What will the Federal Center of Competences do?

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The national project called “Labor productivity and employment support” stipulates that beginning from 2024 labor productivity in the basic non-oil sectors of the Russian economy will grow by no less than five percent per year, and by that time programs to increase productivity will cover at least ten thousand Russian large and medium-sized enterprises. Until 2024, in accordance with the national project’s targets, labor productivity should increase by a total of 21 percent. The main result of the project should be a 3 trillion ruble growth of GDP by 2024. One of the key organizations responsible for the project implementation will be the Federal Center of Competences.

Global labor productivity

According to the Organization for Economic Cooperation and Development (OECD), labor productivity in Russian enterprises was the lowest among the European countries in 2018. Labor productivity per worker in Russia is 26.5 dollars. (The indicator is calculated based on GDP per hour worked). According to the OECD calculations, only workers in South Africa and Mexico have lower labor productivity ($24.5 and $21.6 per hour, respectively), while Ireland, Luxembourg and Norway have been in the top positions for years. In those countries, productivity per worker is $99.5, $98.5, and $83.1 of GDP per hour, respectively. According to a study on labor productivity performed by the Analytical Center under the Government of the Russian Federation, labor productivity grew by 19.8 percent in Russia over the 10 years from 2005 to 2015, while in the European Union countries it grew by a mere 9.3 percent. But, despite the relatively high growth rates, Russia didn’t stand a chance to catch up with the Big Seven: in 2015, the EU’s average labor productivity was $54.85 per hour, while in Russia it barely exceeded $23.

Labor productivity as a national project

In December 2018, the session of the presidium of the Presidential Council for Strategic Development and National Projects approved the data sheet for the national project “Labor Productivity and Employment Support”. It envisages that, starting from 2024, labor productivity in the basic non-oil sectors of the Russian economy will grow by no less than five percent per year, and by that time programs to increase productivity will cover at least ten thousand Russian large and medium-sized enterprises. Until 2024, in accordance with the national project targets, labor productivity should increase by a total of 21 percent. The main result of the project should be a 3 trillion ruble growth of GDP by 2024.

The national project identifies three areas, three federal projects: «Systemic measures to increase labor productivity», «Supporting employment and increasing the efficiency of the labor market to ensure labor productivity growth» and «Targeted support for increasing labor productivity in enterprises.» The Ministry of Economic Development is responsible for the first of them, the Ministry of Labor for the second, and the Federal Center of Competences, a specially created organization, for the third.

Systemic measures imply a change in the government’s approach to supporting enterprises. We are talking about lowering administrative barriers, encouraging enterprises to increase labor productivity by providing them with credit and tax preferences, retraining management personnel, and promoting international cooperation with countries where labor productivity is higher. Measures to support employment will include establishing a training system in the sphere of productivity enhancement, and increasing the efficiency of the employment centers throughout the country.

But most of the work will be carried out as part of the federal project “Targeted support for increasing labor productivity in enterprises”. It’s evident by the sheer number of tasks assigned to the Federal Center of Competences and by the amount of funding supplied. Thus, although the government plans to spend 5.5 billion rubles on systemic measures for supporting employment over a period of six years and a little less than 12.7 billion on increasing the efficiency of the labor market, it will spend as much as 28.3 billion rubles on targeted support of enterprises. The FCC will have to earn another 5.6 billion over the six year period through the provision of consultancy services aimed at productivity enhancement at large enterprises that have not been entitled to participate in the program for free.

The economy must be economical!

In fact, the task is to widely introduce “lean” technologies in industrial production. Interestingly, Nikolai Solomon became General Director of the FCC, having worked for ten years as Deputy Director General of Rosatom and having personally supervised the deployment of the Rosatom Production System, whose ultimate goal was to reduce the time being spent on operations and to increase productivity at all Rosatom enterprises, particularly at nuclear power plants.

Today, the FCC employs a staff of 150, which will be upped to 350 by the end of the year. Experts travel to enterprises that have already expressed their wish to join the productivity enhancement program, and advise general directors on what could be changed to improve the efficiency of production processes. Besides, they train their colleagues in the regions, who will subsequently perform similar work based out of regional centers of competences.

In 2018, the FCC’s services were available to over 100 enterprises in 16 regions of the country. By mid-March 2019, the number of participating enterprises exceeded one hundred and fifty, another 600 expressed their wish to join the project in the near future. According to plans, by the end of 2019 the total number of companies engaged in productivity enhancement under the guidance of the federal or regional centers of competences should exceed 900 in 36 regions. By 2024, 65 regional centers of competences will be established, which, like the federal center, will be dealing with labor productivity enhancement in enterprises within their area of ​​responsibility and will receive funding from the regional budgets.

Currently, enterprises in four industries: manufacturing, agriculture, transport and construction, with revenues ranging from 800 million to 30 billion rubles a year, are allowed to take part in the program of targeted support for increasing labor productivity. By the end of the year, enterprises in the housing and utilities sector should join them, as the government has already decided. In future, the federal project is also expected to encompass education and medicine. The FCC is already implementing a pilot project in one of the Moscow schools.

First things first!

The focus is on the growth of labor productivity in industrial enterprises. There, the effect from the introduction of “lean” technologies is the most noticeable and much easier to assess than in the other sectors. According to Nikolai Solomon, medium-sized enterprises operating in competitive markets are the most interested in participating in the project. They really use every opportunity to enhance their competitiveness at the lowest possible cost. Enterprises of the public sector and the military-industrial complex are the least motivated. Their management is very difficult to convince to make even a slightest change to the production processes that had existed for years, and they lack motivation to do so, because, rather than making profit in the marketplace they just fulfil the plan and have their costs covered by the state.

