Translation of the article published in the Russion Journal "Finansi",October 2005

Carl H. Tretner

In April 2004 the government of the Russian Federation approved the “Concept for
Reforming the Budget Process in the Russian Federation in 2004 to 2006”(Resolution 249
of May 22, 2004).

It was proposed to change the philosophy of the budget process from “management of
resources (expenditure)” to “management of results”. This would entail the expansion of
autonomous decision making by the participants in the budget process, an increase in their
responsibility for the achievement of measurable medium-term objectives and the principal
change to the program oriented method of financial planning. The new approach would
secure a direct relation between the allocation of resources and the planned and actual
results, which were to be derived from the policy of the government.

The “Concept” envisages the use of Reports (Doklads) on the Results and Important
Activities of the Institutions for Budget Planning (Federal ministries, federal agencies,
federal services), which should include objectives, tasks and indicators for the objectives,
expenditure obligations, estimated volume of revenue, measures of results that would be
planned and achieved in a period of 3 year, targeted programs, and also the allocation of
expenditure by programs and non-program activities.

The preparation for the “Reports” of several federal ministries, federal agencies and
services, which should be summarized in the „Consolidated Report“, began in 2004. The
work was continued in the following year in order to prepare the three-year financial plan
for 2006 to 2008. This paper comments essentially on the “Methodological
Recommendations for the Preparation of the “Reports” and also on the preliminary work
for the introduction of results oriented budgeting.

The reform of the budget system in Russia according to the conceptual and methodological
recommendations issued by the Ministry of Finance and the Ministry of Economic
Development and Trade puts a very heavy workload on the government administration. The
“Methodological Recommendations” for program budgeting and the “Concept“ which was
developed with the assistance of the “State Budget Reform Project” (TACIS) presents a
model – or better as a vision - for a most modern and comprehensive reform of the budget
process in industrialized countries. It emphasizes the need for a simultaneous
implementation of measures of all aspects of budget as well as general administrative
reforms on a large scale. Such kind of concept on medium-term program and performance
budgeting is a reality in a very few industrialized countries only because the expectations
connected with this method did not come true or the consequences were not accepted by
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Taking into account all aspects of program budgeting at this stage makes the
recommendations very complicated to realize under the conditions of the Russian
Federation. The language, the many details and requirements are very demanding and are
not conducive to trigger large-scale cooperation from the side of civil servants. If this
approach is not fundamentally revised for introduction in the Russian Federation, the
implementation is endangered and the government cannot count on the expected results, to
introduce more transparency, efficiency and cost savings in public administration.

One has the impression that the authorities are not aware of the investigation by the OECD 1
on the limited use of performance budgeting in industrialized countries. In addition, it
appears that at the beginning of the introduction of the reforms the conditions for
implementing parts of such comprehensive model were not sufficiently investigated for
Russia. It is, however, a prerequisite that “budgetary reforms need to be strongly tailored to
the national circumstances. It is tempting to ministers in developing and transitional
countries to imagine that some progress which they understand works well in some other
country can be imported, and for those in the other country to be more than willing to help
with such process. However the record of such good intentions is poor.” 2 What Russia needs
is a concept that is adjusted to the prevailing circumstances in Russia, an approach that is
implemented in pilot projects and then step-by-step and not with a “big bang”? Only
“Russian practice” can be successful” and not so-called “Best practice”.

There is need to revise the methodology and to emphasize that this concept is the final stage
of a very long gradual process. But in addition, a simple operational guide high lightening
the introductory stages for program and performance budgeting is required which would
make the method much more acceptable to civil servants.

More transparency

As a policy instrument the text of the “Consolidated Report“ as well as the “Reports” of the
ministries must be short, right to the point and understandable. However, the
recommendations for the preparation of the “Reports” in general reflect too much
systematizing and subsequently repetition.

