction rate shows that if we commission 500 km of roads each year, the whole thing will take us 1,000 years. So the prospects are very distant. Thank you. 

Dmitry Medvedev: And they are fairly dismal, too. To avoid ending our meeting on such a pessimistic note, I will issue a directive to finalise the programme by the agreed deadline, i.e. December 10, and submit it to me for approval. Can we do that? So it is a deal then.


Denis Manturov: Mr Medvedev, if you don’t mind, I would like to give you an issue of Foresight [an academic journal], the product of our joint effort with researchers, which we have used as a basis for our programme. The Open Government specialists have looked through it and given their recommendations. I would like to briefly describe the national aircraft industry, as well as the global aircraft industry, which is developing dynamically despite the current recession. By 2025, the industry’s output is expected to double. Intense competition forces the industry leaders to continuously improve all aircraft engineering elements and create new technologies, designs and materials. The aircraft industry stimulates the growth of related sectors and innovation technologies, creating a multiplier effect.

Aircraft engineering plays a key role in Russia’s defence potential and national security. By 2025, the share of aircraft equipment in the global arms exports is expected to reach over 70%. Currently, the sector’s defence segment remains stable but civil aviation is weak, with the exception of helicopter engineering and production of aircraft components. Since 2005, there has been a considerable growth in budgetary allocations for the aircraft industry. Supporting the sector during the global economic crisis has allowed us to preserve the growth trend and maintain the stability of aircraft enterprises. We have managed to achieve a great deal. We have started the batch manufacturing of the Sukhoi Superjet aircraft, the first post-Soviet civil airliner. The project was based on the principles of large-scale international cooperation, with global market orientation. For the first time in Russia, the design was made solely with the use of digital resources. The PowerJet SaM146 turbofan engine for this jet was developed together with our French partners. Our other efforts include developing and testing the Il-476 military transport aircraft, designing the fifth generation fighter aircraft and commissioning the new Mi-28N attack helicopter. However, we have failed to reach the planned indicators for civil aircraft batch manufacturing due to certain factors that limit our competitiveness.

The aim of the present programme is to create a competitive aircraft industry, which will lead to a gradual increase in the share of Russia-produced commercial aircraft on the global market, while our position in the military sector will remain stable.

To achieve this goal, it is necessary to meet four key objectives. First, we must make organisational changes that will foster the sector’s efficient development. Russian enterprises must become global level companies. We must improve corporate governance efficiency and complete the restructuring of assets in the sector. It is also necessary to establish an efficient system of post-sale support, as well as a supplier system and a corporate research centres network, to secure the growth of the aircraft engineering market.

The second objective is developing a competitive product line and securing the production of aircraft equipment. In accordance with the programme, the government support will focus on several key projects, as shown on slide 6. First, this includes development of the MS-21, a new multi-purpose short to mid-range airliner of the 5th generation. Also, development is in progress on an advanced high-speed light helicopter which is a project we are working on in cooperation with our foreign partners as we lack experience in this area. We are designing this helicopter with the Italian company AgustaWestland. This project will be implemented with non-budget financing only, 20% of which will be used for certification and market adaptation at the final stage. Another project, called the All-electric Aircraft, includes efforts to develop new integrated modular avionics and advanced components.

The third objective is to establish a modern scientific, technological, engineering and manufacturing base. The programme proposes changes in managing sector research, to provide an efficient system for scientific research management in the sector that creates mechanisms for coordination, as well as research and development of advanced technology, among research institutions and companies in the industry.

Using this approach, we are setting up a unified technical research centre named after Nikolai Zhukovsky. This implies creating a unified body to coordinate all of the research activities. To implement the scientific part, work is being done to draw up a national plan for developing science and technology in aircraft engineering through 2025 and further, as well as a comprehensive plan for research  and an experimental testing base for development. The industrial sector will take an active role in setting tasks for the scientific community and reviewing the results which will expand the scope of potential investors in scientific work.

Holding an independent evaluation at each stage of aircraft equipment production, including comparisons to international technology, will be an important part of the process. The programme should result in a significant reduction in accident risk, in noise levels, fuel consumption and other indicators, which will allow Russian aircraft to take a competitive advantage in global and national markets.

