5bW1 uj4 08 O 9 I A W O R L D B A N K C O U N T R Y S T U D Y Fiscal Management in Russia The World Bank Washington, D.C. Copyright (C) 1996 The International Bank for Reconstruction and Development/ THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing March 1996 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the aca- demic, business and finanicial, and development communities. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. 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Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 0191, U.S.A. The complete backlist of publications from the World Bank is shown in the annual lIldex of Publications, which containis an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'lena, 75116 Paris, France. ISSN: 0253-2123 Library of Congress Cataloging-in-Publication Data Fiscal management in Russia. p. cm. - (A World Bank country study) This report was managed by Philippe Le Houerou. Includes bibliographical references (p. ISBN 0-8213-3568-5 1. Fiscal policy--Russia (Federation) 2. Monetary policy-Russia (Federation) I. ILe Houerou, P'hilippe. II. International Bank for Reconstruction and Development. Ill. Series. HG186.R8F58 1996 336.3'0947- dc2O 96-17 CIP CONTENTS Acknowledgements ................................................ vii Abbreviations and Acronyms . .......................................... viii Currency Equivalents . ix Countrv Data.X Executive Summary.xv 1. Stabilization, Economic Recovery and Fiscal Management ................... 1 Fiscal Transformation: A Bird's Eye View .............................. 1 Managing Fiscal Changes . ........................................ 7 Outline of the Report ........................................... 11 2. Intergovermnental Fiscal Relations .................................. 13 Regional Revenues .13 Regional Spending .22 Design Constraints and Elements of a Reform Agenda .30 3. Budget Formulation .41 Redefining Budget Coverage .41 New Approaches to Budgeting .48 Legislature Procedures for Budget Adoption .62 4. Budget Execution and Reporting ................................... 69 Managing Uncertainty ........................................... 69 Saving the Government Money in a Free Market Economy .................... 77 Fiscal Reporting and Accounting for Better Management ..................... 83 5. Budget Evaluation and Audit .89 Rebuilding Internal Compliance .90 Completing the External Audit Function: The Accounts Chamber .92 Establishing a Budget Evaluation Function .97 Ex-post Budget Reviews at the Subnational Level .101 iii A nnexes ....................................................... . 103 1 - Statistical Annex (tables A. 1 through A.11) ......................... 105 2 - Revenue Sharing Between Budgets of Different Levels of Government in 1993 and 1994 .135 3 - Formulas Used to Allocate the Resources of the Federal Fund for Financial Support to the Regions ...................................... 139 4 - Conditional Grants: International Experiences ....................... 141 5 - rhe Reform of the Budget Classification in the Russian Federation: Comparative Analysis ................ ... ... ... ... ... ... ... ... ... ... . 147 6 - Overview of the Budget Execution Process and the Creation of the Treasury . . . . 159 Bibliography .................................................. . 165 Map Russian Federation (IBRD No. 27188R) List of Boxes in Text 2.1 Taxes and Fees by Level of Government According to the New 1995 Draft Law on Basic Principles of Taxation (after second reading). 16 2.2 Compensating Regions Expenditures Associated with Enterprises' Divestiture of Social Assets ............................................... 21 2.3 Local Government Investment Under Central Planning ....................... 23 2.4 Disparities in Regional Inflation Rates ................................. 26 2.5 Tax Reform, Tax Sharing, Federal Transfers and Road Financing ................ 35 2.6 Conditional Grants ............................................. 37 2.7 Textbook Financing ............................................ 38 3.1 Industrial Extrabudgetary Funds ..................................... 42 3.2 Macroeconomic Forecasts: Between Science and Art ....................... 49 3.3 Deficit-Containment: The International Experience ......................... 50 3.4 Multiyear Budgeting ............................................ 52 3.5 Types of Budget Classification ...................................... 54 3.6 Multiyear Commitment in Capital Spending ............................. 59 3.7 Injecting Market Mechanisms in Public Services: The French and British Examples ... . 61 3.8 Limitations on Parliamentary Initiative ................................. 63 3.9 Delays in Budget Approval ........................................ 66 3.10 The Congressional Budget Office of the U.S. Congress ...................... 66 4.1 Procedures for Changing Initial Budget Appropriations during the Fiscal Year in France ......................................... 74 4.2 Controls in the Expenditure Process in France ............................ 76 4.3 Cost Savings through Procurement under the First World Bank Rehabilitation Loan ... . 80 4.4 U.S. Federal Government Procurement ................................ 82 5.1 The New Internal Audit Organization in Argentina ......................... 92 5.2 France's Court of Financial and Budgetary Discipline ....................... 93 5.3 Budget Evaluation Techniques: Measurement of Efficiency and Performance ... ..... 100 5.4 Local Government External Audits in the United States ...................... 102 iv List of Figures in Text 1.1 Russian Federation: Enlarged Government Revenue. Expenditure and Deficit . . 2 1.2 Russian Federation: Structure of Enlarged Government Revenue (percent of GDP) ... 2 1.3 Russian Federation: Structure of Enlarged Government Spending (percent of GDP) . . . . 3 1.4 Russian Federation: Government Subsidies and Social Expenditures (percent of GDP) . . 4 1.5 Russian Federation: Budget Deficit Financing (percent of GDP) ...... . . . . . .. 6 1.6 Russian Federation: Main Sources of Domestic Financing of the Deficit (percent of GDP) 6 2.1 Russian Federation: Structure of Regional Budget Revenue (billions of 1991 rubles) . . . . 15 2.2 Yaroslavl Oblast Consolidated Budget: Evolution of Spending Categories, 1990-1993 . . . 26 2.3 Yaroslavl Oblast Consolidated Budget: The Changing Structure of Spending 1990-1993, (percent of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.1 Government Financial Management Information System - Module ... .. ......... . 86 List of Tables in Text 1. 1 Estimated Consolidated Government Accounts, 1992 - 95 ....... . . . . . . . . . . . . . . 5 2.1 Regional Revenues, 1992 - 94 (percentage of GDP and of consolidated national budget) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.2 Regulatory Sharing Rates of Major Taxes in the Russian Federation (percent of total) . . . 17 2.3 Disparities in per Capita Regional Budget Revenues, 1992-93 (current prices) ..... . . . 19 2.4 Federal Transfers to the Regions in 1992-94 and Budget Plan for 1995 (percentage of GDP) .19 2.5 Regional Expenditures, 1992 - 94 (percentage of GDP and of consolidated national budget) .................. ... .... ... .... ... .... ... ... . . 22 2.6 Assignment of Expenditure Responsibilities in the Russian Federation in 1994 ..... . . . 24 2.7 Regional Privatization Revenues, 1992-94 (current rubles per capita) ..... . . . . . . . . . 25 2.8 Regional Budgets, 1991 - 93 (per capita current and constant 1991 prices) ..... . . . . . 28 2.9 Per Capita Regional Budget Expenditures, 1992-93 (th. rubles in current prices) ..... . 29 2.10 Conceptual Basis of Expenditure Assignment ........ . . . . . . . . . . . . . . . . . . . . . 33 4.1 Russian Official Federal Budget, planned and actual (percentage of GDP) ..... . . . . . 72 v ACKNOWLEDGEMENTS This report was managed by Philippe Le Houerou. It summarizes the work on fiscal issues that began in mid-1993 and the findings of a mission in October 1994 comprising, Gregory Kisunko, Jorge Martinez, Alexander Morozov, Laurent Rabate, David Sewell and Philippe Le Houerou (mnission leader). Major contributions were provided by Jorge Martinez and Laurent Rabate. Statistical support was provided by Gregory Kisunko. Background papers were prepared by a team of Russian experts led by Stanislav Katash and including Albert Igoudin (intergovernmental relations), Ludmilla Voinova (budget classification). Analytical notes were prepared by Sabine Engelhard (procurement), Alexander Morozov (actual versus planned budgets), and David Sewell (conditional grants). Meta de Coquereaumont provided editorial support. Arnold Hanuman tirelessly processed the various drafts. The report greatly benefitted from comments of the peer reviewers, Malcolm Holmes, Paulo Vieira Da Cunha, and Christine Wallich. A number of other people provided valuable background material and/or comments, including Ehtisham Ahmad, Charles Blitzer, Mary Canning, Jack Diamond, Lev Freinkman, Egbert Gerken, Timothy King, Costas Michalopoulos, Dominique Pannier, Pradeep Mitra, Arigapudi Premchand, Marcelo Selowsky, Migara de Silva and Mike Stevens. The work was carried out under the general supervision of Costas Michalopoulos and Pradeep Mitra. vii Abbreviations and Acronyms AO Autonomous Okrug/Oblast CBD Comnmnerce Business Dailv CBO Congressional Budget Office CBR Cenitral Bank of Russia CICA Competing in Contracts Act CIS Commilonlwealthi of lndependent States EBF Extrabudgetary Fund EU Europeani Union FRF Federal Road Fund FSS Federal Supply Service FSU Former Soviet Unioni FTO Foreigin Trade Organization GAO General Accounting Office GDP Gross Domestic Product GKO Gosudarstvennyye Kratkoschyye Obyazatel'stava (Treasury Bills) GOR Governmenlt of Russia IDP Interinal Discussioni Paper ILO Internationial Labor Organization IMF International Monetary Fund INTOSAI Internatioinal Organizationi of Supreme Audit Institutions KO Kaznacheyskiye Ohyazai.el'stava (Promissory notes) MoF Ministry of Finance MoE Ministry of the Economy NSN National Stock Numbers OECD Organization for Economilc Cooperation and Development OMB Office of Managemilenit and Budget RB Ruble RBRV Resouice-Based Relative Value Scale RFP Request for Proposal RRF Regional Road Fund STS State Tax Service UNIDO United Nations Industrial Development Organization USAID United States Agency ol International Development VAT Value Added Tax VEB Vnesliekonomilbank VFM Value For Money viii Currency Equivalents Unit of Currency: Ruble I ruble = 100 kopecks Rubles per US Dollar Moscow Inter-Bank Foreign Currency Exchange/ Moscow Foreign Exchange Auction Market (VEB) Rates P!eriod Average End of Period 1989 8.92 8.92 1990 19.34 22.88 1991 61.95 169.20 1992 227.90 414.50 1993 1,018 1,247 1994 2.212 3,550 1995a 4,560 4.537 a. As of 16 November. ix Country Data GNP per capita in USS in 1994 1,918 General Area (1,000 sq. km) 17,075 Population, mid-1994 eatimate (thounds) 148,300 Growth rate (average annual percent 1984-93) 0.6 Density (per sq. km) 8.7 Social indicators Population characteristics Crude birth rate (per 1,000) 1994 9.4 Crude death rate (per 1,000) 1994 15.6 Health Infant mortality rate (per 1000 live) 1993 18.6 Population per physician 1993 222.2 Population per hospital bed 1993 77.3 Live expectancy at birth 1993 65.1 Inconme distribution (% of national income) Highest quintile a/ 46.3 Lowest quintile a/ 5.3 Distribution of land ownership % owned by top 10% of owners n/a % owned by smallest 10% n/a Access to safe water % of urban population 77 % of rural population 65 Nutrition Calories per day 3,386 Per capita protein intake (grans per day) 106 Education Primary school enrollment (% of relevant age group) 106 Secondary school enrollment 98 Colleges, universities, specialized schools n/a Pupil-teacher at prinmary school 9 a/ Goskomstat Annual Report 1994. x Grow Dowestic Produc current prces Red Growth Rae @1mllics rubles) (an11al % change) 1992 1993 1994 1992 1993 1994 GDP at mrks prices 18,063 162,311 630,000 -18.5 -12.0 -15.0 Total counsmpion 11,642 110,098 446,450 0.8 .8.2 -9.5 Private (ind. data dicrep.) 9,008 75,729 314,978 .. .. -4.3 Genera government 2,634 34,369 131,473 .. .. -20.8 Gross domestic invet 5,447 45,447 170,100 -39.4 -24.2 22.0 Fixed investaen 3.545 35,708 151.200 -39.7 -12.0 -12.3 Change in docks 1.899 9,739 18,900 -38.7 -49.8 -57.5 Net exporw of goods and NFS 10,561 62,083 169.552 -19.8 3.9 7.9 Gros domestic saving 6,421 52,213 183.550 -39.4 -21.4 -26.7 Output, Employmeat, and Prodty, 1994 GDP Employment GDP per worker bin USS X of toa than of total USS X of avg. Agriculturm a/ 18.3 6.4 10.132 14.6 1.777 44.1 lndut b/ 121.5 42.5 27,371 39.4 4,342 107.7 Services 146.0 51.1 31.892 46.0 4,479 111.1 Total/Average 285.8 100.0 65,395 100.0 4,031 100.0 Notes: a/ Including forestry. b/ Including cornstnution. Source: Goskonistt. Goverumeut Fhmce (Percent of GDP) EnIarged Government Fderal Government 2992 1994 1992 1994 Revenues 46.2 36.3 16.2 12.7 Expenditures 69.1 46.0 25.2 22.9 Total deficit (-) -22.9 -9.7 -9.0 -10.2 xi Money, Credit, and Prices 1992 1993 1994 Money Supply (Bn Rb) a/ 6,083.0 32,851.0 96,378.0 Net credit to enlarged Governnent (Ba Rb) 725.0 9,018.0 69,606.0 Credit to enterprises and households (Bn Rb) 6,384.0 35,055.0 119,877.0 Money and quasi-money as % of GDP b/ 15.8 10.0 9.5 Consumer price index (annual % change) 1,354.0 895.3 303.4 Notes: a/ Currency and mible deposits. b/ Ratio of ruble broad money stock to annual level of December's GDP. The Balae of Payments (BMion USS) (Excluding transactions with former Soviet republics) 1992 1993 1994 Non-interest current account surplus -0.2 4.3 4.9 Trade Balance 4.4 9.6 11.9 Exports, merchandise 41.6 44.5 51.4 Imports, merchandise 37.2 34.9 39.5 Ne services exduding interest payment 4.6 -5.2 -7.0 Interest payments due 5.4 5.0 5.2 Repayments due a/ 9.5 15.4 14.8 Grants 3.0 2.8 0.8 Disbursenents a/ e/ 12.1 5.3 2.9 Other long-term flows b/ 0.7 0.4 -1.0 Short-term outflow (-) c/ -13.9 -5.8 -6.8 Overall balance -13.2 -13.4 -19.2 Change in net international reserves -0.8 -3.4 3.9 Rescheduling d/ 7.2 15.2 12.4 Other financing 6.8 1.6 2.9 Notes: a/ Long- and medium-term loans only. Excluding IMF purchases and repurchases. b/I nluding foreign direct and portfolio investment. c/ Identified net outflow as well as errors and omissions dl Includes the deferral of pre-cut-off principals. e/ Excluding IMF lending. Source: IMF. xii Composti of Exports sd Imports (io billion of USS) (Excluding transctions with former Soviet repubtics) 1992 1993 1994 Exports Petroleum and petroleum products 12.7 11.9 12.6 Natural gas 7.5 7.5 7.8 Other exports 21.4 25.1 30.9 Total Exports (FOB) 41.6 44.5 51.2 Inuorts Food 8.3 6.9 9.1 Capital goods 16.2 9.8 9.2 Other imports 12.7 18.2 21.9 Total Imports (FOB) 37.2 34.9 40.2 Source: RosKomStat. Debt Service -1994 (in blions of USS) 1994 Total scheduled debt service obligations 31.1 Medium and long-term 20.0 Principal 14.8 Interest 5.2 Short-tenn r 1. Source: EI1. IBRD Lwding as of August 31, 1995 (Millions of USS) 1995 Total lending 4.631.00 Total disbursed 776.00 Total undisbursed 3,855.00 Source: IERD. xi. i Executive Summary IlMRODUCTION The structural transformation of the Russian economy since 1992 has been accompanied by major changes in the country's fiscal picture, ranging from massive reductions in government spending, through the introduction of noninflationary treasury bill financing, to fiscal decentralization. The spending cuts, especially in off-budget outlays, have slashed the enlarged government deficit (which includes off-budget spending) from 22.9 percent of GDP in 1992 to 9.7 percent in 1994 and to about 3.5 percent of GDP by mid-1995. These are major steps toward financial stability. Still ahead lies the need for more efficient fiscal management. The remaining fiscal challenge is to ensure the durability of the government's stabilization policies by maintaining a low fiscal deficit and improving the allocative and redistributive efficiency of government resources. Without efficiency gains, fiscal stabilization could require spending cuts and taxation of a magnitude capable of endangering the political sustainability of the stabilization effort and economic recovery. The answer lies in the effectiveness of fiscal management -the principles, institutional arrangements, information flows, and techniques that govern the budget process and define fiscal relations between levels of government. Despite significant progress since 1992, budgets have not yet adapted to the far-reaching changes brought by the transition. On the economic front, market forces (liberalization of prices, massive privatization, the growth of the banking sector) have emerged faster than the government's capacity to adjust its budget management practices, which still bear the mark of their Soviet past. At the same time, major institutional changes are compounding the uncertainty and exacerbating the shortcomings of fiscal management at all levels of government, thereby weakening the central mechanism available to discipline decision-making by government. Economic and fiscal powers are being reallocated vertically, among levels of government, horizontally, between the executive and the legislature and, within the executive, arnong ministries. In addition, there is still confusion regarding the boundary between the public and private sectors. One underlying difficulty is an intermingling of functions that blurs the composition of the budget sphere. Large enterprises still perform functions that should be left to the government, while budgetary organizations are often involved in functions that are private in nature. This report analyzes the deficiencies of the budget system and recommends ways to improve fiscal management so that it meets the requirements of a decentralized market-based economy. It does not address reforms of tax policy and administration, nor does it attempt to recommend where government spending should be channeled. These subjects are covered in detail in other Bank and IMF reports. Instead, the report focuses on two crucial and interrelated features of fiscal management which, to a large extent, determine the outcome of fiscal policy and the allocative efficiency of government resources: (i) intergovernrmental fiscal relations; and (ii) the structural, technical and institutional aspects of the budget system. These two aspects of fiscal management can hardly be separated. Streamlining intergovernmental fiscal relations is essential to improving financial accountability and budgeting. Improving the quality of budgeting techniques and strengthening institutional capacity are essential to establishing a workable system of intergovernmental fiscal relations. Furthermore, each stage of the budget process is closely dependent on every other stage so that for example, the quality of new budgeting techniques at the budget preparation stage depends on the quality of budget audits and evaluations, which depend on the quality of the data generated by the accounting system. xv xvi INTERGOVERNMENTAL FISCAL RELATIONS Issues Extent of decentralization Fueled essentially by strong political centrifugal forces, decentralization in Russia went very far, very fast during 1992-93. While federal budget revenues in relation to GDP shrank from 16 percent in 1992 to 12.7 percent in 1994, regional revenues expanded from 14.6 percent to 17.5 percent. Moreover, federal transfers increasingly substituted for the regions' own revenues, rising from 1.7 percent of GDP in 1992 to 3.5 percent in 1994. Excluding transfers, the budgetary revenues of the regions came largely from a few shared federal taxes. The trend toward increasing shares for the regions was however halted and partly reversed in the tax-sharing arrangements for 1994 and 1995. Budgetary expenditures by the regional governments in relation to GDP increased from 12.7 percent in 1992 to 17.5 percent in 1994, reflecting the shift in expenditure responsibilities from the center and the rapid growth in subsidies from regional governments to the productive sector as well as housing and related public utilities. Most of these subsidies, estimated at 7.2 percent of GDP in 1994, went to agriculture and local public utilities. Lack of Clarity Despite major improvements in 1994, the system of intergovernmental fiscal relations remains unsettled-and unsettling. Since 1992, the practice of withholding federal taxes from the center has been pervasive and several regions have negotiated special tax privileges, either formally or informally. The lack of detailed legally established expenditure assignments gravely undermines fiscal responsibility. The distinction between funded and unfunded mandates is unclear, and expenditure responsibilities may vary from one region to another. Moderate equalization The system of federal transfers has not reduced the large fiscal imbalances among regions. Disparities in per capita expenditure have widened since 1991, reflecting growing revenue disparities. Per capita budget spending in the Koryaksiy autonomous okrug was about 12 times greater than spending in the Penzenskaya oblast in 1993. There are two main reasons why the system of federal transfers is only moderately equalizing: (i) the total amount of federal transfers is relatively low (in relation to that in other federations), and (ii) too large a share of transfers - three-quarters in 1994, or about 3 percent of GDP - consists of funded mandates and specific transfers allocated through nontransparent procedures rather than equalization transfers. Potential instability Vertical imbalances are widening as well, posing a threat to macroeconomic stabilization. The overall budget balance of the regions (excluding intergovernmental transfers) moved from a small surplus in 1992 to a deficit of 3.4 percent of GDP in 1994, while the number of regions in surplus fell by half between 1992 and 1993. What is of more concern, most of the regions went from a surplus to a deficit despite higher revenues in real terms. Thus decentralization has led to a "regionalization" of government resources and a "federalization" of the deficit. Adding to the instability of the current arrangement is the rapid increase in local borrowing. There is the real possibility of uncontrolled local borrowing for Executive Summary xvii inappropriate reasons-financing the operating budget deficit, propping up local enterprises, investing in activities better left to the private sector-and the potential for default by subnational governments. Local debt issues may have consequences that go beyond subnational jurisdictions, since the federal government might be forced into bailing them out. Limited efficiency gains The main theoretical argument for decentralization is increased efficiency. This argument is weak in Russia right now because the key ingredients required to realize efficiency gains are missing. Both political and financial accountability are weak in most regions because of the lack of expenditure management systems and clear expenditure assignments among levels of government. Also, underdeveloped housing markets prevent people from signaling their dissatisfaction by moving to a region where conditions are more to their liking. Overall assessment and constraints The initial conditions outlined above suggest that in 1992 and 1993 decentralization of the tax base went too far, too fast. The progressive recentralization of the tar base that took place in 1994 and continued in 1995 is therefore justified. This trend could be pursuedfurther, albeit with care. Limits to recentralization and equalization. Political considerations, a key ingredient in the design of a working system of fiscal federalism, constrain the degree to which equalization can be reconciled with macroeconomic stabilization, at least in the short term. The de facto asymrnmetrical federalism that has prevailed since 1992, which involves greater autonomy for fiscal and other matters for some regions, may be the only feasible solution that allows the federation to hold together. However, the tradeoffs must be clear. If the weaithiest regions keep most of the taxes generated in their territory, the level of equalization that can be achieved will be reduced accordingly. Political constraints aside, too much recentralization and equalization are not desirable either. Overgenerous federal equalization transfers may discourage the regions' own efforts to raise revenue and further weaken the accountability of local governments, creating a vicious circle in which lack of accountability justifies recentralization, which further reduces accountability. Over the longer term, local financial autonomy may foster local political accountability and better budgetary management. And, as the real estate market develops, a major argument against decentralization will disappear. Recommendations. There is no blueprint for designing an optimum system of intergovernmental fiscal relations. As in other federal countries, the system of intergovernmental relations in Russia is primarily a political issue and the system will have to be adjusted over time to reflect changing political preferences and realities. However, on economic grounds, the outlines of a reform plan to remove the main technical drawbacks of the existing system can be identified. With a view to reconcile the objectives of efficiency, macroeconomic stabilization and equity, the proposed reform package includes clarifying the current expenditure assignments, redefining the current tax-sharing arrangements in favor of the federal government, increasing and rationalizing federal transfers, and regulating subnational borrowing. xviii 1. Detailed assignments of expenditure and policy responsibilities among levels of government should be formalized by law in order to promote transparency, accountability and efficient resource allocation. In doing so, the government should: * Distinguish between funded and unfunded federal mandates with particular attention to eliminating unfunded federal requirements such as wages of regional and local public servants. * Distinguish between decentralization of expenditure responsibility and delegation of responsibility for delivering services but not for financing them. * Completely redefine the role of the employment fund, transforming it from a source of wage subsidies and project finance to an unemployment compensation fund. All resources of the employment fund should accrue to the federal level and be collected by the State Tax Service, with standards and financing set by the federal government, and service delivery remaining at the subnational level. 2. The progressive recentralization of the tax base that started in 1994 should continue, paying due attention to the changing mix of revenues from different taxes as a result of the ongoing reforms. This recentralization of the tax base could increase federal revenues by I to 2 percentage points of GDP. While it would not be a substitute for other fiscal increases, it would help stabilization and put more pressure on subnational governments to develop cost recovery. The changes proposed include, inter alia: * Assigning the land tax and the real estate tax entirely to the local level of government. * Increasing the federal profit tax to 15 percent and unifying the regional profit tax rate at its current maximum rate of 22 percent. * Redefining the allocation of the personal income tax among levels of government with a view to determine the tax rates accruing to the federal governrment and to allow the regional governments, within federally-specified limits, to top the federal rates with their own regional personal income tax rates. * Increasing the rate of the timber tax and reassessing its current sharing arrangement. 3. In parallel, federal transfers should be increased and directed toward reducing the huge fiscal disparities among regions of the federation and influencing the composition of subnational spending. In addition to eliminating the practice of effecting federal transfers to regions on a tax-offsetting basis, this implies reforming both the existing general equalization transfers as well as the specific -purpose transfers: * Equalization transfers. The size of the Federal Fund for Financial Support (FFFS), used for general equalization transfers, should be set as a percentage of all federal tax revenues rather than of the VAT only, as at present. Also, the formulas governing the allocation of transfers through the first and second windows of the FFFS should be redesigned to refocus transfers to the poorest regions. Federal transfers through the first window to "needy" regions should be based on per capita regional revenues from federal taxes only or some other reliable measure of the region's income, to avoid discouraging subnational governments' own tax efforts. If maintained, transfers through the second window to "very needy" regions should take into account only shortfalls in per capita revenues from the main federal taxes before transfers. This change will establish a clearer link between the declining regional tax base and federal equalization transfers without motivating excessive spending while encouraging regional efforts to raise revenues. Executive Summary xix * Specific transfers also require major restructuring. Federally funded mandates should be clearly defined, and different types of shared-cost programs or conditional grants should be systematically developed to influence regional policies and sectoral spending (e.g., health, education, and welfare programs). In particular, policy-based transfers (distinct from the formula-based equalization transfers) linking federal transfers to the reduction in the provision of subsidies by subnational governments should be introduced. International experience shows that conditional grants are most effective when they are few in number, have predictable funding, and are distributed according to objective criteria. 4. Subnational borrowing should be more tightly supervised by the federal government: * The federal government should legislate borrowing ceilings for subnational governments, as a percentage of regional governments' budgetary tax revenues and/or capital budget. The limit should include all types of debt (bond issues, borrowing from banks), as well as contingent liabilities. * To protect both taxpayers and investors, bond issues should be strictly regulated by the federal authorities through a true certification process (condition of the issue, intended use of funds) instead of the current simple registration mechanism. The Ministry of Finance should have the power to suspend the bond issuing rights of subnational governments that fail to comply with certification. Private market rating systems for subnational government issues should also be encouraged. * Subnational government borrowing in foreign currencies should require the special permission of federal authorities, including the Central Bank and the Ministry of Finance. Borrowing from the Central Bank should be explicitly prohibited. The right of subnational governments to establish their own banks and borrow from them, as granted by the law on self-government, should be repealed. BUDGET FORMULATION The many changes needed in budget formulation at all levels of government include (i) a complete redefinition of the budget coverage; (ii' building the macroeconomic constraint into the budget formulation process; (iii) improving the microeconomic efficiency of government spending; and (iv) streamlining the budget adoption procedures at the Parliamentary stage. Budget coverage Issues. A large share of government revenues and expenditures are not included in the budget, which violates the integrality and universality principles of government finance. In particular, extrabudgetary funds account for a large share of government revenue and expenditure (over 13 percent of GDP in 1994), and there is no central record of the total amount of government guarantees, tax expenditures, and revenues from the commercial activities of government agencies. This infringement of the integrality and universality principles has many undesirable consequences for fiscal management. Policy decisions made on the basis of partial information are likely to be less than optimal. Moreover, off-budget operations and, more generally, the earmarking of resources reduce the flexibility of resource allocation. For budgeting to discipline decision-making, all prospective spending should be included in the budget and compete with all the other demands on government resources. Lack of control and auditing also reduces fiscal discipline and prevents the realization of potentially enormous financial savings from cash and debt management. xx Recommendations. 1. Enforce the integrality principle: * Eliminate mandatory contributions to industrial extrabudgetary funds; include voluntary contributions by enterprises to industrial funds in the profit tax base. * Integrate the territorial road and ecological funds into the regional budgets. * Keep other earmarked budgetary funds included in the budget to a minimum to increase flexibility of resource allocation. * Keep extrabudgetary funds for pensions and social security separate from the budget, if desired, but submit reports on planned and actual revenues and expenditures to the Ministry of Finance for review, and audit their activities systematically. * Include in the budget all remaining directed credits from the central bank (such as to domestic enterprises and to other countries). 2. Enforce the universality principle: * Strictly limit and regulate contingent liabilities (government guarantees), presenting information on total liabilities in an annex to the budget. * Substantially reduce tax exemptions,and include information on remaining exemptions in the budget document by sector as tax expenditures. * Include in the budget revenues and expenditures of the commercial activities of government agencies. Doing this will require a comprehensive survey of government activities to determine which should rely mainly on budget appropriations (schools, for example) and which should rely nainly on user charges. To maintain incentives for government agencies to raise their own revenues, agencies should be allowed to retain rights to a proportion of the resources that they raise through these new economic mechanisms, although all revenues should be included in budget accounts. Macroeconomic and fiscal forecasts Accurate macroeconomic and fiscal forecasts are essential for good fiscal management. When forecasts are widely off the mark, budgets are unreliable, introducing considerable uncertainty to fiscal affairs and impeding efficiency. Issues. Since 1992, over-optimistic macroeconomic and revenue forecasts have resulted in expenditure sequestering as revenues clearly failed to reach forecast levels. Making over-optimistic forecasts is tempting for governments because they avoid having to make difficult trade-offs at the formulation stage. However, the costs are very high. Sequestering at the execution stage turns the budget into no more than an indicative framework, results in the accumulation of arrears and creates major disruptions in the provision of public services. This stop-and-go process is particularly damaging for investment projects, which suffer costly delays. In the end, everybody loses: parliament loses real budgetary oversight because actual spending allocations diverge widely from voted appropriations and the administration loses credibility and efficiency. The Ministry of Finance, recognizing the need for reliable macroeconomic and fiscal forecasts in a market economy, set up the Department of Macroeconomic Policy (DMP) in 1992; it became fully Erecutive Summary xxi operational in 1994. This was a major step forward; the next step is to build the macroeconomic stabilization objective into the budget process and to develop multiyear programming. Recommendations. 1. The budget instructions sent by the Ministry of Finance to the line ministries to launch the budget preparation process should clearly specify the overall budget deficit target and the spending limits for each ministry. This would make less difficult the choices that have to be made when spending requests are reconciled with the overall level of the deficit target. 2. The DMP should develop realistic three-year macroeconomic forecasts and medium-term expenditure frameworks at the national level, and each regional department of finance should do the same at the regional level. Multi-year fiscal forecasts, even if preliminary, give decision makers information on the continuing financial implications of current policies and help boost investor confidence by signalling sustainability of the government's fiscal policy. 3. The DMP will have to be further strengthened, especially by deepening institutional relations with other government agencies and other departments within the Ministry of Finance, to help them generate the data and analysis needed to improve its forecasting capacity. Microeconomic efficiency of government spending Since the abandonment of central planning, new budgeting techniques have been superimposed on the old, creating considerable confusion. The old method relied on a "normative" approach to budgeting, with agencies computing expenditures according to a detailed set of physical and cost norms (cost of food per type of hospital patient, for exanple). These norms are rarely used now. Incremental (or decremental) budgeting has become the rule because of the high inflation and fiscal stress since 1992. Program budgeting is also used extensively. Issues. The Ministry of Finance and the Budget Commission of Parliament developed a new budget classification based on international standards that was more relevant to the budgeting techniques needed in a market economy. The 1995 and 1996 federal budgets presented to the Duma followed the new classification, although Parliament has not yet formalized the new classification into law. Regional and local governments have not yet adopted the new classification. The incremental approach to budgeting also has some drawbacks in an economy in transition because of the tendency to renew appropriations that are inefficient or of limited use in a rapidly changing economic environment. And unlike the case in most OECD countries that use incremental budgeting, the institutional arrangements and incentive framework in which government agencies operate in Russia are not conducive to efficient management of public resources. Techniques for prioritizing expenditure and increasing the microeconomic efficiency of government spending are not systematically used. Government-financed investments, which include large transfers to the productive sector, suffer from lack of data, an absence of economic and financial evaluation of projects, and inadequate financing of projects, resulting in a large number of stalled or delayed projects. xxii Recommendations. 1. The new budget classification should be improved, legally formalized and fully implemented by insisting that budget execution data follow the same classification as the budget plan. The government should further improve and detail the new budget classification system that is being discussed in the Duma, with a view, in particular, to clearly reflect government net lending operations, intergovernmental transfers and separate interest from principal repayment of debt. The new classification should also be applied at regional and local levels of government. To take local circumstances into account, a common classification could be established for the major spending categories (parts, chapters), while leaving some freedom to the subnational levels of government on the more detailed items. 2. The development and systematic use of new and meaningful norms is premature at this stage in Russia. Three preconditions for launching such an exercise are missing. First, there should no longer be significant changes in relative prices. Second, structural reforms that entail a redefinition of the role of government in various sectors should precede any attempt to introduce norms for specific activities. Third, cost accounting should be strengthened to provide adequate data for the exercise. In addition, to avoid creating a supply- rather than outcome-driven budgeting system, institutional arrangements and incentive systems should be reformed first, accompanied by the development of performance evaluations as recommended below. 3. Proper use of program budgeting requires targeting, strict limitations on duration, and yearly monitoring and evaluation of performance, all designed to highlight the exceptional character of the programs. 4. Incremental budgeting should be accompanied by strategic reviews of public expenditures and functions, based on exhaustive analyses of selected sectors and activities. The objective is to assess the economic impact of government spending. To be effective, assessments have to be closely linked to budget preparation. In turn, this means reporting the results and detailing how they are reflected in the new budget appropriations. This feedback process can be made an integral part of budget hearings. 5. Capital investment budgeting needs to be overhauled. In addition to focusing on social overhead capital, the following principles should guide reform of government-financed investment: * Each level of government should establish a multiyear capital expenditure program each year. The program should reflect the implications of ongoing and proposed investment projects on current expenditure and source of financing. * No new investments should be undertaken if the maintenance cost of the current public activities selected to continue operations is not being fully financed. Lack of maintenance can result in an enormous waste of resources. * Large investment projects should be prioritized according to their economic and social returns. This implies developing the capacity of implementing agencies at all levels of government, to conduct cost-benefit analysis. Until such a capacity is developed, financial consulting firms could be hired to conduct feasibility studies. * To the extent possible, flexibility should be built into large investment projects; designing the project as a series of modules, each with its own economic and financial rationale, can be helpful in this respect. Executive Summary xxiii Multiyear spending authorizations should be used to ensure adequate financing of an investment throughout its construction period. 6. The institutional and incentive framework of government agencies should be reconfigured to foster flexibility, management independence, responsibility, and competition for resources: * The number of the "distributors of funds" (glava) at the federal level should be significantly cut by consolidating their budgets under their respective supervising sectoral ministry. * For marketable services, government units should compete with private providers of services. * Reforming the institutional framework and management of public utilities and infrastructure could result in huge efficiency gains and savings. A prerequisite is full cost recovery. At the same time the government will need to regulate prices for natural monopolies. * To give consumers a stronger voice in public services, budget allocations should be demand rather than supply driven, when feasible. This can be done through the use of vouchers, which introduce competition into the provision of public services. Russia has experimented with this sort of a system in compulsory education in a number of regions. These experiments should be closely monitored and assessed, with a view to extending them to other activities and regions. Budget adoption procedures Issues. Fiscal discipline in budget formulation should also apply to Parliament. Despite major improvements at the federal level since the adoption of the 1993 constitution and the law governing budgetary adoption procedures, further streamlining is desirable. At present, nothing prevents parliamentarians from voting after the third reading spending programs that will exceed the budget deficit voted in the second reading of the draft budget law. In addition, separate laws -- sometimes voted just after the budget law -- may also increase the voted budget deficit (e.g., increases in minimum wages). The complexity of the procedure and the numerous interruptions allowed during budget discussions delay approval, sometimes well into the new budget year. Political decisions would be better informed by more reliance on analytical work and methodological assessments. Regional and local legislatures are still uncertain about their role in the process. They are often inadequately staffed, receive inadequate information, rarely hold public hearings, and do little to publicize budgets, a critical step in reaping the benefits of fiscal decentralization. Recommendations. 1. The parliamentary adoption procedures should be amended by restricting the right of parliamentary amendments to increase the budget deficit, while maintaining the right to amend the budget to maintain deficit-neutrality. The Duma's budget commission should be responsible for assessing amendments, while the Ministry of Finance should confirm the reliability of the evaluation or the feasibility of supplementary measures. Parliament should also consider limiting the time allocated for discussion and voting at each reading. 2. The Budget Commission in the Duma should have a properly staffed analytical and technical unit. Such work should not be undertaken by the recently created Accounts Chamber (see below). 3. The budgetary role of subnational legislatures needs to be better defined. The federal government could write a set of master procedures and regulations on which subnational legislatures could model their own rules. xxiv 4. The executive veto power at all levels of government could be transformed into a more flexible tool by allowing line item vetoes instead of requiring that the entire budget be jettisoned because of disagreements over specific items. BUDGET EXECUTION Good fiscal management implies that once adopted, the budget should be implemented according to the approved appropriations, that adjustments to new developments be made transparently and efficiently, that savings be maximized, and that reporting be detailed, accurate, timely and informative. Most of these characteristics are absent in Russia, despite major efforts since 1992. There is a striking lack of compliance with budget laws in budget execution, a lack of control over the spending process, an absence of procedures and institutional capacity for saving money, and an inadequate reporting capacity and accounting framework. Managing uncertainty Issues. Sequestering underlies the lack of compliance in budget execution made necessary by the unsettled macroeconomic environment and overoptimistic revenue forecasts. This is compounded by the lack of fiscal discipline in decision making and the absence or breakdown of control mechanisms and therefore of detailed monitoring of expenditures. While improvements in macroeconomic forecasts could help improve compliance, some uncertainty is unavoidable and the difficulty lies in reconciling compliance, control, and flexibility in a changing economic environment. One solution is to combine flexibility in the use of funds with a system that ensures compliance and accountability for the effective use of funds. No mechanism of this sort exists today. Expenditures are controlled by limiting the allotments to spending units and there are no checks on spending between appropriations and actual spending. One result has been an accumulation of arrears, with no easy means of quantifying them. Another has been a severely limited capacity to assess the feasibility of cutbacks or the reallocation or scheduling of spending. Such absence of expenditure control makes expenditure cutbacks more brutal and disruptive. Recommendations. 1. The legal and institutional powers to modify the budget law during budget execution need to be clarified: * When changes are needed in the level of deficit, overall spending limits, or discretionary increases in taxation, parliamentary authorization in the form of a revised budget should be required. For specific changes in spending patterns, the government could be granted the right to replace old programs with new ones, following parliarnentary review. * The government should be permitted to make routine changes in spending allocations within a small limit of the initial appropriated amount without legislative approval, so long as changes do not affect the overall spending ceiling. * The amount of unallocated emergency reserves included in the budget should be set as a (small) percentage of overall spending appropriations. Uncertainty allowances could also be built into the budgets of spending units, again within c]ear and strict limits. * The administrative decision-making process should be streamlined with a view to strengthening budget oversight by the Ministry of Finance over line ministries. Decisions made by the line ministries during the year must not be allowed to worsen the deficit (if financed) nor increase EJxecutive Summary xxv payment arrears (if not financed). The Ministry of Finance must be informed systematically of policy proposals made by other ministries that have fiscal consequences. The latter should be quantified before the proposal is even considered. 2. To reconcile fiscal retrenchment with efficiency, government spending should be controlled and reported at the three key stages of the expenditure payment process: * At the commitment stage, when contracts are signed and procurement initiated, the key step is to check whether the agent making the budget commitment is properly authorized. * At the verification stage, the key step is to verify that the work has been completed according to the contract and that an "order to pay" is issued. * At the payment stage, the accountant verifies that all previous controls were properly applied before releasing funds for payment. In addition to improving planning, this process builds in spending controls by clearly separating authority for authorization of purchase from authority for disbursement. Saving government money Issues. Cash management, debt management, and procurement, unimportant under central planning, are the key to saving the government money in a market economy. While the potential savings from instituting these practices are significant, progress in these areas depends on progress in other areas of fiscal management. For example, the absence of commitment accounting makes planning for effective cash and debt management and procurement nearly impossible, while the large size of off-budget financial flows significantly reduces the scope for savings from centralized cash management. In the case of procurement, no gains are possible until the legal and institutional framework governing public contracts is reformed and properly enforced. Recommendations. To improve and complete the regulatory framework established in the procurement law of December 1994, several steps are needed: - Eliminate the distortionary fiscal incentives (tax breaks, subsidized loans) granted to suppliers. * Open up competitive bidding to foreign suppliers consistent with the provisions of the World Trade Organization regarding government procurement practices. * Enforce systematic and widespread notice of tenders, public openings and publication of awards. * Develop standard specifications and harmonize them across different levels of government. * Clarify the issue of governmental immunity. * Eliminate potential conflicts of interest by prohibiting those with a business or with family ties to a business from authorizing purchases from those firms. Improve financial reporting Issues. Budget execution reports are cursory, incomplete and until recently, prepared in a format that is not readily comparable to the budget laws. Much of the information is compiled manually, increasing the chance of error. The Ministry of Finance generates little information on its own, acting primarily as a consolidating agency. xxvi Beyond the mechanics of setting up the treasury network throughout the country and automating its operations, the usefulness of the information system that the treasury is trying to establish hinges on a proper definition of the government accounting framework and methods. A proper accounting framework is the backbone of modern integrated financial systems, as demonstrated by countries such as Argentina and New Zealand that have made accounting system reform a central element of their fiscal reform. Proper accounting is still missing in Russia. Accounting standards and practices inherited from central planning are inadequate to provide either controls or useful information for analysis and decision making, the two major functions of an accounting system. Recommendations. A two-pronged approach is recommended: * Develop budgetary accounting system that permits improved monitoring and control of the successive stages of the spending process, as recommended above. * Adopt the revised general accounting plan and formats designed for the commercial sector for the budget-supported organizations' proprietary (assets/liabilities) accounting system, thereby taking a shortcut to the convergence between government and commercial accounting plans that has occurred gradually in many countries. A new government accounting board, the Treasury, or the newly created Accounts Chamber should be assigned the task of adapting the commercial accounting plan and formats to the needs of individual spending units (hospitals, schools, museums, research institutions, pension fund, central agencies). BUDGET AUDITS AND EVALUATION Issues. Auditing and evaluation are virtually absent in the budget cycle in Russia. The Directorate of Financial Control and Audit in the Ministry of Finance, the institution in charge of internal audits, has a sizable staff deployed throughout the country, down to the rayon level. But the directorate's resources are spread thin by the need to satisfy the control requirements laid down by the executive and the legislature, as well as to meet the requests of the judicial police. The effectiveness of these internal audits is further diminished by (i) the absence of a legal basis for administrative sanctions resulting in a lack of graduated penalties, and (ii) a lack of clear regulations on the proper conduct of public officials in handling public funds, in procuring goods and services, or in engaging in activities that may produce conflict of interests. External audits, independent of the executive, are entirely new in Russia. The creation in January 1995 of the Accounts Chamber as the supreme audit institution, accountable exclusively to Parliament, was a major step toward institutionalization of independent budget audits. However, the law assigns to the Accounts Chamber duties that involve it directly in the budget formulation and adoption process, thereby compromising the independence and objectivity that constitutes the basis for the authority of its audit reports. The Accounts Chamber has also been given the authority to issue mandatory executive orders and to suspend funding to audited institutions where there are irregularities, a breach of the separation of powers between the legislative and executive branches of government. Budget evaluation is virtually nonexistent in Russia, a legacy of a budget philosophy bent on ensuring minimum funding for spending programs rather than maximum efficiency in the use of limited resources. No government institution is charged with reviewing and assessing budget outcomes even though Executive Summary xxvii performance evaluations are a way of learning from experience and improving allocative efficiency in a way that incremental budgeting alone cannot ensure. Reviews of budget spending at the subnational level experience similar problems. Personnel of the Directorate of Financial Control and Audit of the Ministry of Finance are supposed to conduct internal audits at the subnational level of government. However, very few audits have taken place in recent years at the oblast and local level except where there was evidence of fraudulent use of funds. No independent external audits by units attached to the legislative branch have been conducted at the subnational level. Recotmmendatiotns. 1. Transform internal audits into a management tool at the spending unit level designed to support the head of the agency in the discharge of his/her responsibilities. The bulk of internal audits should be focused on1 assessing the adequacy of management systems, spot checks and special investigations internal to the agency. The audit department in the Ministry of Finance should be responsible for overseeing the quality of internal audits of the spending units and assisting them in developing their capacity. 2. Establish rules to foster effectiveness of internal audits in case of misappropriations: (i) Establish rules for administrative sanctions that are proportionate to the infraction committed; and (ii) define precisely the legal framework for administrative controls and the procedures to be followed during these audits. 3. Redesign the responsibilities of the Accounts Chamber: (i) Assign responsibility for advising Parliament on budget formulation to another legislative office (see above). Responsibility for reporting on the progress of budget execution should also be reassigned; and (ii) eliminate or limit the power to issue executive orders. Where there is evidence of fraudulent behavior, the Chamber should be able to refer the infraction to the courts for due process. 4. Develop the budget evaluation function so that performance evaluations are an integral part of the budget cycle: * Responsibilities for performance evaluations, as in the case of internal audits, should be assigned primarily to each line ministry and each spending unit. The Budget Department in the Ministry of Finance and the Accounts Chamber should assist to build capacity and to look strategically at cross agency policies and government-wide systems and processes. * Develop performance indicators and criteria based of past and ongoing evaluations, and ask each spending unit to submit them for approval to their overseeing ministry, which would pass them on to the Budget Department of the Ministry of Finance. These measures should specify the results expected if the spending request is approved. This practice can start on a pilot basis in a few government agencies. Other agencies will buy into evaluation and performance indicators when they can see that they make a difference to the way decisions are made about spending appropriations. 5. Develop budgetary audits and evaluations at the subnational level: * Clarify the role and responsibilities of the staff of the regional and local branches of the Federal Directorate of Financial Control and Audit of the Ministry of Finance with respect to audits of xxviii regional and local budgets, in line with the supposed budget autonomy of subnational governments. The federal government should provide guidelines for internal audits, which could be adapted to the needs of individual regional governments. * Adopt a federal law delineating the general and common principles of the external audit function a, the regional level. This law could also state the general principles for collaboration among the different regional Accounts Chambers. The regional governments should prepare similar laws to develop the external audit functions of local governments. Lccal governments could be audited by the oblast's Accounts Chamber or by properly regulated nongovernment auditors. * Create a performance evaluation unit within the budget or finance departments of oblasts, cities, and rayons. The evaluation units could provide guidance to spending units on cost measurement and management improvements. These units could also assist agencies to devise plans for cutting back on expenditures, based on identification of their core and noncore activities. Finally, the evaluation units should undertake formal reviews of efficiency in selected areas of government, starting with subsidy programs. Chapter 1 Stabilization, Economic Recovery, and Fiscal Management The structural transformation of the Russian Federation since the end of 1991 has been quite impressive. Liberalization measures have broadly removed price controls and virtually eliminated barriers to foreign trade. The mass privatization program has shifted two-thirds of enterprises to private ownership, and in several sectors private firms now dominate the economic landscape. A dynamic banking sector has emerged and now numbers some 2,500 banks. Significant progress has been made since mid-1993 toward market-determined interest rates and more efficient allocation of central bank credit. In addition to the decentralization of economic decision-making from government to enterprises and consumers, the transition to a market economy in Russia has been accompanied by the decentralization of political and fiscal power from Moscow to the regions. These systemic changes have come at some cost however, and economic recovery has been hampered by slower progress toward macroeconomic stabilization and institutional strengthening. GDP declined by about 40 percent in real terms from 1991 to 1994. Fixed investment also plummeted, and inflation soared along at a two-digit monthly rate for most of the period. Inflation compounded the high level of uncertainty generated by the transition itself. In turn, uncertainty held back new fixed investment and delayed the economic recovery.' At the same time poverty2 increased, and a massive redistribution of income has resulted in a widening of income disparities. The level of unemployment, however, remains surprisingly low by international standards. Officially registered unemployment was just over 2 percent in 1994, while unemployment according to the ILO definition reached 7 percent. The structural transformation of the Russian economy was also accompanied by major changes in fiscal outlook, including both a massive reduction of government spending -- essentially through a major cutback in off-budget spending -- and fiscal decentralization. The expenditure cutbacks effected to date, although politically difficult, were technically easy. They were essentially "stroke of the pen" measures. More difficult measures lie ahead. Tax reforms are needed to remove distortions and to halt the decline in revenue that began in early 1993. And more efficient fiscal management systems and techniques will be needed to ensure the success and sustainability of stabilization policy. Fiscal Transformation: A Bird's Eye View The rapidly changing role of government in the economy since 1992 has profoundly transformed the fiscal picture in Russia. With revenues declining due to widespread tax exemptions, design flaws in major taxes, and difficulties to capture the growing private sector in the tax net, the federal government significantly reduced its fiscal deficit by reducing spending, mainly off-budget subsidies to the productive sector. Both revenue and spending have shifted markedly from the federal to the subnational levels of government, which are now responsible for most public goods and services and increasingly for subsidies I The link between uncertainty, investment, and economic recovery is discussed in Le Houerou, "Investment Policy in Russia,' Studies of Economies in Transformation 17. World Bank, 1995. 2 See "Russia Poverty Assessment," World Bank, 1995. 1 2 to the productive sector. Finally, the rapid development of a treasury bill market has increasingly allowed the fiscal deficit to be financed through noninflationary means. To understand the fiscal picture in Russia, it is important to know that the consolidated "official" budget, which includes federal and regional budgets, represents only a fraction of government financial operations. The Russian Federation: Enlarged Government Revenue, "enlarged" budget adds to the consolidated ExpenditurandDeficit(percentofGDP) official budget the extrabudgetary funds, off- budget foreign transactions, and off-budget directed credits guaranteed by the Ministry of Finance. Even this enlarged budget is not the whole fiscal picture. however, because it 6000 - 1 excludes a number of off-budget government 50.00 financial flows for which adequate data are 40.00 lacking. These include the industrial 30.00 extrabudgetary funds (funds set up by line 2 ,NpInditure ministries and usually funded through taxes Reveiiue on the production costs of enterprises in the 10 0i (i/cluding. .-- . . sector), the regional and local extrabudgetary 1992 arrearsoex d,1) funds for which no consolidated data exist, 199 1994 and quasi-fiscal spending of the central bank (credits to other countries of the former Figure 1. 1 Soviet Union and directed credits to domestic enterprises). The enlarged fiscal deficit of the Figure 1.2 general government shrank from 22.9 percent of GDP in 1992 to 8.5 percent of GDP in 1993, before increasing to 9.7 percent of Russian Federation: Structure of Enlarged GDP in 1994 (figure 1.1). Since revenues GovernF e ven:Strctu ofE gd declined sharply during the period, the Government Revenue (percent of GDP) adjustment was concentrated in massive cutbacks on the spending side, particularly off-budget spending, which plummeted from 20.00 33 percent of GDP in 1992 to 9 percent of GDP in 1994 (figure 1.3). During the first 15.00 half of 1995, although revenue collection increased to 37.4 percent of GDP, enlarged 10.00 government spending was further cut to less Regional than 40.8 percent of GDP. As a result, by 5.00 Federal mid-1995 the enlarged government deficit 0.00 LO-Bud_c amounted to an estimated 3.5 percent of 1992 1993 - - GDP. 19 3 Revenue decline Total enlarged revenues of the enlarged government fell from 46.2 percent of GDP in 1992 to 40.7 percent of GDP in 1993 and 36.2 percent of GDP in 1994. Both off-budget revenues and revenues accruing to the federal level shrank (figure 1.2). The off-budget revenues dropped from 17.4 percent of GDP in 1992 to an estimated 9.6 percent of GDP in 1994. The off-budget revenues of the social funds declined from 12.2 percent of GDP in 1992 to 8.8 percent of GDP in 1994, while those of road and ecological funds declined from 1.6 percent of GDP to 0.8 percent of GDP. Federal revenues declined from 16.2 percent of GDP in 1992 to 11.9 percent in 1993. They rose slightly to 12.7 percent of GDP in 1994 because of the transfer of off-budget revenues from foreign economic activities3 to the federal budget in 1994. Without these revenues (they accounted for 3.3 percent of GDP in 1994), federal budget revenues would have fallen to 9.4 percent of GDP in 1994. The drop in federal revenues from 1992 to 1994 came almost entirely from declines in two major taxes, the value added tax (VAT) and the profit tax. This decline resulted primarily from the widespread use of exemptions, the flawed accounting rules used to determine the base of these two taxes, the sharp cut in the VAT tax rate in 1993, and difficulties to capture the growing private activities in the Figure 1.3 tax net.4 VAT revenues plunged from 8.3 percent of GDP in 1992 to about 4.4 percent in 1993 and 1994. Profit tax revenues shrank Russian Federation: Structure of Enlarged from 3.6 percent of GDP in 1993 to 2.7 Government Spending (percent of GDP) percent in 1994. Transfers of central bank profits to the federal budget were a significant new source of revenue for the federal budget in 1993 (1.26 percent of GDP), that partly 35.(. ) compensated for the shortfall in VAT 30.(X) revenues during that year. liowever, their 25(-* sharp decline to 0.25 percent of GDP in 1994 worsened the overall revenue shortfall that year. I .n0 Federal As federal government revenues On)B-udget shrank, regional budget revenues expanded, rising from 14.6 percent of GDP in 1992 to o__ Regional 17.7 percent in 1993 and 17.5 percent in 1992 1994. A larger regional share of major federal taxes and federal transfers explained much of the regional gain in 1993. This decentralization of the tax base was partly reversed in 1994, although significant increases in federal transfers to the regions made up most of the difference (see chapter 2 for a more detailed discussion). 3 These off-budget revenues from foreign economic activities in 1992-93 included the proceeds from the sales of gold and precious metals, the proceeds from the centralized export scheme, as well as foreign trade taxes paid in foreign exchange to the foreign exchange fund. 4 A detailed analysis of the performance of individual taxes in Russia over the period is presented in the Country Economic Memorandum, "Towards Medium-Term Viability," World Bank, October 1995. 4 Expenditure cuts Enlarged government spending declined from an estimated 69.1 percent of GDP in 1992 to 46 percent in 1994, a decline that was accompanied by a major change in the structure of government spending. Off-budget spending was slashed from an estimated 33 percent of GDP in Figure 1.4 1992 to 9 percent in 1994 (figure 1.3), mostly by eliminatinig import subsidies Pmsian Fcderadont emnmt Suhsiti&s and Soial (estimiated 13 percent of GDP in 1992) and Exptfitus(pcmvnt ofG by severe trimming of off-budget directed credits guaranteed by the Ministry of Finance (table 1.1). Adding quasi-fiscal spending by the central bank to the picture makes the cutbacks even more impressive: credits to 70 otlher states of' the former Soviet Union were 60 cut from 7 percenit of GDP in 1992 to an 50 estimated 3.2 percent in 1993, and directed 40 credits to domestic enterprises (in addition to 3( a A d , t those guaranteed by the MoF) were cut from o 15.5 percent of GDP in 1992 to 5 percent in oX 1993. Official budget spending, meanwhile. 0 C increased from 38.2 percent of GDP in 1992 199) t to 40.5 percent in 1994. Nearly all the increase over the period came on the regionial government side, reflecting their increasing revenues and expenditure responsibilities. Regional budget spending increased from 13 percent of GDP in 1992 to 17 percent in 1993 and 17.5 percent in 1994. At the same time, federal government budget spending declined from 25.2 percent of GDP in 1992 to 20 percent in 1993. It rose slightly to 23 percent in 1994 with the inclusion in the federal budget of directed credits and of foreign exchange outlays which were previously off-budget, and increased federal transfers to the regions. The bulk of the cuts were concentrated in current and capital subsidies (both budgetary and off- budget). social spending was relatively protected (figure 1.4). Current and capital subsidies plummeted f'rom an estimated 32.2 percent of GDP in 1992 to 14.8 percent in 1993 and 11 percent in 1994. These subsidies went primarily to producers in agroindustry and coal and to large loss-making state enterprises in a variety of industries, but an important share of the subsidies benefited households (by lowering the cost of public utilities, housing, and some imported consumer goods) and .he health sector (import subsidies that lowered the costs of medical equipment). Compared with subsidies, social spending (health, education, and cash benefits provided through the social extrabudgetary funds and some budgetary allowances) was relatively protected. Government spending on social programs increased from 17 percent of GDP in 1992 to 17.5 percent in 1993 and 17.9 percent in 1994. Real social spending declined, however, by about 8.7 percent between 1992 and 1994. Overall, social spending also suffered from the significant decline in social spending by enterprises and from the cuts in current and capital subsidies that represented social transfers. 5 Table 1.1: Estimated Consolidated Government Accounts, 1992 - 95 (percentage of GDP) Jan.