R E P O R T .' 2-K1. Road Financing Study in the Russian Federation. on the results of the. /Phase 21. Engdorservice

Transcription

1 Engdorservice Resea rc h a n d P rod u cti o n Center Partnership LTD R E P O R T on the results of the Road Financing Study in the Russian Federation /Phase 21 (SECTIONS 5-10) Mosc - April ber, 1997.' 2-K1

2 139 Section 5. Current Road Financing System in the Russian Federation 5.1. Changes and Additions to Le2al Acts Since the enactment of the Law of the Russian Federation On Road IFunds in the Russian Federation legal and other regulatory acts pertaining to road fund formation procedures or affecting the road financing sources have suffered a number of changes, which resulted in the reduction of the investment capacity of the Federal Road Fund of the Russian Federation and Regional Road Funds of the constituent parts of the Russian Federation. First, the aforesaid refers to the Law On the Road Funds per se: its text has been changed and extended by the legislators seven times, mostly in relation to the introduction of additional privileges for various payers. Second, since 1995 excise taxes on cars sold to individuals, which is one of the sources of the Federal Road Fund of the Russian Federation, have been transferred to the federal budget pursuant to the federal laws on the federal budget for a respective year, while Law of the Russian Federation No dated July 14, 1992 "On a Closed Administrative/Territorial Unit" stipulates that all earmarked road taxes, which form the Regional Road Funds and are collected in closed administratlive/territorial units, be retained in the budgets of such units. Third, the reduction of the revenue flow to the Regional Road Funds has been promoted by individual Decrees of the President of the Russian Federation and Resolutions of the Government of the Russian Federation passed in support of various industries and agriculture (e.g., Decree of the President of the Russian Federation No. 1008, which relieves oil product manufacturers of the fuel/lubricant sales tax if these materials are exported outside the Commonwealth of Independent States; Resolution of the Government of the Russian Federation on the transfer of small businesses to a simplified accounting system; on measures to stabilize the economic status of the agribusiness sector or its operation conditions in , and a nurnber of other documents 1 ). At the same time, insolvency of oil refineries and mutual arrears in the economy as a whole have had an extremely negative effect on the revenue part of the budgets of 1). The majority of the documents are not directly related to the formation and size of the road fund revenues, however, their implementation reduces the tax base.

3 140 the Federal Road Fund of the Russian Federation and Regional Road Funds of the constituent parts of the Russian Federation. As of September 1, 1997 arrears of the fuel/lubricant sales tax and penalties and fines due to the Federal Road Fund of the Russian Federation are as follows: (billion rubles) Arrears of the fuel/lubricant sales tax, total 3,670.5 including: arrears proper 3,234.4 deferred payments including: those resulting from Decree of the President of the Russian Federation No. 65 of January 19, 1996 those requested by the Ministry of Finance of the Russian 55.2 Federation investment tax loan and other decisions 49.3 Arrears of penalties and fines due, total 6,017.2 including: penalties and fines proper 3,701.4 deferred payments 2,315.8 including: those resulting from Decree of the President of the Russian Federation No. 65 of January 19, 1996 those requested by the Ministry of Finance of the Russian 1,786.5 Federation based on other decisions Arrears, grand total 9,687.7 The above arrears of the fuel/lubricant sales tax are comparable with the annual amount of that tax. Therefore, taking into account that the introduction of the Tax Code of the Russian Federation will eliminate the fuel/lubricant sales tax, it would be preferable for the Federal Road Fund of the Russian Federation that the Federal Law On the Federal Budget for 1998 include a provision stating that arrears of the fuel/lubricant sales tax, as well as penalties and fines on that tax be fully transferred to the Federal Road Fund of the Russian Federation. It would be advisable if the Federal Law on the Federal Budget for 1998 could include similar provisions on the following taxes (penalties, fines):

4 141 Federation; - part of the road user tax payable to the Federal Road Fund of the Russian - part of the road user tax payable to the Regional Road Funds of the constituent parts of the Russian Federation; - parts of the vehicle ownership tax and vehicle acquisition tax payable to the Regional Road Funds of the constituent parts of the Russian Federation. The road financing situation deteriorated drastically in the second half 1996 because of the resolution of the Constitution Court of the Russian Federation pertaining to the verification of the constitutionality of Article 1, paragraph 1, and Article 3, paragraph 4, of the Law of the Russian Federation On Road Funds in the Russian Federation. The resolution recognized that these paragraphs were not ccnsistent with the Constitution of the Russian Federation (Article 5, Parts 1 and 4), and legally established the right of the federal cities of Moscow and S.Petersburg (as constituent parts of the Russian Federation) to form their own Regional Road Funds in compliance with the Law of the Russian Federation On Road Funds in the Russian Federation, i.e. from taxes that were payable to the Federal Road Fund of the Russian Federation under the laws effective at that time (Resolution of the Constitution Court of the Russian Federation No. 16-fl of July 15, 1996). According to the legislation, resolutions of the Constitution Court of the Russian Federation that abrogate laws or selected provisions of laws, which are recognized inconsistent with the Constitution of the Russian Federation, shall be final, not subject to claims, become effective immediately upon promulgation and have a direct effect. Therefore, as agreed with the Russian Ministry of Finance and State Tax Service, the federal cities of Moscow and S.Petersburg have ceased transferring taxes to the Federal Road Fund of the Russian Federation since September 1, 1996, which has resulted in the failure to implement the Federal Law On the Federal Budget for 1996 as far as the Fund's revenues and expenditures are concerned. The enforcement of the aforementioned resolution of the Constitution Court did not take into account that the equality of rights of the constituent parts of the Russian Federation does not mean the equality of their potentials and level of socioeconomic development and that the federal legislators can differentiate the distribution of road tax revenues.

