FOREIGN DOCUMENTS DIVISION TRANSLATION ORGANIZATION OF FINANCING AND CREDITING IN CAPITAL INVESTMENT

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• Publication Date: February 28, 1955
• Content Type: TRANS

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FOR OFFICIAL USE ONLY
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FOREIGN DOCUMENTS DIVISION
TRANSLATION
28 Feb 1955
ORGANIZATION OF FINANCING AND CREDITING IN CAPITAL INVESTMENT
Organizatsiya Finansirovaniya i Kreditovaniya Kapital'nykh
Vlozheniy, Moscow, 1951, 375 pp.
THIS IS AN UNEDITED TRANSLATION DISSEMINATED
FOR THE INFORMATION OF THE INTELLIGENCE ADVI-
SORY COMMITTEE AGENCIES ONLY. IF FURTHER DIS-
SEMINATION IS NECESSARY, THIS COVER SHEET MUST
BE REMOVED AND CIA MUST NOT BE IDENTIFIED AS
THE SOURCE.
Number 351
CENTRAL INTELLIGENCE AGENCY
2430 E Street, N. W.
WaehIngton, D. C.
FOR OFFICIAL USE ONLY
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Distribution List
State
5
Army
16
Navy
5
Air Force
11
AEC
1
NSA
.7
USIA
1
CIA
63
Total
109
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ORGANIZATION OF FINANCING AND CREDITING IN CAPITAL INVESTMENT
Symposium of Authors under the Direction
of Professor N. N. Rovinskiy
Approved by the Minister of Higher Education of the
USSR as a Teaching Aid For Financial-Economic
Institutes and Departments
Gosfinizdat, Moscow, 1951,
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The Soviet people, led by the great party of Lenin-Stalin, has
successfully completed the Postwar Five-Year Plan. The chief tasks
of the Five-Year Plan -- restoring the nation's war-damaged areas, re-
gaining the prewar level of industry and agriculture and then surpass-
ing that level by a considerable margin -- have been successfully ful-
filled.
The rapid rates of growth of industrial production and all branches
of the national economy have been achieved by a grandiose program of
capital construction. In four years and ten months of the Postwar Five-
Year Plan, about 6,000 industrial enterprises were reconstructed or
newly built, not counting small state-owned and cooperative enterprises.
The economies of the areas that suffered from the war have not only been
restored., but have also been greatly expanded and new and more modern
technology introduced.
In advancing toward communism, the Soviet people, under the leader-
ship of the great Stalin, are working with great enthusiasm for the
continued expansion of the national economy and improved. technical out-
fitting of all branches of the economy. A clear indication of this is
the beginning of construction, pursuant to the Government's decision on
the Kuybyshev and Stalingrad hydroelectric stations on the Volga, the
Main Turkmen Canal from the Amu-Dar'ya to Krasnovodsk,,the Kakhovka
hydroelectric station on the Dnepr, and the South Ukrainian and. North
Crimean canals. In scope, technical design, and the speed. of construc-.
tion, these are true projects of communism. The construction of such
facilities is possible only in the Soviet Union -- a country advancing
toward. communism.
The grandiose scale of capital construction in the USSR is expand-
ing from year to year. In this connection, questions relating to further
improvement of the organization of construction and the reduction of
costs are becoming important state matters.
A key role in the reduction of construction costs and. the achieve-
ment of speedier construction rates and. greater efficiency is played. by
the proper and most rational organization of the financing of capital
investments and further improvement of the operation of the long-term
investment banks.
The present textbook discusses the existing system of financing and
crediting capital investments and the financial and economic operational
methods of the long-term investment banks.
This teaching aid has been compiled. in accordance with the syllabus
approved for the course on Organization of Financing and Crediting in
Capital Investment.
In compiling the textbook, the authors took account of the fact
that the course on Organization of Financing and. Crediting in Capital
Investment is open only to students who have taken the prerequisite
courses on Finance in the USSR and Money and. Credit in the USSR, which
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discuss finance and. credit in the USSR and the theoretic bases of the
Soviet financial and credit system.
The book does not offer an exhaustive treatment of questions
relating to advance planning, making cost estimates, organization and.
planning construction, operational and accounting techniques in long-
term investment banks, and analysis of the operations of construction
organizations, since these questions are taken up in other courses.
The book has been written on the basis of legislation in effect as
of 1 November 1950.
The members of the symposium who wrote the textbook under the
direction of Professor N. N. Rovinskiy are: I. D. Sher, S. I. Nedelin,
V. F. Girovskiy, P. M. Yakushev, and. Ye. G. Tul'chinskiy.
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CAPITAL INVESTMENT AND THE FIXED CAPITAL OF THE
NATIONAL ECONOMY OF THE USSR
1. General Characteristics of Capital Investment in the Economy of the
USSR
The means of production include independently of the social condi-
tions under which labor is performed, the tools of labor (machines,
implements, and so forth) and the objects of labor (raw materials, sup-
plies, and so forth).
In. a capitalist economy the means of production is capital and
serves as a means of exploiting the workers. The difference between the
tools of labor and the objects of labor is then resolved into a difference
between fixed capital and working capital.
The social and economic character of the means of production dif-
fers in principle in a Socialist state. As a result of the victorious
Great October Socialist Revolution, a new, unprecedented form of social
development has been created in the Soviet Union. The economic basis of
the Soviet state -- the Socialist economic system and Socialist owner-
ship of the means of production -- has arisen as the result of the
liquidation of the capitalist economic system, the elimination of pri-
vate ownership of the means of production, and the annihilation of
exploitation of man by man.
In a Socialist economy, the means of production -- the tools of
labor and. the objects of labor -- are neither capital nor private
propertyo they are state (people's) property or cooperative and col-
lective farm property and serve as a means for the further expansion of
Socialist production, raising the material and cultural living standards
of the working people, and. strengthening the independence and defensive
capacity of the country.
The tools and objects of labor in a Socialist economy function as
fixed and working capital and are the component parts of the social
production capital.
At the end of the Second Five-Year Plan, the share of the Socialist
sector in the USSR's production capital was 98.7 percent, of which 90
percent was state (people's) property and 8.7 percent cooperative and
collective farm property. Individual collective farmers owned 1.1 per-
cent and private farmers and artisans owned only 0.2 percent of the
total production capital of the USSR.
The difference between fixed. capital and working capital lies in
their differing functions in the production process, in the way in which
their value is transmitted to the final product. Working capital (raw
materials, supplies, fuel, and so forth) is used up in its entirety in
the production process and. transmits all its value to the finished
product. Fixed capital (machines, implements, and. so forth) retains
its natural form in the course of the production process and transmits
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its value to the finished product not in its entirety, but gradually in
the form of depreciation.
This essential difference between the respective functions of fixed
and. working capital in the production process also determines the char-
acter of their reproduction. While working capital is regularly repro-
duced in its entirety within relatively short periods, fixed capital is
replaced in its entirety only after a lengthy period. in the course of
which individual parts of machines and implements may first be replaced.
Working capital (raw materials, auxiliary supplies, and so forth)
in the course of a complete cycle is made up entirely of materials in
kind and passes not only through the production phase (at first in the
form of production reserves and later directly in the production pro-
cess) but also through the circulation phase (in the form of goods and
money). The funds of the enterprise that correspond to the value of the
circulating working capital and the capital in circulation are called
working capital..
Funds allocated for the creation of fixed capital are spent at
once and in their entirety and are replaced gradually in'the course of
the extended. period during which the fixed capital participates in the
production process. Fixed capital participates in kind and in its en-
tirety in each cycle, but only part of its value enters into the value
of the finished product. This part of the value of fixed capital, when
converted into money, makes up the so-called amortization fund, which
after a more or less lengthy period of service is used to make up
depreciation of the fixed capital. Funds allocated. for the creation of
fixed capital, the fixed funds, function in the course of a lengthy
period. until the time when the fixed capital must be replaced in kind.
K. Marx, in defining the difference between fixed and working
capital in the capitalist economy, said- "It is this expenditure, all
at one time, and the only partial reproduction in kind that disting-
uishes fixed capital from working capital" (K. Marx, Kapital, Vol II,
1949, page 167).
A major characteristic of fixed capital in the national economy of
the USSR is that its predominant share, the people's property controlled
by the state, does not enter into circulation and is not an object of
purchase and sale (State enterprises, buildings, and installations may
not be sold or purchased for money by the state organs. State enter-
prises, buildings, and installations may be transferred only with
Government approval, free of charge, by transferring the value of the
property from the balance sheet of one agency to that of another.)
Simple reproduction consists of the constant renewal of production
capital at its previous level. Simple reproduction is effected by
amortization, i.e. the value of depreciation of fixed capital is carried
over to the finished product and is taken into account in the calcula-
tion of the cost of the finished product.
Socialist economics, however, is characterized by continuous,
systematic, expanding Socialist reproduction of fixed capital, part of
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which is simple reproduction. The amount of investment in the fixed
capital of the national economy exceeds by many times the amortization
deductions. For example, during the First Five-Year Plan, total amor-
tization in the industry of the USSR made up only l4 percent of all
investment in fixed capital and during the Second Five-Year Plan 18.1
percent.
As we have said above, the nature of the outlays for the expanding
reproduction of fixed. capital in the national economy differs substan-
tially from that of funds allocated for the reproduction of working
capital. These features of planned Socialist economy require the separ-
ate planning of funds allotted for the expanding reproduction of fixed,
and working capital and requires separate accounting of these funds and
different methods of financing and financial control.
Outlays for the expanding reproduction of fixed capital in the USSR
are called capital investments.
Capital investments in the USSR are directed chiefly into new con-
struction and the reconstruction of existing enterprises. During the
Great Patriotic War, and particularly during the Postwar Five-Year Plan,
a major share was allotted to reconstruction work in areas that had been
temporarily occupied. (this work consumed 16 percent of all the centra-
lized capital investments of the First Postwar Five-Year Plan).
Fixed capital in the USSR includes productive capital (production
buildings, installations, machines, and so forth) and nonproductive
capital (residential housing, schools, hospitals, administrative build-
ings, and so forth). Capital investment in the USSR thus includes the
sum total of outlays relating to the creation of new fixed capital and
the reconstruction and rehabilitation of existing fixed capital, both
productive and nonproductive.
The classification now in force does not include outlays for cap-
ital repairs of fixed capital, in planned capital investment. Capital
repairs are covered by special funds derived from the amortization
deductions and capital-repair outlays are thus provided in addition to
(outside of) the capital investment plan.
Fixed capital does not include objects of low value and rapid de-
preciation worth less than 200 rubles or tools of labor that serve less
than one year irrespective of the value of each unit.
In the capitalist economy the expansion of fixed capital is re-
lated. to the irregular and cyclic character of development. "Although
periods of capital accumulation vary greatly and, by no means coincide
with one another, a crisis is nevertheless always the initial point for
new capital investment. Consequently, if we take society as a whole,
then a crisis creates to a greater or lesser extent the material basis
for the following cycle" (K. Marx, Kapital, Vol II, 191+9, page 182).
In the capitalist economy, the volume and direction of capital in-
vestment are determined in the interests of the capitalists in a hap-
hazard. fashion according to the law of the average rate of profit.
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In the Socialist economy the volume and direction of capital invest-
ment are fixed in a planned manner by the state; the capital investment
plan is an organic component part of the entire national economic plan.
Comrade Stalin in his conversation with British writer Wells (in
1934) said that in the USSR a planned economy presupposes emphasis on the
output of those branches of industry that are especially needed by the
masses of the people, while under capitalism "capital tends to be invest-
ed, in those branches of the economy that offer the greatest'rate of
profit. You will never find a capitalist who agrees to take a loss and
accepts a lower profit rate merely to satisfy the needs of the people.
Unless you rid yourself of the capitalists, unless you'eliminate the
principle of private ownership of the means of production, you will not
be able to create a planned economy" (I. Stalin, Vo ros leninizma
Problems of Leninism], 10th edition, pages 600-601).
Bourgeois economists are now trying to show that the economy can be
"planned" in capitalist countries, particularly in the United States,
and that the state plays the key role in economic development. What
this actually amounts to is that in the capitalist countries the state
has always defended. the interests of the capitalists, and in the im-
perialist period, especially during the general capitalist crisis, the
state as a whole has been a servant of the monopolistic combinations.
The advantages of the planned nature of capital investment in
Socialist society tend to make these highly effective. Moreover, the
difference in principle between the direction given capital investment
in the USSR and in capitalist countries in turn characterizes the funda-
mental difference between the methods of determining the effectiveness
of these investments.
The basis used. for determining the effectiveness of capital invest-
ment under capitalism is the volume of profits derived from the capital
and the strengthening of the ability to compete.
In the Socialist system the law of the average profit rate is no
longer operative and no longer determines the development of individual
enterprises or branches of the econoriiy. In our country, the Socialist
state is the directing force of the development of the national economy.
Under the leadership of the Communist Party, the Soviet state directs
capital investments in a manner that corresponds best to the needs of
the development of the national economy, strengthens the defensive
capacity and independence of the nation, and insures a rise in the mater-
ial and cultural living standards of the working people.
Under public ownership of the tools and the means of production "the
development of production is not subordinated to the principle of com-
petition and the securing of capitalist profits, but to the principle of
planned direction and systematically raising the material and cultural
living, standards of the working people" (I. V. Stalin, Sochineniya
follected Works], Vol 12, page 321).
Only on the basis of these instructions from Comrade Stalin can we
properly solve the question of the effectiveness of capital investment
in a Socialist state.
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The resolutions of the fifteenth congress of the All-Union Communist
Party (Bolshevik) said. "The capital construction plan should be based on
the plan for the most expedient development of the national economy as a
whole, with due account to regional peculiarities; it should. also be
based on the maximum effectiveness of capital outlays from the point of
view of both the construction target date and the productive effect of
the enterprises under construction" (VEP b v rezol utsiyakh i resheni-
akh s" ezdov, konferentsiy i plenumov TsK The All-Union Communist Party
Bolshevik) in the Resolutions and Decisions of Congresses, Conferences,
and Plenary Sessions of the Central Committee7, Part II, 1941, page 239).
Only such a national economic approach to each specific construction
project can insure truly the maximum effectiveness of capital investment
in a Socialist economy.
A high effectiveness of capital investment can be insured on the
basis of the colossal construction experience in all areas of the economy
and. culture that we have accumulated in the USSR. The study of this ex-
perience and the generalization and application of the economic indexes
of the best projects and. existing enterprises play a key role in the
selection of given construction alternatives.
This factor was stressed, in their appeal to Comrade Stalin by the
directors of 88 leading Moscow enterprises, who urged. the planning or-
ganizations "to take account of the experience accumulated by industry
and plan a more rational use of production space" (Pravda, 3 November
191.9).
The advantages of the Socialist economic system insure an immeasur-
ably greater efftiveness of the use of fixed capital than is true in the
capitalist countries.
The production anarchy and. the periodic crises in the capitalist
economy result in a chronic under-utilization of the means of production.
According to the somewhat understated data of the bourgeois press, more
than 40 percent of the fixed. capital in the ferrous metallurgy industry
of the United States was not being utilized in mid-191.9, while more' than
half the capacity of the machine-tool plants of the United States was
idle in early 1949 (see A. Arakelyan, Ispol'zoyaniye osnovnykh sredsty
promyshlennosti SSSR [Utilization of Fixed Capital in the Industry of
the USSRospolitizdat, 1950, page 22).
At the Eighteenth Party Congress, Comrade Molotov said. that the
power production capacity of the USSR was being used twice as intensive-
ly as in the bourgeois countries.
During the Postwar Five-Year Plan, the utilization of industrial
equipment has greatly improved. For example, blast furnaces are being
used 25 percent more intensively than before the war, open-hearth fur-
naces 32 percent more, and so forth.
However, all this does not mean that we have reached the limit of
utilization of fixed. capital. Data on the fulfillment of the Postwar
Five-Year Plan show that there is room for improvement and that increas-
ing use is being made of capacities.
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2. Capital Investment and Fixed Capital of the National Economy of the
USSR During the Five-Year :Plans
As a result of World War I, followed by the Civil Wax-and foreign
intervention, the nation's economy reached a very low level. The output
of large-scale industry was only one-seventh of the prewar level, and
pig iron output was 3 percent of the prewar level.
Following the end of the Civil War, the economy, thanks to the ad-
vantages of the Soviet system, returned to its prewar levels in a very
short period (5 to 6 years), and in the course of reconstruction the
nation embarked upon the realization of the Leninist plan of electri-
fication (GOELRO).
Comrade Stalin, in his speech to Red-Army Academy graduates in 1935,
described the tasks that faced the nation after the restoration of the
prewar economic level, "You know that we inherited from the past a
technically backward, semi-destitute, ruined country. A nation ruined
by four years of imperialist war, ruined again by three years of civil
war, a nation with a semi-literate population, a low level of tech-
nology, with individual islands of industry in a sea of minute peasant
holdings, that is the nation we inherited. from the past. We faced. the
task of shunting this nation from the rails of the Middle Ages and dark-
ness to the rails of modern industry and. mechanized agriculture. As you
can see, it was a serious and. difficult task. The problem we faced was
this.- either we solved this task in the shortest time and consolidated
socialism in our country or we did not solve it and our country -- tech-
nologically weak and culturally dark -- lost its independence and became
a pawn of the imperialist powers" (I. Stalin, Vo Srosy leninizma, 11th
edition, page 187).
The need for liquidating the age-old backwardness of Russia co-
incided with the task of building socialism here. The key to the
solution of this problem was Socia:List industrialization and above all
the development of heavy industry.
During the five-year plans, the volume and direction of capital
investment in the USSR was guided by the Stalinist policy of industrial-
ization and the collectivization of agriculture.
Comrade Stalin worked out the Soviet method of industrialization,
on the basis of which the working people of the Soviet Union under the
leadership of the Communist party have turned our Motherland into a
leading industrial power. This "Jump" was achieved in the shortest pos-
sible historical period.
The method of industrialization worked out by Comrade Stalin dif-
fers fundamentally from the capitalist method and expresses the inherent
advantages of the Soviet economic system. Comrade Stalin has described
the difference 'between the two methods of industrialization as follows.-
"What constitutes the essential disadvantage of the capitalist
method of industrialization? It is the fact that the capitalist method
separates the interests of industrialization from those of the masses of
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the working people, sharpens the internal contradictions within the
nation, impoverishes millions of workers and peasants, and uses profits
not for improving the material and cultural levels of the broad. masses
within the country, but for the export of capital and the expansion of
bases of capitalist exploitation within and. without the country.
"What constitutes the essential advantage of the Socialist method
of industrialization? It is the fact that the Socialist. method com-
bines the interests of industrialization and the interests of the broad
masses of the working people, that it does not lead to the impoverish-
ment of-millions of persons but to an improvement in their material
position, that it does not lead to a sharpening of internal conflicts,
but to their alleviation and. elimination; it is the fact that this method
steadily expands the domestic market and increases the volume of this
market, thus creating a solid domestic base for the development of in-
dustrialization" (I. V. Stalin, Sochineniya, Vol 8, page 287).
Industrialization in the USSR has been based on the powerful
development of heavy industry, especially its core -- machine building --
while industrialization in capitalist countries begins with the develop-
ment of light industry. The development of heavy industry has strength-
ened the defensive capacity and the independence of the nation. "The
party knew that war was coming, that it was impossible to defend the
country without heavy industry, that the development of heavy industry
had to be speeded, and that to lag in this matter meant to lose out.
The party remembered Lenin's words on how it was impossible to preserve
the independence of a nation without heavy industry and that the Soviet
regime would be destroyed without it. Therefore the Communist party of
the Soviet Union departed from the 'usual' road. of industrialization and
began to industrialize the nation through the development of heavy in-
dustry. It was a very hard 'road, but unavoidable" (I..V. Stalin, Rech'
na redvzbornom. sobranii izbiratele Stalinsko o izbiratel'no o okra a
Moskvy 9 fevralya 19+6 g. Speech at the Election-Campaign Meeting of
the Voters of the Stalin Election District of the City of Moscow on 9
February 19467, Gospolitizdat, 1946, page 17).
Socialist industrialization involves very rapid. rates and a con-
tinuous program of industrial construction. The average annual increase
in the fixed. capital of Socialist large-scale industry during the first
two five-year plans (1928-1937) was 22 percent, while in the United
States fixed capital increased by only 3.7 percent from 1923 to 1930 and
actually declined during the economic crisis of 1929-1933.
The high rates of industrialization and later the collectivization
of the country were opposed by traitors of the Motherland., the Bukhar-
inists and. the Trotskiyists, who propounded "the theory of the diminish-
ing curve" of capital investments.
Comrade Stalin in his speech to the sixteenth Party Congress fully
revealed the reactionary character of these "theories."