-June 1995 1992 1993 1994 (preUminkary) Total Revenue ' 46.21 40.70 36.25 37.39 Federal hudgel 16.20 11.87 12.70 13.22 Intergovernmenial transfers 0.28 0.02 0.07 0.00 Regional bLidgcl 14.61 17.66 17 54 15.83 binereosernnienilalTranlsfers 1 74 2.69 3 50 1 55 Ofl-budgci 17.42 13 88 9.58 9.89 Social EBF 12.23 9.11 8.77 8.26 Road anid eco,logical lunds 1 62 1.46 0.81 1.63 Foreigin economic aclivitics 3.57 3.32 0.00 0.00 Foireigin cxclidlgc lax 3.49 1.52 0.00 0.00 Total Expeiidilure" 69.11 49.21 45.97 40.82 Fedcrai budgci 25.17 19 88 22.95 17.08 Iniergoveininiental iraiislers 1.75 2 71 3.50 1.55 Net inieresi paynicnis ion foreign dehi) n/a n/a 1.36 1.21 Intercsi tin Exiernal Dehi (nol paid) n/a n/a 0.86 n.a. Regional budgei 12.98 16.97 17.53 15.62 intergoicriverienialTransfers 0 27 0.02 0.07 0.00 Off-budge, 32.98 15.09 9.06 9.67 Social EBF 8.97 8.09 8.25 8.10 Road anid ecological funds 1.32 1.40 0.81 1.57 Fiireigii economic activsites 13 09 3.50 0.00 0.00 Iiipiori subsidies 11.88 2.32 0.00 0.00 Nei inieresi paymeitis (onl foreign debilt 6 29 2.10 n/a n. a. Inieresi otn external debi (nol paid) 6.16 1.34 n/a n.a. Direcied crcdii (guaraniteed by MoFI 3.32 0.00 0.00 0.00 Balance (iniclutdirng interest arrears on external debt) -22.90 -8.51 -9.72 n.a. Federal blidgri -8.97 -8.01 -10.25 n.a. Regioiial budgei 1.63 0.69 0.01 0.21 Off-budget -15.57 -1.20 0.52 0.16 Foreign econoniiic aci,vities -9.52 -0.18 0.00 0.00 All oilier off-budgeiiransaciions -9.31 -2.04 0.00 0.06 Balance (excluding interest arrears on external debt) -16.74 -7.17 -8.86 -3.43 Federal budgei -8 97 -8.01 -9.39 -3.86 Regioiial budget 1 63 0.69 0.01 0.21 Off-hudgei -9 41 0.14 0.52 0.16 Foreign econlomic activities -9 52 -0.18 0.00 0.00 All other ioff-budget transactions -3.15 -0.70 0.00 0.06 Quaoa-fiz,ei Spending by Ce-ent Bank of Rassie 22.46 8.25 n.a. n. a. Crcdit lo he other FSU staies (estimate) 6.96 3.25 n.a. 0.00 Central bank directed credit (IMF esuimate) 15.50 5 00 n.a. n.a. Industrial extrabudgetasy funds Revcnue 5.80 4.20 2.51 n.a. Centralized part n.a. 0.05 0.02 n.a. Expenditure 3.60 3.30 2.32 n.a. Cenuralized part n.a. 0.03 0.01 n.a. Balauice 2.20 0.90 0.39 n.a. Centralized part n a. 0.02 0.01 n.a. Memo item: GDP (billions of rubles) 18,063 162,300 630,000 606,000 n/a - niot applicable n.a. - not available. Note: Both revenues and expenditures include government transaction on gold and precious metals. a Includes privatization proceeds. b Consolidated revenues and expenditures exclude imergonernmental transfers. c In 1992 ihis item included 0 13 percetit of GDP paid to serve domestic debt. 6 Figure 1.5 Deficitfinancing Russian Federation: Budget Deficit Financing (percent of GDP) There have also been major changes in the financing of fiscal deficits since 1992. One important change was the switch from 2500 mostly foreign sources of financing to mostly domestic sources. Net foreign financing 20.00 dropped from 18.3 percent of GDP in 1992 50 to I percent in 1994, and preliminary data for the first quarter of 1995 show that net foreign 10.00 7 Total Financing financing turned negative. Much of the sharp 5.00 Domesic Sources drop between 1992 and 1994 reflects the drying up of tied credits (disbursements ForeignFinancing plummeted from 12.7 percent of GDP to 0.9 1994 percent) following the elimination of import subsidies by the federal government. Domestic financing rose from 5.5 percent of GDP in 1992 to 9 percent in 1994 (figure 1.5). Another important change has been in the structure of domestic financing, as government securities began to substitute for central bank credit. Central bank credit went from 9.4 percent of GDP in 1992 to 6.7 percent in 1994 (figure 1.6), with a further cut to about I percent of GDP during the first quarter of 1995 (according to preliminary data). At the same time, net financing from government securities went from a negligible 0.3 percent of GDP in 1993 to 2.6 percent of GDP in 1994, becoming the predominant source of domestic financing of the fiscal deficit. During the first quarter of 1995, it amounted to 2.3 percent of GDP, which represented the bulk of deficit financing for Figure 1.6 that period. _ _ _ _ _ __1.6 Government securities in Russia Rissian Federation Nhin Sources of Dmiestic consist mainly of treasury bills Fmancingof thelDfcit(pwctofGM (Gosudarstvennyye Kratkoschyye Obyaza- tel'stava, or GKOs) and treasury promissory notes (Kaznacheyskiye Obyazatel'stava, or i_ KOs). In essence, the GKOs are zero-coupon 100 bonds with maturities of three and six ,_.0 months. They are freely marketable and bear 8.0 , a positive yield in real terms. The bulk of outstanding GKOs--which amounted to 1.7 6.0 percent of GDP at the end of 1994--is held by 4.0 -> the commercial banks, most of which are located in Moscow. The government plans to 20 speed the development of a national market for government securities with a view to expanding the country's absorption capacity 1992 1993 for treasury bills and reducing the advantage 1994 of Moscow banks over regional banks in trading and investing in this attractive 7 financial instrument (restricted access to the market has allowed the Moscow banks to reap oligopolistic profits). The KOs, or promissory notes, are another case altogether. Far from improving the fiscal picture they work against the government's stabilization objectives and should be eliminated. In the fall of 1994, the Ministry of Finance started to issue a flurry of promissory notes to enterprises to cover government arrears, especially to defense industries. These one-year notes, with interest rates far below market rates, are negotiable among enterprises and, can be used to pay tax liabilities. There were some 7 trillion rubles (Rb) KOs outstanding at the end of 1994, or 1.7 percent of GDP. Preliminary data show that another Rb3 trillion in KOs were issued during the first quarter of 1995. In practice, the KOs are being used to circumvent the limit on central bank credit for deficit financing by the Ministry of Finance, a practice that blurs the macroeconomic picture. Because KOs can be used as tax payments, they reduce the cash demand of enterprises. The KOs contributed to a sharp rise in the velocity of money in the last quarter of 1994. and inflation surged by much more than might have been expected on the basis of the relatively modest expansion of credit and monetary aggregates. Managing Fiscal Changes At this stage of the transition, the priority of the government of Russia is to stabilize the economy and lay the ground for recovery. That implies further reducing the fiscal deficit and restructuring the composition of revenue and expenditure.5 On the revenue side, this means generating more tax revenues through tax reform and stronger tax administration. On the expenditure side, it means deeper cuts overall in government spending and a restructuring of spending by cutting producer subsidies, increasing cost recovery on public services, and focussing government-financed investment on social overhead (infrastructure, human capital, research) while increasing social spending (welfare programs for the poor, health. education). However, this is easier said than done, and more difficult, done efficiently. The challenge is not only to cut the fiscal deficit, but to improve the allocative and redistributive efficiency of government resources. Without efficiency and effectiveness gains, fiscal stabilization may translate in unnecessary social stress, which may endanger the sustainability of the stabilization effort and/or excessive taxation, which in turn will hamper economic recovery. In addition to sectoral reform of the tax regime and administration, the success of the formulation and implementation of appropriate fiscal policies is dependent, to a very substantial extent, on the effectiveness of the fiscal management. And therein lies another problem. Despite progress since 1992, Russia has yet to develop a style of fiscal management appropriate to a market environment where prices are free and money has a price. Slowly, budgets are being transformed from simple annexes for activities defined by Gosplan in the economic plan to policy instruments for the federal and subnational governments. But the past has not yet relinquished its hold. The budgeting practices, controls, information flows, reporting, and auditing systems inherited from the Soviet Union are inadequate to their resource allocation role in a market economy, especially under conditions of considerable uncertainty. Compounding the economic uncertainty and intensifying the shortcomings of fiscal management at all levels of government were the 5 The same argument was made in the World Bank Country Economic Memorandum for the Russian Federation. Country Economic Memorandum. Towards Medium-Term Viability. ibid. 8 major institutional changes brought by the political and economic transition (decentralization of responsibilities to the subnational governments, redefinition of the roles of the executive and legislative branches of government, the line ministries, and the banking sector). The role of the budget in the former Soviet Union In the former Soviet Union the budget was subordinate to the economic plan. It was a simple accounting statement showing how state agencies were to finance the allocation of resources detailed in the economic plan for the entire economy. Because the budget was dictated by the plan, budget classifications were based primarily on each branch of the economy matching the sectors of the national plan. The planning authorities made the essential resource assignments, usually based on extensive negotiations across sectors and levels of government, while the parallel Communist Party apparatus made the decisions of a more political nature and effected the most important reconciliations in resource allocationi. Each level of government -- the Union, republics, oblasts, and rayons -- had its own budget, giving the appearance of a decentralized system with each government assigned exclusive responsibilities according to basic public finance theory. Each level of government had a representative body or soviet that, in theory, discussed and approved the budget at its government level, and negotiated its revenue sharing and expenditure level with the immediately higher level of government. In reality, however, the process was almost a formality, and budget officials outside of Gosplan of Moscow were mere agents of Gosplan's centralized orders. Because the local authorities had very limited discretionary power over budget composition or implementation, budgets did not really reflect the preferences of citizens residing in the jurisdiction, and local authorities did not feel accountable to those citizens. The efficiency losses associated with the lack of representation (and manifested in the form of prestige projects mandated from Moscow) may have accounted for a significant dissipation of resources. The role of the budget in a market economy and democratic political system In a market-oriented economy, the budget is the most important tool for achieving national priorities and goals through the allocation and distribution of resources, and the maintenance of a stable macroeconomic environment. In a democratic society these priorities represent the collective will of citizens, as interpreted by their political representatives -- who may be voted from office for failing to properly interpret individual and collective interests. In an ideal democratic and market-oriented setting, therefore, budgets represent the collective preferences for the allocation of resources to the provision of public services. Usually in practice, pressures and influences from competing lobbies and interest groups are an important and integral part of the process. While economic and political transformation in Russia is driving budget reforms at the federal, oblast, and rayon levels of government, the system has not yet changed enough to allow budgets to perform their essential functions in a modern market economy and to become an instrument of government accountability to its citizens. On the economic side, three fundamental changes are forcing a reshaping of the role of the budget: the reliance on market mechanisms for the allocation of resources throughout the economy; the steadily growing understanding that most enterprises are not an inherent part of the public sector and that enterprises should be able to manage themselves, with government playing a minor role; and the 9 awareness that inflation presents a severely destabilizing risk to the economy, giving government a critical role in macroeconomic policy and making the budget an important tool for achieving stabilization. On the political side, the budget process needs to adapt to the radical transformation that is unfolding in the division of powers between federal and subnational governments and between the executive and legislative branches of government at each level. Another challenge is to reign in expenditure decisions that remain outside the formal budget process at the federal and subnational levels. Because of the radical differences in the functions of the budget under central planning and market economies, the absence of people trained in most areas of fiscal management is also holding back reform of the budget process. At the budget preparation stage, there are severe deficiencies of staff trained in macroeconomic and sectoral quantitative analysis in modern expenditure appraisal techniques. At the implemenitation stage, the lack of adequate mechanisms for expenditure compliance, control, money saving, accounting, and reporting, is a severe impediment. And there is virtually no evaluation tradition for verifying that objectives have been achieved or identifying the changes needed to reach them. The old budget system focused on the correctness of fund appropriations and ignored the efficiency of public expenditures. Old procedures need to be reformulated for the new environment, and new procedures appropriate to a market economy need to be introduced (such as procurement and contracting procedures with private suppliers). Institutional difficulties of a system in transition The combination of rapidly evolving institutional, administrative, and political environments and a concurrenitly, but not always synchronously evolving budgetary process, has often created uncertainty in key areas of budget responsibilities and procedures. This rapid process of change is expected to continue over the next several years as obsolete institutions are replaced by institutions more relevant to a market economy and a democratic polity. The resultant uncertainty is evident on several fronts. A new view of the state's role in economic activity is emerging, but there is still confusion regarding the boundary between the public and private sectors. One underlying difficulty is an intermingling of functions that leaves the budgetary sphere undefined. For example, the exact composition of the "budget sphere" has become fuzzy. Large enterprises still perform functions that in a market economy are considered budgetary (maintenance of schools and clinics, provision of basic infrastructure and subsidized housing), while budgetary institutions are often involved in functions that are private in nature (some large ministries are really holding companies for groups of enterprises, and large ministries like defense have numerous enterprises in their portfolios). Rapid privatization of state enterprises is the critical step that will help clarify the role of the budget. But the de-linking of state activities from market activities is proceeding slowly because of the fear of massive unemployment and the difficulties local governments would experience in taking over the social responsibilities of state enterprises. This desire to protect employment and the tax base has led to "reverse privatization," with governments getting involved in joint ventures with private companies without a clear vision of the limits of public sector responsibilities. In recent years, the boundaries of the public sector have been shrinking in all parts of the world, though their exact dimensions vary by country. Like any other society, Russia will have to decide how to organize itself, but it is inevitable that the role of the public sector will continue to shrink. 10 Two other broad realignments of power and responsibility are also contributing to uncertainty. One is the shift in the balance of power between the legislature and the executive, with the legislature exercising independent powers that it never had before. The second is the shift in the assignment of expenditure responsibilities and taxes from the central government to local governments. The shift to a more decentralized form of government is unmistakable, but it has been a haphazard process, that resulted in increased vertical and horizontal imbalances. The roles of the Ministries of Finance and the Economy have also begun to realign themselves towards the respective roles of these ministries in market economies. The MoE (the former Gosplan) has gone from being the prime allocator of resources in the economy under central planning to an important but secondary role in this process. Though still nominally in charge of macroeconomic planning, the Ministry has found this role increasingly difficult to fulfill in the current climate of great uncertainty and volatility. Its role in developing investment plans is also shrinking as the resources available for investment diminish, and many capital investment responsibilities are transferred to subnational governments. Conversely, the Ministry of Economy has found a new and important role in the area of structural reforms. The Ministry of Finance has meanwhile emerged from its role as an auxilliary in the planning process to become the prime allocator of resources in the economy through the budget and as the main macroeconomic manager. These added responsibilities, unaccompanied by adequate instruments to fulfill them, have made it more difficult for the Ministry to concentrate on the budget process itself. Still, budget preparation and fiscal control will have to play a critical role in macroeconomic management. There have also been changes within the Ministry of Finance. In a stable planning environment, the Budget Department responsible for preparing the budget derived its importance from being the financial adjunct of the plan. In the current, rapidly changing environment, however, the budget's role in resource allocation has been downgraded in favor of its role in securing macroeconomic stability. Moreover, because of the volatility in economic condition, and the lack of political consensus, budgets have been prepared on a quarterly basis only during 1992-93, with frequent adjustments. In any case, budget appropriations become increasingly irrelevant in conditions of high inflation. As a consequence of these developments, the Budget Execution Department, with its new Treasury Department, has grown in importance. The economic and political transitions impose adjustment costs of their own, whose burden inevitably falls on public budgets. These temporary transition issues require as much attention as (if not more) that demanded by longer-term reform issues. Sorting out the priorities and establishing a hierarchy for reform has further contributed to the confusion, as the need to deal with to short-run pressures and demands drains attention from systemic problems and issues. The impact of the transition on subnational governments The confusion is even more pronounced at the subnational government level. The most important change here is that these governments have won some degree of true budgetary autonomy, but this has 11 come with additional responsibilities. Basic laws on local self-government, budgets, and taxation principles have been enacted, but not all have been implemented and changes and revisions are frequent. 6 In addition to the confusion, subnational governments are also feeling the squeeze from rising costs and expenditure responsibilities on one side, and changing rules on tax sharing and limited scope for raising local taxes and service charges on the other. At the same time subnational governments have to work within a hard budget constraint, no longer able to run deficits that would be financed by higher government levels. Budget delays and uncertainties at the federal level have forced subnational governments to work with interim budgets, making program planning and expenditure control almost impossible. These pressures have made fiscal management all the more important for subnational governments.7 A positive by-product of the confusion of the transition has been to force many subnational governments, as well as the federal government, to seek new sources of savings (such as privatization of the management of such services as parks, sports stadiums, and cultural facilities) and to rely more on cost recovery through user charges. More generally, the fiscal stress associated with the transition is forcing governments at all levels to introduce new budgeting techniques. Outline of the Report This report documents and analyzes the shortcomings of the current fiscal situation in Russia and, drawing on international experiences, suggests options for reforms. It emphasizes the management aspects of fiscal policy; the principles, organization, systems, methods, techniques, and administrative rules that govern the budget process and its outcome in terms of financial stability, allocative efficiency, and redistributive impacts. These "rules of the game" define fiscal relations among levels of government and at each stage of the budget process from formulation to execution and evaluation. These rules of the game cannot replace political decision making. Their function is to help decision-making and to ensure that decisions are executed as efficiently as possible. When the most important instrument of economic and financial-policy is inadequate, however, the outcome is likely to be wasted resources, protracted inflation, and delayed economic recovery. Before examining each stage of the budget process at each level of government and the changing fiscal relations among levels of government, it is important to know which level of government is responsible for which expenditures, how revenues are divided, and what are the incentives and outcome the system gczierates. Chapter 2 reviews the trends in central-regional shares of government expenditurcs and revenues since 1991 and the pattern of expenditures and taxes across regions. Special attention is given to the redistributive properties of Russia's system of intergovernmental transfers. The chapter identifies the constraints and tradeoffs involved in designing a system of intergovernmental relations conducive to good fiscal management and outlines the elements of a reform to further streamline the current system. 6 The Law on the Principles of Budgetary Rights of April 15, 1993; The Law on the Rights of Local Self-Government, 1992; The Law on the Basic Principles of the Budget System and Budgetary Process, 1992; The Law on the Basic Principles of Taxation, 1992; and The Law on the Special Status of the Capital of the Russian Federation, 1993. 7 See C. Wallich. "Fiscal Decentralization in Russia," in Studies of Economies in Transformation 6, World Bank, 1992. 12 Chapter 3 deals with budget formulation. The first step toward better budgeting practices is to apply the principles of integrality and universality to government finance. This means simply that all government's financial flows should be included in the budget document. The budget document should also include more information and analysis to help decision makers. As regards budget preparation, in addition to strengthening macro and sectoral quantitative analysis, there is a need to introduce modern expenditure appraisal techniques, to progressively introduce performance budgeting, and to organize and foster competition for government resources. Withi respect to the adoption of the budget law, the major progress accomplished since 1993 should be continued, and in particular parliamentary initiative should be streamlined. Chapter 4 reviews the shortcomings of budget execution and reporting. It addresses the practice of sequestering, the lack of expenditure controls and management, and the resulting lack of compliance and accumulation of arrears. It also highlights the absence of money-saving practices and the shortcomings of reporting and information systems that damage the credibility of the government as well as being costly in monetary terms. The lack of good information flows, accounting systems, and timely and detailed reporting is a major handicap for the introduction of modern budgeting practices, which make heavy demands on data and analysis. Chapter 5 deals with audit and evaluation functions, including administrative (internal) audits and the legislative (external) audits that are to be conducted by the newly created Accounts Chamber. Both types of audits need to be refocussed, and traditional audits, which concentrated on misappropriation or embezzlement, should be complemented by performance audits that focus on efficiency and effectiveness. The results of such audits should feed back into budget preparation, where they could make an important contribution to better fiscal management. Chapter 2 Intergovernmental Fiscal Relations Decentralization has profoundly transformed the fiscal landscape in Russia. The question is whether the way fiscal decentralization has been implemented is conducive to good fiscal management. From an economic (and fiscal) standpoint, decentralization in itself is neither good nor bad. If accompanied by increased accountability, decentralization may provide substantial benefits in terms of public sector efficiency. If poorly conceived, it can result in financial instability, waste of resources, and social inequities. With respect to fiscal management, the central questions of fiscal federalism are how expenditures and revenues are distributed among levels of government and what incentives this system generate. The political and administrative organization of fiscal federalism in Russia is a unique blend of de jure federative organization and de facto elements of a confederation and of a unitary state, an organizational blend that reflects the country's size, diversity, and Soviet legacy. Russia's subnational governments consists of "subjects of the federation" that have very different administrative and political status. The Russian Federation is made up of 89 regions consisting of 21 republics, 50 oblasts, 6 krais (native lands), and 10 autonomous okrugs, plus 2 metropolitan cities (Moscow and St. Petersburg) that are referred to collectively and officially as the 89 "subjects of the federation." The regions are further subdivided into more than 2,000 districts (municipalities and rayons). All local governments within a region report to the regional government and are subject to regional regulations, though each local government has independent budgetary and administrative status. The law on the fundamentals of budget organization and budget process of October 1991 layouts the principles of interbudgetary relations in Russia. By establishing the independence of the budgets of all level of government, this law broke with the previous unitary fiscal system. Fiscal independence of the regional and local governments is to be ensured by the availability of their own revenue sources and by their right to decide freely how to spend their revenues. In the context of a changing political system, the evolution of intergovernmental fiscal and economic relations has been a rapid and somewhat chaotic decentralization of fiscal and economic responsibilities through successive waves of tax sharing arrangements (usually promoted by the regions and the legislative branch) accompanied (or followed) by increased expenditure responsibilities for the regions (usually promoted by the federal government). The new constitution of December 1993, helped to clarify and stabilize the system of intergovernmental relations, and major improvements were achieved in 1994. But more remains to be done to design a system cf intergovernmental fiscal relations conducive to good fiscal management. Regional Revenues Between 1992 and 1994 the total budgetary revenues of the regions increased from 14.6 percent of GDP to 17.5 percent while those of the federal government declined from 16 percent of GDP to 12.7 percent in 1994 (table 2.1). As a result, the share of regional revenues in the consolidated "official" budget (which excludes off-budget operations) increased from 50.7 percent in 1992 to 65.7 percent in 1994. 13 14 Table 2.1: Regional Revenues, 1992 - 94 (percentage of GDP and of consolidated national budget) 1992 1994, prelIminly %ofGDP % of GDP % of GDP Item Consol. Region. Share of Consol. Region. Share of Consol. Region. Share of Budget Budget Region. Budget Budget Region. Budget Budget RegioQ. Consolid. Consolid. Consolid. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ :__ _ _ _ _ (% ) _ _ _ _ _ (% ) Total revenues 28.78 14.61 50.7 26.82 17.66 65.8 26.7 17.54 65.7 Profit taxes 8.68 5.10 58.8 10.33 6.96 67.4 7.75 5.03 64.9 VAT 11.07 2.76 24.9 6.94 2.48 35.7 6.83 2.39 35.0 Excises 1.17 0.61 52.5 1.09 0.54 49.6 1.18 0.47 40.0 Sales tax 0.03 0.03 100.0 n.a. n.a. n.a. n.a. n.a. n.a. Personal income tax 2.39 2.39 100.0 2.70 2.70 100.0 2.78 2.76 99.3 Property tax 0.30 0.30 100.0 0.34 0.34 100.0 0.77 0.77 100.0 Foreign economic activity 2.07 0.04 2.1 1.27 0.06 4.4 3.52 0.03 0.8 Payments for the use of nat. resour. 0.61 0.61 100.0 0.52 0.37 70.6 0.38 0.32 84.3 Land tax 0.39 0.30 76.1 0.19 0.17 86.8 0.26 0.25 93.3 Government duties n.a. n.a. n.a. 0.08 0.06 71.5 0.05 0.03 61.7 Other tax and non-tax revenue 2.09 0.72 34.6 3.37 1.30 38.4 3.11 1.99 64.0 o/w: reevaluation of stock 0.24 0.06 23.1 n.a. n.a. n.a. n.a. n.a. n.a. privatization revenues 0.34 0.24 69.7 0.20 0.16 79.2 0.12 0.10 84.5 Intergovernmental transfers' 0 1.74 n.a. 0 2.69 n.a. 0 3.50 n.a. Memo item: GDP (billion rubles) 18,064 162,300 630,000 a Intergovernmental transfers cancel out in the consolidated budget. The regions' own revenues make up the bulk of these revenues.' Own-revenues increased from 13.4 percent of GDP in 1992 to 15 percent in 1993 before decreasing to about 14 percent in 1994. This relative decline in own-revenues between 1993 and 1994 was compensated for by increased federal transfers, which rose from 1.74 percent of GDP in 1992 to 2.7 percent in 1993 and 3.5 percent in 1994 (see figure 2.1). I Own revenues refers here to the regional budget revenues before federal transfers. They therefore include both revenues that accrue entirely to the regional and local levels of government and the regional part of revenues shared with the federal govermnent (e.g., VAT). 15 Tax sharing The taxes and fees accruing to the ofe taxesachlevel ofageruinmnto ae Rusian Federation: Structure of Regional Budget budgets of each level of govemment are Revenue (billions of 1991 rubles) determined by federal law. The first law on 2000 basic principles of taxation was adopted in 0.0 _ _ | _ December 1991 and has been amended several 0oo -- - |_ - --- I - - times since.2 A new version of the law has 1400 _ _ _ _ _ been discussed in the Duma since December 120.0 1994 and should be adopted in the course of 0_0 1995. As in previous versions, the latter 600 clearly specifies the federal, regional and local J0 _* taxes and fees (see box 2.1). Within this 200 menu of tax options available to them, the . regional and local governments can decide 1991 1992 1993 1994 whether to introduce specific taxes and can set OTotal Reven *Own Reven EFederal Transf the rates up to the maximum established by federal law. All taxes are collected by the federal State Tax Service. The law specifies that any taxes not included in the list are Figure 2.1 illegal. However, this provision seems to 0 contradict a presidential decree of December 22, 1993, authorizing subnational govermnents to introduce new taxes and fees in addition to those provided by the legislation of the Russian Federation, provided t.hat they do not affect the base of the federal taxes. What happens in practice at the regional and local level is unclear. Subnational governments can easily avoid this apparent contradiction by channeling additional taxes through their local extrabudgetary funds. Although subnational levels of government were assigned a large number of taxes and fees, most of their revenue comes from four taxes: the profit tax, the value added tax (VAT), the personal income tax, and excise taxes. These taxes accounted for 85 percent of the revenues of the regions (before federal transfers) between 1992 and 1994. The share fell to 76 percent in 1994, with the partial recentralization of revenues from the profit tax and the VAT and the improved yield of local tax and nontax revenues (property tax, land tax) during the year. The recentralization of major taxes continued in 1995, with 10 percent of the revenues from the personal income tax slated to accrue to the federal budget. Because of the difficulties in moving quickly from an inherited system of intergovernmental "shared" taxes to one of pure tax assignment, the tax assignment system of the 1991 law on basic principles of taxation was never implemented. Beginning in the first quarter of 1992, the law was superseded by tax-sharing arrangements for the major taxes, with the sharing rates determined by successive budget laws (see annex 2). 2 For the details of this law, see C. Wallich: 'Fiscal Decentralization in Russia'; ibid. 16 Box 2.1: Taxes and Fees by Level of Government According to the New 1995 Draft Law on Basic Pinciples of Taxation (after second reading) Federal Taxes * value added tax * excises on selected goods and mineral resources * federal corporate profit:(income) tax * taxes, associated with natural resources utilization (except land) * personal income tax * sales tax on fuels and lubricants * tax on road users * tax on motor vehicle owners * custom duties. Fees 0 state duty * federal license and registration fees * custom fees * license fees. Regional Taxes * regional corporate profit (income) tax * corporate property tax * the regional government are granted the right to introduce new taxes based on the enterprises' wage bill, up to a limit of 2% of the wage bill. Budget institutions are exempted. General principles of introduction and levying of regional taxes in italics are set by federal laws. Fees * regional license and registration fees. (set by federal authorities) Local Taxes L Iand tax * personal property tmx * inheritance and git tax for individuals * the local govemments are granted the right to introduce new local taxes based on the ..enterprises' wage bill for legal entities and individuals. For legal entities the maximum consolidated rate of these new taxes is defined as 5% of the wage bill and for individuals, as 12 minimum wages, Budget organizations are exempted. General principles of introduction and levying of local taxes in italics are set by federal laws. Fees S resort fee * hotel fee * local license and registration fees. (set by federal authorities) Comment: Land tax and wage tax payments are profit tax deductible. Tax sharing arrangements between federal and regional levels of government changed frequently throughout 1992 and then stabilized somewhat (table 2.2). Two changes merit special mention. One was the partial reversal in 1994 of the trend toward an increasing share for the regions in 1992-93. Another 17 was the discontinuation of the practice of adjusting VAT rates across the regions as a means of "regulating" regional revenues. This practice, inherited from the Soviet Union, fostered bargaining and negotiations. It was replaced in 1994 by a uniforrn tax-sharing rate and a formula for federal equalization transfers, a major improvement. Table 2.2: Regulatory Sharing Rates of Major Taxes in the Russian Federation (percent of total) Basic Princ. 1992, Ql 1992, 1993 1994, Ql 1994, Q2-Q4 1995 Fed. Reg. Fed. Reg. Fed. Reg. Fed. Reg. Fed. Reg. Fed. Reg. Fed. Reg. VAT 100 0 ad hoc negot. 80 20 80-50 20- 50 75' 25 75' 25 75 25 Profit Tax 0 100 47 53 41 59 31 69 37-34" 63-66" 37-34b 63-66" 37c 63- Personal income tax 0 100 0 100 0 100 0 100 0 100 1 99 10 90 Excise on alcohol 50 50 50 50 50 50 50 50 50 50 50 50 50 50 Energy excises . ... 100 0 100 0 100 0 100 0 100 0 1o0 0 Excises on imports ... .. n.a. n.a. n.a. n.a. n.a. n.a. 100 0 100 0 100 0 Excises on domestic ... .. n.a. n.a. n.a. n.a. n.a. n.a. 0 100 0 100 0 100 productions === I a. VAT on domestic goods and services. Starting July I, 1994, 22 percent of VAT receipts accruing to the federal governmentare earmarked for the "Fund for Regional Support (FRS)". b. The federal profit tax rate is 13 percent; regional profit tax rates range between 22 and 25 percent of profits. The resulting sharing percentages are calculated based on the 13/22 and 13/25 profit tax range. c. According to the 1995 Budget Law, regions can tax enterprise profits at a rate "not higher than 22 percent of profit." This highest rate was applied to calculate the profit tax sharing in 1995. Special regimes and lack of compliance The above tax-sharing arrangements do not apply to a number of regions. In addition to the Chechen Republic which virtually seceded in 1992, the republic of Karelia and the three resource-rich ethnic republics of Bashkortostan, Yakutia, and Tartarstan benefitted from special regimes. The last three mineral-rich republics unilaterally declared fiscal sovereignty and benefit from special fiscal regime (the so-called "single channel" arrangements) by which these regions retain all revenues from the taxes collected on their territory and transfer a fixed (negotiated) amount each month to the federal budget. The Ingush Republic was virtually exempted from paying taxes to the federal level under the so-called economic free trade zone. These special agreements reflect political realities and compromises. They were forced on the federal governmnent by the republics and have not been sanctioned by Parliament. Although the amount of taxes transferred to the federal budget is negotiated, in fact the regional governments largely determined how much they will transfer and may even withhold payment to Moscow altogether.3 Indeed, the withholding of federal tax revenues by the regions has been a recurrent problem since 1992. Many regions have calculated on their own the amount of federal transfers to which they are entitled, and then 3 According to the analytical center under the President of the Russian Federation, in 1994, (i) the republic of Sakha paid no taxes to the federal budget, (ii) the republic of Karelia kept up to 90 percent of all taxes collected on its territory; and (iii) the republics of Tatarstan and Bashkortostan paid no taxes during the first half of the year. 18 simply withhold their VAT revenues rather than waiting for transfers from Moscow. Some regions have withheld tax revenues from the center when the federal government failed to comply with a commitment (say, by delaying transfers) or to cover unfunded mandates from the federal government (such as increased wages of civil servants and employees of budget-supported organizations). This problem of compliance reflects the lack of trust by the local authorities that federal commitments for funding will be honored, weak fiscal discipline of the federal and regional governments and the lack of clarity in expenditure assignments among levels of government. Helping to make this noncompliance work is the dual allegiance of the tax administration. Although oblast-level finance departments are autonomous by law, finance and tax officers are paid by the central government, a practice consistent with the fact that all budget taxes and fees at all levels of government are determined at the federal level. In practice, however, tax collectors and regional finance officials are subject to a dual allegiance. While their salary comes from the federal government, their wage bonuses, housing, and other fringe benefits are usually provided by the regional governments. Regional finance officers and tax administrators may feel competing loyalties to the center and to the oblast. This dual allegiance causes an obvious conflict of interest. Regional interests often win out, as the practice of the single-channel arrangements and the withholding of the federal tax share by regions demonstrate. Revenue disparities among regions The decentralization of the tax base between 1991 and 1993 resulted in higher budget revenues for the regions as a whole, but lower revenues for the majority of the reEions. In 1993 only 35 regions had own-revenues higher than they had been in 1991, though these 35 regions account for 62.5 percent of the Russian population. The increases were particularly striking for a few usually mineral-rich regions.4 In the remaining 52 regions, own-revenues declined in real terms. In 16 regions per capita budget revenues were halved or more.5 These 16 regions represent only 4 percent of the country's population and 14 of them are either republics or autonomous okrugs. The disparities in per capita own-revenues across the regions are enormous, and they generally reflect underlying economic disparities.6 The coefficient of variation of regional per capita budget revenues increased significantly from 0.6 to 0.9 between 1991 and 1992, before declining to 0.7 in 1993 (table 2.3). Much of the decline in revenue disparities between 1992 and 1993 is explained by the sharp drop (from 0.9 to 0.6) in the coefficient of variation of regional per capita VAT revenues. VAT sharing rates were used during 1993 to equalize regional revenues. The share of VAT revenues accruing to the regional budgets in 1993 varied from 20 to 50 percent, depending on the level of the regions overall own- revenues (see table 2.2). Despite this equalization through adjustments in the VAT sharing rates in 1993. per capita revenues were 27 times higher in the wealthiest region, the Yamalo-Nemetskiy autonomous okrug, than in the poorest region, the Dagestan Republic (the gap is even wider in real terms). 4 Own revenues increased by 146 percent between 1991 and 1993 in Kanty-Mansiyski, by 137 percent in the Moskovskaya oblast. by 120 percent in the Bashkortostan Republic, and by 111 percent in the Tatarstan Republic. 5 These regions are: the Aginskiy Buryatskiy autonomous okrug (AO), the Chukotskiy AO, the Dagestan republic, the Evenkiyski AO, the Gomy-Altai republic, the Kabardino-Balkar republic, the Kalniikiya republic, the Komi-Permyatski AO, the Koryaksky AO, the Magadanskaya oblast, the Nemetskiy AO, the North Ossetian republic, the Shakhalinskaya oblast, the Tuva republic, the Ust'-Ordynskiy Buryatsk AO and the Yevereyskaya AO. 6 For a more detailed discussion, see P. Le Houerou, Decentralization and Fiscal Disparities among Regions in the Russian Federation"; World Bank, IDP No 138, January 1994. 19 Table 2.3: Disparities in per Capita Regional Budget Revenues, 1992-93 (current Overall revenue per capita Of which: (th. rubles) Propctty tax VAT Excises Profit tax Income tax Other revenue t91|19 93 1Y 931991 9r 19 1 1993 92 1 19.93 1992 1 1993 _M7 I9 Standard deviation 0.75 13.41 99.98 0.33 3.16 2.98 15.73 0.50 4.33 3.83 38.35 2.77 24.50 5.51 34.43 Maximum 4.48 89.92 565.26 2.42 23.24 18.41 83.72 2.70 30.85 20.57 201.02 16.41 155.56 47.13 252.91 Minimum 0.53 2.49 20.97 0.05 0.29 0.40 2.87 0.002 0.04 0.37 3.31 0.49 4.83 0.29 2.24 Range 3.95 87.43 544.29 2.37 22.95 18.01 80.85 2.70 30.81 20.21 197.71 15.92 150.73 46.84 250.67 Average 1.21 15.10 149.83 0.34 3.43 3.33 26.10 0.63 4.74 5.28 62.09 3.27 31.77 2.26 21.82 Coefficient of variation 0.61 0.89 0.67 0.97 0.92 0.90 0.60 0.79 0.91 0.73 0.62 0.85 0.77 2.43 1.58 Weighted average 1.06 15.4 163.6 0.4 3.7 3.4 27.3 0.8 6.0 6.2 76.9 2.9 29.9 1.8 19.8 Noie: ExCl. privat. proceed / Source: Muustry of Finance, staff caloulations. Federal transfers The growing share of regional spending has been accompanied by an increasing deficit in pre- transfer regional budget balances and by an increase in federal budget transfers to regional governments. The consolidated pre-transfer regional budget balance shifted from a snmall surplus in 1992 to a deficit that widened from 2 percent of GDP in 1993 to 3.5 percent in 1994 (see table 2.4). Total explicit federal transfers to the regions increased from 1.7 percent of GDP in 1992 to 3.5 percent in 1994, or from 12 percent to 20 percent of total regional revenues. Table 2.4: Federal Transfers to the Regions in 1992-94 and Budget Planfor 1995 (percentage of GDP) Actual |Acual | Prelim. Plan ' . g~~~~~~~~~~~~~~~~~~~~~~~~~992 1993 1994 1994 1 i99S5 Total Federal Transfers 1.75 2.71 3.50 3.72 2.18 A. General Transfers (Equalization fund) 0.79 0.69 0.77 1.64 1.14 1. Subventions 0.79 0.69 0.42 ... 2. Federal fund for fin. support of territories ... ... 0.36 1.64 1.14 B. Targeted Transfers 0.87 1.97 2.69 2.08 1.04 1. Mutual settlementsb 0.87 1.95 2.60 ... ... 2. 'Closed cities" ... 0.02 0.09 0.08 0.08 - Mutual settlements with the "closed cities" ... 0.00 0.00 - Subventions to the "closed cities" ... 0.02 0.05 0.08 0.08 - Subsidies transferred to the regional budgets for the "closed cities" ... 0.04 ... ... 3. Subventions to Moscow City as a country capital ... ... ... 0.38 0.15 4. Subventions to other special towns (Sochi and Leninsk) ... ... ... ... 0.02 5. State support of shipment of goods to the Far North and other remote territories ... ... ... 0.89 0.34 6. Financing of social-cultural objects and housing transferred to local budgets in 1994 ... ... ... 0.56 0.33 7. Federal programs of regional development (Development fund) ... ... ... 0.17 0.13 C. Short-term loans 0.10 0.05 0.03 ... ... Memo item: GDP (billion rubles) 18,064 162,300 630,000 725,000 1,306,850 Sources: Ministry of Finance and staff estimates. 1994 as per the October 1994 draft budget; 1995, as per budget law passed by Federal Duma on March 15, 1995. 'Mutual Settlements" is a budget execution item. It regroups all targeted transfers shown in the budget law - with the exception of transfers to closed cities - as well as (unbudgeted) funded federal mandates that arise during the year. 20 The system of intergovernmental relations set in place in early 1992 did not take into account regional differences in revenue capacity or spending needs or the need for federal transfers and equalization. The principle of independence of budgets at all levels of government enshrined in the basic budget law of October 1991, ended the reliance of lower levels of government on higher levels to automatically finance deficits incurred in implementing agreed programs. It also ended the practice of transferring surpluses to the next higher level of government. As it became evident during the course of 1992 that the economic and tax revenue base in some regions was too weak to finance their expenditure responsibilities, the federal government resumed its old practice of providing federal transfers to the regions. The share of VAT revenues that the regions could withhold and the amount of explicit federal transfers they would obtain were both negotiated with the federal government on an ad hoc basis. The increase in federal transfers was accompanied by an attempt to rationalize them in 1994. The establishment of the formula-based Federal Fund for Financial Support to regional governments in 1994 represented a welcome change toward more transparent mechanisms for grant allocation. However, the overall system of federal transfers to the regions is multi-channeled, and the criteria of distribution are, in general, non-transparent. The equalization fund accounted for only 22 peicent of federal budget transfers to the regions in 1994; with specific transfers and short-term credits aLcounting for the rest (see table 2.4). Federal transfers also take place off-budget through the national extrabudgetary funds. General transfers. The Federal Fund for Financial Support, introduced in July 1994, replaced the general subventions to the regions that, together with variable VAT revenue sharing rates, had been intended to equalize revenues across regions. Unlike the general subventions, the revenues of the Federal Fund are clearly determined and their distribution is governed by a formula. The funds resources are limited to 22 percent (raised to 27 percent in 1995) of the VAT revenues (except those on imports and precious metals) accruing to the federal budget. The funds resources are allocated through two "windows," one for "needy" regions and one for "very needy" regions. In 1994, 76.5 percent of the fund was distributed to needy regions and 23.5 percent to very needy regions. Needy regions are defined as regions with per capita budget revenues below 95 percent of the country's average. Transfers are distributed among the needy regions in inverse proportion to their per capita revenues, corrected by a ratio representing the per capita current expenditure level of the 12 economic regions of the federation relative to the national average (see annex 3 for the exact formulas used to determine allocations). In 1994, 59 regions benefited from these transfers. Very needy regions are defined as regions in deficit in the base year (calculated after transfers to needy regions). Thus "very needy" regions are not necessarily "needy" since regions that are in deficit are eligible for transfers from the second window even if their per capita revenues are above the national average. In 1994, 7 oblasts and krais with above average per capita budget revenues received 66 percent of total transfers to the 23 very needy regions. Indeed, one oblast, Keinerovo, received just under 47 percent of all funds distributed to very needy regions. The idea behind these transfers is to compensate regions that are under particularly severe fiscal stress, but the formula used to capture fiscal stress is flawed in that it favors the status quo (the situation prevailing in the base year, 1993). Federal equalization transfers are also effected through extrabudgetary funds such as the federal road fund, the employment fund, and the smaller ecological fund and medical insurance fund. The rules governing these transfers are fuzzy. Some of the problems with this system are illustrated by the employment fund. First, the federal government has little of the 2 percent payroll tax to redistribute; the 21 federal government keeps just 10 percent of the tax; local and regional governments each get a 45 percent share. Second, most of the resources of the employment fund go not to unemployment benefits but to subsidize enterprise wages or investments (to maintain or create employment). What this means is that relatively rich regions with low unemployment will accumulate surpluses -- or spend more on subsidies and investments in production sectors -- while the relatively poor regions with high unemployment may accumulate deficits too large for the local employment fund to cover. Specific transfers and short-termn credits. Since 1992, specific transfers have accounted for the major -- and increasing -- part of federal grants to the regions (table 2.4). They represented 2.7 percent of GDP in 1994. The bulk of these specific transfers are concentrated in the "mutual settlements" category, which includes a mixed bag of transfers. Although completely nontransparent (there are no details), most of the transfers under "mutual settlements" represents (partly) funded mandates, such as many presidential or governmental resolutions on wages increases, divestiture of enterprises' social assets (see box 2.2), and development measures aimed at particular regions. Also included is compenisation for costs incurred by subnational budgets for "vital" purposes, (such as hospitals), but these transfers have to be negotiated individually with the Ministry of Finance during the year. Box 2.2: Compensating Regions Expenditures Associated with Enterprises' Divestiture of Social Assets Since 1994, Regional authorities have been allowed to petition for federal budgct transfers to compensate them for expenditures associated with enterprises' divestiture of social assets. To claim these transfers, regional authorities must submit an application to the social sector departments of the MoF, listing all costs and revenues concerning the divestiture, brokenl down by every divested house, kindergarten, and so on. The bulk of the claims (about 95 percent) have been associated with the divestiture of the housing stock. First, the departments of the MoF recalculate the bills attached to the claims according to unified standards used for the whole country, which are usually lower than those used by the regions. As a result, the MoF will generally substantially reduce the ruble value of the claims. In 1994, total initial claims were reduced by 33 percent. Second, the department looks for regional sources to raise revenues: commercial use of a part of the divested asset, 1.5 percent tax imposed on legal entities to support social sphere, and the like. In 1994, this led to an additional cut of about 10 percent. Third, the amount of the transfers are negotiated within the MoF with a view to the final amount of money the budget can afford. In 1994, only 44.5 percent of approved claims were included in the budget. After budget approval by the legislative, an order for money disbursement is forwarded to the Treasury. Treasury usually sequesters most expendliture items (only about 70 percent of planned expenditures on the federal budget in 1994 are estimated to be actually disbursed). It is estimated that sequestering in 1994 reduced the amount approved for social asset divestiture by less than 15 percent. In the end, only about one- quarter of the initial claims submitted to the Ministry of Finance by the regions in 1994 were actually satisfied. When money is transferred to the regions, the federal budget has no control over how it is use(I Specific transfers also include grants earmarked for specific cities or areas. For example Moscow benefits from federal transfers to compensate for expenditures associated with its status as the capital city. Other transfers are directed to so-called closed cities servicing nuclear and military installations and to the far north and remote regions to compensate them for high transport costs. However, the criteria used for allocating these transfers are not clearly spelled out in the budget document. 22 The regions also receive short-term credits from the federal budget to compensate for temporary revenue shortfalls. The credits are intended to help the regions finance "protected expenditures" (wages, social spending; see chapter 4). The credits are interest free and are supposed to be repaid within a year. In practice, however, these credits are often written off and included in mutual settlements. Regional Spending Budgetary expenditures by regional governments increased from 13 percent of GDP in 1992 to 17 percent in 1993 and 17.5 percent in 1994. Their share of the consolidated 'official" general governrment budget increased from 36 percent in 1992 to about 50 percent in 1993 and 1994, reflecting in part the shift of expenditure responsibilities from the federal government to the regional governments, but more importantly. the increasing involvement of the regional governmrents in the productive sector. The regions' share of social sector spending (mainly education and health) soared from 66.3 percent in 1992 to more than 80 percent in 1993-94 (table 2.5). The regional share of expenditures under "national economy" also grew enormously from 46.8 percent in 1992 to above 70.6 percent in 1994, reflecting the sharp increase of the region's subsidies and capital transfers to the productive sectors. Table 2. 5: Regional Expenditures, 1992 - 94 (percentages of GDP and of consolidated national budget) 1992 1993 1994, preliminary % ofGDP % ofGDP % of GDP Consol. Regional Share of Consol. Regional Share of Consol. Regional Share of Budget Budget Regional Budget Budget Regional Budget Budget Regional in in in Consolid. Consolid. Consolid. (%) (%) (%) Total 36.12 12.98 35.9 34.14 16.97 49.7 36.91 17.53 47. National economy 11.40 5.34 46.8 10.10 7.30 72.3 10.17 7.18 70.6 Social and cultural activities 8.08 :5.36 66.3 9.45 7.65 80.9 9.64 7.78 80.6 o/w: Education 3.76 2.49 66.2 4.29 3.45 80.5 4.36 3.49 80.0 Health and physical culture 2.59 2.30 88.7 3.32 2.97 89.6 3.13 2.76 88.2 Culture and mass media 0.64 0.31 48.9 0.64 0.43 67.5 0.73 0.47 64.2 Youth policies ... ... ... 0.01 0.01 98.2 0.02 0.02 87.2 Social protection 1.09 0.28 25.4 1.18 0.78 65.8 1.40 1.04 74.3 Chemobyl and Semipalatinsk n.a. n.a. n.a. 0.23 0.00 2.0 0.20 0.00 1.7 Science 0.58 0.02 3.2 0.58 0.03 5.2 0.49 0.02 4.9 Foreign economic activity 3.66 ... ... 0.58 ... ... 0.79 0.04 4.7 Law enforcement and state administration 1.95 0.38 19.6 2.52 0.57 22.7 2.94 0.62 21.2 Other' 8.45 1.60 19.0 10.92 1.42 13.0 12.07 1.82 15.1 Intergovernmental transfers' 0 0.27 n.a. 0 0.00 n.a. 0 0.07 n.a. Memo item: GDP (billion rubles) 18,064 162,300 630,000 a. Including debt service. b. Intergovernmental transfers cancel out when consolidated. Source: Ministry of Finance. 23 Decentralization of expenditure responsibilities The system of expenditure assignment still bears the imprint of the former Soviet system, when responsibilities were predetermined by the assignment of enterprises to various levels of government. The Union budget included activities of national importance, such as transportation and defense. The republics were responsible for light industries (cotton, food industry), and oblasts were responsible for housing, utilities, trade, and public services (health care, primary and secondary education). With the breakup of the Soviet Union, national level activities (defense, foreign affairs, long distance communications, fundamental research) were shifted from the Union to the federal government of Russia. All other types of expenditure responsibilities are sprinkled throughout the budgets of all levels of government. The scale of provision is determined by the benefit-area principle as well as by the relative wealth and political independence of the individual regions. Although expenditure assignmnent are not prescribed in a law, a numbner of central functions were shifted to the regional budgets since early 1992. In early 1992, several expenditures formerly undertaken at the central level were shifted to the regions. These included consumer price subsidies (milk, bread, meat, baby food, and others), cash subsidies for vulnerable groups, welfare programs for pensioners and the disabled, family and child allowances, and support for the homeless. Initially, these subsidies were financed by the central government, through tied transfers to the regions, which in turn disbursed these funds to the rayons. Budget-financed investments were also decentralized beginning in 1992. UJntil then regional governments had no responsibility for capital expenditures except in housing (see box 2.3). The federal government has progressively cut its subsidies to the "productive" sector, including the subsidy-hungry agriculture sector, thereby increasing the demand for subsidies on subnational governments. In 1994, the federal government shifted responsibility for financing vocational technical schools to subnational governments. Box 2.3: Local Government Investment under Central Planning Under central planning, the subnational levels of government had no direct responsibilities for investment, except in housing construction. All requests from subnational governments and agencies were channeled to the line ministries, and Gosplan would put together the investment program. Responsibilities for investment decisions and for maintenance and operation of facilities were in separate hands. Maintenance suffered since local governments had little incentive to maintain capital whose replacement would be a cost only to the central government. Similarly, there was little incentive to use local resources for public investment because any such effort would have simply crowded out financing from the center. Source: P. Le Houerou, Investment Policy in Russia, Studies of Economies in Transformation 17, World Bank, June 1995. The resulting de facto assignment of expenditures among levels of government (see table 2.6) poses a number of problems. The absence of detailed codification of the assignment of expenditure and policy decision responsibilities among levels of government leaves a number of murky areas. One is that the distinction between funded and unfunded mandates is unclear. For example, should the central government set the wages of civil servants, including those working in the regional governments, and should it pay for it? Another is that expenditure responsibilities seem to vary across regions. For example, regions that benefit from special tax regimes are financing expenditures that, in other regions, would be the responsibility of the federal government. Finally, distribution of expenditure responsibilities, even in broad terms, is sometimes at odds with the expenditure assignments in other federations. 24 Tabke 2.6: Assignment of Expenditur Responsibilities in the Russian Federation in 1994 Expenditure Fedu Olasts Rayons Village Soviets Defense I0 percent (except military Military Housing l ________________________ housing) Justice/Internal security I0W percent Foreign economic relations 100 percent Education All university and research All technical and vocational schools Wages, operation construction, institute expenditures and maintenance of all primary and secondary sciools Culture and parks National museums Regional museums Local museums National theater All recurrent expenditures of all Health Medical research institutes Tertary hospitals, psychiatnc secondary Hospitals Paramedics hospitals, veteran hospitals, diagnostic centers, and special service Primary health clinics Roads Construction and maintenance Construction and maintenance of Maintenance of rayon and city innance of federal roads oblast roads roads of commercial roads Public Transportaion (Previously interjunsdictional Most Public transportation facilities Some transportation facilities, highways, air, and rail) (assigned earlier to federal including subway systems government) Fire protection Most fire protection services Voluntary, military, and enterprise services possible at this level Libranes Special rirarnes (for example, Special library services Most local library services the Lenin library) Police services National militia Road (traffic) police Local security police (since 1991) Sanitation Part of garbage Part of (garbage collection) garbage collection Sewage Infrastructure capital invesument Most of the operational Somne expenditures operational expenditures Public utlities Subsidies to enterprises Subsidies to enterprises (gas, electricity, and water) Housing Part of housing construction Part of housing construction Part of housing construction and maintenance Price subsidies Part of food and medicine Fuels, mass transport; food subsidies (bread, milk); medicines Welfare compensation Part central govemment Part oblast govemment responsibility Managing programs funded by responsibility upper-level governments Environment National environmental issues Local environmental problems, (for example, the preservation of forests) Public enterprises Federal investment programs, Subsidies to particular sectors Various explicit and implicit (productive sector) subsidized credits, subsidies to (agriculture) investments, grants, tax subsidies and benefits. I particular sectors (mining, benefits. Source: Update of table on assignment of expenditure responsibilities in "Decentralization of Fiscal Relations in the Russian Federation", World Bank, 1992. 25 Enterprise reform and regional budgets In the Soviet Union enterprises played an important role in providing social assets (nurseries, kindergartens, schools, medical centers, housing, and sometimes infrastructure). As privatization and restructuring occur, these social assets are being shifted to the local budgets. On the face of it, this divestiture of social assets represents an additional fiscal burden for subnational governments. Enterprises reported total spending on social assets amounting to 4.12 percent of GDP in 1992 and 3.3 percent in 1994; housing maintenance accounted for about 40 percent of these expenditures. However, the net fiscal impact of this divestiture of social assets is not clear. Privatized enterprises may not want to get rid of all of their social spending. In many Western countries, enterprises sometimes find it to their advantage to offer social services to their employees (nurseries, on-site medical facility, vacation camps for children, and even housing) as part of the overall compensation package. Furthermore, the net flow of funds associated with divestiture is not necessarily negative for the local budgets. The revenue side of the equation should not be ignored. Enterprise privatization accounted for additional income for subnational governments equivalent to about 0.1 percent of GDP in 1993 and 1994. And because most of the social expenditures of enterprises are deducted from the profit tax base, part of the additional budgetary expenditures associated with the divestiture of social assets is compensated for by higher revenues from the profit tax. In addition, the federal government through the mutual settlements, compensates for part of the additional costs stemming from divestiture as well. Finally, a new local tax of 1.5 percent of enterprise turnover was introduced in 1993 to help subnational governments finance these additional expenditures. Obviously, actual social spending by enterprises is deducted from this tax liability. Table 2.7: Regional Privatization Revenues, 1992-94 (current rubles per capita) 1992 1993 1994 Total Regional Privetzation Revenue 0.24 0.16 0.10 (percent of GDP) Standard deviation 209 1.23 i n.a. Maximum 1,264 7,866 n.a. Minimum 2 179 n.a. Range 1,261 7,687 n.a. Average 291 1.602 n.a. Coefficient of variation 0.72 0.77 n.a. Source: Ministry of Finance and staff estimates. There are adjustments on the expenditure side as well. Regional and local governments appear to subsidize (or extend ad hoc tax exemptions to) enterprises that maintain large stocks of social assets. That means that reduced subsidies (or increased revenues) will neutralize some of the increase in local expenditures resulting from the transfer of social assets from enterprises. The additional burden can also be reduced by streamlining and restructuring the organization of health and education services and increasing cost recovery for housing and public utilities. As a result, the federal compensation of regional expenditures associated with enterprises divestiture (box 2.2) should be phased out. As decentralization and enterprise reform progress, local governments increasingly see themselves not only as providers of public goods and services, but also as managers of the local economy. Subnational governments are increasingly involved in joint ventures with domestic or foreign partners, using locally owned assets as their equity share, often to help failing enterprises and to avoid unemployment and the resulting social problems. Typically, these ventures involve purely private, market-oriented activities. The involvement of regional governments in commercial activities has at least two flaws. It defeats the purpose of privatization, and it fosters mercantilistic rivalry and the temptation to protect local enterprises from "imports" from adjacent oblasts. The development of local government businesses also perpetuates bureaucratic management and may have unfavorable fiscal consequences, from the imposition of price controls (see box 2.4) to new subsidies, and ad hoc tax exemptions for failing enterprises. In addition, expectation of profit sharing in joint ventures can quickly turn into budgetary obligations to cover losses. 26 Box 2.4: Disparities in Regional Inflation Rates Inflation rates vary significantly across regions. The coefficient of variation of regional inflation rates was 0.14 in 1992 and 0.15 in 1993. In 1993 (statistical annex I table A.ll), the inflation rate in the Kalmikia Republic (1,512 percent) was more than twice that in the Leningradskaya oblast (726 percent). The disparity in inflation reflects the fact that transportation costs -- which are closely linked to energy prices -- increased twice as fast as the overall consumer price index. This trend in relative prices widened the price gap for regions far away from production centers. It is also explained in part by the fact that in March 1992 the federal government devolved to regional governments the authority to adopt their own price policies. This resulted in different pricing policies, especially for food products. For example, the Ulyanovsk oblast maintained the retail prices of milk 12 times lower than the national average in 1992 and 4.5 times lower in 1993. The good news is that the variation of the regional inflation rates declined substantially in 1994. (The coefficient of variation dropped to 0.09.) This decline reflects the fall in the relative price of transport in 1994 and, perhaps, the fact that the economic agents are taking advantage of arbitrage opportunities across regions thereby defeating the "protectionists" measures adopted by regional and local governments. Changing regional spending patterns: the case of Yarosla vl' In Yaroslavl', revenues and expenditures of the consolidated regiona! budget (oblast, city, and rayon) more than doubled in real terms between 1990 and 1993.7 All types of expenditure increased in real terms, but some categories rose much more than others. Subsidies to agricultural and food processing rose eightfold (figure 2.2). Housing expenditures rose fivefold ("housing", maintenance, investment outlays, and subsidies for electricity, gas, heating, water and sewer). Social spending (education, health, culture, and social safety net) increased by only 34 percent. Total social spending in the Yaroslavl' region has decreased since 1991, however, because of the decline of social spending by enterprises and the federal government. Figure 2.2 Y'aroslavl' Oblast Consolidated Budget: Evolution of Spending Categories, 1990 - 1993 (real terms, 1990 = 100) 1200 u r _ = a W N ~~~~~~~~~~~~~~p- .t - -Fe- I000 600 4 90 r,91199 9 N.Regona Emon;,. 200 Food 1ndo,y, 1 ~~~~~~1990 1991 1992 1993 7 For a detailed analysis of fiscal policy in the Yaroslavl' region, see Lev Freinkman and Stepan Titov: 'The Transformation of the Regional Fiscal System in Russia: the Case of Yaroslavl"'"; IDP No 143, World Bank, August 1994. 27 As a result, the structure of spending has been profoundly transformed (see figure 2.3). Social spending dropped from 69 percent of the consolidated oblast budget in 1990 to 28 percent in 1993. The share of housing and public utilities doubled, from 14 to 28 percent, and the share of (current and capital) subsidies to agriculture and food processing jumped from 3 percent in 1990 to 26 percent in 1991 before declining to 13 percent in 1993. This relative decline in agriculture's share in total regional spending after 1991 was compensated, however, by increased extrabudgetary transfers. Figure 2.3 Yaroslavl' Oblast Consolidated Budget: The Changing Structure of Spending, 1990 - 1993 (percent of total) 70 60 O 1 f ~~~~~~~~~~~~~~~~~~~~~~~Hou l~ng 40 A8ncu1ture and Food Indu,ry | 30 No. _ Econoy,. other than 20 Agn-atuon and Food INd.stnz 10 0 1990 1991 1992 1993 What has happened in Yaroslavl' illustrates both the increased role of subnational governments in economic activities and the need to rationalize expenditures at the subnational level. Cost recovery for public utilities and housing maintenance is an obvious priority. Similarly, producer subsidies to the agroindustrial sector seem motivated by the desire to maintain low food prices, rather than by any economic justification. Replacing cash benefits targeted to the poor (for example, in the form of food stamps) would greatly increase the efficiency of local spending (see next chapter). Spending disparities among regions Reflecting the significant increase in regional revenues, regional per capita budget expenditures increased in real termns between 1991 and 1993 in 56 of 87 regions, accounting for 75.5 percent of the population of the Russian Federation. 12 of these regions, accounting for 22.5 percent of the country's population, increased their per capita expenditures by more than 50 percent.8 Many of the regions with the largest increase in own-revenues are in this group, although two of them (Evenskiyski and the Koryaksky autonomous okrug) have experienced per capita budget revenue declines of about 70 percent. Of the 31 regions that experienced a real decline in per capita budget expenditures, only two (Kalmikia Republic and Shakhalinskaya oblast) experienced declines of more than 30 percent. 8 Tbese 12 regions are: the Bashkortostan republic, the Evenskiy AO, Kanthy-Mansiyski AO (184 percent), the Koryaksky AO, the Lcningradskaya oblast, Moscow city, Moscovskaya oblast (112 percent), Nizhegorodskaya oblast, the Tatarstan republic, the Taymyr AO, the Yamalo-Nemetski AO and the Yaroslavl' oblast. 