An effective state sector in the Russian economy cannot be formed unless a favorable institutional environment and efficient organizational procedures are provided. This involves building a ramified system with diverse economic instruments of management of state– owned enterprises. At present, when the establishment of such a system is just beginning, there exist vast organizational and legislative reserves that, if mobilized, could give the state sector an entirely new quality [1–2]. Institutional support of this segment of the Russian economy is currently a priority target, and one that does not require large investments. It would be sensible first to exhaust the organizational development reserves, and then, as the financial situation in the country improves, to begin looking for money to support state sector enterprises.

Referring to institutional support, one should distinguish two aspects of this issue: improving the legislative framework of state sector regulation and introducing new procedures and instruments to stimulate its development. Let us consider them in more detail.

First of all, let us look at the concept of state property, which is closely linked to that of the state sector. These concepts are often used synonymously and, without reason, interchangeably. The main source of this economic and juridical collision is the Concept of State Property Management and Privatization in the Russian Federation approved by the Russian Government on September 9, 1999. It defines the state sector as

A sum of economic relations connected with the use of state property assured to federal state unitary enterprises based on the right of economic management or operative management, state organizations, and the Russian state treasury, as well as the property rights of the Russian Federation arising from its participation in for–profit organizations (with the exception of state property involved into the budget process in conformity with the laws of the Russian Federation).

This definition deserves at least two serious critical remarks. First, even in purely etymological terms, it is pointless to define an economic sector through a sum of relations, since these concepts differ in principle. One may refer either to a sector as a sum of material objects (this is a “piece” of national production), or a system of relations as a sum of juridically established norms that are essentially nonmaterial (a “piece” of national legislation).

Second, the presence of this definition in the Concept is a logical absurdity. First of all, it is puzzling that a normative document dealing with state property refers to the latter’s substitute which is absolutely inadequate. Also, the introduced concept in fact has proven to be “dead”: it is mentioned only in the very beginning and is not used again. In other words, it is informationally redundant for this document. And, finally, although it deals with state property, it does not contain a correct definition of the latter.

In our view, the first paragraph of the text of the Concept should be revised to read as follows:

This Concept defines the principal goals, objectives, and principles of Russian government policy in the area of state property management; state property implies a sum of federal state–owned unitary enterprises and state organizations, the Russian State Treasury, and the joint–stock capital, land, mineral resources, forests, and other natural resources belonging to the Russian Federation.

We believe that this definition largely removes the economic and juridical inaccuracies of this document, setting the institutional framework for state property and, at the same time, laying no claim to a more subtle definition of the state sector.

The next step should be a clear definition of the state sector itself. The basic fact is that its distinctive feature is the opportunity of the state to engage in direct and operative management of the incorporated economic entities through its representatives, who take part in the formation of the strategy and tactic of the state–owned enterprises.

Russia’s national production system is a sum of all economic units of the Federation who produce goods and services on the country’s territory, that is, all legal entities, as well as the individuals who engage in economic activities without forming a legal entity (engaged in individual entrepreneurship). Correspondingly, the national production system is divided into three sectors, state, municipal, and private.

The methodological foundation for defining the first two sectors is the concept of administrative and economic management of legal entities (economic units). We refer to a manager’s effect on the activities of a given legal entity so as to attain the set goal as quickly as possible. Drawing on this concept it is easy to formulate definitions of all segments of the country’s economy. Thus, the state sector is a sum of legal entities (economic units) managed by the state through federal government bodies or government bodies of the Federal constituent members. Management is executed on the basis of the right of state ownership over the property of legal entities on the basis of the law of obligation.

Analogously, the municipal sector is the sum of legal entities under administrative economic management of local governments. Together, the state and the municipal sectors form the public sector of the economy.

As for the private sector, which embraces all legal entities that are not included in the previous two sectors, as well as individuals engaged in economic activities without forming a legal entity, one must identify the mixed sector within it. We refer to the sum of economic units in which a nondominant part (under 50%) of property and/or stock capital belongs to federal government bodies and/or those of the federal constituent members. Correspondingly, the private and the municipal sectors together form the nonstate sector of the economy.

The in–depth meaning of the proposed system of definitions is that an enterprise or company finds itself in the state sector only when the state, acting through its authorized representatives, can execute direct management of its activity. The state receives this right either as a result of an enterprise’s status (e.g., state unitary enterprise, state organization, etc.) or when the state has a dominant share in the property or the stock capital of an enterprise.

