Interview of Deputy Minister of Finance Sergiy Marchenko for RBC-Ukraine (November 24, 2017)

11/24/17

Deputy Minister of Finance Sergiy Marchenko on how government officials negotiate about the state budget with member of Parliament, problems with the transfer of subsidies and funding for higher institutions. The Cabinet of Ministers expects the Parliament to adopt the state budget for 2018 in the beginning of December. The draft budget passed the first reading relatively well, except for the fact the Government had to keep subsidies for housing utilities and to accept the Parliament’s scenario for the increase of the excise tax rates.

However, the most interesting part of the budget process will come in the second reading, which, as it happened more than once, can result in the state budget changed completely. But Deputy Minister of Finance Sergiy Marchenko, who is responsible for budget preparation, is confident that the Government will find a compromise with the Parliament, which will also be reached through increasing subsidies to the local level. To know more, please read the interview of the deputy minister for RBC-Ukraine.

- A group of IMF experts visited Kyiv on November 9 to study and to discuss the draft state budget for 2018. Did you meet them?

- Yes, we discussed the prospects of the budget execution. And we had one more meeting to discuss the monetization of the subsidies for housing utilities. The IMF experts asked questions about the new Government’s decree which abolishes clearing settlements and implements the monetization of subsidies at the level of service providers. They were keen to know how these changes will impact the market.

- Does the IMF have any concerns that in the process of the budget preparation for 2018 the Parliament will again step in just like it was in July with amendments to the state budget for 2017, when the revenue part of the budget was significantly expanded?

- No, it was not mentioned. It is our job to prevent any contingencies and to keep the budget balanced. The IMF does trust us that we will do this job properly.

Draft state budget

- Tomorrow (the interview was recorded on Monday, November 13), the Parliament will be discussing the state budget in the first reading. What changes did the draft budget absorb resulting from corrections made by the Parliament’s budget committee?

- The Parliament did express its remarks to the budget. To gain enough votes for the budget law, we must pay as much attention as we can to the recommendations of the Parliament members and, if possible, absorb them in the state budget. This is necessary to gain the 226 votes needed to adopt the budget in December.

- What points are subject to discussion now?

- There are no global points of dissent. We received recommendations on some points to increase the spending part.

- And these recommendations are not agreed with the Ministry of Finance?

- At this stage, we have a number of spending proposals amounting 1.7 billion hryvnas. The Parliament proposes to cover these expenses with revenues which are transferred to the state budget by the National Bank. When making the final corrections to the draft budget, we will be looking for a compromise.

- Have you already discussed this with the National Bank?

- No, we have not. But I think that the opinion of the National Bank was clear enough, when the budget preparation started.

- You mean, they will not give more than planned in the draft budget?

- Yes, exactly.

- The same was in the previous year. So, this is the same story again?

- Yes, we already know this.

- You have issues agreeing amendments to the Tax Code based on which the state budget was calculated. How do you want to agree them with the Parliament’s committee on taxes?

- It is for the first time in many years that the Ministry of Finance does not offer any radical changes to the Tax Code along with the state budget. Everything which we deemed necessary we have been doing in the course of the year this time. The Ministry of Finance is not going to put any surprises under the Christmas tree. What we propose in regard to the tax regulations mostly refers to the adjustment of the excise tax rates. I think, we will be able to make a compromise here.

- Is it easier to gain votes for the state budget this year?

- No, it is not. We have more experience now, but so does the Parliament. It is understood that the problems we are trying to solve are still acute. On the other hand, the members of Parliament are well aware that we depend on each other. There will be a compromise. No budget is not good for anyone.

Monetization of subsidies

- You told that the IMF experts asked questions about the monetization of the housing utility subsidies. The decree on that was adopted. What now?

- This is a major victory for the Ministry of Finance. We will be in control of the situation paying the subsidies for the energy delivered and services provided in fact. The market participants will trust each other more and will trust the entire system.

- What were the snags of the clearing mechanism, and why is the new system better?

- Clearing is, to put it roughly, an exchange of papers, protocols. The responsible department for social protection reports about assigned subsidies; based on that, suppliers, NJSC “Naftogaz” and the State Treasury Office agree these protocols. Someone had these protocols handled on time, someone did not, someone received prepayments based on protocols. Honestly speaking, we, I mean the Ministry of Finance, did not understand the background of these operations. We only saw the final point - NJSC “Naftogaz”. We paid for the assigned subsidies, not for the consumed energy and services. As a result, after the heating season 2016/2017 the unclaimed subsidies, based on the recalculation, amounted 8.3 billion hryvnas. Last year, they were equal to 15 billion hryvnas. This means that the funds were used ineffectively.