28 Disparities in regional per capita budget spending increased between 1991 and 1993 (table 2.9), following the trend in regional per capita own-revenues. The coefficient of variation of per capita budget expenditures increased from 0.6 in 1991 to 0.8 in 1992 before falling back to 0.7 in 1993. The reduction in regional spending disparities between 1992 and 1993 reflects essentially the reduction in the regional revenue disparities in 1993 (see para. 2.14). Nonetheless, even in 1993, per capita budget spending in the Koryakskiy autonomous okrug was about 12 times higher than in Penzenskaya oblast. The system of intergovernmental transfers had only moderately equalizing effects in 1992 and 1993. (The equalizing impact is broadly captured by the difference in the coefficient of variation of regional per capita revenues and expenditures.9) In current prices, the system of federal transfers was equalizing in 1992 but counterequalizing in 1993, while in constant 1991 regional prices, the transfers were equalizing in both years, albeit less so in 1993 (table 2.8). In 1993 most equalization took place through the variable VAT sharing rates rather than through transfers. The differences in equalization effects in current prices and constant prices in 1993 reflect large differences in inflation rates across regions (see box 2.4) and the adjustment of federal transfers to regional price differentials. Table 2.8: Regional Budgets, 1991 - 93 (per capita current and constant 1991 prices) Per Capita Reven. Per Capita Expend. Per Capita Bal. 1991 1992 1993 1991 1992 1993 1991 1992 1993 Curent p,ices Standard deviation 746 13,413 99,981 759 15,636 170,248 231 11,147 143,790 Maximum 4,480 89,924 565,258 4,734 85,146 1,189,237 495 15,840 56,515 Minimum 535 2,491 20,970 741 7,158 100,611 -1,310 -71,527 -1,044,831 Range 3,946 87,434 544,288 3,993 77,987 1,088,627 1,805 87,367 1,101,346 Average 1,214 15,098 149,828 1,354 18,895 219,705 -141 -3,796 -69,877 Coefficient of variation 0.61 0.89 0.67 0.56 0.83 0.77 -1.64 -2.94 -2.06 Constant 1991 prices Standard deviation 746 1,089 847 759 1,127 1,065 231 784 821 Maximum 4,480 6,771 5,488 4,734 6,103 5,896 495 1,514 446 Minimum 535 207 148 741 567 767 -1,310 -5,019 -5,180 Range 3,946 6,565 5,340 3,993 5,535 5,129 1,805 6,532 5,626 Average 1,214 1,151 1,115 1,354 1,415 1,566 -141 -264 -451 Coefficient of variation 0.61 0.95 0.76 0.56 0.8 0.68 -1.64 -2.97 -1.82 The main reason for the modest equalizing effect of federal transfers is their small size, as well as the lack of focus on the poorest regions. Federal transfers to the regions amounted to 4.6 percent of the consolidated official budget in 1992 -- and an even smaller fraction of total government spending given the large size of off-budget operations in Russia. The share rose to 7.4 percent in 1993 and 8.8 percent in 1994, still well below the average of about 14 percent of general government expenditure in Western industrial countries.'° 9 The budget surpluses of the rich regions, which were particularly large in 1992, helped to reduce the coefficient of variation of per capita spending. However, this effect was pardy compensated by the fact that a number of relatively poor regions also accumulated surpluses in 1992. 10 See Jonathan Levin, "Measuring the role of Subnational Governments," IMF, Fiscal Affairs Department, January 1991. 29 Regional spending between and within the two major spending categories of "national economy" and "social activities" varied significantly. Per capita spending on national economy had a significantly higher coefficient of variation than did per capita spending on social activities, indicating that social spending is less revenue-elastic (see table 2.9). Two characteristics of social spending help explain this relative inelasticity: wages make up a large part of spending in health and education, and wages are a "protected" budget item (adjusted for inflation) and are largely determined by the federal government. Health spending has consistently had the smallest and most stable coefficient of variation over the period (0.6) of all regional budget spending categories examined. This means that health expenditures have been particularly well protected by regional governments and are likely to have reached their core level in a significant number of fiscally stressed regions. Though regional disparities in social spending are significantly smaller than in other major spending categories, they remain extremely high. In 1993, per capita budget spending in education was 10 times higher in the Koryakskiy autonomous okrug than in Tulskaya oblast and per capita spending in health was 9 times higher in the Chukotskaya autonomous okrug than in Dagestan Republic. Table 2.9: Per Capita Regional Budget Expenditures, 1992-93 (th. rubles in current prices) Total per of .bkb l9k. mhbls per caD 3 Capita NatJal of whih: Tl. Soida of wikhLbnc Adr. E.pe.dit. Economny Actktefs CYp;rl Inm. Food Fd i e HeWth sodtliJ7lu Subsidy. Security 19219319159 92 19 l 5 92 ',319l 93 192119 1919 199Z 1 1993 1992 1 193 J9 tl'* Siandard deviation 15.6 170.2 6.3 63.3 2.7 17.1 0.4 3.7 6.0 64.7 3.2 34.7 1.9 22.1 0.8 9.6 0.5 5.4 0.16 2.49 0.55 7.82 Maximum 85.1 1,189 45.1 491 15.9 104 6 2.0 19.6 36.6 392.5 18.2 217.8 12.1 132.1 7.0 90.9 3.5 34.6 0.96 17.13 3.57 53.59 Minimum 7.2 100.6 2.3 40.0 0.5 9.3 0.0 0.0 3.7 49.1 1.8 21.6 1.5 14.9 0.0 0.5 0.1 2.1 0.00 ".01 0.18 2.78 Range 78.0 1,089 42.9 450.7 15.3 95.4 2.0 19.6 32.9 343.4 16.4 196.2 10.6 117.1 6.9 90.5 3.4 32.5 0.96 17.12 3.39 50.81 Average 18.9 219.7 7.2 86.6 2.9 27.5 0.5 2.6 8.3 96.4 4.0 48.2 3.2 36.9 0.5 4.7 0.6 6.3 0.05 0.96 0.61 8.34 Coeff of variation 0.83 0.77 0.87 0.73 0.93 0.62 0.91 1.41 0.73 0.67 0.80 0.72 0.59 0.60 1.6 2.06 0.95 0.85 2.93 2.59 0.90 0.94 Weighied uverage /5.2 182.4 6.5 80.4 2.5 28.4 0.5 2.3 6.6 80.0 3.0 38.0 2.8 32.8 0.3 4.0 0.4 4.8 0.03 0.8 0.4 5.5 Souirce. Minisirv of inance. Social security spending illustrate the approach to redistributive policies in the regions. Although its variation across regions is enormous, Regional social security spending is only 2.2 percent of total budget spending by the regions. The small share devoted to welfare programs reflects a general supply- based approach to welfare rather than a demand-based system of programs directed to the poor (vouchers for services, food stamps, cash benefits). Most of these supply-based subsidies -- designed to keep prices of housing and public utilities low and to maintain employment in productive sectors, especially agro- industry -- are captured under national economy spending rather than under social spending because they involve transfers to the productive sector. 30 Design Constraints and Elements of a Reform Agenda There has been tremendous progress in the system of intergovernmental relations in Russia since 1992, but much remains to be done, especially to reconcile the objectives of efficiency -- the main economic justification for decentralization-- with those of macroeconomic stabilization and equity. There is no blueprint for an optimum system of intergovernmental fiscal relations. As in other countries, fiscal federalism is to a very large extent a political issue and the system of intergovernmental relations will have to be adjusted over time to reflect political preferences and realities. Nonetheless, on economic grounds, the outlines of a reform plan to remove the main technical drawbacks of the existing system can be identified: * Establish clear, rational expenditure responsibilities among levels of government * Recentralize the tax base * Increase the amount of federal transfers * Improve the equalization formulas, especially for the "very needy" regions * Rationalize other federal transfers as well * Tighter federal restrictions and controls over regional and local borrowing. the triangular dilemma Balancing the objectives of efficiency (through decentralization) macroeconomic stabilization, and equity is a difficult exercise because the objectives are partly conflicting. This creates a triangular dilemma for the government that can be roughly described as follows. Reducing horizontal imbalances (imbalances between revenue raising capacity and expenditure needs) across the regions entails increasing equalization transfers from the federal budget. Reconciling this equity objective with the macroeconomic stability objective of reducing vertical imbalances (the consolidated fiscal deficit) means that the tax base will have to be recentralized. And that puts the squeeze on the efficiency objective since it implies reducing the local fiscal autonomy of governments. Other arrangements lead to similar conflicts. Increased local fiscal autonomy can be reconciled with reduced vertical imbalances only at the expense of widening horizontal imbalances, while increased local autonomy and equalization can both be increased only at the expense of macroeconomic stability. Theory offers little help in directing a country on where to position itself within this triangle. The design of intergovernmental relations needs to be tailor-made, guided first by initial conditions and altered over time to maintain the fit with the political and economic evolution of the country. In Russia, it is clear that macroeconomic stabilization should be the overriding priority in the short term. The tradeoff, then, boils down to more equity or more local autonomy. Here again, initial conditions can help in determining where to put the emphasis. Back to basics. The economic argument for decentralization rests largely on allocative or efficiency ground. " Many public goods produce only local benefits, and different geographic areas may have different preferences for public goods. On this premise, the arguments for decentralizing the supply of public goods to lower levels of government are that information on the demand for and the cost of 11 For a review and assessment of the literature on decentralization, see Vito Tanzi. 'Fiscal Federalism and Decentralization: A Review of Some Efficiency and Macroeconomic Aspects"; Annual Bank Conference on Development Economics. May 1995. 31 supplying such goods is more readily available, accountability is better ensured because constituents are closer to local governments and can move to another jurisdiction if they are dissatisfied ("voting with one's feet"), and with the right incentives, decentralization of supply leads to competition among local government and the customary improvements in efficiency and innovation. This efficiency argument calls for more local financial autonomy and therefore -- under the macroeconomic stabilization constraint -- less equalization, while the argument of different community preferences weighs in against the centralization of redistributive policies. To paraphrase Vito Tanzi, if Yaroslavl' prefers to spend more for invalids while Khaskass prefers to spend more on orphans, a national redistributive package could imply a loss in welfare compared with a decentralized system that allows each region to design its own package.'2 On the revenue side, this implies decentralizing the tax base so that subnational governments have adequate means to finance their expenditure responsibilities. Also, to foster financial responsibility, some major taxes should be assigned fully to the regional governments rather than shared, and regional governments should be free to introduce new taxes and fees (except any that would impede domestic trade). Federal transfers would be comparingly reduced. Initial conditions. That is the argument from theory. In Russia, however, the current situation in the regions undermines the efficiency argument. For efficiency gains to materialize through decentralization, political accountability and good budgetary management are essential. Both are weak in most regions. The chief executives of regional and municipal governments are often appointed rather than elected, and local parliaments generally play only a marginal role in shaping the budget. The underdeveloped real estate market makes "voting with one's feet" a virtual impossibility. Clear expenditure and policy assignment among levels of government is yet another missing prerequisite for accountability despite some progress in this direction. Finally, the lack of a good budgetary management system (i.e., budgeting, controls, audits) weakens financial accountability and casts doubt on the ability of subnational govermnents to use regional and local resources efficiently. Conversely, the case for equalization is strong in Russia. Federal transfers to the regions are small compared with those of other countries, and fiscal disparities among the regions are enormous. Besides the political and social aspects of these (lisparities, the problem is again the lack of mobility of people which hampers equalization through migration. In addition, these disparities reflect to a large extent rents from natural resources. Under these conditions, equalization can be justified on efficiency, redistributive, and macroeconomic grounds. The nation as a whole stands to loose if the rich regions waste resources on uneconomic spending programs'3 while poor regions underspend, especially on human resources (health, education, safety net). In macroeconomic terms, if the federal government tries to increase equity by decentralizing the tax base, the result is likely to be the "regionalization" of fiscal surpluses and the "federalization" of deficits, thereby worsening the vertical imbalance. International experience demonstrates that when clear guidelines are missing, decentralization may create a situation in which each government can gain if it can increase its own spending and shift the financing cost to the whole country." 12 Vito Tanzi. ibid. 13 As we have seen above, wealthier regions tend to spend relatively more on subsidies to the productive sectors, as evidenced in the case of Yaroslavl', where subsidies go primarily to agriculture and local public utilities. 14 Vito Tanzi, ibid. 32 In fact, this is already happening in Russia. The consolidated budget balance of the regions went from a small surplus of 0.16 percent of GDP to a deficit of 1.73 percent of GDP in 1993 and 3.4 percent in 1994. The disaggregated picture is even clearer. The number of regions in surplus was halved between 1992 and 1993, from 33 to 14, while their aggregate surplus shrank from 1.05 to 0.31 percent of GDP. (The consolidated surplus of the 13 regions that had a surplus in both 1992 and 1993 declined by over 67 percent in real terms.) Meanwhile, the aggregate deficit rose from 0.89 to 2.05 percent of GDP. More alarming, 12 of the 19 regions that went from a surplus in 1992 to a deficit in 1993, experienced increasing revenues in real terms.'5 Initial conditions in Russia therefore suggest that in 1992 and 1993 decentralization of the tax base went too far, too fast. The progressive recentralization of the tax base that took place in 1994 and continued in 1995 is therefore justified. This trend could be pursuedfurther, albeit with care. Limits to recentralization and equalization . Political considerations, a key ingredient in the design of a working system of fiscal federalism, constrain the degree to which equalization can be reconciled with macroeconomic stabilization, at least in the short term. As suggested earlier, the de facto asymmetrical federalism that has prevailed since 1992 may be the only feasible solution that allows the federation to hold together. However, the tradeoffs must be clear. If the wealthiest regions keep most of the taxes generated in their territory, the level of equalization that can be achieved will be reduced accordingly. Political constraints aside, too much recentralization and equalization are not desirable either. Overgenerous federal equalization transfers may discourage the regions' own efforts to raise revenue and further weaken the accountability of local governments, creating a vicious circle in which lack of accountability justifies recentralization, which further reduces accountability. Over the longer term, local financial autonomy may foster local political accountability and better budgetary management. And, as the real estate market develops, a major argument against decentralization will disappear. The problem now, however, is that there is no recipe for determining how much recentralization and equalization is too much. This is fundamentally a political decision that reflects the social contract (which can change over time) that binds the country together. But whatever the decision about how much equalization is desirable and feasible, several measures should be taken now to improve the existing system. Clarifying who is responsible for what Detailed assignments of expenditure and policy responsibilities among levels of government are a prerequisite for a workable and efficient system of intergovernmental relations. The government is well aware of this problem. However, reflecting the difficulty of the task, and its political sensitivity, the work is still to be done. Rationalizing the assignment of expenditure responsibilities also requires making a clearer distinction between decentralization (or devolution) of expenditures and delegation of responsibility to deliver services (without the responsibility to finance them). Theoretical arguments and international experience suggest the tentative division of labor presented in table 2.10. It distinguishes between service responsibility, which is concerned with objectives, and service provision, which is the 15 Three of them by more than 30 percent, namely Krasnodar krai, (36 percent), Leningrad oblast (42 percent) and Moscow city (51 percent). 33 actual delivery of the service. The two need not coincide. De facto expenditure assignments in Russia (see table 2.6) fall broadly in line with this tentative list, with the notable exception of unemployment insurance. Table 2.10: Conceptual Basis of Expenditure Assignment Expenditure category Service responsibility Service provision Defense F F Foreign affairs F F International trade F F Environment F S, L Currency, banking F F Interregional commerce F F Immigration F F Unemployment insurance F F Airlines. railways F F Industry, agriculture F, S, L S, L Education F, S, L S, L Health F, S, L S, L Social welfare F, S, L S, L Police S, L S. L Highiways F, S, L S, L Natural resources F, S, L S, L F = Central Government; S = Intermediate Government (province, state); L Local Government Source: Anwar Shah, "The Reform of Intergovernmental Fiscal Relations in Developing and Emerging Market Economies", Policy a.jd Research Series No. 23, Washington, D.C., World Bank, 1994, table 2. On both equity and redi':tribution grounds, the employment fund needs to be completely redefined and its revenues need to be centralized. The fund should focus solely on distributing benefits to the unemployed, shedding its action in wage subsidies and project finance. Setting standards and financing unemployment benefits should be the exclusive responsibility of the federal government, even if service delivery remains at the subnational level. The 2 percent payroll tax that is currently distributed to different levels of government should accrue entirely to the federal level, and unemployment benefits should be adjusted for price differentials across regions. As a corollary to this recentralization, the collection of the contributions accruing to the employment fund should be effected by the State Tax Service rather than by the Fund's administration. More generally, expenditure and decision-making assignments among levels of government should be detailed across the board. Because decentralization of expenditure responsibilities happened in a piecemeal fashion, there are still a number of areas of blurred responsibilities, and the distinction between funded and unfunded mandate is not clear. Public sector wages are a case in point. A clear decision needs to be made with a view to eliminate unfunded federal decisions concerning the level and rate of increase of wages for regional and local public servants. 34 Tax sharing and equalization The trend of recentralization of the tax base that started in 1994 should be further pursued with care. Given the large amount of subsidies granted by the subnational government to the productive sector (e.g., agriculture) and public utilities, there is some room in aggregate to further redefine the tax slharing arrangements in favor of the federal government. As a broad indication, this recentralization of the tax base could increase federal revenues by I to 2 percentage points of GDP. (The subsidies to local public utilities and maintenance of the housing stock added up to an estimated 4.2 percent of GDP in 1994.) Among other things, tax recentralization will help increase the pressure on subnational governments to develop cost recovery. The recentralization of tax revenues should be accompanied by an overhaul of the current tax sharing arrangements. However, such overhaul should take into account the current situation, and be accompanied by the elimination of the practice of tax withholding and netting out at the regional level. A complete separation of the major taxes in the Russian Federatior between federal and subnational governments, as originally designed in 1991, is probably neither feasible nor desirable in the short term. The sharing of federal taxes should continue in the near future because of their importance as a source of revenue for subnational governments. The key to transparency and accountability, however, is to clearly separate the revenue raising function of tax sharing from the equalization function. Russia took an important step in this direction in 1994 with the elimination of the varying sharing rates for the VAT and the establishment of a formula-based equalization grant mechanism. The next step is to discontinue the practice of compensating for committed federal transfers by withholding taxes at the regional level. Some regions do this because they are uncertain that federal obligations or commitment for transfers will not be honored. Thus, to effect reform, it is necessary to break the vicious circle of lack of trust between the federal government and the regions. To this end, the federal government should start by avoiding to delay committed transfers and other financial obligations to the regions. The tax sharing arrangements will have to change over time to adapt to the revenue impact of the economic transition, as well as the ongoing reforms in the tax regime and administration. For example, revenues from the profit tax will decrease as it becomes a real profit tax (once the excess wage tax is eliminated and both depreciation of fixed assets and inventories are automatically indexed for inflation). Revenues from some other taxes are likely to increase -- from the personal income tax as the monetary income of households'6 rises, and from energy taxes as energy prices in Russia reach world levels. (An example of the implications of tax reforms for the financing of roads is presented in box 2.5.) As a result, the government should renounce the 3-year freeze of the current tax sharing arrangements over 1996-98 proposed in the 1996 draft budget law presented to the Duma in August 1995. Instead, the government should increase the federal profit tax rate to 15 percent and increase the federal share of the personal income tax from its current level of 10 percent to 25 percent in the 1996 budget. Furthermore, the government should redesign the current tax sharing arrangements for imiplementation in 1997. To this end the government could, inter alia (i) assign the land tax and the real estate tax entirely to the local level of government; (ii) unify the regional profit tax rate at its current maximum rate of 22 percent to avoid tax competition among regions; (iii) redefine the allocation of the personal income tax among levels of government with a view to determine the tax rates accruing to the federal government and to allow regional governments, within federally-specified limits, to top the federal rates; and (iv) increase the rate of the timber tax and reassess its current sharing arrangement in favor of the federal government. Also to foster the fiscal autonomy of subnational governments, the government should explore the possibility of limiting the responsibilities of the State Tax Service to the collection of federal and shared taxes and assigning the task of collecting taxes and fees accruing exclusively to the regional and local governments (e.g., land and real estate taxes) to local tax administrations. 16 For a detailed discussion of the tax reform see the Countro Economic Memorandum. ibid. 35 Box 2.5: Tax Reform, Tax Sharing, Federal Transfers and Road Financing The road funds illustrate the need to closely coordinate tax reform, tax sharing and federal transfers. * Regional and local governments are responsible for 90 percent of the roads and the federal government for the rest. An off-budget Road fund was created in early 1992 to protect road financing. The federal and the regional road funds (90 together) are financed through earmarked taxes. In addition to financing the federal roads, the federal road fund redistributes resources across regions over and above the revenues of the respective regional road funds. Two of the main earmarked taxes create distortions: the vehicle production tax (a 35 percent tax on the turnover of domestic vehicle manufacturers), which accrues to the federal fund, and the enterprise tax (0.4 percent tax on all enterprises' turnover), which accrues to the territorial funds. The vehicle tax discriminates against domestic producers, and the enterprise tax has nothing to do with the use of roads. The vehicle tax has been recently eliminated. The enterprise tax should also be eliminated. The revenue loss can be made up by the fuel and lubricant tax (accruing to the federal road fund), which will increase significantly once oil prices attain world levels in 1995. Box Table 1: Actual Road Fund Collections in 1993 Compared to a Counterfactual Scenario Actual Road Fund Collections I Counterfactual - Road Fund Collections' US$million Federal Road Fund … Fuel and lubricant tax 421 1 1830.2 Vehicle production tax 107.7 0 Moscow and St. 113.4 113.4 Petersburg collections Subtotat PRF 642.1 . I 1943.6 Regional Road Funds Enterprise tax 628 1 0 Vehicle sales tax 186.5 f 186.5 Vehicle registration tax 48.6 1 48.6 Subtotal RRFls - 31 - 235.1 TotaT - I 178,7 A. Assuming the proposed scenarie. (i) no enterprise tas. oli n vehicle pirduction tao. and t wli iiel price closer lo nmmenatonal prnces at UI S .35/hier. These changes would profoundly alter the structure of revenue of the consolidated road fund (box table 1). Most of the revenues will accrue to the federal fund, although most of the roads are the responsibility of the regional funds. In addition to developing new user fees (toll roads, weight-distance tax) the only viable solution in the short term will be to share the revenues from the fuel and lubricant tax between the federal fund and the regional funds or to increase federal transfers from the federal fund to the regional funds. Obviously, the larger the transfers relative to the tax sharing, the more oversight the federal government will have over the regional funds. In any case, objective and quantifiable criteria for allocating the federal transfers should be developed to avoid allocation on a negotiated, ad hoc basis. * For a detailed discussion of the road funds, see "Russian Rttad Financing Systeni, World Bank, April 20. 1995. In parallel to recentralizing the tax base, federal transfers to the regions should be increased. In turn, this increase should be made with a view to reduce horizontal imbalances and to influence the restructuring of regional spending. As a rule of thumb, to foster vertical balances, the increase in federal transfers should be a fraction of the savings made through the recentralization of the tax base. The system of equalization transfers needs adjustment. The objectives of such reform should be to refocus transfers from the Federal Fund for Financial Support (FFFS) to the poorest regions, and to avoid creating disincentives for regions to strengthen their tax collection efforts. In turn, this means changing the formulas governing the allocation of transfers through the first and second windows of the 36 FFFS. As regards the formula governing the allocations effected through the first window (for the "needy" regions), the current approach of basing transfers on the tax raising capability of each subnational government is fundamentally sound. However, the benchmark for eligibility (which is currently equal to 95 percent of the country's average per capita tax revenue) should be lowered to limit the number of regions benefitting from the equalization transfers. Another problem is that, for lack of data, the tax- raising capacity is defined as the actual per capita budget revenues of the region in the previous year. This base misses the revenues from regional and local extrabudgetary funds and provides little incentive for subnational government to aggressively collect the taxes that accrue entirely to them and to eliminate extrabudgetary funds. Using only per capita regional revenues from federal taxes or the region's income calculated by Goskomstat (both corrected for regional price differences) in assessing regional tax-raising capacity would not only simplify the formula, but also improve incentives for regions to increase collection of the taxes accruing entirely to their budgets and to eliminate extrabudgetary funds. Over the medium-term the measure of the regions' taxable capacity should shift from the actual revenue collection to a function of the revenue potential of the regicns' tax bases. This alternative measure of the regions' taxable capacity will encourage regional tax efforts. However, the approach implies detailed, accurate and to update data on the regional tax bases. The generation of such data should be a key objective of the reformii of the tax administration. There are even more serious problems with the formula for allocating transfers through the second window for "very needy" regions. Although the existence of this second window is hard to justify on equalization grounds, helping regions that are experiencing exceptional fiscal stress during the transition is a legitimate concern of the federal government.'7 But basing the distribution of transfers on each region's deficit of the previous year (after transfers from the first window) works to maintain the status quo. Instead, only shortfalls in per capita revenues from the main federal taxes (corrected for regionial price differences) should be counted. (In other words, the steeper the decline in revenues in a region, the higher the share of transfers it will obtain from the second window). That strengthens the link between a declining regional tax base and federal grants while encouraging regional tax efforts without encouraging excessive spending and deficits. The base of the Federal Fund for Financial Support should be changed as well from a percentage of a single tax (the VAT) to a percentage of total federal taxes. Broadening the base avoids the risk that macroeconomic and tax policy will be influenced by the dependence of the fund on a single tax and improves the stability of the fund, since its size will be determined by a portfolio of taxes (the portfolio effect). Specific-purpose tranisfers No general equalization program can deal with the whole host of local factors that influence sectoral spending, such as differences in the size of school age populations. Nor are equalization transfers directed toward particular sectors. They are intended to boost the overall revenues of subnational governments, to spend according to their own priorities. What is still missing are shared cost or conditional grant programs of the type used by many OECD and other countries for spending in specific areas, such as health, education, and welfare (box 2.6). Because of their continuing and systematic nature, these differ from the many federal grants that have been designed to a;d particular regions or to compensate regions for federal mandates. 17 Over the medium-term, however. when the economic and fiscal conditions stabilize, the second window should he eliminated. I 37 Box 2.6: Conditional Grants Conditional grants have to be spent for the purpose specified by the grantor government. Conditional shared-cost programs may apply to both current and investment expenditures. The conditions imposed may be quite specific, such as requiring a subnational program to follow particular design features. Or the conditions may be general, as in block grants, which fix total transfers for broad functions such as health but allow recipients considerable flexibility in relative spending on the function's components. Conditional grants may be bilateral or multilaieral. Bilateral grants are negotiated individually between the donor government and each recipient subnatiorial government. Multilateral grants are made available to all subnational governments according to common specifications. Conditional transfers may also be matching or nonmatching, depending on whether the donor government provides a proportion of the funds spent by the recipient government. The purpose of matching grants is to induce subnational governments to spend more on the specified goods or services. Unconditional grants increase income in the recipient's jurisdiction without altering relative prices between spending prograins or between spending and tax relief, whereas matching conditional grants do alter the composition of regional spending programs. Limits on funding (or their absence) also help define conditional transfers. Under an open-ended grant, the donor government offers to supply funds without a limit, whereas closed-end grants stipulate a ceiling or upper limit. Conditional transfers may also incorporate indicators of need, as measured by proxies such as miles of road maintained, or the number of elderly in the subnational jurisdiction. The form of conditional transfer will be chosen to attain the effects desired. For instance, equal per capita transfers or closed-end transfers may be employed to ensure the provision of minimum service standards. If the concern is to increase the supply of a service because spillover effects are thought to be important, open-ended matching transfers are appropriate because there should be no limits on such transfers. While responsibility for equalization payments to subnational governments is assigned to central agencies such as the ministry of finance in most countries, responsibility for ensuring that the requirements of conditional transfer programs are satisfied is often given to line departments responsible for sectoral issues. Conditional grants are a means of expressing the common interest in a federal system and of attaining national objectives. The national government may well retain an interest in influencing the scope and composition of services whose delivery is the responsibility of subnational governments in order to promote national equity or efficiency goals. In particular, policy-based transfers (distinct from the formula-based equalization transfers) linking federal transfers to the reduction in the provision of subsidies by subnational government could be introduced in Russia. For merit goods such as health and education, the central government may have an equity interest in ensuring all citizens equal access or in making health care or health insurance benefits portable from one jurisdiction to another. A curriculum that stresses national identity may be an important "nation building" interest for the central government. The federal government may also be concerned that benefit spillovers to nonresident freeriders may keep subnational governments from providing enough of particular goods or services. A small oblast, for instance, might decide not to provide higher-level technical education if the students who get the education will have to move elsewhere to get jobs. In this case, federal transfers may be designed to increase the supply of such goods with spillover benefits. Conditional grants from national to subnational governments allow these national objectives to be achieved while maintaining subnational 38 delivery of services. For example, the use of conditional grants would greatly improve the transparency and efficiency of the existing system of textbook financing (see box 2.7). Box 2.7: Textbook Financing The funding of textbooks for the compulsory education system in Russia involves an opaque and inefficient fiscal mechanism. Currently, the textbook publishing industry is dominated by large state monopolies which rely on subsidies from the GOR. The costs of publishing, printing and distribution of the Federal List textbooks are notionally covered by a Ministry of Finance budgetary loan to the Oblasts, which then bear the costs of textbook provision. However, the Ministry of Education plays the role of an intermediary as it receives the loan which it then passes to the subsidized state publishing monopolies and to the state distribution monopoly. A date is specified by which Oblasts must repay the advances. Failure to repay by the Oblast will result in the Ministry of Finance deducting the relevant sum through the system of budgetary transfers. By April 1995, three Oblasts had repaid their advances from 1994 and it appeared unlikely the other Oblasts will repay their advances directly, and that the MoF will make deductions from the central Oblast account. The system does not merely lack transparency - it is also inefficient. In both 1994 and 1995, there have been substantial delays in provision of the loan tranches. The Ministry of Education advised the Bank in April 1995 that the Ministry of Finance agreed to arrange Rb400 bn of pie-financing for the cost of textbooks (out of an estimated requirement of Rb700 bn). A first funding tranche of Rb2O bn was made available "to the Oblasts" through the Ministry of Education in March 1995. A second tranche of Rbl4O bn was made available in April. The third tranche promised for later in 1995 was so delayed that, by July, the issue of non-availability of books for the coming school year, had erupted onto the front pages of the national press forcing the Ministry of Finance to intervene publicly in the debate. This protection of state monopolies effectively prohibits private sector publishers, printers, and distributors from competing. It also limits textbook variety and contributes to higher textbook costs. There are growing inequities in the system too, as this year the Ministry of Education is allowing 500,000 books to be sold instead of published "not for sale". This will mean that some parents will be able to access books of their choice while poorer parents would be denied access to textbooks if asked to pay. The consequence of the way textbook provision is financed and managed is an inefficient textbook industry which produces too few books, poor quality books, and books which are not distributed efficiently. The lack of transparency, accountability and predictability means that, as the funding of publishers and distributors is erratic and unpredictable, crises in the supply of textbooks to schools are becoming an annual event. International experience has demonstrated the effectiveness of conditional grants in influencing spending by lower-level governments to attain national goals, even when the responsibility for the function is formally assigned to subnational governments. (See annex 4 for an extended discussion of international experience and specific country examples.) Russia might well consider adding this instrument to its tool kit of intergovernmental transfer mechanisms. In addition to increased transparency, conditional grants would have the advantage of "stretching" the hard-pressed Russian federal budget. Another lesson from international experience is that conditional programs work best when they are few in number, have predictable outlays and are based on objective indicators tailored to specific sectors or objectives. Local borrowing The legal framework for subnational borrowing in Russia is more permissive than in many countries. Although significant problems have not yet arisen, there is a real possibility of massive 39 uncontrolled borrowing for the wrong purposes, including financing operating budget deficits, propping up local enterprises, and investing in activities that are best left to the private sector. The consequence of unsound subnational government debt issues may reach well beyond the subnational jurisdictions themselves, yet Russia has no effective supervision of subnational borrowing policies. International experience shows that when a subnational government defaults on its debt, the federal government is often forced for political reason to bail it out."I And even if the federal government refuses to foot the bill, defaults by subnational governments would shake the already wavering confidence of investors in the emerging capital market, especially after the recent bankruptcies and financial scandals in private securities markets, thereby delaying the development of markets for sound subnational government securities. These concerns justify close regulation and control of subnational borrowing practices by the federal authorities. The State Duma should pass implementing legislation on borrowing ceilings for subnational governments, as mandated in article 12 of the May 1993 law on budgetary rights. The limit could be stated as a percentage of the regional government's budgetary tax revenues. The limit should include of all types of debt including bond issues, borrowing from commercial banks and international lenders, as well as contingent liabilities (guarantees). Bond issues should be strictly regulated by the federal authorities. The present registration mechanism at the Depaitment of Government Securities of the Ministry of Finance does not go far enough. Protecting both taxpayers and investors requires instituting a true certification process of the condition of the issue and the intended use of funds. In addition to the principle stated in the law on budgetary rights that higher-level governments will not bail out lower-level governments that default on their loans, the Ministry of Finance should have the power to suspend the issuing rights of subnational governments that fail to comply with the conditions of certification. At the same time, the federal government should encourage the development of private market rating systems for subnational government bond issues. The tax-exempt status of interest from regional and local government bonds should be explicitly addressed in the law to remove the cloud of confusion on this issue. This law should also address several related issues: * The federal tax status of bonds from rayon and city governments * Rules for declaring the interest of rayon and city bonds exempt or taxable across oblasts and local jurisdictions * Limitations and guidelines for the types of projects and activities for which local bond issues can be exempt from federal income tax * Powers of the State Tax Service to grade bond issues by regional governments as exempt or nonexempt at the time when the bond issue is registered with the Ministry of Finance. Borrowing by subnational governments in foreign currency should be prohibited unless special permission is granted by the federal authorities including the central bank and the Ministry of Finance. Borrowing from the central bank should be explicitly prohibited so that the central bank's mission of controlling the money supply and overall price level is not compromised. Similarly, the right granted in the law on self-government for subnational governments to establish their own banks and borrow from them is potentially dangerous and should be repealed. 18 See Vito Tanzi, May 1995, ibid. Chapter 3 Budget Formulation As we have seen in chapter 1, a large part of resources of the Russian economy (about 40 percent of GDP) still flows through the government, making sound management of those resources all the more important. Budget formulation, despite considerable progress, still reflects a general lack of method. The transition from central planning to the more decentralized approach followed in market economies has brought significant chaniges and confusion at all stages of the budget process at all levels of government. Major institutional chaniges are taking place within the government, in addition to the changes in iimtergoverniieital relatioils discussed in the previous chapter. Changes since 1992 have brought the Ministry of lFiinance to the forefront in the formulation and execution of fiscal policies, while the roles of line miniistries, governimient agencies, and budget-supported institutions are still being redefined. The polifical transition to a democratic system has also had important repercussions on the legislature's role in fiscal aflairs. Both the Ministry of Finance anC thc legislature have moved from passive spectators al Gosplan's budget show to center stage in tl;e budget process. Budget formulation nieeds to be redesigned at all levels of government, starting with the premise thalt all liscal decision iieed to be made on the basis of comprehensive information. Decisions based on incomlplcte intforiiationi are likely to lead to suboptimal policies and a waste of resources. This means that the coverage of the budget should be redefined from top to bottom. Macroeconomic constraint slhould be built into the budget formiulation process, along with measures to improve the microeconomic efficiency of governmenit spending, from new budgeting techniques to institutional reforms within the public sector. Changes are also needed to improve the procedures for adoption of the budget at the parliamentary stage. Redefinting Budget Coverage Among the most serious problems with budget policy in Russia is the large number of significant government activities that are outside the budget, a practice that is pervasive at all levels of government. T his practice breaks two fundamental principles of budgetary practice, integrality and universality. The two principles complement one another: the principle of integrality requires that revenues and expenditures be presented in a single document, while the principle of universality requires that all revenues and expenditures to be presented in that document. Adherence to these principles makes it possible to ascertain and control all government spending and commitments by closing off the access of public entities to resources of their own that could escape the scrutiny of the budget process and the imiposition of financial discipline. In management terms, this requirement that all public activities be covered in the budget can be regarded as "budgetary oversight." In Russia the principles are officially recognized in the law on budget principles of 1991, but they are not applied in practice. Lack of compliance with these rules has serious consequences. Transactions outside the budget (even formalized extrabudgetary funds) are not subject to the same kind of fiscal discipline as are budget operations, which means that activities that would not normally survive the scrutiny of a regular budget process often continue. Furthermore, earmarked resources, whether on or off-budget, decrease the flexibility of resource allocation. 41 42 Infringements of the integrality principle: off-Lw "get financial flows Off-budget flows include extrabudgetary funds created at all levels of government and directed credits. Extrabudgetary funds of all sorts multiplied throughout Russia in 1992 at all levels of government, but no data are available on regional and local extrabudgetary funds. At the same time, large amounts of off-budget credits were being directed from the Central Bank to enterprises, some guaranteed by the Ministry of Finance, and to the states of the former Soviet Union. Since 1991, a multitude of extrabudgetary funds were formally created by federal law or decree. In 1994, the "identified" extrabudgetary funds included: five social funds (pension fund, social insurance funds, employment fund, social protection fund, and the medical insurance flund); tlhree other public funds (the federal and regional road funds, the ecological fund, and the technological de:. elopment fund); and 50 industrial funds (see box 3.1). Excluding the latter (which are only partly publicfunds), the identified public eitrabudgetary funds accrued almost as mnuch revenue as the federal budget (statistical annex 1 table A.4). Their revenues totaled 14.1 percent of GDP in 1992 and 16 percent of GDP in 1993 and 13 percent of GDP in 1994. Box 3.1: Industrial Extrabudgetary Funds At the federal level only, there are at least 50 industrial or sectoral extrabudgetary funds. These funds were established by line ministries and state committees with a view to foster research and development (the R&D funds), investment (investment funds), and to help financially stressed enterprises (insurance funds) in a given sector. In 1994, there were 28 "Research and Development funds" covering all sorts of industries. The remaining 16 sectoral funds included essentially of "investment and insurance funds" in a number of industries. T'he revenues of most of the R&D funds come from a percentage of the production costs -- typically 1.5 percent -- of the enterprises in the sector. Depending on the sector, they can be voluntary or mandatory. Most of the revenues of the "investment and insurance funds" come from a percentage of sales - - varying across sectors. The identified revenues of 44 of these federal industrial funds amounted to at least Rubles 15,811 billion in 1994, i.e., 2.5 percent of GDP and 20 percent of the federal budget's total revenues. Almost all (97.5 percent) of this total amount accrued to the 16 sectoral "investment and insurance funds". In turn, almost two-thirds of these revenues (rb. 10,141 billion --i.e., 1.6 percent of GDP and 12.6 percent of the federal budget's total revenues) accrued to the investment fund of Gazprom. The bulk of the resources of these funds are in fact kept by the enterprises, and are either spent for the purpose intended (R&D or investment) or simply kept as deposits in bank accounts. Only a fraction of these revenues (the centralized part) accrues to the line ministries that are supposed to redistribute them within the sector. According to Goskomstat data, the centralized part of these sectoral funds amounted to only 0.02 percent of GDP in 1994. Furthermore, h 'f of this amount was not spent by the line ministries but deposited in interest-bearing commercial bank accounts. From a fiscal standpoint, the relevant feature of the revenues earmarked for the industrial EBFs is that they are deductible from the contributing enterprises' profit tax base. The resulting profit tax revenue loss for the government amounted to 0.95 percent of GDP in 1994 (assuming that the enterprises concerned made a profit). Again, most of this consolidated tax expenditure benefitted to Gazprom which could subtract Rb. 3,854 billion (i.e., 0.6 percent of GDP) from its 1994 profit tax liability. 43 In addition to these domestic extrabudgetary funds, the federal budget also excluded all foreign exchange transactions by the government until mid-1994. The "foreign economic activities" recorded in the official budget included only ruble-denominated transactions. Some of these flows were formally recorded in a "foreign exchange fund" managed by the Ministry of Finance, while some of the ruble operations included in the budget reflected the counterpart of foreign exchange transactions. This arrangement complicated consolidation of the external accounts of the government,' and as a result, the budget underestimated government revenues by about 3.5 percent of GDP in 1992-93 and underestimated government expenditure by 12 percent of GDP in 1992 and 2.5 percent in 1993. As discussed in chapter 1, these huge expenditures represented essentially import subsidies. Another form of unbudgeted federal expenditures were directed credits from the Central Bank earmarked to specific sectors on nonmarket terms. According to some estimations, these credits may have amounted to about 25 percent of GDP in 1992. Part of this amount (3.3 percent of GDP) was guaranteed by the Ministry of Finance but not included in the budget. But the bulk of it (an estimated 22.4 percent of GDP in 1992 and 8.2 percent in 1993) were directly extended by the Central Bank to domestic enterprises and countries of the former Soviet Union. Budget practices at the oblast and rayon levels are no more faithful to the principles of unity and integration than at the national level. In addition to the regional funds derived from the national extrabudgetary funds, regional and local governments have their own extrabudgetary funds, legally sanctioned by the law on budgetary rights and laws on budgetary process. Oblasts and rayons are authorized to establish the funds and their sources of revenue, but funding may not come from taxes or other payments allocated to the general budget. The law specifically states that budget resources are not to be transferred to extrabudgetary funds. The federal government made substantial progress in 1994 and 1995 in bringing more activities into the budget. In 1994, the foreign exchange fund of the federal government managed by the Ministry of Finance and all directed credit guaranteed by the Ministry were included in the budget. In 1995, the federal part of the national road and ecological funds was included in the budget, although their revenues remain earmarked. To complete the positive steps taken in 1994 and 1995, the compulsory contributions of enterprises to industrial extrabudgetary funds should be eliminated; voluntary contributions should be included in the profit-tax bases and all quasi-fiscal spending by the central bank should be shifted to the budget (as part of the "net lending" or budgetary loans category). The same should be done at the subnational level. Regional and local extrabudgetary funds should either be included in regional and local budgets, or abolished. Instituting this change will require modification of the law on budgetary rights. There are some exceptions. Generally speaking, there are good reasons to place national pension and social insurance funds outside the budget (they have earmarked sources of revenues, are intended to deal with services well in the future, and can be demonstrably segregated from other government activities). But even for these funds, this practice can distort the interpretation of the impact of governmental activity and cloud assessment of the relative merits of all state obligations, especially when the resources involved are large. A common compromise is to keep pension and social insurance I For a detailed discussion see 'Budget Coverage and Government Finance in the Russian Federation". P. Le Houerou, E. Gold, S. Katash, IDP - 137, World Bank, January 1994. 44 programs outside the budget but to include the accounts with the main budget document for discussion and revision by Parliament. It is also key to provide comprehensive information on their operations, to allow closer monitoring of fund management. One way of doing so is to prescribe a format for financial statements and to require each fund to present (duly supported) estimates for the coming year and forecasts for future entitlements at the time of budget hearings and to regularly audit their activities. The Ministry of Finance has clearly recognized the need for these reforms of extrabudgetary funds, but vested interest groups have curtailed Ministry success so far. The MoF submitted a draft law on federal Extrabudgetary funds to the Duma on June 7, 1995, that incorporates most of these recommendations. The budget committee of the Duma approved the draft, but the Duma as a whole rejected it. This decision is difficult to explain since these recommendations would widen the scope of the Duma's oversight of government finances, reduce the gains of commercial banks on the idle balances of the government's accounts, and strengthen fiscal management. Government-subsidized credit, the other large off-budget spending category, should be brought into the budget under the "lending minus repayment" category. And to ensure that the real cost to the state of subsidized credit is budgeted, the difference between the subsidized rate and the market rate (for example, the interbank lending rate) should be recorded as a budget subsidy. Repayments should be closely monitored, and defaults should be reported in detail in the budget document. Infringements of the universality principle: unrecordedfinancial activities Three other categories of government financial flows and commitments are not fully recorded in the budget: tax expenditures, revenues from the commercial activities of budget institutions and their uses (new economic mechanisms), and contingent liabilities. Tax expenditures. Like other countries, Russia has many categories of fiscal exemptions and deductions for each type of tax. The cost of these exemptions can be substantial,2 yet their total cost is not known because the costs are not presented in a clear and consolidated basis in the descriptive budget document submitted by the government to the Duma. In some countries (Spain, the United Kingdom) the executive is required to present to parliament at budget time an estimate of the forgone revenues due to the different programs of fiscal incentives. In addition to these general exemptions, there are myriad individual exemptions, especially in foreign trade taxes. Ad hoc exemptions have been pervasive at the federal level. For example in i994, the financially strained Kamaz enterprise (which also suffered a fire at its Naberzhnye Chelny piant) received an exemption on its profit tax and the federal VAT. Other countries also grant ad hoc exemptions to enterprises facing exceptional conditions, but qualifying conditions are strictly established by law, and the uncollected tax liability is usually recorded. Exemptions are limited to certain taxes, typically the profit taxes and/or other direct conti ibutions with VAT exemptions strictly excluded because they create price distortions and are hard to administer. Exemptions at the subnational level seem to be substantial, as revealed by field visits to oblasts and rayon governments. When enterprises are being privatized, partial and even general deductions of 2 In 1994, the Ministry of Finance estimated that the statutory tax exemptions granted to the agriculture sector accounted for over 0.6 percent of GDP. 45 local taxes are often granted in exchange for the continuing provision of social services by enterprises. Local authorities sometimes exempt enterprises that have sustained natural disasters (fire, floods) from all regional and local taxes. And sometimes ad hoc exemptions are also used simply to subsidize enterprises. Only the barest formalities are observed in reaching these decisions at the oblast and rayon level. In Yaroslavl oblast, tax privileges are voted by oblast soviet deputies meeting "in committee." There may be a need to regulate these exemption practices through federal legislation. In some cases, where exemptions are likely to distort competition unduly, they should be prohibited outright. The danger of tax incentives is that they can undermine tax compliance and are easily abused. Granting a subsidy through tax incentives instead of direct transfers also reduces the transparency of the cost of the subsidy and increases the likelihood that it will become permanent. Also, by lowering total regional revenues, tax exemptions improve the region's share of equalization transfers under the current formula, creating incentives to use tax exemptions liberally. Recommendations. For general tax advantages granted to whole sectors and regions, the tax expenditure should be accurately measured and incorporated into an annex to the draft budget, to make it possible to assess the pertinence of such exemptions. Some countries (France, Spain, the United States) require the executive to present to the legislature the consolidated statement of all tax expenditures, even though the statements arc not voted on. Other countries (Australia, Germany, the United Kingdom) also regularly issue estimates of tax expenditures implied by the tax laws. Individual tax exemptions should simply be eliminateJ. Help for a particular enterprise or group of enterprises is more transparently provided through explicit budget subsidies than through tax breaks. A second-best solution is to clearly lay out in the law the conditions that can trigger individual tax exemptions. which tax exemptions are eligible, and the maximum duration of the exemption. The Ministry of Finance has already recognized the need for some of these policy changes. The preliminary draft of the 1994 budget called for the elimination of individual exemptions as a priority concern. However, there has been no declared intention as yet to quantify the fiscal cost of tax privileges or to incorporate them into a budget annex. The new economic mechanisms. The "new economic mechanisms," introduced in 1992 gave budget-supported institutions and agencies (except defense-related agencies) wide discretion in developing suppleraentary sources of funds. Agencies are leasing out school buildings, charging for child-care services, setting fees for health care facilities, under a wide variety of arrangements. Despite the potential importance of these additional revenue sources, the framework for regulating these activities is still very limited. It consists of two letters from the Ministry of Finance and the State Tax Service (October 28, 1992 and September 9, 1993) stating that the commnercial activities of budget-supported institutions are subject to the profit tax and describing how to calculate the tax base. Public accounting systems seem at the least to recognize the existence of these additional sources of revenue. Some of the revenues are monitored by the tax authorities, which collect taxes on them. In some cases there has been a broader reapportionment of funds collected by individuals units, as in the case of schools and hospital facilities in the Moscow region. And the budget appropriations process seems to consider the ability of each unit to raise its own revenue. 46 Information on the extent of these practices is however sketchy. They seem to have emerged in a chaotic, unplanned manner, with almost no centralized oversight (no comprehensive data base or systematic monitoring). The hidden financial flows that escape budget control appear to be quite substantial, if based on anecdotal evidence. For example, the Kounstevo hospital in Moscow allocates 34 percent of its beds for paying clients. The revenues from these new economic activities in the health sector may represent up to one-third of the total revenue of hospitals. Encouraging this development of independent revenue sources has been a deliberate government policy. In many cases budget appropriations for administrative units in the past two years have deliberately intended to cover only a part of their unit's resource requirements. In the social sectors, the development of revenue-raising mechanisms has been driven by the near pauperization of some public services. The use of cost-recovery mechanisms is a welcome trend, especially for the numerous activities of an economic nature that remain in the public sector. In the case of pure public goods, however, cost- recovery mechanisms pose problems. They may be an unpredictable source of revenues, discourage the use of services, make it difficult to establish appropriation levels for each spending unit, and leave the door open for abuse. These types of services ought to be financed through the budget, and any revenue they generate should be incorporated in the general budget. Also the widespread use of revenue-raising mechanisms may diminish the range of budget control, especially in the case of basic services. Relying too heavily on fees and charges may also reduce the effectiveness of guidelines set by the federal or local governments, by encouraging each agency and department to advance the development of its commercial activities, at the expense of compliance with the instructions under which it is supposed to be operating. Recommendations All resources raised directly by administrative units through user fees and related means should be incorporated into the budget, even if earmarked. Though all earnings should be treated as budget revenues, the incentive for administrative units to raise revenues may be preserved by assigning the revenues to the units that collected them, as an addition to their normal appropriation, either in their entirety or in proportion to the amounts raised. The problem is more difficult when it comes to deciding which commercial revenues should be integrated in the budget. This poses the structural problem of redefining the economic and social activities to be financed by the budget and of formally redefining the legal status of the budget-financed organizations and institutions, efforts that need to be undertaken simultaneously. The guiding principle for determining which commercial revenues to include in the budget is their relative importance in the organization's total revenues. For public services with an important commercial component (public utilities), revenues from cost recovery should not be included in the budget (the independence principle), while any budget transfers to the agencies should be temporary and limited in scope (say, cost sharing for a specific investment project). The problem arises for the large grey areas (health is an example) for which the distinction between commercial activities and public goods is not obvious and may change over time. That means that the redefinition exercise needs to be conducted in detail for each sector and the applicable rule needs to be revised from time to time to reflect the evolution of the public sector during the transition. 47 Each level of government should conduct an inventory of resources collected by all administrative units, specifying their intended uses. This will allow departments with their own resources to be identified so that proper allowance can be made for these resources in computing their total resources. The inventory also provides an opportunity to review and formally approve the intended uses of the funds now being collected. Contingent liabilities. Government guarantees are potential expenditures, if called in, yet they are not recorded in the budget. Knowing the outstanding amount of such contingent liabilities is important for fiscal planning and management. Open-ended contingent liabilities are a particular risk. As established, the new "treasury" enterprises ("kazionnie") would automatically benefit from government guarantees in the form of subsidiary government responsibility. Although the number of treasury enterprises is not yet established, there is a high demand from public enterprises to benefit from this status. The open-ended guarantee would be extended to the commercial activities of the enterprises, developed on their own initiative, in addition to their principal public activity. Government guarantees of long-term foreign credits is a potentially important source of investment financing for the government and the conmnercial sector. Foreign banks will make long-term loans to Russian enterprises only if backed by some form of government guarantee because of the perceived high risks of policy reversals in Russia's unsettled policy environment (sovereign risk), which could reduce the profitability of the borrowing enterprises. Thus, although the government may need to continue to guarantee foreign credits to domestic commercial firms at least for the next few years, international experience shows that such guarantees are easily abused. Officially guaranteed export credits, which account for a large share of government guaranteed external credits, may tempt firms to borrow for projects that are not viable. Guarantees ought to be granted selectively, to avoid accumulating government-guaranteed foreign debt with little to show for it. Several rules for government guarantees can help ensure efficient selection. First, there should be no interest rate or foreign exchange subsidies: the cormmercial borrower should be fully responsible for the integrality of debt service payments. The government should even levy a guarantee fee. Second, the Ministry of the Economy should rigorously enforce the government's policy of linking guarantees to the ability of the borrower to generate foreign exchange from exports. Third, only enterprises that can provide updated audits of their accounts and projections of future financial performance should be eligible for guarantees. Fourth, the government's guarantees should be strictly limited to the sovereign risk; the enterprise and its commercial bank should bear the commercial risk. The government could condition its foreign loan guarantee on the provision of a guarantee of repayment from the borrower's commercial banks (in the ruble equivalent of the foreign exchange needed to service the debt). And, finally, to avoid insolvency, the total amount of foreign borrowing should be strictly tied to the country's ability to generate foreign earnings. For investments in public services, government guarantees of external loans should be allocated within the overall budget process and subject to an overall ceiling. Two other factors come into play as well with respect to the financing conditions (full, partial, or no pass-through of the debt service burden) 48 for public service investments: the degree of cost recovery achievable and, if the service is the responsibility of a subnational government, considerations of regional equity.3 Open-ended contingent liabilities should be eliminated. The potential cost of all contingent liabilities should be calculated and included as an annex to the budget document. Any liabilities that cross the fiscal year should be examined carefully, perhaps as one task of the newly-created Account Chamber (see chapter 5). Government guarantees of foreign loans for the commercial sector should be strictly limited, cover only sovereign risk, and give priority to exporting firms. New Approaches to Budgeting Since 1994, major progress has been achieved in preparing and adopting budgets on time. Before then, political conflicts, the lack of constraints in the parliamentary adoption procedure (see next section), and slow administrative preparation (see annex 6), led to severe budget delays. Delayed budgets mean that spending units do not know their appropriations and therefore cannot plan or commit resources, which is disruptive and financially costly. Since 1994, however, delays in presenting and adopting the budget have been shortened. The 1994 federal budget was adopted in June 1994; the 1995 federal budget was presented to the Duma in November 1994 and adopted in April 1995. Further reductions in preparation time are expected for the 1996 budget, which will be presented to the Duma during the summer of 1995 -- major progress, if it happens. In the unsettled political and economic environment in Russia, new budgeting techniques were often superimposed on old. Under the "normative approach" used in the Soviet era, each agency computed expenditures based on a set of detailed physical or cost norms, such as the cost of food for a hospital patient receiving a particular type of treatment. These norms are rarely used now, although some spending agencies in the social sectors and local governments profess to still use them, replaced by incremental budgeting. Institutions draw up budget plans for the current year based on the previous year's cost adjusted for inflation. Many improvements are needed in the area of budgeting techniques. Most are needed in order to build macroeconomic constraint into the budget preparation process and to increase the microeconomic efficiency of government spending. Building in macroeconomic stabilization requirements into the budget process Government spending, though still falling, accounts for a large part of total demand (see chapter 1). Thus the goal of financial stabilization is especially urgent. Achieving it will require more realistic calculation of the main fiscal variables, particularly the level of the fiscal deficit and its mode of financing from the start of the budget preparation process; once properly determined, these variables must become an immutable constraint, not to be reopened at each stage of the budget process. It will also be important to run macroeconomic forecasts and budget projections beyond the current fiscal year. 3 For a detailed discussion of the conditions of on-lending of foreign loans within the public sector, see "Regional Projects in Russia: Issues and Options for the World Bank Lending Program", World Bank, 1994. 