However, the criterion of administrative and economic management does not imply a “gap” in the initial status of an enterprise. When the latter is placed in trust management, it does not leave the state sector. Officially rejecting administrative and economic management over an enterprise, the state retains the right to take back its legal powers at practically any moment. The same happens when state enterprises are leased. As for private enterprises/companies in similar circumstances, they remain private. Thereby, the principle of the absence of a “gap” in the initial status of an enterprise is symmetrical for the state and the private sectors.

The formulated characteristics of the state sector make it possible to build a functional classification of the legal entities embraced by it. They include:

– state unitary enterprises;

– state (budget–financed) organizations;

–joint–stock companies, when the controlling parcel of voting shares (over 50%) in their charter capital is in state ownership (federal and/or that of Russian federal constituents);

– branches, when the parent company belongs to the state sector;

– enterprises within a holding company that belongs to the state sector;

– joint–stock companies whose controlling parcel of voting shares (more than 50%) in their charter capital is owned by state unitary enterprises; and

– enterprises whose charter capital contains a “gold share” held by the state.

This above list needs discussion. For example, the “complete” inclusion of holdings is determined by the fact that the head company performs management and controlling functions. And, say, the financial industrial groups cannot be considered in the same vein, since the legal entities incorporated in them usually retain independence. Also, for many corporate structures, this status is unofficial.

An analogous procedure should be the “expansion” of the state sector through branches. Under Paragraph 2, Art. 6, Chapter 1 of the Law On Joint–Stock Companies of November 24, 1995, “A company is recognized as a branch if the other (principal) economic company (partnership) has an opportunity to shape the decisions passed by such a company thanks to predominant participation in its charter capital, or in conformity with an agreement concluded between them, or in some other way.” Thus, due to its initial status, the principal (parent) company determines the policy of its branches; consequently, they must have the same status as the principal (parent) company. Unlike them, dependent companies should not be included into the state sector, since they are not fully subordinate to the principal (parent) company.

Incidentally, in such economic structures as Svyazinvest, RAO UES of Russia, or Gazprom, practically 100% of the economic activities are concentrated in branches, while the principal (parent) companies perform mainly administrative functions.

Another expansion of the state sector should take place through the financial mechanisms used to merge state and private structures. At present, state unitary enterprises based on the right of economic management are forbidden to take part in setting up financial structures. The ban, however, does not extend to production units. Since this issue is not adequately regulated by the law, unitary enterprises often take “aggressive” steps. In view of this, it would be sensible to provide for the possibility of extending the state sector to the joint–stock companies that depend, in a decisive measure, on unitary enterprises.

The institutional foundations of the state sector also need to be revised. First of all, amendments should be made in the Russian Government Resolution of January 4, 1999, No. 1, On the Forecast of the Development of the State Sector of the Russian Economy, which mentions only the first three items on the list, while the others are absent.

Simultaneously, the Russian treatment of the concept of the “gold share” must be brought in line with that practiced in other countries. Since in most European countries, the state’s holding of the gold share entitles it to vetoing changes in the capital or the management bodies of an enterprise, Paragraph 4 of the Russian President’s Decree of November 16, 1992, No. 1392, On Measures Aimed at Implementing Industrial Policy during the Privatization of State Enterprises, should provide for (apart from the rights of the holder of the gold share listed there) the right to veto the appointment of the head manager. This would enable the state to retain its exclusive rights when management decisions are made in privatized companies that, thanks to the gold share institution, remain essentially in the state sector.

When placing a branch into the state sector, depending on the status of the principal (parent) company, there arises a statistical problem of establishing the status of the branches as such. In our view, one cannot propose a sensible algorithm for “sorting out” branches that have no formal status, since no criteria for the selection of these legal entities will yield a positive result. This problem should be dealt with not by improving statistical algorithms but by introducing organizational measures, namely, improving the institutional foundation of the functioning of joint–stock companies. In view of this, the Law On Joint–Stock Companies should be amended by adding a provision on the branches’ obligation to reflect, in their charter documents, the presence of a principal (parent) company, and to communicate information about the parent company to the Russian State Committee for Statistics (Goskomstat). In that case, the problem of a branch belonging to the state sector would be automatically solved by analyzing the structure of the charter capital of the principal (parent) company. This law can be amended by the following addition to Art. 6, Chapter 1:

Either the rules of the branch or its agreement with the principal company must contain information on the principal company. The rules of the principal (parent) company must contain information on its branches. Information on the changes in the company rules arising from changes in the composition of the branches is submitted to the body executing state registration of legal entities under the established notification procedure.

