Analysis. Public finances. Budget of Kiev Articles.

The 2012 kyiv budget: challenges and opportunities for future budget policy

Thursday, 29 August 2013 1408
Kyiv Budget: Challenges and Opportunities for Future Budget Policy./ By Oleksandr Babanin and Ivan Sikora

THE FULL VERSION OF THE SURVEY CAN BE FOUND HERE

This analytical report examinesthe main problems of Kyiv’s budget and budget policy for 2012 and part of 2013, in light of the existingchallenges and opportunities. It offers optionsto increase budget revenue and optimize budget spending in Kyiv for 2014.Based on the findings of the analysis of implementation of the2012-2013 Kyiv budget by the Kyiv city government and the four general principles laid out in the International Monetary Fund’s Code of Good Practices on Fiscal Transparency, we have developed recommendationson how to improve transparency, accessibility, and intelligibility of the budget and budget processin Kyiv.

This analytical report represents the opinion of its authors and the Open Society Foundations. When copying, republishing or quoting in other publications or media, reference to the authors and the Open Society Foundations is required.

For further cooperation or additional comments and opinions, contact us via email: osf55@ukr.net

© The Open Society Foundations, 2013

© Oleksandr Babanin, Ivan Sikora, 2013

1. OVERVIEW

To paraphrase the British classical geopolitician Halford Mackinder, one can say that who rules Kyiv commands Ukraine. Kyiv is the key outpost for controlling the country. However, is it really necessaryto seizeKyiv to gain that control? Under the existing Kyiv budget rules, the city mayor has little influence on Kyiv’s budget policy and neither does the Kyiv community which is effectively excluded from participation in the budget process. In fact,the mayor of Kyiv has no decisive influenceon the budget planning process and is totally controllable by the central government. A change of the game rules would make the mayor an independent political figure which, in the current political environment, would go against the central government’s interests.Thus, there is every chance that after the next election, those Kyiv residentswho oppose the central government may very well be, once again, disappointed in their elected officials.

Apparently, realizing how difficult it would be for them to win more than ten percent of votes in the Kyiv election, the Party of Regions team opted to make the city mayor position a mere figurehead similar to the Queen of England. As a result, the mayor of Kyiv, the capital of Ukraine and a major donor to the state budget, transformed from an independent political figure into one of many requestors of budget funds on behalf of the community. On the other hand, budget allocations are usually made to suit business interests of public officials and members of parliament who have decision making power in Ukraine. Considering this, there is no point in saying that the needs and interests of the Kyiv community have any bearing on budget planning and implementation.

Essentially, these days, the mayor of Kyiv is an ‘emperor with no clothes on’ who has fairly little influence on anything. The rule of political responsibility demands that to fulfill the stated election promises, one needs to have adequate powers and resources. What powers and resources does the mayor of Kyiv have now? The mayor has no leverage on the people controlling the budget, the vertical power structure, and key providers of public services and amenities in the city. The best the mayor can do is beg and not much else!

Given the existing game rules, the fiasco that struck Leonid Chernovetskyi who lost touch with reality and started playing his own game may as well hit Oleksandr Popov, or whoever else may be the mayor, for that matter. All it takes is to begin pursuing the interests of the inside people instead of the right people and entities, or begin actually catering to the needs of the community.

How the game rules should be changed to make the city mayor stop worrying about how to satisfy the insatiable needs of businesses affiliated with public officials and members of parliament and instead focus on promoting the well-being of the community that elected him/her to the high position and is waiting for the stated promises to be fulfilled?

WHAT SHOULD THE KYIV BUDGET LOOK LIKE?

The Kyiv budget is the main instrument allowing the appointed or elected city mayor to fulfill his/her political promises. Without control over the budget, pretty election promises and charismas can only help to take the mayor’s office but not much else.

To better understand who benefits from the existing game rules in Kyiv, one needs to see through the budget figures to figure out the interests of certain members of parliament, public officials, social groups and businesses.

On the other hand, there are three main problems facing Kyiv’s budget policy.