49 The need for accurate forecasting. Realistic, technically sound forecasts of revenues, expenditures, and general economic conditions, free of partisan manipulation, are essential for the budget to have political credibility and practical usefulness. Though the budget itself necessarily reflects a country's political and social objectives and priorities, the background information on the consequences of various levels of revenues and expenditures should be politically neutral, based on technical analysis. Revenue forecast procedures should be open, inclusive, and multifaceted to forestall the political attacks to which unrealistic budgets will be particularly vulnerable. Such attacks will intensify if budgets are constantly revised or deliver vastly curtailed services when compared with unrealistically high budgeted service levels. Economic forecasting tools for a market enviromnent are still being developed in Russia. The Ministry of Economy has long been responsible for the macroeconomic forecasts, and only recently has the Ministry of Finance developed the capacity to prepare its own macroeconomic forecasts. The Department of Macroeconomic Policy was set up in the Ministry in 1992 and produced forecasts in 1994 that were used in the preparation of the 1995 budget. The Ministry of Finance plans to further develop, deepen, and strengthen its forecasting capacity, which is so for limnited to the main macroeconomic aggregates. This capability is an important input to the Treasury's financial planning and puts it in a position to offer guidelines to the Budget Department and other ministries on the key macroeconomic parameters as part of their own budget preparation process. Box 3.2: Macroeconomic Forecasts - Between Science and Art In most OECD countries, several independent agencies produce their own forecasts at the start of budget preparation, and confront their results. Ministries of finance have forecasts tools for screening these external forecasts and testing variations in fundamental fiscal choices and orientations. As a general rule, the models they use to test these variation and the level of fiscal revenues linked to the level of economic activity are reliable. However, experience throughout the world shows that these forecasts are not infallible. For example all EU countries underestimated the severity of the recession in their 1992 forecasts for 1993. Furthermore, the corrections made in the fall of 1992 often came too late to change the major fiscal reconciliations, which were already too far advanced. Forecasting models perform best when the economic environment is settled and economic activity is on a steady trend. Turning points and reversals of trends are much harder to forecast. Countries the world over have found that permanent and effective deficit contaimnent cannot take place without an explicit targeting of the permissible deficit (box 3.3). This means that the budget instruction sent by the Ministry of Finance to the spending ministries at the beginning of the budget preparation cycle should clearly quantify the targetedfiscal deficit and the derived spending limit for each nministry. This practice would increasefiscal discipline in the spending ministries and help to legitimize the difficult choices that have to be made at the follow-on stage of reconciling spending requests with the overall level of the targeted deficit. These macroeconomic parameters should be reviewed over the course of the financial year and updated as required. In a rapidly changing macroeconomic environment, quarterly reviews of budgetary performance are also needed. Timely reports on overall budgetary and macroeconomic developments are 50 essential as a basis for policy adjustments. The Ministry of Finance should strengthen its ability to estimate a sustainable fiscal target and to ensure that budget estimates support this target, by providing guidance on preparing realistic budget estimates and on projected changes in macroeconomic parameters. Box 3.3: Deficit-Containment - The International Expenience Many countries now use some sort of high-level targeting to set a limit on total expenditures. Another frequently used tool is the setting of a pfiori financial limits to the request of individual ministries and departments ("top-down" budgeting). Virtually all OECD countries, for example, use specific quantitative targets for total expenditures and the overall deficit, rather than general qualitative statements of intent about these objectives. These targets are typically expressed as a percentage of GDP, an absolute value, or a rate of change over levels in the previous period. Most of these countries have pursued policies of deficit containment and reduction over the past 15 years. In France, deficit containment policies in the 1980s took the form of explicit fiscal constraint, rolled over from year to year, limiting the size of the deficit GDP. More recently, fiscal deficits are one of the key "convergence criteria" established by the European Union to facilitate the introduction of a single European currency. In France, the fiscal deficit in 1993 was too high to meet the target. To bring it to its target level within five years, a law passed in January 1994 established interim targets for the fiscal deficit as a share of GDP: 1993 1994 1995 1996 1997 -4.5 4.1 -3.5 -3 -2.5 The law is not binding because it does not limit the right of parliament to set annual target deficits. It does, however, represent a political commitment and provide a reference point, especially for the international financial community. As a first priority an adequate data base should be established to facilitate analysis of revenue estimates on a regular and timely basis. Profiles of expenditure programs (running costs, labor and capital mix, impact of inflation, implication for future resources, pattern of demand) should be built up by the Macroeconomic Policy Department, to inform the work of the Budget Department. The Revenue Division of the Budget Department has been increasingly engaged in making revenue estimates. This effort could be improved through collaboration with the State Tax Service in collecting data for taxpayer profiles, for example. The Macroeconomic Policy Department should also provide guidance to the spending departments and regional governments on changes in projected key macroeconomic parameters, in part through collaboration with other institutions responsible for macroeconomic forecasting and analysis, such and the Central Bank and the Ministry of Economy. This information needs to be provided at the outset of the budget cycle; when the budget is being finalized to allow for fine-tuning, and quarterly throughout the year as a check on implementation. The quarterly reviews of budget implementation would be based on the Treasury's reports on budget execution. They would constitute part of a wider macroeconomic picture, drawn up in coordination with other agencies responsible for macroeconomic developments. As input to the Treasury's financial planning, these reports would also form the basis of summary reports to the legislature. 51 Improving forecasts requires better models and better data. Improvements are needed in the scope, relevance and quality of data collected by Goskomstat (prices, income, sectoral flows, value added), by the State Tax Service, Customs Administration (tax bases, collection patterns), and by the Central Bank (detailed balance of payment and monetary aggregates). The quality of the data generated by the Ministry of Finance on budget execution also needs improvement (see chapter 4). Because the lack of the necessary technical skills and experience in cost accounting have made accurate measurement of the effectiveness and efficiency of government programs difficult, it is important for the Macroeconomic Policy Department to develop its institutional relations with other government agencies to help them define and generate the relevant data and analysis. The desirability of multiyearfiscalforecasts. Multiyear planning is important for directing the attention of decision makers to the continuing financial implication of current policies and for showing the extent to which available resource are already committed to current policies (see box 3.4). Multiyear expenditure frameworks are particularly helpful in showing the future implications of current policy decisions in investment spending (to measure the recurrent cost implications of investment decision), debt management (to quantify the future burden of debt and guarantees), social spending (to assess the impact of policy decisions on entitlements such as pensions and social security), and personnel management (to assess the future impact of wage decisions). Despite the difficulty of making projections in an inflationary environment with continuous structural changes, it is important to introduce multiyear fiscal forecasts in Russia as soon as possible. Given the past difficulties of the government to budget even on a yearly basis, a legitimate question is whether the introduction of multiyear fiscal forecasts is a realistic proposition at the present time in Russia. The answer is yes. First, as we have seen earlier, major progress has been accomplished since 1994 towards stabilizing the country's financial situation and developing the forecasting capacity of the Ministry of Finance. Second, multiyear fiscal forecasts are essential to the design of policies that support the sustainability of the on-going financial adjustment and to discipline government policies. The need for multiyear fiscal forecasts is made especially critical by the long-run nature of the structural changes required as the economy moves to a market basis. Such economic and fiscal stress makes eliminating the fiscal deficit in a short period of time nearly impossible and makes sustaining fiscal stabilization, once achieved, difficult. Multiyear programming contributes to the credibility of the government's policy, which is a key to investment recovery. Unless investors view the adjustment program as internally consistent and are convinced that the government will carry it out despite the implied costs, the possibility of reversal will dampen or obliterate any investment response. The Macroeconomic Policy Department should construct three-year revenue and expenditure forecasts. The same should be done at the oblast level. These multiyear fiscal forecasts need not be as detailed as the annual estimates, nor should they be regarded as a blueprint for future operations or as a conmmitment of future resources. Rather, in the short-term they should be interpreted as rough indications of the levels of spending and receipts implied by current policies, to check the consistency of these projections in reaching the planned overall fiscal target derived in the context of a consistent financing programming framework for the whole economy. These "forward estimates" would represent a consistency check on the proposed fiscal strategy and related financing plans and provide a clearer picture of the need for adjustment and trade-offs. 52 Box 3.4: Multiyear Budgeting It has become quite common for ministries of finance around the world to practice some variety of nultiyear budgeting. For example, Canada, Germany and the United Kingdom all have multiyear expenditure plans which get reviewed and approved every year. In these countries, the starting point for the next year's budget is the expenditure level approved for this year in the multiyear expenditure plan. Any changes to these previously approved levels have to be treated as additions to the budget, to be financed by raising total spending or by making offsetting changes in other programs. The multiyear documents are detailed plans providing disaggregated targets to be used in the preparation of budget plans by programs and agencies. These plans are annually updated. In Germany, the annual budget is integrated in a multiyear financial plan, which is presented to parliament at the same time the annual budget is presented. The multiyear plan and the annual budget incorporate the fiscal objectives of the Lander and the local governments as reported by the Financial Planning Council. This planning organization has representation of all three levels of government. The information made available contains annual rates of growth of total spending and overall levels of borrowing, with some allowance made for price increases. The most important objective of the multiyear financial plan is to monitor the possible existence of excessive demands on public resources. In Canada, each year the federal government reviews and rolls forward the Fiscal Plan which comprises in more detail the current fiscal year and three more years. Each spending unit develops its own multiyear expenditure plan with the levels needed to keep the current level of services running for the next three years, which are then negotiated with the Treasury Board. In the United Kingdom the multiyear public expenditure survey also covers the next three fiscal years. Even when they do not have multiyear expenditure plans, other countries carry out forecasts of the financial consequences of current expenditures (for examnple the future liabilities implied by increases in pension plans) or capital investment projects (such as future expenditure on maintenance and operation). For example, in Denmark, there is an appendix to the annual budget showing the expenditure level for the next three years at the same level of disaggregation as in the annual budget. Microeconomic efficiency of government spending The distribution of scarce resources among different pubiic administrations, and a wide range of activities, from subsidies to space stations, street cleaning and vaccination programs, is extremely difficult and complex. There is no simple and reliable indicator or formula to do it. Also, unlike the private sector, the public sector has no "bottom line", no statement of profits and loss that provides indisputable and rapid feedback on the efficiency and effectiveness of its operations. Countries have tried many methods over the past decades to introduce a system of rational choices in selecting spending and to carefully design the incentive system in which such choices are made. All have shortcomings, demonstrating the need for a pragmatic stance that combines diverse approaches in selecting expenditures. By default, the most widely used method is a budget constructed according to the nature of spending items for each organization constituting a unit of management with respect to budget appropriations. The appropriations are revisited each year on the basis of what was allocated the previous year. The main virtue of this "incremental budgeting" method is its simplicity. 53 This method corresponds to the genera] stability of public services, which should normally be governed by the principle of continuity (unlike the case in private enterprises, which must constantly adjust to changes in the market). Such activity as defense, security, education, or health entail long term- actions and require continuity of efforts. That is why incremental budgeting, by combining simplicity and adequacy with administrative action, found a strong de facto legitimacy in most countries. The risk, however, is that appropriations that are used inefficiently or that have become useless will simply continue to be renewed. This risk is especially great in economies in transition, where change and discontinuity are more the rule than the exception and where financial stabilization ouglht to be the overriding priority. Decremental rather than incremental budgeting is needed in this environmiiient. To prioritize spending and identify programs and activities to be cut, Russia needs a more analytic approachi to budget preparation that systematically asks such fundamental questions as: Should governmlent continlue to finance this function, program, or project? Are there better ways to finance this service (for example, users fees)? Does everyone who now receives social protection or other types of subsidies nieed themn? These are difficult questions, but they must be posed and answered in the budget preparation process. In Russia's budget process, staff review is focused on conformance with normiis or the previous year's allocations and with new policy initiatives, rather than on answering these questions. Logical. systematic consideration of policy change is thus impossible. To achieve efficiency and effectiveness in government spending, a two-pronged apprioach is recommended: improving the incremental method currently in use, by reforming the budget classification and improving its presentation and analytical content, and simplifying the admiiinistrative structure and using competition and systematic evaluation to improve performance in the spelndilng units. Reform of budget presentation and methods Budget classification and presentation. The budget classification system has important imp I icat i(ns for fiscal management. By facilitating the compilation of accounts, proper classification encourages accountability in the use of public funds and indirectly influences how those funds are use(l. Proper classification provides a framework for fiscal decision making. At least two kinds of classitication are useful: functional classification, which allows for the analysis of government expenditures in particular activities even when the organizational structure of government changes, and economlic classification, which facilitates projections and therefore budget planning (see box 3.5). Russia's expenditure classification is based on the four-level "branch-departmcntit" approach inherited from central planning. The first-level branches or sections of the economy (called "razdeyl"), are broken down into para2eraphs describing component functions or programs within each section and then into articles of expenditure (or "statia"). In addition branch expenditures were broken down into 126 executing agencies, called chapters (or "glava"). These agencies ("the distributors of funds") oversee thousands of spending units divided into budget-supported and self-financing institutions. Budget- supported units perform government functions, and generally have detailed budgets that are monitored by the glava. Self-financing units are generally enterprises and submit aggregated balance sheet data. They receive transfers to support their production activity or subsidies to compensate for pr-ice regulation. In a major departure from the inherited soviet classification system, the 1995 federal budget was presented under a new classification, developed by the Ministry of Finance and the Budget Colmmittee of parliament. The new system follows international standards (see annex 5) in classifying expenditures by spending organizations, functions, and the economic nature of the expenditure (see box 3.5). Although this new classification has yet to be formally approved by Parliament, it represents a major improvement in the transparency and quantity of information presented to Parliament and prepares the way for strengthening budget preparation. 54 At this stage, the immediate challenge is to complete the work on the new classification and to formalize it in a law. The first reading of the draft law on the budget classification took place in December 1994 and the concept of a new classification was accepted. Since then, a lot of work has been done to finalize the proposed budget classification. A second reading is scheduled to take place before end-1995. During this process, the initial draft has been significantly improved and most of the shortcomings identified in Annex 5 have been eliminated. However, a number of key technical improvements have still to be made, especially with respect to debt flows and intergovernmnental transfers. As regards debt flows, the governmnent debt service for all types of debt, should clearly separate interest payments (shown "above the line") from repayment of principal (shown "below the line" as part of the source of financing). Also, the budget classification should include a "net lending" expenditure category reflecting the disbursements and repayment flows of budget loans. Finally, all transfers to other levels of governments should be regrouped together rather than scattered in different places. Box 3.5: Types of Budget Classification A system of budget classification enables the myriad government operations and transactions to be organized into relatively homogeneous categories that facilitate the analysis of the impact, nature, and composition of revenues, expenditures, and other financing activities of government. On the revenue, taxes are classified by the type of activity on which the tax is levied (income, sales, property and so on). Other current non-tax revenues are classified by the nature of the inflow, such as income from government property, sales proceeds, fines, and donations. Capital revenues are classified by the type of asset sold. Grants are distinguished by whether they come from domestic or foreign govemments and international institutions and whether they are for current or capital purposes. On the expenditure, outlays are frequently classified by the responsible institution or organization. The two most useful types of classifications of government expenditures are the functional classification and the economic classification. In functional classification, expenditures (and lending) are classified according to the main purpose or function such as defense, education, and health. The three-level Classification of the Functions of Government published by the Statistical Office of the United Nations, is commonly accepted. The value of functional classifications is that they permit analysis of trends in government expenditures even when the organizational structure of govermnent changes. The economic classification groups expenditures into current and capital and by whether they are requited or unrequited; if requited, for what kind of goods and services, and if unrequited, by the type of person or institution receiving the payment. The objective is to show the kinds of transactions through which the government performs its functions and their impact on markets, financial conditions, and the distribution of income. These transaction categories are wages and salaries, purchases of goods and services, interest on the debt, subsidies to enterprises, transfers to households and other governments, and lending. One of the most useful ways to analyze government outlays is by means of a cross-classification by economic character and function. This classification reveals the means by which government performs its functions and the impact these activities will have on the rest of the economy. As evidenced by the difficulty experienced in 1995 for reporting the subnational budgets under the new classification, a second challenge is to introduce this new classification in the regions, a potentially difficult and lengthy process because of the regions' varying needs. A flexible solution would 55 be to ensure a conmmon classification system for major spending categories (parts, chapters), while letting governments adjust more detailed items (articles and paragraphs) to their individual needs. The new classification fosters incremental budgeting. The first priority at each stage is to show the amount of appropriations necessary to finance ongoing activities. Requests for new activities and proposals for savings are entertained next, within the global constraint. The recommended top-down approach to budget preparation should be complemented by a bottom-up approach when requests for financing are discussed. Getting agencies at the end of the chain directly involved in budget preparation early on in the budget process is one important step. Following guidelines from the Budget Department, these agencies could present requests (supported by documentation and explanations) detailing: * The amount of funding necessary to continue current service levels * Proposals for expanding programs * Proposals for generating user fees * Proposals for spending cuts * Proposals for boosting efficiency. This "revolving budget" method, if used more systematically at the administrative preparation stage, could improve the transparency of the budget submitted to the Duma by showing the real level of expenditures by comparison with the preceding year, and the relative efforts made by each sector. A format that allows appropriations allocated to each sector to be compared to the amounts allocated during the past year is particularly necessary, in a period of high inflation. It makes it possible to base the distribution of resources on a critical analysis of previous operations, and to clearly identify priority actions benefiting from a real increase in resources. Although the 1995 budget included far more supportive information than previous budgets,4 this detailed type of information is still not available. To allow for rational decision making, the budget must contain adequate information in an understandable format. A good budget is more than tables of numbers; it also includes graphs, a narrative description of the functions that the request will finance, and a summary discussion of the economic assumptions about prices, wages and growth rates used in deriving budget estimates. The budget should also follow a consistent structure that moves from detailed to summary information. Each summary category should contain information on each of the components that make up that group. Currently, detail is provided only for selected components, so it is impossible to examine the full detail of budget groupings. The relevance of norms and program budgeting. Although the old system of norms has largely fallen into disuse, there are plans to revamp it. The Ministries of Finance and the Economy, several line ministries, and regional governments are reportedly engaged in preparing a new set of norms. Article 15 of the resolution of the Supreme Soviet accompanying the budget voted on May 14, 1993, provides for "definition of a uniform methodology for implementation of a system of social and financial standards appropriate to the conditions of a market economy," suggesting that the legislative branch too wants to see a revamped system of norms. While there seems to be wide consensus among these groups to avoid 4 To a large extent, this positive development resulted from the pressure exerted by the Duma for increased transparency in goverunent accounts. 56 a return to an exhaustive system of detailed physical norms, the problem is how to derive new norms and how binding they should be. Norm-based budgeting suffers a number of shortcomings. The norms are equitable in appearance only. For example, the cost per student can vary enormously with age, the qualification of the teacher, and other factors, while food intake by a hospital patient can vary by patient and region. Trying to correct for these variations would result in an enormously complicated and unwieldy system, without resulting in a truly equitable set of norms. An even more serious shortcoming of such systems is that they are supply driven, fostering soft budget constraints and inefficiency. Despite these shortcomings, norms can be useful in a market environment if used selectively. For example, a number of countries (France, Germany, Japan, the United Kingdom, the United States) have developed an extensive system of norms on hospitals costs in an effort to control health expenditures. These norms include detailed costs for various types of hospital treated illnesses (diagnosis related groups) and costs of procedures undertaken by physicians.5 They are a method of trying to pay providers without the adverse incentives to overtreat, as tends to happen with "fee for service", while pure capitation might lead to undertreatment. The development of new, meaningful norms is premature given Russia's stage in the transition to a market economy. Although the reintroduction of indicative norms for carefully targeted government activities is not necessarily a bad idea, three preconditions for successfully conducting such an exercise are missing. First, there should no longer be significant shifts in relative prices; this means that all key prices, including energy, should be free. Second, structural reforms that redefine the role of government in different sectors should precede any attempt to selectively introduce norms for specific activities. Third, cost accounting should be strengthened to provide adequate data for the exercise (see chapter 4). In addition, to avoid the shortcomings that often attend a norms-based system, its introduction should await reform of the incentives system for budget-supported institutions and the establishment of systematic performance evaluation audits. Another common budgeting practice used extensively in Russia is program budgeting. Many countries have adopted program budgeting as part of their efforts to introduce performance- or output- oriented budgeting methods. The rationale is that it makes sense to group under one program all the activities necessary to achieve a given objective, for example the development of tourism, the conversion of defense industries, or the investment and current expenditures to care for the children of Chernobyl. Advocates argue that the system enables cost-benefits analysis and therefore can contribute to the rationalization of budgetary allocations, and that it provides a way of monitoring a program's success by comparing program targets with actual outputs. Managers are given flexibility in meeting their targets, with success judged on the basis of output measures. Experience with the method in Russia elsewhere points out two main dangers: efforts to develop programs" often end up forcing activities into artificial groups, and programs tend to become a routinized expenditure item in the budget over time, automatically renewed with little or no evaluation. Appropriate use of the method requires emphasizing its exceptional character by narrowly defining the 5 In the United States, an analysis known as resource-based relative value scale (RBRV) was adopted to determine the remuneration scale of physicians for about 700 procedures. See "Changing Patterns in Public Expenditure Management", A. Premchand, IMF Working Paper WP/94/28, March 1994. 57 purpose of programs, and strictly limiting their duration. This implies that each discrete component of the broader program needs to be tightly defined and kept under review at the agency level. Investment in analytical work. Intensive strategic reviews of public expenditures and functions, based on exhaustive sectoral analysis and evaluation, are required to make the revolving budgeting method effective -- especially in a country undergoing massive political and economic change. As in zero-based budgeting, it is important to reconsider each year all the resources allocated to specific services or activities. The idea is to assess the economic impact of government spending, to analyze productivity gains, and to seek ways to increase efficiency. However, given the additional work involved in such an approach, the activities under scrutiny should be carefully selected each year. The thorough evaluation of government spending is extremely demanding of analytical skills, often requiring the use of consulting services as well as the evaluation audits performed by a specialized - - and independent -- agency (see chapter 5). But conducting in-depth sectoral public expenditure reviews is a waste of time and resources if the results are not reflected in budget preparation. The key is to build these reviews into the budget preparation process, a practice that is not that systematically followed in Russia. For example, in an oblast, the analysis by the internal audit service concerning inefficient spending was not taken into account in the allocation of resources for the following year. Similarly, remarks made by the federal government regarding lack of selectivity in spending in the agro-industrial complex did not translate into a massive reallocation of resources. Evaluation needs to be made internal and obligatory and linked to the budgetary process. The allocation of government spending should be clearly linked to the adoption and monitoring of reforms at the sectoral and enterprise or agency level.6 In addition, each annual budget should indicate, in detail, the programs proposed to be cut, new programs that are being launched, and the effect on the budget. To restore credibility, these programs should be explicitly audited each year and the results should be made an integral part of budget hearings in Parliament. Budgeting capital investment. Investment selection is a complex process. Many capital projects extend beyond a single fiscal year, even though government budgets cover just one year. That generates a need for consistency across several years of budgetary appropriations. Investment projects also require frequent modifications. And multiyear investment projects not only irnpose demands on the capital budgets of future years, but they also have profound implications for future current expenditures for operations and maintenance. The complexity of investment projects and their financial impact on future budgets explain many of the rules and techniques that have been developed in market economies to manage public investment. Investment budgeting in Russia needs to be overhauled at all levels of government. Among the major problems: much of government-financed investments consists of large transfers to the productive sector, there is little or no economic and financial evaluation of projects, and ongoing investment projects are inadequately financed, resulting in stalled and discontinued projects. In addition to a new focus on social overhead capital and an end to capital transfers to enterprises in the productive sector,7 the following principles should guide reform of government-financed investment: 6 For a detailed discussion of this issue see Le Houerou, "Investment Policy in Russia". Studies of Economies in Transformation No 17, World Bank, June 1995. 7 For a more detailed discussion of this issue, see "Investment Policy in Russia", ibid. 58 * Each level of government should establish a multiyear (three to five) capital expenditure plan that reflects the expenditure implications of proposed capital projects and their source of financing. This budget should include all government-financed investment ("capital repairs" as well as "new fixed investment"). To demonstrate the financial sustainability of the proposed investments, the spending plan should include provisions for meeting the recurrent costs of continuing and new investment projects. This draft investment plan should be accompanied by an explanation of the rationale underpinning the proposed selection. * The current and capital spending of govermrnent programs should be considered together. The first question is whether ongoing activities are still priorities for continued funding. If so, as a rule of thumb, no new investment projects should be undertaken if the maintenance costs of ongoing public investments are not being fully financed. The underfunding of maintenance on past investments can result in enormous waste of public resources. As World Development Report 1994 points out, reconstructing a run-down road is many times more costly than properly maintaining a new road. * Large investment projects (infrastructure) should be prioritized according to their economic and social returns. The Ministry of the Economy drafted detailed project evaluation guidelines in 1994 (based on the UNIDO methodology of project evaluation). To be practical, this initiative needs to be complemented by a nationwide training program in cost-benefit analysis for implementing agencies at all levels of government and by the development of a simplified methodology for small investments. Meanwhile, government agencies should hire private financial consulting firms to conduct feasibility studies. * Since feasibility studies based on cost-benefits techniques are not infallible, and financial conditions can force interruption of a project, flexibility should be built into the design of large investment projects. Following the French example, large projects should be composed of modules or "functional tranches," each with its own economic and operational rationale. (For example, a hospital construction project could be designed so that the surgical department is fully operational in one year, the pediatric care department in two years, and so on.) This programming technique limits the cost of interruptions and allows for adaptations to prevailing financial conditions. Careful design and close collaboration between technicians and financial specialists are needed to make this technique work. * To avoid costly delays caused by funding shortages once investrnents are under way -- something that seems to have happened frequently in Russia since 1992 -- many countries distinguish between budget authorizations, whose validity extends beyond the annual budget framework, and payment appropriations opened for the year and necessary for financing the execution of the technical work (see box 3.6). * The Ministry of the Economy and the Ministry of Finance should strictly condition disbursements on the timely execution of the work, according to a predetermined schedule. In turn, the executing agency should spell out clearly to contractors the conditions of delivery and completion, and penalties for noncompliance. Government- financed investment should follow strict procurement rules (see next chapter), designed to hold down costs. 59 Box 3.6.: Multiyear Commitment in Capital Spending Many countries (Denmark, Germany, the Netherlands, the United Kingdom, the United States) use multiyear commitment to reduce the inefficiencies associated with the strict application of the principle of annuality to capital investments. Germany's budget law allows capital investment funds to be carried over to future years. In the United States, Congress may authorize spending over the entire life of a project rather than enacting appropriations for a period of one year. The theoretical advantages of all these budgeting rules, methods, and procedures are not always realized in practice because of interactions with social and political environments. The influence of lobbies can often result in the postponement of necessary decisions and structural reforms. However, the pressures coming from different interest groups partly offset each other, especially if the financial constraint is strict and sectoral ministries have to reconcile these various interests. Recourse to consultants, transparency of procedures, and broad dissemination of the results of analyses of the efficiency of sectoral government spending can help dampen the influence of these interests by encouraging compromises that focus on more spending efficiency. Institutional reform and incentives Improvements in budgeting techniques to increase the allocative efficiency of government resources must be complemented by institutional and organizational reform designed to increase competition and improve performance. It is particularly important that the "distributors of funds" be redefined in a way that regroups institutions with similar missions and eliminates inefficient institutions. It is also important to revise incentive structures to reward efficiency and effectiveness. Eventually, the aim is for spending units that want additional resources (or smaller cutbacks) to propose their own economies and efficiency improvements. Cutting the number of distributors offunds. In Russia the procedure of allocating spending appropriations has not yet been accompanied by a reflection on the administrative structures and the targeting of fiscal efforts. At the federal level, there are over a hundred "distributors of funds" (glava) of "first-level spending units" (institutions that negotiate their budget directly with the Ministry of Finance) -- many with overlapping functions. An individual activity, such as protection and development of forest resources, can have a host of formally distinct organization units, such as ministries, commissions, and state committees, each negotiating its budget independently with the Ministry of Finance. This arrangement is administratively costly and interferes with the reallocation of appropriations from one structure to another to improve the effectiveness and efficiency of spending. The federal government recently recognized that simplification of governmental structures was an important objective, but rationalization of governmental structures has not extended to the budgetary level. However, that process can be separated from the process of integrating and rationalizing budgets. Thus, for example, the Siberian Centre of the Academy of Science or the Russian Academy of Medical Science, whose appropriations are currently negotiated directly with the Ministry of Finance, can maintain their administrative autonomy even as their budgets are integrated into the more general budgetary framework of the federal academies of science or the research ministry. The situation is similar in other sectors. 60 Most of these structures should retain their administrative autonomy because of the income they generate. Other countries have transformed such units into independent agencies, while consolidating their appropriations into the supervising ministry. The supervising ministry could encourage the regrouping of agencies for increased management efficiency, where appropriate, or condition appropriations on a better complementarity among these agencies. In simplifying internal procedures, responsibility for final budget reconciliations must be assigned to the Budget Department in the Ministry of Finance. At the same time, the role of each spending unit in this process should be strengthened, since cost saving efforts that have been proposed by or at least discussed with the unit involved are likely to be better targeted and more consonant with effective management. To make this feasible will require a drastic simplification offederal structures at the glava level. Cutting the number of such structures by half is desirable from a budgetary standpoint, even though the structures concerned are likely to resist the change because they view their budgetary autonomy as a sign of bureaucratic strength. Fostering results-oriented management. Since the mid-1980s, several countries (starting with Australia, Canada, New Zealand, and the United Kingdom) began to introduce a new philosophy in public expenditure management that gives spending agencies more independence and more responsibilities. The intention is to get public administrators to focus more on results than on simple compliance with rules and procedures designed to control resource use. The underlying premise is that efficiency depends primarily on the self-directed efforts of spending agencies, which are in the best position to know their clients' needs. Australia introduced a program of "efficiency dividends" in 1987 that called for a percentage reduction in overall current spending over several years, to be realized from the efficiency gain achieved through improvements in management and technology. Though this approach has precedents in performance budgeting, and productivity contracts, it differs from them in its emphasis on outputs, autonomy, competition, and accountability for results within a specified budget. In other words, this new approach goes beyond the financial confines to the vital organizational aspects. A complement to this approach is a fundamental reform in accounting practices and information flows and the feedback of evaluation results into budget preparation. Although the approach appears straightforward on paper, it is not easy to introduce market mechanisms to improve the management and efficiency of public service provision. To achieve this goal, most countries have adopted rules that vary according to the nature of the activity concerned. The "next step" approach to accountability is designed explicitly to test the feasibility of allowing the market forces of "exit" and "voice" to influence the efficiency and quality of "marketable" services provided by the government (see box 3.7). Pure public goods, like national defense, would be excluded. Where the government is not a monopoly provider, dissatisfied buyers can be allowed to seek an alternative source of supply. Their actions would affect the revenues of the government institution, thereby revealing its poor performance. Another way to give voice to consumers of public services is to shift from supply- to demand- driven budget allocations. Instead of transferring allocations directly to public providers, the government could distribute vouchers that consumers could redeem for well targeted services. This technique fosters competition among providers of public services, whether publicly or privately owned. Russia is experimenting with this technique in compulsory education in a number of regions. These efforts should be closely monitored and, if successful, carefully extended to other regions, with appropriate modifications. 61 Box 3.7: Injecting Market Mechanisms in Public Services - The French and British Examples An economic logic: the British "next step" approach The next step approach which is still being developed in the United Kingdom, starts by identifying public activities that have a close commercial counterpart. When these activities can be organized into a coherent unit, a competition is organized between private enterprises, which can take over the activities on a contractual basis, and the unit itself, which can bid to take over the activities. The unit continues to operate within the public sector, but it is transformed into an "agency" that functions with very flexible rules, in particular with respect to personnel decisions (wage levels, recruitment policy). Examples of this transformation of public services in such agencies includes communications services and cafeterias. A legal and financial logic: the French approach to "government-owned organizations" (etablissements publics) Over the past two decades, numerous public services in France have been granted various forms of legal and financial autonomy, according to the nature of the activities they perform and the relative importance of their own revenues with respect to budget appropriations. But this budget autonomy is accompanied by strict controls, including the presence in the organization of a public accountant responsible for financial operations and, enforcement of the government accounting plan. These controls are also aimed at ensuring that the public service nature is retained and that profit-making objectives do not take precedence over their public missions. Such etablissements publics include hospitals, universities, secondary schools, and major museums (Louvre). For activities with a more pronounced commercial character ("etablissement public a caractere industriel et commercial"), different rules apply. Financial controls and the rules governing management autonomy (personnel, financial management) are more flexible. The specific degree of "commercialness" is determined on a case by case basis, to reconcile profitability and the performance of public services. The government printing office and the geographic institute, for example are defined as commercial govermnent organizations. So is the railways company. Infrastructure and public utilities offer the promise of enormous efficiency gains and savings from management reforms. Government throughout the world are increasingly involving the private sector in managing and cofinancing infrastructure services, particularly to help remedy infrastructure inadequacies. Performance tends to be more efficient under private financing and management than under public management--with shorter completion times, lower project costs, and improved operational performance (see World Development Report 1994). And with fiscal constraints curtailing funding for infrastructure, private finance is becoming more important for addressing capacity shortages. Technological developments such as containerization and wireless telecommunications have reduced the natural monopoly characteristics of some infrastructure components, allowing private entry and competition in these "unbundled" services. The administrative capacity needed for service provision or private sector ownership depends on how much regulation is required. For an activity that is likely to remain a monopoly, it may be easier to embody regulation in a contract than to privatize the activity and set up a regulatory body. Where free entry can be allowed within a competitive environment, private sector involvement requires little or no direct economic regulation. Overall, private participation does not have to wait for a full-scale regulatory 62 framework to be in place. Contract-based relationships enable regulatory issues to be addressed at the project level. More important, institutional choices depend on sectoral characteristics relating to differences in cost recovery, distributional concerns, spillover effects, the public nature of consumption, and technological considerations favoring natural monopolies -- in sum, the "marketability" of various semi- public goods and services.8 For example, while large network facilities such as transmission grids, primary irrigation channels, and railbeds allow for very little competition, activities such as urban waste collection and urban bus services are potentially quite competitive. Some infrastructure projects such as long distance phone service are entirely private in consumption and adaptable to market provision. Other activities such as rural roads are intrinsically monopolistic public goods with low potential for cost recovery. In Russia, full cost recovery is a prerequisite for management autonomy and possibly private management of public utilities. The federal government has mandated that local governments phase in full cost recovery for public utilities by 1998. This will result in aggregate savings of about 4 percent of GDP (1994 data), the amount now transferred as subsidies to public utilities. Part of the savings will be used to increase targeted transfers to the poor. This is obviously the right policy on macroeconomic, efficiency. and redistributive grounds. The sooner this plan is implemented, the better. For natural monopolies, the challenge for government is to establish a price-setting mechanism that enables the public utilities to provide good services and invest in new capacity, without fostering management inefficiencies that shift excessive costs to consumers. Another danger is that the profit motive will overtake the public service aspect of their activities. The government will need to regulate the price-setting mechanism to reconcile management autonomy and public service goals (for example, access to telephone services by marginal consumers in rural areas). Legislature Procedures for Budget Adoption Well functioning democracies have come to recognize the importance of the separation of legislative and executive functions in budget preparation, execution, and review. In many countries, the legislative branch acts as a check on government requests by forcing agencies to justify their expenditure proposals and demonstrate the effectiveness of their programs. Executive officials, for their part, curb the natural inclination of legislators to champion their constituents' demands for particular projects by assessing the relative worth of the added spending. This approach brings government spending under close scrutiny. The result is greater fiscal restraint and stronger incentives to choose efficient expenditure policies, allowing government objectives to be met at a lower overall level of taxation. Russia has moved toward greater clarity in its budget procedures, especially with the adoption of the December 1993 constitution and the October 1994 law on budget adoption procedures. But the framework governing interactions between Parliament and the government during budget adoption is not yet settled. 8 For a detailed discussion on the marketability and institutional management for the provision of infrastructure, see P. Le Houerou, "Investment Policy in Russia", ibid. 63 Gaps in parliamentary procedure Some countries severely restrict parliamentary initiative in the budget area, on the grounds that control of the budget deficit at the parliamentary stage demands specific rules. British budget legislation prohibits any amendments during the parliamentary budget debates. Other systems are less restrictive but still strictly regulate the right of parliamentary initiative (see box 3.8). Box 3.8: Limnitations on Parliamentary Initiative Parliament's authority to amend budgets presented for approval by the executive differs widely among countries. In Australia the budget is debated in the House of Representatives and the Senate, but the Constitution limits the Senate's authority on appropriations for the current budget, such as wages and salaries, to rejecting or deferring the Executives's proposal; no amendments are allowed. For capital expenditures and new initiatives the Senate has full voting powers. The Senate may not initiate bills proposing new taxation or increases in existing taxes. In Canada, Parliament may delete or reduce amounts being proposed by the executive, but may not enlarge the scope of budget items or increase the amount proposed by government in the proposed budget. In Germany, the Bundestag may change or add to the proposals submitted by the executive. Parliament can appropriate more than the government proposes, and certain proposed expenditures may be deleted or frozen. The only exception is for a category of mandatory expenditures, which cannot be changed unless the underlying legislation is amended. However, laws increasing expenditures or involving new programs require the consent of the government. The executive may require the Bundestag to postpone the vote on such bills or reconsider its vote. In Denmark, Parliament can change any individual budget account. Each account is voted on separately before the final vote on the entire budget. In the United States, Congress has a more active and more independent role than is typical in other countries. The budget process in Congress is also more complex and more fragmented than in most other countries. The Congress does not discuss or approve a unified, detailed, and comprehensive budget document. Instead, Congress establishes overall budget guidelines through the approval of "concurrent budget resolutions." These are basically a mandate of Congress to itself relating individual budget actions to targeted budget aggregates (revenues, expenditures, budget authority, the federal deficit, federal borrowing ceiling, and direct loan obligations and loan guarantees). Implementation and enforcement of the concurrent budget resolution occurs through the enactment of separate tax, expenditure authorization, and fund appropriation bills. In the authorization process the legislation establishes a program, creates an agency, or gives authority to perform a function. In most cases, legislation for authorization does not provide specific authority to spend money or incur obligations. This type of authority is granted in separate appropriations legislation. Source. The Control and Management of Government Expenditure OECD, Paris, 1987. Russia, too, restricts parliamentary initiatives in budget matters, but the restrictions are weakly enforced. For example, article 14 of the Budget Act of May 14, 1993, repeats a traditional provision of Soviet law that parliamentary budget amendments proposing supplementary expenditures may be entertained only if the amendments identify the corresponding sources of revenue or equivalent cuts in expenditures. However, in the absence of implementing procedures, this restriction has not been applied. As a result, Parliament has substantially raised the deficit over the figure set in the executive's budget proposal -- doubling it in 1993, for example. This lack of fiscal discipline led to a presidential veto and later to dissolution of the Supreme Soviet. 64 The Constitution of December 1993 includes three key provisions with respect to fiscal and monetary policy. First, the president can veto the budget law adopted by Parliament, though Parliament can override the veto with a two-thirds majority of total members (article 107). Second, parliamentary initiative in fiscal matters is limited, albeit in general terms (article 104). Third, the Central Bank was granted operational independence from the other organs of state power (article 75). It remains to be seen how these relationships will develop in practice. Parliament passed a law on October 25, 1994, covering adoption procedures for the 1995 draft budget. in which it distinguished three stages or readings, each to be followed by a vote: * The first reading focuses on the macroeconomic and sectoral projections, policies, and assumptions on which the draft budget was based. * The second reading focuses on approval of the tax-sharing arrangement between the federal and the subnational governmiients, overall revenues, the deficit, and therefore the overall spending envelope. * The third reading focuses on detailed discussion of resource allocation. Yet the final budget law for 1995 was voted only after a fourth reading, during which the final details of spending allocations were agreed. The new procedures are a major step forward, although there is no explicit provision restricting Parliament from exceeding the overall spending limits voted on during the second reading. That means that Parliament may end up increasing the level of the agreed fiscal deficit. In the United States, Congress is not restricted to discussing the budget proposed by the President. However, Congress votes separately on targeted budget aggregates that Congress itself has to respect. Some countries view undesired increases in the budget deficit as a serious enough threat to warrant restrictions on budget discussion and approval by the legislature. The French budget law establishes that Parliament must first approve the overall deficit before discussing expenditures by sectors, thereby preventing the detailed budget discussion from leading to an increase in the deficit. Gaps in budget procedure at the subnational level The problems in the budget process at the federal level are for the most part repeated at the oblast and rayon levels. The Law on Budgetary Rights and other laws have granted oblast and rayon legislatures considerable control over the composition of their budgets.9 However, the lack of a strong legislative tradition has meant that subnational councils are still trying to define their roles relative to the executive branch of government. Local councils are often inadequately staffed, receive inadequate information, are improperly involved in such administrative functions as accounting and disbursement, and are out of the approval loop for some spending and revenue decisions affecting the city. Subnational legislatures and local councils do little to publicize budgets or budget hearings, a process that is routine in most democratic countries. And yet as Russian oblasts, rayons, and cities face difficult adjustments in spending and revenue, citizen understanding and support will be vital. In addition, the budget process ought to be a means for citizens to express their spending priorities and make suggestions for improving the efficiency and effectiveness of program delivery. This is the critical step 9 See footnote 6 in Chapter I for a list of these laws. 65 in the budget process for reaping the benefits of decentralization. The degree of voter participation found in Switzerland, where many canton-level decisions are made by direct referendum of local residents, may not be possible in most countries, but public hearings and regular referendums are part of the local government process in many countries. Improving parliamentary procedure at all levels At the federal level, some restrictions on Parliament's budgetary authority could improve the budget process. Requiring that the overall level of the deficit be set before sectoral expenditures or revenue changes are discussed and shortening the adoption process would be useful changes. The October 1995 law on the budget adoption process should be amended to specify that the overall deficit, once voted in second reading, cannot be increased by new expenditure commitments during discussion of the third and last reading on sectoral expenditure allocation. Furthermore, other laws voted separately (e.g., increases in the minimum wage) should not result in increasing the voted budget deficit. Following up on the spirit and direction of article 104 of the new Constitution, Parliament's right to increase the deficit through budget amendments should be restricted to balanced amendments. Any amendment implying lower tax revenues or higher spending should be accompanied by compensating measures to increase other revenues or to cut other spending. Amendments could be sent for review to the Budget Commission, together with proposals for raising revenues or cutting spending to keep the budget deficit unchanged. The commission would examine the accuracy of the proposals and the feasibility and effectiveness of the proposed offsetting measures, similar to the procedures followed in France, the United States, and other countries. The Ministry of Finance could, in turn, confirm the reliability of the evaluation or the feasibility of supplementary measures. To bring budgets in on time and help contain the deficit, both the executive and legislature need to abide by the formal timetable for the budget cycle. No country seems to have found a satisfactory solution for holding the branches of government to the budget timetable (see box 3.9). The October 1994 law on parliamentary approval procedure attempted to define the length of the first two readings, though not of the third. But the complexity of the procedure and interruptions -- for example, to reconcile differences between the government and Parliament -- continue to create delays. Nonetheless, efforts should be made to limit the time allotted for discussion and voting during each of the readings. 66 Box 3.9: Delays in Budget Approval It is not uncommon in many countries for the fiscal year to start without a budget approved by parliament. What happens in this situation varies, but there does not appear to be an efficient mechanism for forcing the executive to submit the budget on time or the parliament to approve it on time. Following are examples of how some countries deal with this problem. In Australia, Parliament approves, typically without much debate, "Supply Acts" authorizing ongoing expenditures until final approval of the budget in both houses of Parliament. In Canada, Parliament grants an interim budget at the beginning of the fiscal year, typically authorizing spending equal to one-quarter of the total expenditure being proposed in the budget document. In Denmark, if Parliament has not approved the budget before the start of the new fiscal year., a provisional budget bill is enacted that enables the government to continue activities on the basis of last year's budget. In the United States, if budget appropriation action has not been completed by the end of the previous fiscal year, Congress passes a continuing resolution that provides spending authority for goverument programs to continue at a specified rate, which can be that of the outgoing fiscal period, until approval of the regular budget appropriations. Source: The Control and Management of Government Expenditure, OECD, 1987. Parliament should develop an analysis unit with expertise in all fiscal issues to assist the Budget Commission of the Duma. The unit would be a source that is independent of the information on budget issues and general economic policy provided by the Ministry of Finance and the Ministry of Economy. Key political judgements and decisions affecting the final budget outcomes would be increasirgly informed by better and more extensive analytical work. Box 3.10: The Congressional Budget Office of the U.S. Congress The U.S. Congressional Budget Office (CBO), established in 1974, has a director appointed by the Speaker of the House of Representatives and the President pro tempore of the Senate. The director is named or reappointed every four years. An important functions of the CBO is to produce budget expenditure projections and estimates implied by the executive's budget proposal, but possibly based on economic assumptions different from those used by the Office of Management and Budget (OMB). The CBO, for example, produces budget projections adjusted for inflation while those of OMB are in current prices. As a benchmark for comparison against OMB's projections for the president's proposed budget, the CBO produces projections based on its economic assumptions for "current services," that is the level of expenditures that would hold in future years under current law without any policy changes. These projections are used by Congress, alone or in combination with those produced by executive, in its budget discussions and legislative actions. Other irnportant functions of the CBO are to provide technical analysis for congressional committees and to present alternatives to programs and systems proposed by the executive. 67 With respect to the subnational level, the role of oblast and rayon councils in the budget process needs to be better defined, whether in federal laws, as in Germany, or in regional government laws, as in the United States. Local legislatures need adequate staff and information to carry out their responsibilities. Explaining the composition of the budget, the reasons for changes, and the limitations of local governments should become routine in the budget process. Given the diversity and autonomy of these "subjects of the federation," one solution is for the federal authorities to write a set of master procedures and regulations that oblasts can then adapt to their individual circumstances. Executive veto power at all levels of government could be transformed into a more flexible tool. The executive could be granted the power to act on individual decisions of the legislature (line item veto) instead of having to veto the entire budget bill. Chapter 4 Budget Execution and Reporting Good fiscal management does not end once a deficit-respecting budget is adopted on time. The budget must also be implemented according to schedule following the approved appropriations, with transparent and efficient adjustments to new developments throughout the year, efforts to maximize savings, and detailed, accurate and timely reporting. The situation in Russia falls far short of these goals despite major efforts since 1992. There is a striking lack of compliance with the approved budget, lack of control over the spending process by the Mir-istry of Finance and the central ministries, absence of procedures and institutional capacity for saving the government money, and very weak financial reporting capacity. Inherited shortcomings from the Soviet era are compounded by the high level of uncertainty and the institutional changes as the country transforms itself into a market economy. Since 1992, one of the main changes in budget execution has been the introduction of sequestering, which limits appropriations to monthly cash limits determined by revenue availability. On the institutional side, the main change has been the emergence of the federal treasury. The transformation of the banking system and the refusal of the central bank to continue to shoulder the treasury role it had under central planning weakened the old budget monitoring and reporting system and, to a large extent, forced the Ministry of Finance to establish its own treasury department (see annex 6). Despite these efforts, however, budget execution has not changed much since 1992. The efforts needed to strengthen the budget execution and reporting system at all levels of government can be grouped into three main challenges. The first is to manage uncertainty by establishing rules and procedures to minimize the negative aspects of sequestering. The second challenge is to establish cost-saving practices, mainly cash management and procurement rules, that will save the government money irrespective of the efficiency of spending and tax policy. The third challenge is to improve financial reporting by reforming government accounting and thereby strengthening accountability and management. Managing Uncertainty The enormous discrepancies between planned and actual budgets since 1992 have stemrnmed from the practice of sequestering, a necessary tactic for containing deficits in a period of high economic uncertainty. However, sequestering has many undesirable consequences, from turning budget plans into no more than indicative frameworks to creating efficiency losses and prompting the accumulation of arrears. These negative consequences were compounded by the lack of systems for budget control and expenditure monitoring. In Russia today, uncertainty is unavoidable. Th ilhlenge therefore is to reconcile compliance, control, and adaptability to changing circumstances. AA-d titat means clarifying the rules and methods governing budget decision-making and improving conLrol a d monitoring of the spending process. 69 70 Uncertainty and the need for sequestering Given the enormous degree of uncertainty prevailing since 1992, a mechanism to adjust expenditures to actual revenues was necessary to maintain a minimum of macroeconomic and fiscal discipline. The first and major source of uncertainty came from the highly unsettled macroeconomic environment and huge gaps between the macroforecasts (inflation, GDP, capacity to collect taxes) underpinning fiscal policy and the actual outcomes. In 1993, for example the yearly budget adopted in May grossly underestimated inflation and, therefore, budget revenue. As a percentage of the actual GDP, the planned revenues were 6.3 percent. In the revised 1993 budget adopted on December 21st, the revised revenue forecasts for the year were 15.4 percent of GDP (table 4.1). In fact, actual revenues for 1993 amounted to 10.5 percent of GDP. Under such volatile conditioiis, yearly budgeting has been impossible, and spending allocations have become a matter of daily decisions. This economic uncertainty has been compounded by a lack of fiscal discipline in the government decision making process. Often, the sectoral ministries or Parliament make decisions that have budgetary implications (tax breaks, new pending commitments) without consulting with the Ministry of Finance. These uncontrolled administrative initiatives increase the deficit (if financed) or government arrears (if not financed). A Presidential decree of June 3, 1993 stating that it is "essential that ... the state government and administrative authorities of the Russian Federation take no decision leading to an increase in expenditure at any budget level or in the extrabudgetary funds" confirms the existence of a multitude of disorganized administrative initiatives. Early on, the government had anticipated the fiscal fragility that would accompany the transition to a market economy. In February 1992, a modified system of cash execution of the budget was introduced, linking expenditure authorizations and payments to actual revenue collections (sequestering). Spending authorizations are allocated monthly rather than quarterly, and each month's allotment depends on collections made in the previous month. This significant change followed in part from the central bank's refusal after January 1992 to advance money to the Ministry of Finance. This decision was in line with the Law on Budgetary Process of October 1991 which clearly stated that the Ministry of Finance did not have the right to get loans automatically from the central bank but required a specific resolution of Parliament to do so. The law also expresses a strict view of fiscal policy generally: "balanced budgets at all levels shall be a necessary condition of budgetary and financial policy" (article 13.1). How sequestering works. The law stipulates specific steps to be taken to close an unanticipated budget gap, beginning with spending cuts (increasing government debt is to be undertaken only as a second-best alternative, within the limits authorized by Parliament). The law (articles 13.2 and 13.3) even specifies the priorities to follow in sequestering. Capital spending is to be cut first. Current spending is to be cut proportionately across the board each month, as needed. Several major categories of current spending are protected from these cuts, including wages, medicines, transfers to students, and other transfers for "social protection." The basic tenor of the Law on Budgetary Process is that expenditure appropriations are not a mandate to spend but an upper limit within which sequestering should be applied to accommodate the available revenues plus authorized net indebtedness. Sequestering has been relatively successful in containing the official budget deficits of both the federal and subnational levels of government. At the federal level, despite a shortfall in actual over- forecasted revenues of over 6 percent of GDP, the actual deficit in 1994 was smaller than the planned deficit by 1.5 percent of GDP (9.6 percent of actual versus 11. 