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I.   An Overview of the Budget Reform in Russia
II.  Pre-Reform Budgetary Institutions
     and Reasons For Changes
III. The New Budgetary Institutions in Russia
IV.  The Problem of Performance Management
     in Public Sector
V.   Conclusion


In the beginning of the XXI century the system of public expenditures is viewed as another source of improving financial situation in different countries.

Many expenditure reviews are issued to identify best practices and show expenditure imbalances. Countries all over the world put a lot of efforts in improving the budget process and, in particular, in improving the public expenditure management systems. The budget is more and more often considered to be a political document setting purposes and the policy by means of redistribution of finances.

The budget reform in Russia is coupled with administrative and municipal reforms and formed the context for the new start of strategic management and planning in the form of a common public management approach in Russia. By means of the reforms Russia is gradually building a modern strategic and enabled state. Like many other jurisdictions a consistent strategic approach in public management that faces a financial crisis gives priority to tactic measures for counter-acting the crisis.

Reforming the budgetary system and constructing an effective system of public finance is a complicated and demanding task. One of the most common steps in the context of improving budgetary systems is the reform of budgetary institutions. The reform of budgetary institutions is sometimes mentioned as the paramount in improving general public sector performance.

This important reform of budgetary institutions is currently in progress in the Russian Federation. This stage of the general budget reform seems to be the most controversial and time-consuming. The budget reform in the Russian Federation included the following steps:

1. 2001-2004: the reform of inter-budget relations (transfers);

2. 2004-2008: the reform of budgetary process;

3. 2010--till present: the Reform of the budgetary institutions system (chain).

Traditionally reforms in Russia follow a top-down model and all the three reforms are not are not an exception. In particular the agenda of the budget reform started with the central issues and the current stage finally covers participants at the lower levels - budgetary institutions. Once all the levels of the budgetary system are reformed and financed according to the new principles the financial policy is finally expected to support the economic growth in Russia.


Under the post-soviet legislation, before the third stage of the budget reform budgetary institutions were legal entities with a controversial legal status. According to Article 120 of the Russian Civil Code an institution was an organization founded by the owner to conduct administrative, cultural, social, or other functions noncommercial in character and financed by an institution in whole or in a part. An institution was liable for its obligations only with its own monetary assets that an institution had at its disposal. If the assets were insufficient, the owner of the respective property had to assume subsidiary liability for the obligations of the institution. This general rule covered the budgetary institutions. Article 120 of the Russian Civil Code is not in force since 1 September 2014 according to the Federal Law N 99-FZ of 05 May 2014 "On amending Chapter 4 of Part 1 of the Russian Civil Code and on declaring several Russian legislative provisions to be no longer in force"

All the institutions including budgetary ones had restricted rights to dispose of the assets - the right of operational management. Institutions could own, use and dispose of their assets only within the framework prescribed by the law in accordance with the purposes of their activity, tasks of the owner of the assets (Article 296 of the Russian Civil Code). The owner had the right to withdraw the assets from the institution at any time.

Budgetary institutions were financed according to the operative costs estimations. Although under the Russian Civil Code institution profits were at their own disposal, in fact, budgetary institutions were restricted in this respect. An insolvency procedure for a budgetary institution was also not clear under the Russian legislation.

Such legal entities with an inconsistent status were quite numerous in Russia. On April 1, 2009 there were 25,287 budgetary institutions at the federal level and 30,260 budgetary institutions at the regional and local levels. There are a few reasons to explain the situation that are usually attributed to the reform of the budgetary institutions system.

First, the previous system of budgetary institutions was formed under different social and economic conditions. Budgetary institutions were quite conservative and operated, to some extent, in isolation from contemporary market approaches to public governance. Expenditures of budgetary institutions were allocated on the basis of fixed estimates, and "if the basis of spending is taken for granted and new funds are simply added, the result is a growing budget". The principles of efficiency and optimization were not applied to budgetary institutions.

Second, budgetary institutions fell out of the public management system and planning. The Reform was an urgent step to involve budgetary institutions into the new management and administration system. Financed on the base of cost estimations, budgetary institutions did not provide any feedback that could influence the finance allocation. No goal setting and resource allocation mechanism were applicable to the former system of budgetary institutions.