The Soviet method of industrialization involves, furthermore, the
most rational location of industrial construction projects, an extremely
high degree of use of new technology and a high effectiveness of capital
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In contrast to the capitalist economy, in which industry is located
in a haphazard manner, unevenly and in some cases quite irrationally,
industrial location in the socialist economy is determined by the plan
and rests on the principle of bringing industry closer to sources of raw
materials and to consumer areas, the principle of speedier development
of formerly backward areas and the principle of the complex development
of major economic regions.
In contrast to capitalist industrialization, the industrialization
of the USSR is effected on the basis of domestic resources, without
enslaving loans and concessions, without military contributions and
without colonial plundering.
The industrialization of the Soviet Union has made it possible to
transform a small-scale peasant agriculture into the world's largest-
scale mechanized Socialist agriculture.
The total volume and direction of capital investments during the
first two five-year plans is shown in the following table:
VOLUME OF CAPITAL INVESTNff NTS DURING T}
FIRST AND SECOND FIVE-YEAR PLANS
(in billions of rubles in current prices)
First
Five--Year
Second Five-Year Plan
Plan
Including
Extra-Limit Capital
Outlays and. Capital
Repairs
Exclusive of
Extra-Limit Outlays
and Capital Repairs
The Socialist Economy
as a Whole
52.5
137.5
11+.7
which includes:
Industry
24.8
65.8
58.6
which includes:
Group A
21.3
54.6
49.8
Agriculture
10.8
16.8
11.3
Transportation
9.8
25.4
20.7
(see Itogi vypolneniya ervogo pyatiletnego planes razvitiya narodnogo
khozyaystva Soyuza SSR Results of the Fulfillment of the First Five-
Year Plan of Development of the National Economy of the USSR7, pub-
lished. by Gosplan Soyuza SSR, 1933? page )+2, and Itogi vypolneniya
vtorogo pyatiletnego plana razvitiya narodnogo khozyaystva Soyuza SSR
'Results of the Fulfillment of the Second Five-Year Plan of Development
of the National Economy of the USSR7, Gospolitizdat, 1939, page 71).
Capital investments in the construction of social cultural and ad-
ministrative institutions in the Second Five-Year Plan were 25 billion
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rubles, exclusive of extra-limit outlays and. capital repairs 20.8 bil-
lion rubles.
The tremendous volume of capital investments, especially during the
Second Five-Year Plan, insured high rates of expanding reproduction of
fixed capital. In the period 1928-1937, fixed capital in the national
economy increased by 3.8 times, while fixed capital in industry alone
increased by 6.4 times.
Of special interest is the relationship between the volume of
capital investments and the new fixed capital put into operation. Thus,
while during the First Five-Year Plan 72 percent of the total capital
investments were put into operation, this share rose to 90 percent in
the Second. Five-Year Plan.
The first two five-year plans also saw a change in the structure
of the fixed capital of the national economy of the USSR: the share of
the fixed capital in industry and transportation greatly increased, a
clear indication of success of the general party line on the nation's
industrialization. It should be noted that while the percentage share
of housing dropped somewhat in the nation's total fixed. capital, it
sharply increased in absolute terms.
The building of the foundations of the Socialist economy was com-
pleted during the First Five-Year Plan. The Soviet Union had entered.
the period of socialism, and the once agrarian country was turning into
an industrial nation. The share of industrial output rose from 32 per-
cent in 1928 to 70 percent in 1932. More than 1,500 industrial enter-
prises, more than 200,000 collective farms, 5,000 state farms and about
2,500 machine-tractor stations were completed. during the First Five-Year
Plan.
From a country that had been weak and. unprepared for defense, the
Soviet Union had "turned into a powerful nation in the sense of being
prepared for defense, a nation ready for all eventualities, a nation
capable of large-scale production of all modern means of defense and
able to equip its army in case of attack from abroad" (I. Stalin,
Voprosy leninizma, 11th edition, page 375).
The reconstruction of industry and agriculture on the basis of the
new, modern technology was completed during the Second Five-Year Plan
and. the rests of the exploiting classes were completely eliminated.
Socialist industry made up 99.97 percent of the nation's total industri-
al output. Completed during this period were 4,500 industrial enter-
prises, the number of machine-tractor stations rose from 2,500 to 6,000,
the number of tractors in agriculture in 1938 rose to 1.83,500, and that
of harvester combines to 153,500. In terms of industrial output, the
Soviet Union had become Europe's leading country.
As a result of the victories of socialism in all branches of the
economy following the successful completion of the Second Five-Year Plan,
our country entered a new stage of development, "the stage of completing
the building of a classless Socialist society and the gradual transition
from socialism to communism..." (Rezolyutsii VIII s"yezda VEP (b)
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/Resolutions of the Eighteenth Congress of the A:L1-Union Communist Party
Bolshevikj7, Gospolitizdat, 1939, page 11).
The sustained victories made it possible to confront the Soviet
people with a new task -- to catch up with and then surpass the capital-
ist countries in the economic sense, i.e., in terms of industrial output
per capita. "Only when we durpass the economically leading capitalist
countries, can we regard our country as fully saturated with consumer
goods, only then will we have an abundance of products and. be able to
pass from the first phase of communism to the second phase.
"What must we do to surpass the economically leading capitalist
countries? We must, first of all, have a serious and unbending desire
to move ahead and be prepared to make sacrifices, to make major capital
investments for the expansion of our Socialist industry" (I. Stalin,
Voprosy leninizma, 11th edition, pages 578-579).
These instructions of Comrade Stalin formed the basis of the Third
Five-Year Plan, which envisaged a volume of capital investments in the
economy of 192 billion rubles.
During the three and a half years of the Third Five-Year Plan (1938-
1941), total capital investments amounted to 130 billion rubles. During
this time about 3,000 state enterprises were put into operation, i.e.,
almost twice as many as during the entire First Five-Year Plan.
As a result of the tremendous capital investments, the fixed
capital of the national economy rose by five times in the period 1928-
1940 (it rose by eight times in industry alone) and state-owned housing
doubled.
The realization of the Leninist-Stalinist nationalities policy and
the direction of huge capital investments into the economy and culture
of the national republics and oblasts not only.ended the former economic
and cultural backwardness of these areas, but produced a sharp rise in
the level of their economy, culture and arts.
The fulfillment of the program of the three Stalinist five-year
plans also created. the necessary material base for the victorious comple-
tion of the war that had been started. by Fascist Germany.
Speaking to the voters of the Stalin Election District of Moscow on
9 February 1946, Comrade Stalin said that by 1940 the production of pig
iron had. increased by almost four times compared with 1913, steel by 4.5
times, coal by 5.5 times, oil by 3.5 times, raw cotton by 3.5 times and
the output of commercial grain had reached 38.3 million tons in 1940, or
17 million tons more than in 1913.
The successes achieved by the Socialist state under conditions of a
savage struggle against the enemies of the people -- the Trotskiyists
and rightist would-be restorers of capitalism -- were the result of the
wise policy of our party.
"The party has repeatedly been subjected to sharp criticism and
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attacks for its construction program. The fight regarding the scope and.
character of construction has always been deeply political in nature"
(V. M. Molotov, 0 stroitel'stve i zadachakh stroitele fn Construction
and the Tasks of the Builders/, Partizdat, 1935, page 27).
Of the greatest importance in the matter of insuring high rates of
industrialization was the defeat by the party under the leadership of
Comrade Stalin of the Trotskiyists, Zinov'yevists and. rightist would-be
restorers of capitalism, including former leading officials of the
People's Commissariat of Finance of the USSR, who strove to disrupt the
industrialization program by greatly reducing appropriations for indus-
trial construction and to retard the development of state and. collective
farms.
3. Capital Investments and Fixed Capital of the National Economy of the
USSR during the Great Patriotic War
The tremendous advantages of the Soviet socialized and state regime
also became evident during the Great Patriotic War -- the hardest and
most devastating our Motherland has ever known -- when the nation's
economy continued to grow in accordance with the law of expanding Social-
ist reproduction. During the four war years, capital investments were
91..6 billion rubles, or more than 81.5 percent above the capital invest-
ments of the First Five-Year Plan (see K. N. Plotnikov, Byudzhet
sotsialisticheskogo gosudarstva. ?5he Budget of the Socialist State,
Gosfinizdat, 1948, page 304).
At the start of the war more than 1,300 industrial enterprises were
evacuated to the eastern part of the country. In addition to the capital
work involved in reactivating the enterprises evacuated to the eastern
parts of the country, wartime construction also included the building of
a large number of new enterprises and other projects for residential and
cultural-social purposes.
Of the greatest significance in the rapid increase of production
capacity was the extensive use of rapid construction methods and the use
of a number of measures made necessary by wartime conditions.
The rapid rate at which fixed. capital was put into operation is
shown by the following examples.
Each of the blast furnaces at one of the metallurgical plants was
built within 7-8 months during the war, while before the war the con-
struction of similar blast furnaces required 2.5 years.
At one of the thermal electric stations before the war the first
boiler was mounted in 480 days, while during the war the second boiler
was mounted in 120 days, the third in 86 days, the fourth in 76 days and
the fifth in 35 days.
In spite of the great losses suffered during the war, the tremen-
dous capital investments made during this period insured the expanding
reproduction of the nation's fixed, capital, especially in the east.
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Starting in 191I.3, simultaneously with the construction of new enter-
prises and residential dwellings, began in accordance with the historic
decree of the Council of Ministers USSR and the Central Committee of the
All-Union Communist Party (Bolshevik) of 21 August 1943 "On the Immedi-
ate Measures for the Restoration of the Economy in Areas.Freed from the
German Occupation" (Izvestiya, 22 August 191+3), the extensive work of
restoring the economy of these areas. Alone during the war capital
investments for this purpose were 75 billion rubles, an amount that
made it possible to rebuild about 30 percent of all fixed capital in
formerly occupied. territory.
But restoration work and new construction did. not reach their
fullest extent until after the end of the war, when our Motherland em-
barked upon the First Postwar Five-Year Plan.
1+. Capital Investments and Fixed Capital of the National Economy of the
USSR during the First Postwar Five-Year Plan
Aroused by the victorious completion of the war, our nation, led by
the great party of Lenin-Stalin, is carrying out with enthusiasm the
magnificent task of building a Communist society.
In 1946, Comrade Stalin set the following specific tasks for the
next three five-year plans: to triple industrial output compared with
the prewar level and achieve an annual output of 50 million tons of pig
iron. 60 million tons of steel, 500 million tons of coal, and. 60 mil-
lion tons of oil. The First Postwar Five-Year Plan of reconstruction
and development of the national economy was to be a major step ahead
toward these great goals.
The task of the Postwar Plan consisted in healing as rapidly as
possible the wounds caused by the war, restoring the war-damaged areas
of the country and greatly surpassing the prewar level of industry and
agriculture. The solution of this task required the rehabilitation and
further growth of heavy industry and railroad transportation, the rise
of agriculture, the development of technology and advanced. Soviet science
and the insuring of a steady rise in the materia:L well-being of the
Soviet people.
The volume of centralized. capital investments was planned at 250.3
billion rubles (in 191+5 -prices), thus exceeding the volume of capital
investments during the First and Second Five-Year Plans taken together;
of the total amount, 115 billion rubles were to be invested in formerly
occupied areas. The cost of enterprises to be put into operation, both
reconstructed and newly constructed establishments, was set at 2311. bil-
lion rubles.
Most of the capital investments (157.5 billion rubles) were directed
into Socialist industry. Capital investments in railroad. transportation
were 40.1 billion rubles, or two-thirds more than during the First and
Second Five-Year Plans taken together. Capital investments (both central-
ized and noncentralized) in the state sector of agriculture were set at
19.9 billion rubles, and capital investments of the collective farms
themselves at 38 billion rubles. Capital investments in housing (exclud-
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ing individual housing construction) were set at 42.3 billion rubles.
The chief tasks of the Postwar Five-Year Plan -- the restoration
of war-damaged areas, the return to prewar levels in industry and agri-
culture and then a further rise of that level -- have been successfully
fulfilled. The planned increase of industrial output by 1950 of 48
percent above the 1940 level was not only fulfilled but considerably
overfulfilled. "The prewar level of gross industrial output has been
exceeded by 70 percent during the first ten months of 1950" (N. A.
Bulganin, 33- a godovshchina Velikoy 0 abr?sko sotsialisticheskoy
revolyutsii The Thirty-Third Anniversary of the Great October Social-
ist Revolution7, Gospolitizdat, 1950, page 9).
After World War I, the Civil War and foreign intervention, a
return to the prewar level of industry had taken about 6 years. After
the Great Patriotic War, and in spite of the fact that the damage suf-
fered had. greatly exceeded the losses during World War I, prewar output
levels in the Soviet Union as a whole were reached as early as the end
of 1947, i.e., a little more than twice as fast. By 1950, prewar in-
dustrial output levels had been exceeded even in the formerly occupied
areas.
High rates of development in all branches of the national economy
were achieved by the great volume of capital investments, which system-
atically rose during the postwar years. Thus, capital investments in
1946 were 117 percent of 1945, in 1947 110 percent of 1946, in 1948 123
percent of 1947 and, in 1949 120 percent of 1948. During the first ten
months of 1950, capital investments rose 25 percent compared with the
same period of 1949.
In the course of 1946, about 800 state industrial enterprises were
rebuilt or built anew and put into operation, in the course of 1946 and
1947 about 1,900, and during four years and 10 months about 6,000, not
counting small state arid. cooperative enterprises. Such rates of activat-
ing new enterprises had never before been reached. in any country.
Unprecedented. rates were acheived. in the. reconstruction of coal
mines. By the start of 1949 more than 600 million cubic meters of
water had been pumped out of the flooded mines of the Donets Basin.
"The history of technology has never known rates of reconstruction such
as were acheived in the rehabilitation of the Donets Basin by Soviet
people led by the Bolshevik party. It should be noted that the basin
was reconstructed on new, modernized technical foundations" (Editorial
in Pravda, 18 April 1949).
It is noteworthy that the pumping of water out of the French coal
basins of Nord and Pas-de-Calais, which had been destroyed by the Ger-
mans during World War I, lasted almost 6 years, in spite of the fact
that the damage was only one-fifth of that in the Donets Basin.
The blast furnaces, open-hearth furnaces, and rolling mills of the
large southern metallurgical plants were also rebuilt and put into opera-
tion in an extremely short time.
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Large capital investments during the Postwar Five-Year Plan were
made by collective farms. During :1946 and 1947 alone, collective farms
invested. 14 billion rubles, not counting the labor of the collective
farmers (see I. A. Benediktov, "Speech at the Fifth Session of the
Supreme Soviet of the USSR", Zasedaniya Verkhovnogo Soveta SSSR (pyataya
sessiya), Stenograficheskiy otchet eetings of the Supreme Soviet of
the USSR (Fifth Session), Stenographic Report7, published by Verkhovnyy
Sovet SSSR, 1949, page 270). In accordance with the Stalinist plan of
the transformation of nature, collective farms, state farms, and affor-
estation farms in the steppe zone of the European part of the USSR
carried out a large amount of afforestation and irrigation. The affor-
estation plan of collective and state farms in 1949 was almost doubled
in fulfillment. The plan for the development of socialized animal
husbandry is also being fulfilled and overfulfilled.
Rapid development was also achieved during the Postwar Five-Year
Plan in housing construction, both in town and country. During four
years and ten months of the Postwar Five-Year Plan, about 90 million
square meters of residential space were newly built or rebuilt in cities
and workers' settlements, either by state enterprises and institutions
and local soviets of working people's deputies or directly by individuals
with the aid of state credit; in rural localities more than 2.5 million
homes were built. Housing and municipal construction in Moscow and
Moscow Oblast was also greatly expanded. Tall buildings of 16 to 32
floors are to built in the capital.
In 1950 began the construction of the Kuybyshev hydroelectric
station on the Volga, the world's :Largest, with an average annual output
of 10 billion kilowatt-hours of electric power. Due in 1951 is the
start of construction on the Stalingrad hydroelectric station on the
Volga, the Kakhovka hydroelectric station on the Dnepr, and the South
Ukrainian and North Crimean canals. The great projects of the Stalin
epoch -- the projects of communism -- also include the Main Turkmen
Canal from the-Amu-Darya to Krasnovodsk, 1,100 kilometers long, with
great dams, hydroelectric stations., pipe lines, irrigation and. watering
canals.
The people's democracies, having adopted the socialist road of
development, are also successfully transforming their economy with the
support of the USSR. Output in these states has greatly exceeded pre-
war levels.
As early as the frist postwar years, considerable capital invest-
ments were made in the people's democracies. New long-range plans
envisage a considerable rise in capital investments compared with
previous years. For example, in the new Five-Year Plans average annual
capital investments in the economy of Czechoslovakia are due to rise
threefold compared with actual investments in 1947-1948, in Bulgaria by
70 percent, and in Hungary more than twofold (see the magazine Planovoye
khozyaystvo Planned Economm7, No 4, 1949, page 80).
A totally different picture is offered by the capitalist world.
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In the capitalist countries, the volume of production and construc-
tion is dropping, unemployment is rising, military expenditures are in-
creasing, inflation is growing, and. the material standard. of living of
the working people is dropping. In his speech on the 32nd anniversary of
the Great October Socialist Revolution, Comrade Malenkov said that
industrial output in the United States in July 1949 was only 65 percent
of the highest level reached during the war and. that output was even
lower in October 1949. Capital Investments of the United States during
1946-19+8 did. not exceed (in 1939 prices) 60-80 percent of the 19+2
level. According to the United States Department of Labor, outlays for
industrial construction in the fourth quarter of 1949 were 41 percent
below the fourth quarter of 1948, and for the entire year of 1949 were
30.3 percent below 1948.
The economy of the Marshall Plan countries has been disorganized.
The excessive increase in military outlays of these countries and in-
flation are steadily reducing output and. capital investments, closing a
number of enterprises and raising unemployment. In Britain, for example,
in connection with the devaluation of the pound. sterling, under direct
United States pressure, the already low volume of capital investments
is being further reduced by an annual average of 35 million pounds in
housing construction and l40 million pounds in industrial construction
(see Pravda, 26 October 19+9).
In recent years, especially in connection with the aggressive war
in Korea, the United. States has been placing its economy on a war foot-
ing. However, as Comrade Stalin has pointed out in his speech to the
Eighteenth Party Congress, placing a capitalist economy on a war footing
means "...to give industry a one-sided military orientation, to expand
production of goods necessary in war but unrelated to consumer demands,
to restrict production and especially the marketing of consumer goods,
and consequently to reduce consumption by the population and confront
the nation with an economic crisis" (I. Stalin, Voprosy leninizma, llth
edition, page 567).
5. Organizational Forms of Construction and the Development of the Con-
struction Industry in the USSR
A requisite for the realization of the huge program of capital in-
vestments in the national economy was the creation of a strong construc-
tion industry based on an advanced construction technology and a skilled.
labor force.
The technical level of the construction industry had been low in
prerevolutionary Russia and. the organization of construction was largely
primitive with a predominance of manual labor. During World War I, con-
struction work ceased almost altogether. The Soviet regime had to create
a construction industry anew.
By a decree of the Council of People's Commissars of 9 May (26 April)
1918 over the signature of V. I. Lenin, a Committee of State Work Projects
was organized within the Supreme Economic Council. The executive organ
of this committee was the Main Administration of State Work Projects
which was charged with the "...preparation and execution of plans for
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work projects of state importance and those local projects that cannot
be carried out with local materials and technical resources" ("Decree
of the Council of People's Commissars of 9 May (26 April) 1918",
Izvestia, 14 (1) May 1918).
In 1921 a special construction contracting office, the Gosstroy,
was organized within the Supreme Economic Council and construction
trusts were set up in the provinces, but the percentage share of con-
struction work carried out by these construction organizations was still
only 7-8 percent of all construction work in the country. Most of the
construction work was carried out with the resources and funds of the
enterprises themselves.
After the end of the reconstruction period when the country began
the execution of the First Five-Year Plan and the volume of capital
investments sharply increased, there arose the need for a new organiza-
tional and technical approach to construction and for an independent
construction industry.
The leading principles in this direction were listed in the de-
cisions of the Sixteenth Party Congress: "The growing scope and rapid
rates of capital construction require all-out intensification of the
transition to industrial construction methods through the use of standard-
ization, typification and scheduled. planning, and the maximum mechaniza-
tion of construction work, the transition to year-round construction
operations and the creation of a permanent labor force" VIA b v
rezolyutsiyakh i resheni akh s" ezdov, konferente;iy i plenumov Tsk he
All-Union Communist Party Bolshevik in the Resolutions and Decisions
of Congresses, Conferences and. Plenums of the Central Committee, Part II,
1941, page 416).