1 percent planned). This means that expenditures were cut by about 7.7 percent of GDP (from 30.9 percent of GDP to 23.2). 71 Although all major spending categories were cut, sequestering resulted in a substantial restructuring of federal budgetary spending. Even at the very aggregate level of information available, the differences in spending structure between planned and actual spending are enormous. Producer subsidies (the "national economy" category in table 4.1) were slashed from 10.5 percent of GDP to 2.9 percent in 1994 -- a 72 percent cut. Defense spending was cut 31 percent. Social spending was relatively protected, with cuts averaging 20 percent and a significant increase in social security transfers. The cost of sequestering. Sequestering is no more than a short-run fix, and it has many undesirable consequences. The implicit acceptance of noncompliance with the budget law hurts government credibility. Sequestering is highly disruptive and inefficient at the micro level, because it lets those in charge of budget execution to redirect priorities. In many cases, financial rationing at the payments stage tends merely to postpone rather than to truly cut spending. Officials have often found themselves with insufficient funds to meet their budgeted obligations. When inflation is high, a two- month delay in transferring funds to the spending unit can make the difference between an adequately financed activity and an underfunded one. Sequestering sacrifices efficiency and cost-savings to the goal of stabilization. At the spending unit level, managers have to repeatedly justify and redraft budget plans as cuts are made in allocations. As allotments are reduced, managers are forced to cut-off payments for the last item of a stream of purchases, without regard to relative importance. This may result in huge efficiency costs. Instead of promoting orderliness, sequestering creates a permanent state of fiscal stress and second-guessing about cuts, leading to short-term solutions to long-term structural problems. Often, the monthly allotments go to meeting public payrolls, with whatever is left over going to other, truncated purchases and related expenditures. The program cutbacks mean that civil servants are underemployed, contributing to higher costs and lower productivity in the government sector. Sequestering also fosters the accumulation of arrears, as government agencies finance programs by delaying payments instead of cutting them back further. The extent of arrears is not readily apparent because they are not systematically monitored in the current cash-accounting system. The amounts in arrears should be shown in reports as memorandum items. Arrears offer only temporary relief, however, because suppliers quickly adjust prices upward to compensate for the additional costs of delayed payment. In the end, total costs are likely to be higher when arrears are significant. Sequestering is particularly damaging to public investments. Sequestering means that construction work is often suspended for lack of funds, leading to completion delays that substantially increase the economic and financial cost of public investments. Sequestering would be less harmful if investment projects were prioritized and funds were distributed among a small number of projects that could be completed on schedule rather than among a large number of projects that would all suffer delays. Table 4.1: Russian Official Federal Budget, planned and actual, (percentage of GDP) ... ... . .../1 93 F * ... . . ..... Revenues VAT 8.31 8.16 8.29 2.40 6.05 4.47 6.28 3.77 Special tax .~T1.13 0.67 Corporate Prfofi tax 2.24 3.12 3.57 0.72 3.80 3.37 3.50 2.72 Excises 0.36 0.35 0.56 0.73 1.24 0.55 2.50 0.71 Personal income tax n.a. 0.02 0.02 0.0.0 0.02 Foreign activity incomes n.a. 2.64 2.54 1.11 2.44 1.39 4.76 3.01 Privatization receipts 0.22 0.22 0.10 0.03 0.03 0.04 0.20 0.02 Price regulation fund 0.88 0.88 0.15 0.68 n.a. n.a. Rent payments 0.54 0.37 0.48 0.33 0.48 0.34 0.53 0.16 Currency sales n.--- .a. 1.71 Other receipts 0.47 1.19 0.72 0.25 1.24 0.34 0.80 0.83 Land & property tax 0.06 0.13 0.09 0.04 0.07 0.03 0.04 0.02 Transfers from Medical Insurance Fund ---- -- -- ---- 0.03 n.a. Total revenues 13.09 17.08 16.42 6.29 15.38 10.55 19.76 13.64 Expenditures Totri! national econom-Y 6.00 6.93 6.26 3.51 6.72 4.60 7.19 3.00 National economy. current expenditures 3.91 4.77 4.15 1.96 3.56 2.64 3.91 n.a. Geological prospecting 0.37 0.37 0.37 0.21 0.36 0.22 0.34 n.a. Inivestnient grants 1.71 1.78 1.74 1.35 2.79 1.74 2.94 n.a. Foreign trade activities 0.50 3.14 2.45 0.74 2.58 1.67 2.74 0.75 Social & cultural expenditures 2.31 2.33 2.30 0.96 1.99 1.64 2.19 1.66 o/w: 1. education 1.17 1.26 1.27 0.51 1.04 0.81 1.16 0.87 2. culture, arts and mass media 0.28 0.36 0.34 0.12 0.22 0.21 0.37 0.26 3. public health and sports 0.33 0.37 0.29 0.16 0.47 0.37 0.61 0.37 4. social security 0.02 0.02 0.10 0.01 0.02 0.01 0.03 0.16 5. youth policy n.a. 0.00 0.00 0.00 0.00 0.00 6. subsidies and compensations 0.03 0.03 0.02 0.01 n.a. n.a. 7. Pension Fund expenditures 0.47 0.28 0.28 n.a. 0.05 0.05 8. Other 0.00 0.00 0.00 0.15 0.18 0.18 0.01 0.00 Science 0.48 0.56 0.58 0.42 0.72 0.52 0.80 0.47 Law enforcement 1.20 1.29 1.33 0.57 1.54 1.54 2.02 1.71 Administration and law 0.31 0.35 0.23 0.18 0.48 0.44 0.72 0.61 Ear-marked programs ---- 0.45 n.a. n.a. ---- Defence 3.95 4.68 4.69 1.92 5.02 4.39 6.45 4.45 Disarmament 0.05 0.05 n.a. 0.02 0.03 0.03 0.13 n.a. Reserve funds 0.04 0.04 0.04 0.05 0.14 0.14 0.07 n.a. Reserves for inflation 0.17 0.23 n.a. 0.06 n.a. n.a. 0.00 n.a. State inventories ---- 0.01 0.74 0.74 0.94 n.a. Emergency fund ---- ---- 0.02 0.08 0.06 0.13 n.a. Domestic debt servicing and repayment 0.75 1.03 0.66 0.53 2.26 1.44 1.00 1.19 Foreign debt servicing and repayment ---- --- 1.09 n.a. n.a. 1.43 0.50 Social support fund 0.03 0.04 n.a. 0.02 n.a. n.a. Currency purchase ---- n.a. 1.23 Parliament infrastructure fund 0.00 0.00 n.a. 0.00 n.a. n.a. Intergovernmental transfers n.a. 1.55 1.47 0.58 2.94 2.10 4.28 3.36 o/ w: Subsidies to regions 0.58 n.a. 0.71 1.37 0.47 Mutual settlements n.a. 0.97 n.a. n.a. n.a. 1.94 n.a. 2.53 Remote regions program ---- ---- n.a. 0.57 0.12 1.03 n.a. Equalization fund ---- ---- 1.88 0.36 CIS programs 0.05 0.05 n.a. 0.02 0.49 0.32 0.08 n.a. Stalin's victinis compensation 0.04 0.04 n.a. 0.04 0.09 0.00 Agricultural 1991 bonuses 0.04 0.04 n.a. ---- Other expenditures n.a. 1.11 1.21 0.04 1.95 1.25 0.53 1.77 Subtotal expenditures - .a ____n.a. _ 21.69 n.a. 27.95 20.99 30.87 21.32 Budget loans n.a. n.a. 0.46 n.a. n.a. 1.31 n.a. 2.22 Investment and conversion credits ---- n.a. 0.45 0.43 Geological prospecting credits n.a. n.a. 0.12 ---- ---- Short-term loans ---- ---- n.a. n.a. 0.05 n.a. 0.03 Unexplained residual 1.95 0.57 0.00 0.00 -0.45 -1.79 0.00 0.04 Total expenditures 10.34 24.53 23.28 11.54 27.95 20.99 30.87 23.17 Deficit (+) . 5.25 7.46 6.86 5.25 12.57 10.44 11.11 9.54 Deficit (incl. CBR floating, balance on credit and currency operation) ---- ---- ---- 10.63 ---- 10.30 For reference: GDP, billions of rubles 18,100 162,300 630,000 73 Reconciling uncertainty, compliance, control and flexibility Continued progress towards more realistic macroeconomic and fiscal forecasts underlying the budget formulation will go a long way towards improving financial stability and the compliance of the budget execution.' However, uncertainty is an integral part of all market economies and is likely to remain particularly high in Russia in the coming years. Ensuring compliance, control, and flexibility under conditions of uncertainty is not easy. There are clear tradeoffs between the degree of flexibility allowed in budget execution and effective control of budget execution. Advocates of more compliance through more control take the view that elected officials should have more control over actual spending since they are directly responsible to the voters for those decisions. Right now, many budgetary allocations are decided administratively, since appropriations are voted at a very aggregate level. Compliance and control could be improved by increasing the detail of budget appropriations and requiring reporting on spending at the same level of detail. Others argue on efficiency grounds that more discretion should be left to the implementing units, which have better information on the input mix needed for service delivery. Budget execution and management can also be effective when government managers have flexibility and appropriate incentives for efficient and innovative management and use of resource. Managerial flexibility may be especially desirable in Russia under current conditions of high inflation and budget stringency. A reasonable compromise is to allow flexibility in the use of funds within a system that ensures compliance and accountability for the effective use of funds. These mechanisms are largely absent in Russia's budgetary process. Improvements can be made at the execution stage by setting priorities more clearly, by clarifying the legal and institutional powers to adapt budget execution to changing circumstances, and by reforming the budgetary accounting and control system. Legal and institutional powers The Law on Budgetary Process needs to set out clearly the conditions under which a revised budget law rather than sequestering is the response to significant changes in the macroeconomic environment. Clearly, these include changes in the deficit, in spending limits, or in taxes. Most countries allow for supplementary budgets to be submitted to parliament over the course of the fiscal year. The foundation laws on the budget process should also define how much flexibility spending units may exercise and when they must get the Ministry of Finance to authorize reassignments of budgeted funds. Some countries (Australia, Canada, the United States before 1982), build in flexibility for addressing unanticipated developments in the budget through formal budget reserves established as a small percentage of the overall spending ceiling. Their use has to be also strictly limited and carefully regulated. Other countries, (for example Japan) allow new programs to be substituted for old after parliamentary review as long as overall cost remains unchanged, a faster and more flexible approach than full budget amendment. As a counterpart to this flexibility, the use of these reserves needs to be very transparent, including through detailed reporting to Parliament. Individual spending units can provide a contingency reserve in their own expenditure plans as well to accommodate uncertainty. Here again, I In Brazil and Argentina, nominal budgeting with declining inflationary assumptions became an important anchor for stabilization. Conversely. indexing appropriations to actual inflation does not solve the problem of sequestering. 74 the amount needs to be strictly limited, for example, to a percentage of the unit's total spending appropriation. Under that ceiling, the specific amount of the contingency reserve should be based on the characteristics and internal dynamics of each expenditure program, decided in collaboration between the spending unit and the overseeing ministry. Several countries combine the two metliods (see box 4.1). The administration is allowed to modify approved appropriations or to adopt emergency measures within certain bounds, but major changes in the spending pattern require parliamentary approval and formal budget amendment. In this case the formal framework must clearly distinguish between the minor modifications that do not require parliamentary action and those that do because they alter priorities. Box 4.1: Procedures for Changing Initial Budget Appropriations duiing the Fiscal Year in France Administrative procedure. Routine changes can be effected by the executive without legislative approval. Appropriations can be transferred from the article to another or from one chapter to another within a 10 percent limit of the initial amounts. For emergencies, the executive can first allocate the reserves included in the approved budget for this purpose. If reserves are inadequate, the initial structure of spending can be modified by decree. However, a draft law must be presented to Parliament without delay for these changes to be ratified. Legislative procedure. A draft budget amendment law is presented each year by the government to the Parliament to sum up the changes made to the initial appropriations. This draft budget amendment is generally submitted just after the draft budget law for the following year, usually in November. When the political or economic context is changing significantly, draft budget amendment laws are presented much earlier. A number of amended budget laws can be adopted within a given year. At the local level, changes are even more frequent. It is not unusual for a city or regional legislature to be presented with five or six draft budget amendments within a year. This would reconcile the twin goals of giving better information to Parliament and the necessary flexibility of management. The government intends to increase the number of budget chapters and articles that require their own parliamentary authorization. The government should seize this occasion to specify the legal standing of different types of appropriations and to differentiate between spending authorizations that may be exceeded and those that may not. For example, in France the budget law distinguishes three types of appropriations: * "Limitative" appropriations, which cannot be exceeded by the implementing agency. * "Evaluative" appropriations, which are merely indicative and whose levels can be modified to match actual need. These are outlays, such as debt service, that are independent of administrative action and whose changes cannot be controlled (for example, an increased interest rate translates automatically into an increased debt service). * "Provisional" appropriations, which can be modified only within a given range, by drawing on reserve appropriations. They represent expenditures that are difficult to forecast accurately but for which the freedom of spending units to modify the original appropriation is restricted. 75 Such rules, although helpful, cannot replace hard decisions when revenues falls short of projections. Expenditure cutbacks have to be specific since economies cannot be realized uniformly from all programs. Grouping expenditures into clusters with common features is a useful step. For example, subsidies, entitlements, and other social welfare payments, which are money-intensive transactions, have to be addressed at the policy rather than the payment level. In other areas, such as administrative and socia! services, transactions tend to be labor intensive. Cutbacks there need to consider reductions in staff, which usually entails major civil service reforms. In development areas, transactions are likely to be capital intensive, and emphasis needs to be placed on clear priorities and the sequencing of investment programs, as well as on streamlining procurement. Reform and streamlining of the administrative decision-making process, with a view to strengthening the Ministry of Finance, are important as well. Decisions made by the government during the year must not worsen the deficit or increase payment arrears. Internal procedures should be adopted to improve the consistency of ministerial and presidential decisions with overall fiscal policy. To ensure even a minimum of fiscal discipline, the Ministry of Finance must be systematically informed of policy proposals by other government agencies that are likely to have fiscal consequences. Before any decision is made, these fiscal consequences should be systematically quantified by the proposing unit and the Ministry of Finance. If the cost of the proposal is greater than the available reserves included in the budget, compensating cuts in other programs or increases in tax revenues should be required. It is not uncommon in many countries for the ministry of finance to have considerable powers in such matters. Expenditure control and management In Russia, there are no information flows or controls on spending between the allotments of appropriations and the payment stage. And even then, the constraint comes from limits on the amount of funds transferred by the Ministry of Finance (or regional financial services) rather than from any systematic commitment accounting. This practice has led to difficulties in expenditure management, lack of information on expenditure commitments and the delivery of goods and services, and the accumulation of arrears. As a result, the government has no accurate count of the amount of arrears and no means of properly assessing the appropriateness and feasibility of cutbacks, spending reallocations, or program rescheduling. The lack of expenditure controls makes expenditure cutbacks more brutal and disruptive. In most Western countries, budget execution follows a four-step process that facilitates exante control of government expenditures: (i) the commitment stage, when budget appropriations are authorized, contracts are signed, and procurement is initiated; (ii) the verification stage, when work is completed, bills are received, and the obligation to pay is verified by each spending unit; (iii) the payment order stage, when payment is authorized; and (iv) the payment stage, when money is actually spent. This arrangement, with its related controls for each expenditure, is demanding and reduces flexibility. It is generally reserved for expenditures that are considered sensitive because of the large amounts involved or their nature (data processing equipment, for example, which requires controls to ensure overall consistency in a given institution). Current expenditures are usually subject to simplified procedures, with more global controls. Controls at the commitment level provide a built-in mechanism for verifying that the agent responsible for an expenditure is authorized to commit funds (and that the funds committed do not exceed the authorized amount) and has obtained the necessary clearance for expenditures subject to reinforced controls. Box 4.2 describes the controls built into the spending process in France. Controls at this level usually have limited goals -- generally to avoid mistakes and provide detailed information on the spending 76 process. However, these ex ante procedural controls constitute the basis for an important series of ex post audits and evaluations to review the efficiency and effectiveness of government spending (see chapter 5). Box 4.2: Controls in the Expenditure Process in France Controls at the commitment phase: - Is the agent responsible for the expenditure authorized? - Have the rules been followed (for certain expenditures, consultation and coordination with specialized institutions or other government agencies, special approvals beyond the ceilings in force)? - Has the expenditure plan been followed (for certain expenditures, no more than 1/12th of the year's appropriation may be spent each month). Consistency with the amount authorized is ensured in a double way: by each ministry or agency, on one hand, and by the Ministry of Finance, which monitors the commitments and is responsible for drafting rules where extra caution seems warranted. At the "liquidation" stage: Before payment is made, the completion of the work is verified (the financial service of the spending administration requests an affidavit from the agent that committed the expenditure and, in certain cases, verifies directly that the work or service has been completed); conformity of the work with specific conditions of the contract is also verified, and complementary work can be requested if the work is not satisfactory. At the "order to pay" stage: An order to pay is issued by the financial service before transmission to the accountant. The transaction is therefore recorded separately (which enables double-checks) by two services: the financial service of each ministry or administrative institution and by the accounting service responsible for payment. At the "payment" stage: The accountant verifies that all previous controls have been properly applied (for example without a general or specific waiver, an expenditure without "order of payment" cannot be paid) and applies additional controls: exact identity of the beneficiary, proper recording of the expenditure in the budget classification, and so on. Plans are underway to set up the missing control and inonitoring functions within the new Treasury Department in the Ministry of Finance. The plan is for the new department to require all spending units to report their operations at the commitment, verification, and payment stages. After verification of budget allocation and compliance with existing authorizations, the Treasury will issue the payment order against a unified Treasury account with the central bank. This far-reaching change will allow the government to exercise effective spending controls to collect accurate information on government expenditures, enabling progress in other areas of budget execution and reporting (see next sections). The special case of investment outlays Budgetary execution and monitoring of investments is a complex operation on two accounts. First of all, monitoring is made more difficult by investment execution timing, which often extends beyond the budget year. Second, the often long periods between the start of the construction work and the effective payment for the work performed lead to significant gaps between the initial budget estimates for the work 77 under way and the amount of appropriations actually required to pay the bills. At the payment stage, these funds often may not be available. For this reason, the traditional monitoring of budgetary appropriations is in some countries supplemented by a commitment or expenditure authorization accounting system. Under this type of system, whenever an order is received or works are started, the corresponding appropriations are frozen in the commitment accounts. The use of commitment accounts introduces the need for multiyear accounting procedures and the annual authorization of payments. This will help reduce the costs associated with abandoned or uncompleted projects. Commitment accounting also facilitates breaking up an investment project into modules or tranches, a method particularly applicable to projects with long construction periods. Saving the Government Money in a Free Market Economy Adapting the budget execution process to the new economic reality where prices are free and money has a price should be one of the major objectives of a comprehensive fiscal management reform. Under central planning, prices were set administratively and money was merely a numeraire to facilitate accounting, so fiscal management was not much concerned with getting the most from government resources. By early 1992 systemic price reform had had the salutary effect of shifting the economy from an administrative order, where decisions were based on bureaucratic considerations, to a monetary order, where decisions are based on costs and benefits. Since then, consumers and businesses have learned the meaninig of competition and are demanding value for their money. Government has been slower to adapt to the new economic order because of the difficulty of reforming the budget system and the institutional arrangements and practices inherited from the Soviet Union. Independent of changes to improve the allocative efficiency of spending, all levels of government in Russia can save substantial resources by improving their cash and debt management and enforcing competitive and transparent procurement practices. Cash management Central pooling and management of cash deposits, usually in a treasury account, minimizes idle, excess balances and maximizes interest receipts on cash balances. Active cash management allows disbursement requirements to be met in a way that minimizes borrowing requirements and therefore interest payments. Governments in Russia use banks to handle their cash flows. Bank incentives are to increase both the collection and the disbursement floats, to earn interest on the idle balances. The resultant delays in payment, transmission, and notification of government receipts and obligations impose a cost on the government in the form of increased borrowing. Although difficult to quantify, the losses to government at all levels from the absence of a centralized treasury function are substantial. On the expenditure side, the switch from quarterly to monthly allotments undoubtedly saved money by reducing the amounts of idle balances of the spending units in their bank accounts. However, the treasury estimates that the average balance of federal budget resources in bank accounts amounted to 3 trillion rubles in 1994 (0.5 percent of GDP). Centralizing expenditures in treasury accounts would enable the federal government to include the average balance as part of its resources and therefore to save on costly borrowing. The gains from centralization on the revenue side are potentially substantial as well. Centralizing the revenues and expenditures of the extrabudgetary funds -- which have their own bank accounts -- in the treasury system, would result in 78 even greater savings. In addition, cash management planning would be facilitated by establishing a system of commitment accounting for expenditures (see previous section). The potential gains to be made through better cash management justify the federal government's efforts to establish a modern treasury function in Russia. To improve cash management, spending units financed by the federal government should work from a single treasury account. A first step is to complete the network of treasury offices across the country. Of the seventy-four regional treasury offices in place by March 1995, forty-seven were up and running, recording, controlling, and reporting on budget revenues and expenditures. The treasury network is expected to be completed by the end of 1995. The treasury network represents a major improvement (though much remains to be done in computerization; see annex 6). Local treasury offices are notified by banks of taxpayers deposits, on which they report regularly to headquarters. The treasury has taken on the role of splitting revenues from the shared taxes among different levels of government. The accounts of regional governments are now credited more rapidly than they were when the commercial banks were in charge. The regional treasury offices are also responsible for distributing funds to the spending units in their area after checking and verifying the register of payments and payment orders received from the central treasury. The offices then monitor drawdowns against these accounts and report monthly on spending by spending units to the central treasury. Most federal ministries -- except the defense ministry -- use the treasury network where it exists. The distribution of the funds is executed according to the directives of the ministries. Debt management The Russian federal government owes foreign creditors some $120 billion. External debt service payments amount to about $20 billion a year before rescheduling Large amounts of funds now have to be raised in domestic and foreign markets to cover budget deficits since the government has replaced inflationary financing of the budget with the issuance of treasury bills. Managing this stock of debt and its associated flows efficiently requires highly skilled and specialized staff, backed by appropriate computer systems, and an institutional and legal framework in which the debt manager can operate. Shortcomings in any of these can lead to significant financial loss, often in the form of lost opportunities. Debt management is underdeveloped.2 The management of federal domestic debt is carried out by the Department of Government Securities, which operates in coordination with the T reasury. The limited number of staff with sufficient expertise has been drained by more attractive compensation packages in the rapidly developing private financial market. Computer capabilities still fall short in data manipulation and interagency sharing of information. Institutional arrangements are fragmented. The Ministry of Foreign Economic Relations is responsible for external debt management, with important input from the Ministry of Finance. The central bank is not strongly enough involved in debt management despite the influence of foreign debt flows on monetary policy, and the efficiency gains obtainable from linking debt and reserve management. The Vneshekonombank (the foreign trade bank in the former Soviet Union) is responsible for data collection and some manipulation, complicating the process of feeding debt flow information into budget and macroeconomic decision making. The Duma 2 For an extensive discussion of debt management see, "Russian Federation: Selected Issues in Debt Management," IMF: October, 1992. 79 must approve all external loans (except very modest ones), which injects a political element into a highly technical area.3 A comprehensive debt management strategy -- and the skills to execute it -- becomes increasingly urgent as Russia begins to tap international markets for resources, to deepen the domestic market for government paper, and to service a larger share of its external debt without rescheduling. Efficient debt management requires: (i) an institutionally well-defined center with access to full information on the debt stock; (ii) detailed information on cash management positions and budget execution; (iii) the capacity to update such information continuously and to manipulate it, as well as to build projections; and (iv) access to information on trends in domestic and international financial markets. The natural institutional home for both domestic and external debt management is the Treasury Department within the Ministry of Finance, but close cooperation with other institutions, especially the central bank, is critical.4 If data collection and storage remain the responsibility of another institution, continuous access lines will be needed between the two institutions, and the legal and bureaucratic setting must leave no room for interpretation with respect to access and areas of responsibility. A better solution, though, would be to establish a single center for debt in the Ministry of Finance, with individual divisions responsible for analysis and policy formulation linking debt management and payments to macroeconomic projections, including budget execution; domestic capital market information and borrowing transactions; international capital markets and external borrowing and payments; and a statistical unit for collecting data. The policy and analysis unit would incorporate debt-related flows into macroeconomic projections, budget execution, and balance of payments data. The unit would need continuous access to the detailed information about the debt stock maintained by the statistical unit, including data on currency and interest rate composition, maturity structures, creditors, and technicalities associated with debt payments, including account numbers for transfers. The analytical unit needs to be able to manipulate this debt information, performing sensitivity analyses on the effects of exchange rate and interest rate changes, projecting rescheduling scenarios, and the like. Using all this information, the domestic and international capital markets experts would explore opportunities for execution under the supervision and control of the debt management center. This unit should also be responsible for monitoring regional debt (see chapter 2). The capital markets unit would provide detailed and continuously up-dated information on cost structures and other aspects of domestic and foreign capital markets. The debt manager would use such information to realize significant savings by exploiting relative borrowing opportunities in different markets and by identifying when partial prepayment of government debt may be beneficial. The unit that collects the information should also execute the market transactions. The debt management center also needs up-to-date information about cash management, budget execution, and reserve management to plan the timing and composition of new borrowing. All this information needs to be available on-line, preferably, or daily, at a minimum. Having all four functions under one roof facilitates this process. 3 In basically all developed market economies, debt management is left to a technical level of the administration, typically in the Treasury, but sometimes in the central bank (in order to optimize coordination with the country's reserve management.) A politically determined framework for the debt management policy needs to be in place, however, coupled with appropriate auditing and other control mechanisms. 4 Regardless of the location, and regardless of whether indeed a govemment centralizes these functions in one location, it is important to maintain the government (Ministry of Finance) as the debtor and the central bank as reserve holder. In spite of these legal statuses, one or the other may be the administrator of both sides of the balance sheet. 80 Procurement practices Under central planning, the notion of competitive bidding was irrelevant as both volumes and prices where determined by the Gosplan. Logically, competitive bidding was necessary only for imported goods and services. International procurement was performed by central procurement agencies. However, most international purchases were made through direct contracts or barter agreements based on long-term relationships with suppliers. Without competition, foreign suppliers felt free to mark up their prices. Not much progress in the systematic use of competitive bidding to obtain the best value for government money has been made after the collapse of central planning. (Box 4.3, shows the major savings achieved on imports procured through World Bank procedures under the Bank's first rehabilitation loan to Russia, an indication of the kinds of savings possible through competitive bidding arrangements.) Box 4.3: Cost Savings through Procurement under the First World Bank Rehabilitation Loan The use of the World Bank's procurement procedures, large savings were made under the pre-identified import component of the first rehabilitation loan. Out of a US$ 350 million import component, about US$16 million worth of savings were made across all sectors, even after various contract increases are taken into account. The savings were calculated by comparing prices obtained for imported goods financed under the loan (using the Bank's procurement guidelines) with prices originally paid by the government for comparable goods. In the health sector, for example, insulin prices were about 80 percent lower than in the past; in agriculture, savings of about 30 percent were made on hybrid corn seeds. These savings show the importance of systematically using "good procurement" practices. Following the massive price liberalization of January 1992, the government adopted the law on the procurement of goods and services for government needs in May. This law established the legal and economic rules on the preparation, bidding, and execution of state contracts, at all the levels of government under both budgetary and extrabudgetary financing. The December 1994 law on "the supply of products and goods to meet federal needs" limited the application of the May 1992 law to the federal government and restricted foreign competition. Much remains to be done to improve government procurement in Russia. Procurement rules are often ignored (or unknown), while the law itself lacks clarity and transparency and includes provisions that foster distortion. An array of incentives (profit tax exemptions, subsidies, soft loans, foreign exchange preferences) are available for use by government agencies to encourage suppliers to sell to the government. Though presumably intended to elicit better prices, the incentives are highly distortionary and hide the true cost of goods and services. The law allows the government to force public enterprises "to meet federal needs" without mention of price and other conditions. For items produced domestically, the December 1994 law (article 3) prohibits the use of foreign inputs in state contracts, limiting competition. And because tenders do not seem to be systematically or widely published, information and competition (and therefore cost savings) are severely restricted. Another serious problem at all levels of government is the absence of standardized procurement procedures. Government agencies typically lack quarterly and monthly purchasing plans, competitive bidding requirements for contracts above certain levels, standardized specifications for procurement, and 81 conflict of interest regulations. Furthermore, current payment control procedures are rapidly becoming obsolete as the economy moves toward a market structure with alternate suppliers available and banks no longer perform the pre-audit function of checking to make sure that payments are properly authorized before issuing the actual payment. Longer-term agreements beyond the quarterly or annual periods for which funds have been made available can save money, yet the current system discourages these kinds of agreements and make no provision for systematically recording them. Yet in practice commitments are made for subsequent payment. Since they are not recorded by the accounting system, however, their effects are not adequately considered. A similar float exists for authorized payment orders not yet paid. Since control is exercised at the payments stage, there is always the risk that payment orders, validated as required, will not be honored. The current budget execution process presents a real risk of nonpayment for government suppliers and generates a problem of government liability. The law on procurement provides that disputes between suppliers and government customers are to be settled in a court of common law or a court of arbitration. However, restrictive interpretation of government sovereign inmmunity has prevented line ministries from incurring any liabilities5 and so has protected the government, including its ministries, from being sued or taken to arbitration. To circumvent this problem, the government has set up separate entities (or procurement agents) to handle public procurement. At the federal level, public procurement is handled by Roskontract (a joint stock company) for domestic purchases and purchase within the CIS and by foreign trade organizations for foreign purchases. Similar arrangements exist at the local level of government. This arrangement raises the costs to the government (which must pay these intermediaries) and does not solve the immunity problem. Who is liable when government agencies cannot pay the procurement agent for goods or services delivered by the suppliers? This uncertainty further drives up costs and makes the legal status of arrears unclear. Finally, no institution is charged with harmonizing procurement practices between different federal agencies and between the federal and subnational levels of government or coordinating and advising on public procurement issues across the board. At the federal level, regulatory responsibilities are split between the Ministry of Foreign Economic Relations, which is responsible for international procurement, and the State Trade Committee, which formulates government policy for domestic procurement. At the subnational level, efforts to foster good procurement practices have generally been fragmented if they have been attempted at all. Commissions could be established to provide guidance and advice to contracting agencies in order to improve procurement methods, to assist in the award of different types of contracts, or to study the impact of public procurement on various sectors. Coordination and harmonization can bring consistency, help prevent conflicts, and alleviate delays, gains that are particularly obvious in cases of infrastructure cofinancing by different levels of government, where conflicting regulations may arise. The United States federal procurement system provides an example of decentralization with some coordination (see box 4.4). 5 This principle of immunity stems from the principles of Civil Legislation adopted in 1961. When new principles were adopted in 1990, the issue was not addressed. The 1992 law on procurement is also mute with respect to this issue. 82 Box 4.4: U.S. Federal Government Procurement Public procurement by the U.S. federal government can be done by several agencies. Procurement of certain items, mostly large-volume purchases, is done by the General Services Administration (GSA), principally for domestic purchases. The Federal Supply Service (FSS) buys, stores, and distributes a variety of goods for GSA. Other agencies such as the U.S. Agency for International Development (USAID), and the Department of Defense also have contracting authority. GSA publishes a Government Supply Catalog that lists complete item descriptions, prices, the name of the winning bidder and the period of bid validity. Any item in the catalog can be purchased directly from the listed supplier at the listed price since GSA has already conducted a formal competition. Many purchases up to a value of $25,000 are done through the catalog. Construction, goods, and commodities. According to Federal Acquisition Regulations (FAR), all U.S. federal government contracts costing more than $25,000 must be awarded competitively under the terms of Competition in Contracting Act (CICA) of 1984. CICA requires "full and open" competition by sealed bids. All advertisements are published in the Commerce Business Daily (CBD), a publication of the U.S. Department of Commerce. Exceptions to the application of CICA must be justified in writing. There is a long list of exceptions under the classification "Other than FuUl and Open Competition." This list includes sole-source procurement. Prebid conferences at which general procurement information is made available to potential bidders are an important part of the process. Consultants. Procurement by negotiation is allowed for required teclnical services. A request for proposals (RFP) is summarized in the CBD. The evaluation process for such services includes weighing and rating proposals, establishing a competitive range, and negotiating with firms scoring within the competitive range. Cofinancing between the federal government and local governments. Source of financing determines which standards and regulations should apply. For instance, for construction of a highway crossing different states, Federal funds and funds from these particular states will be used. The construction is subject to the Federal Highways Act. Federal standards of construction and federal regulations will apply. In summary, several measures should be adopted to foster cost savings and good expenditure management through transparent and efficient procurement. 1. Regulatory and institutional framework: * Eliminate the distortionary fiscal incentives granted to suppliers. * Open up competitive bidding to foreign suppliers according to the World Trade Organization's rules for government procurement. * Enforce systematic and wide notice of tenders; public openings; and publication of awards. * Classify the issue of government sovereign immunity from liability for nonpayment of suppliers. * Develop standard specifications and harmonize them at all levels of government. * Eliminate potential conflicts of interest by prohibiting purchases from those who have a busi- ness or family relationship with those doing the purchasing; adopt similar rules on the use of cash, the hiring of personnel, and the use of funds for travel and other purposes. * Introduce technical harmonization and coordination of procurement practices at the federal and subnational levels of government. * Drop the use of trading firms and let spending agencies contract directly with suppliers to save costs; this would entail organizing massive training programs. 83 2. Expenditure planning and control: * Insist that government agencies develop annual and quarterly purchasing plans. * Develop simple accounting systems that record commitment and control expenditures on the basis of validated payment orders. * Require special approval for high-cost purchase. * Separate authority for the authorization of purchases from authority for disbursement or authorization of payment to reduce the chances for fraud by collusion in carrying out fraudulent purchases. Fiscal Reporting and Accounting for Better Management The objective of financial reporting is to provide useful information. Government financial reporting must satisfy a variety of users including legislative and other governing bodies, the public, the state Chamber of Accounts for audits, investors and creditors, and economic and financial analysts. Internal managers, policy makers, and administrators are also primary users of financial reports. An increasing number of countries ranging from New Zealand to countries in Latin America6 have implemented integrated financial management systems to meet the common information needs of external and internal financial reporting in various forms and formats. Fiscal reporting and information systems The budget execution reports produced by the Russian government since 1992 are incomplete, cursory, and not readily comparable to the budget plans. Reflecting the shortcomings of budget coverage reviewed earlier, budget execution reports exclude a sizable share of government operations. First, complete information about the extent of government borrowing and other liabilities from external sources is not gathered on a routine basis nor is the information that is collected kept in a central location in the treasury. Second, activities of domestic extrabudgetary funds are not reported. The situation has somewhat improved at the federal level with the recent integration of the federal road fund and the ecological fund into the federal budget, although there is still no systematic reporting on other federal extrabudgetary funds. The information gap on extrabudgetary activities remains at the subnational level. Third, revenues from the widespread use of the "new economic mechanisms" by government organizations involved in cost-recovery activities are not recorded. Finally, neither contingent liabilities (government guarantees to third parties) nor payment arrears are shown in the budget execution. In addition to being incomplete, the official budget reports are cursory, their information value limited by the absence of detailed data. Federal and local budget execution reports typically run to only a few pages of summary data. Only very aggregated spending data are available. Furthermore, the classification used for budget execution reports is inconsistent with the classification used for budget preparation. Although close monitoring of subaccounts should, in theory, allow all expenditures related to a given program to be reconstituted, this would be a very demanding task (not easily completed within the fiscal year). Nor does current classification allow for the consolidation of program-related items that 6 For a detailed discussion of the experiences in Latin America, see J. Wesberry, "Govemment Accounting and Financial Management in Latin American Countries" in A. Premchand "Govemment Financial Management", IMF, 1990. 84 are dispersed geographically or across several administrative units, making it difficult to monitor program execution. What these shortcomings mean is that there is no complete, effective supervision of budget execution. As a result, there is no clear and comprehensive picture of the role of government in the economy. Nor is there any effective way to check whether the executed budget respected the guidelines submitted at the time of parliamentary debate and approval. Financial supervision by units of the Ministry of Finance and accounting units involves a number of seemingly extensive checks (service performed, precise payment), but they are not devised to measure how well expenditures conform to the uses for which they were budgeted. Budget execution and reporting remain a complicated and fragmented process. All spending units, including oblast governments, report monthly to the Ministry of Finance on the use of their funds. These reports show flows in and out of the main treasury account (funds credited and debited to the account of the spending unit). Information on budget execution is also received from the banking system and the State Tax Service. There are several problems with the information received by the Ministry of Finance: * The Central Bank of Russia reports monthly, with a two-week delay, on the cumulative revenues received by the government. Sizable revisions are not uncommon. The central bank also reports the outstanding balances of the main spending units. - Each ministry prepares a monthly aggregate report showing disbursements and balances by budget section. The Division of Accounting in the Ministry of Finance verifies the accuracy of these statements against bank records. Not all spending units are covered, however, and reports are often late. * The monthly reports were originally intended to be completed by the ministries and then sent to the functional departments of the Ministry of Finance. However, large ministries like the Ministry of Industry (which has 25 departments, each formerly a separate ministry) often send raw data to the functional departments directly. This has overwhelmed the functional departments. The Treasury Department processes and consolidates the data in conjunction with the Computer Center. * Oblasts report their monthly budget operations directly to the Ministry of Finance, with a three-week delay. The reports contain consolidated budget information for all local governments as well as the oblast. The reports include borrowing from the Ministry of Finance but not from the banking system. The absence of banking data means that there is no way for the Division of Accounting to verify the accuracy and completeness of the consolidated information presented by the oblasts. * The State Tax Service provides only tax information, based on payment orders issued by taxpayers against their bank accounts. The Customs Commission reports some revenue items such as custom taxes and VAT on import. In both agencies, reporting is often late and incomplete. The Ministry of Finance has not yet integrated the tax reports into its reporting system. Communication -- even satellite communication -- remains a difficult problem in a country with so many time zones and poor phone-line coverage. 85 * Information is usually compiled manually, which increases the chance of error. The Ministry of Finance operates primarily as a consolidating agency and generates little information internally. Improving budget execution reporting comes down to a few policy and technical recommendations. On the policy level, the recommendation is straightforward: as at the budget planning stage, all government transactions and contingent liabilities (except, perhaps, social extrabudgetary funds) should be included in the budget. Even social extrabudgetary funds, though distinct from the budget for management purposes, should be subject to the controls and reporting requirements applicable to other government agencies and programs and their resources included in the treasury system. On the technical side, the way to improve the accuracy, consistency, and timeliness of budget execution reports is to finish setting up the information system of the treasury. Territorial coverage of the treasury network has already improved substantially. Coverage of sub-accounts at the budget article level, though scheduled, cannot be implemented immediately, so in 1995, an interim solution is being implemented. Each month, spending units prepare an execution report for each article. The treasury matches these reports to the more aggregated financial data provided by the banking system. In this way detailed monitoring by budgetary article is possible even before the treasury finishes setting up the direct expenditure management system. The Treasury Department is establishing a new computerized, integrated system for the execution, reporting, accounting, and overall financial management of government operations. ' "Integrating" the system is a base of common, reliable data, the Treasury Ledger System or data bank (figure 4.1). The treasury ledger system must include both budgetary and proprietary (asset and liability) accounts. Because all the subsystems and users of financial information share information through the common database, and in the appropriate form and format, compatibility of information is ensured without duplication of recording and processing. The validation, classification, and recording of information is a function of the accounting subsystem, which receives the flow of information from the other subsystems and produces timely and reliable reports useful for decision making. This comnmon base of information can be maintained manually but it is more efficient, flexible, and timely if it is processed electronically, especially at the central government level. The success of the information system that the treasury is trying to setup hinges on the proper definition and implementation of the government accounting framework and methods. Russia's current central accounting system does not yet provide adequate detail or consistent information for constructing useful budget summaries, in large part because of the lack of automation. The systems development and computer programming needed to establish an accounting system with all its ancillary systems are a major undertaking. Subnational governments, too, need major improvements in their accounting systems to meet the reporting requirements of all interested parties, including program managers. If the central accounting system cannot provide adequate detail for the officials in charge of implementing specific programs, individual operating units will lack vital decision making information or will set up separate accounting systems for their specialized needs. Other countries with weak accounting systems have found that agencies end up relying on their own partial or incomplete information and that management decisions are not based on full disclosure. This is an undesirable development since reconciling individual systems with the main system becomes usually impossible and maintaining several systems dealing with the same basic data is inefficient. 7 The main features of this system are presented in "Russian Federation: Setting-up of the Treasury" October 7, 1992, IMF. 86 Figure 4.1 Government Financial Management Information System - Module Budget Implementation mudgg - - Cantwbnst Fundl AIbOn P ~ ~ BP _ nyssFOO eEach module is a set of operations utilizing the Treasury Ledger System (Data Bank)(TLS) wiith Information flowring both to and from the TLS. TSA = Treasury Single Account Accounting reform Accounting is the backbone of the integrated financial management system. In government as in commercial sectors, accounting has several roles. Accounting is a means of verifying that funds are used properly and do not "disappear" because of inadvertent or deliberate mismanagement (financial control and monitoring purpose). Accounting also supplies valuable information for planning the use of resources, allocating resources, and increasing efficiency. Accounting is a key source of information for strategic decision making and production cost control. As a general rule, the larger the organization the more important is the accounting system for better management. Government, the largest organization in most countries, often follows accounting practices that do not meet its needs. This is why a number of countries, including Argentina and New Zealand, have made accounting system reform a central element of their fiscal reform. Accounting standards and practices in Russia fail in the two major functions of an accounting system: providing controls over spending and providing relevant information for management. Based on a summary review of foreign experiences and the main shortcomings of the current system in Russia, this section highlights the main features that should guide accounting system reform (a detailed analysis of the accounting framework, methods, and organization is well beyond the scope of this report).8 The accounting framework in Russia has been defined by a dual set of instructions, one set applicable to enterprises, the other to the government. Under a Ministry of Finance instruction of July 8 For a detailed discussion of governoent accounting, see A. Prcemchand, Effectve Government Accountenger IMF, 1993. 87 28, 1994, enterprises are subject to international generally accepted accounting principles (prudence, uniformity, unit of account, objectivity, periodicity, information). The required accounts and formats are specified in a detailed instruction of June 24, 1994. Government and budget-supported institutions follow the procedures and formats outlined in an instruction dated November 3, 1994. The scope of the government accounting plan. The government accounting plan applies to all budget-supported institutions, except that operations financed through cost-recovery measures ("new economic mechanisms ") are expected to apply commercial accounting rules. Budget-supported institutions that have to keep two distinct accounting systems thus are forced to violate the principle of unity, which states that the accounting statements of enterprises should reflect all their activities. Similarly, public organizations involved in commercial activities, such as public utilities, are subject to the commercial accounting plan, although even some organizations that depend mostly on budget appropriations have been authorized to use the commercial accounting plan. For example, the forestry committee uses the enterprise accounting plan even though 70 percent of its resources are from budget appropriations. This practice is widespread. It results from a series of decisions going back to the 1960s. These decisions were made on an ad hoc basis, rather than following from a general framework. At the same time, some public bodies that have an essentially commercial purpose are required to use the government accounting plan. That has resulted in some peculiar additions to government accounts to accommodate commercial activities. Public versus commercial accounting plans. Although having a separate accounting plan for government organizations is not a shortcoming in itself, the international trend has been toward a convergence of government and commercial general accounting plans. For practical and historical reasons, the differences between commercial and public accounting principles vary among Western countries. For example, because of the specificity of the public sector and the difficulty of quantifying the value of many public assets -- for example national parks or art collections in a museum -- justifies that in many countries, depreciation of fixed assets is not quantified as it is in the comrnercial sector. Another practical argument used for justifying the differences between government and commercial accounting is that public bodies cannot have a bottom line that is equivalent to profits in the commercial sector. Traditions also explain different accounting frameworks for the public and commercial sectors, as is the case in Russia, as well as in Belgium, France, and Germany. The United Kingdom and the United States, however, define and enforce the same general accounting principles for both sectors. But even in countries that maintain distinct systems, the trend now is toward reducing these differences. In France, for example, where the state, localities, hospitals, and public utilities each had its own detailed accounting rules, recent reforms are gradually introducing uniform international accounting standards (e.g., assets can be depreciated over time, provisions have to be made for contingent liabilities). Consistency with the budget classification. The government accounting system needs to be consistent with the budget classification system so that the same instrument can be used to monitor receipts and outlays while accommodating the specific needs of an enormous variety of government agencies. In Russia the structure of the government accounting plan is complex (it includes fifteen categories of accounts that distinguish between the nature of operations and the sources of financing) and at odds with international standards. Despite its complexity, the structure does not provide the flexibility needed to monitor the budgetary subaccounts, so monitoring has to be done through auxiliary accounts. This doubles the work involved, without guaranteeing reliability or accuracy. The technical solution to ensure consistency and flexibility is to use the decimal system of classification. Organization and structure. The centralized accounting system introduced in the 1960s remains basically unchanged today. As in Western Countries, most spending units have their own accounting 88 offices, although not all spending units are responsible for managing their own accounts. For example, a division within the Education Department may be responsible for 20-30 schools, each an individual spending unit. Thus there is one centralized accounting office for all these schools, rather than a separate accounting unit in each school. The accounting services are supervised on a day-to-day basis by executive committees operating at the territorial level under detailed regulations prepared by the Ministry of Finance. Single- ordouble-entry bookkeeping. Ministries' accounts in Russia use single-entry bookkeeping. Each piece of information is entered only once, either as a debit or credit. Single-entry bookkeeping is best suited to cash flow accounts (revenues and expenditure) and manual entry of information. It has several weaknesses compared with double-entry bookkeeping, from unreliability (there is no built-in mechanism for double checking recorded entries) to weak integration (different accounts are not interlinked). The system produces a series of partial and independent accounts that allows some types of operations or assets to be monitored but that prevents information from being synthesized, for example, to measure the results of an activity. Over the past decade or so many developing countries have progressively switched to double-entry bookkeeping, urged on by the accounting and financial reporting requirements attached to financing by donors and lenders. Computerization is pushing countries in the same direction since most software is based on a general ledger system that applies double-entry bookkeeping. Cash or accrual accounting. Accrual-based reporting helps improve resource allocation by linking financial and performance information and giving a clearer perspective on resource use. In Australia, New Zealand, and the United States, accounting standards boards set up in the 1980s have established accounting standards that call on government agencies to prepare annual balance sheets, statements on uses and sources of funds, and income and expenditure statements. In addition, they are to show income due, liabilities, and contingent liabilities. In the United States accrual-based accounts were prepared for more than a decade on a supplementary basis to provide general information to the public, but they were otherwise little used because of an overemphasis on the budget process (which is based on cash accounting). As the emphasis shifted from process to good management however, all agencies were required to prepare commercial-type accounts. New Zealand extended accrual accounting to the whole budget as part of the far-reaching fiscal reform launched in 1988. The need for more comprehensive and detailed accounting data has been part of a shift to performance budgeting to improve the allocative efficiency and effectiveness of government spending through improved cash management, cost control, and "value for money" audits. Using accrual accounting data helps in measuring and comparing performance because it takes all costs into consideration, including depreciation of capital equipment. It also helps in making informed decision on acquisition, maintenance, repair and rehabilitation of physical assets. More generally, requiring each government organization to produce a specific set of standard accounting reports similar to those used in the commercial sector emphasizes the management side of fiscal policy and its corollary, accountability and transparency. Recommendations. Reform of the government accounting framework is crucial to good fiscal management. As mentioned in previous sections, a first step would be to develop a budgetary accounting system that enables improved monitoring and control of the successive stages of expenditures (commitment, obligation, payment), improved cash management, better procurement planning, and so on. In parallel, for their proprietary (assets/liabilities) accounting system, the budget-supported organizations could directly adopt the revised general accounting plan for the commercial sector, rather than converging toward it gradually, as is happening elsewhere. Adapting this general accounting plan to the particular needs of different budget supported organizations (hospitals, schools, museums, research institutes, pension fund, central agencies) should be entrusted to a new government accounting board, the treasury, or the newly created State Chamber of Accounts. Chapter 5 Budget Evaluation and Audit An effective fiscal management system performs three compliance functions. First, internal control and audits by the government agencies themselves check the legality of disbursements. Second, external audits (expost) by an independent institution (or one that responds exclusively to the legislative branch of government) verify the legality and correct use of funds by spending agencies in the executive branch. Third, evaluations of budget programs by various institutions emphasize outcomes and performance to improve the effectiveness of government expenditures. These three modes of compliance reviews are complementary and mutually reinforcing. Modern reforms in budget planning and execution reviewed in previous chapters have led to a revolution in the meaning of "compliance" in the budgetary process.' While the traditional meaning of conforming to budget appropriations and government financial rules is still important, compliance is coming to incorporate conformance with explicitly stated performance-based criteria, among others. Budget evaluation and audit practices are weak or absent in the budget cycle of the Russian Federation. The institutions responsible for internal audit and control practices in the Soviet Union have been transformed and weakened during the past four years of transition, while independent external audits are entirely new in Russia's budgetary practices. The creation in January 1995 of the Accounts Chamber as the supreme audit institution of the Russian Federation, accountable exclusively to Parliament, has been a very significant step in institutionalizing budget evaluation. But several substantial design flaws, lack of experience, and a dearth of trained personnel undermine the external audit function of the Accounts Chamber. Evaluations of the efficiency, effectiveness, and performance of expenditure programs are not legally required - and there is no tradition to draw on in this area. Russia needs to strengthen the institutions that oversee fiscal management practices for at least three specific reasons. First, the disappearance of the strict control and sanction of the Communist Party may have created a sense of breakdown in individual discipline among the rank and file bureaucrats. Second, the current introduction of so many new programs and procedures makes evaluation extremely important in order to shore up the reforms that work and discard those that do not, including those which have become obsolete in a market economy. Third, a well functioning and independent expost audit should strengthen democratic institutions by clarifying and stabilizing the balance of power between the executive and legislative branches of government. This chapter addresses the three challenges facing the federal government in strengthening budgetary compliance and efficiency: how to rebuild internal control and audit procedures within the spending units, how to reform the newly created Accounts Chamber to perform credible and effective external audits of government activities, and how to introduce budget evaluation to increase the efficiency and effectiveness of budget expenditures. A final section presents an overview of budget audit problems for subnational governments. I See for example A. Premchand, Public Expenditure Management, International Monetary Fund, Washington D.C., 1993, and Bill Allan, "Toward a Framework for a Budget Law for Economies in Transition", Working Paper/94/149, International Monetary Fund, December 1994. 89 90 Rebuilding Internal Compliance Internal control and audit functions are typically carried out by each spending unit. The objective is to prevent and uncover breaches of administrative and accounting regulations and the fraudulent use of funds. The functions of internal control and audit Internal compliance comprises two separately identifiable tasks:2 * Internal control of compliance with the objectives, plans, and procedures of the administrative unit. Internal control is carried out by those in charge of the ordinary operations of the administrative unit though the objectives and procedures are typically established by higher authorities. * Internal audit of financial and administrative operations for compliance with the procedures and objectives established for the administrative unit. Unlike compliance control, internal audits are carried out by specialized personnel of the internal audit unit within the administrative unit during or after the completion of tasks or programs. To guarantee fairness and objectivity, personnel in charge of internal audits do not participate in the planning or operation of the programs they audit. Audits follow national standards and procedures. Internal audit units often evaluate performance and prepare reports with recommendations for better management of the administrative unit. A tradition in internal audit and control The Soviet Union had a multiplicity of internal budgetary controls, including controls within each ministry, checks and controls exercised by the central bank and the rest of the state banking apparatus, and controls exercised by the Directorate of Financial Control and Audit of the Ministry of Finance and, ultimately, by the Communist Party.3 These internal controls monitored conformance with decisions made at higher levels, on the allocation of funds and the direction of physical operations. The control carried out by the central bank until 1992 went beyond the simple financial verification of each expenditure item to an exact matching of disbursements with appropriations in the budget, by item. The emphasis of internal control was on matching disbursements with budget authorizations. Much less attention was paid to auditing expenditure programs. Internal audits rarely included an analysis of the quality of the organization or its procedures. There was no place in the system for independent judgment or initiative on expenditure programs or public policies. During the transition of the past three years, the strong financial controls of the former Soviet Union have weakened considerably. The controls currently exercised by the commercial banks are not nearly as rigorous as those exercised by the banking system before 1992, in part because private bank officers know less about the norms and regulations for budget disbursements and in part because there is much less detail in budget authorizations than in the past. The effect is much less control over the destination and purpose of disbursements and over the activities of spending units. 