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New standards, old audit: how state corporations will be tested for efficiency

The article originally published on 1prime.ru

Photo credit: RIA Novosti

The government intends to try a new method to assess the efficiency of state corporations and top management, Vedomosti daily reports with reference to a copy of the Cabinet resolution. Based on these recommendations, Boards of Directors of the state corporations and banks will review key performance indicators (KPIs) that will determine bonuses to top managers.

Most of the KPIs remain the same in the new government decree, such as financial performance indicators and debt burden. But there are also some new ones — the state corporations will have to assist the government in implementing the President’s May decrees. The government introduced KPIs for state corporations in 2014. Since then, 80% of the state corporations have implemented these.

Experts surveyed by Prime agency believe that introduction of the new KPIs is an important action. The new system is more accurate and transparent, most indicators can be quantified and calculated easily.

Nevertheless, the main issue remains the same as before — how effective will be the audit of the budget and KPI performance? Today this is the responsibility of the Boards of Directors and audit firms, paid for by the corporations themselves. A different player is needed to make the situation more transparent.

BETTER AND BETTER

The new KPIs include the ratio of investment to cash flow and depreciation charges. Growth of investment is one of the key points in Vladimir Putin’s May decrees; their share in GDP must increase to 25% in 2024.

The Ministry of Economic Development believes GDP growth rate will exceed 3% starting 2021, thanks to national projects. The Ministry expects the investment to take a real spurt in 2020, with the growth rate more than doubling to 7.6%, then staying above 6% until 2024. For now, however, the situation remains miserable: investment growth rate in the 1st quarter was just 0.5%.

It always makes sense to introduce new KPIs, particularly when they are economically reasonable, says Oleg Shibanov, Professor Russian Economic School. The government as the majority shareholder is entitled to set performance targets that state corporations have to meet, such as production growth or performance growth.

“The devil is in the detail. For example, if a KPI is related to import substitution, then there may be nuances. But even in this situation, you just have to look at detailed breakdown”, the expert explains.

Most often, KPIs are an efficient tool in assessing the quality of private company management operations, says Mikhail Khachaturyan, Associate Professor, Chair of Organizational and management Innovations, Plekhanov Russian University of Economics. They are based on the desirable levels of management system efficiency as established by the owner and top managers. These levels are based on an assessment of the organization’s status and levels established in the strategic plan.

The expert says that introducing KPIs for state corporations is an effective method of measuring the quality of management system, but only if they consider the company’s influence on the social infrastructure in its regions of presence, not just economic effects on the company itself. The new KPIs would enable the government to assess corporate social responsibility of its holdings, on the one hand, and build a transparent mechanism for identifying the most efficient projects impacting social and economic development of the regions, on the other hand.

The government must also factor in the interaction between state corporation management and small and medium enterprises in the regions, engaging the latter in the implementation of state corporations’ projects. An important criteria in efficiency assessment would be the degree of digitization of state corporations’ business processes, Khachaturyan believes.

The main advantage and benefit of the new system is that each criteria is easy to calculate and measure — whether it’s production or investment growth, reducing non-core assets, says Dmitry Zhuravlev, General Director of the Institute for Regional Issues.

“In this situation it is vital that assessment mechanisms are clear and unambiguous, so that officials cannot drown the initiative in red tape”, the expert remarks.

The important thing is that these calculations must actually be performed, according to Mr. Zhuravlev.

WHO DOES THE CHECKING?

To properly evaluate the efficiency of top management’s key performance indicators, an expert information platform needs to be developed, which will record all achievements in an unbiased manner, says Alexander Borodich, the founder of Universa Blockchain platform.

Any data recorded in this system must remain invariable, and not be affected by administrative pressure. This kind of platform can be created using distributed ledger technology, which ensures full transparency and preservation of all the information entered in the database, the expert notes.

For now KPI performance is monitored by Boards of Directors, in which votes are distributed by the number of shares. Since the government has the majority stock in state corporations, the monitoring is done by the government representatives.

Usually this means top government officials, according to Mr. Borodich.

“It is up to these persons to determine whether the new system will work. It is not that hard to control, if you want to”, the expert believes.

Shabanov reminds that it is not just the Boards; there are also audit firms that review the accounting statements and other documents of the state corporations. The Auditing Chamber is starting to pay close attention to the budget performance.

This is the body that can find every detail and inconsistency in the most transparent manner, or confirm that all the KPIs have been met, the expert believes.

At the same time, Shibanov urges caution.

“It would be great to meet all the goals set in the May decrees, but let’s not forget each company has business to mind. We cannot mobilize state corporations to fight poverty. They have their own priorities”, he remarks.

A good approach, according to the expert, would be to introduce specific economic indicators, while implementing the May decrees would follow from efficient work of the state corporations, rather than a target in itself.

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