And finally, the fourth objective is to provide the industry with access to the capital market, attracting financial resources on conditions comparable to those of our competitors, plus an efficient system of supporting aircraft equipment sales. The adjustment of the measures to support the industry will be in line with Russia’s WTO accession. Along with the current measures, tools such as primary sales subsidies and repayment financing will be developed. A mechanism to guarantee an aircraft’s depreciated value is currently being worked out. During the first stage of the programme, the federal budget will be the primary source of funding. Starting in 2020, company investment is expected to become the main source of financing. State financing will be used for technological advances, technical equipment upgrades and sales support.

The programme will result in both quantity and quality changes in the sector. Corporate revenues should grow by 3.5 times, while labour productivity will increase nine-fold and production patterns will change. The share of Russian companies in the global market is expected to increase as well. Aircraft engineering is a dynamic sector, and the proposed programme is a living document to be regularly updated and developed with due account of new competitors and technological advancement.  

During expert discussions of the project with the  Open Government, we received comments and proposals which we considered for the final document. But, as you know, preparing the programme is only one step. The main thing is the programme will be implemented. This is why we have developed a plan to implement the programme that includes a comprehensive control mechanism. Based on the plan, an annual review and audit of the target indicators will be performed, with measures specified and decisions taken to improve the programme indicators, if necessary – and this is why we have proposed introducing a mechanism to update the programme parameters over the next budget cycles, into the  draft protocol  of today’s Government meeting.

In addition, along with the industry’s companies and operators, we will continue to pursue aircraft equipment sales stimulation plans and service development. Throughout the programme, work will be performed to evaluate the efficiency of product portfolio optimisation, with the market’s key segments’ trends and development specified. The programme’s key criterion is aimed at the economic efficiency of results as regards both new aircraft equipment and systemic measures of the sector’s re-organisation and development. The programme has been coordinated with all concerned agencies. I ask for you to support this document. Thank you for your attention.

Dmitry Medvedev: Thank you. Take your seat, please. Colleagues, you are welcome with questions and comments on the programme for aircraft industry development. Mr Rogozin, you are welcome (addressing Dmitry Rogozin).

Dmitry Rogozin: Mr. Medvedev, colleagues, I would like to add some important points to what Minister Manturov said. First of all, the Government’s Expert Council really deserves some recognition since at all the stages of the programme review their input has been absolutely professional and business-like and allowed for incorporating many of their suggestions in the final version of the text.

The second point is that one job in the aviation industry automatically creates nine new jobs in other related industries due to the complexity of the components manufactured at the aviation plants: avionics, electronic components base, new materials including composites and so on. Thus, on the whole when we speak about the aircraft manufacturing industry we mean considerable impact in the development of the overall national economy.

And I would also like to make a third point, Mr. Medvedev. In the course of the of work on the programme at this stage which is about to be completed (the programme comprises two parts – a civilian part and, as you mentioned, the state armaments programme), we managed to find solutions for those complicated, I would even say age-old issues around defence contracts for military transport and special aviation. Thank you.

Dmitry Medvedev: Thank you. OK, any other comments? Yes. Mr. Sokolov, go ahead.  

Maxim Sokolov: Mr. Medvedev, members of the Government, I would like to say that this programme has been coordinated with the Transport Ministry.  Special consideration was given to the support of the regional jet, the development of regional aviation, and our programmes (I mean the Transport System Development Programme) which have been coordinated. The Transport System Development Programme envisions the purchase of regional aircraft by Russian air companies based on annual lease subsidies for loans worth about two billion roubles, which is why this will be a good measure to promote the development of domestic aircraft manufacturing.

Dmitry Medvedev: Thank you. Mr Shoigu, please (addressing  Defence Minister Sergei Shoigu).

Sergei Shoigu:  Mr. Medvedev, colleagues, I would like to draw your attention to a critical issue, the pricing mechanism in aircraft manufacturing as related to helicopters and planes both military and civilian. This is a key issue in the current aviation industry development programme. Of course, we can implement the programme monetarily but it would never meet the required quantities to say nothing about the quality. We have already talked about this, I reported to you, Mr. Medvedev, on the tremendous increase of prices on helicopter equipment.