There are two methods of carrying out construction work: (1) the
contracting method, when the work is done by permanently functioning
special construction organizations for a client; (2) the economic method,
when the work is done directly with the resources and funds of the enter-
prises or organizations that are being constructed or expanded, i.e.,
directly by the builders. It is evident that in the construction or
expansion of a given enterprise part of the work can be carried out
directly by the builder (i.e. by the economic method), while the other
part is carried out by a special construction organization on the basis
of a contract (by the contracting method).
A comparison of these two methods points up the advantages of the
contracting method.. In the economic method, the construction group has
to be created anew every time, construction implements and. means of
transportation must be acquired, auxiliary enterprises must be organized
and workers must be recruited. After the completion of construction
work in a certain place, the acquired experience cannot be exploited.,
the construction workers usually are incorporated into the operating
labor force of the newly built enterprise and lose their acquired skill
as building workers.
When the work is done by permanently functioning special construc-
tion organizations, the construction work can be greatly mechanized and
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In the capitalist countries, the volume of production and construc-
tion is dropping, unemployment is rising, military expenditures are in-
creasing, inflation is growing, and the material standard of living of
the working people is dropping. In his speech on the 32nd. anniversary of
the Great October Socialist Revolution, Comrade Malenkov said that
industrial output in the United. States in July 1949 was only 65 percent
of the highest'level reached during the war and. that output was even
lower in October 1949. Capital investments of the United States during
1946-1948 did not exceed (in 1939 prices) 60-80 percent of the 1942
level. According to the United States Department of Labor, outlays for
industrial construction in the fourth quarter of 1949 were 41 percent
below the fourth quarter of 1948, and for the entire year of 1949 were
30.3 percent below 1948.
The economy of the Marshall Plan countries has been disorganized.
The excessive increase in military outlays of these countries and in-
flation are steadily reducing output and capital investments, closing a
number of enterprises and raising unemployment. In Britain, for example,
in connection with the devaluation of the pound. sterling, under direct
United States pressure, the already low volume of capital investments
is being further reduced by an annual average of 35 million pounds in
housing construction and 140 million pounds in industrial construction
(see Pravda, 26 October 1949).
In recent years, especially in connection with the aggressive war
in Korea, the United. States has been placing its economy on a war foot-
ing. However, as Comrade Stalin has pointed out in his speech to the
Eighteenth Party Congress, placing a capitalist economy on a war footing
means "...to give industry a one-sided military orientation, to expand
production of goods necessary in war but unrelated to consumer demands,
to restrict production and especially the marketing of consumer goods,
and consequently to reduce consumption by the population and confront
the nation with an economic crisis" (I. Stalin, Voprosy leninizma, 11th
edition, page 567).
5. Organizational Forms of Construction and the Development of the Con-
struction Industry in the USSR
A requisite for the realization of the huge program of capital in-
vestments in the national economy was the creation of a strong construc-
tion industry based on an advanced construction technology and a skilled
labor force.
The technical level of the construction industry had been low in
prerevolutionary Russia and. the organization of construction was largely
primitive with a predominance of manual labor. During World War I, con-
struction work ceased. almost altogether. The Soviet regime had. to create
a construction industry anew.
By a decree of the Council of People's Commissars of 9 May (26 April)
1918 over the signature of V. I. Lenin, a Committee of State Work Projects
was organized within the Supreme Economic Council. The executive organ
of this committee was the Main Administration of State Work Projects
which was charged with the "...preparation and execution of plans for
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work projects of state importance and. those local projects that cannot
be carried out with local materials and technical resources" ("Decree
of the Council of People's Commissars of 9 May (',':?6 April) 1918",
Izvestia, 11i (1) May 1918).
In 1921 a special construction contracting office, the Gosstroy,
was organized within the Supreme Economic Council and construction
trusts were set up in the provinces, but the percentage share of con-
struction work carried out by these construction organizations was still
only 7-8 percent of all construction work in the country. Most of the
construction work was carried out with the resources and funds of the
enterprises themselves.
After the end of the reconstruction period when the country began
the execution of the First Five-Year Plan and the volume of capital
investments sharply increased, there arose the need for a new organiza-
tional and technical approach to construction and for an independent
construction industry.
The leading principles in this direction were listed in the de-
cisions of the Sixteenth Party Congress: "The growing scope and rapid
rates of capital construction require all-out intensification of the
transition to industrial construction methods through the use of standard-
ization, typification and scheduled. planning, and the maximum mechaniza-
tion of construction work, the transition to year-round construction
operations and the creation of a permanent labor force" VRP b v
rezol utsi akh i resheni akh s"yezdov, konferentsi ii plenumov Tsk he
All-Union Communist Party Bolshevi)in the Resolutions and Decisions
of Congresses, Conferences and. Plenums of the Central Committee, Part II,
1941, page 416).
There are two methods of carrying out construction work: (1) the
contracting method, when the work is done by permanently functioning
special construction organizations for a client; (2) the economic method.,
when the work is done directly with the resources and funds of the enter-
prises or organizations that are being constructed or expanded, i.e.,
directly by the builders. It is evident that in the construction or
expansion of a given enterprise part of the work can be carried out
directly by the builder (i.e. by the economic method), while the other
part is carried. out by a special construction organization on the basis
of a contract (by the contracting method).
A comparison of these two methods points up the advantages of the
contracting method.. In the economic method, the construction group has
to be created anew every time, construction implements and means of
transportation must be acquired,' auxiliary enterprises must be organized.
and workers must be recruited. After the completion of construction
work in a certain place, the acquired experience cannot be exploited,
the construction workers usually are incorporated into the operating
labor force of the newly built enterprise and lose their acquired skill
as building workers.
When the work is done by permanently functioning special construc?-
tion organizations, the construction work can be greatly mechanized and
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performed in industrial fashion, maximum use can be made of prefabricated
parts, a labor force of skilled construction workers can be created, the
Stakhanovite movement can be developed, and the cost of the construction
work can be reduced. The need for introducing this method. was noted in
a decree of the party and government as early as 1936:
"The basis for the reorganization of the construction business and
for a reduction of construction costs must be found in the transition
from handicraft methods and compartmentalization in the construction
business to the creation of a large-scale construction industry. Con-
struction work must be carried out by the contracting method, i.e., by
permanent construction contracting organizations supplied with their own
material and technical base (machinery, transportation, working capital,
residential space, and so forth) and their own permanent labor force,
making use of the large-scale industrial production of prefabricated.
parts, semi-finished sections and subassemblies" (From the Decree of the
Council of.People's Commissars USSR and the Central Committee of the All-
Union Communist party (Bolshevik) of 11 February 1936 "On the Improvement
of the Construction Business and the Reduction of Construction Costs",
Izvestiya, 12 February 1936).
During the Second Five-Year Plan, the technical equipment of the
construction industry greatly improved: the pool of construction machin-
ery expanded sharply, construction work was increasingly mechanized, and.
the share of the work done by contracting methods increased.
The great program of capital work adopted by the Eighteenth Party
Congress for the Third Five-Year Plan, the need for the expansion of
speeded construction methods and the level achieved by the construction
industry at that time posed the new task "of converting the construction
industry from a backward into a leading branch of the national economy,
with a broad d.evelopment of complex mechanization and the use of pre-
fabricated construction parts and subassemblies" (Rezolyutsii XVIII
s"yezda VKP(b) fesolutions of the Eighteenth Congress of the All-Union
Communist Party (Bolshevikl7, Gospolitizdat, 1939, page 31).
A major step forward in the realization of this task was the de-
cision adopted. by the third. session of the First Supreme Soviet of the
USSR on the organization a special people's union commissariat dealing
with construction, which would combine the large construction trusts of
a number of industrial branches.. The new people's commissariat handled
the construction of the most important industrial projects. At the same
time a number of separate construction trusts and main administrations
were set up in a number of industrial and other people's commissariats.
After this reorganization the total volume of construction carried,
out by the contracting method sharply increased. During the war years
the share of construction and installation work done by the contracting
method. reached 75 percent.
In the Postwar Five-Year Plan, the construction industry faced new,
even more important tasks. For the first time, the Five-Year Plan
listed not only the volume of capital investments (250.3 billion rubles),
but also the volume of construction and. installation work (153 billion
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rubles), or an annual average of more than 30 billion rubles. This was
about twice the construction and installation work done in the last pre-
war years.
The solution of the tasks posed by the Postwar Five-Year Plan re-
quired the organization of new construction ministries and main admin-
istrations and a special Ministry of Construction fachinery7 and Road
Machinery Building USSR.
At the present time there are two all-union construction ministries:
the Ministry of Construction of Heavy Industry Enterprises and the Minis-
try of Construction of Machine-Building Enterprises, and. a number of
republic ministries of housing and civil construction and main adminis-
trations dealing with rural. and collective farm construction. In addi-
tion, large construction organizations are found in a number of other
ministries.- coal industry, oil. industry, power stations, aircraft in-
dustry, railroads, and others. A Ministry of Urban Construction USSR
has been organized.
Of major significance in the matter of raising the construction
industry to higher levels has been the organization in May 1950 of the
State Committee of the Council of Ministers USSR dealing with construc-
tion.
The main links of the construction ministries and main construc-
tion administrations are the contracting construction trusts, which
carry out construction and specialized work on the basis of contracts
with their clients. On the basis of volume, nature and. conditions of
work, we distinguish the following types of trusts.- general construction
trusts, which in turn are divided into territorial trusts (carrying out
their work through their own administrations in various areas), city
trusts and. building site trusts (restricting their work to a certain
city or building site); and specialized. trusts, which carry out certain
types of work throughout the Soviet Union or union republics or groups
of krays and oblasts.
The general construction trusts handle basic, construction work on
industrial, residential, transportation, cultural-social, commercial-
warehouse, administrative, municipal and, other buildings and projects.
The specialized trusts handle sewage, electrical, hydraulic, heat-
insulation, blasting, earth-moving and other specialized, work, also the
installation of steel construction, machinery, etc.
The industrialization of construction work has Peen evident in the
gradual percentage increase of the work done by specialized. contracting
organizations. In 1939, 30 percent of all the construction work handled
by the People's Commissariat of Construction was done by specialized
organizations; in 19+6 the share of such work in the Ministry of Con-
struction of Heavy Industry Enterprises was 46,8 percent.
Depending on the volume and the conditions of work, construction
administrations, offices and sectors are formed within general con-
struction trusts and specialized trusts.
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In addition to the general construction and specialized trusts,
the construction ministries and main administrations contain enterprises
engaged in the production of prefabricated construction subassemblies
and parts, and organizations dealing with the supply of construction
materials.
Large construction projects carried out by the economic method
generally have an office of the chief of construction (in new projects)
or a capital construction department called "oks" ffor the Russian
initials7(in existing enterprises); the relationship between the
director's office of the enterprise under construction or the existing
enterprise and. the chief of construction or "oks" corresponds to the
relationship between the client and the contracting organization in the
case of the contracting method.
The fulfillment of the great program of capital construction during
the Postwar Five Year Plan required. the carrying out of a number of key
measures. The chief measures were. concentration of material and mone-
tary funds and labor force at the key projects; supplying of these pro-
jects with high-quality designs and cost estimates; raising the general
organizational and. technical level of the construction industry; maximum
utilization of prefabricated, parts and subassemblies and wide introduc-
tion of rapid mass-assembly construction methods; considerable increase
in the mechanization of construction and installation work and of auxil-
iary work using modern equipment; general development of complex mechani-
zation; unconditional observance (and, reduction) of the expenditure rates
of materials; increase in labor productivity, insistence on economic
accountability and a regime of economies. All this created the necessary
requisites for a further reduction of construction and installation -
costs, a speedier turnover rate of funds and. a greater profitableness
of the construction industry. Of special significance in this connection
was the decision adopted by the government in May 1950 on the reduction
of construction costs.
"On the initiative of Comrade Stalin, the Council of Ministers USSR
has decided. to reduce the estimated cost of construction by an average
of 25 percent, effective 1 July 1950, with the 1950 plan of new produc-
tion capacity remaining in force. The reduction of construction costs
should. be achieved, through the elimination of excesses in designs and
cost estimates, reduction in the cost of the construction and installa-
tion work itself, and further reduction of the wholesale prices of
materials and equipment and transportation rates. This decision of the
government is of major economic importance. Areduction in the cost of
construction work will greatly increase the effectiveness of capital
investments and ultimately lead. to rises in output and, a growth of the
public wealth" (A. G. Zverev, 0 Eosudarstvenom byud.zhete SSSR na 1950
od i ob is olnenii osudarstvenno o b ud.zheta SSSR za 1948 1 14+ od
On the State Budget of the USSR for 1950 and on the Fulfillment of the
State Budget of the USSR for 1948 and 19427, Gospolitizdat, 1950, page
14).
In its editorial. of 24 May 1950, the newspaper Pravda said: "A
reduction in construction costs should. be one of the most immediate and
important tasks of the army of builders, installers, planners, workers
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of the construction materials industry, metallurgy, the lumber industry
and other branches of the national economy".
In this connection great significance is assumed by the pledges of
leading construction groups to lower the cost of construction and, instal-
lation work and. speed the turnover rate of funds, thus freeing funds for
further use by the state. A key role in the realization of this task
belongs to the long--term investment banks that finance construction.
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THE CHIEF TASKS AND METHODS OF FINANCIAL CONTROL OVER CONSTRUCTION.
ORGANIZATION OF LONG-TERM INVESTMENT BANKS, THEIR STRUCTURE AND FUNCTIONS.
1. Separate Financing and Crediting of Investments in Fixed and. Working
Capital of the National Economy of the USSR
In the Socialist system, the national economy develops according to
plan. The economic plan envisages the volume and distribution of the
national income and. the volume and. direction of investments in fixed, and,
working capital.
The characteristics listed in Chapter I of advancing funds for the
creation of fixed capital require in a planned economy the provision of
special sources for such financing.
Short-term resources cannot be used for advancing the fixed. capital
of a Socialist economy. The sources for such financing are long-term re-
sources provided by the plan. The chief source of financing the expand-
ing reproduction of the fixed capital of state enterprises is the state
budget of the USSR. Long-term credits are used to finance the fixed.
capital of collective farm and cooperative enterprises.
The separate allocation in the economic plan of monetary and
material resources for the expanding reproduction of fixed and. working
capital has required the separate accounting of transactions of the
basic (operational) activity of enterprises and their capital investments.
The use of funds that have been provided for operational activity for
the purpose, of capital investments and the use of funds that have been
provided for capital investments for the purpose of operational activity
is prohibited, by law.
The financial and credit system of the USE, as an organ of the
Soviet state, has served in all stages of Socialist development and is
continuing to serve as a tool for the fulfillment of the plan. The
task of the financial and credit system (aside from the accumulation of
funds) is to provide an organization of the system of financing and
crediting the expanding reproduction of fixed and working capital that
prevents the switching of funds provided separately by plan and insures
the necessary control over their intended and most effective utiliza-
tion.
The forms and methods of short-term crediting and control over the
course of production and the circulation of goods are determined by the
nature of the circulation of working capital, in particular the rate of
turnover set by the plan and the repayment of loans within the terms
planned for the turnover of credited items. The forms and methods of
financing capital investments are determined by the characteristic
nature of the reproduction of fixed capital, in particular the invest-
ment at one time of the total amount for a long period during which the
fixed capital functions in the production process. The nature and
methods of financing capital investments are also affected by the fact
that the process of construction is relatively lengthy, that the com-
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pleted state factories, plants and other enterprises do not enter into
circulation and that funds used in the financing of construction are
not recovered. Consequently the methods used in financing the fixed
capital of the national economy differ from the short-term crediting
of working capital and should be able to insure daily state control
over the individual elements of outlays and stages of construction.
The different nature of the turnover of funds advanced for the
reproduction of fixed and working capital and the different sources,
forms and. methods of financing and. crediting the reproduction of fixed
and. working capital in a planned economy require the separation of the
Soviet banking system into the following two categories: short-term
crediting, which serves the sphere of working capital and circulating
,capital of the national. economy and. is concentrated in the State Bank,
and the financing and crediting of capital investments in the fixed
capital of the national. economy, which is the function of specialized,
banks. The credit reform of 1930-1931 established. the separation of
the banking system according to this principle.
2. Financing and Crediting of Capital Investments Before the Credit
Reform of 1930-1931
After the Great October Revolution, the Soviet banking system as
part of the state apparatus was transformed "from the center of the
economic rule of financial capital and the tool of political rule of
the exploiters into the tool of the workers` re.ime and. a lever of the
economic revolution" (Prog;ramma i ustav VI b The Program and Charter
of the All-Union Communist Party Bolshevik) , Partizdat, 1937, page 3l).
The organization, structure and functions of the banks has contin-
ued to change in successive stages of Socialist development. In the
first years of the New Economic Policy, the task of rehabilitating the
national economy required. chiefly the organization of working capital
and the adjustment of economic relations, while capital investments
were very small and were used. chiefly for capital repairs and power
construction projects. During this period, crediting and accounting
operations of the national economy were handled by the State Bank and
a number of trade banks (chiefly for short-term cred'its'), which (as
well as the State Bank) also handled long-term crediting.
The percentage share of long-term credits of the banking system
during the reconstruction period in the total volume of credit invest-
mentswas 22.6 percent on 1 October 1923 and. 21+.6 percent on 1 October
1926 see Finansy SSSR za 7CXX let The Finances of the USSR during 30
Years, Gosfinizdat, 191+7, page 84'Y.
A separate long-term crediting department (ODK) was set up in
1926 within the Trade-Industrial Bank (organized in 1922) and rapidly
began to play a major role.
The fulfillment of the first Stalinist five-year plan, which pro-
vided a huge increase in capital investments in industry and power
installations, required a decisive reorganization of the credit system.
In 1927, the government decided to reorganize the clientele of the banks
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and concentrated the crediting of the major branches of the economy in
the State Bank. In 1928, the ODK of the Trade-Industrial Bank and the
Electric Power Bank (established in 192+) were transformed into the
Long-Term Credit Bank of Industry and Electric Power of the USSR (BDK).
The following data indicate the growth of operations of this bank: By
1 August 1929, long-term credits given by BDK were 1,879 million rubles,
including 1,470.2 million rubles for capital investments (Materialy po
organizatsii dol osrochno o kred.ita Materials on the organization of
Long-Term Credit/, Issue 4, Moscow, published by Prombank, 1929, page
l4+)
Quite substantial was also the volume of long-term credits given
to agriculture by the Central Agricultural Bank and local agricultural
credit societies (The agricultural credit societies were organized in
1923 and the Central Agricultural Bank in 1924). The volume of long-
term farm loans rose steadily from 1~.2 million rubles as of 1 October
1924, to 724 million rubles on 1 October 1927 and 1,988 million rubles
on-1 July 1929.
Local municipal banks were organized in 1923, followed by the
Central Municipal Bank (Tsekombank) in 1925, to finance residential and
municipal construction. The long-term credit operations of the municipal
banking system rose from year to year. As of 1 October 1928, the total
volume of long-term credits given by Tsekombank and local municipal
banks was 999 million rubles, and as of 1 July 1929 1,381 million rubles.
The rapid increase of long-term credits also raised their percent-
age share in the total volume of bank credits. Long-term credits were
840 million rubles, or 24.6 percent of all credits, as of 1 October
1926; 4,144 million rubles, or 48 percent, as of 1 October 1928, and
5,577 million rubles, or 54 percent, as of 1 July 1929.
Long-term credits were moreover increasingly concentrated in the
trade banks, while short-term credits were increasingly handled by the
State Bank. Taking the total credits as of 1. July 1929 as 100, the
share of individual types of banks in the credit picture was as follows:
Banks Long-term Credit Short-term Credit
State Bank 4.7
BDK (Long-Term Credit Bank) 32.8
Central Agricultural Bank
and local farm banks 35.6
73.0
Tsekombank and local municipal banks 24.7
7.6
Cooperative banks
2.0
6.0
0.2
3.2
100 100
(See Finansy SSSR. za XXX let, Gosfinizdat, 1947, page 110-111)-
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Prior to 1927, part of the budget appropriations provided for
industry were supplied directly by the budget and also through the
State Bank. Starting in 1927, all budget appropriations for the fixed,
capital of industry were supplied only through the Long-Term Credit
Department of the Trade-Industrial Bank.
Subsequently, short-term crediting was concentrated even further
in the State Bank and. all operations connected with the financing and
crediting of capital investments were handled by specialized trade
banks.
Even in this period banks did. not grant long-term credit on the
basis of their short-term resources, but on the basis of special re-
sources, chiefly budgetary funds and special funds.
Right up to the credit reform of 1930-1931 the banks financed
capital investments both in the form of long-term loans and in the
form of nonrepayable financing.
It should be noted that the trade banks during this period were
joint-stock companies under the control of their shareholding agencies.
