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Speech at the State Council meeting

President of Russia Vladimir Putin: Good afternoon colleagues, members of the State Council.

Let’s begin our work.

Today, we will discuss one of the key issues and fundamental areas of government, an issue that concerns every level of government, from federal to municipal.

I am referring to the efficiency of budget spending, how efficiently we spend the taxpayers’ money, our people’s money, and how effective this spending is in addressing the country’s economic and social challenges.

In 2012, Russia’s consolidated budget spending exceeded 22 trillion roubles [around $700 billion]. This is 37 percent of GDP. As we can see, this is a lot of money.

Our budget’s financial possibilities have indeed grown considerably stronger. At the same time, we know that there are problems too, especially with the quality of budget spending.

”We are radically changing the principles for the budget’s formation. The 2014 federal budget will be formed on a programme basis. The regional and municipal authorities also now have the right to use the programme principle to form their budgets for 2014. Our task is to improve financial management at every level of government.“

This was why we passed laws of a conceptual nature that established new types of state institutions and improved financing mechanisms. We are modernising the state procurement system. This summer, amendments were made to the Budget Code that will continue reform of state institutions and improve financial oversight of state spending.

Finally, we are radically changing the principles for the budget’s formation. This is something we have discussed over a long period of time and have worked on at length. The 2014 federal budget will be formed on a programme basis.

I note that the regional and municipal authorities also now have the right to use the programme principle to form their budgets for 2014. I call on our colleagues in the regions to make active use of this method and develop new, more open and effective budget policy approaches.

Let me make it clear to everyone present that our task is to improve financial management at every level of government, and so we will discuss this issue too, today, in this expanded format.

We have repeated over and over that the budgets are executed in chaotic and very uneven fashion. As the year comes to a close we see a great frenzy of last-minute activity, a last-minute rush to spend available money and resources. Any change here has been very slow, just the tiniest steps. 

The 2011–2015 Education Federal Targeted Programme, for example, was executed at 16.8 percent of the target over the first seven months of this year, and the Information Society state programme was executed at 3.5 percent.

This is not a new problem. I must confess that the previous Cabinet had to address these very same problems.

There are some targeted programmes and planned activities that are not being carried out or financed at all. They exist only on paper and the money earmarked for their implementation is just so much deadweight for the budget to carry.

For example, as of August 1, 2013, the Raising Road Traffic Safety and Clean Water federal targeted programmes had not been implemented.

Many budget items and programmes are unclear and amorphous. Instead of setting clear objectives, they are full of vague bureaucratic wording such as ‘improve’ and ‘enhance’. This is all far removed from actual life and, we must admit, is simply no good at all.

The programme to set up a property cadastre was carried out over a 6-year period from 2006 to 2012. Forty-two billion rubles of taxpayers’ money were spent on this project.

The programme has been completed now but the property registration system is still far from ideal.

We sometimes encounter cases when the law is blatantly ignored. Let me cite a few figures.

”All of the state agencies need to set the fundamental goal of ensuring maximum efficiency of budget spending and achieving the best possible results based on the existing financial possibilities.“

In 2012, cases of failure to comply with laws on state and municipal procurement involved a total of more than 130 billion rubles. Cases of violating budget laws involved a total of 187 billion rubles.

Let me make it clear that we are not talking about theft or corruption here. This is simply a lack of proper financial discipline.

Checks resulted in 27,000 officials being sanctioned for these violations. Twenty-seven thousand – that is a huge number.

All of this points to the systemic nature of these problems.

In this context, I propose that we discuss today the possibility of toughening liability in the sphere of state finances. This would extend to both personal responsibility and the responsibility of state organisations.

This alone is not enough of course. We must continue our work to change the actual principles and ideology of the budget process and motivate officials at every level of government to be frugal with budget funds and use them for economically justifiable needs that bring definite final results. 

In this respect I want to highlight the following main points.

First, all spending must be justified and carefully calculated at the programme and budget-planning stage.

At the same time, I think that our state and municipal budget planning must be based on a set of budget rules that reflect the optimum ratio of budget spending to final results and take into account regional best practice and each region’s needs. We already have experience in this area.

I ask the Government to work on this matter and draft the relevant proposals.

I note too, that the new law on the Accounts Chamber came into force on October 1, 2013. The Accounts Chamber can now carry out comprehensive analysis of state spending from the planning stage to the evaluation of spending efficiency. I ask Ms Golikova, the Accounts Chamber’s new head, to make active use of these new powers.

Second, budget investment is a separate issue and we have a lot of work to do on this front. We have drafted a large-scale programme for capital construction using budget funds. But there are also problems in this area, as we know. This concerns above all costs increasing from the original estimates as the projects progress.

