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Page 1
Nuclear Cities Initiative: Interests of
the Program
George D.Pomeroy
Nuclear Cities Initiative U.S. Department of Energy
It is my great pleasure to be here with you today in Obninsk. The
Nuclear Cities Initiative (NCI) is proud to be the sponsor of this
important workshop, which addresses the successes and challenges
facing small innovative firms in Russian nuclear cities. Each of
you has considerable experience to share, which can increase the
effectiveness of defense conversion activities in the Russian
nuclear weapons complex. As a group, there is even greater
potential for insight through the synergy created through dialogue
and exchange. During the next three days, I look forward to sharing
with you lessons learned in the development of business
opportunities in the five nuclear cities of Sarov, Zheleznogorsk,
Snezhinsk, Obninsk, and Zarechny. I am especially interested in
discussions on
successes and failures in creating or expanding commercial
businesses
marketing strategies for domestic or foreign markets
components that enable success and, on the other hand,
obstacles to success
sources of external financing
other strategies for increasing the effectiveness of business
development
I would like to take a few minutes to discuss the broad outlines of
NCI and share with you some of our experience to date.
RUSSIAN NUCLEAR WEAPONS COMPLEX
The five nuclear cities we are addressing in this workshop are
only a part of the Russian nuclear weapons complex. The Ministry
of Atomic
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Energy of the Russian Federation (Minatom) has expressed intent to
downsize this large complex over the coming years. The reasons for
this planned downsizing include the sharp reduction in warhead needs a
decade after the end of the “cold war,” the sharp
corresponding downsizing of the U.S. nuclear weapons complex, the high
cost of maintaining the Russian complex at its current size, and the
world security interest in nonproliferation efforts.
The Russian nuclear weapons complex has the largest quantity of
weapons-usable material in the world. It also has the largest
concentration of weapons of mass destruction in the world. The nuclear
cities as a group have more than 700,000 residents. Alternative
employment will be needed for up to 40,000 workers over the near term,
since they will no longer be needed to support the Russian defense
mission.
There are 10 closed nuclear cities in the weapons complex, including
the NCI pilot cities of Sarov, Zheleznogorsk, and Snezhinsk. A number
of additional cities that have supported the weapons complex are open,
including Obninsk, or semirestricted, including Zarechny. These cities
have populations of up to 100,000. Sarov includes a weapons design
institute, VNIIEF (the All-Russian Scientific-Research Institute of
Experimental Physics); a weapons assembly/disassembly plant, Avangard;
and plutonium storage facilities. Minatom has announced plans to end
weapons assembly/disassembly activities at Avangard over the next few
years. Zheleznogorsk is a plutonium production, reprocessing, and
storage site, with one remaining reactor that serves to provide heat
and electricity to the city. Minatom has plans to shut down the last
reactor in a few years, once a replacement utility plant has been
built to supply steam and electricity to the city. Snezhinsk is home
to a weapons design institute, VNIITF (the All-Russian
Scientific-Research Institute of Technical Physics), as well as
plutonium and highly enriched uranium storage facilities, and may have
a reduced defense mission compared with earlier years.
THE NCI PROGRAM
The Nuclear Cities Initiative is a nonproliferation program within
the National Nuclear Security Administration of the U.S. Department
of Energy. The purpose of NCI is to enhance U.S. and global
security by supporting weapons complex reduction in Russian nuclear
cities. NCI works in cooperation with Minatom to redirect functions
and equipment in the weapons complex; reduce the physical
footprint; and create sustainable, alternative nonweapons work
within a functioning city economy.
Strategies to accomplish these goals include
creating jointly developed city plans for accelerated
downsizing of the Russian nuclear weapons complex
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creating infrastructure to support economic diversification and job
creation in the cities
facilitating a transition from weapons-related research to
non-military funded business and commercial projects
conducting targeted business training and exchanges to improve
marketing and management of businesses and projects
leveraging funding and encouraging outside investment
At present, these strategies are being implemented at the three NCI
pilot cities—Sarov, Zheleznogorsk, and Snezhinsk. In the future,
NCI may expand its nonproliferation activities to include additional
nuclear cities, working jointly with Minatom on defense conversion
implementation activities.