- The Minister of Finance considers this system unclear and unpredictable?

- It was predictable, when the number of the subsidy recipients was not as high as it is now. Previously, there was only the system of housing subsidies in place, and we did not have any major issues with that. One hryvna which was spent from the state budget for subsidies returned to us as one hryvna in tax revenues. It was ok for us. Now, we see many players, many subtleties on the market which we consider risky and turbulent.
Hence, the idea behind the new system is that we will be paying subsidies based on delivered services, we will be paying “real” money to concrete suppliers to their accounts at the State Treasury Office. The suppliers will be paying this “real” money to Naftogaz for gas as well as to other suppliers. Of course, they will be paying taxes as well. I can’t exclude that some of them will accumulate some unclaimed amount, and we will decide based on the results of the half-year what to do with it. We want to change things in this are completely. This will be a win-win situation for all market participants, though everyone is scared about the new system at the moment.

- There is an opinion that the monetization of subsidies at the level of suppliers is exposed to possible misuse by the energy companies themselves. For instance, regional gas distributors (oblgaz) could manipulate the lists of their customers actually “bloating” them. What “circuit breakers” does the Government have for cases like this?

- If someone “inflates” his customers’ database or makes any other violations, it will be visible at once. We have no other tool to take money out of the system but to pay for energy supply or to collect taxes. We are implementing an automated funding for subsidies based on the monthly records and removing manual interventions in the payments. This will significantly reduce risks of mistakes and increase the transparency of all transactions.

- We are now talking about the monetization of subsidies at the level of suppliers. The next stage is to monetize them at the individual level. Is this model viable? When can it be implemented?

- I am sure it is viable. If we see in the first half of 2018 that this mechanism is operable, that people trust the system and there is no fraud or misuse of funds for any other purposes, we will be ready to launch the monetization at the level of individual consumers starting from January 1, 2019. The second half of the year we will use for preparations. This will be enough to deploy the system starting from 2019.

- Minister for Social Policy Andriy Reva said in his interview to RBC-Ukraine that monetization at the individual level is exposed to risks which is due to the high number of subsidy recipients – these are 6.5 million households.

- There is a risk indeed. It is obvious – the fewer recipients we have, the easier it is for us to manage the subsidies. But, we do have many recipients indeed. We think that our eligibility criteria for the subsidy recipients must be more demanding, we must also consider the criterion “household assets”. We are now in talks about this with the Ministry of Social Policy. In fact, the incomes of households are on the rise – the minimum salary is increased, the average salaries in the economy are rising, the pensions are upgraded as well. In fact, households are more affluent now, and we see that in the next heating season we will have fewer subsidy recipients compared to this year.

- This year, the Government amended the state budget twice increasing transfers to the local budgets meant for subsidy payments by 22 billion hryvnas. Thus, these transfers now total 70 billion hryvnas. Why was it necessary to increase these transfers in the course of the year? Was it about the wrong basic calculation?

- I do not think the calculation was incorrect. We expected the number of the subsidy recipients to go down compared to the previous heating season. Also, it must be noted that debts amounting 24.4 billion hryvnas were transferred to this year from the last year period – November to December. The Ministry of Finance did expect the number of the subsidy recipients to lower. Also, we expected the social standards serving as a basis for the allotment of subsidies to be corrected, we expected that to be done earlier and expected the requirements to applicants to become more rigid.

- Will you have subsidy-related debts in the beginning of 2018 as well?

- Yes, we will, nothing can be done about that. The deadline for December subsidies is in January, the part of the pending November amount will be paid in January as well. But it is for sure that we will not have such high debts as we had them in 2017. The total result will be clear based on the results of the whole year.

Local budgets

- The amount accumulated on the United Treasury Account (UTA) by the beginning of November was equal to 48.5 billion hryvnas. Local budgets account for the lion’s share of this amount…

- The total amount on the Government’s accounts at the State Treasury Office on November 1 was equal to 110 billion hryvnas including 48.6 billion on the UTA and 61.4 billion on the currency accounts (recalculated in hryvnas). The remaining amount belonging to local budgets is equal to more than 60 billion hryvnas.

- Talking about local budgets, will they make it to spend this money before the end of the year?

- A part of this they will spend, and a part of this they will not. It must also be noted that the bank deposits of local budgets will be returned on the UTA by December 20.

- There is a huge amount of money accumulated on the UTA, the entitled entities will be in a hurry spending it before the end of the year. Will it pose any pressure on the currency market?

