Shortcoming of normative targeted financing consists in the fact that competition of social service providers is restricted by a number of factors. Under administrative norm of financial input competition does not tell on the price of social services and theoretically allows support ing of overestimated rates. When rates are unified all the providers are interested in increasing them and getting together they can pressure the government. It is not easy to resist such pressure because when there is no price competition, it is difficult to determine the cost rate on social service delivery.
In conditions of rigid budget constraints it is more likely that adminis trative financial cist rates will not cover rational needs in funds to cover corresponding social service delivery. In that case there will not be real competition for consumer because providers who deliver higher quality services will strive not to increase but to reduce the number of consum ers within the government (local government) assignment without addi tional allocations. This, in its turn, will limit for consumers the choice of providers and will support the forced demand on providers of not so good quality services. Thus, it is difficult gradually implement the prin ciple “the money follow after the service consumer” under compulsory government assignments.
Considering above mentioned advantages and shortages inherent to normative targeted financing, its implementation is preferable first of all in those spheres where the government (local government) is obliged to provide free of charge social services to all consumers, i.e.: in general, primary and secondary vocational education, and health care within the Programme of government guarantees for delivering free of charge medical services to the citizens in the Russian Federation.
In other branches of public sector it is preferable to implement nor mative targeted financing in case the cost of social service delivery is more important than the quality of provided social services. This condi tion is true, for example, to the situation where public institution is a monopolist in the market of certain services and demand either very little depends on the price of cervices (i.e. consumers are ready to pay obviously more than they paid before) or visa versa: very much depends on the price of services (i.e. there will be no solvent demand on the ser vices in case of insignificant increase on their price).
Essential requirement to the efficient implementation of normative targeted financing arrangement is its single channel or transparency of funds distribution through financing mechanisms. Although normative targeted financing arrangement is practically implemented in CHI sys tem and in state personal education loans arrangement, so far it was not a single channel of public institutions financing and was used to gether with traditional estimate based arrangement. This considerably restricts advantages inherent to normative targeted financing because competition between public institutions is possible only on condition that norm of financial input on providing a unit of certain services are similar to all organizations acting in comparable conditions.
Considering that estimate based financing is distributed through non transparent rules (usually, according to the past period allocations amount), there is always a danger that a less efficient organization will be trying to balance losses incurred as a result of falling demand on its services by way of lobbing for more budget allocations. As a result, in case of implementation of both normative targeted financing and esti mate based financing the norm of financial input on social service de livery are vary for different institutions and preconditions for competi tion are absent.
In order to assure competition between social service providers one of the following methods of arrangement should be selected:
a) Implementation of normative targeted financing as the only fi nancing arrangement. This option to a greater extent promotes compe tition for consumer because financing of all service provider’s costs (pubic institution or autonomous organization) are in direct depend ence of demand on its services.
b) Combination of normative targeted financing and traditional esti mate based financing arrangement on condition that financing of the same expenditure lines through different channels is inadmissible and on condition of availability of transparent rules for distribution of budget allocations. In addition, normative targeted financing should cover the major share of current expenses incurred on service delivery.
Implementation of this approach requires a clear definition of fac tors, which objectively predetermine differentiation of costs incurred on social service delivery and accounting mechanisms of these factors in calculating norm of financial input or requirements in budget alloca tions. Among those factors should be:
Factors, which characterize feature of proper services. For exam ple, in contrast to schools, financing norms of institutions of pri mary and secondary vocational education should consider differ ences in curricula for different specialties.
Factors, which characterize conditions for performance of institu tions (for example, interregional differentiation of utilities cost, need in expensive equipment and the level of its wear and so on).
Besides, norm of financial input can be differentiated depending on the consumers’ characteristics (for instance, calculation of costs re quired for the creation of scholarship fund should consider good pro gress and (or) well being of the students), number of calculated indica tors of quality of services and other factors. Main point is that all factors considered in determining norms or distribution of budget allocations were fixed in normative documents and methodology of its accounting would allow public institution to independently forecast the volume of public allocations in the future.
Principal advantage of normative targeted financing is that it cannot be applied to the existing public institutions, i.e. their reorganization is not a mandatory precondition for improving efficiency of expenditures on social service delivery. Moreover, it should be noted that implemen tation efficiency of normative targeted financing instead of traditional estimate based arrangement regarding certain institutions is limited. It is due to the fact that normative targeted financing presupposes unifi cation of costs for social service delivery in different institutions of the given type. However, in the number of cases it is necessary to preserve public institution regardless of the level of its individual costs incurred on service delivery. This presupposes tailor made calculation of financ ing needs, i.e. traditional estimate based financing. This is true of vil lage schools and doctor assistant and midwife centres, boarding schools with small number of students, tuberculoses and narcological dispensaries, infectious and psychiatric hospitals, centres of sanitary and epidemiological surveillance, museums, libraries and other similar institutions.
