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Important component in any system of cost management consists in the analysis of efficiency, which must contribute to taking sensible deci sions in the budget sphere and increase in efficiency of various public projects and programmes. In depth analysis includes evaluation of effi ciency (the ability to undertake an activity at the minimum cost possible) and effectiveness (whether the activity is achieving the objectives which were set for it).

There are many techniques for evaluating effectiveness, in particu lar, constant monitoring and performance indicators, project and pro gramme measurementex ante, ongoing/formative and ex post/summative, economic analysis; financial audit. Each of these in struments gives information of performance efficiency and can be used in different circumstances. The choice of certain method depends on, first of all, goals. The Ministry of finance plays an important role in creating, strengthening and developing the system of evaluation and analysis. This ministry must carry out managerial functions and support corresponding initiatives as well as be a recipient of report on per formance of the system of performance evaluation. Besides, it is nec essary to provide a system of training of specialists and analysts in the sphere of evaluation of efficiency and effectiveness.

In many countries different systems of efficiency management have been introduces at organizational and individual levels, i.e. at the level of organization on the whole and at the level of an individual employee of this organization. Performance measurement with respect to organ izational performance is an instrument to assess progress against stated program and organizational objectives. With respect to individual performance it is to assess progress against stated performance objec tives or results to be achieved for individual employees or teams of employees. Performance management system includes the following components: Defining the objectives to be achieved by the organization and the employee. (This is the most difficult part); Documenting the production process of transforming inputs into outputs. In the case of organizational performance that means documenting the goods and services produced by the program and organization. In the case of em ployee performance that means documenting the results they achieve;

Assessing the outcomes. In case of organizational performance that means comparing the program outcomes achieved against the in tended objectives. In the case of individual performance it means com paring the results achieved by employees with the objectives set out in their performance agreements International experience warns us against insufficiently considered linkage between efficiency evaluation and incentives or with penalties due to the fact that badly structured system of incentives can cause inactivity or even unproductive behaviour of the staff. A useful model for understanding these issues is Adams equity theory. imply put the the ory is this: To assess whether a worker is being rewarded fairly, he compares myself to others. He compares not only the rewards he re ceives but also his inputs, and the ratio of his rewards to his inputs. In puts include such things as effort, talent, and tenure. If his ratio is smaller than his fellow workers, he perceives the distribution of rewards as unfair. He will try to redress this injustice by changing the elements of his two ratios to make them equal.

In order to avoid these risks there is a whole set of instruments, which can be used for organizing the system of efficiency evaluation:

- Evaluation techniques of efficiency must correspond to programme objectives;

- Evaluation techniques of efficiency must be clearly determined and understandable to employees;

- Costs for development, implementation and maintenance of indica tors of performance quality should not surpass reasonable limits;

- Performance quality indicators must be introduced gradually and in series;

- Evaluation techniques of efficiency must be clear and be under control of an employee, coordinated with him and be reflected only in his overall remuneration.

3. General Venues and Prospects for the Budget Network Reform Principles for public (budgetary) sector restructuring in through 2006 (hereinafter Principles) adopted by the RF Government on 26 September 2003 is the only ongoing official document that de fines approaches to public (budgetary) sector reform. This document sets out venues for the federal executive bodies activities for several year ahead regarding the public sector restructuring in Russia. Accord ing to Principles main venues of the reform are the following:

- Efficiency improvement of the current network of public funds re cipients.

- Adjustment of legal status and reorganization of public institutions.

- Transition to the new forms of financial provision for public (munici pal) service delivery.

- Implementation of performance based budgeting arrangements.

It should be noted, that this document regarding prospective amendments in the legal status and approaches to the public institu tions reorganization is based on the findings obtained from Russian Canadian Project carried out under CEPRA (Consortium for Economic Policy Research and Advice) titled Increasing the Efficiency of Budget Expenditure on Funding Public Institutions and management of Public Unitary Enterprises84. Regarding the new form of public funding this document includes general approaches, which will be elaborated on in this research paper.

According to Principles, first objective of public network efficiency improvement lies in raising its management by way of administrative and financial changing of subordination of a number of public funds re cipients. This is done with the aim of upholding principal type of activity, liquidation and merger of duplicating public institutions, eliminating situations under which as managers of budget funds belonging to one level of authority stand out administrative bodies of a different level of authority. Public network efficiency improvement will result in public See: Improvement of the System of management and Financing of the Budgetary Insti tutions. Batkibekov S., Grebeshkova L., Dezhina I., Zolotareva A., Shishin S. and others.

Vol. 1, Moscow, IET, 2003.

funds saving as a result of elimination of duplicating public institutions and discontinuation of similar public service delivery by different institu tions.

Second objective of the reform will deal with widening the range of access for institutions with different organizational and legal status to social service delivery from public funds assignments. This process should include implementation of the new organizational and legal status, which can be adopted by public institutions in their reorganiza tion. Decision about the change in administrative and legal form should be taken separately for each individual public institution taking into con sideration a whole number of factors. Those public institutions that cannot adapt to the market environment due to their type of activity should not go through reorganization. Reorganization of these public institutions can bring negative socio economic consequences including reduction in the volume of constitutionally guaranteed social services.

