Alexei Kudrin’s speech:

Good morning,

The Accounts Chamber is a major instrument of effective government spending – of achieving national goals and fulfilling national programmes. I am interested in cooperating with it. I would like to reiterate that we are working very closely with the Accounts Chamber, and we are committed to continuing work on the new draft laws and improving the system of financial regulation. Generally speaking, we support recent legislation on the regional regulatory and auditing bodies in Russia. We have some remarks concerning that law, but we will sort it all out by the time it comes up for a second reading. On the whole, it charts the right path for the development of regulatory bodies because we are aware of existing problems. They all have been highlighted by the Russian president. To date, one has to admit, our common efforts to solve these problems have failed. There are obstacles that we have to discuss in order to decide on a common course of action.

Today we are poised to form new auditing principles. We will have to change our day-to-day practice. Let me elaborate: if we switch our budgets to a principle based on government programmes, the goal will be the fulfilment of those programmes’ tasks, i.e., what has been planned. That will be the main criterion of effective spending.

However, auditing does not begin with checking on what has or has not been done. It begins with planning what we can accomplish with the money we have. Accurately determining the task at hand and its end result even before work begins will enable us to assess the effectiveness of that work. If the planning is poor, one cannot demand the fulfilment of what was originally misguided. The results are no different if we plan everything correctly, but then excuses crop up: inflation has grown, prices have grown, contracts were revised, and where we initially approached a given task from one angle, we were later forced to change our minds. We ask why the cost of everything turned out to be higher than we originally assumed – why additional resources had to be allocated and deadlines postponed.

Quality planning is becoming the key principle of our organisation. We must achieve it if budget resources are to be used more efficiently. Under current work with federal targeted programmes and federal investment programmes, the biggest challenge will simply be to fulfil our procurement and construction contracts. The most difficult aspect of that work will be to avoid making changes after the contracts have been signed. At present, changing contract provisions after the fact is a widespread practice. We aim to put an end to this practice through our joint efforts, such as the consolidated website of state procurements that will be active as of January 1, 2011. All regions and municipalities across Russia will log on to it. They will have to post their bids on the consolidated federal site in order to make the whole picture clear and the process transparent. A customer seeking government orders should be able to go to that site and view the relevant purchase orders of all regions and municipalities in order to make a bid without the interference of regional cronies.

Even so, this is only the first step. Let’s get back to the problem of planning. It will probably be hard to review all the state programmes at once because the scale varies on which this principle is to be applied. In most developed countries, it is accompanied to greater or lesser degrees by other methods of planning. Not all the state budget is packed into state programmes. Some expenditures cannot be easily included in programmes because they are current and ongoing. It is hard to simply write them into some programme.

Second, a full-scale programme is underway to make budget spending more efficient. We are often hard put to decide where to save and where to curtail or drop some government functions altogether. However, efficiency is still the top priority. One should first undertake thorough analysis and expert examination procedures even if the problem appears to call for immediate action: “Give us money, and we will solve the problem in no time.” Before long, it often turns out that the same problem could have been solved at a lower cost and with less effort by other methods. And yet this is done on the taxpayer’s money, which we should seek to use prudently. If a programme has not been subjected to the proper scrutiny and discussion, this is the first serious sign that its future results may be ineffective.

That, unfortunately, is true of the government as well. The government makes decisions too quickly too often. Programmes appear within two or three months. Sometimes a programme sees the light of day while the relevant bill is still pending in the State Duma. Sometimes projects and tasks are set during the year when the budget is already being implemented. I would like to address my plea to Sergei Stepashin and the members of the Accounts Chamber. Do not hesitate to comment on the government’s decision to change the budget and introduce new programmes over the course of the year. Voice your objections. My single-handed efforts are not sufficient.

The project and cost-estimate documentation is yet to be prepared, but the building urgently has to be constructed. Work gets under way. This is all too common. The end cost of the project may change by 30% or even 50% over three years. This has happened to some of our high-tech medical centres, theatres, and perinatal centres. I could site examples of projects undertaken in haste that then progressively change in cost by two or three times or by 30-50%. The reason is that certain things have not been taken into account – certain things have escaped our foresight, and the project was launched before the documentation had been prepared. I urge you to be whistle-blowers and address such issues to the government in order to discipline its members.