It was ascertained in the Concept of Long-term Social and Economic development of the Russian Federation for the period till 2020 that new system of public governance should include strategic planning and result oriented governance, which should be tied up with mechanisms of decision-making in budgetary sphere. Before, many of the problems in preparing a realistic budget arise from the lack of overall budget strategy, lack of strategic role of the government, and the fundamental problem of the lack of clear expenditure policies underlying budget allocations. The reform of budgetary institutions falls within the problem of budget allocation. The old system of budget allocations could not fit in the new reality of social economic and financial strategies.

Third reason for the Reform of Budgetary Institutions was the lack of motivation for budgetary institutions to be effective. The notion "public service" and the quality of public service related to it appeared only in 2010. Public services are linked with the Reform of Budgetary Institutions.

The Budgetary Institutions Reform is aimed at making them transparent and accountable to public. Transparency and accountability of budgetary institutions is an important part of transparency of the budgetary process. Effective management in public organizations in general and in budgetary institutions in particular is based on monitoring of the current performance. The former system of budgetary institutions did not allow effective monitoring of budgetary institutions activity and did not provide for necessary management information.

The Reform of Budgetary Institutions in Russia is considered to be the most debatable and unpopular step taken by the Russian Government in the context of the general budgetary reform. Taking into consideration this unpopularity of public authorities, the obligatory of reorganization was preceded by the possibility of voluntary changing the status from a budgetary institution to an autonomous institution. This possibility was raised by the Federal law of November 3, 2006 No 174-FZ "On Autonomous Institutions". Under this Law, autonomous institutions could be given more freedom. Nevertheless, only few budgetary institutions changed their status.


The program method of planning and financing became the underlying basis for the new budgetary institutions. The program method was prevailing in the budget process long before the Budgetary Institutions Reform. The consistent application of the program budgeting and goal-oriented financing is the fundamental idea of a new budgetary institutions chain.

Initially, the Reform prescribing the obligatory change of their status was planned for 2008. The Global Crisis of 2008 made adjustments to the agenda of the Budgetary Reform, and the Reform of Budgetary Institutions was announced only in May, 2010 after the Federal Law No. 83-FZ of May 8, 2010 "On Amending Certain Legislative Acts of the Russian Federation in Connection with Improvement of the Legal Status of State (Municipal) Institutions" was published. This Law formed a general legal basis for the Reform and set up new types of budgetary institutions.

The Law came into force only on March 1, 2011 - nearly a year after it was published. The Federal Law required a number of acts to be issued by the Government of the Russian Federation and not all of them had been ready even by April, 2011. Therefore, in fact the implementation of the Law took more than one year as apposed to what the Government had planed.

Another reason for the delay of the Reform of budgetary institutions was the lack of official position and legislation with regard to public services in Russia. The legal framework of the budgetary institutions reform depended upon the law on public services. Such a law was adopted only in 2010 - the Federal Law No. 227-FZ of July 27, 2010 "On Amending Certain Legislative Acts of the Russian Federation in Connection with Adoption of the Federal Law on Arranging the Provision of the State and Municipal Services." The law defined the state and municipal services as following:

(1) a state service provided by a federal executive authority, authority of a state non-budgetary fund, an executive government authority of a Russian Federation constituency, as well as by a local government implementing certain government powers it is vested with under the federal laws and the laws of the Russian Federation constituencies - operations aimed at implementing the functions of a federal executive authority, a state non-budgetary fund, an executive government authority of a Russian Federation constituency, as well as by a local government implementing certain government powers it is vested with under the federal laws and the laws of the Russian Federation constituencies performed at the requests made by requestors within the powers established by the regulatory acts of the Russian Federation and the regulatory acts of the Russian Federation constituencies for the authorities providing state services;

(2) a municipal service provided by the local government - activity aimed at performing the functions of the local government carried out at the requests of the requestors within the powers of the authority providing municipal services related to local jurisdiction issues stipulated by Federal Law No. 131-FZ dated October 6, 2003, "On General Principles of the Organization of Local Self-Government in the Russian Federation" and the Charters of municipal entities.

The Government and municipal services are to be included, respectively, in the Government service registers and Municipal service registers.

Federal Law No. 227-FZ came into force on July 30, 2010 and was followed by the special law governing the educational issues - the Federal Law No. 293-FZ of November 8, 2010 "On Amending Certain Legislative Acts of the Russian Federation in Connection with Improvement of Regulatory Functions and Optimization of Rendering the State Services in the Educational Field".