1. The city’s budget is unrealistic and budget projections have not been met once in the last six years. If a company’s manager fails to meet the financial performance indicators set by shareholders for years on end, shareholders either fire the manager or try to motivate him/her to improve professional competence level. During Chernovetskyi’s and Popov’s terms in office, the city’s budget was never fulfilled despite many amendments made on an almost monthly basis. Overall, in 2008-2012, the Kyiv budget revenue wasUAH 21.6 billion below budget projections which is twenty percent over the Kyiv budget revenue projections for 2013.

2. The debt keeps steadily mounting while controls over budget spending were relaxed in 2012. The budget has to reflect actual revenues and budget spending needs to be optimized. The Kyiv budget is deliberately inflated by means of financial instruments such as issuance of new bonds and transfers from the state budget to suit certain business groups. Efficient budget spending on construction of infrastructure must be under close watch by both the governmental control agencies and the public. It is no secret that public procurement of goods, works and services is usually overpriced on average by 30 percent which prevents meeting quality requirements. As a result, in the spring of 2013, we had the ‘Vienna Ball’* when the asphalt pavement was coming off the roads of Kyiv along with the snow. (*Translator’s note: ‘Vienna Ball’ is an allusion to the events of the 23rd of March, 2013, when in the midst of anomalous snow that completely paralyzed road traffic in Kyiv, the mayor inexplicably left Kyiv and flew to Vienna.) In fact, public procurement expenditures could be reduced by 30 percent. Particularly, of the UAH 13.7 billion spent from the Kyiv budget on procurement of goods, works and services in 2012, UAH 9.6 billion would suffice if spent efficiently while the remaining UAH 4.1 billion could be allocated towards wage increases, tariff debt relief, social welfare, etc. In other words, it would have been possible to save UAH 4.1 billion if money was spent efficiently and corruption risks were minimized in public procurement of goods, works and services.

The city government does not release full information on the city’s debt structure and debt burden which so far has exceeded UAH 8 billion and now amounts to 40 percent of the Kyiv budget revenue. In addition, the city’s aggregate debt should include the debts of communal companies such as Kyivpastrans (Kyiv passenger transport service), Kyiv Metro, etc. which, according to the estimates made by member of parliament Natalya Novak, amounts to UAH 4 billion.

3. The budget process must be transparent and accessible to the community, and the budget itself must be intelligible. Every Kyiv resident has to understand why he or she is paying taxes. Otherwise, no tax administration will ever make him/her pay the full amount. This applies not only to the budget but also the requirements for transparency and accessibility of ownership information in Kyiv including contracts with providers of public services and amenities such as Kyivenergo (electricity distribution company), Kyivgaz (natural gas distribution company), Kyivvodokanal (water services company), etc. and any annexes attached thereto containing tariff rate calculations.

ALTERNATIVE SOURCES OF BUDGET REVENUE:

PERSONAL INCOME TAX AND LAND VALUE TAX

The personal income tax (PIT) and land value taxare the key revenue items in cities. The government of Kyiv, a city that is a donor to the state budget, is forced to wait in line for transfers from the said state budget. When the mayor, the head of State, and the head of Cabinet are all members of the same political party, it is one thing. When the office of the mayor is held by a member of the opposition, it is something entirely different. It is commonly difficult to obtain budget allocations for publicly funded institutions in Ukraine’s regional centers. There is a possibility that municipal bonus payments to the city’s public sector employees may be delayed if the mayor of Kyiv decides to pursue a more independent policy that deviates from that of the central government.

PERSONAL INCOME TAX

Traditionally, the Kyiv budget’s main source of revenue has been personal income tax. However, in 2012 when the parliamentary election took place, the city’s largest revenue source was official transfers.

In 2008-2010, the share of funds transferred by Kyiv to the state budget ranged from 25.7 to 36.5 percent. Considering that another UAH 6.2 billion, or 50 percent of personal income taxes collected in Kyiv were transferred to the state budget in 2011, it appears that in 2008-2011, Kyiv’s total transfers to the state budget exceeded the official transfers it received by UAH 14 billion!

Not so complex calculationssuggest thatin 2012, if 100 percent of personal income taxes were retained in Kyiv’s budget,there would be little if any need for cross-payments, i.e. transfers to the state budget and official transfers from the state budget back to the city’s budget.