There is too many of tiny artificial differentiation among terms such as strategic objectives,
objectives of the ministry, tactical tasks of the ministry and programs. This is confusing. The
description of ministerial objectives is a repetition of the functions of the ministry and even
the explanation of tasks contains many repetitions. Thus the separation of ministerial
objectives and tactical tasks is redundant. The one or the other might be omitted. Preferably,
the former might be dropped for the sake of transparency, since the latter together with a
meaningfully name of a program reveal automatically the objectives of the activities. It is,

 “Public Sector Modernization: Governing for Performance”, Performance Information in the Budget Process 1-2 April 2004
 M. Spackman: Multi-Year Perspective in Budgeting and Public Investment Planning, Paper for the OECD Global Forum on
Sustainable Development, Paris 2002, p. 41
                                                                                   Page 3

anyhow, difficult to find indicators for ministerial objectives that stand for a conglomerate of
many programs and activities e.g. in case of Objective 3 of the Ministry of Economic
Development and Trade “To strengthen the capacity of the government administration and
the institutions of a civil society“ in its “Report on the Results and Important Activities in
the year 2004”.

Another example of lack of clarity is the fact that the “Methodological Recommendations”
requires a description of ways as well as methods for the attainment of results? – But what is
the difference between “ways” and “methods” ?

Reduce the manifold requirements

The many detailed requirements to observe 9 features when selecting indicators in the
“Methodological Recommendations” (2. Preparation of Section 1 “Objectives, tasks and
indicators for activities”) as well as the breakdown in basic and supplementary indicators
and the reasoning for choosing the targeted indicators is asking too much from civil servants
at the moment of tremendous changes in many parts of government administration. This
applies also to the prescribed analysis of factors, which prevent the attainment of objectives
and to the explanation of risks that are connected with programs.

The “Reports” must also not demand numerous scientific investigations such as the
quantitative evaluation of the influence of programs on tasks and indicators which are
anyhow difficult to determine under conditions of uncertainty and because of the lack of
data in the initial phase of the reforms (4. Preparation of Section 3 “Targeted Programs and
Non-Program Activities”). Comprehensive deliberations on tasks (2. Preparation of Section
1) are equally redundant. At the end, compliance with the frequent requests for a “short
description“ makes the Report a less suitable policy instrument.

The treatment of non-program activities

One major objective of performance budgeting is to have measurable results of government
activities. Such results are in case of a Federation primarily attainable for services that are
delivered and financed at the local level and to a certain degree at the state level but hardly
at the federal level. This is why in the Federal Republic of Germany the emphasis for
performance budgeting is on the local level of government.

Following changes in the regulation (Polozheniye on the Results and Important Activities of
the Agencies for Budget Planning) from December 23, 2004 No. 838 non-program activities
have to be characterized in Annex 4 of this regulation, objectives and tasks connected with
them have to be described as well as important measures that lead to non-program activities.
Furthermore, indicators for the results of those activities have to be formulated and cost for
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the execution of non-program activities have to be presented. However, non-program
activities are neither defined nor examples presented.

If programs are defined as measures that are implemented to attain a concrete objective
within a limited period of time, then non-program activities could be understood as the
permanent functions of ministries and subordinate bodies such as e.g. policy formulation and
analysis, legal regulatory activities, cooperation in international organizations, financial aid
to lower level budgets, debt service, investments and maintenance in case of government
buildings etc. The nature of such activities is self-explanatory. No meaningful objective can
be set or reasonable indicators formulated. What sense does it make to declare as a program
for a ministry of foreign affairs – as in case of Australia - the improvement in the reputation
of the country?

Inflation impairs on the full use of program budgeting

Macroeconomic stability, which should be one of highest priority among the national
objectives, means in essence internal stability of the national currency (i.e. stability of the
level of consumer prices).

For sound budgeting in any country it is important to compare revenue and expenditure over
time, which the IMF considers a main requirement for fiscal transparency. This is at present
not possible in Russia. Budgets in the Russian Federation do not include the original and
revised budget estimates for the two years preceding the budget, which is being formulated.
An increase in appropriations usually signals to the public that efforts in a particular activity
will be strengthened. But an increase in nominal expenditure for the national objectives as
indicated in the report “Expenditure of the Federal Budget for 2005: according to results” 3
conveys a distorted picture when no reference is made to the expected rate of inflation in the
order of magnitude of 8,5 % and higher in 2005.