These measures are designed to shape the analytical core of a state sector management system, which would make it possible to build a more ramified and detailed system of institutions and organizational steps.

Organizational procedures for improving the performance of the state sector: a look at international experiences

Apart from the fundamental factors determining how efficiently the state sector performs, of tremendous importance are “minor” organizational techniques. Although many of them are only applicable in narrow areas, taken together they have a synergetic effect and promote the formation of a qualitatively different national state sector model. In addition, these techniques do not require large-scale political actions and economic decisions and, provided the environment is favorable, can produce quick results. Russia currently has all the prerequisites for introducing simple organizational innovations tested the world over, which in the foreseeable future will help improve the performance of the state sector. Let us consider the most important and productive ones.

1. Stability of the institutional environment of state sector management. Many specialists note that in some countries the efficiency of the state sector is determined by the high institutional stability of the bodies formulating and implementing economic policy. The most impressive results have been achieved in Sweden, Germany, and Japan, which are implementing a long-term (for a period of up to 20 years) technological resources management policy [3, p. 99].

As for Russia, it suffers from never ending institutional cataclysms. A typical example is the Russian Ministry for Economic Development and Trade, which has had quite an eventful history. At first, the country’s head economic body, the USSR State Planning Committee, was transformed into the Russian Ministry for Economics and Finances. The newly established department was divided into the Russian Finance Ministry and the Russian Ministry for Economics. As a parallel process, the Russian Ministry for Foreign Economic Relations was transformed into the Ministry for Trade, after which it merged with the Russian Ministry for Economics; as a result, the present Ministry for Economic Development and Trade came into being. Along with this, there were endless shuffles of functional departments, their functions and objectives changed; personnel turnover increased, and the very ideology of state regulation was revised [4]. In such circumstances, a stable policy in relation to the state sector is out of the question. There is an ongoing debate on the possibility of reorganizing this ministry, and this creates tensions both among the officials and the heads of state sector enterprises.

Compare: in postwar Japan, reforms were implemented by a specially established Ministry for Foreign Trade and Industry, which existed for more than 50 years. Only in 2000, when the need arose to change the doctrine of state regulation, this ministry was transformed into the Ministry for Economics, Trade, and Industry [3, p. 201]. The “inauguration” of the new ministry (and this is particularly important for Russia) took place not under the slogan of “reform” of the Ministry for Foreign Trade and Industry but under the slogan of its “resurrection” as the Ministry for Economics, Trade, and Industry [3, p. 202]. In other words, institutional changes in Japan imply a continuity of the economic strategy, adherence to economic traditions, awareness of the need for radical reforms, and tactical circumspection when implementing them [3, p. 204].

In our view, we need to legislatively regulate the minimal “life span” of the Ministry for Economic Development and Trade, our head economic organization, which regulates the activities of the state sector. This is possible by adopting a law that would forbid serious reforms of it in the next 10 or 15 years. This law could, of course, be either extended or adopted anew after amendment.

We also need to regulate the ministry’s policy in relation to the state sector. It would be sensible to draft and make public a document specifying the reference points, priorities, instruments, and character of state regulation in this area for the next 10 or 15 years. Such a document could be the Concept of Developing the State Sector of Russia.

2. Diplomatic support of the state sector enterprises abroad. In many industrialized countries, such support is enjoyed not only by the state sector but also by private companies. What is more, international diplomacy is a channel for promoting a country’s trade and economic interests. This instrument is used very widely by the United States and Japan. The other countries practice a more balanced approach. Thus, in Norway’s oil production there operates the state-owned monopoly company, Statoil, which in the late 1980s ceded its oil prospecting rights to other companies to promote geological prospecting outside the country. At the same time, the country’s Foreign Ministry was instructed to ensure diplomatic support of Statoil’s activities abroad [3, p. 164]. The state does its best to protect and stimulate transnationalization of the major companies belonging to it.

Russia currently has a curious system of “lobbying” its foreign economic interests. The Russian Ministry for Economic Development and Trade is in charge of the trade delegations; the latter are stationed at Russian embassies, which report to the Russian Foreign Ministry. This provides an organizational foundation for prompt implementation of an active diplomatic policy in relation to state–owned companies. In the meantime, the available opportunities are not used at all. We need a livelier dialogue between these two ministries to streamline the state sector diplomatic support procedures.