It is in the interests of the Kyiv community as well as its representatives in the city council, regardless of their political party affiliation, that amendments are made to the Budget Code so that 100 percent of revenue generated from personal income taxes are kept in Kyiv’s budget. If able to administer 100 percent ofpersonal income taxes collected, the mayor of Kyiv would no longer dependon transfers from the state budget and thus be free to fulfillhis/her own election promises.

LAND VALUE TAX

Land value tax should be the second largest revenue source after the PIT but here the situation is not much better. Ifreal market value assessment of land resources is implemented and 1 to 12 percent land rent rate is established, the revenue generated from land value taxwould match the current annual budget revenue!

According to different estimates, of the 83.6 thousand hectares of land owned by Kyiv, only 18 to 25 percent of land titles are officially registered. According to the Land Resources Department of the Kyiv City State Administration, as of 12 August, 2013, the total area of registered land in the city contractually rented by individuals and legal entities was 5,833.53 hectares.

The land rental rates paid by renting commercial structures and public organizations range from 3 to 12 percent of the appraised value of the land. Add to that that land rented by many business structures affiliated with the government members was deliberately undervalued several-fold! The land rental rate paid by land owners as well as publicly-funded organizations is 1 percent.

In his speech at the Kyiv City Council session on 31 March, 2011, the head of the Kyiv City State Administration Oleksandr Popov estimated the losses from illegal alienation of 3,500 hectares of land in Kyiv at more than UAH 70 billion. Assuming that, city officials estimated the average market value of one hectare of land in Kyiv at UAH 20 million which is five times higher than the average base value as established by the decision of the Kyiv City Council no. 43/1877 of 26 July, 2007[1].

In June of 2011, Inna Novak, deputy chairman of the Standing Commission of the Kyiv City Council for Budgeting and Social and Economic Development, claimed that the appraised value of land in Kyiv was even higher. She believed that the 15 hectares of land currently used by the communally owned Kyiv Zhuliany airport could be auctioned for at least UAH 500 million, i.e. UAH 32.6 million per hectare.

Using Inna Novak’s estimates as reference, i.e. UAH 32.6 million per hectare, at the rental rates of 1, 3, and 12 percent, the land area of 5,833.53 hectares would earn, respectively, UAH 1.9 billion, 5.7 billion, or 22.8 billion worth of budget revenue. If half of lessees paid a 3 percent land rental rate, and the other half paid a 12 percent rental rate, the revenue generated from land rental would be UAH 14.3 billion, which is UAH 10 billionhigher than budget projectionsfor 2013!

The issue of proper land ownership registration where constitutional documents have not been registered remains unsettled. According to Ruslan Kramarenko, deputy head of the Kyiv City State Administration, the ownership titles to 75 to 80 percent of land in Kyiv are not properly registered. Real revenue can be generated from land areas allotted for dwelling and public sector construction as well as land allotted for industrial, transportation, communications, energy, defense, and other uses that can be taxed at 3 to 12 percent rates. That way, based on Ruslan Kramarenko’s estimates, budget revenue generated from land rental of 40-50 percent, or approximately 33,600 to 42,000 hectares of land, would increase drastically from UAH 2 billion to 6 million per year.

According to the estimates made by the Open Society Foundations based on Ruslan Kramarenko’s calculations,a lot more revenue could be generated. The estimated value of 42,000 hectares of land in Kyiv at the average market price of UAH 32.6 million per hectare would be UAH 1,369 billion. The annual city budget revenue generated from the land value tax at 1 percent rate would be UAH 13.69 billion. If the appraised value of land and the minimum land value tax rate of 1 percent are applied for 2013, the city’s budget revenue generated from land value tax would have increased threefold. The projected budget revenue generated from land value tax for 2013 was UAH 4.1 billion. However, only UAH 1.36 billion had been generated as of 1 August, 2013.

According to the Main Department of the Ministry of Revenue and Duties, as of August of 2013, almost 1,400 business entities had refused to record their land titles and another 600 had refused to renegotiate their land rental contracts, particularly the clause on the 3 percent rent rate, which results in budget losses of UAH 300 million and 260 million, respectively. It should be reminded here that since 2010, a vertical of power has been meticulously constructed in Ukraine and that it has enough leverage to address such issues.

