Improving organizational, economic and legal mechanisms of the development of cultural sector

An article by Elena Melville, Deputy director, Creative Industries Agency, lecturer at the Moscow Higher School of Social and Economic Sciences (Moscow). Published in: Improving Quality of Cultural Activities in the Context of Public Finance Reform in Russia: National and Regional Experience: Collection of articles / Agency for support of cultural initiatives «Tranzit».

One should correlate the management of local cultural processes with general Russian and international context. Today a new complex model of development linking economy and culture, which becomes an important factor of economic and social growth, is being shaped. Efficient operation of organizations of culture, their cooperation with other social actors allows solving social and economic problems, improve urban environment, develop tourism, attract investments and generate new jobs. 

Apart from traditional public cultural institutions creative businesses play a significant role in this process. Emerging «new» producers of cultural products, expansion of organizational and legal forms of public institutions, adoption of new forms of financial provision of public services – all these factors facilitate competition both within the public sector and between public and non-governmental cultural sector for the demand and attention from customers, for financial resources and labor force.    

In the new situation a special role is assigned to public cultural institutions, because over 90% of the population, as experts estimate, consume their services. The leaders of public institutions must not only understand the nature of on-going changes in legislation and economic field in result of restructuring of the public finance system, but also be able to use new instruments.     

Since 2004, the spending of consolidated budget of the Russian Federation for culture has made from 2,4 to 2,8% on average. The condition of cultural infrastructure, monuments of cultural heritage and cultural facilities in general is terribly poor. Despite increase of funding, the diversity and quality of services provided by public cultural institutors as well at the access to them are insufficient. The reasons for this are not directly connected to funding, but rather lie within the realm of cultural policy:  

  1. Imperfect state cultural policy, which considers only public cultural institutions as the subjects of the policy. These institutions traditionally rely on public funding exclusively and, therefore, they are quite distanced from the market;
  2. The lack of modern system for cultural management training and underdeveloped innovative management in the sector;
  3. Lack of real mechanisms of public-private partnership for attracting investments into development of cultural infrastructure.

«The Principles of Restructuring of Public Sector in the Russian Federation in 2003-2004 and until 2006» outline the main problems in funding and managing the sector of public institutions in the social and cultural fields: inefficient allocation of financial resources, unreasonable structure of administration, low quality and accessibility of public services. The document suggests that the main prerequisites for introducing new forms of public finance and improving the quality and accessibility of public services consist in transformations aimed at making legal capacity more clear and (or) reorganization of public institutions, which are able to operate in the market environment, into other legal and organizational forms. The essence of such transformation consisted in relieving the state from the responsibility to guarantee funding to such institutions based on the estimate of expenditures and incomes. In exchange, for the organizations established in the process of reorganization the state removes the limitations for commercial activities and allows them freely manage self-generated incomes.     

The optimization of the network of recipients of public funding was to a some extent carried out in the framework of the administrative and local self-governance reforms. Today the process of transformation of public sector is still underway (in 2006 the Law on Autonomous Institutions was passed). From 2007 on, the state and municipal institutions of a new type (autonomous institutions) started emerging in Russia. So far, only a small number of cultural institutions have become autonomous ones, mostly in the field of performing arts and vocational training.

Economic downturn, which forces the state to reduce public spending, no doubt, will facilitate the process of «autonomization» of public institutions and will encourage  public institutions to look for legal ways of generating and managing extra incomes.

It is expected, that the massive reorganization will take place in the years 2009-2010. The federal authorities push the reform of the public institutions system, which many managers of public institutions testify to. It is supposed that all public institutions will be divided into three categories: autonomous, governmental and public institutions of a new type. The autonomous institutions will be the most independent ones. It is obvious that the number of public institutions fully financed by the state will be significantly reduced. In this situation especially important is the analysis of possibilities provided by new organizational and legal forms of public institutions, particularly the form of an autonomous institution.   

Legal framework for operation of autonomous institutions   

The legal aspects of transforming public institutions into autonomous ones are regulated by the Federal Law «On Autonomous Institutions» adopted on 03.11.2006 and other acts.

Autonomous institutions can be set up in two ways:

  • Setting up from scratch (establishing a new autonomous institution);
  • Changing the type of an existing public institution.