5 142 In other words, since September 1, 1996 these resources have been retained by the two federal cities while customers in the other parts of Russia were not able to pay for road works performed under earlier signed contracts. According to available analytical materials on the use of the Federal Road Fund, accounts payabile for federal construction facilities were Rb billion as of January 1, Total accounts payable by state customers for federal and local construction facilities increased by almost Rb 3 trillion. To eliminate the inconsistency with the Constitution of the Russiain Federation identified by the Constitution Court of the Russian Federation and restore the investment capacity of the Federal Road Fund of the Russian Federation a draft Federal Law On the Introduction of Changes and Additions to the Law of the Russian Federation "On Road Funds in the Russian Federation" was prepared. The discussion and finalization of the draft law involved the President of the Russian Federation, Government of the Russian Federation, legislative (representative) authorities of the constituent parts of the Russian Federation, deputies of the State Duma aind Council of the Federation. In November 1996, the State Duma approved the draft law in the first reading (i.e. approved the concept of changes to be introduced to the Law on Road Funds. Thereupon, processing of the Federal Law On the Introduction of Changes and Additions to the Law of the Russian Federation "On Road Funds in the Russian Federation" was extremely slow. It was mainly accounted by the fact that financial interests of the constituent parts of the Russian Federation were quite different. Processing of the federal law was as follows: January 24, 1997: the draft law is approved by the State Duma in the second and third reading. Outcome of the vote (to be approved by a simple majority): Number of Votes Number of voters "FOR" "AGAINST" "ABSTAINED" nonvoters people % people % people % *) *). Here and below percentage is calculated relative to the number of the State Duma deputies and members of the Council of the Federation as envisaged by the Constitution of the Russian Federation.

6 143 Federation. Federation. Resolution is approved. The draft law is submitted to the Council of the 2. February 13, 1997: The draft law is approved by the Council of the Outcome of the vote (to be approved by a simple majority): Number of Votes Number of voters "FOR" "AGAINST" "ABSTAINED" nonvoters people % people % people % Federation. Resolution is approved. The Law is submitted to the President of the Russian 3. The President of the Russian Federation declines this Federal Law submitted for signature and promulgation (Letter No. np-262 of February, 1997). 4. March 21, 1997: The State Duma considers a proposal made by a group of deputies to overcome the veto of the President of the Russian Federation. Outcome of the vote (to be approved by 2/3 of the votes): Number of Votes Number of voters "FOR" "AGAINST" "ABSTAINED" nonvoters people % people % people % _ L 140 Resolution is not approved. 5. April 18, 1997: The State Duma makes the second attempt to overcome the veto at its Plenary Session. Outcome of the vote (to be approved by 2/3 of the votes): Number of Votes Number of voters "FOR" "AGAINST" "ABSTAINED" nonvoters people % people % people %_r Resolution is not approved. The draft law is proposed for consideration by the Conciliation Commission.

7 The President of the Russian Federation submitted his version of the Law in his letter No. np-575 of April 16, 1997 (three proposals specifying the text of the Federal Law). 7. April 18, 1997: The State Duma considered the proposals of the President of the Russian Federation. Of these amendments, one was adopted while the other two were declined. A decision was taken to consider a new draft federal law at a plenary session. 8. April 23, 1997: The specified version of the federal law was considered by the State Duma. Outcome of the vote (to be approved by a simple majority): Number of Votes Number of voters "FOR" "AGAI NST" "ABSTAI NED" nonvoters people % people % people % for approval. Federation. Resolution is approved. The Law is submitted to the Council of the Federation 9. May 15, 1997: The Federal Law was considered by the Council of the Outcome of the vote (to be approved by a simple majority): Number of Votes Number of voters "FOR" "AGAINST" "ABSTAINED" nonvoters people % people % people % _ Resolution is approved. The Federal Law is approved by the Council of the Federation and submitted to the President of the Russian Federation for signature and promulgation. 10. May 27, 1997: The President of the Russian Federation signs; the Federal Law On the Introduction of Changes and Additions to the Law of the Russian Federation "On Road Funds in the Russian Federation". 11. May 29,1997: The Federal Law becomes effective. On the whole, it took ten months to restore the nominal level of the Federal Road Fund of the Russian Federation. The authors estimate the Fund's financial losses over that period as Rb 6.5 trillion.