According to the Program for Land Use and Preservation in Kyiv for 2011-2015 (hereinafter—the Program), the city budget revenue for 2012 generated from land rental by individuals and legal entities was projected at approximately UAH 1,400,000,000. However, the city government only managed to generate UAH 1,225,000,000 which is UAH 175,000,000, or 12.5 percent less than revenue projections. Even worse were the statistics on the implementation of the Program in relation to revenue generated from sale of land as only 17.7 percent of the projected revenue, or almost UAH 124 million were generated versus the projected revenue of UAH 700 million.

In January-July, 2013, the situation did not improve. After the city government lost its control over the State Land Register in Kyiv and land ownership registration, it also lost control and access to information about land registration and use in the city. The city budget revenue generated from land value tax decreased by UAH 247 million, or 18.1 percent compared to the same period of 2012. In January-July of 2013, only UAH 25 million worth of revenue were generated from sale of land versus the projected revenue of UAH 520 million and the Program target of UAH 755 million. In other words, not even 5 percent of the land sale projections for the current year had been met as of 1 August, 2013!

The absence of regulatory framework for auctions had a negative effect on sales of nonagricultural land and led to a decrease in revenue. As a result, investors looking to buy land for construction or other uses become hostages to clandestine agreements with the mayor’s office and leaders of deputy factions and groups in the Kyiv City Council. The prices for such favors are estimated at billions of hryvnyas. The amount of budget revenue generated from charity donations, grant aid, and gifts to publicly-funded institutions may be indicative of the value of cash flows in that shadow market. In 2012, almost UAH 582 million worth of revenue were officially generated versus the projected UAH 70 million. With that amount of money officially donated to the budget of Kyiv, one can only wonder about the value of shadow cash flow. According to expert estimates, during Leonid Chernovetskyi’s term in the mayor’s office, anonymous market players were offering to pass a positive decision on one land lot through the Kyiv City Council for US$ 200-500 thousand.

Land value tax discounts granted to communal companies deserve special attention. In 2010, the Kyiv city government granted more than 160 communal and publicly owned companies, organizations and structural units a total of UAH 593 million land value tax discounts. In 2012, land value tax discounts were granted to 130 communal companies.

WAYS TO REDUCE BUDGET SPENDING

There are waysto reduce budget spending but the government does not give them enough consideration. In 2012, a whole of UAH 5.4 billion were allocated for the public utilities sector. That amount of money could pay for thermal modernization of every old multi-storey apartment building in Kyiv or replace 2,800 kilometers of worn out heating pipes the costs of which are estimated at UAH 3 billion. However, UAH 4.8 billion of the total UAH 5.4 billion were allocated as subsidies and transferred for tariff debt servicing. Of those, UAH 3.6 billion were transferred to Kyivenergo which, according to expert estimates, is controlled by oligarch Rinat Akhmetov. Meanwhile, in 2012, Kyivenergo replaced only 75 of 2,800 kilometers of pipes that had been in operation for twenty five years and more and were in urgent need of replacement.

The tariff debtestimation is just as debatable. There is still no publicly accessible regulatory document that would clearly establish the methods of calculation of the so-called economically sound tariff rate by the National Energy Regulation Committee. Any information about the tariff rate calculation methods and calculations attached to corresponding decisions and contracts between the city and service providers are ‘for official use only.’ Disclosing the methods used to calculate tariff rates for the services of Kyivenergo, Kyivvodokanal, Kyivgaz, Kyiv Metro, Kyivpastrans, and other companies in the city as well as calculations themselves would really help optimize budget spending. In that case, there is a chance that service providers in Kyiv start thinking less about trying to ‘inflate’ their expenditures to obtain compensations from the city budget and focusing more on improving their cost efficiency, renewal of key assets, etc.

In 2009, the Kyiv Control and Revision Department detected a UAH 1.3 billion worth of fiscal discipline violations in the city and UAH 1.38 billions worth of violations from January to October of 2010. It is quite telling that in 2011-2012, the Kyiv State Financial Inspection service of the Ministry of Finance of Ukraine did not perform any large-scale audits of the Kyiv city government’s operations while in early 2012,the Main Internal Financial Supervision and Audit Department of the Kyiv City State Administration estimated the total losses at UAH 21 million, i.e. 65 times less than the estimates made by the Control and Revision Departmentin 2009-2010. It can be assumed that ‘partisan’ business structures that gained access to the city budget ensure effective financial management of resources and know the political climate well and that complaints against their operations will arise after the government change in Kyiv as is usually the case.It will suffice to mention asphalt pavement that started to disintegrate within six months after it was laidin Kyivin preparation forEURO-2012.