The Long-Term Credit Bank, for example, was under the control of the
Supreme Economic Council of the USSR. The municipal banks were also
joint-stock organizations, with at least 50 percent of the stock held
by the guberniya executive committees. The Central Mun`cipal Bank was
under the control of the People's Commissariat of Finance of the USSR,
the People's Commissariat of Labor of the USSR and the people's commis-
sariats of internal affairs of the union republics. Cooperative banks
were under the control of the State Bank and various cooperatives and.
their central organizations. Finally, the Central Agricultural Bank was
under the control of the People's Commissariat of Finance USSR, the
people's commissariats of agriculture of the union republics and the
agricultural cooperatives.
3. Organization of Long-Term Investment Banks in the People's Commis-
sariat of Finance of the USSR.
Basic Principles of the Present System of Financing and. Crediting Capital
Investments.
In adopting the first Stalinist five-year plan in April 1929, the
16th party conference stressed in its decisions the need for improving
the system of financing and crediting the national economy, intensifying
the struggle for economies, making fuller use of and mobilizing the
available equipment, and raising the effectiveness of ce.pital invest-
ments. On 5 December 1929, the party's Central Committee reached a
decision "On the Reorganization of the Administration of Industry" (M.
Savel'yev and A. Poskrebyshev, Direktivy VEP(b) po Khozya stvenn
voprosam directives of the All-Union Communist party (Bolshevik) on
Economic Questions7, Sotsekgiz, 1931, page 6l1.) in which it stressed.
the importance of economic accountability as a basic method of direct-
ing Socialist enterprises. At that time, moreover, the role of planning
in the development of the economy greatly increased. The need for a
radical credit reform thus became pressing:
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"The rapid development of Socialist principles in the national
economy of the USSR and the level attained, by planning have made neces-
sary a radical credit reform" (From the decree of the Central Executive
Committee and. the Council of People's Commissars USSR of 30 January 1930
"On the Credit Reform", Izvestiya, 1 February 1930).
The elimination of bills of exchange in the socialized. sector of
the national economy, the transition from commercial credit to direct
bank credit, and the concentration of all short-term crediting in the
State Bank -- all this produced major changes in the work of the trade
banks, which became henceforth special long-term investment banks.
At the time of the credit reform, the Long-Term Credit Bank and the
Tsekombank handled only the long-term crediting of industry and residen-
tial and. municipal construction. Short-term crediting still played a
substantial role in agricultural credits, in cooperative banks and in
local municipal banks.
After the credit reform the short-term credit operations of the
cooperative banks were entirely transferred to the State Bank and the
cooperative banks became exclusively long-term investment banks. The
short-term crediting operations of local municipal banks affecting local
industry were also transferred to the State Bank, the municipal banks
became essentially long-.term investment banks and their short-term
credit operations were limited to municipal enterprises and organiza-
tions.
- The greatest changes took place in the farm credit system. The
Central Agricultural Bank was transformed. into the All-Union Agri-
cultural Cooperative and Collective Farm Bank and placed under the
control of the All-Union Council of Agricultural Cooperatives. The
republic, kray and. oblast agricultural banks were abolished (as inde-
pendent banks) and. converted. into branches of the Cooperative and
Collective Farm Bank. The lowest links of farm credit were still the
agricultural credit societies.
The Sixteenth Party Congress decided. to submit the entire organiza-
tional structure.of the collective farm and cooperative system to a
radical re-examination.
As of 1 January 1931, the Collective Farm and Cooperative Bank
-ceased its operations and all farm credits, both long-term and short-
term, were transferred. to the State Bank. Howevel', the subsequent
development of collectivization, the sharp increase of capital invest-
ments in agriculture, and the need for concentrating the attention of
the State Bank system on the problems of monetary circulation, accounts
and short-term crediting made it necessary to release the State Bank of
its long-term investment obligations in agriculture. In May 1932, a
special Agricultural Bank (Sel'khozbank) was organized.
The first stage of the credit reform was hampered by mismanagement,
such as automatic granting of credits and, crediting below the plan, that
undermined the system of economic accountability. In 1931 the party and
government adopted the necessary measures to put an end to this mis-
management.
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The work of the Long-Term Credit Bank of Industry and Electric
Power was completely reorganized To insure the expenditure of funds
in accordance with the course of fulfillment of the construction plan,
the Long-Term Credit Bank was required to grant credit only on the
basis of the actual fulfillment cf construction tasks and obligations
assumed by the projects in their contracts with the bank; the Long-
Term Credit Dank had the right with the approval of the People's
Commissariat of Workers' and Peasants' Inspection and the People's
Commissariat of Finance USSR to open branches in major construction
areas and, when necessary, to designate representatives to State Bank
branches.
Also about this time a solution was found to the problem of the
nonrepayable nature of the financing of capital investments of state
enterprises and organizations. Until then the question of the use of
budgetary funds for the purpose of capital investments in industry and,
for the purpose of working capital had been solved separately in each
specific case.
Funds granted by the Long-Term Credit Bank (and previously by the
Long-Term Credit Department of the Trade--Industrial Bank) from its own
resources, from special funds or from the deposits of industry itself
were granted only as long-term loans,,
Starting in 1930, all appropriations in the state budget for the
financing of state indu:strial, transportation, cc?mmercia:l and agricul.-?
tural enterprises became nc,nrepayable
Starting in 1934, all funds (budgetary as well as the organiza-
tions' own funds) granted through Prombank, Tsekombank and Torgbank
(then called Vsekoba.nk) for the financing of capital investments in
state enterprises of industry, transport and communications, includ-
ing residential, municipal, and social construction and the construc-
tion of workers' s: Tply departments, were recta ded as, nonrepayabls
At the same time, the indebtedness of these enterprises to the special.
banks was canceled, as were their arrears of payments and special
contributions for the financing of capital construction.
The establishment of nonrepayable financing of capital invest-
ments of state enterprises and organizations was based upon state
(national) ownership of the tools and means of production. The mone-
tary accumulations of state enterprises belong to the state and are
disposed of by the state in a planned manner, including capital
investments. In individual cases, long-term loan.a (repayable within
three years) are granted for capital investments in local industry.
The situation is different with respect to the financing of capital
investments in collective farms and cooperative crganizations0
Capital investments of cooperatives are financed largely from their
own funds accumulated in special accounts of the cooperative systems in
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the banks. Therefore the financing of capital investments of individual
cooperative organizations is handled in the form of repayable long-term
loans. The repayment requirement in this case is based on the fact that
funds belonging to the cooperative system as a whole are being used for
individual cooperative organizations (capital investments that, are re-
lated to the system as a whole (for example, the construction of co-
operative educational institutions) and are being financed from the
special accounts of the cooperative organizations that undertake the
construction are nonrepayable).
Funds contributed by collective farms for capital investments in
accordance with Paragraph 12 of the Stalinist Charter of Agricultural
Artels are kept in the bank and are used directly by each collective
farm. In addition the Socialist state grants financial aid. to the col-
lective farms to enable them to fulfill key state measures and further
strengthen the organization and economy of the collective farms. Aid to
the collective farms for capital investments is rendered in the form of
long-term loans, chiefly out of the state budget.
At the present time, the financing of capital investments of state
enterprises and organizations is usually nonrepayable, while capital
investments of collective farms and cooperative organizations are
handled in the form of long-term loans, a difference in approach that
is based. on the differing forms of ownership of the tools and means of
production.
The great rise in capital investments at the end of the First Five-
Year Plan (19.3 billion rubles in 1932 compared with 5.4 billion rubles
in 1928), the high level reached. by the planning of the national economy,
the increased share of budgetary funds used in the financing of capital
investments, and the adoption of nonrepayable financing of capital in-
vestments of state enterprises, all this required greater financial con-
trol over the use of funds granted for capital investments and the
implementation of a unified credit system. In this connection, the
operation of banks engaged in the financing and, crediting of the national
economy had to be reorganized. In 1932, the government decided to
organize all-union long-term investment banks (special banks) within the
People's Commissariat of Finance USSR (Decree of the Central Executive
Committee and the Council of People's Commissars USSR of 5 May 1932 "On
the Organization of Special Long-Term Investment Banks", Izvestiya, 6 May
1932). These banks, which are still in existence, are:
(1) a bank for financing capital construction of industry,
transportation and communications -- Prombank;
(2) a bank for financing Socialist agriculture -- Sel'khozbank;
(3) a bank for financing capital investments of trade and co-
operatives -- Torgbank (at first called Vsekobank).
(4) a bank for financing municipal and residential construction
-- Tsekombank.
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Each of these special banks has been given specific functions.
Prombank handles the financing of capital investments of state enter-
prises and organizations in industry, transportation and communications,
including the residential and. cultural-social construction of these or-
ganizations. Sel'khozbank handles the financing (and long-term credit-
ing) of capital investments of state agricultural. enterprises, the long-
term crediting of capital investments of collective farms and of the
rural population for residential construction and other needs. Tsekom-
bank and. local municipal banks handle the financing of residential,
municipal, and cultural-social construction, capital investments of the
motion picture industry, education and health organs and the long-term
crediting of the working people for individual residential construction.
Torgbank handles the financing of capital investments of state trade and.
procurements and the long-term crediting of capital investments (and.
the replenishing of working capital) of cooperative organizations.
Specialization of the investment banks by economic branches makes
it possible to 'take better account of special factors in the capital
investments of these branches and to insure more effective control.
This has also been facilitated by the transfer of all specialized banks
from their own agencies to the Ministry of Finance USSR and the estab-
lishment of uniform forms and. methods of financial control over con-
struction.
All funds of enterprises and organizations intended for capital
investments, whether derived from the budget or the organizations' own
funds, are concentrated in the investment banks. These banks handle
the accounting operations of their own clientele, the short-term credit-
ing of contracting organizations and their supply organs, and the
accounts and short-term crediting of municipal enterprises (in the case
of the municipal banks).
The financing and crediting of capital investments is handled by
the special banks on the basis of plans approved by law.
The specific forms and methods of bank control were set up by a
number of government decisions. Starting in 1933, the special banks
began to finance only those projects that possessed. approved cost esti-
mates and itemized construction lists and financing proceeded only until
the estimated cost or the appropriation for the construction of the pro-
ject was exhausted. At the same time control over individual outlay
elements was set up: a check on the prices of materials and equipment,
granting of funds for the wage bill within established limits, granting
of funds for administrative-economic and other expenditures in accordance
with established estimates. In contracted projects, the banks paid for
the work by order of the clients on the basis of bills accepted by the
clients at the contracted prices. Preliminary control thus became a key
function of the special banks and resulted in tighter financial and cost-
estimating discipline and reduced construction costs.
Major changes occurred in the methods and forms of the control work
of the investment banks with the decree of the Council of People's Com-
missars of the USSR and the Party's Central Committee of 11 February 1936.
The decree was 'brought about by the need for introducing economic account-
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ability in construction and further extending the contracting method of
construction work. The investment banks were given the right of finan-
cial sanctions in case of mismanagement in a project, as a result of
which further financing was halted until a decision was made by a higher
economic organ. The granting of funds for administrative-economic out-
lays ceased as soon as the appropriations estimated for that purpose
were exhausted..
Of major importance in the matter of improving control over the
observance of construction cost estimates was the rule by which work
performed by contracting organizations was paid for only on the basis
of bills and. acts listing cost-estimate prices and only within the
limits of the specific cost estimate of each major construction item,
rather than within the estimated. cost of the project as a whole. At
the same time, the special banks introduced a system of short-term
credits to contracting construction organizations.
At about this time enemies of the people managed to gain access
to the leadership of some special banks and in their attempts to wreck
introduced formal bureaucratic working methods. This led. to many cases
of mismanagement, in particular the improper use of financial sanctions.
The elimination of the remnants of wrecking activities in the
special banks required a major reorganization of their work. There also
was a need for reorganizing the work of the economic organizations
charged with the planning and cost-estimating of construction projects.
On 26 February 1938, the government issued the decree "On the Improve-
ment of Planning and. Cost Estimates and. the Reorganization of the Financ-
ing of Construction" (Izvestiya, 27 February 1938). Approved at the
same time were: Regulations of Financing Construction by the Prombank,
later applied by the People's Commissariat of Finance USSR to the other
special banks; instructions for the making of designs and cost estimates
in industrial construction; and. regulations for construction contracts,
as well as typical construction contracts, both of the general and the
annual type.
The most important changes took place in the financing of contract-
ing construction, which by that time had. become the predominant con-
struction method. Instead of the previous method of determining the
volume of completed work on the basis of so-called percentage acts,
which was rather approximate and often led to excessive financing, the
new method provided for the execution of acts for completed. parts of
construction elements. The use of financial sanctions was regulated
and. a system of financial incentives was provided for construction
projects and contracting organizations that fulfilled their construction
and. cost plans and showed a good organization of their finances.
The reform thus completed the reorganization of the investment
banks and. set up an orderly system of financing and crediting capital
investments. The investment banks had. become the basic apparatus of
state financial control over construction.
The basic principles of financing and crediting capital investments,
which are still effective at the present time, are the following:
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1. The financing and. long-term crediting of capital investments
are completely separated. from the short-term crediting of the national
economy and are handled by special long-term investment banks.
2. The special banks, which are differentiated according to
branches of the national economy, form part of the Ministry of Finance
USSR, work under its direction and constitute a unified system.
3. The financing and crediting of capital investments is handled
by the long-term investment banks exclusively from special sources
provided by plan, including both budgetary appropriations and the con-
tributions of the economic enterprises and organizations themselves;
the use of these funds for other purposes (such as operational needs)
is prohibited.
4+. All contributions due for capital investments, either by law
or by charter (in the case of the collective farms), must be paid. by
the economic enterprises and organizations into the appropriate special
banks.
5. These banks control all capital investment funds and fulfill
their financing, crediting and control functions in their capacity as
organs of general state accounting and control over capital investments.
6. The banks finance only the construction that is part of the
economic plan and has been properly documented with approved designs and
cost estimates. In addition, capital investments outside of the plan,
the so-called. extra-limit investments, can be financed with special
government permission.
7. Capital investments are financed and credited within established
financing limits that take account of the contributions made for con-
struction by the economic organizations themselves.
8. As a rule the financing of capital investments of state enter-
prises and organizations is nonrepayable, while that of cooperative
organizations and collective farms takes the form of long-term loans.
9. A uniform regime of financing and long-term crediting applies
to all state enterprises and organizations and uniform methods of
financial control over capital investments are used irrespective of the
sources of financing or crediting. The crediting of capital investments
of collective farms is guided by special principles, which are determined.
by the organizational and economic characteristics of collective farming.
10. The special banks finance and, credit capital investments at
cost-estimate prices as the capital investment plan is being fulfilled,
and constantly observe the established control procedures.
11. Accounting operations relating to capital investments are
handled by the special banks and are under their control. These banks
also grant short-term credits to contracting construction organizations.
12. The special banks exercise control over the specified utiliza-
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ability in construction and further extending the contracting method of
construction work. The investment banks were given the right of finan-
cial sanctions in case of mismanagement in a project, as a result of
which further financing was halted until a decision was made by a higher
economic organ. The granting of funds for administrative-economic out-
lays ceased as soon as the appropriations estimated for that purpose
were exhausted.
Of major importance in the matter of improving control over the
observance of construction cost estimates was the rule by which work
performed by contracting organizations was paid for only on the basis
of bills and acts listing cost-estimate prices and. only within the
limits of the specific cost estimate of each major construction item,
rather than within the estimated. cost of the project as a whole. At
the same time, the special banks introduced, a system of short-term
credits to contracting construction organizations.
At about this time enemies of the people managed to gain access
to the leadership of some special banks and in their attempts to wreck
introduced formal bureaucratic working methods. This led to many cases
of mismanagement, in particular the improper use of financial sanctions.
The elimination of the remnants of wrecking activities in the
special banks required. a major reorganization of their work. There also
was a need for reorganizing the work of the economic organizations
charged with the planning and cost-estimating of construction projects.
On 26 February 1938, the government issued the decree "On the Improve-
ment of Planning and Cost Estimates and the Reorganization of the Financ-
ing of Construction" (Izvestiya, 27-February 1938). Approved at the
same time were: Regulations of Financing Construction by the Prombank,
later applied by the People's Commissariat of Finance USSR to the other
special banks; instructions for the making of designs and cost estimates
in industrial construction; and regulations for construction contracts,
as well as typical construction contracts, both of the general and the
annual type.
The most important changes took place in the financing of contract-
ing construction, which by that time had. become the predominant con-
struction method. Instead of the previous method of determining the
volume of completed work on the basis of so-called percentage acts,
which was rather approximate and often led to excessive financing, the
new method provided for the execution of acts for completed. parts of
construction elements. The use of financial sanctions was regulated
and a system of financial incentives was provided for construction
projects and contracting organizations that fulfilled their construction
and, cost plans and showed a good organization of their finances.
The reform thus completed the reorganization of the investment
banks and set up an orderly system of financing and crediting capital
investments. The investment banks had. become the basic apparatus of
state financial control over construction.
The basic principles of financing and crediting capital investments,
which are still effective at the present time, are the following:
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1. The financing and long-term crediting of capital investments
are completely separated from the short-term crediting of the national
economy and. are handled by special long-term investment banks.
2. The special banks, which are differentiated. according to
branches of the national economy, form part of the Ministry of Finance
USSR, work under its direction and constitute a unified system.
3. The financing and crediting of capital investments is handled
by the long-term investment banks exclusively from special sources
provided by plan, including both budgetary appropriations and the con-
tributions of the economic enterprises and organizations themselves;
the use of these funds for other purposes (such as operational needs)
is prohibited.
4. All contributions due for capital investments, either by law
or by charter (in the case of the collective farms), must be paid by
the economic enterprises and organizations into the appropriate special
banks.
5. These banks control all capital investment funds and fulfill
their financing, crediting and control functions in their capacity as
organs of general state accounting and. control over capital investments.
6. The banks finance only the construction that is part of the
economic plan and has been properly documented with approved designs and
cost estimates. In addition, capital investments outside of the plan,
the so-called extra-limit investments, can be financed, with special
government permission.
7. Capital investments are financed and credited. within established
financing limits that take account of the contributions made for con-
struction by the economic organizations themselves.
8. As a rule the financing of capital investments of state enter-
prises and organizations is nonrepayable, while that of cooperative
organizations and collective farms takes the form of long-term loans.
9. A uniform regime of financing and, long-term crediting applies
to all state enterprises and organizations and uniform methods of
financial control over capital investments are used. irrespective of the
sources of financing or crediting. The crediting; of capital investments
of collective farms is guided by special principles, which are determined.
by the organizational and economic characteristics of collective farming.
10. The special banks finance and. credit capital investments at
cost-estimate prices as the capital investment plan is being fulfilled,
and constantly observe the established. control procedures.
11. Accounting operations relating to capital investments are
handled by the special banks and are under their control. These banks
also grant short-term credits to contracting construction organizations.
12. The special banks exercise control over the specified utiliza-
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tion of funds intended for capital investments and over the fulfillment of
the construction plan, over observance of design-estimates and financial
discipline, over reduction of construction costs and over the strengthen-
ing of economic accountability and payment discipline in construction.
This control is both preliminary -- prior to the granting of the funds
and in the course of the accounting operations -- and subsequent.
13. In carrying out their function of state financial control
over construction, the special banks have the right to investigate pro-
jects and contracting organizations (without interfering in the operation-
al and. economic aspects of the project) and inspect the fulfillment of
their work and to call for balance sheets, audits and. other documents
required, for their inspection. If they discover mismanagement, the banks
may, after having notified the superior economic organ, impose financial
sanctions. In the case of properly operating projects and contracting
organizations, the banks may grant financial incentives.
The organizational structure, tasks and methods of the work of
these banks is entirely the product of the character of the Socialist
economic system.
4. Control Work of the Long-Term Investment Banks during the Period of
the Great Patriotic War
The system of financing and control of capital investments estab-
lished. before the Great Patriotic War withstood, the tests posed by war-
time conditions. At the same time, however, the war led to new forms
of control and required greater operational efficiency and maneuver-
ability on the part of the investment banks.
Wartime conditions required the complete and. timely accumulation
by the banks of all funds intended for capital investments and the con-
centration of these funds for the financing of construction and, of the
rehabilitation of war plants and related industries. Greater stress
was placed on the most efficient utilization of monetary and material
funds and the maximum mobilization of internal resources in construction.
Wartime conditions required the temporary halt of construction
at a number of projects and all resources of these interrupted projects
had, to be mobilized and concentrated in war construction projects.
The material resources available in interrupted projects were
transferred to active projects of the same people's commissariats or
to the basic operations of enterprises. All accounts relating to these
transferred resources as well as the funds realized from the sale of
other assets of the interrupted projects were concentrated. in centra-
lized accounts of the main administrations of ministries and served as
sources for the financing of active projects. As soon as a project was
halted, the banks financed only those outlays that were essential for
the maintenance and. protection of the completed part of the project.