8 145 At the same time, the first resources were transferred to the Federal Road Fund of the Russian Federation only in July, i.e. a month after the promulgation of the Law. It was necessary to additionally develop and approve a regulatory act stipulating that the part road user tax payable to the Federal Road Fund of the Russian Fecleration shall be transferred to the Fund via the MOF Federal Treasury Department 2 ). From the legal viewpoint, the regulatory act runs contrary to the effective legislation since the resources of the road funds shall be accumulated on a special account in the Central Bank of the Russian Federation. Since estimated revenues of the Federal Road Fund of the Russian Federation from the enforcement of the Federal Law On the Introduction of Changes and Additions to the Law of the Russian Federation "On Road Funds in the Russian Federation" exceed Rb 4 trillion a year in the mid-1996 prices (i.e. $ 700 million) and since processing of the draft law caused a negative response in the central press, it would advisable to review the fundamental principles of the proposal to cornpensate the losses of the Federal Road Fund of the Russian Federation, as well as irnplications of the introduction of the Federal Law to road financing. a). Road User Tax Rate The federal road user tax was introduced by the Law of the Russian Federation On Road Funds in the Russian Federation (No of October 18, 1991). Pursuant to the Law, the initial road user tax rate was 0.4 per cent of revenues from the sale of products ( works, services). However, the same Article of the Law allowed the legislative (representative) authorities of the constituent parts of the Russian Federation to increase the tax rate. As a result, the road user tax rate established in 1996 in various RLIssian regions varied between 0.4 per cent and 4.0 per cent (a 10-fold difference!). Based on estimates, the tax rate for Russian enterprises as a whole was about 2.4 per cent, and therefore, the new version of the federal law included the federal road user tax rate of 2.5%. At the same time, it should be emphasized that to promote the creation of a competitive environment for enterprises in different regions of the country the law 2) There was no actual increase in financial resources of the Federal Road Fund since the revenues began to "settle down" in the federal budget. As of September 1, 1997, arreairs on the part of the MOF Federal Treasury Department amounted to Rb billion.

9 146 established the upper limit of the tax rate and envisaged a possibility for its reduction. In other words, the road user tax rate in any region can be between 1.25 per cent and 3.75 per cent, including a regional component, which can vary from 0 per cent to 2.5 per cent. Such a range ensures that the overwhelming majority of the regions retain the earlier tax rates adopted by the legislative (representative) authorities of the constituent parts of the Russian Federation. A need for reduction has only emerged in two regions (Voronezh and Tambov Oblasts) while three regions (Altai Republic, Yamal-Nenets Autonomous District and Taimyr Autonomous District) required a tax rate increase. Changes in the road user tax rates in 1997 are presented in the table below: (%% of revenues from the sale of products (works, services) Constituent parts of the Russian Federation Tax rate in 1996 Tax rate in 1997 Northern Zone Arkhangelsk Oblast Nenets Autonomous District Vologda Oblast Murmansk Oblast Karelian Republic Komi Republic North-Western Zone Leningrad Oblast Novgobi :&. I- Pskov Oblast Central Zone Bryansk Oblast Vladimir Oblast Ivanovo Oblast Tver Oblast Kaluga Oblast Kostroma Oblast Moscow Oblast Orel Oblast Ryazan Oblast Smolensk Oblast Tula Oblast Yaroslavl Oblast Volga-Vyatka Zone Kirov Oblast Marii El Republic Republic of Mordovia Chuvash Republic Central Black Soil Zone Belgorod Oblast Mi o t rob 7-

10 Kursk Oblast 2.8 r Volga Zone Astrakhan Oblast Volgograd Oblast Penza Oblast Samara Oblast Kalmyk Republic Ulianovsk Oblast North Caucasus Zone Krasnodar Krai Adlg Republic Rostov Oblast Dagestan Re ublic North Oset Republic Ingush Republic Chechen Republic - Ural Zone Kurgan Oblast N sperm Oblast Sverdlovsk Oblast Komi-Perm Autonornous District 2.0 = 2.0 Alta ChelTabinsk Krai_ Oblast Udmurt Republic West Siberia Zone Altai Krai Novosibirsk Oblast Omsk Oblast Tomsk Oblast 2.5 = 2.5 Tumen Oblast ~~~East Siberia Zone Krasnoyarsk Krai irkutsk Oblast Agin-Buryat Autonomous District Ust-Orda Buryat Autonomous District Chita Oblast Buryat Republic

11 148 Tyva Republic Taimyr Dolgan-Nenets Autonomous District Far East Zone Khabarovsk Krai ~ ~ ~ ~.,& ~ * \-f,,,k Amur Oblast Kamchatka Oblast Magadan Oblast Chukotka Autonomous District Sakhalin Oblast Sakha Yakut Republic Kaliningrad Oblast Moscow City S. Petersburg As is clear from the above data, legislative (representative) authorities of 19 constituent parts of the Russian Federation took decisions to change the road user tax rates in 1997, namely: 1. The tax rate was increased in 14 regions: Novgorod, Nizhny Novgorod, Lipetsk, Saratov and Orenburg Oblasts, Stavropol Krai, Karachai-Cherkess, Kabarda- Balkar and Altai Republics, Khanty-Mansi, Yamal-Nenets, Evenk and Koryak Autonomous Districts, and Jewish Autonomous Oblast. The principal reason for increasing the tax rate was that the authorities recognized the expediency of an accelerated development of the regional road network for the socioeconomic development of their regions. It should be noted that in 1996 the decision to increase the road user tax rate was taken by 16 constituent parts of the Russian Federation, i.e. more than in The tax rate was reduced in the following 5 regions: Voronezh and Tambov Oblasts (they were forced to do that), Kemerovo Oblast, Maritime Krai and Khakass Republic. b). Observance of the Constitutional Riqhts of the Constituent Parts of the Russian Federation As noted above, the Constitution Court of the Russian Federation established that individual provisions of the Law on Road Funds did not comply with the Constitution of the Russian Federation since: (1) Moscow City and S. Petersburg were not included in the list of regions, which have their own road funds; (2) it was g