Establishing a new autonomous institution. As onlythe Russian Federation, a subject of the Russian Federation or a municipal entity can be a founder of an autonomous institution, a decision of the relevant authority is required first of all. The key issue in this situation is the issue of property, on the basis of which a new institution will be established. In the situation of economic crisis the only chance to «rescue» social facilities is to pass them into public property.    

Changing the type of an existing public institution. Any public institution of the social (in the field of science, education, health care, culture, social welfare, employment, physical training and sport) and other spherescan be transformed into the autonomous one, once relevant social and economic grounds are provided. The exception is only the institutions of the healthcare system, the legal type of which, according to the law, can not be changed at the time being. Establishing a new autonomous institution by changing the type of an existing public institution is not considered to be its reorganization. Licenses and other permissions are used by an autonomous institution until their validity expires.

Main conditions for transforming a public institution into the autonomous one. The first and obligatory condition for making decision to change the type of a public institution is the initiative (or agreement of employees) of the public institution itself. The proposal to set up an autonomous institution is prepared with the concurrence of public property management bodies.  Besides, such a decision should not entail violation of citizens’ rights in the social and cultural field, including the right for free education and the right to participate in cultural life.    

The decision on changing the type of a public institution into the autonomous one can be positive, if there exists a real opportunity for development and sustainable operation of the institution in case of decrease of public funding, i.e. if the performance of the institution meets the following criteria:

  • Large share of self-generated income (over 30-40%);
  • Possibility of expanding the range of paid services, which do not fall within the list of services guaranteed by the state;
  • Possibility of raising funds for operation from private sources (grants, donations, sponsorship);
  • Availability of free (reserve) facilities;
  • Availability of staff, which is ready to work in the new conditions and management oriented to innovations;
  • Possibility of involving more qualified employees for improving the quality of services;
  • Solvent demand of population for the institution’s services (readiness of the population to buy services).

Similarities and differences between autonomous and public institutions. Autonomous and publicinstitutions are similar in what concerns the following parameters: type of property (state or municipal), founder (Russian Federation, subject of the Russian Federation or municipal entity), objectives and types of activities, secured funding from a relevant budget, property (state or municipal) on the basis of operation and assignment of the right of unlimited use of land. The founder enjoys the right of appointing and dismissing an institution’s director.

Nevertheless, there is a number of fundamental differences.

Parameter

Public Institution

Autonomous institution

Guarantee of public funding   

The founder allocates funding to provide the institution’s functions, fulfillment of the public service contract based on the estimate of expenditures, joint liability (the founder is liable for possible damage caused by the institution) 

The founder finances public service contract (including maintenance of property and tax payments) in the form of subsidies and subventions. Allocation of subsidies for the development of the institution is not guaranteed and is to be provided only in the framework of approved programs.   

Degree of independence of an institution in spending public money 

Has a right to make expenditures only within the limits of an approved budget. Is obliged to follow federal procurement laws.    

Has a right to spend subsides independently in accordance with the mission and regulation concerning major contracts.  Is not obliged to follow federal procurement laws, as autonomous institutions are not public contractors.

Rights for self-generated incomes and property acquired using them    

Incomes are referred to the budget and included into the income of the relevant public budget.

Incomeismanagedbytheinstitutionindependently. The founder of the autonomous institution has no right to use incomes generated by the institution. 

Right for dispose of assigned property   

Has no right for dispose of any assigned property, including the property acquired at the expense of self-generated income.

Has right for dispose of assigned property, excluding immovable and very expensive movable property, which the institution can dispose only with prior approval of the owner.       

Making payments   


Via Treasury

 

Via independently selected bank   

Employees’ salary range   

Set in accordance with a unified scale of rates or sectoral remuneration systems   

Set independently in the framework of the institution’s own human resources policy and depending on available  financial resources

Number of employees

Set in accordance with a staff list approved by the founder    

Set independently in the framework of the institution’s own human resources policy and depending on available  financial resources.

Liability

Liable. Liability is covered by cash disposed by the institution. In case of insufficient means to cover liability, the owner takes subsidiary liability 

Liable. Liability is covered by property assigned to it, except for immovable or very expensive movable property assigned to it or acquired at the expense of the founder. The owner of the autonomous institution’s property is not liable for the institution’s commitments, and vice versa.   