Furthermore, spreading resources too thin and the effect of various budget restrictions create a situation in which facilities that should have taken a year or two to build end up turning into never-ending projects that go on for years. I ask the Government to do a stocktaking of capital construction projects and concentrate resources on facilities that are close to completion, as we did in 2008–2010. We need to concentrate on projects that are close to being commissioned.

”We must continue our work to change the actual principles and ideology of the budget process and motivate officials at every level of government to be frugal with budget funds and use them for economically justifiable needs that bring definite final results.“

I ask you also to work through decisions on setting construction costs for each capital construction project so as to avoid unjustified cost increases in the future.

Third, there is a lot that we can do with the way state and municipal agencies work in order to make the budget spending that goes into them more effective. Depending on the region, one and the same service in state and municipal agencies can differ widely in price, and this often creates the impression that the final price is just decided on a whim. It is not clear what the budget is paying for and into whose pockets the money is going. At the same time, agencies try to shift extra costs onto consumers.

I propose that we look at this issue today and think about how to spread broadly and swiftly best practice in providing state and municipal services. As I said, many regions already have experience here, and we should make use of and spread this experience. 

Next is the issue of public procurement, another serious matter. What we see sometimes in this area is certainly cause for dismay, and the public is quite justified in raising questions. 

According to the Control Directorate’s data, in 2012, more than 3.4 million state and municipal procurement orders worth a total of around 8 trillion rubles were placed on the official Internet site. Monitoring of more than 10,000 procurement contracts showed that more than 60 percent of them were carried out with violations.

We have been working together with the Government and the deputies on a replacement for Law No. 94, which I think did play a positive part in resolving a number of problems but also had a number of drawbacks. We have put a lot of time into drafting a new system, and on January 1, 2014 it will take effect as the new federal law On the Contract System. It will radically change the whole public procurement system, from planning and placing orders, to executing contracts. 

But I remind you at the same time that this law will not work unless the required bylaws are passed in time. I therefore ask the Government to ensure that all of the required documents are ready for issue by December 1. The Government already has experience here. We know what this law is about, what its provisions entail, and so we need to make sure that all of the bylaws are ready to be issued as soon as the law is adopted. We also need to organise consultations with specialists involved in public procurement.

We will hear a report from the Economic Development Ministry today on how this work is progressing.

Fifth, we need to make more active use of public oversight in the budget’s work. This is not just expressing a desire. Provisions on public oversight and open publication of information on public procurement contracts are enshrined in the law on the contract system. 

”All spending must be justified and carefully calculated at the programme and budget-planning stage. Our state and municipal budget planning must be based on a set of budget rules that reflect the optimum ratio of budget spending to final results and take into account regional best practice and each region’s needs.“

As we know very well, when everything is open and transparent you can see immediately things such as excessively high prices and strange or sometimes completely nonsensical conditions for public procurement contracts. I cannot resist giving one example. In Smolensk Region, they placed an order for purchasing school laboratory equipment for a value of 46 million rubles. But listen to this, the condition for the tender was that the equipment had to be capable of working at high-altitude conditions. High altitude conditions in Smolensk Region? What mountains do they have there? Maybe there is a kind of logic to these demands, but it is certainly not clear from first glance.

We must achieve a radical improvement in the whole public procurement system. The Federal Anti-Monopoly Agency and the Accounts Chamber’s work are not enough here. I want to make it clear to you that all of the state agencies need to set the fundamental goal of ensuring maximum efficiency of budget spending and achieving the best possible results based on the existing financial possibilities.

You all know that we are working in difficult conditions today. The global economy is still having problems and is recovering very slowly. Of course this affects our economy too. This means that we are carrying out our objectives in difficult conditions. In this situation the demands on your work must be even higher, and you must be even more accountable before the public.

In conclusion, let me say a few words about something not directly related to today’s discussion.

This is the matter of implementing the instructions that follow from the State Council meetings. This issue has been raised in the past, and I must say frankly that we have yet to see an improvement in the situation. I will not go through the whole list now, but I want to mention a few of the subjects we have discussed and that are clearly important for the country. They include decisions on the management of forests and land resources, development of the Far East and Trans-Baikal regions and a few other issues.

I will not go into depth on the matter right now. I just want to say that we have set up a special working group to oversee the implementation of the State Council and State Council Presidium decisions. I ask the State Council secretary to include the working group’s report on the agenda for one of the meetings in 2014.

Let’s now turn to the subject of today’s meeting.

<…>

Vladimir PUTIN: Colleagues, it is not by chance that we are meeting today, at the start of October. There are several reasons for getting you all together to discuss raising the efficiency of budget spending.