According to expert estimates, the use of non-publicized shadow pricing schemes for services of key providers of public services and utilities such as Kyivenergo, Kyivgaz, Kyivvodokanal, Kyiv Metro, Kyivpastrans, etc. opens the door to price gouging. UAH 3.6 billion worth of tariff debt relief received by JSC Kyivenergo in 2012 is only one such example, and that is only one of several public services and utilities providers in Kyiv. Non-transparent tariff setting and failure to recognize the real needs of the community result in billions of hryvnyas worth of budget losses every year. For instance, there is currently no accurate equipment in Kyiv for measuring the amount of heat production. Rough calculations are made using the volume of natural gas consumed and equipment effectiveness value divided by the total square area of the living space. According to expert estimates, the use of such inaccurate calculation methods leads to overcharging Kyiv residents UAH 500 to 700 million every heating season. Currently, only 36 percent of houses are equipped with heat meters.

Therefore, sound administering of only a few revenue and expenditure itemssuch as land value tax, lease of communal property, and procurement, can help increase the city’s budget revenue almost twofold. If 100 percent of revenue generated from the PIT, i.e. additional UAH 8.2 billion, go towards Kyiv’s budget and, accordingly, UAH 4.5 billion worth of official transfers from the state budget and UAH 2 billion worth of capital city supplement are abolished, Kyiv could generate additional UAH 1.7 billion worth of budget revenue. The UAH 15.7 billion thus generatedcould in fact be a second reserve budget and could be allocated to implement 51 targeted municipal programs aimed to address the most pressing issues of the city’s functioning such as renovation of the aeration plant in Bortnychi, renovation of public utilities sector including buildings and elevators in need of repair, etc., modernization of communal energy and heating systems, improving the quality of centralized drinking water supply, construction of affordable and social housing, etc.

Main objectivesfor increasing revenueand optimizing expenditure, UAH billions

 

Objectives

Revenue

Expenditure

1

Land value tax

+ 10.0

 

2

Prevention of corruption risks and recovery of budget losses caused by corrupt practices in public procurement. (According to expert estimates, ‘kickbacks’ on public procurement contracts are approximately 30 percent of contract value.)

 

- 4.1

3

Revenue generated from rental of uncommitted communal assets

+ 0.085

 
 

TOTAL

+ 10.085

-4.1

MICROMANAGEMENT IN KYIV: WHO DOES IT BENEFIT AND WHAT TO DO?

The answer to these questions is simple and fairly obvious. Micromanagement in Kyiv benefitsthe central government as it allows to controlwhoever is the current mayor and, conveniently,make him/hera ‘scapegoat’for the central government’s ownfailures. All it takes is to delay any budget transfer and make public sector employees believe that the city government is to blame for their income drop or cut the funding of minor repair of roads after the winter season. Who would bother to dig deeper to find out that the money was never actually transferred to Kyiv from the state budget?

Considering centralization of cash flows and priority funding of infrastructure, particularly the public utilities sector where, as of 2012, transfers from the state budget amounted to 60 percent, whoever is the mayor of Kyiv would be forced to promote the interests of financial and industrial groups rather than the city community. This is logical considering that lobbyists are exactly the ones who can guarantee the mayor that the situation in the city is stable and certain clandestine agreements are kept. Obviously, in this case, there is simply no point in talking about the mayor’s ability to ensure efficient budget spending as the money is allocated to suit certain businesses owned by lobbyists.