2 See, Lynnette Asselin. "Integrated Financial Management Systems in Latin America" The World Bank, 1994. 3 Ex-post controls were also carried out by the Sanitation and Epidemiological Control (Gossanepidnadzor) and the Autonomous Inspection Board of the Ministry of Interior (Gosavtoinspiestsia). 91 The Directorate of Financial Control and Audit in the Ministry of Finance is currently the agency most clearly in charge of internal audits. The directorate's means are significant. It has a staff of some 6,500 across the entire country, down to the rayon level. This corps of officials is answerable to the Minister of Finance alone. However, the directorate has to satisfy both the control requirements laid down by the legislature and the executive and the requests of the judicial police. Responding to the judicial police accounts for 40 percent of the Directorate's activity. Another appreciable part of the directorate's resources is diverted from the oversight and audit of public expenditures and receipts to regular accounting and financial management functions. Two types of problems reduce the effectiveness of internal expost audits: * The absence of graduated penalties makes deterrence practically impossible for internal control. Serious infractions can result in criminal procedures, but there is no legal basis for administrative sanctions, so there are no specific penalties for lighter administrative infractions. * There are no specific regulations covering the proper conduct of public officials in financial transactions (handling public funds, project procurement), or other activities that may give rise to conflict of interests. International experience with internal audit and control Every country has a set of institutions for carrying out internal audits. In most countries individual ministries and spending agencies are responsible for carrying out internal audits of their accounts, following clear rules and procedures set out by the Ministry of Finance or another agency in charge of coordinating internal audits. For example, in France, each ministry is responsible for internal audits and the process is carefully overseen by the Inspector General of the Ministry of Finance. In Germany, each spending unit has an internal audit office, and audits are coordinated by the Federal Audit Office (the agency responsible for external audits). In the United Kingdom, the heads of spending units are appointed accounting officers and are responsible for conducting internal audits of the agency, among other things. An office of the treasury (Internal Audit Development Branch) assists spending units in carrying out internal audits. In the United States, all federal spending units are responsible for conducting internal audits. The largest agencies have an inspector general, who is appointed by the president and confirmed by Congress. In recent years, countries around the world have introduced reforms to strengthen the internal audit function. (See box 5.1 for Argentina's recent experience). Recommendations for internal audit reform in Russia Several reforms could improve internal audits in Russia: * Transform internal audits into a management tool. Internal audits should be primarily the responsibility of the spending units and they should be designed to help management. The bulk of internal audits should be focussed on assessing expenditure management systems, and conducting spot checks and special investigations. The internal audit department in the Ministry of Finance should be responsible fer overseeing the quality of internal audits in the spending units. It should also be responsible for drafting the legislation needed for internal control and audit procedures, and applicable penalties and sanctions. * Establish rules for administrative sanctions to deter improper handling of public funds. The sanctions should define penalties that are proportionate to the infraction. France handles some infractions through it Court of Budget and Financial Discipline (see box 92 5.2). Russia could perhaps adapt this concept by granting such powers to an institution already in charge of similar matters. * Establish rules and regulations for the management of public funds, procurement, conflict of interest, and related aspects of financial transactions and the discharge of public functions. * Establish explicit rules and procedures for internal audit and control to increase the effectiveness of expost administrative controls.4 Bx S.: The New Internal Audit Organization in Argentina Argentina's 1992 innovative Law on Financial Management and Control Systems of the Public Sector created the new intemal control and audit agency, the National Syndic Office. This new office has jurisdictional and financial autonomy and answers directly to the Office of the President. The office is jointly managed by a head syndic, appointed by the president, and three adjunct syndics, nominated by the head syndic and appointed by the president. The National Syndic Office has the power to contract with institutions outside the public sector to carry out audits and evaluations of budget programs. The National Syndic Office is charged with establishing norms and procedures for all internal audits and coordinating the internal audit offices operating within each spending unit. The National Syndic Office is organized under the paradigm of centralized norms and procedures and decentralized operations and itnplenientation. The audit procedures developed by the Syndic Office are universal and integrated, covering all operation aspects of the spending unit including budget, financial, and economic assets. Audits consist of an expost examination of all financial and administrative activities of the spending unit, based on the principles of efficiency in the use of resources and effectiveness in the attainment of the unit's objectives. The head of each spending unit is responsible for conducting internal audits according to the normns prescribed by the National Syndic Office, using specialized personnel inside the spending unit who are exclusively assigned this responsibility. Internal auditors cannot participate in any way in activities they are supposed to audit. The National Syndic Office is also charged with supervising compliance with accounting principles, which are established in cooperation with the extemal audit agency, the National Audit Office. The National Syndic Office must report immediately to the Office of the President all infractions with negative consequences to the public sector. General reporting obligations are to the president, the National Audit Office, and the general public, on a periodic basis. Completing the External Audit Function: The Accounts Chamber The functions of external audit An effective system of budgetary review needs more than internal audit and control mechanisms. It needs an audit institution that is fully independent of the executive or that reports exclusively to the legislative branch of government, since the executive branch of government cannot be expected to be strict and objective about its own operations. 4 There was a plan from the Directorate of Financial Control and Audit of the Ministry of Finance to draft laws establishing these procedures. However, by end-1994 this work was still vague and incipient. 93 Box 5.2: France's Court of Financial and Budgetary Discipline The Court of Financial and Budgetary Discipline was created in 1948 and attached to the Cour des Comptes (the supreme external audit authority in France). The Court of Financial and Budgetary Discipline tries all cases concerning civil servants, except ministers and secretaries, who are nonetheless politically responsible for what goes on in their institutions. The infractions for which the court has jurisdiction are defined in an exclusionary fashion. Specifically, the Court has jurisdiction over cases involving the use of fumds contrary to specific budgetary rules, spending beyond assigned allocations, and procuring illegal profits for other people. A recent law has expanded the authority of the court to "serious management infractions." An order in writing by a supervisor or superior official eliminates the responsibility for the executing agent while placing responsibility on the authorizing official. The penalties imposed by the court are often symbolic, but they go on public record. This facilitates a large demonstration effect, increasing the chances of affecting the behavior of other public officials. Penalties as severe as the loss of one year's wages can be imposed for severe infractions. This external audit institution is charged with final oversight and expost auditing of all budget expenditures, to prevent and uncover inappropriate or fraudulent use of funds.5 The external audit institutions' independence from the executive branch of government rests on several principles: * Plans for audit and control are selected independently of the administration. * Extensive powers of instigation are granted to the external audit institution. * Investigations and audits must, on the responsibility of the auditors themselves, result in corrective actions and, if appropriate, in sanctions for the individuals involved. * Reports and audit are to be publicized either directly or through the intermediation of the legislature. Publicity is especially important if the administration refuses to change certain practices. No tradition of external audit Russia has never had an independent expost audit function in the budget process. After independence and until the dissolution of the Supreme Soviet in 1993, there was an Audit Commission of the Supreme Soviet, which could be considered as an embryonic external and independent audit authority. but the commission's small number of personnel (100-120 persons) and inadequate resources meant that it had to rely on the Directorate of Financial Control and Audit for most of its information needs. In the past three years, efforts have been made to set up the institutions and technical assistance needed to introduce international standards of private accounting. Reform moved more slowly in the 5 Detecting breaches of financial and accounting norms and exposing irregular practices represent the most common forms of control of the supreme audit institution, according to members of the International Organization of Supreme Audit Institutions (INTOSAI), which is a United Nations organization with headquarters in Vienna, Austria. 94 public sector. After long debate, the new Constitution provided for a supreme audit institution responding exclusively to the Federal Assembly. The Accounts Chamber of the Russian Federation In January 1995, the Accounts Chamber was set up as the supreme external audit institution of the Russian Federation. Besides the traditional role of expost external audit, the Accounts Chamber is expected to take on the budget management and analytical work of the Federal Assembly (article 2), placing the Accounts Chamber squarely in the budget formulation and approval process. The chamber is also supposed to evaluate the effectiveness of the use of state funds and federal property6 and oversee budget execution. Traditionally, supreme audit institutions enter the budget cycle only after budget execution, while the treasury department reports to the legislature on budget execution. (At the subnational level, the Accounts Chamber will work exclusively as the external audit institution; see last section of this chapter.) Structure. The Accounts Chamber is headed by a chairman, appointed by majority vote of the federal Duma for a term of six years. The deputy chairman is appointed by a majority vote of the Federation Council also for six years. There are twelve auditors of the Accounts Chamber, six appointed by the Duma and six by the Federation Council. The auditors also serve for a term of six years. Each auditor is responsible for oversight and audit of certain revenue or expenditure items in the federal budget. After six years the entire Accounts Chamber could be replaced. Other countries stagger the timing of appointments to provide continuity. The Collegium of the Accounts Chamber, composed of the chairman, deputy chairman, and the twelve auditors, adopts internal regulations and annual work plans. Criminal proceedings can be brought against members of the collegium only by the procurator general of the Russian Federation. The state Duma and the Federation Council can order particular audits. Requests for audits from the executive need to be considered for action by the collegium. The law allows the Accounts Chamber to contract for services with private auditors and specialists. Powers and reporting. The purview of the Accounts Chamber extends to all public and private institutions that receive federal funds. The Accounts Chamber is also charged with auditing the activities and accounts of the central bank, all extrabudgetary funds, and all borrowing at the federal level, including international borrowing and on-lending operations. The Accounts Chamber findings can include recommendations, remedies, required compensation, and reports of criminal behavior to the judicial authorities. As is common with supreme audit institutions in other countries, the Accounts Chamber has the power to search and seize evidence pertinent to an investigation or audit. What is unusual, however, is its power to issue orders to executive agencies, including ministries that have been audited, and ultimately to suspend funding (with agreement of the State Duma). 6 The evaluation function is vaguely included in the language of Article 2 of the Law, but it is developed more fully in Article 21. The evaluations of the Chamber are expected to yield recommendations for the improvement of the overall fiscal management and the budget process. 95 The Law foresees collaboration between the Accounts Chamber and other control and audit institutions, specifically the internal audit and control carried out by the Ministry of Finance and the central bank. Threats to the effectiveness of the accounts chamber In addition to many good features, the new Accounts Chamber law has several important problems that could compromise the effectiveness and the credibility of the supreme audit institution. Conflict among the two main tasks assigned to the Chamber. A severe flaw is the assignment to the Accounts Chamber of two separate and potentially conflicting functions. In addition to its role as the external control and audit overseer of the use of budgetary funds, the Accounts Chamber is to advise the Federal Assembly on financial issues and draft laws, analyze budget proposals, evaluate government revenue and expenditure projections, and propose its own revenue, expenditure, deficit reduction plans. In the United States, for example, there are two separate institutions that perform these functions: the Congressional Budget Office (CBO), which works as the economic and budget staff of Congress, and the General Accounting Office (GAO), which is the supreme audit institution. Despite some possible advantages of merging the two functions, such as synergies of knowledge and working experience between the two, the risks and disadvantages are greater. Involving the Accounts Chamber in budget discussions would inevitably politicize its audit work. And that would undermine confidence in the objectivity and nonpartisan professionalism of the Accounts Chamber, eventually reducing the effectiveness of its audit reports and recommendations. The recent budget cycles for 1994 and 1995 amply demonstrate that the macroeconomic assumptions and fiscal approaches followed by the executive and the legislative branches are likely to differ quite sharply. Sooner or later the economic staff of the Federal Assembly will be seen to be taking a partisan view of some budget issue and confidence in the audits conducted by the Accounts Chamber will wane. Contradictions of the principle of separation of powers. The power granted to the Accounts Chamber to issue mandatory executive orders and ultimately to suspend funding to audited institutions clearly threatens confusion in the separation of powers between the legislative and executive branches of government. These powers put the Accounts Chamber in the middle of disputes between the government and the Federal Assembly. Article 24 of the Accounts Chamber law gives the Federal Assembly the means of exercising its preeminence directly over the executive. By doing so, it compromises the Accounts Chamber's more important role as the supreme audit institution, violating an accepted principle of supreme audit institutions around the world. External audit should be the last and most important check on the proper budgetary funds and use of power. The supreme audit institution ought not to become a power on its own. Taking action after an audit should be left to the parliament or the government, with ultimate sanctions applied by the courts. Lessons from international experience There is a wide diversity of organizational structures and of the objectives assigned to supreme audit institutions around the world. Despite this diversity, however, two general principles apply to most supreme audit institutions worldwide: 96 * Supreme audit institutions are not granted independent and directly enforceable decision power unless they are constituted as judicial authorities independent of the executive and the legislature. Findings from audits performed by the Court of Accounts in France or Italy are directly enforceable because the supreme audit authority in these two countries is constituted as an independent institution with judicial authority. In contrast, findings and recommendations of audits performed by the General Accounting Office, which reports to the U.S. Congress, or the Federal Audit Office in Germany, which is independent but not constituted as a judicial authority, are not directly enforceable. * Supreme audit institutions concentrate almost exclusively on external expost audits of goverment accounts. In addition to verifying the formal accuracy of the accounts and the lawfulness of operations, supreme audit institutions are beginning to evaluate the efficiency of budget programs and policies (see the next section of this chapter).7 In no case, however, are supreme audit institutions involved in the formulation or discussion of the government budget which they will later audit. These two principles distil the experience gained by many countries in trying to run an effective external audit function. External audit institutions have a history of trial and error in defining their power and influence as they adapt generally accepted principles to their national institutional context. A similar process and cautious adaptation should be expected in Russia. Recommendations on the external audit Several reforms are needed to avoid compromising the effectiveness and credibility of the Accounts Chamber. Redesign its responsibilities. The Accounts Chamber should retain responsibility only for providing expost control and audit of budget operations and evaluation of the effectiveness in the use of funds and state property. Responsibility for providing expert advice to the Federal Assembly on budget formulation, revenue and expenditure forecasts, and policy analysis for draft laws should be transferred to another office within the legislature. Responsibility for reporting on the progress of budget execution should remain with the executive branch, including the treasury and the internal audit function. Separating these functions from the Accounts Chamber is the most important area to be addressed in the immediate future. Eliminate or limit the power to issue executive orders. The power of the Accounts Chamber to issue executive orders needs to be eliminated or significantly curtailed to uphold the constitutional principle of separation of powers and to avoid compromising the independence of the Accounts Chamber as it performs external audits. Respect for the external audit function should come from the quality of the audits performed and not from the power to issue executive orders. Policy should be formulated exclusively by the executive and the legislature, while sanctions for fraudulent behavior uncovered by the chamber should be ordered by the courts. If the Accounts chamber retains the power to issue executive 7 In some instances supreme audit institutions are charged with the task of ensuring conformance with the origination of the execution instruments (expenditure commitments). This is practiced in Italy and Belgium, but owing to the increase in financial instruments, ever-broader exceptions to this practice have been established. 97 orders and restraining actions and to suspend funding, the chamber should be given independent judicial powers to properly prepare cases against individual officials. The timing of appointments to the Accounts Chamber. To provide greater continuity and stability, the tenure of auditors in the Account Chamber should be staggered so that half the auditors' terms expire every three years.8 The deputy chairman and the chairman would be appointed alternatively every three years after each has served six years. For example, the cycle could be started by having the deputy chairman serve only three years in the initial cycle. Establishing a Budget Evaluation Function As a complement to the traditional functions of internal and external audit, budget evaluation has become an integral part of fiscal management in many countries. It takes a more global perspective on compliance by examining the effectiveness of public expenditure programs, promising a wealth of new insights into the performance and role of the public sector. Budget and public policy evaluation use well defined and rigorous methodologies in combination with performance data. A working group of the International Organization of Supreme Audit Institutions (INTOSAI) has proposed defining budget evaluation as: "The use of scientific and systematic techniques to quantify the direct and indirect effects of a budget program in relation to set explicit and implicit objectives and the means provided for their accomplishment." It is this careful assessment of program objectives and program outputs that constitutes the special contribution of the evaluation function. The evaluation function compares the stated fundamental objectives of a program with those actually pursued during implementation and re-examines the relevance of those objectives to the problems and needs initially identified. It also examines the correspondence between the resources allocated to the program and the desired objectives and explores other indirect effects of a particular government policy. Ultimately, budget evaluation provides much more extensive information and feedback than traditional audits have done on how well budget objectives are being attained. Lack of a budget evaluation tradition in Russia There is no government institution in Russia charged with the thorough review and assessment of budget outcomes, just as there was none under central planning. One consequence of the lack of performance evaluation in the Soviet tradition was that little attention was paid to finding the most economical way to accomplish objectives. The central planning agency encouraged implementing units to focus on requests for more resources rather than on more efficient use of existing resources. It is rare in Russia to find a government program that makes systematic corrections in response to performance assessments. Statements of goals and objectives receive little attention at budget preparation, and no systematic effort is made to link budgetary costs to the benefits derived from the funded programs. This applies also to investment projects. Once an investment project is finished, there 8 The cycle could be started by choosing at random 3 of the auditors appointed by the Sate Duma and 3 appointed by the Federation Council for re-appointment after 3 years. 98 are no assessment studies of how well the project performs or of what could be done to increase the efficiency of similar projects in the future. Currently, internal budget audits and reviews are not expected to produce suggestions on ways to economize, nor are there any incentives for budget managers to economize, although they are expected to be frugal in their use of funds. Several departments in the Ministry of Finance are in charge of monitoring the operations of sectoral ministries, but not of putting together comprehensive reviews or assessing government programs and their results. Budget evaluation is especially important at a time of budget stringency. The budget system could rely less on rigid and inefficient rules such as sequestering (see chapter 4) if the ability to perform detailed reviews were better developed. Several missing pieces need to be put in place before an effective evaluation function can be developed. Performance indicators and other information relevant to budget preparation are not available on time. Data on actual expenditures by program for the preceding year are often not yet available at the start of the administrative stage of budget preparation. In addition, the data available at the Ministry of Finance are generally too aggregated for use in evaluating individual programs. Consequently, new budgets are not adjusted to reflect the previous year's performance. The little budget evaluation that does take place does not seem to feed back into the budget preparation process. Thus critical comments by Ministry of Finance officials on the inefficiency of certain budget spending seem not to have been acted on in the new budget proposals (see chapter 3).9 Budget evaluation practices itn other countries After several false starts over the past decades, budget evaluation seems to have become a regular activity in the budget process and fiscal management of many industrial countries. What institution is in charge of evaluation? A notable feature of the international experience is the lack of specialized institutions in charge of budget evaluation. Instead, most countries rely on a wide range of institutional resources to carry out the evaluation function: institutions ir charge of external audits, institutions carrying out internal audits, budget planning offices, and sometimes private institutions under contract, including universities and research institutions. Following a period of experimentation, many countries have assigned responsibility for budget evaluation to their supreme audit institution, expanding their traditional roles in control and audit. Many countries have formalized this enlargement of duties in specific legislation.'" Just about every member country of INTOSAI has seen the need to expand the classic audit and control functions of supreme audit institutions to include budget evaluations. Other countries have entrusted the evaluation function to the Budget Office. Argentina's law on financial management and control systems of the public sector of 1992 assigns responsibility for 9 The budget document for 1993 mentioned, for example, the lack of certainty on the effective delivery of subsidized farm loans to the respective beneficiaries. However, the 1994 budget kept this type of aid in the same form. 10 Recently, this has been the case in Switzerland, Belgium, Japan, and Chile. 99 determining the norms and procedures for the evaluation of all budget expenditure programs and for conducting these evaluations to the National Budget Office. In Canada, the Treasury Board has a review policy requiring reviews/studies, evaluations and internal audits of key activities to be undertaken by departments. As part of this policy, the Treasury Board requires that Departments and Agencies, as part of their annual business plans, provide public notification of plans for future review of key activities. Some countries follow more complex arrangements. In the United States, several agencies handle the evaluation function, following a similar methodology, although most program evaluations are carried out by a specialized department in the General Accounting Office, the supreme audit institution in the country. Often, the General Accounting Office contracts out these evaluations to academic and research institutions. In Germany evaluations are carried out by individual ministries, the independent Federal Audit Office, and other institutions. Parliamentary commissions also conduct evaluations for legislated programs and new policies and social experiments. In France, budget evaluation programs are coordinated by the Supreme Council for Evaluation. The council performs few evaluations itself, contracting out most of them through a competitive bidding system. Qualifying institutions bid for particular evaluation projects, presenting a detailed description of the methodology they would follow in the evaluation. In France and other countries, the enabling legislation for some programs or the text of the budgetary appropriations contains a requirement for periodic evaluations of certain programs. France plans to use this approach more systematically. Each legislative proposal would be accompanied by an evaluation study quantifying as precisely possible the potential impact of new policies. How is budget evaluation performed'? Evaluations are carried out periodically during implementation or after completion. Not all government activities need to be evaluated regularly. In some cases the costs of evaluation may be higher than the benefits produced. At a minimum evaluations should analyze the financial and physical performance of programs, explain any deviations in results from stated objectives, and recommend change. Evaluations rely heavily on methodologies used in the social sciences (see box 5.3). The use of these methodologies have introduced higher and more objective standards and have facilitated identification of perverse or undesirable effects and of discrepancies between stated objectives and those actually pursued by the program. What ultimately determines the effectiveness of evaluations, however, is how explicitly performance indicators have been defined. In the older tradition in countries where budget evaluation has been performed for many years (such as the United States, the United Kingdom or Australia) evaluation has been on bureaucratically defined standards with less explicit performance indicators. Recently, countries with innovative approaches to public financial management, such as New Zealand, have put more emphasis on defining and quantifying performance indicators for individual spending units. This should significantly facilitate and improve the evaluation of each agency's performance. 100 Box 5.3: Bludget Evaluation Techniques - Measurement of Efficiency and Performance The evaluation of a budget program relies heavily on the measurement of its efficiency and performance. The general objective of these techniques is to establish on a scientific basis the relationships between the resources used in a program, the actual outcomes, and the initial objectives of the program. Evidence on efficiency and performance is also used to: * Provide consistent and credible information to decision makers * Improve planning of activities and setting goals * Ensure a better allocation of time, manpower and materials * Simulate the effects of reductions in funding. Measuring efficiency. Two types of efficiency are generally identified. Technical efficiency refers to the correct use of available technologies. It is achieved when the maximum level of output is obtained from the inputs actually used. Allocative or economic efficiency refers to the production of a level of services or output with the least possible cost. The achievement of allocative efficiency presumes that technical efficiency is being attained, but in addition that the input combination or technology used is the one that minimizes the costs of production. Techniques for measuring of efficiency range from simple analysis of input ratios, to regression techniques relating unit costs to levels of output, and Frontier analysis. The latter uses statistical data to recognize the difference between the most efficient units of production (those on the frontier) and other less efficient units. The practical application of the concept of efficiency to the public sector is made more difficult by the multidimensional nature of the public function and the complexity of quantifying actual outputs. Measuring performance. Efficiency is part of the measurement of performance. However, the strict measurement of efficiency is not aiways possible due to the lack of data. In addition, performance involves the concepts of quality of goods or standards of service provision, and the overall quality of the contribution by a particular organization. Performance also implies a degree of accountability for the results achieved and consequently a potential reaction by decision makers or by the public at large. The measurement of performance generally relies on the use of performance indicators. These indicators should help relate the objectives of the program, the resources allocated to the program, and the actual outcomes. Common indicators include volume or number of cases handled, average productivity and costs, time frame for task completion, demand for the service versus availability of the service, and general fulfillment of the overall goals of the organization. To be useful for management control and policy making, performance indicators have to be compared to anchors or benchmark indicators. '[he latter can be represented by particular norms or standards, time series of past experiences, actual performance in similar activities, or performance in control groups. Data on benchmark indicators have become more available following the increasing adoption of management information systems in the public sector. Evaluation. By itself, evaluation has the objective of improving program and agency effectiveness and is viewed as an aid to decision making and management. Management-oriented evaluation seeks to stimulate awareness in three areas: * Policy and program formulation; that is, to what extent are objectives still relevant, what new objectives are desirable, and what are the clients' needs? * Program implementation; that is, the suitability and effectiveness of organizations, their methods, procedures, and time tables. * The impact of completed programs; that is, the distribution of benefits, other unintended effects, and possible waste of resources. Cnce programs are selected for evaluation, an initial determination needs to be made about the kind of information required and the sources of that information. It is also necessary to determine over what period of time the questions will have to be answered. Determining the design of the evaluation involves a choice between a sample survey, a case study approach, a field experiment, or the use of data already available. The process of evaluation begins with data collection and analysis and concludes with reporting to the relevant authority. Accountability is incomplete if the findings of an evaluation are not made available to the general public. Timeliness of the reports and actual clients on the policy making side are crucial for relevance. These aspects underscore the importance of systematic and sustained evaluation practice. This box borrows heavily from T. Carlyle and A. Premchand, Public Expenditurc Management, Chapter 9, International Monetary Fund, Washington D.C., 1993. 101 Recommendations on the evaluation function Assign evaluation responsibilities to the agencies. Budget evaluation should become an integral part of the budget process. Responsibility for budget evaluation should be assigned primarily to each line ministry and each spending unit. These internal evaluations should help to address detailed aspects of a program though they cannot be expected to be objective about such issues as whether a program should be discontinued. The Budget Department in the Ministry of Finance and the Accounts Chamber should assist and encourage the development of evaluation audits by the spending units. Develop performance indicators and criteria. Certain information needs to be produced routinely if the evaluation function is to be effective. Each spending unit should submit indicators and, when possible, quantitative performance measures to their overseeing ministry and to the Budget Department of the Ministry of Finance for approval. The measures should identify the specific results expected if the budget request is approved. Russian budgets generally include information only on inputs and not on expected outcomes and performance indicators. The development of performance criteria could start on a pilot basis in a few activities/budget organizations. Other government agencies will follow the example if they see that developing evaluation and performance indicators make a difference in the way decisions are made about spending appropriations. Ex-post Budget Reviews at the Subnational Level Expost budgetary reviews at the subnational government level have problems similar to those at the federal level, which have been described in detail in this chapter. Internal audits Internal audits at the subnational level are to be conducted by the local branches of the Directorate of Financial Control and Audit, whose personnel report to the Ministry of Finance. However, federal auditors conduct audits of regional and local budgets at the requests of the subnational authorities. But very few audits have been undertaken in recent years at the oblast and local levels. The Directorate of Financial Control and Audit in the Ministry of Finance developed a plan two years ago to audit all oblasts, rayons, and cities once every two years. The directorate's staff in the oblast offices would conduct the audits for rayons and cities, and federal auditors would audit the oblast governments. This plan was never implemented, however. Auditing of public accounts seems to have taken place only when there was strong evidence of fraudulent use of funds. For example, the Moscow Oblast has not been audited since 1989, though it had been audited every year before 1989. In Yaroslavl Oblast, whose Internal Audit Unit had high quality standards, the audit office was not being used to its full potential. Oblast and local internal audit units should become independent of the Directorate of Financial Control and Audit in the federal Ministry of Finance, to be consistent with the budget autonomy of the subnational governments. The internal audit function at the oblast and rayon levels should be carried out by each spending unit according to rules and procedures developed by the finance department of the oblast government. A federal law could provide guidelines for internal audit, which could be adapted to the needs of regional governments. 102 External audits Despite the constitutional autonomy of the Oblasts and other subjects of the federation, all audits of oblast and rayon activities still appear to be effected exclusively by the staff of the federal Ministry of Finance. No autonomous or decentralized entities for external audit, attached to the legislative branch of government, have been established at the subnational level. It would be desirable to have a federal law delineating the general and common principles of the external audit function at the regional level. The law should also state the general principles for collaboration among the different regional accounts chambers. Regional governments could then adapt these principles to their particular needs. The regional governments, in turn, should elaborate similar laws for local governments. Local governments could be audited by the oblast's accounts chamber or by regulated private auditors (see box 5.4). It would also be desirable to develop a collaborative model, to accommodate joint audits of certain activities if mutually agreed. Box 5.4: Local Government External Audits in the United States Many county and city governments in the United States engage an outside entity, for example a public accounting firm, to perform expost audits. This entity reviews the jurisdiction's financial reports and procedures to ensure that reports and controls are adequate. The external audit of other local governments is done by a "public" sector institution. In either case, the key elements-the proper external audit, the independence of the auditors-are maintained. When a nongovernment entity is engaged, it must have experience in conducting audits and issuing reports. Typically, external auditors review the local jurisdiction's financial controls and a sample of the supporting documents that were used to prepare the reports. The auditors also review the statements to be sure that the officials have followed consistent practices from year to year and that there is adequate disclosure of any contingencies. If the reviews are satisfactory, the auditor gives an opinion that the financial statements fairly present the city's financial position according to generally accepted azcounting principles. When an auditor finds problems, the audit report includes "qualifications" or "exceptions" explaining the nature of the problems. Organization of budget evaluation at the subnational level It would also be desirable to create a budget evaluation unit within the budget or finance departments of oblasts, rayons, and cities. These units would be in charge of developing evaluation policies, designing the methodology for formal evaluation plans, coordinating findings and recommendations for government-wide application, and supervising evaluation programs by the sectoral departments. The evaluation units should provide guidance to spending units on cost measurement and on possible management improvement. These units should also assist agencies slated for downsizing to develop cost-reducing plans based on an identification of their core and non-core activities. Finally, the units should undertake formal reviews of efficiency in selected areas of government, including the operations of the remaining extrabudgetary funds. 103 ANNEXES 1. Statistical Annex 2. Revenue Sharing Between Budgets of Different Levels of Government in 1993 and 1994 3. Formulas Used to Allocate the Resources of the Federal Fund for Financial Support to the Regions 4. Conditional Grants: International Experiences 5. The Reforn of the Budget Classification in the Russian Federation: Comparative Analysis 6. Overview of the Budget Execution Process and the Creation of the Treasury 105 ANNEX 1 - STATISTICAL ANNEX TABLES A. 1 Estimated Enlarged Government Revenues and Expenditures in 1992 (billion rubles and percent of GDP) A.2 Estimated Enlarged Government Revenues and Expenditures in 1993 (billion rubles and percent of GDP) A.3 Estimated Enlarged Government Revenues and Expenditures in 1994 (without Chechen Republic) (billion rubles and percent of GDP, preliminary data) A.4 Extrabudgetary Funds, 1992-1994 (in billions of rubles) A.4a Centralized Part of Identified "Industrial" Extrabudgetary Funds, 1993 and 1994 (billion rubles) A.5 Revenues, Expenditure and Balances of Regional Budgets, Total and per Capita (current prices), 1991 - 1993 A.6 Structure of Regional Budgetary Revenues: 1992 - 1993 (current prices) A.7 Structure of Regional Expenditures, 1992 - 1993 (current prices) A.8 Privatization Receipts, Subventions and Other Financing in Territorial Budgets. 1992 - 1993 A.9 Registered Regional Unemployment: End of 1992, End of 1993, End of November 1994 (Number of persons and as a percent of total population) A. 10 Average monthly wage-November, 1992 - 1994 (thousand rubles) A. 11 Regional Price Indexes (CPI), 1992 - 1994 (percent change to the previous year) 107 Table AJ: EstimaedEnilared Govenunent Revenue and Expenditures in 1992 (billon rubles and percent of GDPO) Billion Rubles Peremitof GDP Titlcs [Al [B] [A+BJ IC] [A+B+CJ [A) [B] [A+Bj [C) [A+B4C3 Base Fed. Regic. CoiN. Off-Bud. En1arg Base Fod. Region. Cows. Off-Bud. Ealarg. Bud. Budgets Budge Futids Budget Bud. Budgets Budget* Funds Budget * Tota Revenues 2,928.0 2,633.8 UOO.06 3,147.5 3,348. 16.21 14.61 28.79 17.42 46.21 I. Tota Tax Revenues 2,750.3 Z,270.3 5,021.1 3,147.5 7,375.6 15.23 12.57 27.80 17.42 43.60 A. Tota Drect Taxes 645.9 1,352.7 1,993.6 2,210.0 4,201.6 3.53 7.49 1 1.06 12.23 23.30 1. Income taxes 645.9 1,352.7 1,993.6 ... 1,998.6 3.58 7.49 11.06 ... 11.06 Individua ... 431.3 431.3 ... 431.3 ... 2.39 2.39 ... 2.39 Corporat profits 645.9 921.4 1,567.3 ... 1,567.3 3.53 5.10 3.68 ... 8.68 2. Social wcurity contributions ... ... ... 2,210.0 2,210.0 ... ... .. 12.23 12.23 a. Conttibution by employees ... ... ... 72.0 72. .... . 0.40 0.40 b. Contribution by employers.. ... ... 2,138.0 2,138.0 ... ... ... 11.84 11.34 Pension find ... ... ... 1,767.0 1,767.0 ..... ... 9.73 9.73 Social insurance fund ... ... ... 293.1 293.1 ... ... ... 1.62 1.62 Employment find ... ... ... 58.5 58.5 . ... ... 0.32 0.32 Social protection fund .. ... ... 10.4 10.4 ... ... ... 0.06 0.06 Medieal insuanc fiind ... ... ... 9.0 9.0 ...... 0.05 0.05 B. Tota Indirect Taxes 2,104.9 917.6 3,022.5 644.5 3,667.0 11.65 5.08 16.73 3.57 20.30 1. Domestic indireet taxes 1,733.3 909.6 2,648.4 ... Z,648.4 9.63 5.04 14.66 .. 14.66 a. VAT 1,500.7 498.2 1,998.9 ... 1,998.9 8.31 2.76 11.07 ... 11.07 of which: Special tax b. Excise 100.5 111.0 211.5 ... 211.5 0.56 0.61 1.17 ... 1.17 of vAiceh: Oil Excises c. Lioenseson prod. & sacof aloohol ... 1.0 1.0 .. 1.0 ... 0.01 0.01 ... 0.01 d. Property taxes ... 54.7 54.7 .. 54.7 ... 0.30 0.30 ... 0.30 e. Use of natursl resource ... 110.0 110.0 ... 110.0 ... 0.61 0.61 ... 0.61 f. Operationswithsecurities 1.6 0.1 1.7 ... 1.7 0.01 0.00 0.01 ... 0.01 g. Turnover tax . 3.9 3.9 ... 3.9 ... 0.02 0.02 ... 0.02 h. Sales tax .. 4.7 4.7 ... 4.7 ... 0.03 0.03 ... 0.03 i.Price regulation flid 26.3 ... 26.3 ... 26.3 0.15 ... 0.15 ... 0.15 j. LAnd tax 17.0 54.0 71.0 .. 71.0 0.09 0.30 0.39 ... 0.39 k. Other taxcs and duties 92.7 72.0 164.7 ... 164.7 0.51 0.40 0.91 ... 0.91 2. Foreign ecoonomic activity 366.1 8.0 374.1 644.5 1,018.6 2.03 0.04 2.07 3.57 5.64 a. Export taxes 239.0 3.0 297.0 ... 297.0 1.60 0.04 1.64 ... 1.64 b. Import taxes 63.4 ... 63.4 ... 63.4 0.35 ... 0.35 ... 0.35 a. Custom fewsan duaties 13.7 .. 13.7 ... 13.7 0.08 ... 0.08 ... 0.08 d. Forcip ExchangetAxlI/ ..... 631.0 631.0 ... ... ... 3.49 3.49 Hard currencysuwender schemc ... ... ... 110.0 110.0 ... ... ... 0.61 0.61 Escrow accounts scheme ... ... ... 492.0 492.0 ... ... ... 2.72 2.72 Centralized exportsacbeme ... ... ... 26.0 26.0 ..... ... 0.14 0.14 Othe schemes I... ... ... 3.0 3.0 ... ... ... 0.02 0.02 e. Other ... ... ... 13.5 13.5 ...... 0.07 0.07 C. Road and Ecologica Funds Revenues . ... ... 293.0 293.0 ... ... ... 1.62 1.62 Road Funds ... ... ... 287.0 287.0 ... ... ... 1.59 1.59 Ecological Fund ... ... ... 6.0 6.0 ... ... ... 0.03 0.03 IL.ANou-tax Reeipts 107.1 10.1 117.2 ... 117.2 0.59 0.06 0.65 ... 0.65 1. Geological exploration 73.4 ... 73.4.. 73.4 0.41 ... 0.41 ... 0.41 2. Profits of Cenral Bankk 3. Interest on external loans . .. .. .. .... 108 Tablk A.)I Estimated Enlarged Government Revenues and Expenditures in 1992 (billion rubkes and percent of GDP) Billion Rubles Percent of GDP Titles (A) [B] IA+BJ IC] [A+B+C] [Al [B] IA+BI [Cl [A+B+cJ Base Fed. Region. Cons. Off.Bud. Enlsrg. Base Fed. Rcgion. Cons. Off-BudL En1srg. _______________________________ Bud. Budgets Budget* Fwisis Budget * Bud. IBudgets Budget* Funds Budget * 4. Other non-tax receipts 33.7 10.1 43.3 ... 43.8 0.19 0.06 0.24 ... 0.24 of which: Stock reevaluation 33.7 10.1 43.3 ... 43.8 0.19 0.06 0.24 ... 0.24 III. Intergovenunent.al Transfers 51.2 315.0 0.0 ... ... 0.23 1.74 0.00.... I. Subventions from repub. budget ... 142.5 0.0.. ... ... 0.79 0.00 2. Mutual settlement 49.4 155.2 0.0 ... ... 0.27 0.86 0.00 3. Resources owed to the regions 1.3 ... 0.0 ... ... 0.01 ... 0.00.... 4. Short-Lema loams from repub. budget ... 17.3 0.0 ... ... ... 0.10 0.00.... IV. Tota CwrTent Revenues 2,909.1 2,595.4 5,138.3 3,147.5 3,235.3 16.10 14.37 2944 17.42 45.87 V. Capital Revenues 13.9 43.4 62.3 ... 62.3 0.10 0.24 0.34 ... 0.34 I. Privatization revenues 13.9 43.4 62.3 ... 62.3 0.10 0.24 0.34 ... 0.34 Tota Expenditure I. Cash Basks 4,5469 2,343.9 6,524.6 4,845.5 11,370.1 25.17 12.93 36.12 26.32 62.9 2. Commitment Basis 3i 4,546.9 2,343.9 6,524.6 5,958.1 12,432.7 25.17 12.93 36.12 32.93 69.10 I. National Economy 1,095.0 964.0 2,059.0 233.7 2,297.7 6.06 5.34 11.40 1.32 12.72 A. In Consolidate Budget 1,032.0 ... 1,032.0 ... 1,032.0 5.71 ... 5.71 .. 5.71 1. Geological prospecting 63.0 ... 63.0 .. 63.0 0.33 ... 0.33 ... 0.33 2. Compensation prioe differences 313.0 ... 313.0 ... 313.0 1.73 ... 1.73 ... 1.73 3. Stlae subsidies (net) 163.0 ... 163.0 .. 163.0 0.93 ... 0.93 ... 0.93 Fund for farmers support 54.0 -. 54.0 ... 54.0 0.30 ... 0.30 ... 0.30 Transfers to Agro-Ind. complex 114.0 ... 114.0 ... 114.0 0.63 ... 0.63 ... 0.63 4. Capital investments 315.0 ... 315.0 ... 315.0 1.74 ... 1.74 ... 1.74 S. Odwe expenditures 163.0 ... 163.0 ... 163.0 0.93 ... 0.93 .. 0.93 B. Conversion Program 63.0 .. 63.0 ... 63.0 0.35 ... 0.35 .. 0.35 C. By Extrabudgesary Funds ... ... ... 233.7 233.7 ... ... ... 1.32 1.32 1. Road Funds ... ... ... 237.2 237.2 ... ... ... 1.31 1.31 2. Eoological Fund ... ... .. 1.5 1.5 ... ... ... 0.01 0.01 11I External Relations 661.2 ... 661.2 Z,363.7 3,024.9 3.66 ... 3.66 13.09 16.75 1. Import subsidies 2/ 566.7 ... ... Z,145.3 2,712.0 3.14 ... ... 11.33 15.01 Caah-fuwanoed import sbsidies 566.7 .. ... ... 566.7 3.14 ... ... ... 3.14 Credt finaed import ubsidies ... .. .. 2,145.3 2,145.3 ... ... ... I11.33 1 1.83 2. Frcight and othwrexpenditure 94.5 ... 94.5 213.4 312.9 0.52 ... 0.52 1.21 1.73 Payments for freight .. .. .. 29.6 29.6 ... ... ... 0.16 0.16 Transfers abroad 93.9 ... 93.9 ... 93.9 0.52 ... 0.52 ... 0.52 Trangfers to ftnancial institugtions.. .. . 133.3 133.3 ... ... ... 1.05 1.05 Other 0.6 ... 0.6 ... 0.6 0.00 ... 0.00 ... 0.00 Ill. Social Programs 483.9 971.6 1,563.1 1,620.1 3,030.6 2.71 5.38 3.63 8.97 17.05 A. Health, Eduation nd Culture 341.9 921.6 1,263.5 ... 1,263.5 1.39 5.10 6.99 ... 6.99 1. EtAcwation 229.7 449.3 679.5 ... 679.5 1.27 2.49 3.76 ... 3.76 2. CWumr, arts &mmasmedis 59.4 56.8 116.2 ... 116.2 0.33 0.31 0.64 ... 0.64 3. Public health & physical culture 52.3 415.0 467.3 ... 467.3 0.29 2.30 2.59 ... 2.59 4. Youth poliocies ... ... ... ... ... ... ......... C. Sooial Protection 147.0 50.0 197.0 1,620.1 1,317.1 0.31 0.28 1.09 3.97 10.06 1. Social security 138.0 50.0 63.0 ... 63.0 0.10 0.23 0.33 ... 0.33 2. C~hanobyl and Sen,ipslatinak 73.0 ... 73.0 ... 78.0, 0.43 ... 0.43 ... 0.43 109 Table A.)I Estimated Enlarged Government Revenues and Expenditures in 1992 (billon rubles and percent of GDP) Billion Rublas Perent, Of GIDP Tides [A) [BJ [A+Bj IC] [A+B4C1 [A) fB] IA+Bj IC) fA+B4C] Bane Fed. Region. COAL Oft-Bud. Enlarg. Baso Fed. Region. Corn Off-Bud. Eniarmg BUd. Budgets Budget' Fumds Budget * Bud. B gdges Budge Fuds Budget' 3. Chilfren's benefits ... ... ... ............. 4. Penion Fimd 51.0 .. 51.0 1,325.4 1,376.4 0.28 ... 0.28 7.34 7.62 5. Sooiajl murancFund ... ... ... 234.9 234.9 ... ... ... 1.30 1.30 6. Employment Fumd ... ... ... 46.4 46.4 ..... ... 0.26 0.26 7. Fund for Social Support ... ... ... 9.5 9.5 ... ... ... 0.05 0.05 8. Medical hInsrnc fund 3.9 3.9 ... ... ... 0.02 0.02 WV. Scienoce 104.2 3.4 107.6 ... 107.6 0.58 0.02 0.60 ... 0.60 V. Adlministration and Other Functions 1,137.0 74.5 1,211.5 ... 1,211.5 6.29 0.41 6.71 ... 6.71 1. State admninistration 42.0 64.0 106.0 ... 106.0 0.23 0.35 0.59 ... 0.59 2. Law enforcement 240.0 5.0 245.0 ... 245.0 1.33 0.03 1.36 ... 1.36 3. Defense 855.0 ... 835.0 ... 855.0 4.73 ... 4.73 ... 4.73 4. Inter-goveimmentsl programs ... 5.5 5.5 ... 5.5 ... 0.03 0.03 ... 0.03 VI. Net Interest Payments 120.0 ... 120.0 23.0 143.0 0.66 ... 0.66 0.13 0.79 1. Interest on extemasldebt ... ... ... ... ... ... ... 2. Interest on domestic debt 120.0 ... 120.0 ... 120.0 0.66 ... 0.66 ... 0.66 3. Forex interest on domestic debt .. ... ... ... ... ... ......... 4. Domcstic debt erviocein for. currcecy ... ... ... 23.0 23.0 ... ... ... 0.13 0.13 VIlI Net Lending 276.3 35.0 311.3 600.0 911.3 1.53 0.19 1.72 3.32 5.04 1 . Dircted credits for investmenland 204.0 0.9 204.9 ... 204.9 1.13 0.00 1.13 ... 1.13 conversion program 2. Direcoted credit for working capital ... ... ... 600.0 600.0 ... ..... 3.32 3.32 4. Budgetary loans 72.3 34.1 106.4 ... 106.4 0.40 0.19 0.59 ... 0.59 of which repayments ... -13.9 -13.9 ... -13.9 ... .0.08 .0.08 ... -0.08 Vill. Integovermecntal Transfers 316.8 49.4 0.0 ... ... 1.75 0.27 0.00.... I. Subvention. 142.5 ... 0.0 ... ... 0.79 ... 0.00.... 2. Mutual Settements 157.0 49.4 0.0 ... ... 0.87 0.27 0.00.... 3. Short-term loans from rep. budget 17.3 ... 0.0 ... ... 0.10 ... 0.00 DC. Oilher Expenditures 347.5 246.0 593.5 ... 593.5 1.92 1.36 3.29 ... 3.29 X. tntercat onecxtemnal dcbt -not paid ...... 1,112.6 1,112.6 ... ... ... 6.16 6.16 Bahmwee 1. Cash Basis -1,618.9 294.9 -1,324.0 -1,698.0 -3,022.0 -8.9 1.63 -7.33 -9.40 -16.73 2. Commitment Basis X/ .1,618.9 294.9 .1,324.0 .2,810.6 .4,134.6 -8.9 1.63 -7.33 -15.56 -22.89 Tota Fmncading 4/ ... - . . 4,112.6 .. , ... ... 22.77 A. Domestic Sources . . . . 1,000.0 ... ... ... ... 5.54 1. Domestic bank fmnancing ... .. ... ... 1,000.0 5.54 a. Monetary authorities net credit to the Government .. . . ..... ... ......... -Net credt from CBR ... ... . . 1,700.0 ... ... ... ... 9.41 -Ruble counterpart of Government net ... ... ... ... ... ... ..... b. Net credit from the rest of banking -Net credit from commercial banks ... ... ... . ... ... ......... -Securities held by commercial banks ... .. ... ... ... ... ......... 2. Donmetic non-bank financing ... ... ... ... -0.0 ... ......... a. Scourities held by non-bank scator ... ... ... ... ... ... ......... b. Domestic principal repayments to non- banks ........ -0.0 ... ... ... ... ...__ ___ __ ___ __ 110 Tabl A.): Esdaed Enwaged Government Revenues and Expenaures in 1992 (illion rubles andpercent of GDJJ Billion Rubles Percent of ODP Titles [Al [B] jA+BJ [C] [A+B4C] [A] [B] [A+BI [C] [A+B+C] Bese Fed. Region. Coon. Off-Bud. Enlr6. Base Fed. RegionL Cow. Off-Bud. Ealrg. Bud. Budged Budgdt Funds Budgd e Bud. Budget Budge* Funds Budt B. Nd Forein Fitinei^g ... ... ... ... 3,112.6 ... ... ... ... 17.23 1. Foreip disbursomot ... ... ... ... 2,200.0 ... ... ... .. 12.13 aTiedoredits ... ... .. .. 2,100.0 ... ... ... .. 11.63 b. Untied credib ... ... ... ... 100.0 ... ... ... ... 0.55 o. Commercial oredit ... ... ... ... ... ... ... ... 2. Principal repaymenat, cobh ... ... ... ... -200.0 ... ... ... -1.11 3. Interectnotpaid ... ... ,.. 1,112.6 ... ... 6.16 C. Rei&ual 5/... ... ... ... 22.0 ... ... ... 0.12 Qusi-rcal Sp.ding by CBR ... ... ... 4,062.0 4,062.0 ... *-- ... 22.49 22.49 1.TrsnsfenrtootbrFSU SbtA ... ... ... 1,258.0 1,253.0 ... ... ... 6.96 6.96 1. Lo to ohcr FSU oounties ... ... ... ... ... ... ... .. ... 2. Exoeptionl finanoing to FSU ... ... ... ... .. | ... ... ... ... 2. Central Bank Dircoted Crdit 4/ ... ... ... 2,804.0 2,804.0 ... ... ... 15.52 15.52 Uemo item: GDP (billion rubles) 18,064 100.00 ...... ... * The cooolited budget is n of in mnal trae. 1. Partially budgeted under expenditure in the official budget (oounterpat rubles spent to obtain foreip exchange). 2. Partialy budgeted under revem (ooumtepart rubles reeived fiom the sle of imported goods). 3. Including interer wmrear on extenal debLt 4. Souroe: IMF edimates. 5. Total Financing minu Deficit Soumrsc: Minzstay of Finance, IMF, steffestimates. Table A.2:' Estimated Enlarged Goveniment Revenxe, and E.qpendkaare in1993 (billion iwbla and percnt of GDP) Billion Rubles Pezven of GDP Titles [A) [B] IA+B] IC] [A+B4C] [A) [Bl (A4+B] [C) [A+34C_] Basn Fed. Region. Cown. Off-Bud. Enlsrg. Basw Fed, Region. Cow,. Off-Bud. Mars.g Bud. Budgets Budge Funds Budget' Bud. Budget Budget Funds Budget Totsl Revenues 19,266.0 28,664.0 43,527.5 22,535.0 66,062.5 11.87 17.66 26.82 13.88 40.70 I. Tot.al Tax Revenues 16,457.9 24,038.9 40,496.9 22,535.0 63,031.9 10.14 14.81 24.95 13.88 38.84 A. Tota Direct Taxes 5,471.6 15,755.9 21,227.5 14,779.7 36,007.2 3.37 9.71 13.08 9.11 22.19 1. Incorme taxes 5,471.6 15,690.1 21,161.7 - 21,161.7 3.37 9.67 13.04 .. 13.04 Individual - 4,388.2 4,338.2 - 4,388.2 ... 2.70 2.70 ... 2.70 Corporate profits 5,471.6 11,301.9 16,773.5 - 16,773.5 3.37 6.96 10.33 ... 10.33 2. Social security contributione - 65.8 65.8 14,779.7 14,845.5 ... 0.04 0.04 9.11 9.15 a. Contribution by employees - - - 487.0 487.0 .. .. ... 0.30 0.30 b. Contribution by emiployers - - - 14,292.7 14,292.7 ... ... ... 8.83 8.83 Pernsion funkd - - - 10,621.2 10,621.2 ... ... ... 6.54 6.54 of which: Budget subsidy .- - - 0.0 0.0 ... ... .. .... Social insurance fund - - - 1,968.3 1,968.3 ... . .. 1.21 1.21 Employment fund - - - 628.1 628.1 .. .. .. 0.39 0.39 Social protection fiund - - - 18.0 38.0 .. .. ... 0.01 0.01 Medical insturance firnd - 65.8 65.8 1,037.1 1,122.9 .. 0.04 0.04 0.65 0.69 1B. Total Indiret Tame 10,986.3 8,233.0 19,269.4 5,387.0 24,656.4 6.77 5.10 11.87 3.32 15.19 1. Domestic indirect taxes 9,019.8 8,192.0 17,211.9 - 17,211.9 5.56 5.05 10.60 ... 10.60 a. VAT 7,251.0 4,020.2 11,271.2 - 11,271.2 4.47 2.48 6.94 ..6.94 b. Exciues 898.6 878.0 1,776.6 - 1,776.6 0.55 0.54 1.09 1. .09 c. License on prod. & sale of alcohol - 28.5 28.5 - 28.5 ... 0.02 0.02 ... 0.02 d. Property taxes - 546.3 546.1 - 546.1 ... 0.34 0.34 ..0.34 c. Use of natural resources 248.0 595.9 843.9 - 843.9 0.15 0.37 0.52 ..0.52 f. Operations with secuities 35.8 1.1 36.9 - 36.9 0.02 0.00 0.02 ..0.02 g. Turnover tax - - --- . .. h. Sales tax - - - -. . . . . i. Price r-egulation fund 200.0 *- 200.0 - 200.0 0.12 ... 0.12 ..0.12 j. Land tax 41.5 273.0 314.5 - 314.5 0.03 0.17 0.19 ... 0.19 k. Other taxes and duties 345.0 1,849.2 2,194.2 - 2,194.2 0.21 1.14 1.35 ... 1.35 2. Foreign economic activity 1/ 1,966.5 91.0 2,057.5 5,387.0 7,444.5 1.21 0.06 1.27 3.32 4.59 a. Export taxes 1,201.9 - 1,201.9 609.4 1,811.3 0.74 .. 0.74 0.38 1.12 b. Import taxes 745.2 - 745.2 148.2 893.4 0.46 ... 0.46 0.09 0.55 c. Customs fee and duties 1.5 - 1.5 - 1.5 0.00 ... 0.00 ..0.00 d. Foreign Exchange tax 2/ - - - 2,474.9 2,474.9 .. .. .. 1.52 1.52 Hard cunrreny surrender scheme - - - - - .. .. .. .... Escrow accounts scheme - - --- Centralized expoft scheme - - - 2,474.9 - ... ... ... 1.52 Other schemes - - --- . .. e. Other 17.9 - 17.9 2,354.5 2,172.4 0.01 ... 0.01 1.33 1.34 C. Road and Ecological Funds Revenue - - - 2,363.3 2,368.3 ... ... ... 1.46 1.46 Road Funds - - - 2,364.9 2,364.9 ... .. .. 1.46 1.46 Ecologic-al flurd 3.4 3.4 ... .. .. 0.00 0.00 HI. Non-tax Receipts 2,711.1 - 2,711.8 - 2,711.8 1.67 .. 3.67 .. 1.67 112 Tabke A.2: Estimated Enlarged Governmwnt Revenues and Expenditures in 1993 (billion rubles and percent of GDP) Billion Rubles Percent of GDP Titles [A] [B) [A+B] [C] [A+B+Cl [A] [B] [A+B] [C] [A+B+CI Base Fed. Region. Cons. Off-Bud. Enlarg. Base Fed. Region. Cons. Off-Bud. Enlarg. Bud. Budgets Budget* Funds Budget Bud. Budgets Budget' Funds Budget 1. Geological exploration 309.8 - 309.8 309.8 0.19 .. 0.19 ... 0.19 2. Profits of Central Bank 2,042.0 -- 2,042.0 - 2,042.0 1.26 .. 1.26 ..1.26 3. Interest on external loans 360.0 -- 360.0 -- 360.0 0.22 ... 0.22 ..0.22 4. Other non-tax receipts ... .. ...-.. .. of which: Stock reevaluation ... ..-... .. .. mH. Intergovermecntal Transfers 29.8 4,372.5 0.0 --0.0 0.02 2.69 0.00.... I. Subrventions from repub. budget - 1,124.2 0.0 --0.0 .. 0.69 0.00 ..0.00 2. Mutual settlements 29.8 3,172.4 0.0 --0.0 0.02 1.95 0.00 ... 0.00 3. Resources owedto the regions ---- -0.0 . .. 0.00 ..0.00 4. Short-term loans from repub. budget -- 75.9 0.0 --0.0 ... 0.05 0.00 ... 0.00 IV. Total Current Revenues 19,199.6 28,411.5 43,208.7 22,535.0 65,743.7 11.83 17.51 26.62 13.88 40.51 V. Capital Revenues 66.4 252.5 318.9 -- 318.9 0.04 0.16 0.20 . 0.20 1. Privatization revenues 66.4 252.5 318.9 -- 318.9 0.04 0.16 0.20 ... 0.20 Total Expenditures 1. Cash Basis 32,267.0 27,550.3 55,409.4 22,317.4 77,726.8 19.88 16.97 34.14 13.75 47.89 2. Commitment Basis 31 32,267.0 27,550.3 55,409.4 24,484.9 79,894.3 19.88 16.97 34.14 15.09 49.23 1. National Economy 4,542.2 11,847.0 16,389.2 2,269.5 18,658.7 2.80 7.30 10.10 1.40 11.50 A. In Consolidated Budget 4,287.7 11,847.0 16,134.7 - 16,134.7 2.64 7.30 9.94 ... 9.94 1. Geological prospecting 332.0 - 332.0 -- 332.0 0.20 .. 0.20 ... 0.20 2. Compensation price differences 1,860.0 - 1,860.0 -- 1,860.0 1.15 .. 1.15 ... 1. 15 3. State subsidies (net) 209.0 -- 209.0 - 209.0 0.13 .. 0.13 ..0.13 Fund for farmer saupport ... .. ...-.. .. Transfers to Agro-Ind. cormplex - ... .. .. .. 4. Capital investmentsi 1,321.0 - 1,321.0 - 1,321.0 0.81 ... 0.81 ... 0.81 5. Other expenditures 565.7 11,847.0 12,412.7 - 12,412.7 0.35 7.30 7.65 ... 7.65 B. Conversion Program 254.5 -- 254.5 -- 254.5 0.16 .. 0.16 ... 0.16 C. ByExtrabudgctary Funds -- -- 2,269.5 2,269.5 .. .. .. 1.40 1.40 I. Road Fund - - - 2,266.1 2,266.1 .. .. .. 1.40 1.40 2. Ecological Fund - - 3.4 3.4 ... ... ... 0.00 0.00 II. Extermal Relations 937.6 -- 937.6 5,684.5 6,622.1 0.58 ... 0.58 3.50 4.08 1. Impost subsidies 4/ 807.9 -- 07.9 3,762.2 4,570.1 0.50 .. 0.50 2.32 2.82 Cash-fuinanced imnport subsidies 807.9 - 807.9 -- 807.9 0.50 .. 0.50 . 0.50 Credit fmnanced import subsidies - --- 3,762.2 3,762.2 .. .. .. 2.32 2.32 2. Freight and other expenditures 129.7 - 129.7 1,922.3 . 2,052.0 0.08 ... 0.08 1.18 1.26 Paymnents for freight - -- - 136.4 136.4 ... ... ... 0.08 0.08 Transfers abroad - -- 0.0 ... ... .. .... Transfers to financial institutions - - - 0.0 ... . Other 129.7 - 129.7 1,785.9 1,915.6 0.08 ... 0.08 1.10 1.18 III. Social Programs 2,917.6 12,412.5 15,330.1 13,124.3 28,454.4 1.80 7.65 9.45 8.09 17.53 A. Health, Education and Culture 2,260.0 11,147.1 13,407.1 - 13,407.1 1.39 6.87 8.26 ... 8.26 113 Table A.2: Estimated EnLarged Gomwnsmnt Revenues ansd Expenditures in 1993 (billion rubles and peiramt of GDP Billion Rubles Percet of GDP Titles [A] [B] [A+B] [C) [A+B4C1 [A] [B] [A+B3] IC] [A+B.*C] Base Fed. Region. Cons. Off-Bud. Ertlarg. Base Fed. Region. Cons. Off-Bud. Enlarg. Bud. Budgets Budget* Funds Budget'* Bud. Budgets Budget* Funds Budget I. Education 1,356.4 5,599.3 6,955.7 - 6,955.7 0.84 3.45 4.29 ... 4.29 2. Culture, arts & mass media 340.3 705.8 1,046.1 - 1,046.1 0.21 0.43 0.64 ... 0.64 3. Public health & physical culture 563.0 4,825.3 5,388.3 - 5,388.3 0.35 2.97 3.32 ..3.32 4. Youth policies 0.3 16.7 17.0 - 17.0 0.00 0.01 0.01 ..0.01 B. Socialf Protection 657.6 1,265.4 1,923.0 13,124.3 15,047.3 0.41 0.78 1.18 8.09 9.27 I. Social security 210.7 594.8 805.5 - 805.5 0.13 0.37 0.50 ..0.50 2. Chemobyl and Sesnipalatinask 362.2 7.6 369.8 - 369.8 0.22 0.00 0.23 ..0.23 3. Childrens benefits 0.2 663.0 663.2 - 663.2 0.00 0.41 0.41 ..0.41 4. PensionL Fund 84.5 - 84.5 10,385.0 10,469.5 0.05 .. 0.05 6.40 6.45 5. Social Insuance Fund - -- 1,623.9 1,623.9 ... ... ... 1.00 1.00 6. Emnployment Fund -. * - 376.8 376.8 ... .. .. 0.23 0.23 7. Fund for Social Support -- - - 18.2 18.2 .. .. ... 0.01 0.01 8. Medical Insurance Funds - - - 720.4 720.4 .. .. .. 0.44 0.44 IV. Science 893.9 48.6 942.5 - 942.5 0.55 0.03 0.58 ... 0.58 V. Adniinistration and Other Functions 10,381.3 1,020.8 11,402.1 - 11,402.1 6.40 0.63 7.03 ... 7.03 1. State admin. 658.3 817.7 1,476.0 - 1,476.0 0.41 0.50 0.91 ... 0.91 2. Law enforcement 2,513.0 111.1 2,624.1 - 2,624.1 1.55 0.07 1.62 ..1.62 3. Defense 7,210.0 - 7,210.0 - 7,210.0 4.44 .. 4.44 ..4.44 4. Inter-governmental programs - 92.1 92.1 - 92.1 .. 0.06 0.06 ... 0.06 VI. Nct Interet Payments 989.4 - 989.4 1,239.1 2,228.5 0.61 .. 0.61 0.76 1.37 1. Intemst on cxtemaldebt - - - 1,033.9 1,033.9 .. ... ... 0.64 0.64 2. Intcrest on domestic debt 989.4 - 989.4 - 989.4 0.61 ... 0.61 ... 0.61 3. Foex interest on domcstic debt - - - - - 4. Domestic debt service in for. cuffency - - - 205.2 205.2 .. .. .. 0.13 0.13 Vii. Net Lending 2,783.6 635.7 3,419.3 - 3,419.3 1.72 0.39 2.11 ..2.11 1. Directed Credit for invest., convers. 700.0 - 700.0 - 700.0 0.43 .. 0.43 ..0.43 progirarms and fuel-energy sector 2. Directed credit for working capital - - - - - .. .. .. .. 3. Budgetary loans 2,083.6 635.7 2,719.3 - 2,719.3 1.28 0.39 1.68 ..1.68 of which repayments -50.0 - -50.0 - -50.0 -0.03 ... -0.03 .. -0.03 VIM. Intergovermecntal Transfers 4,404.7 3.3 0.0 - 0.0 2.71 0.00 0.00 ... 0.00 1. Subventions 1,156.3 - 0.0 - 0.0 0.71 ... 0.00 ... 0.00 2. Mutual Settlemnts 3,172.4 3.3 0.0 - 0.0 1.95 0.00 0.00 ..0.00 3. Short-term loans from republ. budget 75.9 - 0.0 - 0.0 0.05 .. 0.00 ..0.00 I.X. Other expenditures 5/ 4,416.6 1,582.5 5,999.1 - 5,999.1 2.72 0.98 3.70 ... 3.70 X. Interest on external debt - not paid - -- - 2,167.5 2,167.5 .. .. . 1.34 1.34 Balance 1. Cash Basis -13,001.0 1,113.6 -11,21.9 217.6 -11,0043 -8.01 0.69 -7.32 0.13 -7.19 2. Commnitment Basis 3/ -13,001.0 1,113.6 -11,281.9 -1,949.9 -13,231.8 -8.01 0.69 -7.32 -1.20 -8.52 Total Financing 6/ ... ... ... ... 13,457.5 ... ... ... ... 8.29 A. Domestic Sources ... ... ... ... 7,890.0 ... ... ... ... 4.86 1.- Domestic bank financing ... ... ... ... 8,870.0 ... ... ... ... 5.47, 114 Tabk A.2: Estimated Enlaged Goeurent Rnwaus and Evpandltures in 1993 (bllon rublm and percent of GDP) Billion R l Percent of GDP Titles [A] [B] [A+B] IC] IA+B+Cl [A] [B] [A+B] [C] [A+B+CJ Bae Fed. Region. Cona. Off-Bud. Ensg. Bae Fed. Region. Cons. Off-Bud. Enlarg. Bud. Budgeb Budget' Funds Budgta Bud. Budgets Budgets Ftnds Budget5 a. Monetary authorities net credit to the Government ... ... ... ... 10,210.0 ... ... ... ... 6.29 Net credit from CBR ... ... ... ... 3,900.0 ... ... ... 5.48 - Direct CBR credit, net ... ... ... ... 3,340.0 ... ... ... ... 5.45 - Net fnancing from securities ... ... ... ... 60.0 ... ... ... ... 0.04 - Ruble counterpart of Government net use of NIR ... ... ... ... 1,310.0 ... ... ... ... O.S I b. Net credit from the rest of banking system -0.83 ... ... ... ... 1-,340.0 ... 4.83 - Net credit from comnercial banks ... ... -1,9S0.0 ... ... ... ... -1.22 - Securities held by commercial banks .. ... ... ... 640.0 ... ... ... ... 0.39 2. Donestic non-bank financing ... ... ... ... -980.0 ... ... ... ... -0.60 a. Securities held by non-bank ector ... ... ... ... -540.0 ... ... ... ... -0.33 b. Domestic principal repayments to non-banks ... ... ... ... -440.0 ... ... ... ... -0.27 B. Net Foreign Financing ... ... ... ... 5,567.5 ... ... ... ... 3.43 1. Foreign disbursement ... ... ... ... 4,620.0 ... ... ... ... 2.85 a. Tied credits ... ... ... ... 3,790.0 ... ... ... ... 2.34 b. Untied credits 3... ... ... 30.0 ... ... ... ... 0.51 c. Comnmercial credits 2. Principal repayments, cash ... ... ... ... -1,220.0 ... ... ... ... -0.75 3. Interest not paid ... ... ... ... 2,167.5 ... ... ... ... 1.34 C. Residual 7/ ... ... ... ... 374.3 ... ... ... ... 0.23 Quasi-fiscal Spending by CBR ... ... ... 13,413.0 13,413.0 ... ... ... 8.27 8.27 1. Transfer to other FSU Sttes ... ... ... 5,263.0 5,263.0 ... ... ... 3.25 3.25 1. Loans to other FSU countries ... ... ... 382.0 382.0 ... ... ... 0.24 0.24 2. Exceptional financing to FSU ... ... ... 4,336.0 4,336.0 ... ... ... 3.01 3.01 2. Central Bank Directed Credit 6/ ... ... ... S,150.0 3,150.0 ... ... ... 5.02 5.02 Memo item: GDP (billion rubles) 162,300.0 100.00 * The consolidated budget ir net of intergovenumental transfen. I Includig sales of gold nd precious mensts and rewmue from eanurland eaport. 2. Partily budgeted under expenditure in the official budpt (eou rt.put ruble spfnt to obtain forepn xehse). 3. Includng interest arrears on externsl debt 4. Partially budgeted under revenues (counterpart rubles received from the wle of ipoirted goode). 5 Including payment. for gold and precious metils on federal leel 6. Source: IMF estimates. 7 Total Financing minu. Deficit. Soarces: Minisjuy of Finance, 1F, staf estimate. 11 5 Table A.S: Estimated Enla,ged Gove,ment Revmesu and Expenditure In 1994 (wftkout Ckechen Republc) (billion rubbes exd percent of GDP, preUNbabuay data) Billion Rubles Percent of GIDP Title& [Al [BJ [A+BI (Cl (A+B4Cj [Al CB] (A+B I C] (A+B4CJ Baan Fed. Region. Cons. Off-Bud. EnIUS0 Basw Fed. Region. Coin. Off-Bud. EHaisl B3ud. Budgets Budget* Funda Budget - Bud. Budgets Budvet FUeNd Budget* Tetal Revenues 8%01S&9 110,489.5 168,029.7 60,358.3 228,38.0 12.70 17.54 26.67 9.50 36.25 L Total Tax Rrvenue. 77,240.2 07,823.8 165,064.1 60,350.3 225,422.4 12.26 13.94 26.20 9.50 35.78 A. Total Direc Taxes 17,239.5 49,269.6 66,509.0 55,279.6 121.70g.6 2.74 7.82 10.56 0.77 19.33 1. Income tsxes 17,239.5 49,005.4 66,324.9 - 66,324.9 2.74 7.79 10.533 . 10.53 bIndividual 113.9 17,395.4 17,509.3 - 17,509.3 0.02 2.76 2.78 ... 2.72 Corporte profits 17,125.5 31,690.1 40,015.6 - 40,015.6 2.72 5.03 7.75 .. 7.75 2. Social security contributiom - 104.1 104.1 55,279.6 55,463.7 ... 0.03 0.03 8.77 0.90 a. Contribution by employee. - - - - - .. .. .. .... b. Contribution by employer.s - - 55,279.6 - .. . . .77 Pension fund - - - 38,270.4 - ... ... ... 6.07 of whichi:Budget uahsidy - - - - -.. .... Social inmuance f.m - - - 7,459.3 - .. .. .. 1.10 . Emnploymiet fied - - - 2,967.4 - .. .. .. 0.47 Social protection fund - - - 64.2 - .. .. .. 0.01 Medical insurance fund - 104.1 104.1 6,510.3 6,702.4 .. 0.03 0.03 1.03 1.06 B. Total Indirect Tax.. 60,000.7 38,554.3 90,555.0 - 90,555.0 9.52 6.12 15.64 ... 15.64 1. Domestic indirec tax.. 37,960.8 30,379.2 76,340.0 - 76,340.0 6.03 6.09 12.12 ... 12.12 a. VAT I/ 27,960.0 15,071.6 43.032.4 - 43,032.4 4.4. 2.39 6.03 . 6.83 of which: Special lax 4,225.1 1,473.2 5,690.3 - 5,698.3 0.67 0.23 0.90 ..0.90 b. Excise. 4,456.1 2,960.5 7,424.6 - 7,424.6 0.71 0.47 1.10 ... 1.10 of vhaicha: Oil Excime 1,675.6 - 1,675.6 - 1,675.6 0.27 .. 0.27 .. 0.27 c. Licaens on prod. A. sale of alcohol - 133.7 133.7 - 133.7 .. 0.02 0.02 ... 0.02 d. Propertytaxe. - 4,031.4 4,031.4 - 4,831.4 .. 0.77 0.77 ..0.77 e. Uw. of nataxml resource. 378.9 2,041.0 2,420.7 - 2,420.7 0.06 0.32 0.30 ... 0.30 f Operatiom with securities 377.3 00.4 457.7 - 457.7 0.06 0.01 0.07 ... 0.07 g. Turnover tax - - - - - h. Ssle tax- - -- i. Price repalation fund - - - -- .. .. . . j. Land tax 110.0 1,550.3 1,661i.1i - 1,661.1 0.02 0.25 0.26 ... 0.26 k. Odier taxes snd duties 4,604.0 11,701.6 16,306.4 - 16,386.4 0.74 1.86 2.60 ..2.60 2. Forcip nevonoicactvity 2/ 22,032.0 175.1 22,207.1 - 2Z,207.1 3.50 0.03 3.52 ... 3.52 of which: Hard cawTencymsale 3,040.2 - 3,040.2 - 3,040.2 0.48 ... 0.43 ... 0.40 Centralized Export 3,416.0 - 3,416.0 - 3,416.0 0.54 .. 0.54 .. 0.54 C. Road and Ecological Funads Revenuce. - - - 5,070.7 5,070.7 ... ... ... 0.01 0.01 Road Fenbds - - 5,076.4 5,076.4 ... .. ... 0.31 0.01 Ecological fund - - - 2.3 2.3 .. .. .. 0.00 0.00 IL Non-tax Recipts 2,217.2 - 2,217.2 - 2,217.2 0.35 .. 0.35 ... 0.35 I. Geological exploration 635.0 - 635.8 - 635.8 0.10 ... 0.10 .. 0.10 2. Profits of Central Bank 1,581.4 - 1,581.4 - 1,581.4 0.25 .. 0.25 .. 0.25 3. Intereston extcrnal loamn. - - - - 4. Otar non-tax receipts of which: Stock reevauation - - .. .. .. .... EL Integovemnmntal Transfem 442.2 22,033.6 0.0 -0.0 0.07 3.50 0.00 ..0.00 116 Table A.3: Estimated Enlarged Goernxnent Revenues and Expenditures In 1994 (wIthout Chechen Republic) (biLlion rubls andpercent of GDP, preliminary data) Billion Rubles Percent of GDP Titles [A] [B] (A+B] IC] IA+B+C] IAI [Bl [A+B] IC) [A+B+Cl Baw Fed. Region. Conr. Off-Bud. Erlafg. Base Fed. RegionL Cons. Off-Bud. ERIsg Bud. Budget Budget* Funds Budget * Bud. Budgets Budget* Funds Budgd * 1. Subvention from the Federal budget - 2,621.6 0.0 - 0.0 ... 0.42 0.00 0.00 2 Fed. findforfuL wn ort of teitowy - 2,249.8 0.0 - 0.0 ... 0.36 0.00 .. 000 Mutusi settlemn 379.0 16,366.0 0.0 - 0.0 0.06 2.60 0.00 .. 0.00 Mutu Irdllementonlom 63.2 - 0.0 - 0.0 0.01 ... 0.00 .. 0.00 Subsidy frn the Fed. bud. to the 'clood cities' - 5S5.1 0.0 - 0.0 . 0.09 °°° 0.00 Short-teamloam fromtheFed.budget - 211.1 0.0 - 0.0 ... 0.03 0.00 ... 0.00 IV. Total CurentReveues 79,S99.6 109,857.4 167,281.3 - 167,281.3 12.68 17.44 26.55 ... 26.55 V. Capital Revnue 116.3 632.1 74g.4 - 748.4 0.02 0.10 0.12 ... 0.12 1. Privatization revenues 116.3 632.1 748.4 - 748.4 0.02 0.10 0.12 ... 0.12 Total Expenditures 1. Cus Basi 139,133.6 110,421.5 227,079.5 57,062.9 284,142.4 22.08 17.53 36.04 9.06 45.10 2. Commiamnt Basis 3/ 144,575.4 110,421.5 232,521.3 57,062.9 289,584.2 22.95 17.53 36.91 9.06 45.97 L National Economy Ig,878.1 45,217.5 64,095.6 5,077.0 69,172.5 3.00 7.18 10.17 0.81 10.98 A. In Consolidated Budget 18,211.4 45,217.5 63,428.8 - 63.42g.8 2.89 7.18 10.07 ... 10.07 1. Geological prospecting - - - - - ... ... ... ... ... 2. Compenstion price differencer _ _ ... ... 3. State subsidies (nt) - - - - - ... ... ... ... ... Fund for farmeni qport - - - - - .. ... ... .. ... Transfers to Agro-Ind. complex - - - - - ... ... ... ... ... 