- This situation is quite manageable. We are doing all possible to reduce the excessive hryvna pressure on the market, on the currency market as well as to distribute payments smoothly in the system to prevent excessive pressure in the end of the year. However, we can’t do the job of the main entities entitled to manage budget funds which have accumulated pending amounts for the previous ten months. We understand the scope of the problem which could come up in December, and we are trying to neutralize it.

- Why can’t the entitled entities spend their money smoothly in the course of the year instead of procrastinating it till December? As far as roads are concerned, it is a usual thing already that road repairs start, when the first snow falls…

- Well, this year we see that road repairs started earlier. We have a number of factors here. First, it is about the specifics of tender regulations for public procurement. Also, capital investments we start to allot starting from the second quarter of the respective year. In the first quarter of a year we monitor the dynamics of the budget revenues, hence capital investments are close to zero in the first quarter.

- When the draft budget for 2018 was negotiated in the Parliament’s budget committee, it was agreed to “shift” 5 billion hryvnas from the Regional Development Fund (RDF) to the subsidy for the social and economic development of territories. Why is that?

- We must understand: as long as we have members of Parliament elected in the plurality voting, the subsidy for the social and economic development of territories will always be on the agenda. This issue is always popular in regard to social issues and it is often utilized during political negotiations about the state budget. Our draft budget for 2018 did not contain a subsidy to local budgets for social and economic development. But, to pass the budget through the Parliament, to ensure that necessary laws are adopted next year, the subsidy for social and economic development is the minimum price for being able to handle many issues with members of Parliament elected in the plurality voting.

- Does it help find a compromise?

- Yes, a kind of a compromise… Deputies elected in the plurality voting can have their own opinion, they have interests in their districts. They want to help their districts which paved their way to the Parliament: they want to build schools, repair roads, arrange some minimum “amenities” for their voters. We can protest, but we are aware that this subsidy will always be there.

- Does the Ministry of Finance monitor how this subsidy is spent?

- This is not our job. We have the Audit Service as well as the Accounting Office. Apart from that, local authorities and hromadas must be motivated enough to monitor the effective use of these funds. The problem is that we have no clear criteria to distribute this subsidy between the territories. It all depends on deputies elected in the plurality voting. They have their interests in their district. On the other hand, these plurality voting districts are distributed more or less evenly in all regions.

- The Association of Ukrainian Cities had critical remarks to the draft state budget: according to this organization, the education subsidy does not fully cover the planned salary increase (by 25%) for teachers...

- Last year, it was decided to increase salaries for teachers by 50%. And we had a dilemma regarding how we shall arrange this salary increase – by inventing some formula on a short notice or by referring to the salary budget of 2015 and increasing it accordingly. We opted for the second way, because it was not possible to develop some fair formula.
However, in the course of the year the Ministry of Education managed to analyze its entire network, to monitor the number of students in all classes and to differentiate schools in cities and in villages. Based on that, this year we have an objective and fair formula. If you pursued reforms, optimized your network and implemented changes, you will be the key beneficiary of this formula and receive more money in 2018 comparted to those who did not optimized but has more teachers.

- To make it simple, if you have 30 pupils in the class, you have a salary increase; if you have 3 pupils in the class, it all remains the same for you, correct?

- Well, yes, like this. But we also considered other criteria. Hence, the formula is fair and served as a basis to calculate the subsidy for the coming year. Someone is a loser, someone is a winner. But, in any case, it is an incentive for development.

- Let’s stay in the education sector. Who will be financing vocational colleges and schools next year?

- We proposed to transfer these institutions to the regional budgets. The reservation for this is that higher education institutions shall have time till July 1 to decide what they want to do with their subsidiaries. If they want to pay for them by themselves, we will finance them proportionately to the number of students whose tuition at facilities of the IIIrd and IVth accreditation grades is covered by the state starting from September 1, 2018. If they refuse to finance them or, for instance, it will be a separate higher education institution of the Ist or IInd accreditation grade with its own balance sheet, it shall be funded from the respective regional budget. The respective region shall decide how to finance them and how many students shall be financed from the regional budget. The scheme will be the same as with vocational schools.

- This year, you have increased scholarships by 18%. It seemed to be a spontaneous decision...

- This year, we had some savings in regard to scholarships. We insisted that these savings should be spent to increase the scholarships instead of paying for the utilities consumed by higher education institutions. Following our discussions with the Ministry of Education, it was decided to utilize these savings in line with the Government’s policy aimed to support the best students and to provide additional performance incentives by increasing the scholarships.

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