Right for loans    

Has no right to take loans

Has a right to take loans

Public control over the institution’s activity   

Not obligatory

Obligatory. The forms of control include a supervisory board and regular publishing of reports on institution’s operation in mass media   

Annual audit

Not obligatory

Obligatory

Right to set up other legal entities and make contributions into the fixed capital  of other legal entities

Has no right

Has a right with the approval of the founder   

Profit tax

Quarterly payments regardless the size of revenue    

Quarterly payments only in case annual revenue exceeds 3 mln. rubles

Possibility of applying a facilitated taxation system 

Can not use a facilitated taxation system 

Can use a facilitated taxation system 

Let’s examine specific features of financial and legal status of an autonomous institution in relation to property, management, liabilities, taxation and funding provided by a founder.

It is set by the law, that property (including cash), assigned to an autonomous institution at the moment of its establishment, has to be sufficient to provide for activities envisaged by the statutes and cover liabilities for the commitments of the public institution, which occurred prior to changing the status of the institution. Attachment or reduction of property(including cash), assigned to public institution during its transformation into an autonomous institution is not permitted. An autonomous institution can not independently (without a founder’s agreement) handle immovable or very expensive movable property, passed to the institution for operation or acquired at the expense of the founder. The rest of property, acquired at the expense of self-generated income, including the property that doesn’t fall within the list of very expensive movable and immovable property, can be handled by the institution at its own discretion.     

Annually, until June 1st of the year following the reporting one, an autonomous institution must publish a report about its operation and usage of the property assigned to it in mass media, defined by a founder. The report is to be approved by a Supervisory board.  

Managing an autonomous institution. Along with a director and bodies defined by the statutes, a Supervisory board is an authority managing the autonomous institution. A supervisory board (from 5 to 11 members) is composed of representatives of a founder, representatives of executive authorities or local self-government responsible for management of public property (not more than 1/3), employees of the institution and representatives of public (not more than 1/3). A head of an autonomous institution and its deputies can not be members of a Supervisory board. Members of a Supervisory board work on a volunteer basis. The exception is the members of the board appointed from the number of officials, for whom performing these functions can be included into their responsibilities at their main job.  

An advisory board provides recommendations regarding: 

  • amendments to a statutes of an autonomous institution;
  • establishment, closing down branches and representative offices of an autonomous institution;
  • reorganization or closing down an autonomous institution;
  • attachment of property, assigned to a autonomous institution for operation;
  • participation of an autonomous institution in other legal entities;
  • deals with immovable or very expensive movable property.

An advisory board puts forward resolutions on:

  • a draft plan of financial and economic activity of an autonomous institution;
  • suggestions on choice of credit institutions in which an institution can open bank accounts.

An advisory board takes decisions on:

  • proposals on major transactions and interested party transactions;
  • auditing annual accounting report and approving an auditing company.

An advisory board approves:

  • draft reports on operation of an autonomous institution and usage of its property;
  • draft reports on implementing aplan of financial and economic activity;
  • annual accounting reports.

Tax at atautonomous institutions. Autonomous institutions enjoy the so-called «taxation immunity» in relation to several types of income: gratuitous assignment of fixed assets is not subject to VAT; property assigned to an autonomous institution according to a decision of authorities of any level is exempt from a profit tax; subsidies and subventions provided to a autonomous institution are considered target finance and do not constitute income, which is the subject to a profit tax.  

Similarly to a public institution, an autonomous institution must have separate records of incomes and expenditures of target finance and its own business activity.  

Financial status of an autonomous institution.A founder fully guarantees only maintenance of immovable and very expensive movable property (only in the part which is not let out) and   provision of funding for public service contracts according to set standards. As far as funding for the development of an autonomous institution is concerned, it is provided only in the framework of approved programs. To ensure smooth transition to autonomy the federal legislation sets  a so-called three-year «leveling subsidy». An autonomous institution gets a subsidy, which is calculated as a difference between public funding allocated to a public institution for an operating year and planning period and a subsidy compensating normative costs of services and maintenance of property during reorganization into an autonomous institution.   