Dmitry Medvedev: So you did.

Sergei Shoigu:  The price of some of them tripled and on some others went up 3.5 times within four years. The same is true of airplanes: doubling was the lowest price hike within a very short time period. And the process continues. If we put an end to it at some point and adopt a unified pricing policy... Or we could introduce a second variant which includes competition from different equipment including foreign-made. It’s something which seems undesirable. Yet the volumes to be procured under our programme, the Defence Ministry programme, we would like to proceed from the amount rather than the funds expended. Unfortunately, we have so far been unable to find a common language with the industry. We really hope for assistance from our colleagues in the Government.

The second part is about anything related to equipment repairs and servicing. When civilian equipment is purchased by companies, they set up their own relations in terms of service and maintenance. The Defence Ministry must have its own absolutely clear-cut system. And we would rather not deal with that ourselves, i.e. anything related to major repairs, anything related to extending service life, including new components, we would like the manufacturers to do it. And here the same issue arises again: this is the service life of our aircraft and the components, whereas if we take similar foreign equipment, the service life is very long. When it expires, that’s it, nobody extends it anywhere. We have set operational spans, then additional money is paid to extend it, and in many cases this can last forever. Something has to be dome about it. We have to fix our regulatory documents and state that aircraft should not be manufactured with an operational life below a certain limit because it’s also a business. When they state a certain operational span (I mean in hours), and then it is extended for a certain amount of money, and… These are the two issues that I would like my colleague Mr Rogozin to address through his office. I know he is dealing with that upfront but we have to put a full stop one day stating that from now on things will be like that in our country. Thank you.

Dmitry Medvedev: Thank you.

Please, go ahead (addressing Olga Golodets).

Olga Golodets: On special equipment: in the course of our work we talked about helicopters for emergency airlift service. I would like to have this issue highlighted since it’s necessary to have several types of equipment: some regions need larger aircraft, and others need smaller models in terms of flying range and landing capabilities because we have some hospitals that serve areas as large as  340 kilometres. Those hospitals are unable to offer every medical service for the population without medical aircraft. We are ready to specify designs and supply equipment for these types of aircraft. The Health Ministry is prepared to join usand select the best option.

Dmitry Medvedev: Thank you, Ms Golodets

Yes, please, in brief (addressing Denis Manturov).

Denis Manturov: I’ll start with the latter issue. Currently we have several modification design options for all existing helicopters. Also, the 340-km radius is not critical, we can cover it. In other words, if there is a specific order, we’ll fill it. As to Mr. Shoigu’s remark, I would like to remind you that we have a contract with the Defence Ministry for various types of helicopters until 2018 inclusive. Unfortunately, the profitability rate is only medium at 6.7%. Thus, regretfully there can’t be any talk about increased prices.

As to technical maintenance and servicing, we agreed with Mr. Shoigu that it involves not only helicopters or airplanes but all types of equipment, respectively. It definitely does not suit the Defence Ministry to deal with this issue. We will shift it to the manufacturers. We have agreed on that and are currently preparing some proposals.

And finally, regarding service life: it’s not set in advance; it’s set in the course of testing. Correspondingly, all the equipment around the world gets a set service life after cyclical testing, and unfortunately, new aviation equipment cannot have a preset service life from the day it’s launched. We would like to be able to do this, but aviation rules do not allow it.

Dmitry Medvedev: OK. Thank you. Just one short remark…

Dmitry Rogozin: Thank you, Mr. Medvedev. I’d like to say that Mr. Shoigu is absolutely right regarding the quality of our manufactured equipment. This is something we need to focus on now whereas earlier we were dealing mostly with profitability while fulfilling state defence contracts (and Mr. Manturov has provided correct numbers), the rates are not high. But we have another problem. There are many complaints about our industry including those that involve military-technical cooperation [with other countries]. That’s why, Mr. Medvedev, we want to hold here, in the Government House, a military-industrial conference in late January, to gather the CEOs, head designers, state contractors, and the meeting will focus entirely on increasing the quality of the products we build.