In some countries, e.g., France, foreign trade policy is, for the most part, the domain of the Foreign Ministry, specifically, its foreign economic divisions. This policy assumes the form of various instruments used to promote export, trade delegations, state insurance of foreign trade transactions, and easy–term loans provided to exporters [3, p. 33]. In Russia, the contribution of international diplomacy to the use of all potential instruments of the country’s foreign trade, including state sector companies, is zero. This situation must be changed; we need to revise the role of the Russian Foreign Ministry and its ties with the Russian Ministry for Economic Development and Trade.

3. Setting up “organizational buffers” to accelerate scientific and technological progress. The future of any country depends on whether it can find a niche in the international market of high technologies. In the absence of hi-tech production, any economy is doomed to play a secondary part in the world economy. The events of the past few years show, however, that this market is subject to crises and slumps even more than the traditional commodity markets. It reached its peak in 2000, after which the quotations fell 70% on average, and investors lost interest in hi-tech companies [5, p. 23]. In 2001 the volume of transactions on this market fell three times in Germany, six times in France, and 20 times in Italy. Since January 2003, the market of hi–tech companies in Germany has been officially closed; other European countries are on the brink of closure [5, p. 23].

This makes one conclude that the sphere of high technology needs state support. In our view, this issue has two aspects, commodities and resources. On the one hand, the state should help promote hi–tech finished products, and on the other, support the high technological standard of the traditional productions and help create new products. The measures of state organizational support should be differentiated correspondingly depending on the objectives set.

A good example of a “commodity” strategy is Japan, which, during the rapid advancement of the electronic industry, set up the Association for Promoting Information Technologies [6, p. 59]. In Great Britain in 1981, state–owned organizations were used as the basis for the financial–commercial British Technological Group, which became the largest company dealing with patenting, licensing, technology transfer, and the commercialization of domestic scientific and technological advances, including activities outside the country [3, p. 149]. This experience is of special interest to Russia, since this country has a great variety of know–hows, most of which are concentrated at state sector enterprises. The establishment of self–paying centers for the marketing and accumulation of information on the needs of the hi–tech market would help support many promising state–owned enterprises.

The resource strategy is implemented by the Fraun–hoffer Society in Germany, which unites about 60 scientific research centers. Its objective is to bridge the gap between basic research and the economic activities of industrial companies [3, p. 128]. This is also the purpose of numerous industrial associations and the network of chambers of commerce, industry, and the crafts, which embraces the entire country. Membership in these chambers and the payment of fees are mandatory for all industrial companies; this helps liven up the transfer of technologies and technical consulting [3, p. 129]. It is no accident that 43% of the firms in the manufacturing industry in Germany cooperate with industrial associations in the transfer of technologies and consulting and 33% use the services of chambers of commerce and industry [3, p. 130].

When Great Britain needed to bridge the gap between advanced academic science and the inadequate economic use of its results, the central and local authorities initiated setting up technoparks at universities, where researchers and workers in industry cooperate in the commercialization of the outcomes of research. In 2000 there were six such centers [3, p. 149]. Great Britain also introduced new rules that made it easier and cheaper for the private sector to acquire and use the results of research obtained with budget money at state laboratories and universities, as well as rules that simplify researchers’ temporary transfers from budget–financed organizations to private companies [3, p. 149].

A curious “personnel” addition to these examples is the experience of France, where in the 1990s the government recommended all state structures to form a backbone of individuals in charge of the management of technological resources at enterprises [3, p. 99]. In this case, one can clearly see how the French government used the high administrative manageability of state sector enterprises for establishing personal liability at such a crucial segment as the management of innovations. There is no reason why Russia should not benefit from this experience.

All the organizational procedures considered above do not imply direct financial support of state–owned enterprises. The reference is to setting up intermediate links of the economic system that would support effective cooperation between the private and the state sector. This is why such procedures can be called the “organizational buffers” of acceleration of scientific and technological progress. For Russia, this instrument of state sector regulation is the most promising and adequate.