The same goes for compliance with the law in the development of federal targeted programmes and, in future, state programmes. All of the government approval procedures should be completed before a bill is submitted to the Duma. We have set a deadline: all state programmes to be fulfilled after 2012 should be approved before October 1 when the bills are introduced at the Duma. The government ministers tell me that this is a very taxing job, which involves serious programmes, and that a tough work schedule on these state programmes has been set. However, if we again begin discussing the budget at the Duma without the prior approval of these programmes, the future budget will become much less effective.

Our budget is in the red. The deficit is still large: 4.6% this year with the oil price at $75 per barrel. In 2007, the oil price was at about $70, and we had a 5% surplus, whereas today we have a deficit of nearly 5% with the oil price at $75. That means that we have seriously departed from the balanced budget principle. If this is a temporary departure, that is not so bad considering the scale of the crisis that we have just experienced. But how long can this temporary departure last? I think three years is the outside limit, after which we should move back toward a reasonable deficit. For example, what if the oil price in 2015 is $82? Are we going to live with a deficit given that oil price? Or should we have no deficit because we know that if the oil price is not $82, but say $50, our deficit will increase by 3%. If we plan on having a 2% deficit in 2015, it would rather become 5% given an oil price of $50.

A normal deficit for Russia if the oil price is $50 should be no more than 2%. Many do not credit that figure. But I would hazard to suggest that over the next three years, the oil price will drop below $60 for a period of six months or so. I proceed from market analysis and from the available data of all energy agencies. It may happen, and we should be ready for it. In general, the average annual oil price was above $70 for just two years, and over the remaining ten or fifteen years, it was less than $70. And yet we assume that it will stay high and that we will be sitting pretty. What makes me raise this issue today? The fact that we face very real and very serious constraints. We have to choose our priorities. We should go ahead with some projects that will benefit the economy while putting other projects on hold.

In 2010, 450 billion roubles worth of federal targeted programmes were not fulfilled. These are the commitments we made two or three years ago when we adopted the federal targeted programmes. They were all broken down by year. They are already foundering, with cost overruns of 450 billion roubles in 2010 alone. So some measures will not be taken in time. That means that development will not be completed, and infrastructure service lines will not be brought to residential neighbourhoods and major industrial zones.

When planning is muddled, spending efficiency drops dramatically. Nobody will be able to ask the executor to explain why he has failed to meet a target plan. Someone failed to build the roads on schedule, someone did not deliver equipment to a hospital because the hospital building did not yet exist at the time of delivery…

One should adhere to long-term budget benchmarks and meet the commitments that are in line with long-term schedules. New commitments should be made within the available resources that we distribute each year. In the second year of the three-year programme, we left at least a 2.5% spending margin, and in the third year at least 5%, because when we move from one three-year period to the next, we acquire certain leeway on indexing some commitments and assuming new ones. I for one believe that this is not enough. In recent years, we have been lucky because the price of oil was slightly higher and we had greater resources available for planning the new budget.

We now return to the problem of long-term financial planning over the next 15 years – the period in which all primary issues and considerations will be determined. If the horizon is 15 years, we can immediately see that our oil and gas revenues will not remain the same because production growth will stop at zero or 1-2% a year. Meanwhile, the GDP will grow by 6%. That means the share of oil and gas in the GDP will decline. In 2009, the oil and gas sector accounted for 17% of the GDP. In 2020, it will be a mere 13% of the GDP. That sector, which yields the highest revenues owing to a world market, will shrink as a percentage of the GDP and will not be able to support the same amount of revenue in the GDP. The revenue will drop.

What will happen to those who pay social taxes? They will decrease year in and year out. The number of gainfully employed people is shrinking at the rate of about 200,000 per year. In 2008, the gainfully employed working age population in Russia reached an all-time high. From 2008 on, the trend has been for that demographic to diminish by 200,000 every year. The number of tax payers is falling as the population ages. We are “an aged nation” according to UN criteria. The cost of pensions and healthcare will grow. This is just one example. We see that our pensions and healthcare commitments will grow even as the taxes and oil revenues that have sustained us will decline. All this needs to be kept in mind in order not to assume unrealistic commitments, including for three, five, and seven years ahead – the periods along which the main programmes will be developed.

