ECONOMIC ISSUES OF EQUIPMENT RENEWAL

V. N. SHCHUKOV

(Presented by the scientific seminar of the Department of Economics)

Scientific and technical progress finds its expression in the constant renewal of machines and equipment, in the replacement of models that have become morally obsolete by new, more advanced models of machines. It is precisely through the accelerated renewal of equipment that the economic effectiveness of scientific and technical progress as a whole is realized: the creation of new use values and the reduction of the social costs of production. The renewal of equipment has a decisive influence on the qualitative structure of production and on the rate of its development.

Modern scientific and technical progress is characterized by ever-accelerating rates of renewal of machines and equipment. Thus, in the manufacturing industry of the USA, the weighted average age of equipment at large firms decreased from 11.35 years in 1958 to 10 years in 1962 and to 9.4 years in 1966. The average age of equipment in machine building and metalworking is 8 years, and in the aviation and rocket industry—about 6.5 years. According to depreciation laws, the normal service life of equipment is about 8.5–9 years in the USA, 10 years in the countries of the European Common Market, and 5 years in Sweden [2].

Accelerated renewal of equipment, and the refusal to use equipment until its complete physical wear, contribute to increasing the economic efficiency of social production. Many researchers emphasize a direct dependence between the rates of renewal of equipment and the rates of development of production.

In connection with the increasing economic role of equipment renewal in modern production, there arises a need to analyze the actual rates of replacement of machines and equipment. In the economic literature, for the analysis of the actual rates of renewal of fixed assets, so-called coefficients of retirement or renewal of assets are usually used [4–5]. Thus, N. Silonova [4] proposes calculating the coefficient of retirement of fixed assets depending on service lives and rates of growth of labor resources. For simple reproduction, this indicator coincides with the depreciation deduction rate. N. Khmelevsky [5] uses a coefficient of renewal intensity, determined by the ratio of the absolute amounts of retirement to the volume of fixed assets introduced.

However, the proposed renewal coefficients characterize only the correspondence of the sums written off for fixed assets to the planned rate of depreciation deductions, adjusted for the growth of fixed assets.

funds. It is precisely for this reason that N. Silonova’s retirement coefficient coincides, for simple reproduction, with the renovation norm. These indicators do not determine the extent to which the actual rates of renewal of fixed assets correspond to the rates of technical progress; rather, they show the extent to which retirement norms coincide with service lives. Consequently, if the amortization service life of fixed assets does not correspond to the rates of technical progress in a given branch, this is not reflected in the proposed renewal coefficients.

According to N. Silonova’s calculations [4], the average retirement coefficient of fixed assets in industry actually amounted in 1950–1956 to 1.7%, while the calculated coefficient was 1.2%. This circumstance allowed the author to conclude that the opinion concerning insufficient rates of renewal of obsolete means of labor was erroneous.

In our view, such a conclusion is mistaken. Can one assert that the rates of renewal of equipment are sufficient if three times more funds are spent on repairs than on the introduction of new equipment? Thus, the actual costs of repairing machines exceed the cost of producing the machine itself by 5–6 times. Expenditures on capital repairs of industrial equipment alone considerably exceeded the volume of retirement due to wear (in 1968, by almost 1.5 times), including in electric power engineering by almost 4 times, in ferrous metallurgy by more than 3 times, and in machine building by 1.6 times [2]. Evidently, recognizing the illegitimacy of her own conclusion, the author is forced to admit that behind the generally high retirement coefficient there are concealed insufficient rates of renewal of the active part of fixed assets—machines and equipment.

An analysis of the rates of renewal of equipment without separating their passive and active parts, and without taking account of branch-specific features, can only distort the actual picture of renewal. The real situation with the renewal of machines and equipment is, in essence, replaced by the buildup of capital investments in the construction of buildings and structures. How else can one explain N. Silonova’s high overall retirement coefficient and the author’s assumptions about insufficient rates of renewal of the active part of fixed assets? Perhaps it is assumed that the amortization service lives of buildings are higher than the actual ones? But the renewal of buildings and structures, even if the normative service lives are exceeded by the actual ones, in no way testifies to technical progress. Therefore such an approach is illegitimate. An analysis of sectoral rates of equipment renewal carried out by D. Palterovich [2] also shows that the amounts of actual retirement in recent years exceed the volumes determined by amortization deductions. Therefore an impression may be created of high rates of equipment renewal if the rates of renewal are considered from the point of view of the correspondence of their actual service lives to the normative values fixed in amortization norms.