12 149 established that road user taxes, vehicle ownership taxes and vehicle acquisition taxes payable in the federal cities of Moscow and S.Petersburg shall be transferred to the Federal Road Fund of the Russian Federation (unlike the other constituent parts of the Russian Federation). Pursuant to the Constitution of the Russian Federation, the revenue part of the Federal Road Fund budget cannot be restored through the adoption of legal acts, which allow withdrawal of the regional road fund from one or several constituent parts of the Russian Federation. Therefore, a unified approach was introduced for all Russian regions both with respect to establishing the part of the road user tax rate payable to the Federal Road Fund of the Russian Federation and with respect to the calculating the size of subventions and subsidies to be allocated to the constituent parts of the Russian Federation. The part of the road user tax rate payable to the Federal Road Fund of the Russian Federation was calculated proceeding from the need to retain the size of subventions and subsidies to be allocated to the constituent parts of the Russian Federation. At the same time, one should pay attention to the fact that legislation does not establish that road user tax revenues coming from the Moscow City and S.Petersburg shall be transferred to the regions as subventions and subsidies. In fact, federal legislators can use these resources to finance maintenance, rehabilitation, reconstruction and construction of federal highways, as well as for other purposes defined by the Procedures for the Formation and Use of the Federal Road Fund of the Russian Federation. The following table illustrates the relation between the size of subventions and subsidies allocated to the constituent parts of the Russian Federation and the part of the road user tax rate payable to the Federal Road Fund of the Russian Federation:. (billion rubles) Revenue and expenditure items of the Federal Road Fund of the Under former Part of the road user tax rate payable to the Federal Road Fund of the Russian Federation Russian Federation conditions 0% 0.4% 0.8% 1.25%/o 1.5% FRF revenues - TOTAL 22,135 11,635 16,869 22,103 27,991 31,262

13 150 including: - last-year balance fuel sale tax 10,495 10,495 10,495 10,495 10,495 10,495 - road user tax 8, ,234 10,468 16,356 19,627 including the one collected: - in Moscow and S.Petersburg 8, ,312 2,624 4,100 4,920 - in the other RF regions - - 3,922 7,844 12,256 14,707 - vehicle ownership and acquisition taxes collected in Moscow and S.Petersburg 2, other revenues 1,000 1,000 1,000 1,000 1,000 1,000 FRF expenditures - TOTAL 22,135 11,635 16,869 22,103 27,991 31,262 including: - balance at the end of the year development and improvement of the federal road network and other road needs of the Russian Federation 17,655 11,250 11,250 11,250 11,250 12,075 - allocation of subventions and subsidies 4, ,539 10,773 16,661 19,107 including those financed from: - the fuel sale and road user taxes 4, ,617 2,929 4,405 4,400 collected in Moscow and S.Petersburg - reimbursement of the road user tax - - 3,922 7,844 12,256 14,707 collected in the other Russian regions _ Reduction of subventions and - 4,095 2,783 1, subsidies allocated to the regions l I _ I I The authors believe that it was the only opportunity to include a vital provision in the federal law, which allows to withdraw financial resources from regional road funds in compliance with the Constitution of the Russian Federation and, if necessary (or desirable), to redistribute these resources between the constituent parts of the Russian Federation. Pursuant to the Federal Law On the Federal Budget for 1997, the regions of the Russian Federation shall additionally receive Rb 4 trillion. The distribution of the funds between the regions is approved in the same Federal Law. c). Transfer of the Road User Tax to the Road Funds The Federal Law On the Introduction of Changes and Additions to t:he Law of the Russian Federation "On Road Funds in the Russian Federation" establishes that the

14 151 federal road user tax shall be transferred both to the Regional Road Funds (1.25 per cent) and Federal Road Fund of the Russian Federation (1.25 per cent). At the same time, the federal law on the federal budget for a respective year establishes standards for the transfer of the part of the road user tax accrued to the Federal Road Fund to the Regional Road Funs of the constituent parts ol the Russian Federation. 3 ).A mechanism has been elaborated, which excludes the transfer of the tax to the Central Bank of Russia (or Federal Treasury Department) with its subsequent reimbursement to the regions where it was collected; besides, the constituent parts of the Russian Federation have retained the right to use all resources of the tax in compliance with the procedures established by their legislative (representative) authorities. At the same time, since financial resources payable to the F-ederal Road Fund of the Russian federation from the collection of the road user tax (at the rate of 1.25%) are federally owned by legislation and their use shall be regulated by the federal law on the federal budget for a respective year, the federal road authorities have an opportunity to establish control over that use. It is an essential fact from the viewpoint of the target use of road fund resources. d). Withdrawal of Resources from the Moscow City and S. Petersburg Regional Road Funds The Law of the Russian Federation On Road Funds in the Russiain Federation did not envisage the establishment of the Regional Road Funds in Moscow and S.Petersburg as cities, which did not have nonmunicipal public roads 4 ). Therefore, federal road user taxes, vehicle ownership taxes and vehicle acquisition taxes collected in these cities were transferred to the Federal Road Fund of the Russian Federation and used in compliance with the Procedures for the Formation and Use of the Federal Road Fund of the Russian Federation, and, int'er alia, were 3).The Federal Law On the Federal Budget for 1997 established the following standards for the transfer of the federal road user tax to the Regional Road Funds of the constituent parts of the Russian Federation: all regions except the federal cities (Moscow and S.Petersburg) per cent; S.Petersburg - 40 percent; Moscow - funds not to be! transferred.. 4). An example of the impact of legislation on the establishment of road funds: Article 4 of the Law of the Russian Federation On the Status of the Capital City of the Russian Federation (No of April 15, 1993) stipulates that "the Moscow City authorities shall:... participate in maintenance and development of the communication systems, federal Public roads and other traffic systems in Moscow;...". In other words, it establishes the existence of federal public roads in the city and creates a precedent for the use of financial resources not only for the road needs of Moscow, but other cities, as well.

