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#17 - JRL 7257
Official web site for the President of the Russian Federation

Staraya Ladoga
July 17, 2003

Excerpts from a meeting on problems of developing small towns of Russia

On problems of work places in the regions

In small and medium-sized towns and municipalities, one of the ways to solve this problem is reducing bureaucracy, and creating the necessary conditions for the development of small and medium-sized business.

On problems of housing and communal services

People pay a lot of money, but the level of services provided remains low. Insufficient financing over many years has led to disorder in the system. But the problem is also in the organisation of the work of housing and communal services themselves. There are enormous subsidies, and they continue to increase, but work does not get any better. This shows an incorrect organisation of work.

The same goes for the reduction in the number of employees. Every five to seven years, large-scale reduction of staff in various budget institutions can be held. But they increase because it is easier to create work places. This is simply budgetary free-loading. Instead of working on creating productive places, which would truly serve the population, and create a product, it is easier to employ people, feeding them with a low wage from the budget. And the result is ineffective administrators, because they receive minimal amounts of money, for which they cannot be bothered working. In this way, we create poverty.

The nature of the Housing and Communal Services sector needs to be changed. Consumer of the services needs to receive this money directly from the state, and adding some money of their own, they will also be able to select companies that provide good services on the market. And then this market will develop.

A clear programme of action is required in the Housing and Communal Services sector. Simply raising tariffs does not solve anything. And they cannot be raised any further now, because the income of people in small towns and villages does not allow this to be done. It is pointless to raise tariffs, because people do not have any way of paying them.

But as far as writing off debts before the budget is concerned, this is not a very good method from an economic point of view, given that there is complete obstruction here. We will see how enterprises which owe money can clear their balances. Because it is very difficult, or almost impossible, to begin a new life with these debts, fines and penalty fees. But conditions should be created so that these debts and fines are not reproduced, and that the industry becomes effective and self-supporting, and even profitable. It is clear that this industry needs to be put into a viable state.

On town-forming enterprises and bodies of power

The approach in this situation should be universal. Putting an excessive burden of the social sphere on enterprises is a dead end. Towns and municipalities themselves should think about this and take care of it themselves. But they should have sources. One of these sources is a prosperous enterprise. So taxes to the budget need to be agreed on. And in such a way that both city and municipal authorities, and entrepreneurs understand what the results will be in the next five to ten years. But it would be even better to know what it will be in three years. Then enterprises will prosper, then their balance will be clear. And if an enterprise contains a lot of social objects, this will pave the way to corruption, because it is not clear who pays for what. There will be crossed subsidising, and a complete mass. But it should be transparent. There needs to be optimisation of work, money should be paid to the municipality, which in its turn should hire effective administrators in the areas of health, education and pre-school education, so that this money is spent effectively. But as money is spent ineffectively, there is general chaos.

On problems of small business

There is excessive control functions of state bodies, and unjustified interference in the affairs of small enterprises – it is very difficult to overcome administrative barriers, to receive a permit for registration for any type of activity. And this is directly linked with the sluggishness of federal, regional, and local authorities.

And at a local level -- I ask the local heads to forgive me for saying this -- there are even more administrative barriers than at a federal level. It is very difficult to overcome them. There is extortion at every step. And for some reason, local heads think that in this way they better contribute to the budget. But in fact they make things worse, because they crush small business, don't allow it to develop, which means that in the final analysis they don't receive all the money they could – legal money into their budget for solving social issues.

So our common goal at federal, regional and local levels is to reduce bureaucracy wherever possible. There must be a stop to commanding, and requiring permission for everything.

As for access to services of natural monopolies, this is the second, most important part of the problem. It is one of the most major problems. This involves transport and supply of gas and electricity. It is very difficult to receive access to these services, and sometimes it is virtually impossible. Many problems and issues arise. In any case, here it is clear what needs to be done. And the Government plans to make certain steps in this direction.

On this topic, I would like if not to argue, then to express doubts about credit. Of course, we have something to think about here. We cannot assume that credit will be without appropriate guarantees, including material and financial guarantees from the receiver of credit. But it is not always justified to count on state guarantees. In cases when a municipality of region is interested in a certain type of activity, they should, of course, provide such guarantees. If they want for a certain type of production to be developed, for people to be employed -- then it is better to make this business independent. This has always been justified, because where state guarantees appear, the quality of economic functions decreases, validity decreases, and the result is often a disaster. Where there are no state guarantees, work is tougher, but more effective, and there is less swindling.

On health problems in small towns of Russia

As concerns federal health programmes, in my opinion they should be of a systematic and methodical nature, and not be directed solely to technical re-equipment. Because today a lot of funds are spent in regional and municipal budgets on expensive foreign equipment. If we are talking about the most effective way to spend this money, then we should not talk about the federal programme, but about co-ordination with the Health Ministry in working with regional authorities and municipalities.

As for staff, this problem does exist. Perhaps it would also make to sense to return to a system of assignment. This decision is not easy, but it is quite possible.

On income tax

I agree that tax from individuals is best collected from the place of residence, as is the practice in most countries. The existing system of collecting income task is left over from the Soviet past. The problem is only in effectively organising administration in collecting this tax. It is thought that it is easier to collect a tax from people at enterprises. And on the contrary, with the lack of proper registering of people at the moment, financiers are concerned that if this tax is collected according to place of residence there will be major losses, people will avoid paying taxes, and we will be unable to simply collect it into the budget. Nevertheless, the Government is thinking about this problem. I suggest that sooner or later we will move to this system. And if we are able to do this, then many problems of municipalities will be solved, if not completely, then at least financial provision will become more reliable. And the interest in creating additional work places will grow even more.

As for loans to the Housing and Municipal Services sector, we will definitely return to this. I will try to encourage this decision as effectively as possible.

As for access to cheap energy resources in the form of natural gas, of course it would be desirable for this to be accessible to as many consumers as possible. There is also another solution -- lowering production expenses, improving quality of work etc. And as we know, gas in Russia is produced and delivered to customers at a cost that is less than its actual production and delivery. Essentially, we are raising the economy of the country thanks to one company -- Gazprom. This cannot go on forever, sooner or later we will also exhaust Gazprom. So this type of energy resources will be slowly evened out, and the advantages that we have today will be lost at a certain moment. And the heads of production should start thinking now about re-equipment of their production, about lowering energy output etc. I think that we should keep this cheap resource primarily for the population, for domestic consumers, and the economy should remember in good time that this will run out at some stage.

The tax system should be flexible and directed towards attracting funds and investments into the economy. This does not always work, but the appropriate structures are working on this. The next steps in reform have also been planned. And a decision has already been made to reduce value-added tax. In 2005 it is planned to reduce the single social tax. Perhaps we will make further reductions if we change the system of administration. Perhaps this reduction will be quite significant. We have just discussed this with the heads of a trilateral committee, and I have met with the Social Bloc of the Government. Some good plans have been drawn up. It is premature to talk about these yet, but there are ideas, and it is fully possible to realise them. At any rate, some of the issues which we discussed two or three days ago will be realised.

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