First, we need to analyse how Federal Law No. 83 is working. We will come back to this. There are matters to discuss here.

Second, we are moving away from Law No. 94, which I mentioned, to the new contract system next year. I want the regional heads to note this, be ready and make all of the necessary preparations. The same applies to the Government.

”We have drafted a large-scale programme for capital construction using budget funds. I ask you also to work through decisions on setting construction costs for each capital construction project so as to avoid unjustified cost increases in the future.“

Finally, we have submitted the main economic law to the State Duma: the draft budget for 2014 and the planning period. This is very important. Seeing as we are working in complicated conditions, as I said before, it is for all of these reasons that we decided to discuss the issue of budget spending efficiency.

Now, as we conclude our work, what I want to note is that, as the parliamentary party faction leaders said, we should turn the heating on when it gets cold, and not on the date the instructions state. This is obviously true and it is a fair comment. In this respect, I want to make it clear to the Government and the regional authorities that we have many rules, regulations and instructions from earlier times that are a hindrance in our work and are completely out of touch with today’s demands.

I ask you to work together with members of the expert community. The Government and the Presidential Executive Office have expert departments in these areas. You need to get everyone together and, with the heads in the relevant sectors, do a detailed stocktaking of these rules and regulations. Then you must make a very thorough analysis of how effectively Law No. 83 is working. As the Governor of Ulyanovsk Region said quite convincingly today, and I cannot but agree with him, there is a view that many of the decisions made, including within this law’s framework, should work effectively but are not working as well as we hoped. Either this is because the needed adjustments have not been made in time through bylaws, or because decisions are made that obstruct the law’s implementation. I will not go into the details now. 

Regarding making the social sector more efficient, which was something the leader of the Communist Party faction spoke about, I have to agree here too. There is a lot of work to be done here and a lot of debate about how to achieve greater effectiveness, but it is absolutely clear that we do need to do something here. I note that we tax the oil and gas sectors just as much as other countries do. Moreover, unfortunately, compared to last year – the figures need to be checked but the fact remains even so – the trend is that our main oil companies and the oil sector overall are seeing a decrease in profits from 13 to 11 percent this year. As I said, the figures need checking, but this is the preliminary analysis, and so we need to monitor this situation closely and not undermine the sector, not undermine its investment potential.

As for Norway and other northern European countries, their main competitive advantage is not in oil and gas like Norway, which does have these resources and puts nearly all of its oil and gas revenue into reserve funds. The northern European countries’ main competitive advantage is that they have effective state institutions. This is the main competitive advantage of successful countries. This is something we should definitely reflect on.

”We need to make more active use of public oversight in the budget’s work. Provisions on public oversight and open publication of information on public procurement contracts are enshrined in the law on the contract system.“

On the subject of public-private partnerships, this issue was raised today too, by the Omsk Region Governor I think. This is a very important area and we need to look at it again very carefully because when projects are carried out using not only state money but also money from private companies and even from the public, everyone who invests their resources in it begins to track very closely how these resources are used and spent. This makes these kinds of partnerships very important even just in terms of oversight over the progress towards the set objectives, and of course it helps to raise effectiveness.

We must focus greater attention on planning and achieving concrete final results in carrying out big projects, especially infrastructure projects. We invest huge funds in these projects. We agreed that some of the money from the National Prosperity Fund would be used to fund big infrastructure projects that will remove infrastructure limitations that restrict economic growth. These are projects such as expanding our rail transport capacity in Russia’s east, and building high-speed motorways and the Central Ring Road around Moscow. These projects all require huge investment. So, it is unacceptable to start out with one price and end up with costs tripling on the way. This is not in any way efficient and no amount of money would be sufficient.

As for the efficiency of public procurement, costs here are on a comparable level to the state budget’s spending and obviously demand close attention.

Finally, regarding this year’s budget, I once again turn to the speakers of the two chambers of our Federal Assembly and the party faction leaders. We know that this is a difficult process of balancing the different interests and sectors. Every sector is important. The social sector is important, and so are defence and agriculture. There are no secondary areas and less important sectors. But we need to find the best balance between all of these different sectors. The one thing I want to draw to your attention and ask you not to touch is the Government reserves. They will be set at a higher level than originally planned at my request. We are in a difficult situation. Not our country, but the global economy faces a difficult situation. I think that the Government must have greater possibilities for responding swiftly if things start to take a turn in a direction we would not want. This money would not be enough in any case to solve every problem in the economy, but the Government must have a solid enough instrument to be able to influence developments if the situation starts to change.

Thank you for your attention.

We will make the relevant decisions based on the results of our discussion today.