What do you do, then, if the city mayor decides to play his/her own game ignoring the central government or begins to sacrifice undertaken commitments to suit own or affiliated businesses? A similar situation happened during Leonid Chernovetskyi’s term in office. It would seem, then, that the central government can be beneficial to Kyiv residents? Indeed, it can be beneficial but only temporarily. However, after the rivals like Leonid Chernovetskyi and more or less independent players like the Kyiv City Council secretary Halyna Gerega whose hypermarket Epicentr was raided by the Security Service of Ukraine get forced out of the political market, the situation becomes as bad for the community as under the previous mayor. The main problem lies exactly in centralization of cash flows, effectively, lack of accountability of members of the Kyiv City Council to the community, and weakness of civil society institutions that are not quite able to monitor whether election promises are fulfilled, how the members of the Kyiv City Council are voting, and how the budget is planned and implemented. That is exactly the weak spot that every other mayor aims to exploit when promising voters to distribute one-off food packages or build a new metro line to a remote suburb or new metro stations and road junctions.

Kyiv residents must finally stop judging the mayor by his/her political party affiliation and instead focus more on his/her ability to manage budget funds and community’s other resources such as land, property, transport, etc., attract investment, implement innovations, create new jobs, and increase wages for employees, preferably without using any ‘donations’ from the Cabinet. That would help create a platform for competing ideas on Kyiv development policies instead of trying to shuffle the responsibility for all failures on predecessors and later repeating the exact same mistakes. In that case, the mayor would be judged by his/her ability to guarantee that the exact revenue projections are met and budget money is spent efficiently. Such game rules would ensure that the mayor of Kyiv will not be a puppet in the hands of the central government but a real king of the city and that Kyivites will not be disappointed in their elect again.

3. KYIV’S BUDGETING POLICY: KEY ISSUES

3.1. Unrealisticbudgets and persistentrevenue underperformance

On paper, the 2012 Kyiv budget was the largest budget in the last five years. With 2012 being the parliamentary election year, the ‘kind’ central government officials granted a generous transfer of UAH 6.4 billion thanks to which the revenue and expenditure projections were unprecedentedly inflated by UAH 5.8 billion and 10.2 billion, or 35.2 percent and 64.2 percent, respectively. The money was directed to keep the public utilities rates and public transportation fares at the current level as well as fund certain social programs in hopes to win the support of Kyiv residents.

However, only 95 percent of the budget revenue projected for 2012 were generated.

Part of the blame for inaccurate revenue forecasts should be placed on central units of the Ministry of Finance of Ukraine which, according to the Budget Code of Ukraine, are responsible for providing local governments with provisional inter-budget transfer estimates and coordinating expenditures for key social programs.

In Kyiv, like in many other Ukrainian cities, it is common practice to make multiple amendments to the city budget during the fiscal year at the insistence of the Kyiv City State Administration officials or certain deputy groups in the Kyiv City Council to implement proposals based on estimates made by professionals of relevant Kyiv City State Administration departments of the Kyiv City Council committees.

In 2012, various amendments to the city budget were adopted by the Kyiv City Council on ten(!) different occasions including three in November-December.

Repeated failure to meet the revenue projections of the city budget during the last six years suggests the inability of the city government to make realistic budget projections and generate sufficient revenue. In 2008-2012, the total deficit on revenue projections was UAH 21.6 billion. (See graph 1.)

Graph 1. Revenue projections versus actual revenue of the Kyiv budgetin 2008-2012, UAH billions.

Sources: http://kievcity.gov.ua, own estimates.

The analysis of revenue performance in the last five years shows a discrepancy between projected and actual revenues which suggests inconsistent development and implementation of the city’s main financial documents. (See table 1.)

Table 1. The Kyiv budget revenue in2008-2012, UAH thousands

Year(s)

Projected revenue as of 31 December of the current year (P)

Actual revenue, (A)

Performance, %

Difference, (A) - (P)

2008

24,550,001

20,532,226

83.6%

- 4,017,775

2009

24,037,642

15,537,652

64.6%

- 8,499,990

2010

22,464,785

17,188,729

76.5%

- 5,276,056

2011

17,290,285

14,546,215

84.1%

- 2,744,071

2012

22,232,498

21,128,057

95.0%

- 1,104,441

2008-2012

110,575,210

88,932,879

80.4%

- 21,642,331

Sources: http://kievcity.gov.ua, own estimates.

The UAH 21.6 billion total revenue deficit of the last five years is greater than one year’s actual revenue.

In 2012, Kyiv’s actual nominal revenue and expenditures were the largest in the last five years. However, in 2012,the budget deficit, i.e.the excess of actual expenditure over actual revenue,increased toUAH 2.5 billion, the highest in the last five years.