Recently, First Deputy Prime Minister Anton Siluanov, who is in charge of supervising the entire national project, directed that state corporations and companies with state participation should join the enterprises participating in the federal project on targeted support. “This should be done in order to increase labor productivity in the regions. Almost every region has vertically integrated companies with state participation outside the governors’ scope of influence,” Nikolay Solomon commented.

Why is there such labor productivity in Northern Ireland?

It’s very simple: the indicator is calculated as GDP per hour worked. And Ireland has the lowest corporate tax in the EU, which is 12.5 percent. It’s low even compared to Trump’s decision to lower the tax to 21% to enable US companies to reshore. As a result, more than a thousand large US global companies moved their operations to Ireland, including Google, Apple, Facebook, PayPal, Microsoft, Yahoo, eBay, AOL, Twitter, Intel, Pfizer, Boston Scientific, Johnson & Johnson, etc. They account for 90% of exports, but employ only 10% of the workforce. The result is a huge performance figure. Serious economists, at best, make jokes about the Irish economy. The Nobel laureate Paul Krugman called it a «leprechaun economy» after dozens of multinational corporations moved their intellectual assets following yet another tax break, and the country’s GDP gained 26% within one year. Another Nobel laureate, Joseph Stiglitz, believes that Ireland simply steals profits from other countries using tax dumping. Other experts believe Ireland has been stealing from itself and its citizens. Sooner or later the taxes will have to be raised, and then the companies will simply move on causing economic collapse in the country.

How do FCC specialists work?

What does a productivity enhancement specialist do during a site visit? He literally stands at the machine with a stopwatch to measure idle time on the part of the worker and the equipment, and to understand why downtimes occur. As a rule, the reason is very simple, and the effect of eliminating it is tremendous. Here is an example: at the Tula aerosol manufacturing plant, it was possible to achieve a 30% productivity boost by introducing two simple improvements. The FCC specialists noticed that workers on the production line spend 20 minutes of every hour on replacing the tank with aerosol liquids – 160 minutes of downtime per shift. It was possible to eliminate the idle time by bringing the pipes closer to the conveyor to ensure continuous supply of liquids. The second innovation at that plant was about reducing the time needed for adapting the conveyor to the production of a different product from 58 to 8 minutes.

There is another interesting method of reducing time and labor costs in production called “Spaghetti Diagram». A specialist, visiting an enterprise, draws a chart showing how parts move from workshop to workshop. As a rule, the resulting “paths” are extremely intricate,  like spaghetti on a plate. Sometimes, by straightening those paths it is possible to reduce several times the downtime of equipment and the time spent on manufacturing a unit of product.

“Production should be continuous, the time required for equipment adaptation should be reduced to a minimum, like at the Toyota plants. It is necessary to produce parts according to the McDonald’s principle — just as much as the consumer needs here and now, not at some point in the future, without clogging warehouses with unsold products and then not knowing what to do with them,” Nikolay Solomon says.

Due to the introduction of the principles of «lean» production, the duration of the enterprise’s production cycle, as well as its inventory and, consequently, the maintenance costs, can be reduced approximately by half. After the introduction of «lean» techniques some companies have even given up their investment programs: they understand they can make much more efficient use of their existing facilities and resources without spending money on the new ones. Manpower often becomes redundant enabling companies to open new production sites without having to pay for the services of inefficient intermediaries and suppliers.

“Many business managers, especially those with a “Soviet” past, refuse to implement productivity improvement programs only because they are afraid of “social tension” due to labor redundancy. They don’t want four machines to be serviced by a single operator instead of two, they say they have enough money anyway, and they don’t want to jeopardize their peace of mind. But an increase in productivity doesn’t always lead to a personnel reduction: one can simply find a more rational use of the freed working hands,” Nikolay Solomon comments.

How effective will be the efforts of all the organizations involved in the implementation of the national project is difficult to predict, although some calculations have surfaced. Thus, the increase of labor productivity in enterprises participating in the targeted support program is expected to be 2 to 31 percent. The first, worst-case, scenario is possible if smaller enterprises will join the project, of which only 30 percent will meet their labor productivity enhancement targets of 10-15-30 percent cumulatively over the first three years of the national project implementation and five percent a year thereafter. The second, best-case, scenario will become a reality if larger enterprises will participate in the project, and 95 percent of them will meet the targets.

Depreciation of fixed assets

Georgiy Ostapkovich,
Director, Center for Market Studies, National Research University, Higher School of Economics

In his best-selling book “The Wealth of Nations” Adam Smith gave a famous example about pin production: one person can make 20 pins in a day, but 20 people, if they divide the pin into 18 functions, will make 48 thousand of these pins, that is, 240 times more. Thus, the organization of labor is essential for productivity. In addition, I believe one of the main reasons why we lag behind is the very high depreciation of fixed assets. In our economy as a whole, depreciation of fixed assets is about 48.5%. And in the most innovative and most productive sector which employs personnel with the highest skills – industrial production – depreciation exceeds 50%. Depreciation of fixed assets in mining is the highest in the country (57%), and it’s 50% in the manufacturing industry. Moreover, about 25-30% of the equipment in the processing sector continues to operate past its design life. It would be extremely difficult to enhance productivity using such equipment. So, the low productivity is not due to the fact that our people do not work enough.

Written by Nadezhda Tolstoukhova

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