Business Projects and Siberia's Ambiguous Realities (an Experience of a Free-lance Expert) by Victor Sokolov. Introduction Since the middle of the 80s, I have participated in developing several dozen business plans and investment projects which have varied in complexity and investment requirements. Although each project had its own unique features and problems, these projects did have common characteristics that enable me to make recommendations to potential investors. Creating joint ventures A series of business projects was developed for the Tomsk Petrochemical Plant. In 1989 I worked on one of these projects, a joint Soviet-Italian venture that planned to use the technology of the Mont-Edison company to produce polypropylene. Although the Ministry of the Petrochemical Industry of the former USSR gave this project a guarantee and the project obtained more than $200 million financing from an Italian bank, the project stopped before it began because of the reform of energy prices, changes in bank rates and other reforms. Another project, Polyethylene-75, a joint venture with four partners (Tomsk Petrochemical Plant, Siberian Chemical Plant, Khimstroi chemical machine-building company, and a Tomsk bank) was luckier. The total project cost amounted to approximately $15 million. Because each participant's risks and contributions (e.g. premises, equipment, technology, know-how, finances, etc.) were carefully evaluated, this project was carried out successfully. A different Russian-American joint venture worked with high-energy magnets and alloy production. “Tomshell” joint venture was going to be located on the territory of the Siberian Chemical Plant (“Tomsk-7”). The project's investment requirements amounted to about $3 million. The project gained authorization from the Ministry of Atomic Industry, but it was finally carried out without the participation of the potential American partners. Employing new technologies A series of business projects was planned to develop the original technologies and patents of Ropat, a local company. These technologies and patents related to underwater hydrohammers. New improved underwater hydrohammers are to work on sea shelfs, build berths, and perform other construction activities. The investment requirements varied between $5-80 million, depending on the volume of projected production. The cost of production of these hammers would be 1.5-2 times lower than the cost of similar hammers manufactured by the German company that has the monopoly in this sector. These projects were shown at international exhibitions in Leipzig and Hannover to try to find potential foreign partner. Finally they received investments from the Russian corporation Gazprom for the next three years. This financial support has allowed the production of a number of different samples, and the first sample is already being tested. The joint venture, intended to produce hydrohammers, has several versions, according to one of them, the production is to be U.S.-based. A $12 million investment was needed for a project developed for a group of hi-tech research teams and big enterprises, both specializing in production of elements used in electronic technology, in Novosibirsk and Krasnoyarsk. It is expected that Hewlett-Packard will be a buyer of these elements. The project obtained a government guarantee. Using leasing in investment projects The Sotovaya Kompaniya, a cellular net company which operates the Beeline cellular net in Novosibirsk, ordered a project based on Motorola equipment's financial leasing. Investment requirements amounted to approximately $9 million. The project started in 1996 when new equipment was bought and put into operation. Such quick success generated considerable excitement among Motorola's competitors on the local market. At the present, another project is targeted at developing a cellular communication system with the participation of both national and foreign companies. The project also suggests the geographical expansion of the cellular company and the increase of its customer base due to the use of steady-state telephones. A recent project for the Novosibirsk Tin Plant (NTP) permitted the leasing of a large amount of energy power equipment from the Czech ABB company. This project required $7 million financing. But after an initial advance payment for the equipment production, the form of financing changed. Instead of leasing, the NTP received the required long-term credit at a relatively low interest. Due to this project, the plant is to be able to reduce sufficiently its electric and heat energy expenditures. The NTP can even sell part of its heat energy to municipal services at a price lower than the monopoly price charged by Novosibirskenergo (Novosibirsk energy company). Other examples of investment interests Two versions of business project for the Novosibirsk Chocolate Factory (with investment requirements of about $9 and 4 million correspondingly) were developed in 1995. Several foreign consultants provided factory managers with their advising services within TACIS program activities. Moscow chocolate factory “Babayevskaya” and Inkombank showed a great interest in investing these projects. As a result of keen competition, these Moscow companies captured the major stock of the Novosibirsk Chocolate Factory, replaced its chief managers, and are going to initiate investing from their own sources with a probable sum of about $10 million. A project which offers a financing scheme for freight cars park privatization, was developed in 1996. Presently, this park belongs to the government sector, and in order to conduct privatization, a holding company should be created, which can further be transferred in a