3.2. Mounting debt burden

In the last five years, the official debt ceiling reached its peak (see table 2). Currently, it amounts to UAH 8 billion, or almost 40 percent of budget revenue. In 2012, Kyiv’s debt service expenditures increased by 20.4 percent compared to 2011.

Initially, the Kyiv budget adopted for 2012 was deficit-free. Yet in April, the Kyiv City Council adopted amendments to the budget to include UAH 3.5 billion worth of internal loans and UAH 2.4 billion worth of external loans.

In 2012, debt servicing expenditures exceeded the city’s total expenditures on promotion of culture, arts, mass media, recreation, and sports (UAH 761.7 million versus UAH 739.2 million, respectively). As a result, Kyiv risks earning the reputation of an indebted city.

Seeing how a number of EU member states such as Greece, Ireland, and Portugal adopt their bail-out programs, the government must release full information about the city’s debt to prevent the city from sinking into the debt abyss. The share of budget funds earmarked for debt servicing is very alarming.

In 2008-2012, Kyiv’s debt ceiling was steadily increasing. Compared to 31 December, 2008, it increased by UAH 5,421,000,000 while revenue dropped by UAH 2 million. (See table 2.)

Table 2. Kyiv budget 2008-2012. Revenue and debt ceilingas of 31 December of the current year, UAH thousands.

Year(s)

Debt ceiling as of 31 December of the current year

Revenue

Debt/Revenue,

%

2008

4,840,000

20,532,000

23.6%

2009

5,439,000

15,372,000

35.4%

2010

6,749,000

17,231,000

39.2%

2011

7,921,000

14,546,000

54.5%

2012

8,070,000

21,128,057

38.2%

2013 (projection)

10,261,403

18,541,326

55.3%

Sources: http://kievcity.gov.ua, own estimates.

During the same period, the debt ceiling to revenue ratio increased by 2.3 and exceeded 55 percent. (See graph 2.)

Graph 2. Kyiv budget: revenue versus debt ceilingin 2008-2012 and projections for 2013, UAH millions

Sources: http://kievcity.gov.ua, own estimates.

3.3. Lack of transparency and accessibility in the budgeting process

The Kyiv budget never became transparent, accessible, and intelligible for the city community despite the Kyiv government’s declared goal to make Kyiv a modern European city.

The International Monetary Fund’s Code of Good Practices on Fiscal Transparency defines transparency as an environment where the public is informed about policy objectives, legal, institutional and economic frameworks, policy decision making and rationalization, data and information about monetary and fiscal policy, as well as accountability rules for agencies in an intelligible, accessible, and timely manner.

The Code is based on four general principles of fiscal transparency that all nations must follow.

1) Clarity of roles and responsibilities

2) Open budget processes

3) Public availability of information

4) Assurances of integrity

For transitional economies such as Ukraine, the minimum standards of fiscal transparency boil down to certain fundamental requirements that fiscal information should be provided to the public in a timely and comprehensive manner.

At its core, communication between the public and the government in a modern democracy has to be based on a principle of transparency which implies publicity of monitoring activities including both the monitoring process and relevant findings.

The term public means all individuals, organizations, and mass media concerned with the issues of budget planning, taxation, fiscal policy, and general functioning of the public finance system. The budget planning methodology may be implemented jointly with everyone concerned using public participation mechanisms such as public hearings, advisory committees, public meetings, public journalism, and many others.

The Kyiv government has not once informed the territorial community about the budget framework, objectives, and forecasts based on the principles of intelligibility, accessibility, and timeliness.

More detailed information about the Kyiv government’s compliance with the four general principles of fiscal transparency laid out in the International Monetary Fund’s Code of Good Practices on Fiscal Transparency can be found in Chapter 7, The Kyiv Budget: for Openness and Transparency, of the analytical report.


[1] According to the decision of the Kyiv City Council no. 43/1877 of 26 July, 2007, On Approval of Technical Documentationon StandardValue Appraisal of Land in the City of Kyiv and Appraisal Procedures, the average base value of one square meter of land in Kyiv is UAH 385.8. The decision was passed before the depreciation of Ukrainian hryvnya that took place in the fall of 2008.

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