During 1942 and. 1943, several billions of rubles were saved through
the mobilization of internal resources and. the reduction of construction
costs. At the same time, the investment banks by exercising their con-
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trol over the mobilization of internal resources at the projects were
able to redistribute material reserves in favor of war projects and.re-
lated branches of the economy.
The first period of the war was characterized by an unprecedented
eastward evacuation of industrial enterprises. The special banks fi-
nanced the expenditures relating to the dismantling and loading of the
evacuated. equipment, the reassembly of the equipment at its destination
and the construction of the new production areas. Toward the end of
1941 and-particularly in 1942, the special banks started. to finance new
construction of war plants, metallurgical, fuel, power and machine-
building enterprises, and residential construction.
Under wartime conditions when military and economic requirements
were constantly changing, quarterly capital investment and construction
plans (in addition to the annual plans) gained operational importance.
This also required greater operational efficiency in the work of the long-
term investment banks.
The people's commisariats (people's commissars) were given extra-
ordinary powers in maneuvering appropriations for, construction. They
had the right: to redistribute capital investments among above-limit
projects approved by the Council of People's Commissars USSR, provided
the appropriation reduction at any one project did not exceed 10 per-
cent; to redirect to active projects funds provided, by the plan for
projects that were interrupted because of the war; to permit partial
departures from approved extra-limit construction designs and cost
estimates within the limits of the general cost estimate of each pro-
ject; to approve the start of operations in completed enterprises or
parts thereof prior to notification of the Council of People's Commis-
sars USSR.
With a view to speeding the completion of new production capacities
and residential space with a minimum outlay of materials, the government
permitted the construction during wartime (in case of necessity) of
buildings designed for short-term operations, making maximum use of wood
instead of metal, of local materials and so forth. In this connection
it was decreed that accounts with contracting organizations be settled
on the basis of actually performed work (following approved work plans)
at unit prices agreed on with Prombank.
The checking of unit prices, i.e. the estimated cost of a unit of
a construction element, became one of the key jobs of the special banks,
particularly Prombank, in the course of the war. This job was so im-
portant because during the war a number of projects were permitted to
work not only on the basis of cost estimates of individual project
items(without a general cost estimate for the project as a whole), but
also on the basis of preliminary cost estimates using aggregate indicat-
ors and sometimes simply on the basis of unit prices.
Starting in the second half of 1943, work began on the restoration
of the temporarily occupied areas. Appropriations for capital invest-
ment in these areas were 16 billion rubles in 1944 and 20 billion rubles
in 1945.
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This restoration work, especially in its initial period, differed
greatly from the construction of new and the reconstruction of operat-
ing enterprises. Special regulations for financing this restoration
work continued in effect until 191.8. These regulations had the purpose
of simplifying work in the liberated areas and. speeding the restoration
of enterprises, residential space and cultural sites. The regulations
permitted financing on the basis of a simplified, designs and estimates
dossier, especially in the case of projects that were being restored to
their prewar capacity; wrecking operations (dismantling of ruins and, so
forth) were financed on the basis of actual outlays. Within an initial
period. of three months, restoration construction and. assembly work was
also financed on the basis of actual outlays (with subsequent recalcula-
tion on the basis of cost estimate rates).
Collective farms in areas that had been temporarily occupied were
given favorable long-term credit terms. These collective farms were
given loans merely on the basis of their remaining real estate and were
granted credit for the purchase of livestock and horses without the
usual requirement that they contribute part of their own funds. Long-
term credit for the construction of individual housing in these areas
was also granted, at favorable terms.
Under these conditions the long-term investment banks obviously
had to establish special control measures for the most economical and
efficient use of the large funds provided by the state for restoration
work. "The huge funds provided by the state for restoration, said M. I.
Kalinin, "should be used, as economically, thriftily and efficiently as
possible, and the party and Soviet organizations should spur the people's
energy and- their initiative toward full utilization of local resources"
(M. I. Kalinin, "The Great National Task", Izvestiya, 10 December 191+3).
The changing nature, distribution and location of construction
projects in various stages of the war required a major reorganization
of the long-term investment banks, in particular the founding of new
branches in the east and the restoration and subsequent expansion of
the bank network in the former occupied areas.
The rapid rates and great volume of capital investments during the
Great Patriotic War played a key role in insuring the ultimate victory
of the Soviet Union over Hitlerite Germany and. imperialist Japan.
5. The Long-Term Investment Banks during the Postwar Five-Year Plan
The work of the long-term investment banks was confronted. with
new demands during the postwar plan, especially in connection with the
monetary reform of 1947. The banks were given the task of further stren-
gthening economic accountability and the regime of economies in construc-
tion and reducing its costs.
The basis of economic accountability in construction and, of the
observance of financial discipline is the existence of economically
computed cost estimates.
In the absence of such an estimate or when estimates or cost
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estimate rates are inflated, construction costs rise and economic ac-
countability is disrupted. The law of the Postwar Five-Year Plan en-
visaged the need of realizing construction work only on the basis of
properly approved technical designs and cost estimates. Accordingly,
the long-term investment banks do not finance projects that lack the
properly approved designs and estimates dossier. However, a solution
of the problem of reducing construction costs required a radical change
in the entire system of making up, approving and checking designs and
cost estimates and the implementation of a number of other measures in
accordance with decisions adopted by the government in May 1950.
At the present time cost estimates of the largest construction
projects are approved by the Council of Ministers USSR. Ministries and
agencies and the Councils of Ministers of union republics are required
to register the approved designs and estimates dossier with the State
Committee of the Council of Ministers USSR dealing with construction.
This does not exclude a check of the cost estimates for purposes of
control by the investment banks, especially in the case of less large
projects whose estimates are not reviewed by the State Committee.
In addition, the investment banks are called upon to strengthen
their control over the project's observance of the cost estimate limit,
both for the project as a whole and for its parts.
Major factors in achieving greater effectiveness of the capital
investments provided. by plan and. in reducing their costs are the speed-
ing of construction and, the concentration of monetary and material re-
sources in key parts of projects. The implementation of the instructions
given by the party and. government has already yielded results. But the
struggle against the squandering of funds continues to engage the atten-
tion of the investment banks. "The success of any construction project
must be judged not simply on the basis of the funds 'used' by the project
but on the basis of actual results achieved with the expended funds"
(V. Molotov, V bor'be za sotsializmn ffn the Struggle for Socialism7,
Partizdat, 1935, page 580). This sstatement of Comrade Molotov, which
related to 1934, is still entirely applicable today.
Of tremendous importance in the reduction of construction and in-
stallation costs is the implementation of a financing system that pre-
vents the overexpenditure of state funds.
The struggle for the observance of designs and cost estimates and
financial discipline on the part of projects and contracting organiza-
tions also requires greater control over the individual elements of
construction costs: equipment and materials, outlays for wages, admin-
istrative-economic and other overhead outlays.
Since the investment banks handle all accounts related to capital
investments, their work as organizers and. controllers of these accounts
is of special importance. Better accounting discipline on the part of
projects and contracting organizations and the speedier turnover of
funds in the accounting phase require better organization of the account-
ing work of the banks, constant observance of the payment. schedules of
projects and contracting organizations, the adoption of measures neces-
sary to insure prompt settlement of the suppliers' accounts, and.
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control over the prompt presentation of bills for fulfilled work and
services rendered..
The growth of the fixed capital of the national economy, the in-
crease in profits and increased mobill.zation of internal resources
raised, the share of the contributions of the economic organizations
themselves in the financing of capital investments. In 1950, 29.1
billion rubles were to be contributed by the state economic organiza-
tions for construction, or almost three times more than was contributed
to the special banks in the prewar years. The amounts accumulated by
Torgbank.for the long-term credit fund of cooperative systems also in-
creased. The organizational-economic strengthening of collective farms
on the basis of the decisions of the Plenum of the Party's Central
Committee of February 1947, the further struggle.for strict observance
of the Stalinist Charter of the Agricultural Artel, the realization of
the three-year plan of development of collectivized livestock, and the
consolidation of collective farms -- all this has tended to increase
the money income of the collective farms and their real estate. The
task of the Sel'khozbank now consists in attracting collective farm
funds for capital investment purposes.
One major reserve in the further development of credit invest-
ments, especially in the case of Sel'khozbank, Torgbank and the Tsekom-
bank system, is the full and prompt collection of outstanding; loans.
In the postwar years the banks have expanded their credit links
with the construction industry, but greater credit efficiency requires
greater control over the use and speedier turnover of the working
capital of contracting organizations and. the unconditional repayment
of loans on time.
Bank operations relating to long-term crediting of cooperative
organizations and especially collective farms have also expanded. Alone
during 1948, long-term credits totaling more than one billion rubles
were granted to collective farms, and according to the plan, these
credits were to amount to 3.8 billion rubles in 1950 (see A. G. Zverev,
0 osudarstvennom byudzhete SSSR na 1220 Sod i ob ispolnenii osud.arst-
vennogo byud.zheta SSSR za 1948 i 1 ~+9 gody On the State Budget of the
USSR for 1950 and on the Fulfillment of the State Budget of the USSR
for 19+8 and 1927, Gospolitizdat, page 18). Credit links between
Sel'khozbank and the collective farms are due to expand in the future.
This will require on the part of Sel'khozbank greater aid to the col-
lective farms in the matter of organizing their finances and constant
checking over the specified use of loans and their prompt repayment.
The amount of long-term credits granted to the working people,
mainly for residential construction, has greatly increased.. In this
connection, the Tsekombank system and Sel'khozbank face the task of
checking over the use of the credited funds for their intended purpose
and of taking measures designed, to secure the extinction of the out-
standing loans on time.
Greater demands are constantly being made on the level of economic
work done by the investment banks. If the banks are to realize real
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financial control over the use of funds granted for capital investments,
they must combine their operational functions of financing and credit-
ing of the capital investments with constant study of the economic
condition of the financed projects and. contracting organizations and
insure a careful check over their accountability and. the documents that
serve as a basis for financing.
As we have stated above, the investment banks are under the control
of the Ministry of Finance USSR. According to the statute, the Ministry
of Finance USSR "directs and. controls the operations of the investment
banks in the financing and crediting of capital investments and in at-
tracting the contributions of the enterprisgs and economic organiza-
tions for that purpose; reviews and passes on for approval by the Council
of Ministers USSR the charters of the investment banks, their credit
plans, annual reports and balance statements, and the percentage rates
and. commission fees levied on their operations; exercises control over
the specified use of state funds intended for the financing of capital
investments, over the reduction of construction costs, over the ob-
servance of designs and. estimates and financial discipline and over the
strengthening of economic accountability and payment discipline in con-
struction" (from the Statute on the Ministry of Finance USSR).
6. The Organizational Structure of the Investment Banks
The tasks and functions of the investment banks in their capacity
as chief instruments of state financial control over capital invest-
ments also determine their organizational structure.
In accordance with Article 14 of the Constitution of the USSR, the
direction of the monetary and credit system is a function of the higher
organs of state power and state administration. The fact that the in-
vestment banks are under the control of the Ministry of Finance USSR
insures uniformity of direction.
Prombank, Sel'khozbank, Torgbank and Tsekombank are all-union .
banks and carry out their functions in accordance with charters approved
by the Council of Ministers USSR and instructions of the Ministry of
Finance USSR. The organizational structure of Prombank, Sel'khozbank
and Torgbank is q uite similar, but each one has its variations condi-
tioned by the nature of the construction to be financed, the volume of
financing, the location of the construction sites and so forth. The
structure of the Tsekombank system is somewhat different.
In addition to their central offices in Moscow, Prombank, Sel'khoz-
bank and Torgbank have provincial offices, branches and authorized
agencies through which they finance construction. These banks have their
offices especially in areas where their capital investments are concen-
trated. In all other areas, construction is financed through the account
of the special banks in branches of the State Bank or another special
bank. Cash operations of all special banks, except the municipal banks,
are handled through the State Bank..
Prombank. The Prombank of the USSR is headed by a board of direct-
ors. The chairman of the board, his assistants and the other members of
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the board. are named by the Council of Ministers USSR upon recommendation
of the Minister of Finance USSR. The Prombank system consists of a num-
ber of links: the central office in Moscow; republic offices in the
capitals of union republics (except the RSFSR and. the Ukraine) and
autonomous republics; kray and oblast offices, and. branches and agen-
cies attached to State Bank offices in a number of cities and rayons.
As a rule, only the republic, kray and oblast offices are under
the jurisdiction of the central office, with the branches and agencies
subordinated to the provincial offices. However, some branches and
agencies that finance especially important projects are subordinated
directly to the central office.
The managers of offices are named by the Minister of Finance USSR
upon recommendation by the chairman of the board of Prombank, while the
managers of branches and, agencies are named by the chairman of the board.
The central office of Prombank is divided into industrial depart-
ments: the department for the financing of construction in the metallur-
gical and. chemical industries, the department for the financing of con-
struction in the machine-building industry and so forth. In addition to
the industrial departments, the central office of Prombank includes func-
tional departments: plans and economics, technical, central accounting
department, operational, review and. inspection, personnel, and so forth.
The organizational structure of the provincial offices and the main
branches is also based on the industrial breakdown.
The financing and control work is handled by the departments (or work
groups) corresponding to the leading branches of industry, transportation
and communications. The provincial offices have planning-economic and
technical departments (or sections or work groups) and. the accounting de-
partment. In some of the small provincial offices and. in most of the
branches, there are no special departments (except for accounting) and.
both financing and control are handled by credit inspectors in coopera-
tion with engineers. Agencies attached to State Bank branches sometimes
include, in addition to the agent, groups of inspectors. The agent is
responsible for preliminary and subsequent control over the construction
projects, while all operational and accounting operations relating to
the projects are handled by the State Bank offices themselves.
Sel'khozbank. The Sel'khozbank is headed by a board of directors.
The chairman of the board, his assistants, and the other members are
named. by the Council of Ministers USSR upon recommendation of the
Minister of Finance USSR. As in the case of Prombank, the apparatus
of Sel'khozbank consists of a number of links-. the central office,
offices in the republics, krays and oblasts, and branches and agencies
attached to State Bank Offices. The nature and large number of the
clients of Sel'khozbank (collective farms, state farms, machine-tractor
stations, and others) have necessitated the organization of a wideflung
network of agencies.
The managers of republic offices are named by the Minister of
Finance USSR upon recommendation of the chairman of the board of
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Sel'khozbank, the managers of kray and. Oblast offices are named by the
chairman of the board and the managers of branches and. agencies by the
bank office managers.
The central office of Sel'khozbank includes the following main
departments: for the financing of state agricultural enterprises, for
the crediting of collective farms, for the crediting of individual bor-
rowers, planning and economics, technical, operational, review, central
accounting department, personnel, and others. Sel'khozbank provincial
offices are similarly subdivided.
The Tsekombank System. The Central Municipal Bank is headed by a
manager and his assistants named by the Council of Ministers USSR upon
recommendation of the Minister of Finance USSR. However, in contrast
to the other special banks, the Central Municipal Bank has only one
provincial office -- the Ukrainian office. The financing and. crediting
of residential, municipal, cultural-social and administrative construc-
tion is handled through republic, kray and Oblast municipal banks (and
in Moscow through Mosgorbank), their branches and agencies.
The municipal banks at republic, kray and. Oblast levels are under
the control of the Councils of Ministers of republics and the Executive
Committees of kray and Oblast Soviets of working people's deputies. To
insure a uniform system, local municipal banks carry out their work on
the basis of uniform rules and instructions approved by the Minister of
Finance USSR; the credit plans of the municipal banks are reviewed by
the Councils of Ministers of republics and the Executive Committees and
are then passed on to the Tsekombank for approval.; the latter also
approves the annual and quarterly reports of these banks and, reviews
their operations.
The managers of republic municipal banks are named by the Minister
of Finance USSR and the managers of kray and. Oblast municipal banks are
named by the manager of Tsekombank..
The composition of the clientele and the nature of the operations
of Tsekombank and the local. municipal banks differ from those of the
other investment banks and their organizational structure differs accord-
ingly. The Tsekombank includes departments for the financing of
residential and. municipal construction, the financing of cultural-social
construction, the crediting of individual residential construction,
planning and economics, cost estimate control, inspection control,
crediting and accounting operations, main accounting department, per-
sonnel, and so forth.
Torgbank. According to its new charter, Torgbank is headed by a
board. of directors, whose chairman, assistant chairmen and other members
are named. by the Council of Ministers USSR upon recommendation of the
Minister of Finance USSR.
The Torgbank apparatus consists of the following links: the central
office, offices at republic, kray and Oblast levels, and agents attached
to State. Bank branches.
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Managers of republic offices are named by the Minister of Finance
USSR and. the managers of kray and. oblast offices by the chairman of the
board. of Torgbank.
The head office of Torgbank is subdivided on an economic basis and
includes a department for the financing of trade, a department for the
financing of cooperatives, and so forth. In addition the head office
includes functional subdivisions, such as a planning and. economics de-
partment, an estimates control section, the main accounting department,
and so forth. Torgbank provincial offices are organized in similar
fashion.
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THE METHOD OF PLANNING CAPITAL INVESTMENTS AND TBE CONTROL FUNCTIONS OF
BANKS. THE FORMAL APPROVAL OF FINANCING.
1. The Method of Making Up and Approving Capital, Investment Plans.
The rates of development-of production in various branches of the
national economy determine the volume of capital investments in those
branches envisaged by the national economic plan. The capital construc-
tion plan thus forms a component of the national economic plan of the
USSR.
The main tasks of planning capital investments are: setting the
proper proportions in the development of individual branches of the
national economy, insuring the rise of output envisaged by the economic
plan, forming the necessary capacity reserves, insuring efficiency of
the capital investments, the proper location of construction projects
by regions and the further economic and cultural rise of the national
republics, careful coordination with long-range plans and concentration
of funds in key projects.
Capital investments go into new construction. (factories, plants,
mines, railroad lines, residential dwellings, and, so forth), reconstruc-
tion and expansion of existing enterprises, restoration work (recon-
struction of destroyed. enterprises or buildings), and capital repair.
Capital investments intended for capital repair of fixed capital are not
included in the capital construction plan and are handled separately by
the national economic plan.
Capital investments are used for construction and installation work,
the acquisition of equipment, tools and implements included in fixed
capital, and so forth.
Construction work :includes the erection, rebuilding, expansion and
restoration of all sorts of buildings (industrial, residential, cultural-
social, commercial and storage) and installations (blast furnaces, mines,
dams, bridges, etc); installation work includes the assembly and instal-
lation of technical, power-generating and other equipment.
In addition to outlays used for the creation. and expansion of fixed
capital (capital expansion outlays), capital investments also include
outlays that have no effect on the growth of fixed capital, for example
outlays for soil-improving and melioration work.
Capital investments are planned for specific purposes. The specific
nature of outlays in various branches of the national economy is deter-
mined by the characteristic features of those branches. Characteristic
of industry, for example, is the construction of new and. the expansion
of existing plants and factories, i.e. construction designed for produc-
tion. In agriculture, capital investments are used chiefly for the
acquisition of tractors and trucks, soil improvement and afforestation,
swamp drainage, the formation of livestock herds and similar measures.
Characteristic of trade and cooperatives are capital investments in the
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trade and storage network, the construction of public eating.places, the
organization of various types of handicrafts, and so forth. In residen-
tial and municipal investments, funds go chiefly into an expansion of
housing, municipal improvements and so forth.
However, capital. investments in various branches of the economy
are not limited to the listed. outlay categories characteristic of each
branch. For example, the mere erection of industrial plants is not in
itself sufficient in the construction of industrial enterprises. In.
most cases, especially when construction proceeds outside of cities, the
workers and employees of the future enterprise must be provided with
housing (housing construction), public baths and laundries (municipal
construction), stores (trade and storage construction), children's
creches, hospitals, clubs and. so forth.
.The capital construction plan approved annually by the Council
of Ministers USSR as part of the national economic plan consists of a
number of documents. In the first place, the plan sets the general
volume of capital work throughout the economy of the USSR and the value
of fixed capital to be put into operation. In addition, there is a plan
for labor, a plan for the introduction of new technology and a plan for
the supply of construction materials, equipment and other necessary
material supplies.
Great importance is attached to the distribution of capital invest-
ments by union republics and by union and union-republic ministries
and. agencies.
The proper distribution of outlays among the branches of the
national economy and. the most rapid completion of projects under con-
struction insures the proper proportion among output levels in the vari-
ous branches. For example, the output level in the metallurgical
industry, which is of decisive importance for the economy as a whole,
depends mainly on the proper channeling of investments into the coal-
mining industry.
