The legal questions of military-technical policy.

The planning of state activities for support and development of the country's military technical potential and of its rational utilization in the interests of the national security of the state is carried out on the basis of military-technical policy (MTP). The main MTP objects are: armaments systems of state power ministries, industrial defense complex and projects of military-technical cooperation.

The head of state, the President of the Russian Federation, directs military technical policy as an integral part of the policy of the state. In the line of legislative power, military-technical policy is implemented by the State Duma and the Federation Council of the RF Federal Assembly, in the line of executive power--by the Government of the Russian Federation, the RF Security Council, the authorized ministries and departments.

The legal MTP basis comprises: RF Constitution, Federal laws, RF President decrees, state military policy documents, international obligations, other RF statutory acts, which govern the activities of state administration agencies in the field of military-technical support for the defense and security of Russia.

The Defense Industrial Complex (DIC) is the foundation base of military-technical policy because its potential determines the level of equipping the Army with weapons and military hardware. The coordination of national security needs with the country's real economic conditions is the key-note problem of military technical policy. The Soviet Union paid the high price for the DIC-oriented distortion of the economy; the reverse bend can cost us even more dearly.

To utilize rationally the major part of the Soviet Union's military-industrial potential, which Russia inherited, it is essential to conduct the DIC reformation, which envisages the implementation of the array of mutually agreed measures for industrial restructuring, including the conversion, privatization and integration of sectoral enterprises.

The implementation of these large-scale transformations, which are dramatically critical for the country's future, must be based on a perfect legislative framework. As we were able to learn by the sad experience of the 1990s, proclaimed political declarations are not sufficient reasons for conducting economic and constitutional transformations. The reasons for specific failures related to the implementation of the conversion and privatization plans of DIC enterprises are at the bottom of this.

In building-up the regulatory and legislative framework of the transformation of the industrial defense complex, one ought to be guided not by the tactical goals of its reduction, but by the strategic aims of providing all state power structures with the requisite quantities of advanced weapons and military hardware. To this end it is essential, first, to retain the DIC core by achieving its staffing, scientific, technological and technical rearmament and, second, to dispose rationally of the released capacities and resources to the benefit of sector modernization and of the social protection of the personnel of the enterprises.

As distinct from privatization and conversion in the 1990s, the plan of creating the backbone integrated DIC structures appears more comprehensive, the implementation of which began after the adoption of the DIC Reform and Development Federal Target Program (2002-2006). Nevertheless, in this particular instance the problem of establishing such structures has also turned out to be more challenging and multidimensional than had been anticipated. There are several reasons for that.

* First. Worldwide operating practices show that the formation of large DIC enterprises by means of concerns and corporations is the decisive political trend of mature economies. Nevertheless, generally enterprise integration processes are not conducted on the mass-scale. As a rule, two, rarely three legal entities are incorporated, besides merger process takes not less than two or three years. As to our DIC reform program, in the course of five years, it was contemplated to found almost one hundred concerns, each of them incorporating about dozen legal entities. Moreover, the better part of the enterprises must undergo the cumbersome phase of converting the enterprises into joint-stock companies. World operating practices do not know any successful solution of the tasks of similar complexity.

* Second. Many Russian DIC enterprises are the biggest urban industrial facilities and in some instances, they are town-forming elements. Under such conditions, their reorganization involves the solution of massive social problems at the regional level.

* Third. The makeup of Russian concerns is more likely determined by the trade-off of interests of the authorities involved in their creation, rather than by scientific industrial and economic expediency. More often than not, the concerns, on the one hand, are overabundant, because they include non-core enterprises, on the other hand, they are penurious and need expanding.

* Fourth. Working documents on military industrial policy fail to provide express guidelines concerning specific requirements of the power ministries in the types and quantities of weapons and special military equipment (WSME). This creates ambiguousness both in forming the structure of concerns, and in their evolvement.

* Fifth. The size of budgetary financing does not provide the quality implementation of planned transformations under the reform program. Such economizing seems myopic in terms of the strategic importance of emerging integrated structures, which bear prime responsibility for national security support.

* Sixth. The best part of the legal documents governing the activities of DIC enterprises was drawn up, when individual enterprises acted as the major entity; therefore they fail to envisage, to the full extent, the specific issues of the activities of more sophisticated structures organizationally and economically.

Let us dwell on the latter of the above factors. The specifics of the concerns being created in conformity with the adopted Federal target program is as follows: the backbone integrated structures have monopolistic position in the development and production of WSME systems and complexes; the integrated structure is headed by the parent (management) company, which bears responsibility for national security support in the assigned direction of WSME growth; the state owns 100% equity stake in the parent company; RF President decrees define the percentage of the joint-stock capital of the subsidiaries, which are retained by the parent company.