NCI IS PRODUCING RESULTS
In fiscal year 2001, NCI cofunded 37 projects. The projects
established commercial businesses as well as the infrastructure
needed to encourage and support the development and growth of
commercial enterprises. Products and technologies represented by
NCI projects have included medical technologies, software services,
automotive technologies, physical security systems, and light
manufacturing. Examples of commercial enterprises that are on the
road to self-sustainability include: two open computing centers
(Sarov and Snezhinsk); a Software Development Center
(Zheleznogorsk); ITEC physical security systems manufacturing
(Snezhinsk); kidney dialysis equipment production (Avangard); and
biological materials production (Zheleznogorsk). Commercial
infrastructure supported by NCI in each city includes staffed and
resourced business centers, telecommunications infrastructure,
technoparks, business training modules and facilities, and loan
centers that provide easier credit access.
There are more than 35 potential commercial partners for projects
in the NCI cities, and 10 are already in place. These potential or
actual partners include such names as Fresenius Medical Care,
Credit Suisse, Novosoft Software, Adapco, Gazprom, Luxoft Software,
Eurasia Software, Motorola, Delphi Automotive, and General
Electric.
Along the road to commercial sustainability and economic
diversification of the cities, NCI projects have received more than
$21 million in leveraged funding from sources outside the program.
FROM PLANNING TO IMPLEMENTATION
As NCI begins program activities in each city, it implements
several stages of operations. These stages are often overlapping.
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First, an assessment is made of city capabilities, existing
technologies, personnel resources, and the like. Small evaluation
teams assess site conditions and meet with local representatives in a
collaborative environment. Second, strategic plans for implementation
are jointly developed based on the assessments. NCI facilitates the
creation of a vision and plan for implementation by principal
interested parties in the community, including government and business
entities. Projects are evaluated for commercial viability, and
business plans are developed for promising proposals. Strategies are
developed to create commercial businesses and infrastructure. Third,
sources of external financing and partners to participate in the
projects are sought. NCI's role in commercialization is to be a
facilitator rather than a primary funding source for projects.
Substantial economic development requires partners and financing from
internal and external sources. Fourth, for projects that can be
implemented with available U.S., Russian, and other resources, the
projects are managed using contracts, project management methods, and
financial controls. Fifth, NCI provides continuous mentoring for
project plans and implementation. This includes exchange visits to the
U.S. for city and institute managers, training in business techniques
for managers and staff, and evaluation of project proposals using
Western business practices.
Finally, NCI has an exit strategy. The objective is to place each
nuclear city on the path to economic diversification and sustained
commercial development, to support our joint nonproliferation goals of
weapons complex downsizing and alternative employment for displaced
workers. The NCI exit strategy is to complete program activities and
move on to new cities once these program goals are met.
DEVELOPING LOCAL INFRASTRUCTURE, BUSINESS
TRAINING, AND EXCHANGES
A key strategy of NCI is to develop local infrastructure to support
economic diversification and job creation. One example of this is
the International Development Centers (IDCs) created in
Zheleznogorsk and Snezhinsk. The Zheleznogorsk IDC was opened in
November 1999. It currently serves more than 200 clients each
month, with 1,350 customers in the last six months. It provided
project analyses to the City Investment Commission, which received
$17 million from the Russian government for 14 projects. It serves
as coordinator and contractor for the city administration on NCI
activities. It served as the model for development of a second IDC
in Snezhinsk, which opened in June 2000. Plans are under way to use
the experience of these first two IDCs to develop a business center
in Sarov in the near future.
Telecommunications is another area in which NCI has been
instrumental in building commercial infrastructure. In each city an
expanded
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internet bandwidth was required to meet the crucial need for business
communications. In the West, business moves at the speed of the
Internet, and adequate telecommunications facilities are needed in
order to be competitive. As a first step in each city, NCI purchased
satellite bandwidth and replaced antiquated equipment. Next, fiber
optic cable was installed, as needed, to the nearest hub to provide
good speed at lower cost, avoiding the future use of expensive
satellite services. Finally, Internet service provider (ISP)
businesses were created or expanded to provide continued support of
the telecommunications infrastructure.
NCI also creates intangible infrastructure in the form of business
train-ing and exchanges. These important ingredients of commercial
success are needed to improve marketing and management of businesses
and projects. Training has included sessions on business plan
development, managerial leadership, project management, marketing, and
English language instruction. Related to this, there have been
numerous exchanges bringing Russian managers to the United States to
visit commercial firms of many types and learn first-hand the reasons
for their success. These exchanges have also focused on the technology
spin-off experience of the U.S. weapons complex in its downsizing
efforts.