The capital construction plans, in addition to being made up on
an industrial. basis by ministries and agencies, are also formulated on.
a regional. basis, giving the distribution of capital work by union
republics. The plan is set for each union republic as a whole and by
republic ministries.
Since it attaches much importance to the rehabilitiation and ex-
pansion of housing, the Council of Ministers USSR approves separately
within the capital construction plan a plan for housing construction
and for the opening of new lousing by union ministries and. agencies
and by union republics.
Approved in addition to capital construction plans for ministries
as a whole are itemized. lists of above-limit construction projects that
contain detailed indicators for large and important projects, including
the volume of work to be performed during the current year. These item-
ized lists include union, republic and local projects whose cost
estimates are equal to or exceed the established limit.
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The limits for various branches of the economy are set by the
Council of Ministers USSR. For example, for the construction of enter-
prises in ferrous metallurgy, the :Limit is 10 million rubles, for machine-
building enterprises 5 million rubles and. so forth.
Projects whose cost estimate is equal to or exceeds the estab-
lished limit and projects that are included in the itemized lists of
above-limit capital construction approved. by the Council of Ministers
USSR, irrespective of their cost, are called above-limit projects.
All other projects not included in the itemized lists are called below-
limit projects.
The inclusion of this or that project in the itemized lists
approved by the Council of Ministers USSR is not always determined by
the limit. In industry, for example, all new and reconstructed coal
and oil-shale mines and open cuts under union-wide jurisdiction are
included in the itemized lists irrespective of estimated cost.
In the field of residential, cultural-social and. municipal con-
struction, above-limit projects include houses, hospitals, sanatoriums,
theaters, libraries, museums, scientific and educational institutions
and. so forth whose estimated cost exceeds 3.5 million rubles, and the
construction of new water, sewage and steam-heating systems irrespective
of their estimated. cost.
In agriculture and forestry, above-limit projects include in
particular irrigation and. melioration projects exceeding 5,million
rubles and newly organized state farms irrespective of their estimated
cost.
In trade and storage, above-limit projects include, for example,
grain elevators of an estimated cost exceeding 3 million rubles and
trade enterprises of an estimated, cost exceeding 2 million rubles.
When a cost estimate of the technical designs is made for a con-
struction project as a whole (general cost estimate) or when a prelimin-
ary cost estimate is for an enterprise as a whole, the inclusion of the
project in the itemized list of above-limit projects is based on the
estimated cost of the project as a whole. In the construction of in-
dividual parts(separate installations, shops, buildings and so forth)
of existing enterprises without general reconstruction of the entire
enterprise, when instead of a general cost estimate such estimates are
made only for the individual parts, the itemized lists of above-limit
construction include only those parts whose estimated cost is not
below the established limit.
With the aim of ending all undesigned. and un.estimated construction,
the government has prohibited the inclusion in above-limit lists of
projects that lack the proper designs and, cost estimates.
Itemized lists of above-limit capital construction include the
following data for each project: the year of the start and completion
of construction; the estimated cost of the project; the estimated cost
of work and fixed capital completed and. put into operation prior to the
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start of the plan year; the volume of work planned for the plan year;
amount of fixed capital to be put into operation in the course of the
plan year, its capacity, cost and. quarterly completion schedule.
Itemized lists of below-limit projects are approved as a rule by
the chiefs of. main administration of ministries within the limits of
the capital construction plan for below-limit construction, which is
approved. by the Council of Ministers USSR for a given ministry and. is
then distributed among the main administrations.
Itemized lists of projects under republic and. local jurisdiction,
whose estimated cost is below the limits. set by the Council of Ministers
USSR, are approved in a manner prescribed by the Councils of Ministers of
union republics.
The capital construction plan is thus approved for the national
economy as a whole and for individual ministries and. union republics.
The plan is further broken down into construction and installation
work, the cost of equipment and other types of work and outlays.
The capital construction plan then forms the basis for the plans
of the construction industry, labor, the supply of material resources
to. construction and the reduction of construction costs.
The realization of the capital construction plan and the placing
into .operation of new production capacities requires further industri-
alization of the construction industry. The approval of capital con-
struction plans and itemized. lists for client ministries is therefore
associated with the assignment to each project of the volume of con-
struction and installation work that is to be performed. by contracting
organizations subordinated to the Ministry of. Construction of Heavy
Industry Enterprises and to the Ministry of Construction of Machine-
Building Enterprises. Also subject to approval is the volume of capital
investments directed into the fixed capital of the construction industry,
which is designed to supply the contracting organizations with housing,
auxiliary enterprises, construction machinery, means of transportation
and so forth.
Subject to approval as part of the national economic plan for con-
struction are annual plans for labor for each union and. union-republic
ministry and union republic. These plans are made up on the basis of
the planned labor productivity. rise to be achieved through the intro-
duction of progressive output norms, the mechanization of labor-consum-
ing operations and the use of mass-assembly methods.
Great importance is attached, to the formulation of plans for the
introduction of new technology into construction. These plans are de-
signed to expand the use of new production materials, improved construc-
tion designs, advanced construction and installation methods and the use
of new and perfected construction machinery and equipment.
The successful fulfillment of the capital construction plans
depends to a large degree on the proper and prompt supply of the con-
struction sites with equipment and construction materials. The plans
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set up for that purpose take account of equipment and materials present
at the site at the beginning of the year and to be used in the course
of the plan year and the normal inventory to remain at the and of the
plan year. These data then determine the supply plan for new equipment
and materials. It is quite evident that the plans for the supply of
equipment and construction materials must be fully coordinated with the
capital construction plans and the project completion schedules by
ministries and individual construction projects.
Party and government are devoting serious attention to the matter
of reducing construction costs. The plans for the reduction of construc-
tion costs therefore not only envisage the plan for construction as a
whole, but the reduction of costs in individual elements of construction,
such as the speeding of construction time, improvement of work organiza-
tion, rise in labor productivity, labor-saving devices, economical use
of construction materials, reduction of overhead outlays and the elimina-
tion of nonproductive losses in production.
Capital construction plans are approved on an annual basis with a
quarterly breakdown.
In accordance with the national economic plan, provision is made
in the state budget of the USSR for funds for the financing of capital
investments (and for additional working capital in construction) by
individual ministries, agencies and union republics. Together with the
volume of budgetary resources, the plan sets the amount of funds to be
contributed for capital investments by the economic organizations them-
selves.
The formulation of the annual capital construction plans of minis-
tries and agencies is preceded by preliminary government approval of
the total volumes (limits) of capital construction. On the basis of
these data and using plan materials received from enterprises and pro-
jects (itemized lists and so forth), the ministries, agencies and Coun-
cils of Ministers of union republics then work out the capital construc-
tion draft plans and. present them for approval to the Council of
Ministers USSR.
The annual capital construction plans and terms of completion
approved by the Council of Ministers USSR for each above-limit project
are then communicated by the ministries and agencies to each project
(with separate indicators for housing construction). At the same time.,
ministries and. agencies distribute the appropriations for below-limit
construction among the main administrations and the latter then pass
them on to each below-limit project (with a statement of the specific
purpose of each amount.)
On the basis of the capital construction plan approved for the
union republics, the Councils of Ministers of union republics break
down the volume of capital construction by branches of the economy
subordinated. to the republic ministries. Each ministry in turn breaks
down the plan into republic and local construction. In the case of
local construction, the Councils of Ministers of the union republics
approve capital construction by oblasts, krays and autonomous republics.
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Changes in capital construction plans in the course of their
fulfillment can be made only with permission of the Council of Minis-
ters USSR. As an exception, ministries are given the right to redis-
tribute appropriations of the annual plan among individual above-limit
projects, provided the reduction in total appropriations for any given
project does not exceed. 10 percent of the annual plan and the reduction
in construction and installation work does not exceed 6 percent of the
annual plan. An increase in the plan of below-limit capital construc-
tion at the expense of above-limit capital construction is prohibited.
2. The Method of Formal Approval of Project Financing
Proper approval of project financing is one of the chief functions
of the investment banks.
Before financing is attempted, the bank branch must be certain that
the project is part of the state capital construction plan and. has an
approved list of construction items for the current year. The law pro-
hibits undesigned and unestimated construction and the bank branch must
first make certain that the project has a properly approved design and
estimates dossier. Finally, before funds are granted, the amount and
sources of financing. must be known.
For proper approval of project financing, i.e. for granting the
project the right to receive funds, the branch bank must have in its
possession the capital construction plan (Form 7), the annual itemized
list of capital construction by construction items and outlays (Form 1),
a certificate on the approval of designs and estimates (Form 6),-a copy
of the general cost estimate. or a copy of the cost estimates for indi-
vidual construction items (in the absence of a general estimate); the
limit of construction financing (Form 5).
The Capital Construction Plan. The annual capital construction
plan is the basic document confirming the inclusion of the project in the
state plan and granting the right to carry on construction in the current
year in the amount and for the specific purpose stated in the plan. With-
out an annual capital construction plan, the branch banks cannot approve
the financing of projects.
After the approval of the annual national economic plan by the
Council of Ministers USSR, ministries and agencies pass on the annual
capital construction plan broken down by main administrations and pro-
jects to the appropriate bank. The ministries of union republics (ex-
cept the RSFSR) present these plans to the corresponding bank offices.
As for projects of local importance, these plans are presented to the
bank offices by the appropriate departments (administrations) of the
Executive Committees of Soviets of working people's deputies.
The annual capital construction plans approved for individual
ministries and agencies contain special housing construction provisions
for the ministry as a whole and for individual projects.
The banks compare the plans furnished by the ministries with the
plans approved by the Council of Ministers USSR. In case of discrepan-
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Gies, the bank returns Form 7 to the ministry for the necessary cor-
rections.
The bank branches receive the annual capita]. construction plans
(Form 7) for above-limit projects from the head office and the plans
for below-limit projects from the head office or from the appropriate
office, depending on the authority that has approved the below-limit
construction projects.
The capital construction plans (Form 7) indicate whether the
project is below or above limit. However, the bank branch verifies
independently on the basis of a certificate (Form 6) received-from the
project whether or not the project belongs to the above-limit category.
If the project is erroneously listed in Form 7 as a below-limit project
and its estimated cost exceeds the established. limit, the branch so
informs its head office and suspends all steps leading to approval of
financing pending receipt of instructions.
The Annual Itemized List of Capital Work by Individual Items and
Outlays. The itemized construction lists approved by the Council of
Ministers USSR include both construction projects as a whole and. the
more important items to be put into operation during the plan year
(blast furnaces, rolling mills, power plants, housing and so forth).
This list, however, does not include all items on which construction
is to proceed. If the enterprise is to be completed and put into
operation as rapidly as possible, construction must be carried on
according to plan not only on the main items, but also on auxiliary
construction items. The document that lists the total annual plan
for the project as a whole and for all items within the project is the
approved annual itemized list of capital work by individual items and
outlays (Form 1), which the project must submit to the bank before
financing can be approved...
This itemized list includes the complete estimated cost of all
items, the volume of work completed since the start of construction
until the start of the plan year (in cost estimate prices), and the
volume of work to be performed. during the current year on each item,
with a breakdown of that work into construction work, installation work
and the cost of equipment. The itemized, list also includes the amount
of construction and. installation work to be performed by contractors;
this makes it possible to compare the volume of work listed in con-
tract agreements with the volume of work listed in the itemized lists.
The itemized. list includes only those items due for construction
during the given year, and. not all items forming part of the general
cost estimate of the project. The items are listed in the order and
with the nomenclature used. in the general cost estimate. In the case
of projects that are financed on the basis of cost estimates for indi-
vidual items, the itemized list includes items for which separate cost
estimates have been mad.e.
The itemized lists of projects being financed on the basis of a
general cost estimate contain the total estimated cost of the project
and. the estimated cost of work completed by the start of the plan year.
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This makes it possible to determine the estimated cost.of the rest of
the project.
Form No. 1
Ministry. of Machine-Tool. Building Submitted Once a Year to the
Financing Branch Bank
Project A
Approved.:
Chief of the Main Administration
(signature)
13 January 1950
1. Total estimated. cost of project (date)
40,240,000 rubles
2. Estimated cost of work completed. This is filled. out only for.
prior to the start of the year projects that have general
25,780,000 rubles. cost estimates
3. Work program approved for the
current year
8,600,000 rubles
ANNUAL ITEMIZED LIST OF CAPITAL WORK FOR 1950 BY ITEMS AND OUTLAYS
(in thousands of rubles)
-------------------------------------------------------------------------
Total
esti-
Com-
Estimated. cost
of annual work program
Items and Outlays
mated
cost
pleted
prior
including
accord-
ing to
to the
start
Con-
struc- Instal-
the cost of the
tion
lation Equip-
estimate Year
Total
work
work
ment
1. Main building
10,500
8,300
2,200
1,360
295
370
2. Designing shop
3,030
1,930
1,100
900
-
3. Foundry shop
5,1E90
4,490
1,000
300
200
500
4. Assembly shop
2,300
--
1,105
1,105
--
5. Compressor station
1,135
635
500
100
9o
310
6. Warehouse for finished
.products
285
1E5
21+0
21+0
--
7. Repair shop
2,440
2,011.0
1+00
--
100
300
8.-Laying of high-voltage
cables
150
--
150
150
9. Water lines
350
100
250
250
10. Residential House No. 4
2,115
1,015
1,100
1,000
11. Dining Room and Club
_1,250
--
8, 00
5, 9 0
685
1,180
To be performed. by contractors:
Construction work --
5,960,000 rubles
Installation work --
685,000 rubles
Director of Enterprise
(signature)
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Itemized. lists of above-limit construction are approved by the
chief of the main administration to which the project is subordinated;
itemized lists of local. construction are approved by the chief of the
department (administration) of the Executive Committee of the oblast
Soviet of working people's deputies; and itemized lists of below-limit
construction are approved by the director of construction or of the
enterprise.
Having received the itemized :List from the project, the branch bank
verifies the proper approval of the itemized list; the proper documenta-
tion of all listed items with proper designs and estimates; and. agree-
ment between the total amount of outlays (including housing) and the
itemized list of the annual capital construction plan (Form 7).
If the itemized list has not been properly approved, the branch
bank will not finance the project until a new, properly approved item-
ized list has been submitted. If any of the other requirements relating
to the itemized list are not fulfilled the branch bank will not hold up
financing but will set a time limit for the project to make the neces-
sary corrections. Until such corrections have been made, the project
will be financed within the terms of the annual plan only for items that
are properly documented. with designs and estimates.
The itemized lists may meet all the requirements listed above and
still require corrections designed to insure the proper destination
of funds and the proper distribution of.appropriations among the various
items. Therefore the branch banks do not limit themselves to a formal
check of the itemized lists, but also analyze their substance.
The main condition for the successful fulfillment of the capital
construction plan and the completion schedule of new production capaci-
ties is the concentration of material and monetary resources and labor
in key construction items.
In its decisions, the government has repeatedly stressed the in-
admissibility of scattering monetary and material resources over a
large number of items.
. In analyzing the itemized list, the branch bank must verify in the
first place whether funds are being scattered over a large number of
items or whether appropriations are being concentrated on the financing
of key shops and installations that are due to be completed on schedule
and will serve as additional production capacities. In making this check,
the branch banks use the lists of key construction items (transmitted
to them from their head office) approved by the Council of Ministers
USSR for the given year and the reports of the projects themselves re-
garding the status of incompleted capital investments.
The practice has been that some projects in making up the itemized
lists and presenting them for approval do not assign sufficient appro-
priations to items that should be completed in the current year or to
auxiliary items (water supply, power plant and so forth) essential for
the start of normal production. Some enterprises, instead of providing
funds in the itemized lists for the rapid completion of previously
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started items-and thus reducing the number of incompleted capital invest-
ments, plan constructs n on a number of new items that would not be.com-
pleted for some time and thus would. immobilize the state's funds.
In comparing the data on the state of the incompleted.capital
investments with the itemized lists, the branch banks establish which
of the incompleted items have not been included in the current itemized
list and the reason for their omission. At the same time the branches
determine the amount of appropriations necessary for the rapid comple-
tion of these items and make the appropriate suggestions for changes
in the itemized lists.
The banks make certain that all key items listed, by the national
economic plan are included in the itemized. lists and. are provided with
sufficient appropriations; when necessary, the banks require the redis-
tribution of the appropriations among individual items to achieve that
aim.
In the course of their check, the branch banks also ascertain
whether certain outlays listed in the itemized lists should actually
be financed at the expense of appropriations for centralized (limited.)
capital investments. For example, an itemized list may contain outlays
for capital repairs, which should. be financed under separate provisions,
or it may contain outlays for the purchase of furniture, office equip-
ment and other goods that should be financed at the expense of non-
centralized (extra-limit) capital investments. In such cases, the
branch bank sees to it that the illegal outlays,are omitted from the
itemized lists.
Also subject to correction are itemized lists of above-limit
projects that include appropriations for the purchase of means of trans-
portation for the needs of the existing enterprise, since such outlays
should be financed from below-limit appropriations.
Following their analysis and. check of the itemized lists, the
branch banks inform the projects of the required corrections. If the
projects refuse to make the suggested corrections, the branch bank so
informs its head office without holding up the financing procedure.
The head office will then reach an agreement regarding the corrections
with the appropriate ministry or agency.
The Certificate on the Approval of Designs and Estimates. We have
noted above that banks may finance only those projects and. items that
have a properly approved designs and estimates dossier. Before approv-
ing project financing, the branch banks must first make certain that
such a dossier exists. For this purpose, the projects must supply the
branch banks with a copy of the properly approved general cost estimate
of the technical designs and. a certificate on the approval of the
designs and cost estimates (Form 6). If a project is to be financed
on the basis of designs and estimates for individual construction
items, copies of these individual cost estimates must be supplied
instead of the general estimate.
The project that does have a general cost estimate lists in its
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certificate (Form 6) the total cost estimate of the project without
separate estimates for individual items. If the project is being fi-
nanced on the basis of designs and estimates for individual construction
items, the certificate must list all permanent and temporary items on
which construction is to proceed. during the current year.
Upon receipt of these certificates, the banks check their proper
execution and ascertain whether the designs and estimates dossier has
been properly approved.
Before approving financing of the projects, the banks verify on
the spot whether the projects do in fact possess approved designs and
estimates for each item in the general cost estimate and whether the
estimated cost of the item agrees with the estimated cost listed in the
general estimate. If the figures disagree, the branch bank without
holding up the financing procedure gives the project a time limit for
making the proper corrections.
Before the technical design and the general cost estimate of a
project has been approved, outlays for preparatory work may be approved
on the basis of an approved draft plan and a preliminary cost estimate.
For the approval of the financing of such outlays, the bank must be
supplied with a certificate (Form 6) confirming the existence of a pre-
liminary draft plan and a preliminary cost estimate for these outlays.
The certificate must also list the construction items affected by the
preliminary operations (railroad. spurs, quarries, auxiliary enterprises
and so forth) and data on the approval of designs and estimates for
these preliminary items or,. if necessary, individual preliminary cost
estimates.
The designs and. estimates dossier of a restoration project varies
somewhat from the dossier of a new construction project.
In the appropriate cases, the bank should. receive together with the
certificate on Form 6 a separate certificate stating that the enter-
prise is being restored to its former capacity (before destruction).
Some projects are granted a grace period for the approval of their
designs and estimates without prejudice to their normal initial opera-
tions. Such projects need not submit certificates on Form 6 and are
financed within the limits of the appropriations listed in the item-
ized lists (Form 1).
However, after expiration of the grace period, the branch banks
are expected to receive the certificates on Form 6.
The Limits of Construction Financing. After the bank has received
the documents confirming the inclusion of the project in the state plan
and the approval of designs and estimates, it can still not approve the
financing of the project since it does not know from what sources and.
within which limits the project is to be financed. It will have this
information only upon receipt of the financing limit (Form 5) from its
head office or the appropriate provincial office.,
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These limits state the total funds assigned to the project for
the given year, with a breakdown by quarters and by financing sources.
The financing sources stated. in Form 5 may fall into two groups.
The first group includes funds that are received by the bank, in-
cluding funds from state and. local budgets, amortization deductions,
profits, funds derived from the incidental mining of minerals or from
the sale of goods removed from existing enterprises (Lines 2-9).
The second group includes funds that are as a rule not deposited in
the bank, but tend to reduce the need for bank financing. planned accu-
mulations of a construction project carried out by the economic method;
funds derived from the mobilization of internal resources and other
sources; amortization of the fixed. capital of the construction project;
materials received at no cost, and.so forth (Lines 10-13).
The total amount allocated to capital construction (Line 14 of the
limit document) should be in accord with the capital construction plan
approved for the project (Form 7); discrepancies are permitted only when
the government decides to finance capital construction on a given pro-
ject in excess of the annual plan.
jee Form No. 5 next page]
Funds granted on the basis of the financing limits are paid within
the quarterly appropriation limits stated in Form 5. Funds that have
not been completely spent in a given quarter may be used in the course
of:the following quarters of that year.
