The Initiative to Establish a Regional Investment Support Fund

Retained federal revenues (which totaled RUB 40 bln at the 2010 year-end) are planned to be the source of financing of the to-be Regional Investment Support Fund (RISF), of which RUB 10 bln, or 25% of the retained federal revenues, is to be allocated to the fund within a year. According to the Ministry of Finance, the fund is intended to encourage the regions to invest in innovations and strengthen taxable capacity of the same.

It should be noted that it is the arrangement of allocation of budget funds that will feature the Fund. For example, a bonus is to be paid to 20 constituent territories of the Russian Federation which are rated at the top of economic performance within a period of three years. A few indicators, namely average per capita growth rate in investments, industrial production, and growth in revenues over a period of three years will be considered to identify recipients (regions) of federal budget funds as part of the stimulation fund.

Later, the federal authorities expressed the idea of estimating both dynamic and static values of the foregoing indicators, and constituent territories of the Russian Federation will be assessed in the oil & gas sector only. It is assumed that the stimulation fund may be established as early as 2011 and the data on 2008–2010²  used for estimation.

Based on the ideas expressed by the federal authorities, allocation of federal budget funds among the constituent territories of the Russian Federation was estimated with consideration of the currently available statistic data on the level and dynamics in the oil & gas sector.

1) The first indicator to estimate is “Capital Investments Per Capita”, which reasonably should reflect the amount of funds allocated to modernization and replacement of fixed assets.

In spite of the fact that this indicator is estimated without consideration of investments in the primary sector, oil & gas producing constituent territories of the Russian Federation such as the Khanty-Mansi Autonomous Area, Yamalo-Nenets Autonomous Area and Nenets Autonomous Area were included into the top-20. For example, the average volume of investments per person at the Yamalo-Nenets Autonomous Area exceeded the Russian average by 3.9 times, which is indicative of a large volume of investments in industries which are not directly recognized in but related to the “Primary Sector” section (e.g., pipeline industry, construction of facilities within the primary sector). This indicator was also influenced by a relatively small number of population with a large number of persons which work on a rotational basis.

2) This was followed by consideration of the indicators such as growth rates and levels of tax revenues in the consolidated budget of the constituent territories of the Russian Federation (net of mineral extraction tax). It should be noted that reduction of aggregate tax revenues by the size of mineral extraction tax had no serious effect on the final rating of the regions, which can be explained by its centralization at the federal level as related to oil & gas production revenues.

However, it is not an absolutely right solution to estimate oil & gas production revenues by extracting tax revenues from mineral extraction tax should, because carbohydrates production companies also pay other taxes: personal income tax, property tax and corporate profit tax, which may account for a large share of total tax revenues in a region. Tax statistics do not allow specific revenues of oil & gas companies to be itemized, and, among other things, it remains to be seen whether the Ministry of Finance of Russia is going to specify such revenues. In our opinion, it would be more reasonable to use the 1–NOM tax reporting form which recognizes tax revenues by type of economic activity, including fuel and energy minerals. However, since 2009, the Federal Tax Service of Russia provides no data as per constituent territories of the Russian Federation. No classification of regional and local taxes with sectoral data of specific constituent territories of the Russian Federation was provided previously.

According to estimates, average tax revenues in the consolidated revenues per capita at 9 of the 20 leading regions (i.e. nearly a half of the group) are lower than the Russia average, which can be explained by a substantial contribution which the first 11 constituent territories of the Russian Federation make to rise the Russian average. For example, in 2010, 11 constituent territories of the Russian Federation which were leading in the foregoing indicator, accounted for 49.7% of all the tax and non-tax revenues of the consolidated budgets of the Russian Federation, thereby having a strong effect on the Russian average.

3) Industrial production, both dynamic and static, is the final indicator to examine. It is quite obvious that oil & gas production regions would be leading in the top-20 in terms of average industrial production, including mineral extraction. However, “cleaning” of industrial production volumes from the primary sector with substantial reallocation of the regions inside the rating failed to exclude the oil & gas production constituent territories of the Russian Federation such as Khanty-Mansi and Yamalo-Nenets Autonomous Areas from the top-20. This problem, which already manifested itself in assessing tax revenues, is that the 20 leading constituent territories of the Russian Federation which are not focused on mineral resources extraction and show fast economic growth rages can be set aside only by a stretch of imagination. Therefore, the use of only oil & gas indicators for estimation doesn’t exclude rich oil & gas production constituent territories from the leading regions – many constituent territories will not be able, even without  considering oil revenues, to catch up with the mineral-rich constituent territories of the Russian Federation.

Besides the Yamalo-Nenets and Khanty-Mansi Autonomous Areas, the group of leaders (both in terms of the level and dynamics of industrial production) also included St. Petersburg and the Belgorod Region. In addition, it should be noted that high level of industrial production per capita at the Lipetsk Region (eight times as much as the Russian average) is mainly maintained by a single metallurgic company – Novolipetsk Integrated Iron and Steel Works.

As a result, in allocating the money of the Funds, as share of the money in aggregate regional budget revenues составила more than 1% only in five of the leading constituent territories of the Russian Federation, whereas in other regions it was far below this threshold. Consequently, allocated money of the Fund would play an insignificant role in encouraging the regions to increase their own income base.

Of all the constituent territories of the Russian Federation which showed the best performance and were enrolled on the top-20 list, seven constituent territories (i.e. one third) were found to be well-off donors (the Leningrad Region, St. Petersburg, the Yamalo-Nenets Autonomous Area, the Lipetsk Region, the Tyumen Region, the Republic of Tatarstan, the Khanty-Mansi Autonomous Area) and receive no donations from the RISF (a total of 14 constituent territories of the Russian Federation which were not financed with the RISF).

Analysis of the idea to create a fund to stimulate investments in innovations, as well as the three suggested indicators to identify leading regions revealed a series of material deficiencies.

First, the idea of providing additional financial encouragement of rich regions contradicts the objective aimed at equalizing fiscal capacity.

Second, the analysis of the suggested indicators revealed weak correlation between the innovative development indicators. The regions with a large share of investments and better tax revenues as well as steady growth rates in industrial production (e.g., oil & gas production regions such as the Yamalo-Nenets and Khanty-Mansi Autonomous Areas) are not necessarily building up the infrastructure for the development of modern technologies.

Third, given a relatively small size of the Fund, a large number of the constituent territories of the Russian Federation which are entitled to bonus would only dissipate budget funds and not have any effect on a new financial policy at the constituent territories of the Russian Federation aimed at generating revenues on their own. Given that recipients as constituent territories of the Russian Federation would total 20, one may infer that the financial support would be insignificant and the goals set by the federal authorities would therefore be unattainable.

In our opinion, to be able to carry on a policy aimed at encouraging the constituent territories of the Russian Federation to increase their own tax capacity, the institute of direct elections of governors should be restored at such constituent territories to strengthen the powers of local governments and increase responsibility to the population. Such elections and “rules of the game” as invariable requirements to contributions from federal taxes to the budget of constituent territories of the Russian Federation would automatically encourage them to increase income base on their own.

A.A. Alayev,  a researcher,  the Budget Federalism Department

¹ http://www.minfin.ru/ru/press/speech/index.php?id4=12465
² http://www.minfin.ru/ru/press/speech/index.php?month41=11-1990&pg56=2&id4=12089