Theoretically speaking, normative targeted financing does not pre suppose expenditure control exercised over the funds received as a compensation for the service delivery. Moreover, such control will con siderably reduce economic independence of institution, the level of its adaptation to changing market environment and consumers’ demands, and finally, hampers reduction of costs for service delivery. That is why in the future expenditure control exercised over the public funds re ceived as a compensation for rendering services should be replaced with control exercised over the volume and quality of service delivery.
Precisely this approach is envisaged in the concept of the new organ izational and legal forms in the public sector.
At present there are two objective barriers, which are standing in the ways of removing expenditure control over the public funds received as a compensation for provided services:
Norms in the Budget Code of the Russian Federation, which envis age approval and treasury control over the execution of expendi ture lines by public institutions;
Lack of adjusted control procedures over the volumes and quality of service delivery.
First of the mentioned above obstacles cannot be removed without introducing amendments into the federal legislation. Moreover, in tran sition to normative targeted financing in the circumstances of the cur rent Budget Code it is possible to gradually reduce soften expenditure control of public institutions, which were received as a compensation for provided services, thus widening their economic independence. The following measures can be implemented in that direction:
Turn into formality the right of principle budgetary managers to approve expenditure and revenue balances of public institutions, which were transferred to normative targeted financing, i.e. to adopt those balances as they are submitted by proper public insti tutions;
Within allowable by the current budgetary classification framework to increase expenditure lines along which they adopt expenditure balances of the public institutions, which were transferred to nor mative targeted financing;
To the maximum simplify and speed up the procedure of funds transfer by the principal budgetary manager on submitting by pub lic institution changes into approved expenditure and revenue bal ance regarding distribution of funds between its lines received as compensation for rendered services.
Reduced expenditure control over the public funds spent by public institutions, which have been transferred to normative targeted financ ing should be synchronized with drastic control increase over the vol umes and quality of their service delivery. This requirement is due to the fact that under normative targeted financing non target spending of funds is possible even under strict observance of expenditure lines if those expenses were directed at social service delivery in adequate volume and quality. Initiation of regular control over the volumes and quality of rendered services requires bigger in comparison with treasury control public expenditures. This is explained by the fact that control over the volumes and quality of rendered services cannot be limited by documentary controls because social service delivery very often is not recorded in the documents. In those cases when such records are en visaged (for example, distribution of coupons for a visit to a doctor in a policlinic) corresponding documents are easily falsified because con sumers are indifferent to public institutions’ attempts to overestimate the volumes of rendered services. This explains a high risk of upward distortion. It is still more difficult to verify the quality of social services with the help of documents. Consequently, control over the volumes and quality of services rendered under normative targeted financing arrangement envisages field check ups, consumers’ surveys, “control purchase” and other control instruments.
2) Contractual financing (social order) Under contractual financing or social order we mean financing of social service delivery under an agreement (contract) signed between the government (local government) and provider of social services in the circumstances when the parties are free to sign such an agreement (contract).
Contractual financing is envisaged by the Budgetary Code and is widely used for public (municipal) procurements and performance of jobs. In contrast to an absolute majority of ongoing contracts in use signed for procurement of goods, performance of jobs, services for government (municipal) needs, agreements (contracts) signed in the framework of a social order have proper features. While with common state (municipal) order contracts the customer and the consumer of goods (performance of jobs and services) are one and the same party, with a state social order contract they are different parties. Government customer (principal budgetary manager and manager of budget funds can be the one) is not social services consumer. This makes the con tract concluded within the framework of the state/municipal social or der an agreement concluded in favour of a third party. Under Article of the Civil Code, seen as an agreement in favour of third party is an agreement under the terms of which the debtor shall deliver not to the creditor but to a third party which is in a position to require from the debtor performance of the obligation in its favour.
Social order arrangement envisages the following model of relations between those who renders social services to the population (provid ers), those who pay for them (customers) and consumers.
a) Customers and providers are not connected by relations of ad ministrative subordination and interact with one another on a contrac tual basis, the object of which are structure, volumes and quality of so cial services rendered to consumers. This means that contractual fi nancing just as it is, is applicable to organizations whose founders are private persons. It is more difficult to implement principles of contrac tual financing regarding organizations which founder is the government (local government). This can be achieved only in case when founder’s powers do not envisage the right to determine conditions for exercising transactions by those organizations. This condition is met with respect to public autonomous non profit organization. Contractual in the true sense of the word relations with public institutions (including autono mous ones) are impossible even if the founder coordinates with them conditions of fulfillment of part of assignment. He always retains the right to give a direct assignment in case the consent was not reached.
b) Customers are not liable for economic activity and financial situa tion of providers. Providers of services should cover their costs from contractual revenues. They are financially responsible in increasing its efficiency. This condition neither is met with respect to public institu tions. The government (local government) is liable on a subsidiary basis for their liabilities.
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