4. Depreciation policy aimed at accelerating scientific and technological progress in the state sector. In all countries, the state sector accounts for a lion’s share of the scientific potential, which, in principle, enables its enterprises to lead in the area of new technologies. However, the costliness of the new specimens of production capacities and the faults of the institutional environment do not always make it possible to fully use the available opportunities. And since the state sector is not very receptive to scientific and technological innovations, a similar situation also forms in the private sector. This is precisely what is happening in the Russian economy.

The problem is aggravated by the inadequate funding of state sector enterprises. We wrote in one of our works that, given sufficient financial support, the state sector proves more efficient than the private sector; if such support is lacking, it is inferior to the latter for the basic economic efficiency indicators [7]. Let us explain this rule. If the state is generous, an enterprise actively updates its basic production assets and purchases the latest equipment; as a result, economic effectiveness rises. If the money is scarce, technological modernization slows down, and the state sector becomes less efficient than the private.

Since, in the foreseeable future, the funding of the Russian state sector is unlikely to improve, it would be logical to try to make up for the shortage of money by progressive changes in the economy’s institutional architecture. In practically all countries, one of the most important ways to accelerate scientific and technological progress is accelerated depreciation. In Great Britain, information equipment is subject to a 100% depreciation write–off in the very first year of its functioning [3, p. 140]. Sweden has a system under which the companies engaged in R&D are entitled to write off all noncapital expenses as the current year’s costs, including instruments and equipment with a short service life (up to three years) [3, p. 182]. Regarding capital goods with a long service life, two depreciation techniques are applied: direct write–offs and a fixed percentage of the diminishing balance. Practically all production equipment has a direct write–off rate of 20%. The fixed percentage of the diminishing balance is, in fact, a version of accelerated depreciation of capital assets thanks to which, in the first few years, its principal part can be written off as costs; in this case, the depreciation rate is 30% [3, p. 183]. This flexible system applied to the active part of capital assets, the latest machinery, instruments, and equipment used in R&D stimulates technical production modernization and the introduction of advanced technological innovations.

For Russia, this is still an unattainable dream: here, the period of information-equipment depreciation can reach 10 years. In the meantime, there is nothing to hamper the introduction of an accelerated depreciation system. Initially, it could apply only to state sector enterprises, while the private sector could join it as it becomes more streamlined. This approach is quite justified. State sector enterprises buy new equipment mostly with investment means they receive from the budget. It would, therefore, be sensible to replace subsidies to the state sector by targeted loans. If the state allocates money to invest in new equipment, its accelerated depreciation will guarantee that the loan will be promptly returned to the state. Otherwise, state sector enterprises would spend years “collecting” depreciation money from the purchased equipment, and the state would have to wait for the return of its money for years.

Russia may benefit from borrowing the Japanese selective depreciation policy used back in the 1950s. At the revaluation of the assets of Japanese enterprises depreciated as a result of inflation, the value of the buildings and equipment was significantly raised. There was, however, strong sectoral differentiation, since the government decided to place certain industries in a more advantageous position to ensure their faster advancement. The assets of steel industry enterprises were raised 9.9 times; ferrous metallurgy, 7.2 times; electricity producers, 5.4 times; electrical engineering, 5.2 times, and mining, 1.8 times [3, p. 191].

Since in the past few years Russia failed to achieve the “natural” inflation rate of 2–3%, an indexation of capital assets would be fully justified. What is more, differentiated indexation of the capital assets in various industries of the Russian economy has long been a pressing concern because of a huge underloading of their productive capacities. In some industries, a larger part of the capital assets cannot be used in the production cycle in principle due to their hopeless obsolescence. In this situation, it would be extremely useful to lighten the load imposed on many Russian enterprises by the property component of their assets, giving them a chance to begin renovating their production capacities on a sensible financial foundation. As for the state sector enterprises that became “exiles” at the time of economic reform, they did not have the budget support that would enable them to modernize their equipment and, in consequence, have extremely worn and obsolete means of production. Differentiated indexation of capital assets in different segments of the economy is the simplest and least painful way to conduct restructuring and to implement the state’s sectoral priorities, which are so extensively discussed by the government but receive very little practical attention.

Of interest is another principle of the Japanese system of selective accelerated depreciation. It implies an accelerated write–off of the assets on a certain list, which includes the equipment of research laboratories and experimental workshops [3, p. 191]. The introduction of this principle in Russia would have a multiplier effect. On the one hand, the state sector enterprises which purchase advanced equipment of other analogous enterprises would be sure of a quick return of their investments, and on the other, the enterprises whose equipment would be subject to accelerated depreciation would get a chance to sell their products faster and would be likely to expand their markets.