CREATING COMMERCIAL BUSINESSES
A number of promising proposals were received during initial
assessments of city resources. As noted, in FY01 alone, 37 projects
were funded by NCI. An example of this is the work to develop
software development businesses in each city. Open Computing
Centers (OCCs) were established in Sarov and Snezhinsk to use the
considerable software talents of displaced workers in the weapons
design institutes. NCI funded construction of the OCCs, as well as
staff training and salaries, to demonstrate their capabilities to
potential Western clients. Today, most of this demonstration work
has been completed, and several commercial contracts are in place.
More recently, a different model is being used in Zheleznogorsk to
develop a software center, similar to the approach used by Obninsk.
Under the Zheleznogorsk approach, a competitive solicitation
identifies a successful software development firm, which is then
invited to the city as a partner. The firm supplies its experience
and marketing resources in setting up a new business. In
Zheleznogorsk the software partner, Novosoft, is supported by NCI
and the city administration through funding of start-up facilities
and equipment, as well as support in making Western customer
contacts. The partner brings its marketing and technical skill, as
well as its track record, to make a successful business at the new
location. Over time, the new business will employ an increasing
number of displaced weapons workers as it expands.
Other businesses supported by NCI that are on the way to commer-
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cial self-sustainability include those in medical technologies,
security equipment production, and other light manufacturing.
LEVERAGED FUNDING
The plans of Minatom for downsizing the Russian weapons complex
will require a large resource commitment over several years. The
role of NCI is to facilitate conversion and economic
diversification activities in the nuclear cities but not to fully
fund them with its own resources. Substantial additional funding
and effort will be needed from other sources. Minatom is
contributing almost $4.8 million on projects supported by NCI, in
addition to other Russian government funds in support of defense
conversion efforts in nuclear cities. NCI has also brought private
partner resources to the cities. Private industry commercial
contracts and contributions supporting NCI activities are valued at
more than $1 million thus far, and are increasing.
The European Bank for Reconstruction and Development (EBRD)
provides support to the nuclear cities through easier access to
loans from its $300 million Russia Small Business Fund. NCI signed
an agreement with EBRD to set up loan offices in each city. This
initial investment has already resulted in more than $1.5 million
in loans for small businesses, with the promise of many more loans
to come. In the United States, access to capital, often in the form
of small business loans, is essential for economic development. By
investing in the commercial infrastructure needed to set up these
local EBRD loan offices, NCI was able to leverage its funding with
a much larger pool of resources.
CONVERSION AT AVANGARD
Sarov has the highest funding priority among the three NCI cities,
in line with Minatom's expressed priority to accelerate
conversion and shut down the Avangard weapons assembly/disassembly
plant. More than ten acres of production space was carved out of
the Avangard facility to form a technopark. Six buildings with a
total of 20,000 square meters of space were converted to commercial
use. This first required moving sensitive defense materials and
equipment from the facilities, and then moving the fence from the
high-security area to form a commercial area that only requires an
industrial level of security. All of this work was conducted by
Avangard under contract to NCI. Facilities for nuclear weapons work
were converted to facilities for the production of kidney dialysis
equipment, in cooperation with the Western partner Fresenius. The
project was also leveraged with funds from the International
Science and Technology Center (ISTC) and the DOE nonproliferation
program Initiatives for Proliferation Prevention (IPP).
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Additional commercial possibilities have been identified for other
buildings in the Avangard Technopark, and plans are under way to move
another portion of the fence to permit additional commercial work.
Production space is currently being developed for automotive parts;
electrical switch gear; materials protection, control, and accounting
(MPC&A) equipment; oil and gas instruments; and other commercial
production.
FUTURE NCI ACTIVITIES
Having just completed its second full year of operations, NCI is
planning for future program activities. The closure of Avangard is
of the highest priority, and significant resources will be applied
to further develop the Avangard Technopark. In all three cities,
additional support will be provided to current projects that are
poised for commercialization, completing project implementation
activities and adding additional resources where needed. New
projects to accelerate facility downsizing and provide alternative
employment opportunities for displaced weapons workers will be
identified, evaluated, and funded. Although much commercial
infrastructure has been built, NCI will continue to support
business infrastructure where needed. This will include continued
funding for the IDCs and additional business training and exchange
trips for Russian managers to gain experience in the United States.
Finally, depending upon continued budget support from the U.S.
Congress and Russia's downsizing priorities, NCI will likely
apply the strategies developed in the three pilot cities to
additional cities in the future.
Representative terms from entire chapter:
weapons complex