15 152 allocated as subventions and subsidies to the constituent parts of the Russian Federation, including Moscow and S.Petersburg, for partial funding of major street rehabilitation and maintenance. Thus, the draft budget of the Federal Road Fund of the Russian Federation for 1997 included the following allocations for these purposes: Rb 4,750 billion to Moscow, including Rb 4,300 billion for the reconstruction of the Outer Ring Road; Rb 505 billion to S.Petersburg. The enactment of the Federal Law On the Introduction of Changes and Additions to the Law of the Russian Federation "On Road Funds in the Russian Federation" will allow the federal cities of Moscow and S.Petersburg to proceed with the establishment of their Regional Road Funds. The financial sources include: 1) the vehicle acquisition tax %; 2) the vehicle ownership tax - 100%; 3) the road user tax (at the rate established by the legislative or representative authorities) Review of the Allocation and Use of the Federal Road Fund of the Russian Federation in Major uses of the Federal Road Fund of the Russian Federation in are described in the tables below: 1993 Budget expenditure items Approved budget * Actual aillocations Amount, Share, Amount, Share, billion Rb %% billion Rb %% Total , including:_ Maintenance and rehabilitation of the existing federal highway network Reconstruction and construction of federal highways and road facilities; development of the production base of road entities Procurement of road equipment and other property required for federal highway operation and maintenance Subventions and subsidies to the constituent parts of the Russian Federation for the development and maintenance of the public road network. Federal expenditures Other expenditures (last-year balance, Fund's reserve, current-year balance, etc.). -

16 153 The federal expenditure item is not disclosed because it was not duly approved Budget expenditure items Appro ed budget Actual allocations Amount, Share, Amount, Share, billion Rb %% billion Rb %% Total 4, , including: _ Maintenance and rehabilitation of the 1, existing federal highway network, 2 Reconstruction and construction of federal highways and road facilities; development of the production base of road entities Procurement of road equipment and other property required for federal highway operation and maintenance _ Subventions and subsidies to the constituent parts of the Russian 1,768.2 Federation for the development and , maintenance of the public road network Federal expenditures / _1.0/ 100 including: monitoring of the conditions of the federal highway network and road facilities quality monitoring of road maintenance and works performed economic analysis and review of projects _ mobilization works on roads research and design work information support of public authorities _ training and retraining of road personnel _ administrative costs miscellaneous Other expenditures (last-year balance, Fund's reserve, current-year balance,... etc.) Budget expenditure items Appro ed budget Actual allocations Amount, Share, Amount, Share, billion Rb %% billion Rb %% Total 7, ,

17 154 including: Maintenance and rehabilitation of the existing federal highway network Reconstruction and construction of federal highways and road facilities; development of the production base of road entities Procurement of road equipment and other property required for federal highway operation and maintenance _ Subventions and subsidies to the constituent parts of the Russian Federation for the development and maintenance of the public road network _ Federal expenditures / / 100 including: monitoring of the conditions of the federal highway network and road 9... facilities quality monitoring of road maintenance and works performed economic analysis and review of projects mobilization works on roads research and design work information support of public authorities _ training and retraining of road personnel _- administrative costs miscellaneous Other expenditures (last-year balance, Fund's reserve, current-year balance,... etc.) _ 1996 Budget expenditure items Approved budget Actual allocations Amount, Share, Amount, Share, billion Rb %% billion Rb %% Total 18, , Including: Maintenance and rehabilitation of the 6, , existing federal highway network Reconstruction and construction of federal highways and road facilities; 5, , development of the production base of road entities _

18 155 Procurement of road equipment and_ other property required for federal highway operation and maintenance _ Subventions and subsidies to the constituent parts of the Russian 5, , Federation for the development and maintenance of the public road network Federal expenditures / / 100 including: monitoring of the conditions of the federal highway network and road facilities _- quality monitoring of road maintenance and works performed economic analysis and review of projects mobilization works on roads research and design work information support of public authorities _ training and retraining of road personnel _- administrative costs _ 49.8 miscellaneous 0, Other expenditures (last-year balance, Fund's reserve, current-year balance,... etc.) L_ 1997 Budget expenditure items Appro ed budget Actual allocations Amount, Share, Amount, Share, billion Rb %% billion Rb %% Total 27,991,3 100,0 29,190,0 100,0 including: Maintenance and rehabilitation of the 6, , existing federal highway network _ Reconstruction and construction of 3, , federal highways and road facilities; development of the production base of road entities Procurement of road equipment and other property required for federal highway operation and maintenance Subventions and subsidies to the 16, , constituent parts of the Russian Federation for the development and maintenance of the public road network