Dmitry Medvedev: I see. Well, regarding the programme, it should without a doubt be accepted as it is a key government programme. But apparently there are a number of problems. The first one is related to funding, and the second one is related to the quality of the product, price formation and  servicing. All these issues have to be resolved.

I don’t mind conferences; I just want to remind you that the situation is fairly complicated. I have had a number of meetings dealing with  both civilian and military aspects, and all those present got involved in one way or another, I mean the respective ministers. Thus, the adoption of a new state programme should not be treated as a green light for extra funding that will never be monitored; this is what is really unacceptable. And even though the aviation industry is a key industry for us, a competitive industry, we still have to monitor how it is developing. The end users have absolutely justifiable questions, and the largest customer is the Defence Ministry. It was like that before too, and Mr. Shoigu has neatly pointed out that this is undesirable… but I’ll be more straightforward: our manufacturers should feel the foreign competition breathing down their necks otherwise we’ll make no progress. I draw your attention to the fact that in large aviation markets, both in the EU and in the US, foreign-made aircraft are still being purchased to keep their domestic industries on point. That’s why we should do our best to ensure an appropriate level of competitiveness of our own aircraft industry.

As to service life, the way it is organised, this is a matter of technology, but it is nevertheless important. Everyone should make money, but it should be done in a civilised manner. Servicing, there is no doubt that this is being done around the world, is performed by the manufactures. We should not breed a feudal subsistence economy here even if it seems convenient for some reason: let me remind you that we used to have such a system, and some parts of it persist.

OK, the format is to discuss some of the most vital issues. I suggest that the programme be adopted and implementation launched. Agreed? OK, let’s go on.


* * *

Minister of Transport Maxim Sokolov and Minister of Industry and Trade Denis Manturov answered journalists’ questions following a Government meeting.

Question: My question is about the prospects of small-scale aircraft manufacturing. Is the An-2 likely to be developed further? Are there plans to design some other type of craft? And how does this correlate with the development of air links within different regions?

Maxim Sokolov:  Who is your question addressed to?

Answer: To both of you.

Denis Manturov: All right. Then let me say a few words on the Mi-2 and some other types of aircraft likely to be employed. We’ve spoken at length about the Mi-2 already. Next February, we’re launching an engine replacement programme. The old engine is to be replaced with a brand-new one or a second-class Honeywell engine and the cockpit is to be adapted accordingly to acquire some new specifications. The right to make repairs and engine replacement will be given to six maintenance plants based in Russia; these will keep our programme going.

Speaking of other aircraft, ones that are being considered today by our joint ad hoc group in terms of the feasibility of their use on local lines, these are Czech jets, the Vector and the L-410. There’s also a number of other projects reflected in the government programme’s section on subsidies for certification and readjustment to Russian market requirements. But, of course, everything depends on the orders to be placed by domestic air carriers. We usually consider such issues within the framework of our ad hoc group.

Well, I suppose Mr Sokolov has things to say about air traffic.

Maxim Sokolov: Yes, let me take over. I’m going to speak of Transport Ministry programmes to support the aircraft industry, among other sectors.  Let me just make a small correction here. The local jet in for engine replacement is the An-2, not the Mi-2.

Denis Manturov: Did I say Mi-2?

Maxim Sokolov: Just a slip of the tongue, I guess. Nothing to worry about.

Denis Manturov: Yes, I meant the An-2.

Maxim Sokolov: As a matter of fact, the government programme for the development of the public transport network involves a whole number of measures for the support of regional aviation.  There are no direct support measures for local aviation because there’s just no such thing as locally administered flights.  These are under the jurisdiction of regional authorities. But we do help them.  For instance, we are working to develop a network of federal state-owned companies at the local level. Today we operate as many as 53 airfields – one-sixth of the country’s total airfield network. This applies primarily to small airfields, ones located in the Far East, the northern regions and some hard-to-reach areas in Siberia. The 53 airfields are part of our system of federal public companies, and we are planning serious support measures to foster their development.