Each of those specific features must be reckoned with in relevant legislative acts and regulatory documents.

The monopolistic position of the concerns predetermines the special kind of partnership relations with state customers. Competition requirements for state-guaranteed defense orders (SGDO), stipulated by current legislation, ought to be improved by introducing the notion of the prime supplier, with whom the customer is entitled to conclude contracts, outside the competition requirements, for corresponding WSME systems and complexes for the entire cycle of development and production; at the same time, the prime supplier is entitled to build-up, within the limits of the committed funds, the cooperation of associate SGDO contractors by competitive bidding. In addition, the prime supplier's responsibility for the end product and his reporting requirements with the relevant Federal authorities must be envisaged legislatively. The implementation of this plan will be conducive to the more rational use of budgetary funds, decreased timeframes for WSME development and manufacture, the raising of its quality, will create a new system of responsibility, which is adequate to the existing DIC management arrangement.

A new approach ought to be also employed in the formation of the mobilization task. It is expedient that state authorities specify for the concern its total volume, and the parent company will autonomously distribute it between subsidiaries. It is reasonable to allow parent companies more freedom and rights in generating and submitting consolidated report documentation to Federal authorities, in making decisions about sending concern employees on business trips abroad.

The public nature of the assets of the concern's parent companies actually results in their directive management on the part of the RF Government, which implies the organization of the clear-cut hierarchal management system inside the concern. But existing legislation fails to provide the parent company with the economic and organizational management of contracts in the line of SGDOs and military technical cooperation. The existing licensing system, which does not envisage the issuance of general license to the parent company for the principal types of activity of the concern's subsidiaries, is the main obstacle to the making out of contracts via the parent company.

Making the parent company responsible for national security support in the assigned WSME line of development pre-configures the advisability for its full-fledged involvement in the formation of state arming deliveries and SGDOs, as well as greater autonomy in military-technical cooperation, which should also be specified in regulatory documents.

The fixation of the amount of interest on the joint-stock capital of subsidiaries in the parent company leads to the conflict of budgeted investment. As joint-stock companies, the subsidiaries, in the event of receiving state-financed credits, must conduct the additional issue of shares and must transfer them to state ownership. This goes against the RF President decree about creating the concern and forms the close-ended legislative circle, which hinders the receipt of budgeted investments. In consequence, the leading DIC enterprises, which had retained state ownership after entering the concern, have forfeited budgeted investment support. This does not meet in any way the interests of the state in ensuring the country's security.

The above-mentioned legislative issues can be solved by introducing relevant amendments in the current laws, which govern the activities of commercial entities, the organization of competitions for state purchases and investments. In addition, it is advisable to realize multipronged approach to solving the problems concerning the improvement of DIC legal, organizational and methodological groundwork. The main direction is the elaboration of the code of laws and subordinate acts about the military-technical support for the country's defense and security, which define the activity of the agencies concerned with the formation, realization and follow-up control of military spending as part of the Federal budget, state-guaranteed defense orders, of the Federal programs aimed at sustaining and developing the technical component of the RF military establishment. The law on RF Military Technical Policy and the Industrial Defense Complex must become the backbone legislative act.

The principal goal in forming the legal framework for DIC activities is the perfection of state control systems for WSME development and production, the provision of coordination and higher effectiveness in the activities of all the components of the RF military establishment.

The proposed law must include conceptual tools in the domain of military-technical policy and the industrial defense complex, define DIC tasks and functions, principles of formulating industrial defense policy, arrangements for its realization, the general questions of the DIC management system, its structure, scientific, manning support, of conducting cross-border economic activity, the questions of protecting state secrecy and other aspects related to the operation and development of the defense industry.

This proposal was considered and supported at the meeting of the State Duma Defense Committee of the Russian Federation Federal Assembly.

V.V. MENSHCHIKOV

General Director, OAO, Concern PVO Almaz-Antei

Vladislav Vladimirovich MENSHCHIKOV was born 16 June 1959. After graduation from Leningrad Mechanical Institute with qualifications for production of flying vehicles (1982)--engineer of research section, Leningrad Mechanical Institute. From 1983 to 1995, he worked in state security agencies. In the period from 1995 to 1997, chief expert of Main Department of Central Bank of Russia for the City of St. Petersburg. Later on, Advisor, First Deputy Chairman of St. Petersburg Regional Branch of RF Federal Commission for Securities Market (1997-2000). From March 2000 to August 2003, he worked as Deputy General Director of Russian Agency of State Reserves. In September 2003, he headed Concern PVO Almaz-Antei.