financial and production group. The project focuses on the forms the company may take and the financing schemes it may employ. The results obtained can be applied when the current problems of freight cars park privatization will be solved in Russia. How to distinguish the factors that lead to successful projects in Siberia Having worked on a great number of investment projects, I can list the key factors that make a project successful. These factors are not surprising, but they can help interested businessmen invest wisely, minimizing risks and maximizing profits. Investors must scrupulously examine their potential business partners or clients. The main risk here is to start a joint business with incompetent partners or partners who haven't yet acquired the necessary capital or knowledge to conduct business. It is better to use reliable sources of information, such as free-lance experts and advisers, independent local consulting companies or specialized departments and sectors at the Novosibirsk Oblast Administration. You can contact, for instance, the following organizations: a)TACIS. TAC - NOVOSIBIRSK, ul. Nemirovicha-Danchenko 165, Suite 712, 630087 Novosibirsk, Russia. Tel +7 (3832) 46 48 36, 46 53 95, fax +7 (3832) 46 44 26, E-mail: centre@tac.sib.ru; b)Ludmila Sergeeva, Luba Pleshkova, Institute of Economics & Industrial Engineering. pr. Lavrentieva 17, 630090 Novosibirsk, Russia. Tel +7 (3832) 35 47 76, fax +7 (3832) 35 55 80, E-mail: sla@ieie.nsc.ru Estimate regional risk correctly. For instance, Novosibirsk Oblast does not have a large supply of raw materials. When developing a project, you have to envisage natural resources import from other regions. Ensure that your partner company has a good management team. I have seen several projects which were efficiently prepared and looked good on paper but were never carried out because of a weak management team. In one case, the president of one company ordered a business project. He owned a large portion of shares, had solid experience in management and in his company's technology, and knew how the market economy functioned. But he ran his company in the old “Soviet” style. This very factor prevented the project from realization and the company failed. Prefer partners and companies that are ready to risk their money or property. If they are willing to use their property as a guarantee or to invest their money, they will be more devoted to the success of the project. Attract Russian experts to analyze the internal market and Western experts for the external. This will enable you to correctly estimate the potential of the local infrastructure and economy. Find a guarantor for the project. Such a guarantor may be a trustworthy bank, a large efficient local enterprise or the municipal or regional Administration. Currently the Novosibirsk Oblast Administration welcomes investments. The Oblast Administration willingly gives support to local businesses and guarantees to their projects. Choose suppliers and customers on a competitive basis. In one of the projects described above, the customer gained better conditions of loans return and saved over $3 million in equipment fees when he let the potential suppliers compete in offering the best price. Take advantage of the highly educated and skilled Siberian population, particularly in such cities as Novosibirsk, Omsk, Tomsk, and Krasnoyarsk. There you can succeed in creating sophisticated high-tech joint ventures. The only problem is the right estimation of their products' unique characteristics on external markets. Thus you must be sure that these products can compete successfully on the international market. Track inflation trends scrupulously since there can be spontaneous, sharp increases in inflation rates in various sectors or regions. Be aware that official statistics can be unreliable since they can't take account of processes as barter flows, etc. Try to monitor market fluctuations and set up inflation forecasts. Conclusion The above factors are all important but equally vital is the preparation of the financial part of the project according to the Russian accountancy standards. This part must be understandable by local accountants and financiers interested in this project. The factor that can significantly promote a project in the nearest future, is the development of barter schemes. Present Russian currency regulations lead to inefficient currency profit when selling products from Russia. It is more efficient to change Russian goods or products for easily convertible foreign goods or products, and then to sell them in Russia. Similar schemes have been already developed, tested, and are widely used in Russia. Siberia will have an opportunity to attract new investments as a result of planned federal reforms in taxes, railway tariffs, and reductions in energy payment, as well as positive changes in bank credits. In addition, the potential labor force will increase as thousands of educated, skilled, active people are released from their present work in the army or the transport sector. This cheap and highly qualified labor force may stimulate local investments. As for the city of Novosibirsk, whose external trade turnover increased ten times with the 1992-1996 period, and its investment prospect is supported by the following advantages: Novosibirsk is a transport center of Siberia; it is also a financial center, where securities trade is active and more than 20 local banks and affiliates of large national banks are located; a highly qualified labor force is available; a German Consulate is already open and French and Chinese Consulates will be opening soon; the government is discussing the possibility of creating a free economic zone.