Moreover, we’ve stabilised both airport duties and the rise of air service rates at the airports qualified as federal state-owned companies, and this paves the way for measures to develop both regional and local aviation.

In addition, that government programme (I’m going to expand on what I said at the Government meeting) provides for measures to support airlines and this is perhaps the most effective measure for the advancement of the domestic aircraft industry. Annual allocations for the purpose are to reach 2 billion roubles in the longer term, and may grow further over time, primarily in terms of partially subsidising leasing payments by carriers who take on jets for regional and local flights. This is a direct measure of support and it is likely to be a major incentive for aircraft manufacturers to cooperate with carriers.

Finally, another measure aimed at promoting local and regional flights. Along with the two programmes we are running today (a programme to support air passengers on mainstream airlines, to subsidise tickets for flights from the Far East and Siberia, etc.), we also have an interregional programme. This one includes 81 routes at the moment.

Starting with the Far Eastern, Siberian, Urals and Northwestern federal districts, we are now reviewing and updating the route chart for local flights which will be directly subsidised by the federal budget. As soon as the programme is started, we’ll see how it works. We will be substantially stepping up the funding, both in the near future and in the mid-term. This seems to be of interest to the Volga Federal District as well: at today’s Government meeting, the head of the Republic of Mari El, Leonid Markelov, casually mentioned the pilot programme to subsidise local flights within that district. We will be launching this project next year, and if memory serves, in the Republic of Mari El the subsidies will be on the order of five million roubles. It will apply to short-distance flights from Yoshkar-Ola to Kazan, Saratov, Samara, Ufa, and a few other destinations which we are now considering. Those are the routes where light aircraft is used, aircraft we can either provide with service and maintenance, or start building domestically in the near future.

Question: Mr Manturov, would you please define the total cost of your programme? And one more question: can you comment on the new Defence Minister’s remarks concerning the quality of the products?

Denis Manturov: I believe the Prime Minister made a point of not mentioning the figures, and in my report I abstained from it as well, just pointing out some target indices, so that we can have something to discuss today. The total budget of the programme up to 2025 is estimated at 1.7 trillion roubles, of which 1.2 trillion  is to be federal financing.

As to the Defence Minister’s report, a good deal of criticism is well deserved. We need to focus on making our products better and more competitive. The state programme, among other things, specifies increasing the quality by modernising our plants and introducing new systems of production management. And this will have a direct impact on the quality of our products.

The Defence Minister also mentioned the prices that increase every year. In the first place, this process is quite natural to some extent, considering inflation. On the other hand, we are trying to reduce production costs, and specific measures are included in the state programme. Providing for a reasonable profit margin, the prices will go down accordingly. Given the variety of products and different production processes, it is difficult to say how much prices can be reduced, and how soon. In any case, we will continue to work it out.

The Minister of Defence also referred to rated service life. I will try to comment on this purely technical issue. The normative service life of a new model of aircraft cannot be predetermined at the start of production. It remains to be estimated according to the mean operating time accrued over a certain period. Is this a clear enough answer to your question?

Question: Mr Sokolov, what are your points of disagreement with the Ministry of Finance? Which projects do they concern? A figure of 400 billion roubles has been mentioned, has not it? Thank you.

Maxim Sokolov: In fact, just about everything has been agreed upon, with only minor differences remaining. It is true that our schedule of disagreements shows an impressive total, but compared with the overall volume of the programme –  just to remind you, it is 12.5 trillion roubles – 430 billion is a minor part indeed; and of that, nearly 400 billion (389.7 billion, to be specific) results from disputes over railway transport development.

Most of those who spoke after Mr Medvedev’s introductory remarks, and after my own report, agreed in that railways must receive state support. This sector can attract private investors, and certainly will do so, but in some areas, and I mean the eastern sections mainly, capital return may be slow, if  possible at all. Those areas are in dire need not of co-financing but of substantial state budget allocations, and I mean an irretrievable injection of funds, as we shall not be able to restructure the debenture using of the infrastructural bonds that Mr Medvedev, otherwise correctly, focused on today.