Thus, the principal shortcoming of the above-mentioned methods for analyzing the rates of renewal of machines and equipment is that they do not answer the question of whether the accepted normative service lives of fixed assets correspond to the rates of technical progress, and whether the amortization service lives take account of the moral obsolescence of equipment. Therefore one should agree with D. Palterovich’s opinion that the insufficiency of the rates of renewal of the stock of machines is due not so much to the excess of the actual service lives of machines over the normative ones as to the discrepancy between the normative service lives themselves and the rates of technical progress at the present stage.

From this point of view one must also approach the assessment of the rates of equipment renewal. In doing so, it should be borne in mind that service lives themselves are a quantity derived from the rates of obsolescence in various fields of technology. In other words, it is not the service life, calculated in one way or another, that determines the rates of renewal of a given type of machine; rather, the economic efficiency of accelerated renewal of equipment determines their service lives. Sometimes the service lives of machines are linked to the advisability of carrying out major repairs. It is believed, for example, that if the cost of the next major repair is lower than the replacement cost of the machine, then it is advisable to extend its service life by one more interval between repairs. However, restoring equipment by means of repairs means reproducing it at the previous technical level and, in many cases, leads to a deterioration of technical and economic indicators.

Substituting major repair of equipment for the actual reproduction of equipment leads to an increased role for repairs as a whole. The considerable expenditures on repair work and, in particular, on major repair can be explained only by the hypertrophy of the economic role of repair and of major repair in particular. On the contrary, renewal of machines means their reproduction at a new, higher technical level, which leads to a reduction in the costs of producing and operating the stock of machines and to an increase in the economic efficiency of equipment renewal.

At present the service lives of machines are being determined to an ever greater extent by the rates of technical progress, by the obsolescence of equipment. Therefore, it is not the service life of equipment that depends on the advisability of carrying out major repair; rather, the need for major repair is dictated by particular service lives of machines. The rates of technical progress in a given field determine the economic efficiency of replacing machine models. Depending on the periods over which machine models are replaced, the corresponding durability of the equipment is established.

Thus, the starting point for analyzing the necessary rates of renewal of machines and equipment is the determination of the rates of technical progress in the given field of means of labor and of the economic efficiency of replacing machine models. The development of one or another type of equipment proceeds continuously in the form of an accumulation of small technical improvements, which subsequently lead to substantial qualitative changes or even to a fundamental change in the equipment. The cycles of substantial qualitative changes differ for different types of equipment, since the rates of technical progress differ.

The cycles of substantial qualitative changes, reflected in the periods of replacement of machine models, may indirectly serve as an indicator of technical progress in one or another field of means of labor. Although the periods of replacement of machine models, reflecting the transition to a new, higher technical level, are, as a rule, not economically substantiated, nevertheless the practice of self-regulation cannot fail to take into account the economic efficiency of equipment renewal. Table 1 shows approximate ratios between the service lives determined by existing renovation norms and the periods of replacement of models of the most mass-produced types of machines.

As can be seen from the table, the periods of replacement of models of most types of machines are considerably shorter than the accepted depreciation service lives, especially for metal-cutting machine tools, tractors, generators, diesel locomotives and electric locomotives, and computers, which indicates insufficient rates of their

renewal and the discrepancy between standard service lives and the rates of technical progress in these areas. Therefore, a reduction of service lives by one overhaul interval (on average from 17 to 14 years), as proposed by a number of authors, would prove economically justified. Thus, D. Palterovich, analyzing the possibility of reducing the average service life of equipment from 17 to 14 years, comes to the conclusion that the main difficulty of this task lies in finding additional annual resources of approximately 1.5–1.8 billion rubles.

Table 1

* Taken according to the 1963 depreciation norms.

However, if the economic effect of renewing machines is taken into account, these additional costs are substantially outweighed by the effect obtained from transferring equipment to a higher technical level. It is precisely this circumstance, and not only the reduction of expenditures on capital repair, that determines the need to shorten depreciation service lives. As practice shows, when switching to new machine models there is a significant reduction in specific capital costs and operating expenses. Thus, for example, the transition of power-generating equipment to higher unit capacities in the postwar period ensured a reduction in specific capital costs by more than half. Fuel consumption decreased from 345 g s.f. for a 100 MW turbine to 297 g s.f. per kWh for 800 MW turbines. Considering that there are now several obsolete machine models in production whose technical and economic parameters are substantially inferior to their modern level, higher rates of renewal would be economically justified, since they would ensure a greater economic effect.

