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225396

6640

2,9

8,8

TaimyrAutonomous District

1082 136

7210

0,7

2,0

Republic ofTyva

140670

7460

5,3

15,9

Ust-OrdynskiBuryatski Autonomous District

12979

19640

151,3

454,0

ChukotskiAutonomous District

464276

35970

7,7

23,2

Evenki AutonomousDistrict

376 722

2 950

0,8

2,3

* without account of outstanding liabilitieson interest payments, penalties and fines.

** as at 1 of October 2001.

*** as at 1 of November 2001.

Data source: calculations performed by theInstitute of Economies in Transition basing on the data provided by the RFMinistry of Finance and Rosbank's Depositary

The rural bonds are not the only financialinstrument, which the territorial authorities have defaulted on (they are themost transparent instruments reflected in the public statistics of defaultscommitted y the territorial authorities). There are precedents of overdue bankloans to the territorial authorities, defaults on other issues of subfederaland municipal securities, overdue payments for commodity deliveries, andarrears of wages. Deemed as a possible motive for the non-repayment of the"rural" bonds may be larger outstanding debts on other financial instrumentsand obligations.

Nevertheless, the weak position of thecreditor, even in the event of judicial support, is quite obvious. The problemlies in the applicable procedure for the enforcement of judicial decisions torecover funds from budget accounts in the instances where allocations for therepayment of liabilities were not included in the budget expenditures or weresequestered during the implementation of the relevant budget.

The need forinfrastructural investment

Over the past ten years, the majority ofterritorial entities have faced the problem of aging fixed assets and thedeterioration of other facilities of social and economic infrastructure due tothe lack of effective investment. The wear and tear of the heating networks andpublic utilities is increasing, provoking an ever growing number of failuresand accidents, which, in turn, automatically boost up the maintenance andcurrent repairs costs.

In the past ten years, the construction ofnew public utilities has been steadily declining. In 2001 the tendency showedsigns of deceleration. However, the rates of new construction have not yetretained the 1998 level, falling 5-8 times short of the 1990 construction rates(Table 37).

Table 37

Commissioned public utilities

Year

Water pipelines, km

% to 1990

Sewage, km

% to 1990

Heat networks, km

% to 1990

1990

7524,3

100,0

984,5

100,0

1456,5

100,0

1994

2397,1

31,9

515,9

52,4

800,4

55,0

1995

2647,3

35,2

491,6

49,9

544,9

37,4

1996

1330,1

17,7

417,3

42,4

634,3

43,5

1997

1513,6

20,1

274,4

27,9

388,5

26,7

1998

1340,7

17,8

249,6

25,4

205,0

14,1

1999

841,8

11,2

130,3

13,2

193,9

13,3

2000

929,5

12,4

147,1

14,9

153,8

10,6

2001

1076,9

14,3

170,9

17,4

163,6

11,2

Calculations performed by the Institute ofEconomies in Transition basing on the data provided by the RFGoskomstat

Investment in the public utilitiesinfrastructure may prove effective only after the transformation of theinstitutional management structure in the sphere of housing and publicservices, including, as a matter of first priority, the reform of the tariffpolicy to enhance its transparency, the lack of which will make theimplementation of commercially viable investment projects impossible. Once theaforementioned problems relating to the improvement of the creditworthiness ofthe regional and municipal authorities have been resolved, the market ofsubfederal and municipal debt instruments will be able to ensure the executionof a top priority task of restructuring the public utilitiesinfrastructure.

At the same time, in the short-termperspective, the funding of the public utilities infrastructure may largelydepend upon loans from multilateral financial institutions, including the WorldBank loans guaranteed by the federal government.

For instance, under the World Bank Loan tofinance the project aimed at "Raising the effectiveness of energy use", 19.3mln. US Dollars has been channeled for the reconstruction of district heatingnetworks to the municipal enterprises and mayor's offices of the cities ofArkhangelsk, Kaliningrad, Ryazan, Semyonov, and Nizhni Novgorod.

The World Bank Loan to finance the projectof "Transfer of departmental residential housing into municipal ownership"incorporates a component worth of 43 mln. US Dollars aimed at the retrofittingof the distribution public networks in the following cities: Ryazan, Vladimir,Orenburg, Cherepovets, Volkhov, Saratov and Izhevsk.