Complicated procedures to take account of the high rate of inflation in medium-term
performance budgeting such as to convert current costs and expenditure to constant prices,
to revaluate assets for proper asset management and to apply indexation causes
inefficiencies (e.g. by complicating the identification of cost savings and the use of performs
indicators in money terms) and impairs on transparency. All countries that apply a medium-
term financial forecast use budget and forward estimates in nominal term. The IMF Manual
on Fiscal Transparency (Paragraphs 107-8, 16.07.2004) recommends such approach in order
to ensure that program managers respond to price changes.

    See page 21of the report by the EU-Project State Budget Reform
                                                                                                              Page 5

The United Kingdom as many other countries made the experience that high and volatile
inflation rates damaged the public sector’s ability to plan ahead in the same way as they did
for the rest of the economy”. 4

Neither the “Concept for Reforming the Budget Process in the Russian Federation in 2004 to
2006” nor the “Methodological Recommendations” elaborate on the problem of inflation in
Russia which is one of the highest among industrialized countries and which has serious
implications for the selection of indicators 5 , for comparisons over time, the compilation of a
meaningful data base and for medium-term financial planning.

Under circumstances of high inflation it will be very difficult – if not impossible - to
advance with certain segments of the ongoing reform of the budgetary process in Russia.
One objective for introducing performance budgeting in Russia is to create transparency in
government finances and to let the taxpayer know how the government spends his tax
money. The medium-term frame cannot accomplish this objective as long as Russia is a
country with a high rate of inflation. When under these circumstances complicated
adjustments in budgeting are necessary to compare data, transparency cannot be guaranteed.
This is why that for the time-being medium-term performance budgeting should only be
used internally in the executive branch of the Russian Federation.

A simple checklist for the first phase of the implementation of Program budgeting is

Civil servants have to get used to the prime requirements at the outset of the operation.
Elaborations on risks and obstacles for the attainment of results and comprehensive
descriptions why targets have not been reached (“Methodological recommendations” 6.
Preparation of section 5 “Efficiency of government spending”) or the establishment of an
Internal Auditing department is premature at this introductory stage when everyone is
learning the new methodology. Besides, the targeted indicators are in most cases just very
rough estimates since a database could not have been established yet. When program
auditing is introduced, it should start as external auditing either executed by the Auditing
Office or the Ministry of Finance.

The reform process should be implemented with the help of a simple checklist in the initial
phase, which should contain many examples. Such checklist should be limited to the
following recommendations:

 HM Treasury (UK), Planning Sustainable Public Spending: Lessons from Previous Policy Experience, p.2
 The use of the Rouble as a unit for indicators in case of the federal tax service and the federal agency for the management of
government property and also in case of financial assistance for small business is misleading if reference to changes in the
exchange rate to major currencies, to the high rate of inflation or the conversion to constant prices (2002 prices) is missing.
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   1. A clear definition, selection and presentation of government activities that can be
      formulated as programs with responsibilities assigned
      • The name of the program should already indicate the major policy instrument.
      • Joint responsibilities of several departments and divisions for one program are not
      • Dependency on other ministries/agencies/departments should only be referred too
         and explained when there is a concrete operational necessity.

   2. The definition of performance indicators
      • Indicators in money terms must be avoided because of the high rate of inflation in
        Russia, which excludes comparability in the course of the plan period of three
      • International indices are not recommendable indicators because of limited
        comparability between countries
      • It is sufficient to present indicators exclusively in matrix-format in the “Reports”

   3. Maintain a separation of expenditure between program and non-program activities

   4. A breakdown of expenditure in existing and new expenditure obligations is very

   5. An allocation of expenditure to programs according to the number of staff engaged in
      a program and of other expenditure that can be directly linked to a program will do. At
      this stage the allocation of overhead expenses is not necessary; they constitute non-
      program expenditure.

Carl H. Tretner, Berlin (Gy)
E-mail: ch.tretner@t-online.de

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