19 156 Federal expenditures 1, including: maintenance of the Federal Road Construction Department of the Russian Ministry of Defense 5 ) _ Other expenditures (last-year balance, Fund's reserve, current-year balance, etc.) Analysis of the actual data on the use of the Federal Road Fund olf the Russian Federation indicates that irrespective of planned figures there is a "stable" distribution of financial resources between the principal expenditure items: in , mean allocations for rehabilitation and operation needs amounted to 23-26% of the Fund's resources; mean allocations for construction and reconstruction were 2,7-30%; mean allocations for subventions and subsidies were 39-44%. The conclusion is self-evident: in spite of a significant and annually increasing federal highway maintenance backlog, the state road authorities of the Russian Federation continued to finance road construction and reconstruction on a priority basis. Thus, they created prerequisites for the deterioration of the existing road network conditions and growth of the amount of incomplete works. Besides, the allocation of 40 per cent of the Federal Road Fund to the constituent parts of the Russian Federation can be hardly justified under these circumstances. Analysis of the traffic and operation conditions of the federal road network in provides interesting results: the most stable situation (unsatisfactory conditions of federal highways) has been maintained at per cent over these years. The share of roads in good or excellent conditions has been decreasing and, hence, the share of federal highways in satisfactory conditions has been increasing. Further implementation of that road financing policy will inevitably lead to qualitative changes in the network status: a drastic deterioration of traffic and operation conditions. That can be confirmed by the road service cycle diagram developed at the first phase of the Study. 5).The new expenditure item of the Federal Road Fund of the Russian Federation, which was not envisaged by legal acts on road funds, was introduced by the Federal Law On the Federal Budget for 1997.

20 Formation and Use of the Re2ional Road Funds of the Constituent Parts of the Russian Federation The situation with the formation of the Regional Road Funds of the constituent parts of the Russian Federation in has been more favorable due to a steady execution of the Federal Road Fund budget under the "subventions arid subsidies" category, as well as due to a legal opportunity to increase the rates of tlhe road user tax, vehicle acquisition tax and vehicle ownership tax given to the legislative (representative) authorities of the constituent parts of the Russian Federation. That can be illustrated by the execution of the revenue part of the Regional Road Fund budget in 1996: (billion rubles) Approved Report %% of the Report budget _ approved _budget Road Fund budget 29, , , including: X X T Federal Road Fund 9, , , Regional Road Funds of the 24, , , constituent parts of the Russian Federation I I_ including: subventions and subsidies 4, , , Moscow and S.Petersburg times received under the "subventions and subsidies" category _ without subventions and 20, , , subsidies _ al Road Funds of the constituent parts of the Russian 26, , Federation without subventions and subsidies and without the proceeds of the Moscow and S.Petersburg Funds At the same time, funding of the regions under the "subventions and subsidies" category has been uneven. Thus, the 1996 allocations to the constituent: parts of the Russian Federation ranged from 24.4 to 100 per cent, with a mean levell of about 70 per cent (without Moscow and S.Petersburg). A major reason is that oil refineries supplied fuel and lubricants to the constituent parts of the Russian Federation towards

21 158 the cost of the fuel/lubricant sale tax. Due to the "restoration of limits" Ithe suppliers found themselves in a monopoly position and increased the selling price! for fuel and lubricants per cent relative to the market price. That allowed the suppliers to reduce their tax arrears, but failed to resolve the financial and economic problems of road entities. The execution of the 1996 budget was characterized by a nontarget use of the Road Funds of the constituent parts of the Russian Federation. It is noteworthy that in the overwhelming majority of cases regions which used the proceeds of the Road Funds for other purposes were the ones that had received subventions and subsidies practically in full. The total amount of funds, which were not used for agreed purposes, was Rb billion. The table below gives the relation between the allocations from the Federal Road Fund and proceeds of the Regional Road Funds not used for agreed purposes: Constituent parts of the Russian Federation Subventions and subsidies Nontarget use of funds %% of the Budget Report Amount receipts billion billion billion rubles rubles rubles Komi Republic Krasnoyarskrai times Maritime Krai times Stavropol Krai Belgorod Oblast times Volgograd Oblast times Irkutsk Oblast Kamchatka Oblast Omsk Oblast ,6 Perm Oblast Rostov Oblast ,1 times Yaroslavl Oblast Chita Oblast * *

22 159 At the same time it should be noted that the resolution of important and difficult road financing problems under current conditions cannot be even compared with the solution of a long-term issue: funding of road network maintenance, rehabilitation and development works following the effectiveness of the Tax Code of the Russian Federation and Budget Code of the Russian Federation. Analysis of financial sources proposed in these Codes is given in the next Section.