Currently pending conclusion is anagreement with the IBRD for a loan of 85 mln. US Dollars for the implementationof the project Municipal heating networks. These funds will be allocated tothe municipal authorities of the Moscow oblast, the Samara oblast, the Kostromaoblast, the Volgograd oblast, the Tambov oblast, the Krasnoyarsk Territory, theRepublic of Sakha-Yakutiya and the Republic of Tatarstan for the implementationof investment projects involving the reconstruction of the relevant districtheating utilities.

Regional components ofloans from multilateral
financial institutions

The loans to the Russian Federationprovided, by agreement with the creditor, by multilateral financialinstitutions (i.e. the IBRD and EBRD loans) may be transferred by way ofsubloans to the participants in investment projects (territorial authorities,joint-stock companies, and the like). As at 1 of July 2000, total fundsdisbursed by the territorial authorities since 1994 by way of the IBRD subloansamounted to 985.0 mln. US Dollars.

The legal relations between the borrows andthe lenders are regulated by contracts concluded on behalf of the RF Governmentby the RF Ministry of Finance with the regional and municipal authorities (bythe general rule, in the instances where a municipal entity acts as theborrower, the relevant territorial subject of the Russian Federation mustprovide guarantees for the repayment and timely servicing of the loan to thefederal government).

Apart from the repayment of the loan(principal debt), the sub-borrowers, pursuant to the contract, must transfer tothe federal budget the pertinent interest payments, commission fees, andpenalty interest (in the event of violation of the contractual terms andconditions):

- the interest payments include interestcharged for the use of loan funds (the World Bank's regular APR is 5-7%) andthe margin levied by the RF Ministry of Finance (from 0 to 2.5%APR);

- a commission fee for liabilities underthe unused portion of the subloan (0.75% APR on the unused loanamount);

- penalty fines for every day of paymentsdelay;

- other payments provided for by thecontract (usually for the non-performance of specific requirements or terms andconditions stipulated in the contract, i.e. the borrower's violation of thecommitment to use specific treatment for the loan account, the non-purpose useof the loan funds or equipment supplied under the subloan agreement, andetc.).

The federal government is allocatingsignificant amounts while the subnational budgets are demonstratinginsufficient financial stability (irregular tax receipts and significantnon-performable obligations under non-funded mandates) on the one hand, andwhile the territorial authorities are lacking stimuli to effect the timely debtservicing and repayment, on the other hand.

Under the circumstances, the borrowers aredemonstrating a lack of responsible management of the loan proceeds, expectingthat the RF Ministry of Finance would treat leniently their violations of theloan agreements. Given the objectively high tension within the subnationalbudgets, the RF Ministry of Finance is not filing lawsuits against thesubordinate public authorities. The logical consequence of such policy is theaccumulation of outstanding debts by the subnational authorities.

Viewed as an example of the remainingproblems with the repayment of loans by municipal borrowers may be the WorldBank Loan to finance the project Municipal transport. Between 6 of October1995 to 31 of December 2001, 14 municipal borrowers accrued 114.423 mln.US Dollars worth of liabilities relating to the serving and repayment of theloan, of which they discharged as at 1 of January 2002 only 52.730 mln. USDollars, or 46%.

While the cities of Cherepovets, Vologdaand Rostov-on-the-Don are running no debts under this project, and Ekaterinburgand Samara have partially repaid their liabilities, the cities of VelikiyeLuki, Pskov, the Great Novgorod, Tver and Smolensk stopped discharging theirrespective liabilities in 2000, Nizhni Novgorod – in 1999, Omsk – in 1998, Kostroma – in 1996, and Saransk hascompletely defaulted on its obligations.

Table 38

Debt of end borrowers on loans frommultilateral financial institutions (mln. US Dollars) as at 1 of July2000

Types of sub-borrowers

Number of sub-borrowers

Amount payable

Amount paid

Overdue payments

Share of overdue payments to amountpayable

City administrations (mayor's offices)

22

58,78

24,67

34,11

58,0

Administrations of territorialsubjects of the Russian Federation

34

14,99

12,03

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