No funds are advanced to projects on the following quarter, but
additional funds from the appropriations for the following quarter may
be paid in the form of a bonus to projects that overfulfill their
capital construction plan.
Some banks follow special rules in approving the financing of pro-
jects. For example, Tsekombank does not send its municipal banks
separate capital construction plans (Form 7) and financing limits (Form
5), but combines these two into a single form called "Annual Credit
Authorization" (Form ii).
The volume of capital construction in Form 4 is listed as a total
amount with a breakdown into construction and installation work, equip-
ment and other outlays. With regard to the sources of financing, this
form does not differ from the financing limit (Form 5).
After all documents have been checked., the branch bank gives its
accounting department a written order to start the financing of the
project.
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Form No. 5
Prombank of the USSR
Operational Department
Moscow
No. 3582 by mail/telegraph
15 January 1950
To the Moscow City Office of Prombank
Moscow
Copy to: ..................
FINANCING LIMIT FOR 1950
1. Name: Project A
of the .......... Trust/Main Administration
of the Ministry of Machine-Tool Building
(in thousands of rubles)
including
Sources Limit set First Second Third Fourth
for 1950 quarter quarter Quarter Quarter
---------------------------------------------------------------------------
2. Budgetary appropriations
6,320
1,314
1,550
1,846
1,610
Industry's Contributions
3-5. Centralized
800
160
200
240
200
Local
6. Amortization
370
70
90
105
105
7. Profits
680
110
170
210
160
8. Others
-.-
--
--
--
--
9. Total financing limit
8,170
1,684
2,010
2,4ol
2,075
Mobilization of Internal
Resources
10. Total (mobilization /,
immobilization -)
/380
/76
/95
/115
/914
11. Including working assets
(increase/, reduction -)
-1450
-100
-110
-125
-115
12. Economies derived from
reduction of construction
costs
jlank7
13. Other Sources
5C)
10
12
15
13
14. Total amount allocated
to capital investment
8,60C)
1,770
2,117
2,531
2,182
Chief of Department Chief Bookkeeper
(signature) (signature)
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Prombank
Moscow City Office
Order to Accounting Department
17 January 1950
Start the financing of project A of the Ministry of Machine-Tool
Building, account number 3052+.
Construction method -- contracting.
Documentary basis: Form 7 - received 4 January 1950
Form 5 - received 15 January 1950
Form 1 - received 17 January 1950
Form 6 - received 17 January 1950
Office Manager
(signature)
Chief of the Department for the Financing of Machine-Building
and Power Plant Construction Projects
(signature)
Upon receipt from the project of some additional documents re-
q uired for the opening of an account (request for the opening of an
account, list of persons authorized to sign monetary documents, samples
of the signatures of these persons, and so forth), the bank's accounting
department is then ready to start financing on the basis of the written
order.
Annual capital construction plans, annual itemized lists, certifi-
cates of the approval of designs and estimates and financing limits are
the prerequisites without which financing cannot be authorized, irrespec-
tive of whether construction is being done by the contracting or the
economic method. In the case of contracting, the client must also
submit to the branch bank in addition to the other documents the con-
tract agreement, and in the case of construction by the economic method,
the enterprise must furnish the bank with a list of the construction
operations (Form 3) being completed by the economic method.
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BANK CONTROL OVER THE DESIGNS AND ESTIMATES DOSSIER AND THE ESTIMATED
COST OF THE CONSTRUCTION PROJECT
1. The Importance of Designs and Estimates in Capital Construction and
the Role of Bank Control
No construction project can be carried out without the preliminary
formulation of a design of the future building or installation. Depend-
ing on the nature and the complexity of the project, this design can be
more or less detailed and contain a greater or lesser number of calcula-
tions, drawings and plans. But in all cases the construction workers
must have a clear, unequivocal and. detailed concept of the future build-
ing or installation. Such a concept is provided by the design of the
construction project, which usually takes the form of a graphic pre-
sentation.
K. Marx has said: "The spider performs operations that recall the
weaver's operations and the bee in constructing its honeycomb puts some
architects to shame. But even the worst architect differs from the
best bee from the very start in having constructed the honeycomb in his
mind. before attempting its actual construction. The result yielded by
the labor process is the one that the worker conceived. at the start of
the process, i.e. ideally" (K. Marx, Kapital, Vol. 1, 1949, page 185).
Under socialism, where planning is the indisputable law of economic
development, designs assume an even greater role and importance since
capital construction performed by Socialist organizations has direct
social usefulness, serves the development of the national economy, im-
proves the material and living conditions of the broad masses of the
working people and insures progress along the road to communism. In a
Socialist economy, the designs of buildings and. Installations represent
in concrete form the state plan for the expanding reproduction of fixed
capital of the Socialist enterprises and organizations.
In addition to the designs, great importance is also attached to
the cost estimates made on the basis of these designs. These estimates
reflect the size of the socially necessary outlays and. give in money
terms the cost of the planned construction. The cost estimate is an
inseparable part of the construction design and is made up only after
all basic technical questions have been resolved in the planning pro-
cess. To the extent that a regime of economics and cost reduction is
an inherent part of Socialist economics, rational. designing decisions
and economical cost estimates are basic requirements of the technical
dossier in the field of capital construction.
The significance of the strengthening of designs and estimates
discipline in construction has been expressed in a number of government
decisions that prohibit investment banks from financing projects that
lack the properly approved designs and estimates.
Party and government in their directives on improvement of the
construction business and reduction of construction costs have
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repeatedly stressed the importance of the cost estimate as a document
that sets the cost of construction, serves as a basis for settling
accounts between clients and contractors and provides the start of
,economic accountability in construction.
In 1938, the government approved "Instructions for Making Up
Designs and. Estimates for Industrial Construction", which listed the
components and the methods of making up and approving the designs and
estimates dossier for the construction of industrial enterprises. In
1939, the People's Commissariat of Construction (upon instructions of
the government) approved for compulsory use by all Soviet organizations
"Instructions for Making Up Designs and Estimates for the Construction
of Residential, Cultural-Social, Municipal, Commercial and. other Non-
Industrial Buildings."
The special construction conditions during the Great Patriotic
War required certain temporary changes in the make-up of the technical
dossier. However, after the victorious conclusion of the war and. the
return to peaceful labor, the question of strengthening designs and
estimates discipline in construction came once again to the fore. In
accordance with the Law on the Five-Year Plan of Reconstruction and
Development of the National Economy of the USSR for 19+6-1950, construc-
tion work is once again being carried. out on the basis of approved
technical designs and cost estimates.
A number of government decisions on problems of construction,
adopted in May 1950, were directly designed to bring further order into
the planning business and remove a number of serious deficiencies that
had given rise to excesses in designs and cost estimates and had pro-
duced a rise in construction costs.
In this connection it should be emphasized. that a reduction of
construction costs depends to a large extent on the proper way of
making designing decisions and. on the economical formulation of cost
estimates. Any excesses in designs and, estimates lead directly to a
higher cost of construction and a nornrational expenditure of state
funds.
For that reason, the government since 1 July 1950 has required the
State Committee of the Council of Ministers USSR dealing with construc-
tion and. the Ministry of Urban Construction USSR to make a check of the.
designs and estimates dossier of all projects for which the estimated
cost exceeds the limits set by the government. Under this arrangement
the Ministry of Urban Construction USSR checks the designs and estimates
dossier of residential-municipal, cultural-social and other civil con-
struction projects in cities, while the State Committee of the Council
of Ministers of the USSR handles all other construction (industrial,
transportation, agricultural and, so forth).
Bank control over designs and estimates dossiers in construction
then involves mainly a compulsory check of the existence of the properly
approved designs and, estimates for the projects included in the capital
construction plan for the current year'. The investment banks are not
permitted to finance projects that are not supplied with the required
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technical dossier. Also of major importance is bank control over the
quality of the cost estimates. Such control is effected by the special
banks chiefly for those projects whose dossier has not been verified by
the State Committee of the Council of Ministers USSR dealing with construc-
tion or the Minister of Urban Construction USSR.
2. Make-up and Method of Approval of the Designs and Estimates Dossier
In accordance with existing legislation, the designs and estimates
dossier for construction is worked out by special designing institutes
(Gipro) and designing organizations.
The former method of paying for designing and. research work on a
contract basis was abrogated 1 July 1950. Designing organizations under
union-wide jurisdiction are now being maintained with funds from the
union budget and designing organizations under republic and local juris-
diction are being maintained. at the expense of republic and local bud-
gets.
Annual plans for the work of designing organizations are approved
by the Council of Ministers USSR together with the annual capital con-
struction plans. Draft plans for these organizations are made up by
the ministries and agencies of the USSR and to the Councils of Ministers
of union republics and are submitted to Gosplan of the USSR for a pre-
liminary check.
The work plans of the designing organizations list the volume,
cost and nature of design and research work for major construction
projects. The -plans list not only work to be done for the ministry that
has jurisdiction over the given designing organization but also work to
be done for other ministries and agencies on their orders.
Construction designs are made up on the basis of specifications
supplied by the clients in three stages, each of which has its signifi-
cance: design specifications, the technical design and the blueprints.
In the first planning stage -- the formulation of designing speci-
fications -- the technical feasibility and the economic advisability of
the proposed project in the given site and within the proposed time
period is assessed. The designing specifications include the site of
the construction project, the capacity of the future enterprise and the
nature of its output; the components of the enterprise and the types of
planned main buildings and installations, the production links between
the enterprise, its sources of raw materials, fuel, water, power, trans-
portation, housing and. so forth. The designing specifications include
as a rule a preliminary general plan of the enterprise. Designing
specifications for residential and other civil construction list in ad-
dition the basic architectural features of the designed buildings and
installations. At this stage of the designing process the preliminary
cost of the construction project is calculated.
After the planning specifications have been approved, the basic
document for any construction project is worked. out. That is the tech-
nical design which treats the basic technical questions and sets the
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technical and economic indicators-of the projected enterprise, building,
or installation. The technical design is.a complex document; in addi-
tion to the general plan of the,,enterprise it includes the basic tech-
nical decisions relating to all parts of the designed construction
projects production, architectural design, power supply, sewage system,
transportation and so forth. The technical.design must be sufficiently
detailed to make.it possible to order in advance all the required equip-
ment and prefabricated parts for the project.
A general cost estimate setting the final cost of the given con-
struction project is worked out together with the technical design and
is approved with. it The cost: estimate that accompanies the technical
design may not exceed, except with permission of the Council of Minis-
ters USE, the preliminary. cost of the project determined on the basis
of the designing specifications approved by the government.
In the case of large projects that are to be put into operation
in stages, technical designs may be worked out separately for each
stage. In the case, the technical design and the general cost estimate
of the first stage must be accompanied. by a general plan and a prelimin-
ary cost estimate of.the entire project.
In making up technical design, maximum use should be made of
standard designs or previously completed designs. This applies above
all to auxiliary construction items (repair and machine shops, trans-
former stations, garages and so forth) and to other simple and
temporary installations.
In the absence of standard. designs or previously completed designs,
the designs and estimates dossier for these items may be made up in a
somewhat abbreviated form, including simply the calculation of the out-
put capacity, the dimensions of the buildings and installations and the
preliminary cost estimate. The same applies to residential and cultural-
social construction items that form part of an industrial construction,
project. In this case the design simply lists the number, dimensions,
area and types of buildings.
Once the technical design has been approved. and the construction
equipment has been ordered, the blueprints are made up. These contain
detailed graphic materials required for the direct execution of the
construction project on the spot.
No special cost estimate is made on the basis of the blueprints
and the cost estimate that accompanies the technical design remains in
force as the document determining the cost of the planned construction.
However, the cost estimate or the preliminary estimate made on the basis
of the technical design may be refined on the basis of the volume of
work, the specifications of equipment and so forth that emerge from the
blueprints. Such adjustments may be made only within the limit of the
total amount of the approved general cost estimate of the project and
must confine themselves to the rates of the approved cost estimate that
accompanies the technical design.
Existing legislation provides a simplified make-up of the designs
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and estimates dossier for certain construction items. For example, in
the case of construction of individual installations, shops, or build-
ings in existing enterprises that are not subject to general reconstruc-
tion, no complex technical design and general cost estimate is required.
In those cases, designing specifications, technical designs and cost
estimates need. be made up only for each of the individual items to be
built or reconstructed.. Still subject to approval, however, are all
basic technical and economic indicators that determine the production
links between each of the designed items and the existing principal
and auxiliary shops of the enterprise.
An abbreviated designs and estimates dossier is also permissible
for residential, cultural-social, commercial, municipal and other non-
industrial buildings of less than 3,000 cubic meters in volume. In-
stead of the usual three-stage procedure, only two stages are required
for such buildings: the designing specifications with a preliminary
cost estimate and the blueprints. In certain cases, this procedure
may be extended. with the Minister's permission to simple nonindustrial
construction items of?as much as 8,000 cubic meters in volume.
Designs and. estimates for restoration work are also made up in
abbreviated form. For example, an enterprise or installation that is
part of the above-limit construction program and. is being restored with
some expansion or reconstruction should have designing specifications
and a preliminary cost estimate for the construction as a whole, and,
for the individual restored. items, technical designs with cost esti-
mates or, in appropriate cases, simply preliminary cost estimates. In
case of insignificant destruction, the Minister has the right to replace
the technical design with a simple description of the work to be done
and a cost estimate based on unit prices.
If an enterprise or installation is to be restored to its former.
capacity as part of the above-limit; construction program, no designing
specifications are required, but a preliminary cost estimate of all
outlays involved in the restoration must be supplied. With the
Minister's permission, moreover, the technical designs of the principal
construction items may be combined with the blueprints.
The designs and estimates dossier for the restoration of enter-
prises or installations under the below-limit construction program
includes the general preliminary cost estimate and, for individual
restored items, technical designs with cost estimates or, in appro-
priate cases, simply preliminary cost estimates. In case of insignifi-
cant destruction, the technical designs may be replaced. by simple
descriptions of the work to be done and. cost estimate based on unit
prices.
In the postwar period, a number of government decisions have
simplified the make-up of the designs and estimates dossier for pro-
jects in certain branches of the national economy. Specifically in
the case of the construction of new ferrous metallurgical enterprises,
present regulations require designing specifications and a preliminary
cost estimate only for the enterprise as a whole and for individual
construction items simply the technical designs with their cost
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estimates (or preliminary estimates). The planning of the construction
of coal mines and oil wells that can be based on standard designs and.
standard decisions is also limited to two stages. The usual three
stage planning procedure has been kept by the Ministries of the Coal and
Oil Industries only for new types of plants and. especially complicated
projects listed each year by the ministries. A simplified form of the
designs and estimates dossier has also been permitted by the govern-
ment for certain construction items of the Ministry of Railroads, pro-
jects of the synthetic fuels and gas industry and so forth.
The decisions of the Council of Ministers USSR designed to simplify
the designs and estimates dossier have been motivated by a desire to
reduce the excessive bulk of the technical designs of industrial pro-
jects; to make greater use of standard designs and decisions, to ration-
alize further the matter of making cost estimates and. so forth.
.It is clear from the foregoing that cost estimates are made at
various stages of the designing process with varying degrees of pre-
cision and that the make-up, types and content of the cost estimates
vary accordingly.
A preliminary cost estimate is made up in the designing specifica-
tion stage. This estimate sets the preliminary cost of the construction
project as a whole, and in some cases of the principal individual con-
struction items. This preliminary estimate is based. as a rule on the
experience of designing and building. similar enterprises, buildings and.
installations, without detailed determination of the estimated cost of
each of the designed, items. The preliminary cost estimate is usually
based. on the indicators of the outlay of funds for the corresponding
aggregated measure-. a unit of productive capacity of the enterprise as
a whole or of the principal component shops; a cubic meter of the de-
signed building; a kilometer of railroad track, transmission line and
so forth.
The same procedure and the same degree of approximation is used in
the technical designing stage in making up preliminary cost estimates
for large construction projects as a whole when such projects are to be
built in stages.
The final cost estimate of the designed project is made up in the
technical designing stage. The basis for this estimate is: (1) the
volume of work and the specifications of the required. equipment envis-
aged by the technical design; (2) the calculation of the cost of con-
struction materials, goods, semi-manufactured items and parts, based
on the current state purchase prices of the supplier, the established
surcharges of supply and distribution organs, outlays for the amortiza-
tion of shipping containers, transportation outlays based. on current
freight rates from the supplier to the construction site, the established
processing and. storage rates of the construction organizations (a
similar method. is used to determine the cost of the equipment envisaged.
by the technical design); (3) the calculation of the estimated cost of
the operation of the construction machinery (machine-shifts), based on
aggregated cost estimate norm handbooks and the prices established for
the given project (account being taken of the correction coefficients
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for wages and outlays for power, compressed air and. so forth), (4) the
existing wage scale for piece workers with the corresponding correction
coefficients; (5) estimated norms of the outlay of materials, labor and
machine-shifts per unit of work according to the corresponding aggregated
cost estimate norm handbooks; (6) the current norms of overhead. outlays
and so forth.
The primary document used in determining the cost per unit of
each of the planned construction elements or types of construction work
is the unit rate. Unit rates are based on the estimated outlay norms
of materials, labor and machine-shifts, which in turn are set by the
corresponding handbooks of aggregated cost estimate norms.
The unit rate document includes construction, work envisaged. by the
technical design, including special construction work. No unit rates
are computed for the installation of equipment and the estimated cost
of this type of work is based directly on the rate books for the in-
stallation of equipment.
The total estimated cost of the construction. project is determined
by the cost estimate of the technic-al designs which is the summary of
all estimated. outlays and is made up in a regularly established form.
Each item of the general cost estimate must be justified by ap-
pended summary cost estimates or preliminary estimates for individual
construction items and outlays. Summary cost estimates or preliminary
estimates for individual construction items include all types of work
and. outlays for each construction item (workshop, building, installa-
tion and so forth) or for each type of outlay listed in the general cost
estimate (preparation of the construction site, maintenance of the
director's office of the enterprise under construction and so forth).
Summary cost estimates or preliminary estimates for individual items
must in turn be justified by cost estimates or preliminary estimates
for individual types of operations and outlays on each construction
item: construction work, inside water lines, inside plumbing, heating,
ventilation, foundations for the equipment, the equipment and its in-
stallation (separately for the principal types of equipment), produc-
tion implements and tools, and so forth.
All types of cost estimates --? whether the general cost estimate,
the summary estimate for each construction item or the breakdown by
individual types of operations and outlays -- includes technical and
economic indicators in the appropriate units for appraisal of the
efficiency and. rationality of the design alternatives. These indicators
also serve as the initial data for determining the approximate cost of
similar items for which no technical designs are being made up.
The general cost estimate and the summary cost estimate for each
construction item may include preliminary estimates (instead of the final
cost estimates) for construction items and. outlays listed in the "Instruc-
tions for Making Up Designs and Estimates for Industrial Construction"
and in the "Instructions for Making Ua Designs and Estimates for the
Construction of Residential., Cultural-Social, Municipal, Commercial and
other Nonindustrial Buildings". Depending on the nature of the work and.
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the outlays, these preliminary estimates may be based on the following
data. aggregated indicators per unit of work; aggregated. measures using
the analogy of other designed and completed. construction items; the,
prices of current price books, and so forth.
Cost estimates for projects that are being realized. on the basis
of designs and estimates for individual construction items are made up
by the above procedure, but without a general cost estimate for the
construction project as a whole.
Effective 1 July 1950,.a new procedure has been promulgated for
approving designing specifications and preliminary cost estimates for
newly started construction projects and for current projects that lack
approved designing specifications.
Under the new procedure, .the Council of Ministers USSR (after a
preliminary review and decision by the State Committee of the Council
of Ministers USSR dealing with construction or, in the appropriate case,
by the Ministry of Urban Construction USSR) approves designing specifica-
tions and, preliminary cost estimates for all projects whose estimated
cost exceeds the following limits:
25 million rubles -- for industrial enterprises under union
jurisdiction of the metallurgical, coal, oil, chemical and machine-
building industries, the construction materials industry, the lumber
and paper industry, power stations and power networks, railroad trans-
portation and the ocean-going fleet;
10 million rubles -- for industrial enterprises under union
jurisdiction of the other branches, the river fleet, communications,
road. construction, agricultural enterprises, irrigation and melioration
systems;
5 million rubles -- for residential-municipal and cultural-
social construction, the construction of commercial enterprises and. other
items under union jurisdiction, also industrial: transportation and
agricultural enterprises, irrigation and melioration systems, residen-
tial-municipal, commercial, cultural-social and. other construction under
republic and. local jurisdiction.