23 160 Section 6. Analysis of the Draft Tax Code of the Russian Federation (Version Submitted by the Government of Russia) and Potential Implications of Its Enforcement to the Road Sector The draft Tax Code of the Russian Federation submitted by the Government of Russia to the State Duma of the Federal Assembly of the Russian Federation establishes new structuring and operation principles of the national tax system, procedures for the establishment, modification and cancellation of federal taxes, principles of the establishment of regional and local taxes; defines the legal status of tax payers, tax and other authorities responsible for tax enforcement, tax agents and other participants of relations regulated by tax legislation; establishes fundamental provisions to define taxable entities, implement tax accounting, execute tax responsibilities, take measures providing for the execution of tax responsibilities pertaining to federal, regional and local taxes, make answerable for the ncncompliance with the tax legislation, and make claims against actions (failure to take actions) of tax and other authorities responsible for tax enforcement or their officials. The Tax Code shall regulate issues related to the collection of taxes and charges. Contributions, deposits and other payments to be made under agreements or other civil legal transactions, as well as payments in the form of fines or other penalties for noncompliance with legislation, shall not be considered taxes and charges 1 ). The MOF believes that streamlined taxation proposed in the Tax Code of the Russian Federation assumes the construction of an integrated taxaltion system, elimination of irrational taxes and other mandatory quasi-tax payments, as well as a significant reduction of the number of taxes and charges currently effective in the Russian Federation. The draft Tax Code of the Russian Federation includes: - General Provisions 2 ), which establish the underlying principles of the tax system of the Russian Federation; 1). NB! Compensation charges introduced this year for the use of public federal roads by heavy vehicles, as well as proposed charges for the use of Russian roads by foreign vehicles from countries, which have no intergovernmental agreements with the Russian Federation on international road communications, might be eliminated after the enforcement of the Tax Code since it is quite possible that they would not be recognised as charges relating to payments to be made under agreements or other civil legal transactions. 2) The finalised draft General Provisions of the Tax Code of the Russian Federation was submitted by the Government of the Russian Federation to the State Duma of the Federal Assembly of the Russian Federation in its letter No. B4-n22-nl 3/265 of June 7, 1997.

24 161 - Parts 2, 3 and 4, which contain norms to develop the underlying principles of the General Provisions relative to specific federal, regional and local taxes and charges. Draft Parts 2, 3 and 4 of the Tax Code of the Russian Federation and draft Federal Law On the Enactment of Parts 2, 3 and 4 of the Tax Code of the Russian Federation approved by the Government of the Russian Federation 3 ) were submitted to the State Duma of the Federal Assembly of the Russian Federation 4 ). Plans for the current year include a due adoption {State Duma -* Council of the Federation -* President} of the Tax Code of the Russian Federation developed by the MOF and its enactment as of January 1, ). The first steps in that direction have been made: the State Duma of the Federal Assembly of the Russian Federation has adopted in the first reading the draft Tax Code submitted by the Government of the Russian Federation, i.e. it has approved the structuring principle of the tax system of the Russian Federation (Resolution No Il Frp of June 19, 1997). The draft law has been submitted to the President of the Russian Federation, Council of the Federation of the Federal Assembly of the Russian Federation, Comnmittees and Commissions of the State Duma, associations of deputies in the State Duma, Government of the Russian Federation, legislative (representative) authorities of the constituent parts of the Russian Federation, Constitution Court of the Russian Federation, Supreme Court of the Russian Federation, Higher Court of Arbitration of the Russian Federation, and Central Bank of the Russian Federation for comments and proposals. All amendments shall be submitted by September 15, 19976). ). Ordinance of the Government of the Russian Federation No. 585-p of April 30, :). Letter of the Government of the Russian Federation No. 1349n-1113 of April 30, Taking into account the socioeconomic situation in Russia, ratio of deputy fraction votes in the State Duma, and views of the members of the Council of the Federation (Governors and Heads of Administrations of the constituent parts of the Russian Federation), the authors believe that the Tax Code of the Russian Federation more likely to be introduced through the adoption of selected tax laws and amendments to the effective taxation procedures. 5).In view of limited time available, the authors find it expedient to inform the Federal Highway Administration of Russia and road authorities of the constituent parts of the Russian Federation on the results of the Tax Code review and proposals to increase the revenue part of the Federal and Regional Road Fund budgets while the work is still in progress, i.e. before the completion of the Second Phase of the Study. That would allow the management of the aforementioned public authoritie!s to take timely measures to implement the proposals developed. Otherwise, the results of the entire Study will not have any practical significance to the road sector.