Of course, this includes the Baikal-Amur Railway (double tracking) and several other projects, such as the North Siberian Railway. By the way, along with the governors of the Khanty-Mansi and the Yamal-Nenets Autonomous Districts and the Tyumen Region, we are trying to establish a public-private partnership for the construction of a bridge across the Ob River near Salekhard. The Nadym-Salekhard section of the Northern Latitudinal Railway will be built with extra-budgetary loans whereas the Ob-Polunochnaya section will be built with federal budget funds. It’s critical that we complete the railway construction before the FIFA World Cup. This should also be part of the programme and has to be completed in the first half of 2013 in order for us to be able to honour our commitments for the World Cup.

Finally, there are two more considerations. I will go over them briefly. The issue is about 30 billion roubles for the development and modernisation of the air traffic control system. That’s not a lot of money, since it will be spread over the period until 2020, but we are holding our ground fully aware of the fact that air traffic upgrades will boost the development of regional and especially local aviation because air traffic control is particularly poor in northern Russia and the Russian Far East.

There’s another issue that I hope will be supported by the Ministry of Industry and Trade: it’s about the 10 billion roubles for aircraft leasing subsidies for regional and local service. I believe we need more than that.

In fact, there are just three disagreements with regard to this amount. There’s one more disagreement that was mentioned during the Government meeting regarding funding of this programme. Based on the Finance Ministry’s proposals, we are looking at a significant increase in the amount, of 30% or even 50% in 2017-2018. Before that, the trend line is almost flat though. In order for us to be able to plan and carry out budgetary and extra-budgetary investment, we believe there must be a smoother, more structured increase in costs under this government programme.

Question: Mr Manturov, I have several questions for you. The first one has to do with attracting private capital to the aircraft industry. Are there any privatisation plans in place?

The second question is about the Superjet crash in Indonesia. Are there any final conclusions? When will they be released?

The last question is about the 130-seater. I didn’t see it in the programme. Will this project be pursued? Thank you.

Denis Manturov: I'll begin by answering your last question, if I may. With regard to the 130-seater, we can’t stop manufacturing an aircraft that’s in demand both in Russia and abroad. We are focusing our resources on finalising the Superjet (95 and 110 seats) and the MS-21 (180-seats). We will have a better idea of the market for the MS-21 when it’s ready for certification, and we will make our decision then. So we’re saying that the government programme for the development of the aviation should always be updated based on market changes. Therefore, we’ll decide on that later.

As for the situation in Indonesia, our Indonesian colleagues have delivered on their promise. They have drawn up and sent out the report to all parties officially involved in the investigation, including Russia. Under ICAO rules, 60 days must pass from the date the report is completed to the date it can be released. The findings will be officially released in mid-December, unless someone comes up with additional comments. Importantly, the Indonesian aviation authorities validated the Superjet’s international certification yesterday meaning that they didn’t find anything wrong with the equipment. The first Superjet will be shipped to Indonesia before the end of 2012.

With regard to bringing private investors into the industry, you may know that we considered an IPO last year. In particular, Russian Helicopters has decided to postpone its IPO and wait for a more opportune moment where they can float it at a better price.

As for specific projects, the Superjet I’ve just mentioned is not only about government funding, but is in fact an international project. A joint venture with Alenia clearly shows that it is not only a private investment but also a foreign one, since Finmeccanica which owns Alenia has invested its own capital in this project as well. I hope that in the near future we will be offering shares of United Aircraft Corporation. I cannot give you an exact year, but I think it will be some time during the implementation of this government programme.

Question: Mr Sokolov, the Minister of Regional Development said today that fixing all the roads in Russia will take at least a thousand years. Here’s a conceptual question for you: can Russia’s roads be fixed any sooner?

The second issue is about using pension funds in infrastructure projects. I believe that the President issued a directive to draft a corresponding Government resolution or an order back at the St. Petersburg forum. What has been done here? If the draft is ready, can you at least share with us some of its key points, such as what portion of the pension fund can be invested in infrastructure projects, which projects exactly and so on?

