Transport tariff-setting system due for big reform (479 words)

Published: 3/1/2001

Last week, President Putin highlighted two initiatives in the area of regulated tariffs - rebalancing transport tariffs and centralising the tariff-setting system. He called for the rapid elimination of housing subsidies and also ordered the government to prepare plans for transition to a 100% payment system, by early April. While the administration's determination to make a breakthrough in these areas is encouraging, according to Alexei Zabotkine of United Financial Group, the short-term impact is likely to increase the inflationary pressure in the economy. Energy tariffs and domestic transportation tariffs are disproportionately low at present, showing little correlation with the wider inflation indices - CPI and PPI - during 2H98-1999, and showed only a modest adjustment in 2000.Tariff rebalancing in the transportation industry is aimed at eliminating the gap between export and domestic tariffs - by lowering the former and increasing the latter - and is a small part of a much larger task. To handle it properly, the Kremlin plans to reform the entire tariff-setting system; a single federal body will synchronise tariff adjustment across the regulated industries, replacing the multiple federal and regional authorities, which operate at present. While compressed energy and transportation costs are used to subsidise the commercial sector, households also benefit from subsidised rents, low communal service payments and lax payment discipline - households covering only 40% of total housing costs in 2000, with housing expenses accounting for only 3.3% of household incomes. The balance of costs is covered by 40% state subsidies and a 20% net loss for housing sector enterprises. Indeed, the housing and communal services sector boasts the highest number of loss-making entities - 64% as against a 42% average for the economy as a whole. The recent energy crisis in the Far East illustrates the potentially dramatic pitfalls, according to Zabotkine, of the current subsidy policy in the energy and housing sectors, and its complete lack of viability from an economic point of view. Encouragingly however, it appears that Putin is eager to speed up the reform process to ensure that further disruptions to vital infrastructure do not spread across the country. Putin's tough stance implies that the pace of reform will be stepped up, leading to aggressive increases in tariffs and housing costs. The new plan calls for households to cover 100% of housing costs by 2003, a substantial reduction on the previous target for 2008 - with subsidies to high-income households likely to be cut as soon as this year. The government also plans to ensure a break-even level for natural gas tariffs by 2003, while the rebalancing of electricity tariffs - namely, the cross-subsidisation of households by enterprises - is an essential pre-requisite for utility sector restructuring. Implementation will most likely add to the inflationary pressure in the economy, but this is an inevitable evil in Zabotkine's view.

Article ID: 2385