The economic effect of accelerated renewal of technology is also expressed in an improvement in the quality of machines and equipment, which helps not only to reduce costs for consumers—for example, as a result of higher reliability or smaller dimensions of the products manufactured—but also creates new use-values. The new quality of technology helps satisfy fundamentally different social needs that could not have been met at the previous technical level. The creation of new use-values leads to a change in the qualitative structure of production, which becomes-

…will in the future be a driving force of accelerated development. An example of this may be the replacement of steam engines by internal-combustion engines, analog machines by electronic computing equipment, piston engines in aviation by jet engines, and so on. New means of labor, fundamentally different in their technological principles of operation, have greater potential possibilities for increasing labor productivity and reducing production costs. But the significance of the problem of creating machines of a fundamentally different quality goes beyond merely reducing costs. The new quality of technology plays a paramount role in overcoming the natural limitedness of material and labor resources. Today it would be difficult to imagine the further development of production without automation and computers, air transport, and modern means of transmitting information. Consequently, the higher the technical level of the equipment used, the greater its potential possibilities for further improvement. One should also not ignore the level of accumulated scientific and production-technical experience resulting from the accelerated renewal of equipment, which becomes a starting point for further technical progress, a transitional stage toward the creation of the newest means of labor.

The principal unfavorable aspect of accelerated renewal of equipment, of the more rapid replacement of morally obsolete machines and equipment, is the increase in the volume of production of fixed assets going to replace retired means of labor. Thus, if the service life of machines is cut in half, then, in order to reproduce the additional stock of machines replacing those retired, additional capital outlays are required for reproducing this stock and for expanding the production capacities of the corresponding branches of machine building.

However, as the practice of other countries shows, an increase in the production of machines need not necessarily be accompanied by growth in the stock of machines; in a number of cases the stock of equipment has a tendency to decrease. The latter depends to a considerable degree on the level of productivity of new machines. An increase in the productivity of newly created machine models leads not only to a decrease in operating costs (a reduction in the labor intensity and depreciation of a unit of output produced with the help of the given machine), but also to a decrease in the number of machines in physical terms required for a given volume of production. In other words, the higher the productivity of the new equipment, the fewer machines are required to perform a given volume of work. If the reduction in the stock of machines as a result of their greater productivity does not affect the reduction of costs for their production (unit costs have already taken this into account), then this circumstance has a substantial influence on the amount of additional production capacity, since the change in production capacities is determined by the change in the number of machines produced not by capacity or productivity, but in physical terms. It is for precisely this reason that many authors point to the insufficient rates of increase in the productivity of new models of machines, and also to the relatively greater rise in the prices of new machines in comparison with their productivity.

A tendency is noted toward a decline in the rates of growth of machine productivity when moving to subsequent models of machines. Thus, according to data in [1], the productivity of tractors of the 1.4 class, with an overall increase of 37%, rose by 22% in the transition from the first to the second model, and, when the third model was replaced by the fourth, by only 7%. An analogous situation is also observed for engine lathes.

with a maximum diameter of 400 mm. In the transition from the first model to the second, productivity increased by 25%; from the third to the fourth, by 15%. The highest rates of growth in the unit capacity of units are observed in power-generating equipment. In recent years, the unit capacity of turbine units has increased by a factor of 4–5 and has now reached 1000–1200 MW, which has ensured a substantial reduction in their unit cost and in capital investments as a whole.

The adverse factors of accelerated renewal may be largely offset by the release of the production capacity of repair services, which at present account, in a number of industries, for up to 30% of all production floor space.

Thus, the economic efficiency of accelerated renewal of machinery makes it necessary to reduce the standard and actual service lives of machines and equipment. However, it is first necessary to determine the economically optimal replacement periods for machine models for specific types of means of labor; these periods dictate the replacement times for morally obsolete fixed assets.

REFERENCES

1. Economic Problems of Improving the Quality of Industrial Products. Moscow, “Nauka,” 1969.

2. D. Palterovich. On service lives and rates of renewal of the stock of industrial equipment. Voprosy ekonomiki, 1970, No. 2.

3. A. Omarovsky. The durability of products and the efficiency of replacing obsolete equipment. In: Problems of the Economic Stimulation of Scientific and Technological Progress, “Nauka,” 1967.

4. N. Silonova. Methodological issues in determining capital investments for the replacement of fixed assets. Voprosy ekonomiki, 1968, No. 9.

5. N. Khmelevsky. The influence of the renewal of fixed assets on the efficiency of their use. Ekonomicheskie nauki, 1969, No. 5.