5. Shaping the institution of trust management. In most cases, the bottleneck of Russian state sector management is management at an individual enterprise, whose heads either rely on the inefficient “bureaucratic” management system or prefer pseudocapitalist management based on unprincipled grubbing. At present, many state sector enterprises are hopeless bankrupt but are not closed down for consideration of a “higher order.” In our view, they should be handed over to private owners using trust management. This is currently one of the principal instruments that can help large companies to shape a progressive structure [3, p. 17]. This would largely cancel the antagonism between the private and the state sector. In actual fact, positive aspects of the two are becoming fused: the stable performance and the strict control on the part of the state typical of the state sector, and the freedom of management decisions that mark the private sector. An advantage of trust management is its high flexibility, which arises from the contract system.

6. Formation of a differentiated system of contracts with state sector enterprises. Of the greatest interest here is the experience of France, which has a differentiated system of contracts with state sector enterprises: the plan contract and the target contract [8, p. 20].

The former is signed with enterprises that operate in industries where competition is not strong and the market is stable. These are mainly transport and power engineering; their organizational form is the same as that of the Russian unitary enterprises and does not imply stock sharing. A plan contract is drafted by enterprises, coordinated with the relevant ministry, and then included in the state plan. A plan contract provides for quantitative performance indicators and their planning on a long-term basis (three to five years).

A target contract is signed with enterprises that operate in the areas with a high level of competition and on unstable markets, as a rule, in industry and finance. A target contract is not incorporated into the state plan but formulates the goals of the production and financial strategy of an enterprise in a more general way and is subject to operative (annual) revision.

Russia has long needed such a system. A target contract can give more freedom to enterprises that, working in a competitive market environment, are currently burdened with unjustified and clearly excessive obligations toward the state. As for the plan contract, it can be used at enterprises working in a comfortable economic environment. It would help raise the liability of the management for the outcomes of productive activity. In Russia, the broadest opportunities for the use of a plan contract exist in education, health care, and scientific research, which are still wholly dominated by state sector organizations.

7. Formation of the institution of state sector enterprise management. It would be no exaggeration to say that the absence of qualified managers and a procedure for coordinating the interests of the state, the employees, and the management is the most pressing problem at almost all Russian state sector enterprises. In the meantime, other countries have learned to cope with it. Thus, the valuable experience of Sweden, where the state sector is one of the most efficient in the world, can help identify “nontraditional” reserves the Russian economy has.

First of all, we should introduce enterprise boards, the highest organ that would define the goals, objectives, and overall strategy of each enterprise. The people on such a board must be highly competent in the current activity of a given enterprise, the specifics of the given business and the industry, and financial issues. Business representatives must represent economic structures (e.g., an enterprise, bank, or insurance company) that have direct business contacts with the given state sector enterprise.

The next step is to determine the number of board members. In Sweden in 2000, it varied from 3 to 14. In Russia, the minimum and the maximum numbers should also be determined to prevent personnel–related abuses. The number of board members should depend on the size of the enterprise. Thus, an enterprise employing from 100 to 300 persons should have a board of three, from 301 to 1000, four or five, etc.

Another important matter is who is on the board. In Sweden, there must be one representative of the government administrative office (under the Swedish law, this person may sit on several boards), and the others must represent the business community. In Russia, this system would not do for both political and organizational reasons: the Russian authorities are simply not ready for such “self–removal,” and the business quarters will never miss the chance to impose their interests over those of state sector enterprises. In view of this, the number of representatives of the federal and regional governments must be higher and must ensure an advantage over the members of the business community. The most suitable people would be employees of the ministries and administrative departments in charge of the industry in question. We must also draft a procedure regulating the election and approval of the board chairperson. In our view, this can be a representative of either the authorities or business, who, however, should not have special voting or decision-making rights. With a larger number of government officials, it would be logical to elect the board chairperson from among the businessmen.

The last link in the described system should be defining the system of nomination of board members. It should be determined which structures are to nominate candidates and which ones are to approve the final lists and the procedure of these structures’ interaction. These rules must be supported by drafting the forms and specimens of documents required to nominate board members. In Sweden, the so–called nonformal nomination committees are set up by the owners of large enterprises that have official market registration (their shares are officially quoted on the relevant stock markets). All nominations by the nomination committees are documented and require clear motivation and arguments in their support.

