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Russia: World Bank Awaits Next Step For Coal Restructuring

Washington, 15 September 1997 (RFE/RL) - The World Bank's director of relations with Russia says he hopes Moscow will have its next set of proposals to restructure the country's coal industry ready for a bank delegation which will be in the Russian capital at the end of the month.

Russian Country Director Michael Carter says the new reform proposals will be necessary for the bank to determine if it can go ahead with a second $500 million coal industry restructuring loan this year.

In a telephone interview from his Moscow office, Carter told RFE/RL's economics correspondent that bank officials were "a little concerned" early this summer because the Russians were not moving forward very quickly on developing proposals for the next phase of reform.

But now, he said, the work is going ahead and while bank officials have not yet seen the Russian proposals, Carter says he's hopeful they will be good enough for the bank to move forward quickly with the second coal loan.

The bank's efforts at helping Russia modernize and privatize its highly inefficient and heavily overstaffed coal industry -- starting with a first loan of $525 million approved last July -- have became the center of a swirling controversy in recent months.

Allegations surfaced that the bank lost track of the money and control of the reform project and that -- in the words of a recent "Business Week" magazine article -- "most of the aid was either stolen by corrupt officials, handed over to foes of reform or spent on projects unrelated to coal."

Russia officials acknowledge there were problems in handling the broad project. Deputy Prime Minister and Economics Minister Yakov Urinson told a newspaper last week that officials in charge of distributing the coal reform money had been replaced and that the government is considering consolidating control over the project in just one ministry -- Fuel and Energy -- from the several now involved.

"We are pressing for full transparency in the use of state support finances, notably the World Bank's money," said Urinson.

Carter says that while there were problems with the Russian coal industry reform program, there was a great deal of misunderstanding of the bank's loan.

"Those moneys were not earmarked in particular for the coal sector," said Carter, but were paid into the general budget in the form of a structural adjustment loan from the bank.

It was up to the government to determine exactly when and where the money would be disbursed, although there was an agreement with the bank about the reforms for which certain amounts of money was to be spent.

Part of the money was distributed through local administrations in coal mining regions and part was channeled through RosUgol, the Russian coal monopoly.

Carter says the money that went through RosUgol was not monitored directly by the bank and bank officials now feel that "some of that money clearly did not reach the intended destinations."

In fact, says Carter, the major problem was with the funds that went through RosUgol because too much was used to continue old state subsidies to inefficient mines.

"We knew that was going to happen," says Carter. "Indeed, that was envisaged." But also as planned there was a "very substantial reduction -- on the order of about one-third in real terms -- of those subsidies as part of the program we supported," he says.

Of course, Carter adds, Russian authorities need to go much further because the objective is to phase out those kinds of subsidies altogether. "We're looking forward to a major reduction in 1998," he says.

The part of the first coal loan that was channeled through local authorities also suffered from some misdirection of funds -- perhaps as high as 15 percent according to some in the Russian finance ministry.

But Carter says the term "misspent" is not clearly understood.

"Our information is that quite a lot of this money was used for partying salary arrears to public sector employees like teachers and doctors" in coal mining regions, he says. "Of course, that is a misspending in terms of money destined for the coal sector, but this was not necessarily money embezzled or stolen -- it was simply money that went to other purposes outside that particular program, but also quite good purposes."

Economic Minister Urinson makes much the same observation. Use of the money to pay wages to teachers and doctors "could be understood, but buying cars by proxy was scandalous," he said.

Carter says a large part of the first coal loan -- and even more in the pending second -- is designated for social spending in mining communities. Before the first loan, there was no government spending on social services because those services were provided by the mines.

That was changed under the reform plan worked out with the bank, says Carter, and last year 20 percent of the total funding going from the government budget for the coal industry went for social purposes.

"What we're hoping is that next year there will be substantial (further) declines in operating subsidies, but another big step up in those social expenditures," says Carter. Miners who have lost their jobs have not yet received severance payments, he says, and there is an urgent need for retraining for the miners and the creation of new jobs in areas affected by mine closures.

"Those kind of expenditures really facilitate immediate structural change, but also have a very positive social impact," Carter says.

Under the broad retructuring plan, production has alreay been stopped at 37 loss-making mines and the remainder of the industry is to be demonopolized, modernized and privatized.

But says Carter: "It's really only going to be possible for (the bank) to continue its support of these coal reforms if we feel they are making a substantial and irreversible progress toward creating a competitive, private sector coal industry as well as addressing the social issues."