4. Cpital invments - - - - - ... ... ... ... ... S. Other expenditure - - - - - ... ... ... ... ... B.ConverionProgrmm 666.8 - 666.8 - 666.8 0.11 ... 0.11 ... 0.11 C. By Extrabudgeiary Funds - - - 5,077.0 - ... ... ... 0.81 ... 1. Road Fund _ - - 5,074.7 - ... ... ... 0.81 ... 2. Ecological Fund - - - 2.3 - ... ... ... 0.00 IL Extenal Relations 4,721.7 234.6 4,956.3 - 4,956.3 0.75 0.04 0.79 ... 0.79 IL Social Prografm 11,745.6 48,988.2 60,733.8 51,985.9 112,719.7 1.86 7.78 9.64 8.25 17.89 A. Health, Education and Culture 9,478.1 42,418.0 51,896.1 - 51.896.1 1.50 6.73 8.24 ... 8.24 1. Educalion 5,488.1 21,964.6 27,452.7 - 27,452.7 0.87 3.49 4.36 ... 4.36 2. Culture, ust & mn media 1,655.0 2,971.3 4,626.4 - 4,626.4 0.26 0.47 0.73 ... 0.73 3. Public health & physical culture 2,320.9 17,386.0 19,706.9 - 19,706.9 0.37 2.76 3.13 ... 3.13 4. Youth policies 14.1 96.1 110.2 - 110.2 0.00 0.02 0.02 ... 0.02 B. Social Protection 2,267.5 6,570.2 8,837.7 51,985.9 60,823.6 0.36 1.04 1.40 8.25 9.65 1. Social secity 999.2 2,373.6 3,372.8 - 3,372.8 0.16 0.38 0.54 ... 0.54 2. Chernobyl and Semipalatinik 1,268.1 21.7 1,289.8 - 1,289.8 0.20 0.00 0.20 ... 0.20 3.Children'sbenefits 0.1 4,174.9 4,175.1 - 4,175.1 0.00 0.66 0.66 .. 0.66 4. Penion Fund - - - 37,320.0 - .. ... ... 5.92 5. Social bIsance Fund - - - 6,629.7 - ... ... ... 1.05 ... 6. Employment Fund - - - 2,407.1 - ... ... ... 0.38 7. Fund for Social Support - - - 64.6 - ... ... ... 0.01 S. Medical lwance Fundr _ - - 5,564.5 - ... ... ... 0.88 117 TabkeA.3. Estuoated Exulged GewrmmgxtReexwnaxsad Expeniiltaesho 994 (w.tkoot Chechex Reublic) (h on ,bl andperceat of GDP, prelUinary ddai) Billion Rubles Percent9 of GDP Tuides [A) IBI JAiB) [Cy -[A+B4CI [AJ jB [A+B) [C) [AMEB+CJT BaseFgd. Ragkon. Corn. Off-Bud. E01513 Base Fed. Region. Cam. Off-Bud. Eidearg, Bud. Badge" Budget$ Fisids Budget - Bud. Budgets Bubdget Funids Budget' IV. Sciocc 2,964.6 150.3 3,115.0 - 3,115.0 0.47 0.02 0.49 ..0.49 V. Adminitration andOther Fuciaicie 42,619.1 3,960.4 46,579.4 - 46,579.4 6.76 0.63 7.39 ..7.39 1. Satme admin. 3,847.2 3,250.6 7,097.8 - 7,097.8 0.61 0.52 1.13 ..1.13 2. A L nawmif caatt 10,753.7 673.0 11,426.7 - 11.426.7 1.71 0.11 1.81 ... 1.81 3. Defame 23,018.1 - 28,018.1 - 28,018.1 4.45 ... 4.45 ..4.45 4. Inter-govccnmental progranm - 36.8 36.8 - 36.8 ... 0.01 0.01 ..0.01 VI. NctIntA=vPaymtents 10,633.9 - 10.633.9 - 10,633.9 1.69 ... 1.69 ... 1.69 1. hneredatn exteena debk 3,135.5 - 3,135.5 - 3,135.5 0.50 ... 0.50 ... 0.50 2. hitres ondomesic deb 7,498.4 - 7,498.4 - 7,498.4 1.19 ... 1.19 .. .19 3. Forexinereton dnmestic debt - - - - .. .-. . 4. Domestic debt mmrvcc in for. curency - - - - -.. .. .. .... VII Net Leading 13,971.8 Z,052.2 16,023.9 - 16,023.9 2.22 0.33 2.54 ..2.54 1. Directed Credit for uwcaL, conwevs. progmmsm and fuel-energ sector - - ..-. . . . 2. Dioeced credit for woaking capital - - - ..-. . . . 3. Budgetary loam 13,971.8 2,052.2 16,023.9 - 16,023.9 2.22 0.33 2.54 ..2.54 of whichrepaymmat - - - - ..-. . . . VIII InTeroveimmenl Tranufera 22,033.5 442.2 0.0 -0.0 3.50 0.07 0.00 ..0.00 Subventiom to local bud"d 2,621.6 - 0.0 -0.0 0.42 .. 0.00 ..0.00 Foderal fimd for fin. aqupo of territoriea 2,249.8 - 0.0 -0.0 0.36 . 0.00 ... 0.00 Mutal settlnet 16,365.0 442.2 0.0 -0.0 2.60 0.07 0.00 ... 0.00 Mutual etlneW nta with the "closed citics" 1.0 - 0.0 -0.0 0.00 .. 0.00 ... 0.00 Subs. t-an to the Im, bud, for the "ci. cities" 238.7 - 0.0 -0.0 0.04 0.00 ... 0.00 Subsidies to the "closed cities" 346.4 - 0.0 -0.0 0.05 ... 0.00 ..0.00 Shcrt-terulomnsto the local budgeta 211.1 - 0.0 -0.0 0.03 .. 0.00 .0.00 DC. Othe expendiwes 4V 11,565.3 9,376.2 20,941.5 - 20,941.5 1.84 1.49 3.32 ... 3.32 X 1n1ere on cteinl deb4- nc1paid 5,441.8 - 5,441.8 - 5,441.8 0.86 ... 0.86 ..0.86 Balance 1. Cash Basks -59,257.7 48.0 .59,049J 3,295. -55,754.4 -9.38 0.01 -9.37 0.52 -&85 2. CesmxJtmu.u Basis 3/ -644,55.6 480 .44,491.6 3,295.4 -61,196.2 -10.25 0.01 -20.24 0.52 -9.71 TotsI Finsancig / ... ... ... ... 63,041.8 ... ... ... ... 10.01 A. Domestic Sourees ... ... ... ... 57,000.0 ... ... ... ... 9.05 1. Domestic bank financing ... ... ... ... 52,400.0 ... .. . . .32 a. Monetary authoities net credit to the Govenmnent ... ... ... ... 48,900.0 ... ... ... ... 7.76 -Ndt credit fiom CBR ... ... ... ... 43,600.0 ... ... ... ... 6.92 -DirecACBR credit, net ... ... ... ... 4Z,100.0 .. .. ....6.68 -Ndt financing from securities ... ... ... ... 1,500.0 ... ... ... ... 0.24 -Ruble counterpaut of Govermment net use of ... ... ... ... 5,300.0 ... ... ... . 0.84 b. ~Wcredit from the rest of banking systm ... ... ... ... 3,500.0 ... ... ... ... 0.56 -Net credit from commercial banks ... ... ... ... 46,100.0 ... ... ... ... -0.97 *Secusitics held by commercial baik ... ... ... ... 9,600.0 ... ... ... ... 1.52 2. Domestic non-ban fnancinkg .. ... ... ... 4,600.0 ... ... ... ... 0.73 a. Sec'niticesheld by non-banksector ... ... ... ... 5,500.0 ... ... ... ... 0.87 b. Domestic principal rcpayinents to non-banks .. ... ... ... -900.0 ... ... ... ... -0.14 118 Tabke A.3: Estmated Enlarged Govrxment Revenue and Expenditwrs In 1994 frthout Checken Republic) (bo ruble and pet of GDP, preliminary data) Billion Rubles Paceat of GDP Tides [A] [B] lA+Bj IC) IA+B4Cl [Al [Bl [A+B] [C] (A+D.C Bae Fed. Regio Cam Off-Bud. Enltg. Bae Fed. Region. Con. Off-Bud. Ea53 Bud. Budget Budget Funds Budget Bud. Budgets Budget Funds Budget B. Net Foreign Financing ... ... ... ... 6,041.8 ... ... ... ... 0.96 1. Forign diabummnent ... ... ... ... 5,500.0 ... ... ... ... 0.7 a. Tied credis ... ... ... ... 4,700.0 ... ... ... ... 0.75 b. Untied credits ... ... ... ... S00.0 ... ... ... ... 0.13 c. Cosecial credits ... ... ... ... ... ... ... ... ... 2. Principal fepayments, cash ... ... ... ... -4,900.0 ... ... ... ... -0.78 3. bIte unot paid ... ... ... ... 5,441.S ... ... ... ... 0.86 C. Residual 6/ ... ... ... ... -1,S45.6 ... ... ... ... 4.29 Quasi-fical Speding by CBR ... .. . ... .. ,.. na. 3.5 1. Trasfees to other FSU States ... ... ... n.&. n.a. ... , ,,. ILa. a. 1. Loam to other FSU countries ... ... ... nIa. n.a. ... .. na. IA. 2. Exceptional finuancing to FSU ... ... ... na. n.a. .. ... ... ILA. t3S. 2. Central Bank Diroted Credit 5/ ... ... ... .LA. P.., nA. na. Wow item: GDP (billion rubles) 630,000 100.00 * The cornolidated budget is ne of integvenunental trmnfem. I VAT revsenus eumdureioad at ths fedeal tele and oveetredd at the local level due to the pructie of convmao betwen fedwnl transfm wid regional reveno. In othr words. vtead of federat tranfsr the repon keep VAT reveoun tn t should smn to the federal budgeL Correug for thie prtie. VAT revenus at the fedea tevet ihould be 31.4 trillion rublsond 1I1.6 trilion nbes t th reginl vee. Convaleny. fedl truf to the regio ure trte d by 0.6 pecent of ODP. 2. lncluti,* sates of old and preio metab and revenue from osntrulized exporL 3. Ineludin inrta enem on exan debt 4. Including payment for gold wod precious metals on federal level. 5. Souse: D6tF et_. 6. Total Fiowenrg nminum DeficiL Sources: Miniuty ofFina,c, IMF, ztqfestimaeu. Table A.4: Extrabudgetary Funds, 1992-19941/ an billions of rubles) .E.xm~~~ I. TOTAL IDENTIFIED EXTRABUDGETARY FUNDS 2/ 3,432.3 2,514.6 917.7 23,547.5 20,822.6 3,14S.7 76,204.9 71,693.9 6,977.7 (In pernt of GDP) 19.0 13.9 5.1 14.5 12.8 1.9 12.1 11.4 1.1 A. Social tm 2,0S7.0 1,620.1 466.9 14,292.7 13,124.8 1,571.1 55,280.0 51,985.9 4,4S6.4 (In percentof GDP) 11.5 9.0 2.6 &8 81 1.0 &8 &3 0.7 1. Pension Fund 1,716.0 1,325.4 390.6 10,621.2 10,385.5 559.1 38,270.4 37,320.0 1,509.5 2. Social hnnuice Fund 293.1 234.9 58.2 1,968.3 1,623.9 395.8 7,459.3 6,629.7 1,211.4 3. ErnloymetFund 58.5 46.4 12.1 62S.1 376.8 279.3 2,967.4 2,407.1 810.9 4. SocialPrectionFundoftbePopulation 10.4 9.5 0.9 18.0 18.2 1.1 64.6 64.6 0.7 5. Medical Inmunce Fund 2/ 9.0 3.9 5.1 1,057.1 720.4 336.8 6,518.3 5,564.5 953.8 5.a Federal Medical Irwance FuDd fa. n rLa. na 54.4 28.3 26.1 ILS. a.S. ra. 5.b. TearilorialMedical lnsuranceFund n.. nr. nL.a 1,002.7 692.1 310.7 n.e. n.L tLtL B. Other ldentffied puble Ie*mds 297.0 237.2 49.8 2,378.7 2,276.8 123.8 5,114.0 5,101.9 33.3 an percent ofGDP) 1.6 1.3 0.3 1.5 1.4 0.1 0.8 0.8 0.0 I.a. Federal Road Fund 133.2 109.6 23.6 1029.8 1026 5.8 3,208.1 3,190.5 23.4 l.b. TewTitorialRoadFund 153.8 127.6 26.2 1335.1 1240.1 113.6 1,868.3 1,884.2 *4.8 3. Federal Ecological Fund nLa. na. na. 3.4 3.4 0.1 4.1 3.8 0.4 4. Fund for Techiological Development na. ra. na. 10.4 7.3 4.3 33.5 23.4 14.3 C. Idendtied "Indstrkl" rulnds3/ 1,058.3 657.3 401.0 6,876.1 5,421.0 1,453.8 15,S11.0 14,606.0 2,458.0 (in percent ofGDP) 5.8 3.6 2.2 4.2 3.3 0.9 2.5 2.3 0.4 1. Setoral and Intra-Sectoral R&D Fund 113.9 49.3 64.6 651.2 335.4 315.8 397.3 376.6 100.9 2. Fund of Fianc. Regul. in Fuel-Energy Compl. 564.0 396.0 168.0 3,705.9 3,152.1 553.8 30.6 27.1 27.9 3. FundofFinnc.Regul.intheMetall.Industry 104.4 62.1 42.3 958.0 591.4 366.6 1,461.0 1,461.0 0.0 4. Gazprommivestmefiund na. na. nra. na. aL Ia. 10,141.0 10,141.0 0.0 5. Otherffunds 276.0 149.9 126.1 1,561.0 1,342.1 217.6 3,781.1 2,600.3 2,329.2 Memo item: GDP 18,093.0 162,300.0 630,000.0 Source: State Committeefor Statistics ofRussia (1993 and 1994 numbers are presented as in Goskomstat document of October 19,1994) andMinistry of Finance '0 I/ Tbe balace does not always corrspond to the difference bdween revenues and expendius. 2/ Fimaed bsed on the firt half of tbe yer informatiom. 3/ Identified iial fi- 1992 - escution, 1993 - estinates, 1994 - centralized put. Table A.4a: Centralized Part of Identifwed "Industrial" Extrabudgetary Funds, 1993 and 1994 (billion rubles) C. Identfed "Iditrblal tl, 75.2 52.7 28.2 1,8SS.9 1,S64.7 12S.8 Pw ,tqfCGDP 0.05 0.03 0.02 0.30 0.30 0.02 1. FundfortheFuucmof 43.7 35.6 1I.S 397.3 376.6 100.9 ........and...... ...... Scieatific Projeds anud Activitic Deaig wh the Invention of New Products 2. Fund of Finuanal Regulation 17.6 3.3 15.6 30.6 27.1 27.9 in the Fuel-Energy Ccmplex 3. FundofFinancaiR fguastion 13.9 13.7 0.8 1,461.0 1,461.0 0.0 in the Metallurgical Indoafy 4. Qthfiund ona. 3.a n.6 3,781.1 2,600.3 2,329.2 Source: StateCommitteeforStatistics ofRussia (1993 and 1994 numbersarepresentedas in GoskomstatdocumentofOctober 19.1994) Table A. 5: Revenues, Expenditures, and Balances of Regional Budgets, Total and per Capita, 1991 - 1993 (current prices). |Ppul ( ) | Total ReverL (rwin rubles) | Toral E Rm lbuble)l Per Cepr Ex (th rubles) |Per Cj Bal (thr ubles)| 10LiiIZ.01.9310194 1991 1992 1 19931 1991 1 1992 11993 | 1991 1992 1993 1991 199 1 1993 71991 r 1992 Adygeya Republic 442 447 449 296 3,544 30,297 393 4,828 61,917 -97 -1,284 -31,620 669 7,928 67,477 889 10,802 137,900 -220 -2,873 .70,423 AgmiulyBurystak3yAO 79 79 79 74 210 1,887 109 1,680 14,852 -35 .1,469 -12,965 941 2,664 23,766 1,379 21,264 1S7,053 -439 -18,601 -163,287 Altaniku Krai 2,666 2,682 2,686 1,940 23,616 246,589 2,634 30,607 429,589 | 694 -6,991 -183,000 728 8,S06 91,792 988 11,412 159,913 -260 -2,607 -68,121 AmurksyOblut 1,075 1,063 1,057 1,563 12.428 140,260 1,674 14,471 193,675 -111 -2,043 -53,415 1,454 11,692 132,734 1,557 13,614 13,2S3 -103 -1,922 -50,549 Ark Isel'rkya Oblist 1,517 1,510 1,497 1,501 18,382 191,618 1,903 19,359 225,419 -401 -977 -33,801 990 12,173 127,993 1,254 12,820 150,570 -265 -647 -22,578 AstrbukhmkaysObla t 1,010 1,013 1,015 1,187 7,930 89,020 1,194 10,762 130,156 -7 -2,831 -41,136 1,175 7,829 87,670 1,182 10,624 128,182 -7 -2,795 -40,512 Bashkortowtan Repubic 4,008 4,042 4,056 4,379 142,240 1.237,537 4,087 86,178 1,008,329 292 56,061 229,208 1,093 35,190 305,135 1,020 21,321 24S,620 73 13,870 56,515 BSlgoro&ka Oblast 1,408 1,423 1,438 1,241 20,992 214,250 1,351 20,675 208,282 -110 317 5,968 881 14,752 149,033 959 14,529 144,882 -78 223 4,151 Briysxkmy Oblst 1,464 1,468 1,472 1,483 12,049 129,584 1,574 13,529 165.741 -92 -1,480 -36,157 1,013 8,208 88,057 1,075 9,216 112,626 .63 -1.008 -24,570 BwyayRepublic 1,059 1,057 1,053 1,072 9,112 101,601 1,517 16,199 201,109 -445 -7,087 -99,508 1,012 8,621 96,506 1,433 15,325 191,023 -420 .6,704 -94,517 Checheno-lruuh Republic 1,308 1,307 1,290 - - - - - - - - - - - - - - - - - - ChelysbinkaysOblast 3,638 3,634 3,617 3,758 60,460 617,612 3,811 66,561 631,029 -52 .6,101 -13,417 1,033 16,637 170,757 1,048 18,316 174,467 .14 -1,679 -3,710 CliftelmysOblat 1,312 1,297 1,289 928 11,879 112,581 1,440 16,169 175.999 -512 4,290 -63,418 707 9,159 87,353 1,098 12,466 136,560 -391 -3,307 -49,207 Chuk&tzkyAO 146 124 113 654 4,461 40,156 691 9,955 100,011 .37 .5,494 -59,855 4,480 35,976 355,049 4,734 80,279 884,271 -253 -44,303 -529,222 ChuvashvoyskRepublic 1,353 1,359 1,359 1,282 10,717 121,894 1,438 15,889 171,923 -156 -5,172 -50,029 947 7,886 89,694 1,063 11,691 126,507 -115 -3.806 -36,813 DageuinsRepublic 1,890 1,925 1,953 1,260 4,795 40,955 1,569 21,239 217,536 -309 -16,444 -176,581 667 2,491 20,970 830 11,033 111,386 -164 -8,542 -90.415 EvenkiyuidAO 25 24 23 52 330 1,943 71 1,018 14,132 -19 -688 -12,189 2,080 13,763 85,973 2,852 42,435 625,310 .772 -28,672 -539,336 OmyyAltaifRepublic 198 197 198 142 973 10,151 223 3,055 51,931 -80 -2,082 -41,780 719 4,940 51,190 1,124 15,510 261,881 -405 -10,569 -210,691 IIbutzkBysOblast 2,732 2,730 2,718 3,172 50,223 425,929 3,607 50,418 472,963 435 -195 47,034 1,161 18,397 156,684 1,320 18,468 173,986 -159 -72 -17,302 lvsnokvsysOblast 1,312 1,308 1,300 - 14,317 122,785 - 14,131 139,541 - 185 -16,756 - 10,945 94,421 - 10,804 107,306 - 142 -12,885 Kabsdino-BalkarRepublic 784 786 786 697 4,610 35,533 817 7,790 100,439 -120 -3,180 -64,906 889 5,865 45,219 1,042 9,911 127,818 -154 -4,046 -42,599 1alulnrdaskaraObilst 894 906 913 839 9,311 118,305 901 10,130 169,736 -61 -439 -51,431 939 10,277 129,564 1,008 11,181 185,890 -69 -904 -56,326 KalmukriysRepublic 327 322 321 346 1,953 15,341 526 5,619 64,068 -180 *3,666 48,727 1,058 6,065 47,851 1,608 17,451 199,838 -550 -11,386 -151,987 KaluzhskaysOblst 1,081 1,086 1,088 844 8,887 109,827 967 9,905 131,834 -123 -1,018 -22,007 781 8,183 100,981 895 9,121 121,216 -114 .937 -20,234 1chmkiylaOblast 433 418 404 801 6,798 83,978 909 11,566 171,304 -108 4,768 -87,326 1,850 16,263 207,866 2,100 27,669 424,020 *250 -11,406 -216,153 Karacbayec o-Clcrkeas Rep. 431 434 434 273 2,775 21,902 364 4,217 51,148 -91 -1,443 -29,246 632 6,393 50,454 844 9,717 117,823 -212 -3,324 -67,372 KmaliyafRepublic 800 800 794 1,089 15,028 161,260 1,157 21,150 175,278 -69 -6,123 -14,018 1,361 18,784 203,047 1,447 26,438 220,698 46 -7,653 -17,650 KemerovskyaOblat 3,181 3,177 3,158 3,791 61,925 556,081 3,956 63,719 755,831 -166 -1,794 -199,750 1,192 19,492 176,092 1,244 20,056 239,346 -52 -565 -63,254 KhubrovkuiKrui 1,634 1,621 1,608 2,342 28,407 371,043 2,537 30,296 445,716 -195 -1,889 -74,673 1,433 17,525 230,719 1,553 18,690 277,152 .120 -1,165 -46,433 KhkmiyarRepublic 581 583 584 723 7,530 73,377 628 7,460 90,696 95 70 -17,319 1,245 12,916 125,646 1,081 12,797 155,301 164 119 -29,656 Khanty-MansiyskiAO 1,305 1,301 1,313 2,835 87,396 722,431 2,406 66,788 707,208 428 20,608 15,223 2,172 67,176 550,382 1,844 51,336 538,784 328 15,840 11,598 KIrvskayrOblct 1,700 1,701 1,694 1,622 18,904 189,531 1,825 19,088 214,526 -202 -185 -24,995 954 11,113 111,857 1,073 11,222 126,609 -119 -109 -14,752 KomniRepublzc 1,255 1,246 1,228 1,904 26,906 259,135 1,976 26,403 319,132 -71 503 -59,997 1,517 21,594 211,005 1,574 21,190 259,858 -57 404 -48,854 Korni-PertnyutakiAO 160 161 160 113 800 6,578 154 1,907 29,680 -41 -1,107 -23,102 707 4,967 41,036 964 11,845 185,153 -256 -6,878 -144,117 Koryakby AO 39 38 35 82 439 5,112 133 3,157 42,099 -51 -2,718 -36,987 2,109 11,550 144,407 3,420 83,078 1,189,237 -1,310 -71,527 -1,044,831 KoatomskaysOblast 812 812 810 661 8,896 100,982 750 10,339 142,442 -88 -1,443 -41,460 814 10,955 124,638 923 12,732 175,811 -109 -1,777 -51,173 KraI ldakiiKrni 4,797 4,879 4,940 3,922 47,389 643,826 4,346 45,626 667,981 424 1,763 -24,155 818 9,713 130,342 906 9,351 135,233 -88 361 4,890 KlisyarskiiKrai 2,973 2,973 2,957 3,382 59,401 504,533 3,432 53,000 506,065 -53 6,401 -1,532 1,137 19,980 170,641 1,154 17,827 171,159 -17 2,153 -518 KurwgnkayuOblat 1,115 1,118 1,315 840 10,596 112,517 1,167 12,759 147,731 -327 -2,163 -35,214 753 9,477 100,930 1,047 11,412 132,518 -293 -1,935 -31,588 KurukayaOblat 1,335 1,341 1,344 1,234 17,521 160,679 1,376 15,225 165,634 -142 2,295 -4,955 924 13,065 119,571 1,031 11,354 123,258 -106 1.712 -3,687 LeurwrdkayaOblast 1,673 1,674 1,669 1,168 20,487 239,752 1,504 19,934 248,504 -336 553 -8,752 698 12,238 143,659 899 11,908 148,903 -201 330 -5,244 Ljcekys Oblst 1,234 1,241 1,246 1,094 18,386 211,541 1,246 16,403 206,278 -152 1,983 5,263 887 14,815 169,844 1,010 13,218 165,619 -123 1,598 4.226 M.pdaukayaOblat 363 327 307 1,595 12,941 117,406 1,416 14,378 169,835 180 -1,437 -52,429 4,395 39,574 382,555 3,900 43,970 553,389 495 4,396 -170,834 Marl-El Republic 762 764 765 489 5,039 57,701 833 10,250 130,128 -322 -5,232 -72,427 642 6,560) 75,456 1,064 13,417 170,169 -422 -6,848 -94,713 Mordavian Sov Soc Rep. 964 964 963 888 7,676 79,310 1,013 13,280 129,523 -126 -5,604 -50,213 921 7,962 82,383 1,051 13,776 134,541 -130 -5,813 -52,159 MoscwtCity 8,957 8,881 8,793 13,429 183,387 2,613,391 12,602 178,165 2,814,840 828 5,222 -201,449 1,499 20,649 297,216 1,407 20,061 320,126 92 588 -22,910 MoukovskayaOblast 6,707 6,682 6,644 4,685 74.632 1,082,430 5,075 61,206 1,048,801 -391 13,426 33,629 698 11,169 162,918 757 9,160 157,857 -58 2,009 5,062 Murmnakays Oblat 1,148 1,117 1,091 2,001 25,677 269,004 1,868 24,933 273,843 133 743 -4,839 1,743 22,987 246,566 1,628 22,322 251,002 116 666 4,435 NendskiyAO 54 52 51 126 642 7,060 143 2,656 18,554 -16 -2,015 -11,494 2,337 12,339 138,703 2,641 51,079 364,519 -304 -38,741 -225,815 NizhegorobksysOblast 3,704 3,697 3,683 3,469 56,247 727,231 2,753 49,339 675,262 716 6,907 51,969 937 15,214 197,472 743 13,346 183,361 193 1,868 14,112 N -Oseu &)ayRep 695 651 650 620 5,160 34,792 714 9,690 86,261 -94 -4,529 -51,469 S93 ',927 53,493 1,027 14,885 132,628 -135 -6,958 -79,134 Ncvgorodskay Oblast 752 752 747 745 8,684 93,747 911 11,560 133,098 -166 -2,876 -39,351 990 11,548 125,431 1,211 15,372 178,081 -221 -3,824 -52,651 Table A. 5: Revenues, Expenditures, and Balances of Regional Budgets, Total andper Capita, 1991- 1993 (current prices) Population (th pna) Total Rven. (rnn rubles) TouLl Expend (rob rubles) Balance (rmIn rubles) Per C ita Raven (t.h rubles) Per C 'its E d (th. rubles) Per Capita Bal. (th rubles) 10192110193 10194 , 1991 T 1992 1 1993 993 1991 1 19921 1993 3 11 1991 ovosibskaysOblatt 2,803 2,803 2,792 2,401 26,034 301,575 2,690 28,950 337,794 -290 -2,916 -36,219 856 9,288 108,010 960 10,328 120,982 -103 -1,040 -12,972 Oukay Oblat 2,170 2,176 2,173 1,731 28,223 299,739 2,103 31,529 411,189 -372 -3,305 -111,450 798 12,970 137,963 969 14,489 189,261 -172 -1,519 -51,298 Orenburg&kyayOblut 2,204 2.219 2,335 2,018 28,624 260,916 2,069 25,885 270,482 -51 2,739 -9,566 916 12,899 111,756 939 11,665 115,853 -23 1,234 4,097 OrlonkyayOblast 903 909 913 864 9,019 106,805 1,030 11,349 144,450 -166 -2,330 -37,645 956 9,922 116,957 1,140 12,486 158,180 -184 -2,563 -41,223 Penzeaskaya Oblat 1,514 1,522 1,523 1,157 11,341 120,323 1,264 12,902 153,260 -107 -1,561 -32,937 764 7,451 78,988 835 8,477 100,611 .71 -1,026 -21,622 Permnbya Oblast 2,949 2,945 2,931 2,666 46,645 440,634 2,697 43,691 460,843 -31 2,955 -20,209 904 15,839 150,325 915 14,836 157,220 -11 1,003 -6,894 Primorskii Krsi 2,309 2,302 2,287 1,929 29,269 452,472 2,414 31,790 532,323 -485 -2,521 -79,851 836 12,715 197,854 1,046 13,810 232,771 -210 -1,095 -34,917 Pskovskaya Oblast 841 840 837 909 7,220 76,674 1,006 11,967 132,442 -97 -4,747 -55,768 1,081 8,596 91,650 1,197 14,247 158,310 -115 -5,651 -66,660 Rostovskays Oblast 4,363 4,383 4,401 3,059 47,450 476,441 3,348 43,878 497,124 -289 3,572 -20,683 701 10,826 108,250 76' 10,011 112,949 -66 815 -4,699 RyazankayaOblat 1,344 1,342 1,337 1,289 15,802 189,185 1,288 14,393 177,712 1 1,409 11,473 959 11,775 141,510 958 10,725 132,928 1 1,050 8,582 Sakha(Yakuty)Republic 1,093 1,074 1,061 4,377 96,579 544,204 4,627 91,446 521,694 -250 5,133 22,510 4,005 89,924 513,061 4,234 85.146 491,839 -229 4,779 21,222 Sadinalraya Oblast 719 714 699 1,604 12,706 151,062 1,711 19,157 234,737 -107 -6,451 -43,675 2,231 17,796 216,235 Z380 26,831 336,011 *149 -9,035 .119,775 SammahyaOblast 3,296 3,312 3,322 3,121 69,519 718,094 3,116 58,668 700,522 5 10,851 17,572 947 20,990 216,137 946 17,714 210,848 1 3,276 5,289 SarstovskayaOblast 2,711 2,722 2,728 1,771 28,149 307,025 2,263 26,564 333,233 -492 1,585 -26,208 653 10,341 112,529 835 9,759 122,135 -181 582 -9,606 Smolenrbya Oblast 1,163 1,165 1,167 1,079 13,005 149,198 1,171 IZ694 155,002 -92 311 -5,804 928 11,163 127,902 1,007 10,896 132,878 -79 267 .4,976 St Peterburg City 5,004 4,952 4,883 8,103 60,240 944,970 7,830 62,953 928,162 273 -2,713 16,808 1,619 12,165 193,538 1,565 12,713 190,096 55 -548 3,442 StvwopolskuiiCKi 2,536 2,580 2,615 2.333 18,520 226,598 2,408 18,468 302,850 .74 52 -76,252 920 7,178 86,650 949 7,158 115,808 -29 20 -29,158 SverdlovsksyaOblat 4,719 4,698 4,667 4,891 79,424 813,201 5,172 73,911 804,068 -282 5,512 9,133 1,036 16,906 174,256 1,096 15,732 172,299 -60 1,173 1,957 TmbovskA Oblst 1,310 1,314 1,315 861 11,537 123,874 1,193 13,518 156,778 -331 -1,981 -32,904 658 8,780 94,222 911 10,2S8 119,250 -253 -1,508 -25,028 Tatrtan Republic 3,696 3,723 3,744 3,453 104,649 853,933 3,833 82,187 778,852 380 22,462 75,081 934 28,109 228,105 1,037 22,076 208,049 -103 6,033 20,056 TaymnyrAO((Dolgano-Nenettsau 53 51 49 112 1,168 8,053 128 1,971 25,701 -16 -803 -17,648 2,109 22,900 163,679 Z412 38,644 522,378 -302 -15,744 -358,699 TonukaysOblast 1,012 1,008 1,001 1,271 13,806 136,028 1,446 13,970 187,351 -174 -164 -51,323 1,256 13,696 135,946 1,429 13,859 187,239 -172 -162 -51,292 TulskayaOblast 1,844 1,840 1,832 1,743 22,059 199,320 1,686 19,050 206,200 57 3,009 -6,880 945 11,989 108,781 914 10,353 112,536 31 1,635 -3,755 TwanRepublic 306 306 306 380 1,083 12,720 607 6.575 69,549 -227 -5,492 -56,829 1,241 3,541 41,528 1,982 21,487 227,062 -742 -17,946 -185,534 TverskayaOblat 1,668 1,663 1,655 1,612 15,892 182,121 1,507 15,185 208,474 106 707 -26,353 967 9,556 110,076 903 9,131 126,004 63 425 -15,928 TyunmenskayaOblast 1,353 1,354 1,349 2,358 23,704 261,723 2,317 27,761 320,675 41 -4,057 -58,952 1,743 17,507 194,041 1,712 20,503 237,748 31 -2,997 -43,707 Udmurtukay Republic 1,637 1,643 1,641 1,873 20,630 202,303 1,783 20,762 235,835 91 -132 -33,532 1,144 12,556 123,303 1,089 12636 143,740 55 -40 -20,438 UInyuovskciyaObit 1,444 1,462 1,480 1,387 18,384 259,400 1,740 17,938 245,385 -354 446 14,015 960 12,575 175,318 1,205 12,270 165,845 -245 305 9,472 Ust'-OrdynskiyBuryatak AO 140 142 143 117 509 5,174 177 2,029 26,890 -60 -1,520 -21,716 833 3,584 36,309 1,262 14,290 188,702 429 -10,706 -152,393 VladimnirskayaOblat 1,656 1,654 1,648 1,559 21,086 198,216 1,509 17,933 197,247 50 3,153 969 941 12,748 120,255 911 10,842 119,667 30 1,906 5uS VolgogradskayaOblat 2,643 2,660 2,674 1,619 35,586 317,478 1,959 33,099 327,256 -340 2,487 -9,778 613 13,378 118,714 741 12,443 122,371 -129 935 -3.656 VologodskaysOblaa 1,362 1,362 1,360 1,469 20,305 227,806 1,539 20,464 252,956 -70 -158 -25,150 1,079 14,908 167,504 1,130 15,025 185,997 -51 -116 .18,493 VoronezhkaysOblast 2,475 2,488 2,499 1,324 23,000 261,623 1,843 23,046 281,389 -519 45 -19,766 535 9,244 104,712 745 9,263 112,623 -210 -18 -7,911 Yamalo-Nenetuki AO 479 465 469 1,540 32,951 264,993 1,424 29,697 276,096 116 3,254 -11,103 3,216 70,862 565,258 2,973 63,864 588,942 243 6,997 -23,684 Yaroslavskays Oblast 1,472 1,467 1,460 1,433 26,336 257,404 1,290 23,398 262,132 143 2,938 -4,728 973 17,952 176,328 877 15,949 179,567 97 2,003 -3,239 Yevryskaya AO 221 219 218 319 1,867 23,343 357 3,300 44,213 -38 -1,433 -20,870 1,442 8,525 107,176 1,614 15,067 202,998 -173 -6,541 -95,822 Total 148,704 148,673 148,466 154,365 zxsD zAtAiS 164,215 M,sts, ) IS -9,850 28,648 L11i1M Weighted verage (w/o Chechen and bigush republics) 1,057 15,440 163,319 1,124 15,246 182,425 -67 194 -19,105 St rmurddevimon 1,506 1,504 1,499 1,843 31,244 358,838 1,771 26,453 357,636 237 Z,948 54,106 746 13,413 99,981 759 15,636 170,248 231 11,147 143,790 Maximutn 8,957 8,881 8,793 13,429 183,387 2,613,391 12,602 178,165 Z814,840 828 56,061 229,208 4,480 89,924 565,258 4,734 85,146 1,189,237 495 15,840 56,515 Minimum 25 24 23 52 210 1,887 71 1,018 14,132 -694 -16,444 -201,449 535 Z491 20,970 741 7,158 100,611 -1,310 -71,527 -1,044,831 Range 8,932 8,857 8,770 13,377 183,177 2,611,504 12,531 177,147 2,800,708 1,521 72,506 430,657 3,946 87,434 544,288 3,993 77,987 1,088,627 1,805 87,367 1,101,346 Average 1,690 1,689 1,687 1,795 26,154 276,283 1,909 25,825 308,603 -115 329 -32,320 1,214 15,098 149,828 1,354 18,895 219,705 -141 -3,796 -69,877 Coefficwnt ofvatron 0.891 0.890 0889 1 03 1 19 1.30 0.93 1.02 1.16 -2.07 24.14 -1.67 0.61 089 0.67 0.56 0.83 0.77 -1.64 -2.94 -2.06 Sources: Ministy of Finance, Gosomstat of Ruia, staff calculations. 123 TableA.6: Structure of Regional Budgetary Revenues: 1992- 1993 (currentprices) v' Totcl Revenue (mlh rubles) Of which: Propertytax | VAT Excises Profit tax Income tax Other renues 2/ 1"2 1 1993 I M 1 199 K |I K W K1 193 i 1992 F b 19 1 193 Adygg iepuWiC ,544 A 30.297 am 05 0 ,461 5-0 214 1.103 1 1,361 * 603 5,972 499 3.246 Arm kiy wyiakiyut&knig 210 1.887 4 49 35 228 0 0 29 263 74 763 66 584 Ah32ydiykrai 23.616 246.5S9 485 5,770 4,775 55,896 2,595 18292 8,043 89,531 6,066 57.399 1,560 19.701 Amursksy,obl2 12.428 140,260 260 3.560 2,740 24,614 579 4,970 3,576 50,075 3.435 34,171 1.11 22,870 AhkiwneWkuycoblet 18.382 191,618 370 4.081 3,393 36,617 548 3,086 7.099 $1970 4,906 48.436 2,043 17,428 A*rmaWkmya oblIg 7,930 89,020 177 1,139 2.416 21,442 532 1.942 2.299 37.619 1,615 16.586 878 10,292 Bauhkond republic 142,240 1.237.537 1,179 1IS506 612146 339.538 7,829 74,939 46,026 51Q0578 10,162 113,088 15,56S 280,888 Btloodsk ob2W 20,992 214.250 206 4.045 3.275 18.210 0 6,807 11,530 120,653 3,692 36,551 2.248 27,984 Boukays oblat 12.049 129.584 242 2,656 2,861 32,224 728 7,449 4.833 54,767 2,476 22,844 873 9.644 Buwyatirepublic 9.112 101,601 222 2,324 2,207 26,053 741 4,706 2,195 33,509 2,727 26.838 986 S,171 Ch Fio-Iznh republic - - - - - - - - - - - - - CheFybinskay oblat 60,460 617,612 1,526 14,738 13,620 73,043 3,185 23,679 26,530 333.203 12,098 115,121 3.385 57,828 Chitimlkcsoblmt 11879 112,581 332 3,364 2,230 19,198 6 3,166 3,624 39,902 3,197 30,467 2,464 16,484 ChukoLdayon. oblast 4,461 40.156 99 1.351 730 5,856 28 296 979 12.003 1,445 12,672 1.10 7X978 Chuvushi republic 10,717 121,894 285 2,575 2,330 30,315 470 3,434 4,485 56.765 2,273 23,187 840 5,618 DmgexArepublic 4.795 40,955 115 1,442 1,075 7,789 588 3,902 1,461 14,010 941 9,432 558 4,380 Eveakiyskiy auton.okri 330 1.943 7 88 83 474 0 5 42 326 123 960 75 90 Gomiy Altay republic 973 10,151 15 188 297 2,269 20 284 219 2,067 286 3.414 125 2.029 tuktska oblit 50.223 425.927 1,066 13,545 6,077 32,036 1,906 12,944 19,929 210.950 21,817 106,407 9.375 50.045 lovlvskaysobat 14,317 122,785 350 2,880 2,990 16,269 683 6,720 7,016 62,698 2,693 23,077 478 11,141 Kabdino-Balki republic 4.610 35,533 98 966 1,483 7.698 214 1.366 1,550 13,608 756 7,185 466 4,710 KaliniWacIcryaobbst 9,311 118,305 215 2,000 1.696 21,234 730 4,172 3,497 50,862 1,944 22,590 1,195 17,447 Kalmykiusqrublic 1,953 15,341 58 361 673 4,147 18 31 470 4,031 449 4,420 250 2,351 Kauiuhka oblao 8.887 109,827 164 2,281 1.850 26,940 782 7,558 3,359 41,736 2.054 21,313 652 9,999 YK odiskayuoblt 6.798 83.978 76 1,436 2,218 20,122 298 1,447 1.547 33.673 2,193 24,305 435 2,995 KmduoroCharkiarep. 2775 21,902 62 679 633 5,011 5 340 1,428 8,311 450 4,255 163 3,306 Kreli republic 25.028 161,260 214 2,486 4,507 42.399 1.330 9,034 5.068 69.942 2,856 27,603 1,033 9,796 Kaneaorovskaoblat 61,925 556,081 1,189 13,046 9,661 107,491 2,297 16,462 23,552 207,666 16,409 148,279 8,690 63,137 habon y kri 28,407 371,043 519 10.060 6,928 81,208 775 4,440 8,545 240,600 6.500 75,402 5,052 59,334 Kholamksyaaulon. oblat 7,530 73,377 210 1.855 1,527 13.272 52 387 3,112 30.274 1,984 18,992 626 8,597 Khmty-MwaiyskiyAO 87,396 722.431 1.998 30,501 23,948 87,856 52 1,684 26.582 234.875 19,411 173,021 15,405 194,494 ICirovskaoblast 18,904 189,531 331 3,543 4,367 48,734 1,723 13,087 6,744 73,663 3,600 36,466 2,097 14,038 Komi republic 26.906 259,135 759 3,520 5,060 30.651 679 3,526 7,943 99,414 8.049 65,041 4.401 57,983 Koui-Paemy*kAya AO 800 6,578 18 170 206 1,731 1 19 246 1.778 213 2,124 115 756 KRyabkiy uton.obi 439 5,112 4 44 88 900 30 28 65 1,522 218 2.263 32 355 Km2romk2 pobla 8,896 100,982 176 1,772 1,623 24.923 1,063 11.255 3,455 40,261 1,675 16,647 866 6,124 Kzusno&rskiyrLi 47,389 643,826 1,297 10,902 10,908 126.647 2,207 19,093 19,284 311,373 9,713 107,045 3.829 68,766 1(niyrkjiykrai 59,401 504,533 1.468 16,413 9,239 45,034 2,238 15,336 25,359 244,000 14,357 121,306 6,672 62,444 Kwrkgymtyoblwt 10,596 112,517 187 2,056 3,483 20.905 449 3.785 3.459 48,479 2,206 23,786 812 13,506 KIa,knyoblast 17,521 160,679 521 3,704 3,516 13,789 1.200 12.911 7.598 78.049 2,785 26,509 1,788 25,717 Lerizadikays oblin 20.487 239,752 443 6,012 2.123 13,916 64 278 13,051 159,478 3.403 33,409 1,381 26,659 Lipdskayaoblat 18,386 211.541 444 4,818 2,904 18,062 842 7.697 10.161 13,168 2,953 30,730 1,051 16,066 Magdumkm oblast I2,941 117.406 266 2.225 2,357 17,828 390 1,590 2,546 37X590 3.087 26,989 4,252 31,184 Mai-El republc 5,019 57,701 121 1,432 1,615 14,955 309 3,359 1,524 22,100 1,151 11,981 301 3,874 Mordoinsrepublic 7,676 79,310 238 1.771 2,181 20,198 482 4,429 2,903 34.259 1,517 25,105 332 3,548 Mueco 183,387 2613,391 9,576 67,604 26.393 218.632 7,653 68,694 97,593 1,614,336 37,213 465,844 4,959 178,281 Mskovskny oblt 74,632 1,082,430 2,324 22,447 13,645 255,721 1,683 13,430 37.094 542,298 14,892 161.441 4,995 87,093 Munnaskaysoblat 25,677 269.004 975 7,145 5,082 60,116 128 834 12.166 122,259 6,207 59,398 1,039 19.252 Nenetskiyautom obrug 642 7,060 14 213 207 1.242 4 19 126 1,851 243 2,267 48 1,468 Ni2kegoro&ksyaobl2t 56,247 727,172 1,160 14.623 14,670 69,716 3,460 36,877 25,643 404,216 8,774 103.602 2,463 98,138 Notiemn Osua republic 5.160 34.792 105 1,008 841 6,849 250 1,684 1.669 15,293 734 6,656 1,526 3,302 NovSoro&kyuoblust 8,684 93,747 196 1,902 2,215 20,624 872 5,223 3,123 41,005 1,627 16,274 640 8,719 Novsibirukay oblat 26,034 301,575 636 7,108 6,637 82,029 1.630 11,345 8.841 123.281 6,294 65,524 2,731 12,288 Omnkaymoblast 28,223 299.739 567 6,879 7.966 49,233 1,860 11,140 10,223 158,252 5,311 55.290 2,240 18,945 Orenb a oblat 28,624 260,916 1,026 7,340 4.492 22,275 763 4,508 14.358 139.445 5.787 56,695 2,149 30,653 Orlo2 sys oblut 9,019 106.805 169 1.777 2,207 24,415 811 6,875 3,272 44,777 1,778 19.654 754 9,307 P oamkayaoblas 11.341 120,323 215 2,339 3,040 29,377 773 7,673 4.131 48.269 2,204 22,726 934 9,939 Pemskayaoblt 46,645 440.634 1,285 13,341 9,292 38,193 1,496 9,437 22,739 255,395 8,771 89,053 3,016 35,215 Primoe,kiykrai 29,269 452.472 1,006 4,725 6,496 94,846 1,411 12,516 10.078 210,840 8,413 97,206 1.768 32,339 Pskovky oble 7,220 76.674 129 1,353 2.303 20.022 65 729 2.742 32,721 1.497 15,702 466 6,147 Rosovskayaoblast 47,450 476,439 1,201 10,737 10,937 105,933 3,089 20.483 17,953 198,610 9.318 91,803 4.771 48,873 Ryammkaaob2t 15.802 I89,185 353 3.381 3,090 28.922 1,680 12,933 7,282 91.094 2,598 28,841 762 24,014 Sakhm (Yakutia) republic 96,579 5.204 846 7.421 11,797 71,222 1,425 7,232 22,095 120,792 9,788 69,276 50,617 268,261 Sulhainskcyaobls 12,706 151,062 274 2.967 3,056 30,578 557 1,410 2,873 41,529 3,684 40,140 2,228 34,438 Smwskayaoblast 69,519 718,094 1,354 21,498 13,820 78,503 3,015 22.054 35,192 402,227 10.557 118,578 5,459 75,234 Swaovskayaob2l 28,249 307,025 518 7,682 6,621 73.017 909 7.042 13.205 137,135 5,309 50,951 1,541 31,198 Smolaka oblag 13,005 149,198 383 3,525 2,867 27,452 894 5.628 5,648 72,698 2.330 24,932 851 14.963 SLPetenburg 60,240 944,970 1,745 17,931 9,242 217,080 4,820 37.968 27.723 438,480 12,527 138,453 3.806 95,058 Stavopotskiykrki 18,520 226,598 543 4,634 4,242 49,695 1,142 7,332 7,003 97,091 3,897 42,173 1,600 25,673 Sverdovsknymobhat 79.424 813,201 1,817 19,252 122125 87,117 3,319 18.159 38,228 449,152 15.843 147,571 7,916 91,950 Tumbovnkaysoblat 11.537 123,874 203 2,325 2,941 28,390 1,018 9,757 4.481 49,379 2.246 23,666 626 10,357 Tutmlanrtpublic 104,649 $53,932 1,189 16,738 35,474 298.484 10,071 115,479 39,805 324,130 8.556 93,260 9.272 105.841 Taymyr./Dolpno.Nenet AO 1,168 8,053 50 245 451 2,121 3 2 82 1,202 535 3,505 46 978 Tomskaysobast 13,806 136.028 380 4,435 3,481 23,776 109 686 5,365 46,544 3,306 33,563 1,139 27,024 Tulsyayaoblast 22,059 199,320 463 4.445 3,987 19.255 1.316 11,327 10.671 112,325 4.450 43,042 1,116 8,926 124 TableA.6: Strudure of RegionalBudgetaryRevenues: 1992-1993 (currentprices) v Total Rtwnue (mhri rubles) Of which: VAT Excises Profit tax kicome tax Other revenues 2V 1991 ~ ~ ~J 1 W 99 f9 91l 99 93 I9l119 1992 1I993 92 1 1 uni qxubic Ub IS 12,72 32,I 39 Z3g ,ZS 37 W 54 2o3 I u 4.5 /Y Zia 1.75F Tvasksyaob2 15.892 1822121 371 3.536 3,235 40.399 1,204 9.844 6,621 77,519 3.202 33.728 1,173 17,095 Tyumaukayoblit 23.704 261,723 6S8 5,703 4,616 45,142 1.112 7,890 5.124 91.981 4,354 46,090 7,S09 64,917 UiTdutie republic 20,630 202,303 460 5.365 5,670 53.199 970 5,215 7,630 89,949 3,704 34,734 2198 13,841 Ulywwnka obl2 18,384 259.400 351 3.755 4,566 74,783 1,044 7,317 7,888 116.005 3.169 37.720 1,366 19.820 U*stOlrdyrkiyBlwyaakiyAO 509 5,174 8 41 56 55 2 0 67 863 240 2.242 133 1.477 Vladiminkay ablast 21.086 19S,216 418 4.357 3,981 24,412 1.757 10,675 10,017 99.528 3,953 36,500 898 22,744 Vol*cskaaobInt 35,586 317.473 794 8,770 6.322 32075 2,1S9 11,156 17,153 163,188 6.033 61.045 3,049 41.244 Volopah obl 20.305 227.806 455 4,798 3,244 19,510 1.,27 9,142 8,364 130.446 4,278 42,715 2,101 21.195 Vramsym aoblmt 23,000 261.623 465 2.654 5,392 65,254 1,734 9,887 8.668 111,525 4.302 45.679 2,380 26,624 Yaralo-NendalmyaAO 32.951 264,993 1,127 7,746 6.844 26,990 41 312 9.519 94,240 7,632 72,926 7,788 62.773 Yuoaiavkyobluz 26.336 257,404 420 5.064 4,S84 29,383 3.379 15,246 12,116 137,247 3.927 41.265 1,503 29,199 YevrmysklnuAa. oblar 1,867 23,343 15 76 604 6.2S4 5 46 470 6,961 585 6,752 122 3,224 Somm: Mqist,y ofFuancV, s6a'ceakulationx I/ Excludig privtizti poce 2! Total per cqpits reveues from the table minus sumation of the above tax remnues for the each regior. Table A. 7: Structure of Regiona Expenditures, 1992 - 1993 (currentprices) ToW Expadurn OfutiCls Territa (mM. robin) NSimal Ecmsy Of whcb: Tot. Sedhi AcIlvilm 3 Gwhicb: LAW Eder AdwmIs. Capkal nest. Fad 80.44, Eduad keith Sadsh Swwally Caler _______________________ 2992m 399 3992 399 392 39339 39 92 9. 39 95 92InMn Adygeys republic 4,828 61,917 1.964 222708 6999 8,713 134 82 2,234 26,97-7 988 12,681 882 10,406 126 1,102 228 2,512 - 32 250 3,126 Agnokiy Bwysakiy AO 1,680 14.852 646 6,155 402 3,507 22 38 690 6,494 418 4,205 225 2.718 4 39 43 463 - - 77 926 AIW,skiy krai 30,607 429,589 20,358 193,57'7 2,832 32,242 729 556 25,645 280,376 7,23 98,362 6,560 64,748 854 6,784 863 20,406 - 66 2,205 26,401 Amunkaya oblost 24,472 293.675 5,299 77,186 2,707 24,319 214 349 7,233 90,529 3,522 44,072 2,874 37,469 342 3,781 392 4.930 0 31 665 9,30 ArthanaLskaya obluo 29,559 225.429 6,463 79,835 2,932 22,013 598 362 20,472 227,533 5,027 56,420 4,378 52,293 3.42 4,822 327 4,927 26 2,937 682 9,325 Asrakhwakaya oblsA 28,762 230,356 4,304 60,395 2,029 20,097 905 5,885 4,625 53,205 2,020 25,724 2,055 23,073 307 2,658 252 2,520 I8 37 325 5,301 Bashkorste republic 86,378 2.00U,29 42,189 474.077 22,235 209,37 5,396 36,535 34,270 406.738 25,283 299.T77 25,227 3621876 977 27,022 2,654 24,262 is8 9 2,338 26,026 Belg"omdukaya ablau 20,675 208,28 8,296 86,36 3,936 37,274 540 3,88 7,958 97,968 3,784 47,584 3,223 39,980 315 4,242 322 6,805 0 330 632 6,94 BMystkAys ableg 23,529 365,743 5,246 72,658 1.869 29,545 225 782 6,227 73,444 2,722 35,0 2,809 30,771 345 3,603 356 3,87 - 26 473 5.683 BLwystia republic 36,399 203.209 3,562 82,655 3,782 29,724 92 97 8,28 93,306 4.604 53,293 2.786 29,678 263 3.002 623 7.243 2 32 565 9,372 Chedch-nabsh rep. - - - , , -- -- -- - , Chelybumkayoblan 66,563 631,029 28,62 244,292 35,532 90,089 364 5,394 29,732 323,990 22,874 151,613 24,053 344,267 2,477 32,0193 2,30 25,434 317 9,641 2,904 38,02.5 Chitunklaysaoblaao 26,269 175,999 4,40 52,183 20,287 26,829 538 72 8,648 94,554 4,254 50,245 3,533 36,488 322 2,527 533 4,806 2 - 575 7,983 ChukotsknAyAO 9,955 300.022 2,443 29,050 237 6,042 37 3,2m 3,29 39,579 2,642 20,729 2,509 14,35 31 442 36 3,442 3 2 296 4,33 Chuvaksbia republic 23589 272,923 5,992 74,185 2,458 32,666 452 590 7,91 76,040 3,922 40,903 3,252 27,54 267 2,025 626 5,387 . 39 424 5,232 Dagextan republic 22,2319 237,336 7,36 73,20 2,896 45,541 2,300 7,329 8,666 99,763 5,299 62,863 2,865 29,306 268 2,36 526 6,226 232 3,474 432 7,030 EvenkiyskiAO 2,828 34,32 345 3.807 274 2,620 6 340 437 5,25 250 3,206 342 3,725 a 49 38 384 - - 43 O Goemiy Altay republic 3,055 52,932 920 13.470 272 5,317 26 83.4 2,752 33.834 928 36,25 647 12,927 45 523 326 3,8317 - 8 349 2,446 lrizutskaya oblast 50,438 472,965 29,292 165,4f2 8,724 58,543 2,650 2,036 29,706 226,065 9,58 3316,073 8,764 23,97 353 5,786 855 30,366 258 - 3.737 19,130 lvanovskaya oblet 24,232 239,542 5,658 55,003 3,655 23,458 204 s0 6,607 68,303 2,674 30,999 2,998 28,337 493 5,0319 448 3,854 5 366 394 4,59 Kabarduio-Bulkmanarep 7.790 360,439 2,429 39,333 989 36,550 356 32 3,762 46,223 2,900 24,20 2,5'72 37,582 96 3,098 202 2,185 209 257 263 3,774 uulgmi,adkaya oblast 20,230 269,736 4,374 93,99 2,527 23,238 246 2,024 4,439 60,906 2,206 30,212 2,872 24,898 209 3,42 247 3,654 - 43 306A3 Kulmykia republic 5,629 64,068 2,282 26,280 2,069 22,225 36 2,822 2,556 28,773 2,397 34,864 318 10,747 18 2,802 393 2,053 - - 383I 2,91 Kaluzlukaya obli 9,905 1333,834 3,673 57,832 2,933 24,673 257 32 4,728 55,663 2,066 28.1334 2,027 20,535 302 2,725 307 3,989 3 3,350 524 5,7899 Kanicbaskaya oblmaI 32,56 272,504 4,824 77,287 2,902 23,48r7 495 723 5,526 64,900 2,899 33,232I 2,058a 25,945 18 3,252 277 4,233 - 222 303 5,262 Karahaevo-Cherk- rep 4,237 32,248 3,492 20,006 934 20,053 72 7,276 2,232 24,242 3,202 11,173 809 10.424 34 825 363 3,652 3 39 133 2,220 Karelia republic 22,250 275,278 4,498 48,392 20,020 23,260 240 3 7 7,037 70,283 3,252 35,296 2,955 24,622 366 5,224 437 5,263 3 227 318 5,817 Kemecrovskaya oblast 63,729 755.231 26,440 330.305 6,630 96,003 392 2,244 28.295 323,695 32,773 262,29 32,092 328,883 2,702 24,63 2.622 27,857 293 5,958 1,047 23,766 Kheabaruvkikrai 30,296 6435,726 23,228 282,296 4,209 49,207 2.493 5,773 24,033 202,446 6,297 84,258 6,282 92,046 737 34,957 709 9,754 29 363 964 33,413 IClua-kas rep. 7,460 90,696 2,832 37,293 2,242 22,305 292 13,74 3,723 42,830 2,699 23.402 2,550 36,780 222 I.87 229 2,570 - 563 273 4,03,6 KharqinUroMzuy*ry AO 66,788 707,206 27,293 298,36 8,029 1331,347 623 3,222 23,672 288,040 20,977 1338,258 20,59 322,765 805 20.483 2.418 27,923 2,853 23,363 2,392 29,554 Kirovikayt oblas 29.088 224,26 7,350 89,537 2,344 24,280 222 2,258 9,440 202,342 3,942 47, 4,203 43.043 8on 5,333 539 6,363 - 54 624 7,330 Kemni republic 26,403 329,332 8,58 106,329 3,456 4254W 32 367 22,226 270,432 5,762 80,596 5,327 74,872 369 6,763 772 8,303 9 79 634 20,10 Komsi.Pcmytskaya AO 3,901 29,080 482 8,306 296 4,220 36 - 2,824 36,473 602 -V 346 6,542 7 78 69 2,336 - 3 80 2,074 Kocykskiyaem. okn 3,257 42,099 2,032 37,372 404 - 49 240 2,392 33,893 693 7,720 450 4,583 205 369 334 3,224 - - 336 3,9 Komrmkalys oblae 30,339 242,442 4,553 61,451 2,602 23,203 302 28 4,503 37,36 2,009 26,939 2,889 22,348 305 3,823 294 3,837 - 23 478 5,622 Kzmodwtiy kai 45,626 667,96 38,968 29-M 5,296 70,347 2,732 15,045 22,069 286,483 8,94 330,49 9,685 322,228 3,505 39,920 950 34,392 2 353 3,078 38,46 2Crawoyvsiy krai 53,000 506,65 27,224 368,26 5,355 32555 2,957 342 27,493 260,622 32,775 322,473 32,729 307.623 3,123 I2 3,82 7 37,4 33 3,929I' 23,062 KwpuukAya abled 32,759 347,733 4,54 56,33 2,73 33,407 259 563 6,3816 '73,660 3,048 37,767 2,6 28,238 423 2,89 441 4,630 58 2,217 479 5. Kmnkyay oblst 25,223 165,4 s,e0 68,63 3,923 28,399 406 4,32 4,463 69,706 2,964 32,696 2,739 29,220 359 3,22 432 4,463 34 331 602 7,596 1nioa&kqaysoble 39,934 2 850 ,326 338,45 3,724 33" 4 7 9,392 98,154 3,783 ,29 4,364 39,27 458 0 4.si 6,786 8 222 637 6,4 Lipebaya oblst 34,403 286,278 6,84 300_36 3,500 32,966 2,338 3,367 7,327 8256 2,733 35,95 3,542 36,610 003 4,89 367 3,069 - 25 669 7.M Mapwlmskaya oblen 34,378 260,835 6,306 72,274 864 7,05 652 4,34 5,380 67,996 2,682 33,332 2,337 27,653 206 1,513 432 5,32 - 65 473 6,393 ?.fi-El republic 20,25 1338,23 3$5 571 2,99 23,4. 254 376 5,370 60,252 2,535 32M 2,354 27,09 289 405 5,063 - 33 223 3,3r Mwviavarqutibc 23,230 19323, 6,039 52,717 2,074 26,67 247 224 5,964 60,595 2,633 31,13 2,404 23,30 55 3,910 343 4,L43 3 3 360 M Macaw 3718,363 2,84,84 300,780 2,570.? 36,026 743, 4,036 6,33 68,435 3,070,724 32,727 446,45 29,240 448,9091 2,497 6535 3,229 A3,29 - 256 3,67 20 MoskovAkynaoblaft 62,206 3,048,803 22,994 3, 9,933 3 861 4,04 28_3 412,36 32,235 390,363 23,7708 1 2 2 ,383 26,7 3,296 27,3n 233 19,224 2,S1 30647 iMemrAukav obleg 24,933 MM'?1 9,945 95 3,015 29,971 243 5 315 5,9 6,328 981 X 61,11913 A9 373,t'....62.370 - II 56 6365 I-f N! Table A. 7: Struct re of Regional Expenditures, 1992 - 1993 (current prices) N TOW Kzpeawife. mati Tewrttay (S rm) N 1 £mn1 00 E_wSo : TeL SdM Aciyie of0 w: Law EMe Adir. Capbw levn. F_d Sted, Educad H_e Sad.! Seely Cuhv7 IMP2 M 1993 I2 1 39 1"2 1995 I 3 12 19 3 1992 1 993 1992 1 1993 I2 1 1"3 NeneLskzyAO 2,656 18,554 589 3,962 395 1,684 25 47 1,050 9,000 521 5,409 318 2,964 149 98 61 503 - - 64 987 Nizhegorodskayaoblast 49,339 675,262 21,855 311,043 7,912 152,474 550 3,191 1|,865 288.294 8,328 131,913 8.544 117,772 851 20,427 1,130 17,836 20 2,005 1,457 20,025 NonhemOsetiarep. 9.690 86,261 3,912 32,976 1,080 13,839 469 2,582 3,378 37,946 1,420 ¶8,277 1,457 14,939 148 1,891 340 2.681 0 48 175 1,13 Novgorodskayaoblan 11,560 133,098 5,924 66,918 2,290 19.016 562 91 4.528 52.391 1.753 24,934 1,892 18,408 349 3,043 529 5,928 a 4a 402 5,176 Novosibirskya oblast 28,950 337,794 12,099 140,958 2,475 29,448 565 2,774 13,188 161,170 6,152 74,109 5,569 66.778 633 9,131 829 10,727 39 571 897 12,206 Omrskaa oblast 31.529 411,189 12,093 189,005 2,465 40,610 720 8,505 14,940 181,406 6,679 81,973 6,657 77288 600 9,556 998 ¶2,324 5 102 847 14,195 Orenburpkayaoblast 25,885 270,482 8,336 94,469 2,470 24,147 643 2,714 13,218 1424249 5,690 65,043 6,262 62.al 605 6,283 636 8.011 - 119 1,020 11,641 Orlovskayaoblast 11,349 144,450 5.54 80.464 2,338 19,764 246 4,510 4,408 50,807 2,019 25,319 1¶771 18,135 315 3,303 276 3.565 1 39 432 5,702 Peozankay oblast 12,902 153,260 4,710 61,047 1,416 14,106 28! 2,897 6,432 74,801 2,871 33.992 2,827 32,088 329 3,650 402 5,004 4 69 490 5,437 Pernskzyaobla4st 43,691 460,843 ¶8,157 192,537 7,308 70,267 262 1,023 21,101 220,591 9,868 106,235 9,233 95,213 1,007 8,007 980 10,248 135 4,94 1,187 15,955 Pnmorskiykrai 31,790 532,323 13,021 246,037 4,087 67,539 572 1,341 14,658 200D001 7,083 98,292 6,477 85,943 454 6,872 624 7,620 6 358 904 14,043 Pskovskaya oblast 11,967 132,442 5,433 56,042 2,644 27,772 151 192 5,240 61,652 2,120 28,908 1,974 22,495 395 4,369 755 5,0 0 13 381 5.587 Rostovakaya blst 43.878 497,124 19,912 216,880 2,997 70,227 3,021 9.675 18,152 223,872 7,977 103,853 8,403 97,499 776 9,315 989 12,886 7 2,956 1|078 14,654 Ryazs yaoblast 14,393 177,712 5,243 75,515 2,448 26,785 299 1.669 6,999 76,528 2,767 33,820 3,299 34,177 404 3,90 525 5.087 56 893 517 6,186 Sakhb(Yakutia)republic 91,446 521,694 48,474 197,824 17,08w 53,812 972 8,409 31,906 243,851 18,640 137,162 9,255 67,374 1.298 17.884 2,170 16,902 212 1,104 2,542 25,606 S.kkltnskay oblast 19,157 234,737 6,250 87,086 2,078 29,608 473 2,350 9,067 113,856 4,112 56,34 3,835 44,657 655 6,095 454 6,140 158 2,307 553 8,551 Samnaskaysoblast 58,668 700,522 28,178 315,929 10,987 ¶46,325 6,623 14,41| 21,230 322,679 10,10! 140,247 8,845 143,557 1,283 17,902 983 20,668 194 7,317 1,096 15,345 Scaaovskayaoblast 26,564 333,233 9,745 145,513 3,914 33,597 1,032 10,017 13,742 149,75 6,108 69,641 5,804 62,111 635 5.70 I,187 I199 24 1,079 839 9,949 Smolenkays aobist 12,694 155,002 5,682 69,661 2,596 19,501 49 130 5,680 69,065 2,478 33,433 2,060 24,132 640 6,483 496 4,931 - 37 391 5,644 StPetersbug 62,953 928,162 35,005 476,478 11,054 125,M3 1,220 5,093 22,160 370,986 9,856 165,457 9,785 170,514 993 13,245 1,448 19,897 62 967 884 13,56 Savropolsk.ykac 18,468 302,850 5,843 136,626 1,3I5 352,43 413 3,467 9,608 129,719 4,862 69,847 3,936 46,767 452 7,420 354 5,525 2 361 580 9,153 Sverdllovskayaoblaust 75,9 804,068 27,642 287,72 10,465 120,727 4,540 40,865 36,713 416,347 16,876 ¶80,745 17,022 203,713 1,530 13.938 1,231 16,326 125 1,298 ¶796 22,487 Tambovskays oblest 13,518 156,77 4,439 58,609 1,122 15,284 181 94 6.866 75.612 3,081 36,8 2,793 29,56 522 4,354 465 4,811 4 3 567 7,341 Talarstan republic 82,187 778,852 49,472 392,513 16,452 146,442 6,625 22,008 24,621 306,276 11,422 145,50| 10,930 133,429 440 5.392 ¶.798 20,317 18 2,468 1,791 17,296 Tayrnyrkiy AO 1971 25,70! 533 4,504 334 1,125 16 6 1.220 11,453 653 5,850 358 4,499 98 41 III 1,047 - - 68 1,211 Tomskayaoblt 13,978 187,351 4,476 68,002 1¶382 18,391 350 6,718 7,7n4 89,799 4,148 49,749 2,763 31,511 396 3,396 421 4,941 28 497 567 6,403 Tuiskeyaoblast 19.050 206,724 7,961 91,083 2,521 31,099 598 954 8,976 91,879 3,483 39.592 4,077 41,788 990 5,515 413 4,46! 19 749 804 7,858 Tuvc republic 6,575 6949 I,849 18,661 1,000 8,803 366 950 3,318 37,787 1,671 20,941 1,263 12,312 160 995 215 3,39 0 45 178 3,663 T%=*aysoblSt 15,185 208,474 5,878 90,935 13957 29,843 360 480 7,143 92,413 3,189 44,23! 3.008 38.208 453 3,628 487 6,055 5 258 630 7,676 Tyuernakaya oblast 27,761 320,673 8992 138,141 3,082 47,056 902 ¶ | 1,984 143,|46 5,251 64,2 5,164 57,412 733 ¶2,977 821 8,542 134 2,445 1,095 12,932 Uimurati rpublic 20,762 235,835 8,035 108,026 2,878 43,196 1,022 118 10,124 110,654 5,157 57,031 3,816 40,222 524 4,560 619 8,37 0 104 612 7,676 U lyJtysn cikyu Oblast 17,938 245,385 8,126 126,132 3,572 47,774 ¶730 29,063 7,805 100,619 3,766 45,808 3,474 46,623 271 3,509 370 4,769 1 75 463 6,091 Un.Cordyn*kiylBuryat AO 2,029 26,390 441 7,73 196 2,066 13 - 1,285 13,224 771 8,153 311 3,624 98 168 104 1,265 - 2,441 121 1,83i Viadimirskayobla 17,933 197,2 7,125 75,201 2,848 24,903 314 243 8,424 100,471 3,623 44,358 3,791 45,529 568 5,494 437 5,223 318 2,166 826 9.381 Volgopudskeyaoblt 33,099 327,256 16,449 152,630 5383 43,895 2,476 18,753 12,568 135,916 5,333 66,681 5,853 56,979 735 4,499 639 7,183 17 a 921 13,I Vologodskwa Oblast 20.464 252,950 7,079 96,7n 3,718 40,913 500 93 10,548 128,606 4,771 653514 3,959 45,954 1,060 8.104 750 8,813 16 183 747 9,567 vormcsezlckaysoblat 23,046 281389 8,898 116,499 2,100 27,537 903 3,218 11,682 129,580 4,877 58,634 3580 59,323 569 5,021 652 6,256 3 1,224 718 10,076 Yunalo-Nerelka rep. 29,697 276,096 13.352 08,36W 5,930 43,883 542 3,575 12,491 134,499 5,246 53,349 3,413 32,449 3,237 42,637 577 5,746 446 4,785 1,072 9,461 Y lmtkaya obhi 23,598 262,132 12,129 137.156 5,074 66,849 51S 1,150 9303 108,851 4,001 47,430 3,619 39,266 1.176 7,730 498 6,13 121 1,935 672 8,02 YereyskayaAO 3,}30 4a213 1,297 20,486 542 7,13 78 1,04 1578 18,414 71 624 7,3631 lI 9181 116 1.160 2 14 23 2 SourW: AMiubyqfFina TableA.8: Privatization Receipts, Subventions and Other Financing in Territorial Budgets, 1992 - 1993' Population Total (million rubles) Per Capita (thousand rubles) (th. persons) 1992 1993 1992 1993 Other 0th. Fhsaae, 0th.~~~~~~~~~~~~~~~~~~~~~O- Odthe Olnant Mao IFl an, Fh.asc. Uao lea: F'in aeIt. Privatle. ImFlase.al l-I.: rhdLIad ._I- Ph__I.al_oil Phd n.a Territory 1992 1993 P"ti.Sub- vatL j .1SeeS ExpeL R.ep Sub.-vL Luaa., ub-n wiselt la Sub. Pivait,lad sodaI Exp. Rocalp. Lansss EAqw M.l Set oilEp RaSp. SLeaas, ExpeLd of Racui. Loan., o mr M. Eakel .f Enter. Mela Euteep. Mau FM Sial., ae. etc Sal. ts Sod, oict Adygeyarepublic 447 449 55 1,286 378 186 6,766 24,802 122 2,877 846 414 15,069 55.238 Aginskiy Buyatskiy A Okrug 79 79 3 1,357 52 19 4,118 8,811 35 17,183 671 239 51,864 110,970 Altayskiy krai 2,682 2,686 518 5,135 3,255 2,770 50,638 145,002 193 1,914 1,214 1,031 18,850 53,976 Amnurskayaoblast 1,063 1,057 331 2,536 2,380 1,309 9,998 53,953 312 2,386 2,239 1,239 9,462 51,058 Arkhangelskayaoblast 1,510 1,497 407 263 5,170 3,095 39,006 270 174 3,424 2,067 26,054 Astraklanskaysoblast 1,013 1,015 196 2,670 908 1,161 13,777 32,760 194 2,635 896 1,143 13,568 32,263 Bashkorstanrepublic 4,042 4,056 524 12,743 1,722 595 130 3,153 425 147 Belgorodskayaoblast 1,423 1,438 507 503 3,127 2,691 12,330 356 354 2.197 1,872 8,577 Bryanskayaoblast 1,468 1,472 447 1,633 1,565 1,519 12.039 30,705 304 1,113 1,066 1,032 8,181 20,865 Buryatiarepubhlc 1,057 1,053 5 6,539 1,576 241 26,441 76,920 5 6,187 1,491 229 25,115 73,062 Checheno-lnguh rep. 1,307 1,290 7 2,890 427 3 7,005 23,036 5 2,211 327 2 5,430 17,857 Chelybinskayaoblast 3,634 3,617 1.065 12,711 7,125 32,451 293 3,498 1,970 8,972 Chlutnskaya oblast 1,297 1,289 553 3,670 1,925 1,484 29,986 39,357 426 2,830 1,484 1,151 23,267 30,538 ChukotskayaAO 124 113 12 2,046 1,128 363 4,819 64,056 95 16,496 9,097 3,210 42608 566,366 Chuvaslua republic 1,359 1,359 348 4,658 2,544 1,536 18,163 33,682 256 3,427 1.872 1,130 13,365 24,784 Dagestanrepublic 1,925 1,953 17 14,426 730 349 57,997 129,163 9 7,494 379 179 29,696 66,136 EvenkyskiyAOknug 24 23 30 597 18 2,035 10,901 1,264 24,890 796 90,044 482,345 Gonuy Altayrepubhc 197 198 48 2,058 61 114 14,173 30,043 245 10,447 310 575 71,473 151,503 irkutskayaoblast 2,730 2,718 597 9,860 6.453 46,917 219 3,612 2,374 17,259 Ivanovsksya oblast 1,308 1,300 400 3,387 1,605 21,297 306 2,589 1,234 16,377 Kabardino-Balkariarep. 786 786 7 3,043 705 179 21.805 50,545 8 3,871 897 228 27,749 64,323 Kaluyirradskoyaoblast 906 913 590 41 1,025 1,955 48,20) 12,226 651 45 1,131 2,141 52,788 13,390 Kalmykibarepublic 322 321 15 3,485 90 92 20,809 30,631 46 10,822 280 287 64,906 95,543 Kaluzlskaym oblast 1,086 1,088 255 486 1,378 1,520 7,057 22,043 234 447 1,269 1,398 6,489 20,268 Kanichbaskayaoblast 418 404 4,298 714 1,391 15,228 72,972 10,283 1,708 3,443 37,693 180,624 Karachaevo-Cherkessia rep 434 434 198 1,250 416 586 9,584 28,017 457 2,880 959 1,350 22,078 64,540 Kareliarepublic SOO 794 258 4,036 2,638 18,652 323 5,045 3,322 23,485 Kemerovskayaoblast 3,177 3,158 803 10,202 11,693 4,630 3,175 217.401 253 3,211 3,681 1,466 1,005 68,844 Khabamso3kyykra 1,621 1,608 645 480 5,510 6,050 273 76,885 398 296 3.399 3,762 170 47,808 Khakesskaya AO 583 584 467 1,673 1,204 1,466 17,813 801 2,870 2,062 2,510 30,502 Khany-MansiyskzyAOOkrug 1,301 1,313 810 36,665 10,325 13,922 623 28,182 7,866 10,606 Kixrovskayaoblast 1,701 1,694 321 774 3,070 1,635 6,608 26,901 189 455 1,805 965 3,900 15,876 Koru republic 1,246 1,228 338 975 1,598 68,176 271 782 1,301 55.513 Komi-PermyalskayoAO 161 160 15 999 83 66 3,499 20,491 90 6,205 516 412 21,828 127,829 KoyakskiyA. Oklug 38 35 1,956 52 37 6,194 33,441 51,461 1,368 1,045 174,972 944,661 Kosomskayaoblasc 812 810 195 1,857 1,620 1,974 18,600 24,981 240 2,286 1,995 2,436 22,957 30,833 Krynodrskiy km 4,879 4,940 1,117 893 7,077 5,960 54,823 87,766 229 183 1,451 1,207 11,099 17,768 Krasnoyarskiykrai 2,973 2,957 596 20,767 4,474 46,930 201 6,985 1,513 15,872 Kwgknsyaoblast 1,118 1,115 318 3,126 1,569 934 20,919 15,875 285 2,796 1,403 838 18,765 14,240 Kurskaya oblast 1,341 1,344 473 383 2,756 2,616 8.539 352 286 2,055 1,947 6,354 Leinagdskayooblast 1,674 1,669 510 123 5,757 4,515 24,286 305 74 3,439 2,705 14,552 Lipetskayaoblast 1,241 1,246 283 4,301 1,320 7,173 228 3,466 1,060 5,759 Magadanskayaoblasw 327 307 56 1,897 4,274 926 8,051 51,353 172 5,801 13,070 3,017 26,233 167,328 Mam-El republic 764 765 172 4,517 703 408 23,879 48,292 225 5,912 920 534 31,227 63,152 Mordovia republic 964 963 132 5,870 1,996 614 16.337 36,175 137 6,089 2,071 638 16,970 37,5T7 Moscow 8,881 8,793 4,078 52,063 22,365 310,240 41,431 459 5,862 2,544 35,283 4,712 Moskovsksyooblast 6,682 6,644 1,832 17,811 8,629 103,857 274 2,666 1,299 15,632 N Murmanskryaoblao± 1,117 1,091 683 1,352 7,350 2025 15,184 611 1,210 6,580 1,856 13.918 NenetsluyAOkrug 52 51 0 1,048 45 2,009 9,451 2 20,162 884 39,470 185,678 Nizhegorodskay oblast 3,697 3,683 1.467 15,484 12,086 15,915 397 4,188 3,282 4,322 NonlrnmOsetiarep 651 650 2,847 728 192 13,809 47,679 4,373 1,118 295 21,232 73,307 Novgorodskva,oblast 752 747 225 3,029 1,461 2,002 11,277 33,461 300 4,028 1,943 2679 15,088 44,770 TableA.8: Privatization Receipts, Subventions and Other Financing in Territorial Budgets, 1992 - 1993 * Population Total (million rubles) Per Capita (thousand rubles) N (th. persona) 1992 1993 1992 1993 Territory 217 6 T Sub- 1,18I7 M2,88 It-9 3,434 17,367 n I00,a36 546 1 326 Soci al8 7,994 46,18 Itaceip. L' ~Sochi Eop.4- Sub- Loans, Soh ..Rd. Sub- was. os. pM i R-p Sub. vut ai,SacW Eap. M415 of Eatorpr. Muiuasmi. t .c. Mutu.o4p Lal Eop.ar. Mutualoof.Easier. Sorhl Ea. SIshL, etc teSent MuuL Novosibirskaya ohiast 2.803 2,792 ).225 271 5,524 3,7) 8 10,663 42, 722 437 97 1.971 .,332 3.819 15,301 Omokaya oblast 2.176 2.173 1,187 2,885 3,593 3.434 17,367 100,336 5146 1.326 1,65 ! 1.581 7,994 46.182 Orenburgskayaoblast 2,219 2.335 505 363 6,344 3,167 11,865 227 164 2,859 1,356 5.082 Orlovskaya oblast 909 913 557 1.876 1,192 1,558 12,268 28,536 613 2,064 1,311 1,706 13,434 31.248 Penzenkayayoblast 1,522 1,523 381 988 1,944 1,236 15,193 19,995 250 649 1,277 811 9,974 13,126 Permskaysoblast 2,945 2,931 362 14,441 1,841 31,941 123 4,904 628 10.897 Primonkiyakri 2.302 2,287 1,638 700 6,869 12,982 117,587 711 304 2,984 5.677 51,418 Pskovskayaobiwa 840 837 169 3,644 946 871 21.567 41,335 201 4,338 1,126 1,041 25,779 49,408 Rootovskayaoblast 4,383 4,401 922 6,585 4,670 46,243 210 1,502 1,061 10,507 RyazAnskayaoblast 1.342 1,337 200 3,951 964 7,272 149 2,944 721 5,439 Sakhs(Yakutia)rep. 1,074 1,061 156 12.498 779 473 145 11,637 734 446 SakhaliNskayaoblast 714 699 477 5,016 1,679 2,204 18,677 78,234 668 7,025 2.352 3,155 26,735 111,987 Samnarskayaoblast 3,312 3,322 791 18,203 8,653 79,815 239 5,496 2,604 24,023 Saratovsk.ya oblast 2,722 2,728 361 377 3,835 3,091 13,478 22,016 133 139 1,409 1,133 4,940 8,069 Smolenskaya oblast 1,165 1,167 431 165 2,193 2,205 357 10,451 370 141 1,882 1,890 306 8,959 St.Petersburg 4,952 4,883 1,828 1,475 9,332 13.085 67,460 369 298 1,884 2,680 13,816 Stavropolskiykrai 2,580 2,615 859 272 2,500 4,217 36,544 69,199 333 105 969 1.613 13,974 26,461 Sverdlovskuyaoblast 4,698 4,667 1,052 24.408 5,601 19,202 224 5,195 1,200 4,115 Tsmbovkayaoblast 1,314 1,315 369 451 1,679 919 14,271 21,680 281 343 1,278 699 10,855 16,490 Tarstasn republic 3,723 3,744 10 12,858 5,138 616 3 3,454 1,372 165 Taymyr./Dolgano-Nerietsk. AO 51 49 7 666 25 2,439 18,732 142 13,054 508 49,573 380.732 Tomskaya oblast 1,008 1,001 308 503 4,660 1,897 53,420 306 499 4,623 1,896 53.388 Tulskaya oblast 1.840 1,832 385 4,114 2,627 9,934 209 2,236 1.434 5,422 Tuvarepublic 306 306 14 4.651 50 242 20,374 37,403 45 15,199 163 790 66,516 122.112 Tvenkayaoblast 1,663 1,655 799 2.557 2.328 45,553 481 1,538 1,407 27,533 Tyumenskayaoblast 1.354 1,349 620 4,686 1,962 6,631 25.962 40,483 458 3.461 1,449 4.916 19,248 30,014 Udrnurtiarepublic 1,643 1.641 609 213 3,622 1,910 1,587 32,738 371 130 2.205 1.164 967 19,954 Ulyanovskayaoblast 1.462 1,480 206 791 3,131 1,564 10.178 20,370 141 541 2,142 1,057 6,879 13,767 UstlOrdynskiyBuryaskryAO 142 143 4 1,491 43 37 5,776 15,300 27 10,501 303 260 40,533 107,368 Vladunirskayaoblasa 1.654 1.648 1,203 4,510 3,857 8.401 728 2.727 2.340 5,097 Volgogradskayoblast 2,660 2,674 1,244 5.206 2,510 14,321 468 1,957 939 5.355 VologodskayolaMast 1,362 1.360 315 4,131 3,567 30,058 231 3.033 2,623 22,101 Voro.nezbsksys oblast 2488 2,499 535 2,326 3,111 2.486 10,681 25,288 215 935 1,250 995 4,275 10,121 YamaloNenetskayarep. 465 469 15 8,687 462 14,107 31 18.682 985 30.092 Yaroslavskayaoblast 1,467 1,460 650 5,804 3,116 17,926 443 3,956 2,135 12,280 YevreyskayAO 219 218 30 1,515 344 181 5,054 18,776 139 6,920 1,571 831 23,205 86,208 TOTAL 148,673 14.466 43,351 142,520 469,261 252,527 1,124,234 3.404,039 (In pcroesn of GDP) 0.24 0.79 2.60 0.16 0.69 2.10 Standarddeviatioan 1,504 1,499 577 2,465 7,977 3,548 41,922 34,510 210 8,029 3,952 1,236 28,344 130,703 Maxmimu 8.881 8,793 4,078 14,426 52,063 22,365 310,240 217,401 1,264 51,461 28,182 7,866 174,972 944,661 Minmum 24 23 0.118 41 43 3 273 473 2 45 163 2 170 147 Range 8,857 8,770 4,077 14,385 52,020 22,362 309.967 216,928 1,261 51.416 26,019 7,864 174,802 944,514 Average 1,689 1,687 510 2,299 5,586 2,870 20,819 38,682 288 5,078 3,079 1,584 25,952 64.530 Coefficientofvariscion 0.890 0.889 1313 1.07 1.43 1.24 201 0.89 0.73 1.58 128 078 109 2.03 Source: Ministry ofFinance. * Those regions which did not have neoessary dat or Privaization revenues andtor ajbventions were excluded frcn the sanple used for calculuion of -wimical vaniables. 129 Table A 9: Registered Regional Unemployment ": End of 1992, End of 1993, End of November 1994 (Number of persons and w a percent of total popuation Z) Popuation (tL perroN) Total Unemployment (pc ) Une Pploympt a Ptcnt of Total End-of-Year Noveber 3/ End-of-Yeap Novnbar 3/ 1.01.93 1.01.94 1992 1993 1994 1992 1993 1 1994 AddwJA &ya Oblat 1510.0 1497.1 17,121 31,477 39,200 1.18 2.10 2.62 Ncnetskiy AO 52.0 50.9 379 S74 0.73 1.72 Vologodakaya ObLat 1362.0 1360.0 5,961 12,292 13,10 0.44 0.90 1.33 MwunnukayaOblbt 1117.0 1091.0 10,956 16,139 25,500 0.91 1.48 2.34 Republic of Kareliya 100.0 794.2 6,365 12,747 20,000 0.S0 1.61 2.52 Republic of Komi 1246.0 1228.1 9,266 12,184 29,900 0.74 0.99 2.43 SL Pctenburg City 4952.0 4812.6 38,313 31,511 44,900 0.77 0.65 0.92 Lcilogradkaya Oblat 1674.0 1668.9 14,046 16,6S1 32,700 0.84 1.00 1.96 Noworod&kaya Oblat 752.0 747.4 3,227 5,423 10,S00 0.51 0.73 1.45 PskovAkayaOblast 340.0 836.6 13,532 15,833 2S,100 1.61 1.89 3.36 Bryanakaya Oblat 1462.0 1471.6 1,002 12,212 27,600 0.55 0.53 1.S1 Vladinkaya Oblst 1654.0 1641.3 21,258 27,210 49,300 1.29 1.65 2.99 lvanov.kya Oblaa 1302.0 1300.4 26,461 36,395 51,100 2.02 2.50 4.47 TverkayaOblat 1663.0 1654.5 6,167 6,590 11,000 0.41 0.42 0.66 Kalu2idayaObLt 1086.0 1087.6 3,111 5,072 11,100 0.29 0.47 1.02 Kostromakaya Obbst S12.0 S10.2 13,379 16,677 23,300 1.65 2.06 2.55 Mocow city SBB1.0 1792.9 17,6SS 27,617 27,100 0.20 0.31 0.31 Moskowkaya Obb t 6652.0 6644.0 26,056 40,934 63,000 0.39 0.62 0.95 Orlovskaya Oblt 909.0 913.2 3,418 5,306 20,000 0.3S 0.55 2.19 Ryazankaya Oblst 1342.0 1336.9 4,379 5,320 7,700 0.33 0.40 0.5S Snwlnakaya Oblat 1165.0 1166.5 1,776 2,753 25,000 0.15 0.24 2.14 TuW'kaya OAlst 1840.0 1532.3 4,607 6,479 9,900 0.25 0.35 0.54 Yaroslavakaya Oblut 1467.0 1459.S 30,784 49,306 54,800 2.10 3.38 3.75 Nizhegorodsaya Oblast 3697.0 3682.7 23,173 34,066 46,900 0.63 0.93 1.27 Kiroivkaya Oblast 1701.0 1694.4 16,996 25,581 51,300 1.00 1.51 3.03 Republic of Maii-El 764.0 764.7 7,243 10,487 13,500 0.95 1.37 1.77 Morcovian Soviet Sociau Rep. 964.0 962.7 11,441 16,509 24,500 1.19 1.71 2.54 Republic of Chuvaahkaya 1359.0 1359.0 16,407 32,001 35,700 1.21 2.35 2.63 Bcgorodakaya Obbat 1423.0 1437.6 1,912 3,754 1,900 0.13 0.26 0.62 Voronezhakzaya OWN 2451.0 2495.5 5,069 6,574 16,600 0.20 0.26 0.66 Kunrkaya ObUal 1341.0 1343.S 2,337 6,003 10,600 0.17 0.45 0.79 Lipetsaya Obluat 1241.0 1245.5 2,975 4,370 8,900 0.24 0.35 0.71 Tambovkaya Oblast 1314.0 1314.7 S,0S5 13,867 24,800 0.62 1.05 1.89 Aakhmakya OblQa 1013.0 1015.4 6,322 8,491 17,500 0.63 0.54 1.75 Volgopadakaya Oblat 2660.0 2674.3 3,6B5 4,956 12,000 0.14 0.19 0.45 Sannhakay Oblaat 3312.0 3322.4 4,419 9,202 13,700 0.13 0.21 0.56 PenzenakayaOblaAt 1522.0 1523.3 11,313 17,520 29,700 0.75 1.15 1.95 SaratoikAys ObQat 2722.0 2728.4 14,597 I5,209 32,300 0.54 0.56 1.1I U'yawvkaya Obb t 1462.0 1479.6 4,933 6,859 16,000 0.34 0.46 1.0S Repubdic of Kajnukiya 322.0 320.6 3,175 4,957 9,000 0.99 1.55 2.21 Republic of Tatatrn 3723.0 3743.6 3,602 12,772 21,100 0.10 0.34 0.56 Kraudankii Krai 4879.0 4939.5 12144 21,752 29,800 0.25 0.44 0.60 Republic of Adugeys 447.0 449.0 3,521 4,675 6,300 0.56 1.04 1.40 StawpolUkii Krai 25S0.0 2615.1 4,757 6,758 19,300 0.18 0.26 0.74 Karachayevo-Cr Repubc 434.0 434.1 694 926 4,600 0.16 0.21 1.06 RoetowkayaOblaat 4383.0 4401.3 1,011 12,754 23,100 0.13 0.29 0.52 Republic of Dagel 1925.0 1953.0 29,633 39,133 48,500 1.54 2.00 2.48 Kabard6o-Balar Republic 786.0 725.5 2,933 4,651 9,300 0.37 0.59 1.25 North Octikaya Soviet Sociat Rep. 651.0 650.4 4,717 7,563 9,400 0.72 1.16 1.45 Chcc-Inguh Reputlic 1307.0 1290.0 522 18,588 23,600 0.04 1.44 1.83 Kurpnsaya Oblut 111I.0 1114.8 7,432 10,020 22,400 0.66 0.90 2.01 OrenbrkayaObbt 2219.0 2334.7 3,327 3,583 9,100 0.15 0.15 0.39 Pernukaya ObQa 2945.0 2931.2 12,395 22,973 57,000 0.42 0.78 1.94 Konu-Permyataki AO 161.0 160.3 2,211 2,732 1.32 1.70 Swerdlovskaya ObbUt 4698.0 4666.7 25,727 32,33S 63,100 0.55 0.69 1.35 130 Table A.9: Registered Regional Unemployment ': End of 1992, End of 1993, End of November 1994 (Number of persons and as a percent of total population 2/) Population (thi peson) Totl Unmoyent (pa) Unemp1oymat ma Pert t of TotaI End-of-Year November 3/ End-of-Year Novwi_ 3/ 1.01.93 1.01.94 1992 1993 1994 1992 1 1993 1994 ChelyabinAkymOblast 3634.0 3616.9 14,399 21,179 39,100 0.51 0.59 1.03 Republic of Bashikonostan 4042.0 4055.7 3,733 11,066 27,100 0.22 0.27 0.67 Republc of Udmumalsays 1643.0 1640.7 17,593 26,267 42,400 1.07 1.60 2.53 AJtakiiKrai 26S2.0 2686.4 15,254 21,435 30,400 0.57 0.30 1.13 Gornyy AlIi Republic 197.0 193.3 615 2,207 1,600 0.31 1.11 0.31 Kemerovskaya Oblaa 3177.0 3157.9 7,05S 12,701 13,700 0.22 0.40 0.59 Novesbuskaya Oblaut 2303.0 2792.1 11,453 19,596 29,200 0.41 0.70 1.05 Omukaya Oblat 2176.0 2172.6 4,735 7,201 15,100 0.22 0.33 0.70 Tonxkaya Oblut 1008.0 1000.6 4,014 6,512 14,400 0.40 0.65 1.44 Tyumenskaya Oblut 1354.0 134y.8 2,414 5,192 35,500 0.13 0.38 2.63 Khnnty-Maaiyuk AO 1301.0 1312.6 2,687 3,450 0.21 0.42 Yanalo-Ncnetski AO 465.0 46S.g 1,459 3,269 0.31 0.70 Krrnoyakii Krai 2973.0 2956.7 6,530 15,190 32,500 0.22 0.51 1.10 Republic of K hikaaiya 583.0 584.0 2,075 5,213 6,700 0.36 0.S9 1.15 Taymyreki (Dolpno-Nenettski) AO 51.0 49.2 195 330 0.33 0.67 Evenkiy AO 24.0 22.6 69 S1 0.29 0.36 Ibkutskaya Oblast 2730.0 271S.4 10,902 23,330 43,400 0.40 1.04 1.60 Use-Ordynakiy Buayatakiy AO 142.0 142.5 324 502 0.23 0.35 Chitinskays Oblast 1297.0 1233.3 2,222 2,664 5,600 0.17 0.21 0.43 Aginskiy Buryatskiy AO 79.0 79.4 131 172 0.17 0.22 Republc of Buryatiya 1057.0 1052.8 2,395 3,767 9,200 0.23 0.S3 0.S7 Republic ofTuva 306.0 306.3 517 3,215 3,500 0.17 1.05 1.14 Primorskii Krai 2302.0 22S6.9 6,711 10,252 20,000 0.29 0.45 0.37 Khlibarovkii Krai 1621.0 1608.2 4,396 12,5S7 23,300 0.27 0.73 1.76 Yeeyskaya AO 219.0 217.8 332 446 1,500 0.38 0.20 0.69 Amurslaya Obbst 1063.0 1056.7 3,052 6,439 16,900 0.29 0.61 1.60 KxmchAt*Ay Oblma 41S.0 404.0 2,566 3,139 5,600 0.61 0.79 1.39 KoryLsiy AO 3S.0 35.4 250 370 0.66 1.05 Magdankaya Oblat 327.0 306.9 2,333 3,202 5,100 0.71 1.04 1.66 Chukotlkiy AO 124.0 113.1 902 1,150 1,500 0.73 1.02 1.33 Shkhalin kya Oblat 714.0 698.6 7,701 9,537 15,500 1.08 1.37 2.22 RepublicofSakha(Yakutiya) 1074.0 1060.7 1,185 3,219 6,600 0.11 0.30 0.62 Kaliningadskaya ObLat 906.0 913.1 3,011 10,903 21,500 0.33 1.19 2.35 Residual 4,351 -2,432 -11,700 Total 148,673.0 148,465.6 717,108 1,084,509 1,826,600 werage 0.48 OL73 1.23 Stakdard deviation 1504 1499 7994.20426 10,346 15,464 0.44 0.62 0.37 Maximum 3331 3793 33,313 49,306 63,100 2.10 3.33 4.47 Minimum 24 23 69 31 1,500 0.04 0.15 0.31 Range 857 3770 33,244 49,225 61,600 2.06 3.22 4.16 Average 16S9 16S7 3,094 12,352 23,270 0.56 0.33 1.52 Coefficient of variaton 0.390 0.S39 0.9SS 0.373 0.665 0.786 0.710 0.574 Sowres: Goakosat qfRuaaia and saf caklulaicon. 1/ Nunber of people who ae not ernployed an loking for a job. 2/ To calculate percent of unploYed population in November of 1994 tota population for die bcgnning of die yea was used. 3/ Unemployrent for the 'mised' sub-rgions included in the numbers for region. they belong to accrding to adminis regaion, Le. Komy-Perm. AO is a paut of Ariaegel'sk oblat 131 Table A. 10: Average Monthly Wage-November 1992 - 1994 (thousand rubles) Territory 1992 1993 1994 Adygeya republic 6.7 61.5 171.7 Aginskiy Buryatskiy aut.okrug Altayskiy krai 8.2 78.3 207.1 Amurskaya oblast 13.1 147.6 419.2 Arkhangelskayaoblast 13.1 121.8 350.6 Asrakhanskaya oblast 7.0 65.2 204.0 Bashkorstan republic 10.6 100.7 245.4 Belgorodskaya oblast 9.7 8.6 212.1 Bryarrskata oblast 7.2 61.4 177.3 Buryatia republic 10.7 114.0 291.7 Chelybinskaya oblast 11.9 109.9 270.3 Chitinskaya oblast 11.1 113.6 328.2 Chukotskaya auton. oblast 286.7 1,042.0 Chuvashia republic 7.4 66.2 160.4 Dagestan republic 3.7 34.0 106.5 Evenkiyskiy auton. okrug Gorniy Altay republic 7.7 71.0 217.9 Ingushetia & Checnhnya republic 5.6 33.7 Irkutskaya oblast 15.3 143.4 420.3 Ivanovskayaoblast 7.2 64.4 175.5 Kabardino-Balkaria republic 5.8 53.2 151.3 Kaliningradskaya oblast 8.1 88.6 227.3 Kailmykia republic 5.3 57.2 145.4 Kaluzhskaya oblast 6.9 67.5 203.3 Kamchatskaya oblast 19.7 227.2 735.2 Karachaevo-Cherkessia republic 5.5 49.4 164.6 Karelia republic 12.0 125.5 358.8 Kernerovskaya oblast 18.0 164.6 417.9 Khabarovskiykrai 14.5 175.4 428.7 Khakasskaya auton. oblast 12.3 117.4 330.1 Khanty-Mansiyskiy auton.okrug Kirovskaya oblast 8.9 73.0 196.1 Koini republic 20.0 179.8 491.2 Konii-Permyatskaya auton.oblast Koryakskiy auton. okrug Kostroniskaya oblast 7.6 72.4 210.3 Krasnodarskiykrai 8.1 72.6 206.3 Krasnoyarskiy krai 15.7 154.2 433.6 Kurganskayaoblast 8.6 77.9 212.2 Kurskaya oblast 8.2 73.9 184.5 Leningradskaya oblast 9.3 82.6 241.4 Lipetskaya oblast 8.3 82.2 216.6 Magadanskaya oblast 28.4 283.8 749.9 Mari-El republic 6.6 59.4 156.6 Mordovia republic 6.6 61.2 162.6 Moscovskaya oblast 8.3 88.7 260.1 Moscow 10.1 111.8 364.6 Murmanskaya oblast 20.4 200.6 586.0 Nenetskiy auton. okrug Nizhegorodskaya oblast 9.0 86.4 247.8 Northern Osetia republic 5.7 150.0 Novgorodskayaoblast 8.0 76.4 213.3 Novosibirskaya oblast 8.5 89.5 250.4 Ornskaya oblast 9.9 88.3 233.9 Orenbw-pkya oblast 11.7 93.4 234.7 Orlovskaya oblast 7.4 68.6 182.3 132 Table A. 1O: Average .onthly Wage-November 1992 - 1994 (thousand rubles) Territory 1992 1993 1994 Penzenskaya oblast 6.1 57.5 163.4 Permskayaoblast 11.3 103.1 277.0 Primorskiy krai 12.3 161.9 417.0 Pskovskaya oblast 6.9 66.8 191.1 Rostovskaya oblast 7.5 74.7 206.9 Ryazanskaya oblast 7.5 72.4 213.1 Sakha (Yakutia) republic 21.8 209.6 649.0 Sakhalinskaya oblast 15.5 196.1 562.4 Samarskaya oblast 11.8 116.4 312.1 Saratovskaya oblast 7.7 68.1 182.2 Smolenskaya oblast 8.0 71.4 196.9 St. Petersburg 8.8 94.0 279.6 Stavropolskiy krai 7.1 64.1 179.9 Sverdlovskaya oblast 12.0 101.0 281.1 Tamnbovskaya oblast 6.9 69.9 174.9 Tataustan republic 9.5 94.3 233.3 Taymyrskiy/Dolgano-Nenetsk. AO Tomskaya oblast 11.7 122.1 321.6 Tulskaya oblast 8.7 83.1 207.9 Tuva republic 6.3 73.1 257.5 Tverskaya oblast 8.2 74.4 211.6 Tyurr.enskaya oblast 28.1 268.7 702.1 Udmurtiarepublic 9.1 75.4 213.8 Llyanovskaya oblast 8.6 84.6 229.0 Ust-Ordynskiy Buryatskiy AO Vladimirskaya oblast 8.2 68.3 195.0 Volgogradskaya oblast 8.8 79.6 223.8 Vologodskaya oblast 11.3 98.8 285.3 Voronezhskaya oblast 7.2 67.4 180.6 Yamalo-Nenetskaya AO Yaroslavskaya oblast 9.3 84.3 223.4 Yevreyskaya auton. oblast 126.8 Standard deviation 4.7 53.4 163.4 Maximum 28.4 286.7 1,042.0 Minimum 3.7 33.7 106.5 Range 24.7 253.0 935.5 Average 10.2 102.4 287.1 Coefficient of variation 0.46 0.52 0.57 Source: Goskomstat ofRF and staffcalculations. 133 Table A.11: Regional Price lndeces (CPI), 1992 - 1994 (percent change to the previous year) " Annual Average CPI (percent change to a previous year) 1992 1 1993 1994 Adugeya Rep. 1,246 843 327 Aginskiy BuryatskiyAO 1,189 1,147 305 Altaiskii Krai 1,095 1,075 277 Amurskaya Oblast 1,399 1,004 303 Arkhangel'skaya Oblast 1,366 935 328 Astrakhanskaya Oblast 1,093 952 308 Bashkortostan Rep. 1,200 875 273 Belgorodskaya Oblast 1,252 772 312 Briyanskaya Oblast 1,126 900 326 Buryatiya Rep. 1,175 841 291 Checheno-Ilidushetia Rep. 703 Chelyabinskaya Oblast 1,315 901 291 Chitinskaya Oblast 1,189 1,147 305 Chukotskiy AO 1,500 1,032 291 Chuvashskaya Rep. 1,079 883 312 Dagestan Rep. 1,062 849 320 Evenkiyski AO 1,420 802 289 Gomyy Altai Rep. 1.249 1,079 277 Irkutskaya Oblast 1,340 1,079 279 Ivanovskaya Oblast 1,154 927 331 Kabardino-Balkar Republic 1,019 1,058 269 Kaliningradskaya Oblast 1.259 953 322 Kalmukiva rep. 1.323 1,512 296 Kaluzhskaya Oblast 1,176 892 332 Kamchatskaya Oblast 1,325 1,315 315 Karachayevo-Cherkess Republic 1,249 746 263 Kareliya Rep. 1,558 899 341 Kemerovskaya Oblast 1,183 1,089 376 Khabarovskii Krai 1,430 1,096 298 Khakassiya Rep. 1,249 826 302 Khanty-Mansiyski AO 947 884 282 Kirovskaya Oblast 1,352 928 296 Komi Rep. 1,291 834 267 Komi-Perrnyatski AO 1,392 794 320 Koryaksky AO 1,325 1,315 315 Kostromskaya Oblast 1.360 839 324 Krasnodarskii Krai 1.131 885 284 Krasnoyarskii Krai 1,420 802 289 Kurganskaya Oblast 1,200 930 323 Kurskaya Oblast 1,207 947 337 Leningradskaya Oblast 1,162 726 318 Lipetskaya Oblast 1,228 874 301 Magadanskaya Oblast 1,500 1,032 291 Mari-El Rep. 1,126 862 310 Mordovian Soviet Socialist Rep. 913 1,104 368 Moscow city 1,142 855 350 Moskovskaya Oblast 995 799 308 Murmanskaya Oblast 1,376 939 372 Nenetskiy AO 1,366 935 328 NizhegorodskayaOblast 1,325 883 314 North Osetinskaya Rep. 1,219 1,066 324 Novgorodskaya Oblast 1,196 972 310 Novosibirskaya Oblast 1,297 936 379 Omskaya Oblast 1,414 1,068 310 Orenburgskaya Oblast 1,084 1,036 359 Orlovskaya Oblast 1,081 877 349 Penzenskaya Oblast 1,129 949 304 Perrnskaya Oblast 1,392 794 320 Primorskii Kmi 1,728 1,047 309 Pskovskaya Oblast 813 867 302 134 Tabk A.11: Regional Price Indvces (CPI), 1992- 1994 (percent change to the previous year) v Annual Average CPI (percent change to a previous year) 1992 1993 1994 Rostovskaya Oblast 1,234 938 281 Ryazanskaya Oblast 1,178 973 309 Sakha (Yakutiya) Rep. 1432 906 306 Sakhalinskaya Oblast 1,254 1,394 401 Samarskaya Oblast 1,316 973 301 Saratovskaya Oblast 1,159 829 295 Smolenskaya Oblast 1,288 845 284 St. Petersburg City 1,247 764 348 Stavropol'skii Krai 1,162 1,097 305 Sverdlovskaya Oblast 1,256 815 285 Tambovskaya Oblast 1,178 961 269 Tatarstan Rep. 1,047 909 298 Taymyr AO 1,420 802 289 Tomskaya Oblast 871 1,058 302 Tul'skaya Oblast 1,252 893 301 Tuva Rep. 1,200 1,030 341 Tverskaya Oblast 989 823 325 Tyumenskaya Oblast 947 884 282 Udmurtskaya Rep. 1,273 852 305 Ul'yanovskaya Oblast 1,156 1,016 281 Ust'-Ordynskiy Buryatsk. AO 1,340 1,079 279 Vladimirskaya Oblast 1,366 901 350 Volgogradskaya Oblast 1,276 903 307 Vologodskaya Oblast 1.228 736 313 Voronezhskaya Oblast 1,059 863 308 Yamalo-Nenetski AO 947 884 282 Yaroslavskaya Oblast 1,111 1,023 377 Yevreyskaya AO 1,345 1,096 298 R~~F.derptl4~~~~~~i 1,354 ~~~895 .: ~ O 0-eoB i . 