Despite the fact the according to the legislation the state can not permit decrease of funding for public services, many institutions face the problem of delayed provision of finance, sometimes for three and more months. In this situation an autonomous institution runs the risk of loss of solvency. i.e. ability to fulfill its commitments, that can result in:

  • attachment of movable property, acquired using the institution’s own assets;
  • punitive measures from tax authorities;
  • charge-offs from an institution’s bank accounts based on a judicial decision;
  • loss of credit sources of funding by an autonomous institution.

Belated funding of public contracts of an autonomous institution can result in the institution’s failure to fulfill its commitments towards the staff, that in its turn can lead to a decrease in the volume and quality of provided services.

In this case profound elaboration of contracts between a public contractor and an autonomous institution is required. The contracts shall envisage liability of a public contractor for a belated provision of funding to an autonomous institution in the framework of a public contract and a schedule for financing the public contract of an autonomous institution.

Practice of making a contract for public services: calculating the volume and cost of public services. The public sector reform envisages transition from cost management to management by objectives. The reform relies on the principle of result-oriented budgeting, which can be defined as a system of budgeting reflecting correlation between public spending and achieved results.  This principle is reflected in the new system of financing public services – standard special purpose funding (SPF). When SPF is applied, expenditures for provision of specific services are calculated based on a single standard set by executive authorities. The SPF is used to calculate allocations for executing contracts for public services by both public and autonomous institutions.

It is very important for cultural institutions to identify, what a particular public service is, as far as its volume, structure and cost are concerned. To set a standard for financing contracts for public services it is vitally important to calculate the cost of a public service in a proper way.  In case the contract is made using a reduced cost without consideration of real costs, it will be impossible to execute it, that undermines the operation of a cultural institution. It’s natural, that in this situation vitally important becomes systematization of public services, that implies clear description of services provided at the expense of the public budget as well as elaboration of the system of their standardization based on priorities and tasks set by the federal legislation in the form of authorities’ responsibilities in the field of culture.    

Methodology for calculating the total cost of a public service. The Institute of Urban Economics(Moscow) developed the Methodology for Calculating the Total Cost of a Public Service. The authors of the Methodology suggest the following procedure for calculating the total cost of a public service:

  1. Setting objective sand tasks.
  2. Analysis of the procedure of providing a service.
  3. Selecting the unit of measurement.
  4. Identifying expenses incurred for providing a service.
  5. Identifying the cost of a public service.

To an organization (public or autonomous institution) such calculation of the cost of the service can help identifying whether it is possible to improve the quality of services using the institution’s internal reserves or additional public funding will be required for that.  In practice various methods of calculating the cost of a public service are applied in Russian regions. 

Contract for public services (works). TheContract for Public Services is a document setting requirements to the structure, quality and (or) volume, conditions, procedure, terms and results of carrying out works and providing public services in accordance with the core activity of an institution set by its statutes. It’s the main administrator of public funds who has the authority to formulate a public contract (work, task). The contract includes parameters of a service (characteristics and quality of beneficiaries (demographic, social and economic status, place of residence; title and specification of services; quantity and time related characteristics of a service and its quality); required conditions for provision services (organizational; competence related; infrastructural); expected results; cost.

Efficient execution of the contract, and, consequently, the quality of services provided in its framework, depend not only on the actions of the authorities, but on to what extent an institution as such is financially precise and methodologically competent in collecting and analyzing information in order to prepare a contract. 

Changes in the procedure of financing public services, appearance of competitors from the private sector, transformation of organizational and legal models of activity put public cultural institution into a new context. The transformations in legislation and economic field which took place during the last years encourage greater independence (economic, operational and creative) of cultural institutions and stimulate further development. To effectively use the new legal and economic instruments cultural institutions will have to shift from simple following of instructions to real management activity that consists in development of an institution’s own strategy and tactics, implementation of set objectives and adequate assessment of its performance. Organizations of culture should have a look at themselves from a new perspective, to consider themselves as producers of new and relevant to consumers’ demand cultural products and services, not as static bureaucratic systems. Flexibility and dynamism, openness and readiness to act – these are the qualities, which are today in demand not only in creative practice, but also when social problems of the society are being solved. These are the qualities of a responsible manager, who sees and understands the future of his/her organization.  

 

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