Third objective of the reform envisaged transition to the new forms of budgeting of social service delivery. Participation of institutions with different organizational and legal status in social service delivery envis ages diversification of financing mechanisms, competitive mechanisms of public funds distribution, financial attractiveness of public order ful fillment, flexibility in government policy implementation in different sec tors taking into account their features.

Implementation of performance based budgeting arrangements en visages increased responsibility of government bodies and departmen tal institutions for achieving set out goals and objectives, their interest in most efficient use of public funds, guaranteeing linkage between the principal public funds managers of budget funds and social services providers.

In the following chapters of the research paper we will analyze in de tail each of described reform goals, describe ongoing state of the re form and issues revealed in its implementation as well as describe prospects for future measures.

3.1. Analysis of the state of budget institutions network and main venues for its efficiency and effectiveness improvement In accordance with the RF Budget Code the budget network em braces the following categories of institutions:

a) Principal budgetary managers (head authority in charge of alloca tion of budget funds). According to the original version of the Budget Code only government bodies of the Russian Federation, which have the right to distribute the federal budget funds across subject manag ers of budget funds (authority in charge of allocation of budget funds) and budget recipients can be principal budgetary managers. Principal budgetary managers are included in departmental classification of the federal budget expenditures. However, because this norm was actually not observed, amendments were introduced into it in 200385. According to these amendments principal budgetary managers (head authority in charge of allocation of budget funds) can also be most significant public institutions of science, education, culture, healthcare and mass media.

Principal budgetary manager (head authority in charge of allocation of budget funds) has the following powers regarding subordinate man agers of budget funds (authority in charge of allocation of budget funds) and budget recipients: determines assignments for state and local (municipal) service delivery; approves estimates of revenue and expenditure and introduces amendments into them; composes budget revenue and expenditure and distributes budgetary allocations; exer cises control regarding target use of public funds; reporting for gov ernment and municipal service delivery.

b) Managers of budget funds are government bodies or municipal authorities that have the right to allocate public funds across subordi nate budget recipients. At the same time, manager of budget funds ex ercises the same powers with respect to a budget recipient as the prin cipal budgetary manager.

c) Budget recipients are budget institutions or other organizations, which are entitled to receive public funds in accordance with budget revenue and expenditure for a corresponding year.

See: Federal law of December 8, 2003, No.158 FZ The largest category of public funds recipients represents institu tions, i.e. organizations created by government bodies or local authori ties for administrative, socio cultural, scientific and technical and other non profit purposes and their activity is funded from budgets on esti mate basis. These institutions are permanent budget recipients and are included in the register of public funds recipients.

Besides institutions there are budget funds recipients on a single basis (for example, recipients of public credits, subsidies and subven tions).

However, the Budget Code insufficiently clearly regulates public network structure and the order of interaction between its elements. In particular, it does not provided answer to the following significant is sues:

- Haw many levels are there in the public network - Can one and the same institution be held subject to two or more principal budgetary managers (managers of budget funds) - Has principal budgetary manager the right to directly run a budget recipient in the presence of a manager of budget funds to whom it is subordinate - Can principal budgetary manager (manager of budget funds) have in subordination institutions, which activities do not correspond to the principal budgetary managers (manager of budget funds) type of activity - Can principal budgetary managers, managers of budget funds or budget recipients simultaneously be financed from different budg ets Due to ambiguity of budget network arrangement the ongoing net work of public funds recipients at all levels of budgetary system does not correspond to rational organization requirements, which reduces public funds efficiency. Shortcomings of the ongoing network of public funds recipients can be integrated into two major groups:

1. Distribution of public funds of one level of government is carried out by organizations administratively subject to another level of gov ernment;

2. Some ministries and agencies have in their subordination a con siderable number of institutions engaged in unrelated activity, princi pally in providing medical, educational and cultural services.

As an illustration for registered issues we provide analysis of the cur rent federal budget network structure. This analysis was carried out re garding correspondence of this structure with legislatively required principles of rational organization. Unfortunately, necessary information on managers of budget funds and federal budget recipients is fully available only as of 1 July 2003. Some adjustments as of 1 January 2004 are provided in report on public sector monitoring findings.

As of 1 July 2003 there were 93 principal budgetary managers, 3,220 managers of budget funds of the federal budget funds and 44,700 public funds recipients.

At the same time, there were considerable vertical and horizontal disproportions observed in budget network. Out of 3,220 managers of budget funds of the federal budget funds 337 were not in subordination of principal managers of budget funds (ministries, agencies and de partments). For example, 255 managers of budget funds were under the RF subjects jurisdiction because in those regions ministries and agencies did not have territorial bodies. This, in particular, is true of the Ministry of Agriculture, the Ministry of Labour and the Ministry of Educa tion. Out of 44,700 budget recipients 7,700 received funds outside of the federal government bodies structures.

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