1 i ff :: i .: $ - ; - 1S0L:::: ;- ;8502r '5: ' Standard deviation 165.1 140.5 27.8 Maximum 1727.5 1512.2 401.3 Minimum 703.0 726.3 262.6 Range 1024.5 785.9 138.8 Average 1222.3 947.8 310.8 Coefficient of variation 0.14 0.15 0.09 Source: Staffestimates based on Goskomstat monthly data. 1. Annual regional CPI are not available. To obtain them, based on the available monthly regional CPI, the following formula wm usd Regcpi = RuscPi*Kt.s, where Regcpi Average annual CPI for the region. Ruscpi - Average awnual CPI for Rusian Federation (from Goacomstat). KReg =1(Product of compounded monthy Reg. Price Ind. for the yvar)/(Product of compounded monthly RF Price Ind. for the year)) in a pow oef (1/12) 135 ANNEX 2 Revenue Sharing Between Budgets of Different Levels of Government in 1993 and 1994 Share or revenue sharing ,eIhodf-1 Federal budget I___ _h. udistaed toren t Tival nlw oft Regit nalhudget L I 2 3 4 - 5 6 1. Feder.. tunes I VAT in irpins. pre-i-us metaL aol 100% prmuiivsShinmes 2 VAT i. d-neslse g-st rn .,dersi-es According to -merally fried *trmg rates 1 50- S0% in 19931 120- 50% in 19931 175% i 19941 25% r 19941 3 Ta. tn prcfi.c Itt entryi-et ud T;n raT: 11% Ta. t-ae 22 -25% Asnediqg I autly fued wrganoaleiss stuetuh g roe 4. Tn tn -ri fis 1t hbnhk crTetI rssriti Tn rate: 13% Tao rare 22 -30% Amcding b artaly fmed insurance cpanres. vstS encanhg. va1 shtne rae hsoer mnermediary fiialurtl msifinrtimrs I S Tan enterprise d,Iid-ed and tmieret Tan rate 13% T.. rae 2% A-niedmg nt ally fined trasit tr morn sirrim issued in Russi- shanyg rTa 6 Ta in anks' dis-etd at neret Tu raee: 13% Tao rAte. 5% Acording st ar lslly fned incrte Inse securittes scted in Russia shtri rate 7 Tao dsoIsdnd at interest ouime Iron Ta rTe: 15% participatitr in fimreigo investment neterprieso Tax t rityati aold rent ia rtiTes r. rate 20% 9 T.a ir freight n--oe Ta. rae: 6% 10 Tn tn sid priucs ar. services Tu rare- 13% Te rate: 57% Aonrditg us eIly fried II Ta its m a thseegambling Tar e: 13% Tao n: 77% An,r,ding u rnelhyfiled huot "ssesW 12 En-isis n adnmral gs. cal. ganslrm, aa-hiks, ad -irted gintds 1OD% I3 Tn n spirits.v sdikd. atcer 1h iun 50% 50% Ac=rding tu anly fined (escepe imynirtd) ah eIr 14 Other ssses _ 100% According to nmudly fined shArin rte 15. Cumsions duties lO% 16 PaymenLs t,r the niglos 1 =rnctl 40% 60% 30% 30% hydr-,arhin ram materials 17 Payments the nighbs tit enuw n-que 25% 75% 25% 50% ra- materaL incldudg prei-us met-l aod preci-m -sints 18 Payreny s liv the tghrs tt pmsp-t ads_ 100% 1OD% 19 Py-enrs fe thOe oghts 1. nr e-ath 100% 100% h rn fhr pnrpine tvhee thn enraissn if esoerats 20 Pay-ems fh the Tergt mi - urenh bhsek 40% 60% 60% sf c-tintttl shelf 21. Paynerst fir the d ghs stin easn-h Nreel kOD% if see stomer 136 ________________ Share lie reverue char ni meIh dl) Fedr-l bhdgel C i 1ulldared erc-al h.e ci Teyal ic/a ad _ ~~~~~~~~~~~~~~ ~ ~ ~~~~~~~~~~R,g,,m.l h.dgotLldlhde I 2 3 4 5 6 22 Pr.s,,imrc lI he reprilaui n i erererah 1(0% arc] raw marerilsR have 23. ay-rentc rir he reyrinduicr n and I(0% PreKwcsiu "t F-L,e 24 Re8i-rrari ma l-m scIunirli. i i m.sic- (i!) a the Mmn srr fll.ranrrc v the Rl 110% (ii )ar gceal leIcvel - 100% 100% (iii) al leve I-- 100% 10% 25 PIT Acuirdirg vil a-ually cv-Ii sharing -ale 26 Sucr dury in arhirraee, -cun 10t% I l00 is 19941 27 Scae daty m -ommcm ic un 1c00 100% 28. Srar cpa 100% 100% 29 Synvial W. ic enrerpeiscc. ivrcmrrienv, 80% 20% 20% and iegaenariirrns 1i capncrm viral ne l rs it the eari-ial .n cmy 30 Ta i inherimud ad gifded pecreery 1(0% 100% 31. Tearn -rasie a,c 1(0% Ac->elieg cv annually fined rharie rare 32. Feec, rice ucccv 1 namer - 'Raccia 10% anal 'Raian Federarlier" 11. Rcgie.ral t.cc I Timbhr ra 100% Accieding vt a-eally rIed sharceg rae 2. Paym,n,.vc fr rnda,reial ac si mwae 100% Acfi,rdinig nannually lined shain race 3. Ta.n l niempre.rce p enc 100% S0% 50% 4. Ley tileInse ecpemdieaee cc primary and ser sredary euh-Ilc 100% 100% 5 RegionXw,alre u- - ea fted in m ,, (0% 100% ,,.cg-evrively ulegarvc sf rhe RFi IIJ. Loal) !.e A. Ohlicu.rs ree I Land rae (are nmcc pay. ern) (i) m arac lamd .0% 90% 10% 60% tii) cn agrialearal Lae 30 - 60% 70- 40% 20% 0- 30% 2. Pensial ti--cc ,ec frieaici n rele 100% 100% 3 Tac n peerinel prceny 10% 100% B. Resrgre*dd trs I. Ta x ndvenising 1(0% 1I0% 2. Levy cm dc cgicnen 100% 10(0% 3. Licence lee fi rI te right v cell liquern_ 100% 100% 4. Regcetrricr fIe fi. rLhe fighi ccc mcn eca cicenhip apaemem_ 100% 100% S. Aw-cbril, pa.hieg fee 100% 100% 6 Paymem ir rfie nhl figh e c- l -I sychc.r fir ciccneial prp,mce 100% 100% 137 ! harc or revenue u harinr methnd(l Federal hudger C W,olidated rcei,nal hur. v Regional hudge r _Laval hudiet 2 34 7 LUceme tee toer the right 1- undemiake r-3a5 aucttie and hvteries 100% 100% 8 Tax in dustrial co-nsr ,ciomn work in reort area ' 101% 100% 9 Reci area tee 100% 100% 10 Ear-rrked 1-c Es toma ex,,penditur-e ou,E milta. -en thee communs purpr.es 100% 100% II Tax ii, resaleit c,ars. Lomputers 100% 100% 12. Itirse r-acs as_ 100% 100% I1I TI cen tan k s -xA h-nge contra t- . 100% 100% 14 la-ereni tr the ight to' underake 100% 100% cinra or TV sheiclg 15. Tat to tinnce mainlena-ce it jecLLI lOD% 100% it puhhc h, Nsing and cultural sphere 16 Cleanup payment 100% 100% C Other liul toic- n-i ipei /fiid n the _ 100% 100% rIt Igetloc-e,o oft/hi RF IV. P6n.Iisation proeeds i) Ir-nt tederol prirpeny ihjcrLs heW-ne uly 1. 1994 60% 40% 20% 20% aftee July I 1994 - real estie 10% 24% 15% 9% - emerprises 55% 20% 10% 10% Oli Itrim rgolna o wnership heore- July 1.1994 10% 60% 50% 10% altr July I 1994 - rel esaue 10% 29% 20% 9% - enterprises 10% 65% 65% 1110 trpni muncipal ownership IWlore July 1. 1994 10% 60% 10% 50% ate,r July 1.1994 - real esWte 10% 23% 10% 19% - roerpr-es 75% 75% V. Bond issues and other I R-nuer Itrue tederal gi-venmenm 100% hi-xd issues and stare loorries 2 Revenue term regii-nal h-ind issues and temertes 100% 100% 3 Resenue rum lr- al t-rnd issues & hrteries 100% 100% 4 Re-emee trim sals it c-nfiscaied prireny 300% 100% According ii cueniM (mid- 1994) legislale- if m0 unirwise spcifed ANNEX 3 139 Formulas Used to Allocate the Resources of the Federal Fund for Financial Support to the Regions The FFFS was introduced on July Ist, 1994. It is made of two windows. The first window is for the "needy" regions and the second window is for the "very needy" regions. The first window amount of transfer to a "needy" region is calculated according to the following formula. 1) If Rev,,g < RevRF* .95 where Rerv - Per capita tax revenue in a given region Rev,, - Per capita tax revenue in Russian Federation for the same penod of time 0.95 - So-called "coefficient of incentive", used to force regions to find own resources of expenditures financing. 2) Then, if the region is eligible for a transfer as a "needy" one, total amount of money received from the Federal government is calculated as the following. TranN = Pop,,,. * (ReVR51 - Rev,g.) * (EXPER)Y ReVRF where TranN - Total ruble amount of federal grant to a "needy" region Pop_,. - Regional population without residents of "closed cities" under the jurisdiction of the Ministry of Defense and Ministry of Nuclear Energy (these settlements are financed separately) ExpER - Average per capita expenditutes'of regional budget without capital investment for all regions in the same 'Economic Region" with the considered one (the 12 "Economic Regions" and the 89 administrative regions that they regroup are listed in appendix 1). The second window 3) If TranN + Popw/o * Revreg < TotExpreg where TotExpreg - Total expenditures of a regional budget without capital investment. 4) Then the region is eligible to receive a federal grant as a "very needy" region. TranVN = TotExpreg - (TranN + Popw/o * Revreg) where TranVN - Total amount of a federal grant to the 'very needy" region. In Total To calculate an amount of a grant from the federal budget every eligible region should receive in the next period the following procedure was employed. 5) For "needy" regions: Tran(t + l)N = TotPlanN * TranN/ETranN 6) For "very needy regions: Tran" "vN = aotPlanvN * TranvN/MTranvN where Tran" '], Tran" l)v, - Amount of in the next period to a region found "needy" or 'very needy" in the base period TotPlan, . TotPlanv, - Total planned transfer in the next period to all regions found 'needy" or "very needy" in the base period ETran5 . ETran,, - Total amount of transfers in the base period to all regions found "needy" or 'very needy". Everywhere else, if nothing else specified, expenditures are considered without capital investment. 140 Appendix I RUSSIA: ADMINISTRATIVE GEOGRAPHY (THE ECONOMIC REGIONS) 1. Northern Re2ion 8. Uralskiv Re0ion Arkhangelskaya oblast Kurganskaya oblast Nenetskiy autonomous okrug Orenburgskaya oblast Vologodskaya oblast Permskaya oblast Murmanskaya oblast Komi-Permyatskaya AO Karelia republic Sverdlovskaya oblast Komi republic Chelybinskaya oblast 2. North-Western Region Bashkorstan republic St. Petersburg Udmurtia republic Leningradskaya oblast 9. Western Siberia Region Novgorodskaya oblast Altayskiy krai Pskovskaya oblast Gorniy Altay republic 3. Central Re0ion Kemerovskaya oblast Bryanskaya oblast Novosibirskaya oblast Vladimnirskaya oblast Omskaya oblast Ivanovskaya oblast Tomskaya oblast Tverskaya oblast Tyumenskaya oblast Kaluzhskaya oblast Khanty-Mansiyskiy autonomous okrug Kostromskaya oblast Yamalo-Nenetskaya republic Moscow 10. Eastern Siberia Region Moscovskaya oblast Krasnoyarskiy krai Orlovskaya oblast Khakasskaya autonomous oblast Rvazanskaya oblast Taymyrskiy/Dolgano-Nenetsk. AO Smolenskaya oblast Evenkiyskiy autonomous okrug Tulskaya oblast Irkutskaya oblast Yaroslavskaya oblast Ust-Ordynskiy Buryatskiy AO 4. Vol2o-Vvatskiv Repion Chitinskaya oblast Nizhegorodskaya oblast Aginskiy Buryatskiy autonomous okrug Kirovskaya oblast Buryatia republic Mari-El republic Tuva republic Mordovia republic 11. Far Eastern Region Chuvashia republic Primorskiy krai 5. Central Chernozemniv Region Khabarovskiy krai Belgorodskaya oblast Yevreyskaya autonomous oblast Voronezhskaya oblast Amurskaya oblast Kurskaya oblast Kamchatskaya oblast Lipetskaya oblast Koryakskiy autonomous okrug Tambovskaya oblast Magadanskaya oblast 6. Povolzhskiv Region Chukotskaya autonomous oblast Astrakhanskaya oblast Sakhalinskaya oblast Volgogradskaya oblast Sakha (Yakutia) republic Samarskaya oblast Penzenskaya oblast 12. Kalininuradskava Oblast Saratovskaya oblast Ulyanovskaya oblast Kalmykia republic Tatarstan republic 7. North Caucases Region Krasnodarskiy krai Adygeya republic Stavropolskiy krai Karachaevo-Cherkessia republic Rostovskaya oblast Dagestan republic Kabardino-Balkaria republic Northern Osetia republic Ingushetia republic Chechnya republic 141 ANNEX 4 Conditional Grants: International Experiences The Use and Extent of Conditional Grants Experience with conditional grants is not limited to federations; the device is also widely used in unitary states. Our discussion will concentrate on describing practice in a few developed federal states such as the United States, Canada and Germany, with occasional illustrations drawn from other states, both federal and unitary. In most mature industrial federations, conditional grants from central to sub-national governments are substantial and exceed unconditional grants. In the United States, federal conditional grants accounted for 18.2% of state and local general revenues in 1990; the peak federal contribution having occurred in 1978 when federal conditional grants accounted for 25.3% of state and local general revenues (Advisory Commission on Intergovernmental Relations [ACIR], 1992, p.8). The sheer number of federal conditional grants is staggering: a total of 593 grant programs accounted for total outlays of $206.4 billion in 1993. About three-quarters of this grant aid is distributed by formulas, with the rest being distributed on a discretionary basis by federal agencies. A major change in the form of conditional grants took place in 1966, with the replacement of some categorical grants by the first block grants. Block grants, of which there were 15 by 1993, allow sub-national governments which receive funding much greater discretion in spending than do categorical grants, which are for fairly narrow and specific purposes and impose tight requirements on federal spending. These various conditional transfers have a variety of objectives, from the desire to attain minimum national standards to that of augmenting the supply of particular goods and services. Many of these transfers are also intended to provide greater benefits to jurisdictions with lesser fiscal capacity, which is significant given that the U.S. does not have a program to equalize the revenues of sub-national jurisdictions. In Canada, the major federal-provincial transfers amount to $37.1 billion Canadian in fiscal year 1994-95 or slightly under 32% of program spending by the federal government and 27.4% of provincial revenues. $28.6 billion Canadian or 77% of these transfers are conditional transfers, primarily in the form of two large block transfers for health, education and welfare, with the Canadian Equalization Program--an unconditional transfer to provinces with below-average fiscal capacity--making up the remainder. Although the Canadian Constitution assigns "exclusive" responsibility for health, education and welfare functions to provincial governments, the Courts have upheld the legitimacy of the large federal spending programs in these areas on the grounds that they do not infringe on the ultimate provincial legislative power and do not involve provision of the services concerned. Germany is the exception to the rule that conditional transfers exceed unconditional transfers in most mature western federal governments (Spahn, 1994). The sharing mechanisms in the German federal system consist almost exclusively of revenue-sharing and equalization payments. There are few conditional grants and most of the latter, such as federal grants to the lander for municipal infrastructure, reflect recent measures adopted to deal with problems arising from unification and perhaps may not persist as a permanent feature of the German federal system. The German federal system functions with much joint federal-state decision-making in areas of concurrent jurisdiction. Even in areas where the Lander are responsible for the delivery of programs, such as education, the federal legislative power is paramount and there are many federal framework laws specifying common standards, such as a minimum 142 school leaving age. A salient feature of the German federal system is that the upper chamber of the German federal parliament is composed of delegates from the lander, so that almost by definition federal legislation is not going to be inimical to the interests of the lander. As Shah remarks, however, "German experience suggests that a well thought out revenue sharing system can obviate the need for many specific-purpose transfers" (Shah, 1994, 39). The U.S. and Canada are not the only examples of mature decentralized industrialized federations which make extensive use of conditional grants: the central government of the most decentralized federation of all, Switzerland, also provides some compensation for spillovers to the cantons. On the other hand, Germany is atypical of centralized mature industrial federations in its lack of use of conditional transfers. For instance, Australia makes extensive use of conditional transfers to ensure uniform provision of public services in all of its states. Conditional transfers to local governments are also used extensively in unitary states and frequently by higher level governments in federations. Criteria for Distribution An important aspect of conditional grants is the desirability of determining them by formal criteria such as by use of formulas, as is the case for Russia's equalization program, rather than by ad hoc or discretionary methods. There is a substantial difference in this respect between the shared cost programs that we have described which are common in most OECD states on the one hand, and the "negotiated" transfers on the other hand that prevailed in the former Soviet Union, that are still the standard method of redistribution between the Subjects of the Russian Federation and their local governments (Freinkman and Titov, 1994), and that are common in many developing countries. Negotiated transfers are discretionary and non-transparent. They introduce uncertainty into the budgets of recipient governments, reward negotiating skills and may be used largely for pork barrel purposes. Good shared cost programs, on the other hand, have the characteristics of transparency, predictability and accountability. The shared cost programs in OECD states are usually available to all sub-national governments in a jurisdiction, whether they be states, lander or provinces in federal countries or local governments in the same states, lander or provinces or in unitary states. Furthermore, allocation of funds between regions in these OECD programs is usually done by objective indicators.' Appropriate Objectives An important criticism of many U.S. conditional grants-in-aid is that they try to do too much (Oates, 1972; Thurow, 1966; Boadway & Wildasin, 1984). Specifically, these grants are often intended to provide larger benefits to sub-national governments with below-average fiscal capacity, and also aim to ensure minimum standards of service as well as augmenting the supply of the service in question. To attain three separate goals such as these, however, one ordinarily needs at least three separate instruments. Each of these objectives may be best pursued by the use of different types of transfers: unconditional equalization transfers for inadequate fiscal capacity, conditional lump sum or equal per capita transfers to attain minimum standards and open-ended matching transfers to increase the supply of a service having externalities. The issue of whether conditional transfers may be being asked to do too much is not restricted to the United States. McMillan also finds that many conditional transfers to local governments in OECD ' Examples might be the number of school-aged children for education programs, kilometers of roads for a highway support program, or proportion of aged for a program supporting health care for the elderly. 143 countries are rationalized in part by the general lack of fiscal capacity of local governments (McMillan, 1994, fn 75). Do Shared Cost Programs Benefit the Rich? Contrary to the opinion of some officials we have encountered in Russia, conditional shared cost programs can be designed so that they do not benefit richer sub-national governments more than others. For instance, costs to be shared may be defined as national per capita expenditures rather than actual costs in the sub-national government receiving the grant -- a method of distribution which actually penalizes high-cost areas. No sub-national government is large enough relative to others in Russia to influence costs defined in this way favorably for itself.2 The federal government of Canada shares costs of health care with provincial governments in just such a program. Excessive Use of Conditional Grant Programs Conditional programs serve best when they are few in number. A multiplicity of conditional grant programs with differing conditions complicate administration and accountability and may well represent a threat to the autonomy of sub-national governments. Many federal and unitary governments have accordingly reduced the number of such transfers by combining individual conditional grants into "block"grants related to broad areas of spending. Generally defined block grants offer sub-national govermnents improved financial stability and the flexibility and discretion to shift resources between uses in broad functions such as health according to the priorities of these governments. Thus, two substantial block grants for purposes of health, education and welfare now account for 93% of Canada's conditional transfers to provincial governments. Many unitary states have also chosen to amalgamate numerous specific transfers to local governments into a few or even a single "block" conditional grant. Thus, Denmark in the 1970's combined a large number of conditional transfers to local governments into a single block grant based on aggregate indices of expenditure needs such as population, number of school children and road length. Norway also reduced roughly 220 specific purpose grant programs into 4 block grants in the same period. Some countries still have large numbers of programs of conditional transfers to lower level governments, however. McMillan reports that local governments in the Netherlands face more than 300 conditional grant programs, even though this is a reduction from the 532 that existed in 1980 (McMillan, 1994, 50). Current U.S. proposals ( December, 1994) to introduce block grants in areas such as child care, job training and social services are partly based on desires to consolidate a vast number of number of overlapping programns providing slightly different services and having slightly different eligibili,y requirements. For instance, one recent count indicates that there are "93 different federal [child care] programs... 154 job training programs, 71 social service and child welfare programs and--depending on how you count them--hundreds of nutritional programs, housing programs and health programs. "(Besharov, 1994) 2 In the Russian Federation, the largest subject of the Federation, the city of Moscow, accounts for just under 6% of total population. If the federation government decided to share national per capita health costs with subjects of the federation, and the City of Moscow tried to take advantage of such a program by doubling its expenditures on health care, it would only boost its receipts from the federation government by just under 6%. 144 Conditional Grants in Practice: North America Examples of conditional grants in the United States and Canada can be used to illustrate the application of the concept. In both of these federal countries, conditional grants have accounted for as much as one quarter of subnational government (here state or provincial) revenues. In both countries, there are current discussions (1995) about turning open-ended shared cost programs (entitlement programs in the U.S.) into block grants. The latter would reduce outlays but allow subnational governments substantial discretion and flexibility in allocating monies. Despite their similarities, differences in background and development of these two neighbors provide some interesting differences in conditional grant programs. The transportation sector provides many examples of conditional grants for capital expenditures. Both the U.S. and Canadian federal governments are or have contributed funds for construction of highways in states or provinces. The much smaller Canadian program was an open-ended shared cost program designed to attain minimum standards for construction of the TransCanada Highway. The latter is the longest highway in the world (7821 kilometers), but the federal program only provided support for construction of two lanes. The federal contribution after 1956 was 90% of construction costs for 10% of the mileage in each province and 50% of construction costs for the remaining mileage. Conditions for obtaining the transfer involved meeting criteria related to appropriate road construction such as standards with respect to loadbearing, shoulder width, etc. The U.S. Federal Transit Administration's Formula Grants Program of $2.5 billion in 1995 provides an example of conditional transfers for spending by states and local governments on public transit. Funds are allocated according to population density. In the 1995 Budget, for instance, urban areas over 1 million in population receive 70% of funds while non-urban areas of less than 50,000 in population receive 5.5% of funds. Funds may be used for any transit purpose such as capital, operating and planning costs, although capital costs account for about two-thirds of the total in the 1995 Budget. The federal matching rate for operating grants is dollar for dollar, but for capital projects and planning is 80%. The non-federal share can be provided by states, local governments or private sources. All projects are selected by state and local officials. To be eligible for federal funding, projects must meet general conditions such as being selected through a planning process that includes public involvement, meeting "buy America" requirements, and use of a competitive procurement process. Canadian federal funding for health is provided through an equal per capita block grant to provinces. Canadian expenditures on health are almost entirely publicly funded and account for 10.4% of GNP. Originally, costs of health programs were shared equally between federal and provincial governments on the basis of per capita national costs times a province's population. (This method of cost-sharing was adopted so that the spending policies of the highest income provinces could have practically no effect on federal funding they received). To contain program costs, allow complete provincial flexibility in allocating expenditures for different medical purposes and recognize provincial constitutional jurisdiction in these spending areas, the program was converted into a block grant in 1977 with federal contributions at the time of the conversion being subsequently escalated on the basis of a formula related to annual growth of GNP. Over and above reporting and auditing requirements, five conditions for health care are imposed. These criteria specify that all Canadian residents are entitled to services, all medically necessary services must be covered, services must be accessible to all (the imposition of user fees results in a dollar for dollar reduction in transfers), services are portable in that persons are covered while temporarily absent from their provinces, and health plans must be administered by a public authority. The 1995 federal budget has recently announced plans to extend block funding for health and higher education to include transfers for welfare payments and reduce total transfers for all three purposes, while maintaining health conditionality. 145 The structure of U.S. federal transfers for welfare programs is also currently under intensive discussion. As an example, Aid to Families with Dependent Children (AFDC) was a $22.5 billion program in 1993 which provided transitional assistance to just under 5 million needy families for over 14 million children. The federal government provides broad guidelines and program requirements, and states are responsible for program formulation, benefit determinations and program administration. Eligibility for benefits is based on the state's standard of need as well as the income and resources available to the recipient. Unless otherwise exempt, AFDC recipients are required to participate in work programs designed to promote self-sufficiency as a condition of eligibility. The federal government reimburses the states for operating AFDC programs with matching funds at different rates for various activities. Administrative and training costs are matched on a dollar for dollar basis. Payments for benefits are matched under a formula which takes into account a state's per capita income relative to national per capita income. The federal matching rates for benefits ranges from 83% in the states with the lowest per capita income to equal dollar for dollar matching in the states with the highest per capita income. Although state participation in decision-making for AFDC is obviously extensive, this is one of a number of federal transfers for welfare programs being considered in 1995 for block grant treatment with lower levels of overall funding. 147 ANNEX 5 The Reform of the Budget Classification in the Russian Federation: Comparative Analysis This annex addresses shortcomings in the budget classification inherited from central planning and the distinctive features of a new budget classification prepared by the Ministry of Finance used (de facto if not yet de jure) for the federal budget since 1995. The new classification is compared with IMF's Government Finance Statistics (GFS) classification. The new budget classification is a substantial step forward in the area of reforming the budget system in Russia. The classification is structured on the basis of program-oriented approach, it is noted for its systemic nature and multi-level interrelated structure. The international comparability of its indicators is mainly ensured on the basis of IMF's GFS. At the same time, there are several drawbacks; it is especially true with respect to the organizational classification of expenditure. The new budget classification has not yet been officially approved and is going through the stage of refining on the basis of comments made by the Federal Assembly and the subjects of the Federation. 1. REVIEW OF THE PREVIOUS BUDGET CLASSIFICATION The budget classification in use until 1995 was officially adopted by the Order of the Ministry of finance #71 of August 14, 1992 "On the confirmation of the classification of revenues and expenditures of the budgets in the Russian Federation". It consisted of four parts: L Revenue; 11. Expenditure; 111. List of expenditure articles; IV. List of expenditure chapters. Part L. Revenue contains 26 razdels subdivided into paragraphs. It did not distinguish clearly between tax and nontax revenue, between current and capital revenue, between current and capital grants. Alongside with conventional budget revenue categories there are razdels (under BC codes 33, 34, 40, 53, 59, 60), which represent nothing but deficit financing items. Razdel 56 merely lists extrabudgetary funds. Part 11. Expenditure, which consisted of 39 razdels subdivided into paragraphs, in essence exemplifies functional classification of government expenditure. At the same time it bears many elements of economic classification (e.g razdels 102, 103, 160, 239, 253, 254). Razdel 256 repeats the enumeration of the extrabudgetary funds, given in part I. On the one hand, many expenditure razdels and paragraphs were of overaggregated character, on the other hand, there are plenty of "shallow" items. This complicated the analysis of budget allocations and clarification of budget priorities. For instance, paragraph 90 "Budgetary fund for support to the most important branches of the national economy" (razdel 100 "national economy") consolidated very significant amounts of money, but its breakdown by the recipients was not provided for. Part IIl. List of expenditure articles was based on the semi-developed concept of economic classification. Of twenty articles listed here, those related to subsidies and other current transfers, to 148 capital expenditure, and to lending minus repayments were rendered in very aggregate form. Interest payments are not shown at all. At the same time the availability of rather detailed guiding materials on how to handle these articles indicates that there was a good groundwork for the introduction of an extensive economic classification. Part [V. List of expenditure chapters contained exhaustive list of firsthand recipients of budget resources allocated across ten of the thirty nine expenditure razdels. (Expenditure allocated across the rest twenty nine razdels are not supposed to be assigned to particular spending units.) The list names over one hundred institutions and organizations in the order of increase of their assigned BC-code numbers. It includes not only federal ministries, governmental agencies and other major budgetary institutions, but also the central bank, several specialized state funds, and big nonfinancial public enterprises and state unions of enterprises. The main shortcomings of the 1992 expenditure classification taken as the combination of its three parts could be summarized as follows: 1) categorization by razdels was a mixture of classification by functions of government and classification by economic characteristics of expenditures. Despite the predominance of the former component over the latter component this can not be easily (if at all) reconstructed in accordance with the IMF's Government Finance Statistics (GFS) guidelines; 2) categorization by articles though economic in essence was (i) incomplete and (ii) not detailed enough to match the standards of the IMF's GFS; 3) categorization by chapters did not distinguish between the general government sector and other sectors. It lists major firsthand recipients of budget outlays and their assigned BC-codes, but does not provide a breakdown of expenditure exercised by these major spending units; 4) insufficient links among razdels, chapters, articles, andparagraphs enabled rather scanty cross-classification possibilities thus limiting the basis for analysis and comparisons. In addition to the above the shortcomings of the 1992 budget classification per se, it was not consistently applied in the budget process. Budget estimates and budget execution never entirely conformed to the budget classification format. Some items were often merged, other could be split, and even new categories not specified in the classification could appear. Furthermore, budget estimates and budget execution could also differ in arrangement: items presented in the budget law were sometimes not shown in the budget execution data, and vice versa. 2. MAIN CHARACTERISTICS OF TILE NEW BUD)GET CLASSIFICATION The new budget classification has been prepared pursuant to the Resolution of the Supreme Soviet #5509-1 of July 23, 1993. It has not been adopted yet. The draft, after its presentation to the State Duma, is currently being brushed up. It is being tested in the preparation and execution of the 1995 budget. 149 The new budget classification consists of revenue classification, functional classification of expenditure, departmental (by organizational units of government) classification of expenditure, economic classification of expenditure, classification of financing items, and classification of government debt. The new revenue classification is based on the methodology of the IMF's GFS manual. Revenues are assigned five-digit BC codes and divided into four groups: (10000) Tax revenue, (20000) Nontax revenue; (30000) Property revenue; and (40000) Gratuitous transfers. The first and second groups constitute current revenues, the third group comprises capital revenues. The fourth group includes five types of grants: grants from abroad, from other levels of national government in breakdown by five items, from state extrabudgetary funds, from state enterprises and institutions, and from supranational organizations. Within the other groups revenues are also classified by type, and then subdivided by item. Altogether 22 types and 79 items are specified. Classification of financing items consists of two parts: (i) classificator (classification setting) for internal sources of financing; and (ii) classificator for external sources of financing. The first part represents combined classification of domestic financing by type of debt holder and by type of debt instrument. Its five principal categories are: Central bank of the Russian Federation (0100); state marketable securities (0200); credits from state extrabudgetary funds (0300); credits from other levels of government (0400); other domestic borrowing (0500). State securities category encloses treasury bonds (0210), gold certificates (0220), treasury bills (0230), and other government securities (0240). External financing is classified by type of debt holder, conformingly to the IMF's GFS pattern. The only peculiarity is in that there are two additional categories specifying principal repayments of official and private loans to the former Soviet Union. Classification of government debt is based on two independent classificators (classification settings) depending on whether ii is owed to residents or nonresidents. The classification of domestic debt lacks definite structure based on clearly seen principle. It is rather a mere list of fifteen debt items some of which are more of type-of-debt-holder nature (e.g., 003 - debt to the State insurance company, 012 - debt to the central bank on credits tofinance budget deficit), other are more of type-of-debt-instrument character (e.g., 013 -treasury bonds, 014 - gold certificates). The itemizing is also strongly influenced by the factor of time when the debt was incurred (e.g., 001 - Purpose-oriented loan 1990, 007 - 1991 Public loan of RSFSR, 011 - Public loan 1992, 015 - 1994 treasury bills). Foreign debt is subdivided into debt of theformer USSR (010) and debt of the Russian Federation (020) and classified by type of holder: international financial organizations, foreign governments, and foreign banks and firms. 3. NEW CLASSIFICATION OF BUDGET EXPENDITURE There are three related ways used to classify budget expenditure: one according to the functional nature, another according to the economic character, and the third according to the institutions (see Chart 1). 150 Chart 1. NEW CLASSIFICATION OF EXPENDITURE IN THE RUSSIAN FEDERATION E By functions of || By 1 By economic government organizational characteristics 19 Major 1 || Budgets of major gvmt. [ 3 Expenditure groups razdels institutions [ L (major groups)ll ( 90 podrazdels Purpose articles 8 Object titles (subgroups) jj Items Subtitles ] Elements of titles ] The main differences between the new and old classification of expenditure include the following: tmulti-level classification by major government institutions (by organizational units of government); multi-level classification by functions of government; detailed economic classification; interrelationship between the three types of classification; - major correspondence with IMF's GFS in terms of functions of government and economic characteristics; - essentials for presenting the consolidated budget of the Russian Federation in compliance with international requirements. The new classification provides for the following principal categories and subcategories on the expenditure side of the federal budget of the Russian Federation: 151 * by functions of government - major razdels (major groups) and podrazdels (subgroups); * by major government institutions - purpose-oriented articles and items within the government institution's budget; * by economic characteristics - object titles, subtitles and elements of titles. The classification by functions of government is structured in compliance with accepted international practices. 19 major razdels subdivided into 90 podrazdels have been identified. The razdels correspond to basic functions of the government which are, in their majority, characteristic of all the countries. Podrazdels have been primarily formed to reflect the Russian specific peculiarities and, in the majority of cases, they do not comply with IMF's GFS (which is also true in respect of many other countries). Overall, this classification has a clear-cut structure and is, in most cases, rather detailed, allowing for identification of priorities in the governmrent's activities and achieving the established objectives through proper budgetary financing. Each razdel combines expenditures designed for appropriate objectives of all ministries and major government institutions that make these expenditures (it includes the whole budget of a body of this type or another, or a portion thereof oriented towards this razdel). As a rule, a razdel is implemented by several institutions and, on the other hand, an institution is involved in implementation of a number of razdels. Basic deficiencies of this classification are as follows: 1) A number of relevant areas are not directly reflected here; some of podr-azdels are excessively enlarged. For instance, razdel 06 "Industry, energy and construction" contains the fuel and energy complex which enjoys special attention in terms of its development, yet which has not been singled out into an independent podrazdel. Under IMF's GFS, the fuel and energy complex forms up a separate section. Besides, to make analysis of the RF budget structure more detailed and have it, to a greater extent, comparable internationally, it seems expedient if external economic activities and economic assistance are discriminated in razdel 02 "International activities", and housing construction - in razdel 11 "Housing and public services". Outer space activities, as well as regional development programs might be shown separately. 2) A composition of some podrazdels does not quite correspond to their general purposes. For instance, podrazdel 0702 "Land resources" is more appropriate, in terms of its contents, to be incorporated in razdel 08 which includes water and forest resources. Organizational classification (by maior government institutions) provides for distribution of expenditures by ministry, by government agency and among other recipients of budgetary funds, and within the framework of their budgets - by purpose-oriented articles and items. This classification ensures the targeted nature of financing and plays an important role in the process of budget implementation, budget control and audit. In fact, it gives way to all other expenditure tables. If compared with the previous classification, here, a range of recipients has been more rigidly determined, and also a multi- level structure has been stipulated. Implementation of this classification introduces radical changes in the budget classification of Russia and in the budgeting process, in general. However, primarily due to its 152 basic novelty especially due to its multi-level structure, the classification by major government institutions has three major drawbacks. First, in most cases, purpose-oriented articles are excessively aggregated, which makes analysis of the composition of expenditures more complicated. For instance, the Federal Assembly, the Administration of the President and the Government are assigned to only one article of expenditure. All expenditures of the Ministry of Defense related to operation of, and provision to, armed forces are combined in one article "Provision for operations of army and navy". This degree of aggregation does not conform with UN requirements in respect of reporting on military spending. Other budget articles of the Ministry of Defense are unambiguously in line with podrazdels of the functional classification. As for the budget of the Interior Ministry, all purpose-oriented activities are also reduced to one article. The same is characteristic of a number of other institutions. Budgets of the Ministry of Culture, of Health and of Social Protection are presented in sufficient detail which is primarily due to the fact that these areas for financing have been detailed in the existing classification. Second, identification of purposes for which expenditures are designed, receipt of specific information from budgetary documents are extremely complicated in view of very generalized and uniform names of a number of articles and this, not infrequently, makes it hard to understand them in reviewing the budget of an individual institution. Deficiencies of the approach of this type are especially well observed in the list of uniform articles and items of expenditures for R & D works. Names are long and do not reflect earmarked assignment of funds; two articles have been individualized on the basis of form of work execution (under contracts with the general customer or its affiliated institutions) while items have been divided to take account of whether the R & D work is part of the federal program, or carried out in the interests of the sector, or through a target-oriented fund consolidated in the budget. The most important is the fact that in this case one cannot immediately find a specific item of expenditure (environmental, medical research, development of energy conservation technologies, etc.). The names of articles should reflect peculiar features in the activities of a specific institution. Third, the organizational classification has not been completed since, as regards the breakdown by items, only an example is provided though the composition of the items must be approved by Law on Budget Classification, but not defined by the Ministry of Finance. The given sample shows that often an article coincides with an item, i.e. there is no detail (a multi-level structure). At the same time, the research work within the Ministry for Foreign Economic Relations, for instance, is small in scale yet split into three standard articles with long names which are still further subdivided into three standard items that do not reflect the nature of activities in this ministry. One article " Research of foreign economic issues" would have been sufficient. Many of the indicated basic deficiencies did not exist in the original draft budget classification. However, during additional work on the draft, due to various reasons the degree of detailing in the institutional classification has been sharply lowered; articles purpose-oriented by their names have been replaced with uniform names, in many cases. Legislative approval of expenditures if done by sufficiently detailed, specifically named purpose-oriented articles and items would not only provide for the comprehensive review of the budget but for its transparency, as well. The classification by economic characteristics groups expenditures according to their economic meaning irrespective of a budget razdel or an institution, proceeding from the approach accepted in the 153 international practice. Discrimination is made between funds allocated for procurement of goods and services and payment of subsidies and other transfers. All expenditures are combined into two groups: operating and capital. Each group features object titles subdivided into subtitles and then broken down to elements of titles. All in all, 7 object titles divided into 27 subtitles which are further split into 44 elements of titles have been identified. The economic classification incorporates also "lending minus repayments classification" composed of 6 subtitles split into 12 elements. The Instruction drafted by the Ministry of Finance outlines the contents of each object title which seem to be sufficiently justified excepting expenditures which reflect procurement of armaments and military construction. They have been wholly included in the subtitle "Other operating expenditures". This contradicts the general approach to the construction of the economic classification, contents of the operating expenditures. It would be more appropriate to distribute military expenditures across the whole lot of titles of similar economic nature. In particular, construction of military facilities is a part of the title "Capital construction". The new budget classification of expenditure of the RF features the relationship between three types of classifications. Chart I shows that the functional and organizational classifications are related to each other at the level of "podrazdel - purpose-oriented article", the organizational and economic classifications - at the level of "items - elements of titles (items of organizational classification are divided into elements of the economic classification). The link between first two structures is achieved through coding the purpose-oriented articles by their assignment to a podrazdel. As a result, each podrazdel (and therefore, razdel) leads to identification of bodies which are implementing adopted federal prograns for financing, and purpose-oriented articles based on budgets of these bodies which reflect specific areas for activities. Such presentation of federal expenditures is very convenient for analysis of goals and objectives of each podrazdel, specific activities therein. On the other hand, one can see the functional structure of expenditures for each institution, their participation in implementation of state programs which is relevant in the analysis of institution's functions. With respect to the relationships between these two classifications, the following comments should be highlighted: 1) The razdel "State administration". In the classification of expenditure of the RF, this razdel includes expenditures allocated not only to run legislative authorities, administration of the President and the Government but also offices of all ministries and government agencies. In contrast, the approach accepted in the United States and in some other countries whereby expenditures to run offices of organizational units of government are respectively assigned to those budget razdels which finance basic functions performed by these bodies (for instance, Administration of the office of the Ministry of Agriculture and Food would be under the razdel "Agriculture"). This results in clear presentation of all expenditures required to perform a definite function. To control spending to run offices of the ministries and government agencies, related expenditures may be presented and summarized in additional tables. 2) A number of podrazdels include only one purpose-oriented article. It means that such podrazdels are either small in scale and should not be singled out (e.g., 1603 "Youth program") or else, 154 there is no appropriate specification of articles. For instance, if one looks at the razdels "National defense", or "Environment protection", outwardly it is felt they should have many podrazdels and articles, but actually there is no breakdown. A new budget classification lays the basis for drawing up a consolidated budget of the Russian Federation in accordance with international requirements. The economic classification applies in every respect to all levels of administration providing for the uniform financial system in the country. In addition, all subnational budgets can be presented under enlarged functional classification. The institutional classification for each subnational budget features its own characteristics and the IMF reporting does not require it. 4. INTERNATIONAL COMPARABILITY OF THE NEW BUDGET CLASSIFICATION OF THE RUSSIAN FEDERATION The new classification of revenues of budgets in the RF has been constructed in compliance with IMF's GFS. Revenue groups are in unambiguous agreement with groups I Y-YII in IMF's GFS. In most cases, the direct correspondence is also observed at the level of types and kinds of revenue. The difference from IMF's GFS is basically limited to the fact that revenues in the form of social security and pension fund contributions have not been foreseen. In general, the new classification of revenue allows to submit reports on state revenues according to the established format and it has been an obvious improvement in comparison to the existing classification. The economic classification of expenditure is also close to the IMF's GFS. There is an unambiguous transition at the level of titles and subtitles, and, in the vast majority of cases, at the level of elements which provides for submitting the detailed reports to IMF in accordance with the established format (see appendix 1). The only thing the level of elements lacks is the break-down of operating and capital transfers abroad and, speaking about loans, details on external loans. The functional classification is less comparable. With few exceptions, there is a direct link only at the level of sections in IMF's GFS. In addition, it is possible to obtain indicators for essential sections which are stipulated in IMF's GFS (see appendix 2). The structure of the tables does not allow for immediate derivation of indicators for the fuel and energy complex and housing construction. CONCLUSIONS In general, the new budget classification of the Russian Federation is based on principles which ensure the systemic presentation of government revenue and expenditure; enable their analysis from various angles; and take account of international requirements. To further improve this classification and its analytical usefulness, the following areas need further work: 1) Refine the classification of expenditure, first of all, by expanding the composition and clarifying the formulation of purpose-oriented articles, specifying their links with podrazdels in the functional classification, by identifying the whole list of items within the framework of budgets of government institutions; more appropriate reflection of military expenditures in the economic 155 classification; singling out the fuel and energy complex into an independent podrazdel in the functional structure. 2) Ensure strict use of the budget classification at all stages of the budget process: budget laws, as well as budget execution reports should contain paras similar to those in official budget applications which should, in turn, be fully based on the classification. Any other groupings and breakdowns of revenue and expenditure should be of additional nature. 3) Detail (in the course of further work on the classification) basic items down to the level of elements and specific projects or programs placed in a supplement to the budget to ensure adoption of more informed decisions on a budget application and retain during budget execution target-oriented allocations approved by law. 4) Separate interest on domestic and foreign debt (shown "above the line" as expenditure) from repayment of principal (shown "below the line" as part of deficit financing) for all types of government debt. 5) All types of transfers to other levels of government should be presented under the same category "regional programs". 6) The "net lending" expenditure category, reflecting lending and repayment of budget loans, is currently missing. 156 Appendix I Russia: New budget classification by functions of govenment 19 Major razdels (major groups) of expenditure Code Name 0100 State administration 0200 Foreign affairs 0300 National defence 0400 Law enforcement and safety 0500 Fundamental research and support for technology progress 0600 Industry, energy, construction 0700 Agriculture and fishing 0800 Protection of environment and natural resources, hydro- meteorology, cartography, and geodesy 0900 Transportation and communication 1000 Development of market infrastructure 1100 Housing and community amenities 1200 Emergency and natural disaster affairs 1300 Education 1400 Socio-cultural development 1500 Health and physical culture 1600 Social policy 1700 Public debt service 1800 State reserves replenishment 1900 Other 157 Appendix II Russia: New budget classification by economic characteristics (7 object titles and "lending minus repayment") Code Name 110000 Purchases of goods and services 120000 Interest payments 130000 Subsidies and current transfers 240000 Investments in fixed capital assets 250000 Purchases of stocks 260000 Purchases of land and intangible assets 270000 Capital transfers 380000 Lending minus repayment 159 ANNEX 6 Overview of the Budget Execution Process and the Creation of the Treasury This annex provides an overview of the budget execution process, the role of the new treasury, and the status of implementation of the treasury system. One of the most significant breaks with the system inherited fromii the Soviet Union took place in February 1992 when the cash execution of the budget for the first time linked expenditure payments to actual cash collections. Under the system of cash execution inherited from the Soviet Union, the MOF distributed expenditure authorizations in accordance with the approved budget among the ministries, and these in turn distributed expenditure authorizations among smaller spending units. The distribution of expenditure authorizations were in line with a detailed spending plan called the "smeta." This smeta typically authorized departments to spend a certain amount in a given time period for specified goods or services. To finance the expenditures, quarterly allocations of funds were placed in a bank account at the disposal of the budgetary spending unit. Often Gosbank utilized one of the specialized state banks in carrying out these payments. The payment process was initiated by a payment order from the budgetary unit, which had to identify in detail the purpose and nature of expenditure by the appropriate codes of the budgetary classification. Whether this passed through the special banks or the CBR, the payment order confornity with the "smeta" was checked, and the payment was implemented either in cash, or by a transfer to another bank account, as appropriate. An advantage of the old system was that the banks had a vested interest in carefully checking the claims for spending and rapidly reporting to Gosbank so that they could be compensated for the free financing they were extending to the government. Under this system, the CBR compiled monthly reports on budgetary operations classified by chapters. The annual reports featured the most detailed breakdown of budgetary operations. Under the old system, the CBR and more generally, the banking sector, operated defacto as the Treasury for the government and kept one accounting system parallel to that kept by the government ministries. On the institutional side, a major change since early 1992 has been the progressive setting-up of the federal treasury. To some extent, this change has been forced by the refusal by the CBR and the banking sector to continue performing the functions of a Treasury for the MoF (see box). The Past Reliance on the Banking System for Government Accounting Under the former Soviet Union the banking system was very instrumental for maintaining the public accounts. This reliance on the banking system has been rapidly curtailed since early 1992, when the CBR refused to perform the Treasury function for the govermnent and threaten to withdraw from government accounting entirely. Unfortunately, the MoF became a victim of the so-called "war of the banks" between the former Gosbank of the Union and the new CBR. In the old Union system Gosplan had a network of branches down to the rayon level. There were a number of specialized banks (Agroprom, Promstoi, Sberbank, etc.) which also had their own regional networks. However, because they were specialized their networks did not cover the whole Union territory. Promstroi was mainly in urban and industrial areas; Agroprom mainly in rural areas. While Sberbank had a more developed network, it performed different functions and was not equipped to undertaken large project financing. With the 'war of the banks" the Promstroi network collapsed, and the Promstroi bank remained only as a central entity with 16 branch offices, the rest of its system became independent commercial banks with the encouragement of the CBR. The same happened to the Agroprom system. In this way, the MoF lost the system of state banking operating in the USSR and Gosbank's vast network throughout the country with staffed qualified personnel. This system was only partially replaced by the CBR, which has a much less extensive system, and has experienced increasing difficulties in staffing its regional offices. 160 The Budget Execution Process The actual process of budget execution and procedures have not changed as much as have the legal principles. On the expenditure side, the process of budget execution begins when the General Division of the Budget Execution Department (BED), now part of the treasury, receives the approved budget from the Budget Department. The budget document is accompanied by the smeta, which contains a detailed breakdown of expenditures according to the budget classification and the funding plan for the approved budget: that is, the smeta states to which account which funds must be paid, when, and for what purpose. In the Budget Execution Department, various functional units cover individual sectors of the budget. On the basis of the smeta, the relevant functional unit prepares the payment order to transfer the funds to the "distributors of funds" it supervises.' All spending units of the federal budget as well as the oblast goverinments are funded in this manner. But in practice, only a fraction of the monthly appropriation is advanced at the beginning of the monith. The rest of the funds are transferred at the end of the month, depending on revenue availability. All spending units at the federal level report back quarterly on the use of these funds, through their ministries and then through the relevant functional department in the MoF. The basic reporting unit is below the Ministry level, at the level called "financial administration level," which groups several separate spending units. This quarterly report comes in the form of a Report of Balances and is consolidated by ministry showing two types of "spending:" the amounts flowing out of the main treasury account credited to the ministry's bank account; and, the amounts debited from the ministry account. The Division of Accounting in the MoF checks these reported transactions against the bank records, and if there are any problems in reconciliation it contacts the spending unit or subnational governments as required. The Division of Accounting then prepares a general report on the execution of the budget, usually with a lag of one month. On the budget revenue side, budget execution takes the form of enterprises paying taxes into the government's revenue accounts in banks throughout the entire country. Payment periods differ depending on the type of taxpayer. Large enterprises may pay as often as three times a month, the medium sized pay once a month, and the small pay once each quarter. The funds deposited in commercial banks are transferred twice a month (on the 15th and on the last business day of the month) to one of 84 regional settlement centers of the CBR, or "RKZs," and retained there on account No. 100. Until 1992, commercial banks were supposed to transfer monies to the CBR's territorial payment centers or RKZs on a daily basis. There has been some suspicion in the MoF and oblast finance departments that the banks purposely delay the transfer of funds for their own use. But an important cause for delay has been the CBR's refusal to centrally divide tax payments between different levels of government. As a result, instead of submitting one tax payment form, taxpayers have to submit a different form for each level of government. After most local banks also refused to split tax payments among the different levels of governments, this task was left, by default, to oblast and rayon finance departments, adding significantly 'Five copies of the payment order are actually prepared. The top copy shows the distribution of credit, and it is checked to see that it has the correct signature and stamp from the chief accountant. All 5 copies then go to the Budget Execution Department, where the payment order is checked again to see that the payment complies with budget purpose and whether there is money in that account. The signed payment order is then sent to the CBR, allowing the transfer of the stated sum from the main Treasury account to the bank account of the particular spending department. Of the 5 copies, the top copy remains with the CBR, the second is filed with the Budget Execution Department, the third goes to the relevant ministry from which the spending unit depends, the fourth to the respective functional department in the MoF, and the fifth copy goes to the Computer Center for processing. 161 to the work load of these offices. But regardless of these difficulties, supervision of the commercial banks at the local level appears to be lacking, and there may exist a sizeable float on unaccounted government monies. Twice a month each RKZ credits the government account in Moscow via cable and files a report showing cumulative revenue collections from the beginning of the year and unspent balances on the government's expenditure accounts. Based on these reported amounts of budgetary revenues, the CBR makes an appropriate transfer into the MoF account (the treasury account) from which the MoF distributes funds by crediting the accounts of the ministries and departments.2 Changes in budget execution at the oblast and rayon government levels have paralleled those introduced at the federal level. In particular, banks are no longer involved in the execution of jurisdiction budgets. The actual procedures followed in budget execution mimic those we have just reviewed at the federal level. The process of budget execution can be summarized as follows: Both the Accounting Department and the Budget Department are in charge of execution. Once the budget is approved by the oblast soviet, a smeta (detailing each expenditure item in the budget) is issued by the Budget Department. In some oblasts, these expenditure items are coded and entered into computerized files as the budget gets executed. In other oblasts the tracking is still done manually in accounting ledgers. As expenditures are authorized by the Budget Department, the Accounting Department actually makes the transfer of funds crediting the bank account for each "spending unit" and debiting the main oblast account at the bank. The spending units are the main departments and committees in the subnational government (about 35 to 40 in an oblast). In turn, each of these major spending units funds the account of a larger number of smaller spending units, such as schools and hospitals. As is the case at the federal level, the transfer of funds from the main oblast account to accounts of the spending units is carried out on a monthly basis. Once the spending unit has been credited the funds, it can write checks up to the maximum authorized in the budget. On the 30th of the month, each spending unit is required to submit a report to the Accounting Department verifying the use of the funds. The report contains only information on the actual balances drawn from the account rather than the expenditures the unit has accrued during the period. Rayon governments have to provide an identical report for their entire budget execution to the oblast's Accounting Department. The Accounting Department verifies the reports sent by the spending units and the rayons against their bank balances and produces a formal report of the consolidated executed budget of the oblast by the 15th of the next month which gets sent to the MoF in Moscow. These monthly reports have no information on the activities of extra-budgetary funds at the oblast or rayon levels. On the revenue side of budget execution at the subnational level, the three different tax payment checks (one for each level of government) written by enterprises are sent by the banks to the Accounting Department of either the oblast or rayon which sort them out by level of government. (The Accounting Department subsequently passes the checks on the offices of the State Tax Service.) With the growing number of enterprises, it has become more difficult to keep track of the payment orders. Often, enterprises make one single payment to the Federal government, and in this case, oblasts and rayons receive their money from the MoF with significant delays. 2For spending purposes. the CBR transfers funds from account 129-700 (the treasury account) on a daily basis into the central spending units accounts of principle ministries. From there the funds are transferred to the RKZ where the specific spending unit is located. Normally the CBR does not transfer directly to a commercial bank account, but in RKZ areas which cannot handle the volume of transactions, like Moscow, they often transfer directly into a settlement account in a commercial bank. Of course, if the recipient has an account at the RKZ they do not have to transfer money to the commercial bank account. While this approach is preferred, it is not practically possible because the RKZ network only reaches the oblast level and not generally the rayon level, and distances can be great. 162 Establishment of the Treasury A critical step in the modernization of the budget execution process in Russia was the creation of the Treasury Department within the MoF by a presidential decree in December, 1992. The establishment of the new Treasury appears to be taking place as planned. A directive containing a precise definition of the functions of the Treasury was published as a government decree in August, 1993. This directive contains an exhaustive description of all functions. The existing provisions only cover federal budget expenditure; at a later date, and with the approval and participation of the subnational authorities, the Treasury may also perform many of the Treasury functions for subnational governments. The necessary human and material resources are being gradually assembled (in some cases this involves re- deployment of existing accounting staffs). Among the 24 functions listed in the organizational directive, the first seems very important from the point of view of continuity of the budget system. It states that "the Treasury organizes the budgetary and financial execution of the budget and of the extra-budgetary funds," at both local and federal level, and the local organs of the Treasury, "taking account of the stipulated delegation of appropriations, guarantees financing in a manner consistent with the objectives of the agencies, organizations and enterprises receiving resources from the federal budget and from the extra-budgetary funds, and guarantees their application in a manner consistent with the stipulated objectives of the extra-extra- budgetary funds." The same directive provides for Treasury employees to have extensive powers in on- and off-site supervision, enabling them to monitor application of the public funds in conformity with the budget guidelines. These powers, however, should not be extended to the control and audit functions. Treasury should be only concerned with financial supervision. The new Treasury should play a critical role in the overall supervision of budget execution. Above all, the new the Treasury should make it possible to strengthen ex ante expenditure controls through the creation of a commitment accounting system. Other key functions of the new Treasury will include cash management, short and long term financing, administering the internal and external government debt, regularly reporting on budget execution, and the definition and improvement of accounting rules for the entire government sector. Status of Implementation of the Treasury System As of beginning March 1995 the progress made in introducing the treasury system in the Russian Federation appears as follows: 1. The regional network of treasury offices. It is intended to establish 89 regional treasury offices, of which 74 have been physically established, with a number of subordinate local treasury offices -- the number depending on the size of the region and its importance governed by the volume of transactions. Of these 74, 47 are truly operational in the sense that they record, control and report on revenues and expenditures. In such cases, the local treasury offices receive notification from the banks of taxpayers deposits, they record these, making regular reports to headquarters. They receive the proceeds of shared taxes into their account and make the division between federal and local levels, transferring the local level revenues to their accounts by the close of the next business day. They receive from the central treasury a register of payment orders against all payment orders and are responsible for distributing these funds, after checking and verification, to the SUs in their areas. They then monitor the drawdown against these accounts, and make monthly reports of the spending of the SUs to the central treasury. Of the 74 treasury offices established, 66 perform the latter functions pertaining only to expenditures. Seven regions, "pilot centers", have been tested with the new software designed by IMF experts that will process the register of approved expenditure items sent by the central treasury department, and generate the associated payment orders. Since the final system has yet to be completed at the central 163 level, it appears only 2 of the 7 pilot regions selected are operating with the provisional software tested in 1994. At present the majority of regional offices operate with their own software, and there is little uniformity among them. This lack of a common technology at the regional level means that e-mail from the central treasury when downloaded must be converted to their system. This is not necessarily done electronically but often manually. Indeed, by developing their own systems to meet their own specific requirements, may have created some resistance to adopting the more general but standardized central system. Of these regional offices, 55 have e-mail communication with the central treasury office; the remainder use fax. It is intended that computerization of regional offices will be completed by December 1995, when plans are to have 80% of local offices ready for operating the 1996 budget, and the remaining 20% physically established if not operational. It was planned by end May to have a standard revenue package installed at the regional level, and by end June, a standard expenditure package. 2. The computerized central registering of payments. The software system designed for the central registering of limits, the generation of payments orders, and the registering of all government transactions, completed in December 1994 by IMF experts, has not yet been implemented. The introduction of the new classification system is probably now the most serious reason for explaining the delay. The adjustments to the software package are still continuing. Also it has taken considerable time to disseminate and train people in the new classification system, not only in the Treasury Department, but also in the Sectoral Ministries (SMs) and Spending Units (SUs). Difficulties have been experienced in introducing new procedures in the Operations Division of the treasury, which is responsible for entering data into the system. A leading problem slowing down implementation is the heavy workload of the Operations Division which does not leave them much time to implement the new system. This is compounded by their unfamiliarity with the system, the lack of training, and the need to issue payment orders in two classification codes. 3. Connections with other institutions. There is no electronic link with the CBR, so that payment orders can be automatically processed between these two institutions, and as yet there is no direct link with the spending ministries. However, although the CBR has resisted any agreement of a direct link between them, the Computerization Division is working on a conversion program between the new budget classification and the CBR codes. They are now planning e-mail connections with principal SMs. The objective is to prepare the detailed expenditure limits in electronic form and register those within the expenditure package. To implement this they are establishing work stations in the major ministries, and equipping them with PCs to operate on the treasury system. 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