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PLANNED REFORM OF PUBLIC SECTOR IN 2000 BEGINS WITH CUTS TO STATE FUNDS; ANALYSTS APPLAUD, BUT FUND MANAGERS SAY THEIR ROLE IS CRUCIAL

Finance Ministry axes state slush funds

Slovakia took its first painful step towards reforming public finances in January with the politically sensitive cancellation of a majority of state funds. The cuts were announced during a January 3 press conference by Finance Minister Brigita Schmögnerová, and aim to meet one of the European Union's 'Copenhagen criteria' for membership - control of state budgetary spending.
The cuts effectively terminate eight out of 12 existing state funds in the first quarter of 2000. Although the move will not bring great savings, it represents the first in a series of expenditure reductions planned by the government for this year.
Analysts welcomed the plan, one which they had been demanding for over a year, but officials with the funds and the ministries which administer them warned that the government would now be unable to meet the targets in its programme for 2000.

Slovakia took its first painful step towards reforming public finances in January with the politically sensitive cancellation of a majority of state funds. The cuts were announced during a January 3 press conference by Finance Minister Brigita Schmögnerová, and aim to meet one of the European Union's 'Copenhagen criteria' for membership - control of state budgetary spending.

The cuts effectively terminate eight out of 12 existing state funds in the first quarter of 2000. Although the move will not bring great savings, it represents the first in a series of expenditure reductions planned by the government for this year.

Analysts welcomed the plan, one which they had been demanding for over a year, but officials with the funds and the ministries which administer them warned that the government would now be unable to meet the targets in its programme for 2000.

State funds serve as a bridge between ministries and applicants seeking funding for projects in various fields like culture or agriculture. In theory, the projects which are financed by these funds in turn support the activities of government ministries, this helping the cabinet meet its programme objectives.

In 1996, the twelve funds cost the government 35 million Slovak crowns ($875,000) to operate; in 1997 it was 56 million crowns ($1.4 million) and in 1998, 80.5 million crowns ($2.01 million).

Too many bureaucrats

The funds were targeted for cuts because the Finance Ministry believed they added an unnecessary layer of bureaucracy to the economy and performed functions better suited to the ministries themselves or other institutions.

The Finance Ministry also felt that the funds had become corrupt, with little transparency or accountability for spending.

A case in point was the Pro Slovakia Fund under the Culture Ministry, which during the Mečiar government in 1997 poured six million Slovak crowns into a 'cultural monument' at Devín Castle that was little more than a large rock.

Finance Ministry spokesman Peter Švec said that the time was ripe for cuts. "This issue [cancellation of state funds] has been in the government since last year," he said. "It was up to the various ministries to come up with ideas. But since nothing was done, we took the initiative into our own hands and will push the reform forward."

But not all the funds will be so easy to get rid of. Some borrowed huge amounts of money to complete government projects, the best example of which was the Road Fund. Since the banks that provided loans for the building of highways actually signed the loan contracts with the Road Fund, the fund must continue to exist until the loans are repaid.

"We [the Finance Ministry] would like all the funds to be cancelled, but this will be the subject of tough political discussions," Švec said.

Ján Tóth, a senior analyst with the Dutch investment bank ING Barings, welcomed the liquidation of the funds, saying they had added billions of crowns in unofficial spending to the fiscal sector deficit.

Because of the special legal status the funds hold, Tóth explained, loans taken for big state projects were not always seen as state expenditures, meaning that the true deficit remained concealed.

The fund also customarily paid up to 1.5% more in interest than the government would have had to, adding approximately 77.4 million crowns in expenses every year.

Tóth agreed the funds had become corrupt. "I believe that it is necessary to cancel these funds, because there is a natural temptation for corruption there," he said.

Fund managers protest

But not all are keen to see the Finance Ministry's plans unfold. Zoltán Kasa, the head of the Housing Development State Fund, said he had taken great pains to ensure transparency in spending, and had recently undergone audits from the Supreme Control Office and the Construction Ministry.

He added that the Housing Development Fund was "a living body" which had already given out 7.2 billion crowns to 14,271 people. "I can understand that the existence of the funds is an obstacle on the way to the EU and OECD, but it's important to differentiate which funds should survive," Kasa said.

The Finance Ministry wants banks, instead of the Housing Development State Fund, to provide loans to home buyers, a plan Kasa dismissed as nonsense. "There is no chance that banks can provide loans at the same rates as we do," he said. "Before the government accepts the cuts, it should bear in mind that its programme says that by the end of the year 2000, Slovakia will have 56,000 more flats. Without our help they can forget about it."

Both ministry officials and analysts expect tough political debates on cancellation of the funds. Culture Minister Milan Kňažko announced at a press conference on January 11 that the culture fund Pro-Slovakia would certainly not be cancelled this year.

For Martin Barto, the head of strategy at the state-owned bank Slovenska Sporiteľňa, the issue was clearly political.

"A lot of people found jobs in these funds, while the heads of the funds are usually political nominees closely connected with their parties. These funds are safe havens for them," Barto said, adding that the Finance Ministry should press ahead no matter what the opposition. "This is only first step on the way towards larger reform of the public sector."

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