In our view, the Russian system of board member nomination should be patterned after the Swedish one without any major alterations. The only limitation is probably the size of the organization that nominates candidates. It could be based on the number of employees (e.g., over 500), the annual turnover volume, or the size of charter capital.

Another important reserve in state sector management is optimizing the procedure of interaction between the enterprise board and the executive director appointed by the board. To deal with this issue, Russia’s legislative system must be supplemented by new normative documents.

The main purpose of this innovation is to separate strategic and operative powers in state sector management. Thus, under the Swedish Law On Joint–Stock Companies, the board and the executive director divide the responsibilities in such a way that the latter deals with general operative management in accordance with the guidelines and instructions drafted by the board. Such a system should be introduced in Russia. The board should be in charge of negotiations and the appointment and dismissal of the executive director.

8. Preventing unjustified diversification of the activities of state sector enterprises. The management of state sector enterprises must minimize the range of their activities, which with time tend to go beyond the stipulated basic range. As a result, resources are dispersed, and this may prevent enterprises from achieving the set goals. This refers especially to the state sector enterprises whose activities have a social aspect, where the principle of minimization of diversification must become a top priority. This principle was vigorously introduced by the government of Sweden in 1999–2000. The Swedish Railroads Company dispensed with such secondary activities as restaurant meals and ferry crossings. The Telia Co. transferred all secondary activities to a specially established branch, and the Vattenfall Co. even limited its geographic diversification, closing down its branches outside Europe.

As applied to Russia, this principle should be consistently introduced by the supervising ministries and administrative departments in relation to low-efficiency enterprises, acting, in fact, as an organizational sanction. Focusing the efforts on the main lines of activity of state sector enterprises would make it possible to streamline management and prevent the dispersion of resources.

9. Setting up a system of state franchising. This exotic modem technique of raising state sector efficiency is used on transport in some regions of Great Britain where the Labor Party has a majority in the local government bodies [3, p. 145].

This system came into being as an alternative to the primitive methods of privatization and nationalization. A large state sector company sells its franchise (literally, privilege) to private individuals (including the trademark and business organization technologies) and provides organizational and consulting services. The result should be the establishment of independent private companies, which act as a sort of organizational and production continuation of the state sector company and, in fact, perform the part of branches. This system helps deal with two problems. On the one hand, the state gets hold of private companies it needs; these companies make investments thus relieving the excessive investment burden that would fall to the state sector in the absence of franchising. On the other hand, a state sector company may inspect “its” private companies and demand that they perform to a high enough standard. What is more, a state sector company and private firms that have bought the franchise usually form an economic symbiosis, which binds them even tighter and makes them “transparent” to each other.

Although state franchising is a recent technique, it is already showing great promise. One of the most complicated current problems arising from the disintegration of the RAO UES of Russia could be solved by introducing state franchising. What is more, it may be the only solution.

* * *

Although simple, the described state sector management procedures are effective. The main thing is that, unlike the traditional methods of state sector support, they do not demand large outlays. It is, of course, possible that the sensible organizational schemes and institutions that are effective in other countries may fail in Russia. However, the introduced economic mechanisms may be eventually adjusted and improved, or discarded if need be. This is still much better than no mechanisms at all, as is currently the case in the state sector of the Russian economy.

References

1. E.V. Balatskii. Probl. Teor. Prakt. Upravl., No. 1 (2001).

2. E.V. Balatskii. Probl. Teor. Prakt. Upravl., No. 2 (2002).

3. National Industrial Policy of Compatibility: Western Experience in Russia's Interests (IMEMO Ross. Akad. Nauk, Moscow, 2002) [in Russian].

4. E.V. Balatskii and V.A. Konyshev. Vestn. Ross. Akad. Nauk, No. 12 (2003) [Herald RAS 73, 588 (2003)].

5. I. Doronin, Mir. Ekon. Mezhdunar. Otn., No. 6 (2003).

6. A.S. Zeltyn’. ЕКО, No. 3 (2003).

7. E.V. Balatskii and V.A. Konyshev. Obshch. Ekon., No. 7 (2003).

8. A. Rassadina. Ekonomist, No. 6 (2002).

Official link to the article:

Balatskii E.V., Konyshev V.A. The State Sector of the Economy: Institutional Support// «Herald of the Russian Academy of Sciences», Vol. 74, No. 2, 2004, pp. 144–151.