New budgetary institutions are funded on the basis of a task assigned by the state that, in turn, is based on the list of public services rendered by each institution. Without the definition and legal regulation of state and municipal services the reform of budgetary institutions was not possible.

According to Federal Law No. 83-FZ of May 8, 2010 that prescribed the legal framework for the Reform all budgetary institutions are obliged to change their legal status and become one of the three types of institutions, namely: autonomous, budgetary (new budgetary institutions) or government institution.

Autonomous institutions are the most self-reliant institutions. Autonomous institutions are liable for their obligations with all their assets in respect of which an autonomous institution exercises its rights of operation management except immovable property and very valuable movable property invested by the founder or acquired by an autonomous institution on behalf of a founder. Autonomous institutions are given a state or local task on the basis of the results of an open tender. A founder of an autonomous institution is not liable for the obligations of an autonomous institution. An autonomous institution renders state or municipal services according to the state task.

New budgetary institutions have more restrictions initiated by their founder, the Russian Federation, subject to Federation or local authorities. New budgetary institutions have to operate in accordance with the purposes set in laws, other acts, local acts and charters. New budgetary institutions cannot refuse to carry out state or local task assigned and approved by the Founder. New budgetary institutions are financed by subsidies on the grounds of state or local tasks. New budgetary institutions are allowed to render services in consistency with the purposes of their activity for fee if in their performance they go beyond the state and local task. The prices for such services are determined by the Founder.

Government institutions are not allowed to render additional services besides those prescribed by a state task. If they gain any additional profits, if any, they are given to the budget. The legal regime of government institutions is designed for those spheres where application of market conditions is not possible, e.g. a penitentiary system.

In short, the main feature of a new type of budgetary institutions is treating their functions as public services and funding all types of budgetary institutions according to tasks based on the list of services rendered.

Earlier, budgetary institutions were funded according to the costs estimations and results of their operations were not attributed to financing.


There are three central budget functions, namely: management, planning and control. All these functions are performed by means of financial resources allocation to the chain of budgetary institutions. However, as the result of applying special-purpose financing - the current paradigm of public finance - the stage of control and the notion of "result" becomes crucial both for the budget resources that have already been spent and for further budget expenditures planning.

Russia shares with other jurisdictions the problem of performance measurement for the new types of budgetary institutions. A state task for the new budgetary institutions has to contain the criteria of measurement of public service quality and quantity. However, as the concept of public services is implemented simultaneously with the reform of budgetary institutions, it became even more difficult to find appropriate measurement criteria for different services.

The most important "strategic" mistake of the reform of budgetary institutions in Russia is that the emphasis is made only on the financial aspects. The main idea of the Budgetary Institutions Reform was to improve the management of the budgetary institutions system adjusting it to the general strategic management system. This concept is not clearly defined by the officials and is not explained to the public. The system of result-oriented budgeting of the public sector is supposed to operate in the context of the strategic and enabling state concept.

The change of the way of how budgetary institutions are funded and financed is an important but not the only purpose of recent changes in the budgetary process. Austerity and reduction of funds are to be compensated by the advantages of a better managed system and financing attributed to the operational results. Changes of the budgetary institutions system were mentioned in association with the better quality of public services and effective allocation of resources.


Reformers have long viewed budgets as means to represent new ways of thinking about government resource allocation. Jesse Burkhead quotes one midcentury advocate of the budget reform saying: "The budget is a psychological device to make people in an administrative organization think". Although the Budgetary Institutions Reform is still unpopular, it was absolutely necessary because it was impossible to leave an "island" of old-style thinking concerning public financing of public institutions in the middle of the "market ocean." It is impossible to have numerous budgetary institutions chain managed on the basis of old principles. It is assumed that the Reform of Budgetary Institutions System in Russia is a positive step in terms of better management of the public sector and improvement of public finance management, but still, it is not very well accepted by both consumers of public services and employees of the budgetary chain.


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by Ekaterina Kudryashova (Russian Federation)


LLM, Associate Professor, Lecturer of the Moscow High School of Social and Economic Sciences.
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Author:Kudryashova, Ekaterina
Publication:Kutafin University Law Review
Date:Oct 1, 2016

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