We should observe more strictly the delimitation between different levels of government. Every level should be primarily responsible for its own tasks. One frequently asked question is how much should the federal government spend and how much should the regional governments spend. If one subtracts from federal spending the cost of pensions and pension transfers, if one subtracts all spending on constituent entities in the form of transfers, subsidies, and subventions and then reassigns all that spending to the regions, the ratio between federal and regional spending would be about 50:50. Who should help whom to strengthen the army, improve higher education, and modernise the economy? We are already at a 50:50 level in terms of expenditure. Scrupulous compliance with commitments and funding out of local revenues is a key principle. As it is, we often help the regions meet their obligations. That affects our results and makes our spending less effective.

The Russian president said in his speech that the share of the regions in our common budget should increase. We should look into commitments and revenues. I understand that more should be left to the regions, and we need to find ways to increase their revenue sources. At the same time, the president has set the task of strengthening our defence capability and allocating 23 trillion roubles to defence over the next ten years. It will be very difficult to change the current ratio because federal spending may grow. Even so, I think that regional sources of revenue should be increased to enable the regions to meet their commitments on their own.

Federal Law 83 on the reform of municipal institutions will come into force shortly. It too changes the principles of meeting obligations and the protocol of supervision. We should formulate more clearly the tasks set by the state for these institutions and check their fulfilment not through a cost estimate, but through the fulfilment of the given assignment. This has yet to become a universal practice. Our initial experience has not been uniformly successful. My ministry has yet to learn to set state targets on a large scale. It involves thousands and tens of thousands of institutions that should be given state assignments so that their work may be properly monitored.

Today I have touched only upon our new approach to budget planning and budget policy. The solution of these problems should make for more effective budget spending. I am not going to mention the proper methods and procedures the Accounts Chamber and local auditing bodies perform. Enough has already been said about it.

Still, I would like to say that the law must spell out budget offenses and sanctions against them more clearly. I think that some of these laws are outdated. That is true above all of administrative fines imposed on officials. The traditional measure of blocking spending is no longer a valid sanction because it punishes the consumer and not the offender. We should make greater use of administrative punishment within administrative legislation. These sanctions are not harsh enough, and liability is not sufficient.

I have already referred to altering cost estimates and contracts. I would like to draw your attention to that part of this year’s presidential Budget Address in which we would address those who write one thing in feasibility studies and another as work progresses. Such approvals must be serious documents on the basis of which executors can be brought to account. Not infrequently, to get a bill passed in the Duma, these executors write that it will not require extra budget spending. The bid for funding is approved before the ink even dries on the law. The law on non-commercial social organisations has just been passed. The rider to the bill says that no additional funding will be required. But the Duma is already discussing an amendment to authorise more funds. All are in favour. Money has been allocated. The law has just been passed, and it has been said that no additional expenditure is needed; yet we have already endorsed extra spending. There are many such laws.

I have already spoken about the law on regulatory and auditing bodies. All we are doing with regard to this issue is working out some amendments. I would like to take another look at the right of our auditing bodies to enter commercial entities. The law says neatly that once budget funds have been disbursed or benefits have been awarded, auditors have the right to inspections. I must say that either the language is vague or we are breaking some important basic principles. Commercial entities should be inspected by tax authorities for taxes and by other authorities for other problems. These are not budget-funded institutions. Nevertheless, we should think of ways to monitor how budget money is being spent. Not every case of transferred budget money warrants an audit. For instance, money often comes through authorised capital. That money is diluted. The only thing one can verify is whether the block of shares has been received, registered, and is in the Rosimushchestvo database. That’s all. There is no other way of monitoring how the money is spent. This is a business entity.

Again, take the subsidies on loan interest. It does not mean that a financial institution should be audited on every parameter and that any question can be asked. We have not yet drawn a clear boundary between audits of commercial entities and banks by supervisory and auditing bodies. I would like to go on record as stating this together with the Central Bank. We are discussing the language of the statement. We will finalise it, and I do not expect any problems.

Thank you very much.