25 162 In fact, improving and streamlining of the tax system of the Russian Federation is an extremely important and urgent task. However, it is quite evident that all respective changes shall improve the socioeconomic situation and strengthen lthe national and economic security of Russia, as well as facilitate the implernentation of ambitious and large-scale investment projects, which include, in particular, all road network development and improvement projects in Russia. How can changes in the national tax system proposed by the Government of the Russian Federation affect the formation of the revenue part of the budgets of the Federal Road Fund of the Russian Federation and Regional Road Funds of the constituent parts of the Russian Federation, and what are the conditions under which the introduction of new financing sources would facilitate the development and improvement of the road network? Answers to these and other questions might be found through the review of the draft Federal Law On the Enactment of Parts 2, 3 and 4 of the Tax Code of the Russian Federation and the list of taxes included in the draft Tax Code of the Russian Federation Draft Federal Law On the Enactment of Parts 2, 3 and 4 of the Tax Code of the Russian Federation Pursuant to Article 2 of the draft Federal Law On the Enactment of Parts 2, 3 and 4 of the Tax Code of the Russian Federation, the following acts effective in the Russian Federation shall be abrogated as of January 1, 1998: tax laws (13 laiws), selected Sections and Articles of other laws (11 laws), and other regulatory legal acts (provisions, which regulate taxation), including a number of Articles of the Law of the Russian Federation On Road Funds in the Russian Federation 7 ), namely: 1). Article 4. Fuel/lubricant sale tax; 2). Article 5. Road user tax; 3). Article 6. Vehicle ownership tax; 4). Article 7. Vehicle acquisition tax; 5). Article 8. Tax payment accounting; 7). NBI Pursuant to Article 5 of the draft Tax Code of the Russian Federation, the Law of the Russian Federation On Road Funds in the Russian Federation shall lose the status of ai tax law and only regulate road fund formation principles and national road financing procedures. In view of the above, ALL TAXES AND CHARGES PROPOSED AS FINANCIAL SOURCES FOR ROAD WORKS (SERVICES) SHALL BE INCLUDED IN THE TAX CODE.

26 163 6). Article 9. Responsibility for tax avoidance. Article 1 and 2 retained in the Law On Road Funds define the purposes of road funds and establish procedures for the formation and use of the Federal Road Fund of the Russian Federation and Regional Road Funds of the constituent parts of the Russian Federation. The MOF believes that by way of using such an "original" tool it has ensured the execution of the instruction of the Government of the Russian Federation on the adoption (taking into account the development of a special part of the draft Tax Code of the Russian Federation) of exhaustive measures to implement Decree of the President of the Russian Federation No of December 6, 1995 On the Presidential Program "The Roads of Russia" (paragraph 2) with respect to maintaining the existing system of the formation and use of road funds defined by the Law of the Russian Federation On Road Funds in the Russian Federation. Since the Government of the Russian Federation has approved the draft federal law, it can be concluded that the Government finds it expedient to retain earmarked road funds; at the same time the Government of Russia has agreed with the MOF's proposals to replace their financial sources. Special attention shall be devoted to Article 3 of the Law On Road Funds, which establishes the financial sources of road funds and their distribution between the Federal and Regional Road Funds. Since the Article is retained (at present, it defines the list of road fund financial sources contained in Articles 4-7 to be abrogated), it shall be brought into compliance with the Tax Code of the Russian Federation within six months following the effectiveness of Parts 2, 3 and 4 of the Tax Code (pursuant to the draft federal law on the enactment of the Code). It means that it is from the list of taxes enumerated in the Tax Code that the new road financing sources shall be selected and duly approved, and procedures for crediting resources to the Federal and Regional Road Funds shall be developed 8 ). In its turn, such a "selection" of road taxes might be based on the use of various methods: 8) NB! Resolution of the State Duma of the Russian Federation No ll F,o of June 19, 1997 On the Draft Tax Code of the Russian Federation requests that the Committee for the Budget, Taxes, Banks and Finance, when finalizing the aforementioned draft law for the second reading, shall take into account fundamental provisions, which form the tax policy concept, including the clefinition of the financial sources for the Federal Road Fund of the Russian Federation and Regional Road Funds.

27 164 a) inclusion of additional Sections in the General and Special Parts of the Tax Code to ensure that the current earmarked road taxes are retained and/or provide for the introduction of new road taxes; b) addition of Articles (paragraphs) to selected Sections of the Tax Code, which mention the target (road-oriented) use of taxes established by the Code 9 ); c) addition of Articles (paragraphs) to selected Sections of the Tax Code, which establish per cent of total taxes to be transferred to the road funds; d) combined use of effective and newly introduced taxes (i.e. a trade-off option). Anyway, the aforementioned requires the development and adoption of a new federal law On the Introduction of Changes to Article 3 of the Law of the Russian Federation "On Road Funds in the Russian Federation", as well as inclusion of additional Articles in that law List of Taxes Envisa2ed in the Draft Tax Code of the Russian Federation Federal Taxes A). Taxes and charges proposed as financial sources of the revenue part of the Federal and Regional Road Funds 1. Value-added tax (VAT) as a potential financial source of the Reaional Road Funds. The Tax Code proposes to establish two VAT rates: 0% - sale of goods (works, services) procured for foreign assistance funds or covered by the customs regime established for exports outside the CIS, as well as directly related to the transportation goods covered by the customs transit regime across the customs area of the Russian Federation; 22% - sale of all other goods (works, services). Increasing the single tax rate by 2% and eliminating a reduced VAT rate (10%) is related to the need to compensate the loss of revenues both by the target budgetary funds and state extrabudgetary funds. Pursuant to the Explanatory Note to the draft Tax Code written by the MOF, the value-added tax is proposed as a financial source for the federal budqet (19%), Pension Fund (2%) and road funds (1%). 9). Pursuant to the Tax Code concept, issues relating to the interbudgetary clistribution of tax revenues are outside the terms of reference of the Code and shall be addressed in the Budget Code of the Russian Federation.