Maxim Sokolov: That’s a big systemic question. I will begin with the first part. Indeed, our country has for  centuries been criticised for bad roads, but I still think that in recent years, especially with the return of the federal and regional road fund... I have the information coming from governors that several regions have decided to create municipal road funds...

We keep in close touch with governors, so I know that some of the regions have now decided to set up municipal road funds at their level -- the regional level -- and that they have already found sources of finance. This is going to be an important step toward resolving the problem.

We won’t be able to fix all our problems overnight, nor in one take -- especially given the current state of our roads and constant underfunding, which has badly affected their state. In 2014, we are planning to switch over to full-scale financing of road operational costs so that by 2020 (the programme’s final year) we could bring 85% of the roads up to standard.

Currently, a little less than 40% conform to the standard. But we’re now beginning to fund them 100%, and we see this as a key priority. Our nearest reference point is the year 2018, by which time we propose to bring 80% of our roads up to standard. What does this mean? This means that we cannot spread our resources too thin, and we cannot invest heavily in the construction of new roads. We will be doing that, too, but of the 7,000 kilometres that I’ve mentioned, only 1,000 will be highways with fast speed limits, and we may turn these into turnpikes. But overall, we are going to build 7,000 kilometres of new roads under the new programme. That’s only about 15%. The federal network totals 50,000 kilometres. If we look at the current level of funding, though – as indeed, we won’t be able to improve the network without direct investment from the treasury – we’ll see that the funding has more than doubled since 2010, owing to the introduction of a system of regional road funds. In 2010, the funding amounted to 200 billion roubles. In 2013, we’ll have as much as 470 billion in the integrated regional road fund and 450 billion in the federal fund. That’s quite a handsome sum, is it not? And the regional road funds are expected to grow by more than 50% in 2012 year-on-year.

I’m trying to show the momentum gained and the priorities addressed thanks not just to the Government’s efforts, but also to regional legislative amendments. I’m sure that our generation is up to the task and that beyond 2018 or 2020, priority in distributing money from the road funds will begin to be given to the construction of new roads and new lines – something Mr Markelov (Leonid Markelov, Head of the Republic of Mari El) spoke about earlier today. I can see this in our Strategy for the period until 2030… Well, the Government programme we’ve been presenting today is planned to run through 2020. But we’re also going to submit to the Government our draft strategy extending to 2030, and there the focus will definitely shift to the construction of new roads.

Question: And what about pension money?

Maxim Sokolov: As for pension money, I know that the Economic Development Ministry is busy drafting system-wide legislative amendments. This is the prerogative of another ministry, so it would be incorrect to comment on the achievements of our colleagues that make it possible for pension money to be used in funding infrastructural projects.

‘Infrastructural bonds’ may sound somewhat clumsy, but it's an established term already, so we’d better stick to it. According to our estimates, about one trillion roubles could be used for investing in infrastructure development projects in all sectors and types of transport, including motorways, railways, postal terminals, even airports. Examples of road lines, platforms, and runways constructed with redistributed or extrabudgetary money are still rare, but they exist. And I don’t think that the entire sum – 1 trillion – will be allocated all at once in the first stage. The initial sum is likely to be far smaller. We’ll know the tentative amount right after New Year’s holidays, I think.

Question: I’ve got a question about road funds. Do you have any proposals on the revision of excise duties in the near future?

Maxim Sokolov: We’ve developed related proposals and have presented them to the Government within the framework of the budget-making process. Most of them have been approved. But in the new draft budget, which the State Duma has on its table and which will, hopefully, be approved and signed into law in its current form, we’ve managed to obtain an additional 7 billion roubles by rising excise duty rates. This is an issue we’re going to bring up next year. I believe that the funds that are left out (especially starting from 2016, when the amount of these funds is likely to reach 350 billion roubles – an amount comparable to the Federal Road Fund’s holdings) should be compensated for, otherwise we won’t be able to solve the problem I spoke about earlier, in reply to your question. This is something we must do. In fact, if we compare the situation in Russia with that of its European neighbours, we’ll see that our fuel excise duty rate is 17% while Hungary’s threshold is 35% and in the Netherlands, it is as high as 50% or even higher.

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