Designing specifications and preliminary cost estimates for other
projects are approved by ministers and. the heads of agencies of the
USSR in the case of construction under union jurisdiction and the
Councils of Ministers of Union republics in the case of construction
under republic and local jurisdiction.
Technical designs and general cost estimates of especially large
projects and the construction of enterprises in new branches of in-
dustry must be approved by the Council of Ministers USSR irrespective
of their estimated cost (A list of such projects is submitted, to the
Council of Ministers by the State Committee dealing with construction
and by the State Planning Committee USSR).
Technical designs and cost estimates of other projects under union
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jurisdiction must be approved by ministers or heads of agencies of the
USSR and projects under republic and local jurisdiction by the Councils
of Ministers of union republics. Such designs and. estimates may not be
changed without the permission in each case of the Council of Ministers
USSR.
Present legislation enables ministers and. heads of agencies of the
USSR to delegate to heads of main administrations the approval of design-
ing specifications, technical designs , and general cost estimates for
projects under union jurisdiction of an estimated cost of up to 500,000
rubles. The approval of the designs and. estimates dossier for union
projects of an estimated cost of up to 300,000 rubles may be delegated
to heads of trusts and enterprises. The Councils of Ministers of union
republics have the right to delegate the approval of the designs and
estimates dossier for projects under republic jurisdiction of an
estimated cost of up to 300,000 rubles to the heads of ministries and
agencies of republics and for an estimated cost of up to 100,000 rubles
to the heads of main administrations and trusts.
Construction started prior to 1 July 1950 is regarded as supplied
with an approved designs and estimates dossier (under the regulations
effective prior to 1 July 1950) if the following rules (formerly in
effect) have been observed..
if the designing specifications for above-limit projects have been
approved by Ministers of the USSR, and for below-limit projects by heads
of the main administrations of ministries;
if technical designs and cost estimates for above-limit projects
have been approved by ministers of the heads of main administrations
of ministries;
if technical designs and estimates for below-limit construction
have been approved by the head of main administrations of ministries or
(in the case of delegated powers) by the heads of trusts and the d.irec?-
tors of enterprises.
The government decisions adopted in 1950 have greatly strengthened
state control over the quality of the designs and. estimates dossier.
As was noted above, designing specifications and preliminary cost esti-
mates for projects whose estimated cost exceeds the limit set by the
Council of Ministers USSR are first reviewed by the State Committee
of the Council of Ministers USSR dealing with construction (or, in the
appropriate cases, by the Ministry of Urban Construction USSR) before
being approved by the Council of Ministers USSR. Later the State Com-
mittee dealing with construction and the Ministry of Urban Construction
USSR review the technical designs and final cost estimates approved by
the ministries and. agencies of the USSR arid. by the Councils of Ministers
of union republics.
Any discrepancies between the technical designs and. final cost
estimates and, the designing specifications and preliminary cost
estimates that have been approved by the Council of Ministers USSR
are reported by the State Committee and the Ministry of Urban Con-
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struction USSR to the Council of Ministers USSR.
The State Committee dealing with construction and the Ministry of
Urban Construction USSR are also c1arged with the registration of all.
properly approved. designs and estimates dossiers, including. the
designing specifications and preliminary cost estimates and the technical
designs and, final cost estimates.
3. Bank Control over the Provision of Projects with Designs and Estimates.
In the preceding chapter it was said that one of the chief requi-
sites for financing was the certificate on Form 6 on the construction
project's being provided. with approved designs and estimates. Together
with this certificate; the?.projects must also submit to the banks
certified. copies of the approved general cost estimates. Projects
that have been released from the requirement of making up general cost
estimates and are being financed on the basis of designs and cost
estimates for individual construction items must submit copies of the
approved cost estimates for these items.
Before authorizing financing of a newly started construction pro-
ject, the bank verifies the information given by the project in the
certificate (Form 6). As a rule verification is handled directly at
the construction site by an engineer or a credit employee of the bank.
After the information has been verified, the bank employe and the head.
of the project execute an act confirming the results of the comparison
of the information in the certificate with the actual existence of the
approved designs and estimates dossier.
The purpose of this verification is to make certain that the
project does have the technical dossier required by law and that such
a dossier, has been properly approved. In addition the bank employes
verify the existence of the actual authorization orders in the designs
and estimates dossier or the authorizing signatures on the designs and
estimates documents.
If such verification by the bank discloses approval of the de-
signs and. estimates dossier by a noncompetent authority, financing of
the project is held. up.. If there are only individual inaccuracies
(for example, the absence of authorizing signatures on a number of
designs for the principal production shops, or the absence of justify-
ing documents for certain items in the general cost estimate in the
form of final or preliminary cost estimates for the individual con-
struction items, and so forth), then the bank finances only those
construction items and outlays that are fully documented in the properly
approved technical dossier. In those cases where the final or pre-
liminary summary cost estimates for individual construction items and
outlays do not agree with the corresponding items in the general cost
estimate, the banks set a time limit for the proper corrections
(usually 15 days, but never more than one month). In the meantime,
such construction items and. outlays can be financed by the bank, but
within the limit of the lesser of the two differing amounts.
By a number of government decisions and. orders of the Ministry
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of Finance USSR, the investment banks have been strictly prohibited from
financing construction projects or individual items that have not been
provided with the properly approved designs and cost estimates.
4+. Bank Control over the quality of the Cost Estimates Dossier
It was stated above that the investment banks verify the quality of
cost estimates chiefly in the case of those projects whose plans and
estimates dossier has not been checked by the State Committee of the
Council of Ministers USSR dealing with construction or by the Ministry
of Urban Construction USSR.
Bank Control over the quality of cost estimates extends to all
basic documents making up the general cost estimate.
The banks check in the first place the correct calculation of the
cost of construction materials, goods, semi-manufactured. sections and
parts and the appended. calculation of transportation outlays. These
calculations require an especially careful check since the share of
construction materials, prefabricated parts and so forth in the total
cost of construction and installation work amounts as a rule to more
than 50 percent.
The check of these calculations extends first of all to the cor-
rectness of the state purchase prices of the suppliers, the surcharges
of the supply and. distribution organizations, the cost of the containers
or their amortization, the freights rates of rail., sea, river, truck and
cart transportation, the norms and rates for loading and unloading opera-
tions, the weight by volume of materials, the type of "free on board"
(f.o.b.) (point of destination, point of origin, and. so forth). It must
be borne in mind that prices set for the output of cooperative organiza-
tions and for enterprises of local state industry can be changed only
with special permission of the Council of Ministers USSR.
The list of calculations must not include materials of the grades,
sizes and. types omitted from current handbooks of aggregated cost esti-
mate norms (with the exception of work not listed, by these handbooks).
Of major importance is a check of the proper sources of supply
and supply points considered. in the calculations. For example, with a
view to preventing an illegal increase in outlays for transportation
costs, the banks must ascertain whether there is justification for the
adopted freight haul distances to the construction site: in the case of
material supplies -- from the suppliers' warehouses or the correspond-
ing destination points (f.o.b. station of origin or station of destina-
tion and so forth); in the case of local materials -- from their pro-
duction or delivery points; in the case of construction materials, semi-
manufactured goods and parts -- from the producing plants or the project's
on auxiliary enterprises. With the same aim in view, the banks verify
the legitimate use of coefficients for mountainous terrain, lack of
roads, and so forth that tend to increase transportation costs. The
banks' verification also extends to the use of the proper ratios of
transportation costs as between cart and truck transportation and among
trucks of varying makes and. capacities (depending on the make-up of the
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truck pool available to the construction organization or planned for the
project).
In the course of the check, attention is also devoted to the in-
admissibility of including in the calculations outlays for the haul-
ing of materials available locally (bricks, stone, road metal, gravel,
sand and so forth).
The banks must also insure that the calculations envisage no more
than a single operation, as required by law, of stockpiling and storing
materials when they are transported from their point of origin or pro-
duction to the construction site.
The following and very important stage of bank control involves
the verification of the unit rates. The check covers the proper use
of current cost estimate norms for the outlay of materials, labor and
machine-shifts of construction machines, the tariff rates of piece
workers (taking account of current correction coefficients for wages),
the calculation of the cost of materials, goods, semi-manufactured
sections, parts and so forth, and the cost of machine-shifts (based. on
the catalogue listing cost estimate rates for machine-shifts of con-
struction machines, which is compulsory for the great majority of
projects). In this connection, the bank employes must pay particular
attention to the inadmissibility of including in the unit rates any
kind of illegal coefficients for inconvenient, complex, laborious,
and rush operations and so forth, as well as departures from the norms
and rates listed by current cost estimate handbooks.
The banks must also ascertain the strict observance of the
established grades, types and recovery norms of materials listed by
the handbooks.
In checking the labor outlays, the banks must see to it that a
number of supplementary outlays for wages authorized. by special
governmental decisions have been included in the calculation of the
unit rates. Such outlays are normally reimbursed to the construction
organizations on the basis of their bills over and above the cost of
the work calculated at unit rates. Such supplementary outlays in-
clude payments relating to the use of the progressive bonus system,
for work in remote areas, for length of service, and for work comple-
tion bonuses.
After the unit rates have been checked, the banks verify the
cost estimates for individual types of work. In this connection
special attention must be devoted to the proper choice of unit rates
in strict accordance with the technical design data regarding the make-
up and nature of construction parts and operations. The banks also
? make use of the research materials to determine the proper character-
ization of the category and nature of the soils at the construction
site. The calculations of the volume of individual types of operations
and construction parts are verified by spot checking the most common
and most expensive categories. In the course of this ch.eck,.the banks
ascertain whether the recovery of materials envisaged by the unit rates
is properly reflected in the cost estimates and whether the adopted
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overhead expenses are legitimate.
At the same time the check is intended to disclose any superfluous
excesses in the cost estimates. For example, without special permis-
sion of the appropriate minister industrial construction projects are
not permitted to use plaster and oil paints on the walls of workshops
and storage rooms, unless required by the technological process or
heating considerations.
In the cost estimates of the equipment and its installations,
the check covers the following aspects: the proper nomenclature,
types and grades of the installed equipment and the correct equip-
ment prices and. shipping costs to the project site. The cost of in-
stallation work is verified on the basis of data in current price
books listing equipment installation costs. The cost of nonstandard-
ized equipment, including outlays for designing, is usually estimated
by analogy with current prices of similar equipment. The estimated
cost of the equipment may not include the cost of testing and adjust-
ing of equipment since such outlays are already considered part of the
installation price-book norms. Nor may the complex testing and
regulating of equipment after. installation be calculated into the
cost estimates since such outlays form part of the expenses of putting
the plant into operation and are not financed as capital investments.
After the checker has verified the correct transfer of the esti-
mated cost of individual types of work and outlays to the cost esti-
mates of individual construction items, he proceeds to a check of the
general cost estimate. This involves a comparison of the figures in
the general cost estimate with the summary data of the cost estimates
for individual construction items and outlays. At the same time the
checker verifies the outlays for the maintenance of the director's
office of the enterprise under construction. He then verifies the
justification for the following cost items in the general cost esti-
mates: the cost of geological exploration work; outlays for preparing,
planning and developing the construction site; the cost of residential,
cultural-social and. municipal construction; nonlimited. and special ex-
penditures and. outlays, including outlays for the maintenance of roads
during the winter, the removal of rubbish, first-year repairs of wooden
buildings, various types of additional payments authorized by special
government decisions and so forth. Information given in the work
organization design is then used. for a check of the justification for
outlays for temporary buildings and installations and for the acquisi-
tion of construction machinery and means of transportation (in the
third part of the general cost estimate). The correct calculation
in the Peneral cost estimate of amounts to be recovered is also veri-
fied.
As a result of the check of the cost estimate dossier, the bank
executes a protocol listing in detail the nature and amount of any
inflated estimates. Before the protocol is approved by the head of
the bank, the protocol is discussed with representatives of the client
and the contractor. The results of these discussions are also drawn
up in the form of a protocol, to which the views of the various sides
are appended if necessary.
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The need for eliminating the inflated estimates discovered in
the course of the on-the-spot check of the cost estimate dossier is
called by the banks directly to the attention of the appropriate
authorizing authorities. If these authorities refuse to review the
cost estimates, the problem is placed. before the head office of the
given investment bank.
In those cases where individual ministries and, agencies refuse
to meet the banks' request for elimination of the inflated. cost
estimates, the problem is placed before the Ministry of Finance US
Once the necessary corrections in the cost estimates have been
approved., the banks see to it that such corrections are actually
entered in the.cost estimate dossier.
According to a government decision adopted in 1950, the cost
estimate of construction is now be'.ng calculated. in prices effective
1 July 1950.
5. Bank Control over Observance of the Cost Estimate Limit of Finan-
cing
To prevent the granting of funds above the approved estimated
cost of construction, the investment banks carry out constant con-
trol over observance of the cost estimate limit of the financed pro-
ject. For the purpose, the banks make a special accounting of funds
and upon opening the financing account determine annually the amount
of the unexpended remainder of the cost estimate limit.
When necessary, the banks review the unexpended remainder of the
cost estimate limit in the course of the year. Such a review is
carried out especially in the case of projects that have a very small
unexpended remainder of the cost estimate limit or have increased the
annual volume of construction, and. so forth. Banks grant funds to
the projects in accordance with the approved annual financing plans
only within the limits of the unexpended remainder of the cost esti-
mate limit; once the limit is reached, financing ceases.
-The calculation of the unexpended. remainder of the cost estimate
limit is based on the total amount of the general cost estimate of the
project; in case the project is being financed on the basis of designs
and estimates for individual construction items, the calculation of
the remainder of the limit is based on the total amount of the approved
cost estimates of the construction items and outlays listed. in the
annual itemized list. The cost estimate of the completed. part of the
construction project is then compared with the total amounts obtained.
by the project by the start of the year or by the date of the bank
review, including receipts from sources other than the bank (such as
the sale of fixed. capital, amortization deductions on fixed capital
of the construction project and so forth). In making its review, the
bank takes account of a number of factors that may affect the size of
the remainder of the cost estimate limit. We will discuss only the
most important of these factors relating to the two main groups of
construction projects (those financed on the basis of general cost
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estimates and those financed. on the basis of cost estimates for indi-
vidual construction items).
In accordance with the current "Regulations on Contract Agree-
ments", funds listed in the third part of the general cost estimate
for the acquisition of construction machinery, means of transportation,
construction implements and stores are granted to the contractor at no
cost for the construction operations assigned to him. This is usually
done by adding the corresponding appropriations to the capital con-
struction plan of the main contracting administration while deducting
the same amount from the plan of the main client administration. In
that case the remainder of the cost estimate limit is accordingly
reduced. In addition the remainder of the cost estimate limit can be
reduced by the amount of the planned accumulations and. reductions in
construction costs (in the case of construction carried out by the so-
called economic method). The cost estimate limit may also be reduced
by the amount of illegitimate capital outlays (since such outlays may
not be replaced by the investment banks under existing legislation)
and the amount of centralized funds spent for outlays included. in the
construction cost estimate.
The remainder of the cost estimate limit may be increased by the
amounts of additional payments and compensations not envisaged by the
approved cost estimate of the project, but subject to payment by the
bank; the cost of fixed capital and materials handed over at no cost
and. in approved fashion to other organizations at the expense of funds
intended for the financing of the project (except for cases where the
project hands over at no cost to the contractor construction machinery,
means of transportation and so forth that were acquired under the
terms of the third part of the general cost estimate); the amounts
of outlays for interrupted and incompleted construction written off
with permission of the Council of Ministers USSR; the total amount of
losses incurred. in the project's economic operations after such losses
have been written off in approved fashion.
A number of additional factors are taken into account in the case
of projects that are financed on the basis of plans and. cost estimates
for individual construction items. For such projects the remainder of
the cost estimate limit may be increased. by the amount of legitimate
outlays made before the start of the year on construction items not
listed in the itemized list of the current year; the estimated cost of
construction items that are provided with approved designs and estimates
and have been added to the annual 'itemized list, or items that were
formerly listed in the itemized list but were not taken into account
in the initial determination of the remainder of the cost estimate
limit because they lacked at the time the proper designs and estimates
dossier (in the case of construction items on which construction had
previously been halted, the unused remainder of the cost estimate limit
applies). The remainder of the cost estimate limit in projects financed.
on the basis of designs and estimates for individual construction items
is reduced by the amount of the estimated cost of the items that were
originally listed in the annual itemized list but were subsequently ex-
clud.cd; however the actual outlays already made are then deducted from
the full estimated cost of such items.
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The investment banks are required to grant funds only within the
limits of the estimated cost of each major construction item. In this
connection, the banks are required.. to insure the proper observance of
the cost estimate limit not only for the project as a whole, but also
for individual construction items. For this purpose, the banks make
use of the data in "Certificates on Actual Outlays for Individual
Construction Outlays".that are submitted by the projects to the banks
together with the annual itemized lists. The banks then deduct from
the approved estimated cost of the item the actual cost of work already
done (minus the additional payments and. compensations paid out in ex-
cess of the cost estimate prices) and the cost of the equipment already
brought to the construction site, but not yet installed.
Prombank, Tsekombank and Torgbank offices carry out their account-
ing of the.remainder of the cost estimate limit both for projects
financed directly by these banks and for projects financed through the
intermediary of the State Bank.
In Sel'khozbank, the accounting of the remainder of the cost esti-
mate limit is handled. by the appropriate oblast, kray or republic
offices in the case of above-limit projects, and by the same bank
office that handles the financing in the case of below-limit projects.
As for the projects that are being financed through the State Bank,
subsequent control over observance of the remainder of the cost esti-
mate limit is also handled by the appropriate offices of Sel'khozbank.
In addition to the accounting of the use of the remainder of the
cost estimate limit, Tsekombank and Torgbank offices also carry out
separate accounting of the remainders of appropriations provided in
the approved cost estimate for the maintenance of the director's office
of the enterprise under construction.
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CHM'TER V
SOURCES OF FINANCING AND CREDITING CAPITAL INVESTMENTS
1. Funds for Capital Investments in a Socialist Economy.
The tremendous capital investments made in our country require
colossal funds. The amount of funds directed into the development of
Socialist industry is especially considerable. The problem of funds
for capital investments, especially the sources of Socialist industrial-
ization, especially acute at the time when the industrialization of
the country was only beginning.
The theoretical formulation of the question of sources of
Socialist industrialization has been provided in the brilliant works
of Comrade Stalin. Comrade Stalin has critically generalized the data
on the sources of industrialization in capitalist states, has demon-
strated their inherent unsuitability for the Soviet state and has
pointed to the existence in our own country of sources for industriali-
zation such as do not and could not exist in any capitalist nation.
The practical realization of socialist construction has clearly con-
firmed. these hypotheses of Comrade Stalin.
Comrade Stalin has demonstrated that Britain for many years
carried out her own industrialization chiefly at the expense of pillage
and merciless exploitation of the millions of working people in her
colonies. The "surplus" capital thus obtained was invested by Britain
in her industry and speeded the rate of industrialization.
Germany speeded the development of her own heavy industry through
the use of 5 billion gold francs' worth of contributions obtained from
defeated. France in the 1870's.
After World War I, the restoration and development of German heavy'
industry was also financed by foreign sources, this time by American
monopolies: "..a golden rain of American dollars fertilized the heavy
industry of Hitlerite Germany, in particular her war industry"
(Fal'sifikatory istorii fialsifiers of History-7, Gospolitizdat, 1948,
page 12).
Some countries have developed their industry through the granting
of concessions and the accepting of loans of an enslaving nature. Such
a course was followed by Tsarist Russia. The slow development of in-
dustry is characteristic of all capitalist countries. "Even America,
the mightiest of all capitalist nations, required 30-40 years after the
Civil War to develop her industry through the aid of foreign loans and
long-term credits and the exploitation of her adjoining states and.
islands" (I. V. Stalin, Sochineniya follocted Work, Vol 9, page 173).
All these sources of industrialization were inherently unsuitable
for the Land of the Soviets "either because colonial exploitation and
military conquests for plundering purposes did not fit in with the
nature of Soviet rule, or because of the fact that we did not wage three
years of civil war, repelling all and any interventionists, in order to
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submit voluntarily, after victory over these interventionists, to their
imperialist bondage" (I. V. Stalin, Sochineniya CCollected Works7, Vol 8,
pages 123-124).
Comrade Stalin has also demonstrated that in the capitalist states
industrialization started with light industry and lasted for a long
time. "Only after a long period., during which light industry accumu-
lates profits and deposits them in banks, comes the turn of heavy
industry and the accumulations are then gradually transferred. to make
it possible for heavy industry to develop" (I. V. Stalin, Rech'na pred-
v bornom sobranii izbiratele Stalinskogo izbiratel'no o okra a
Moskvy 9 fevralya 1946 g. Speech at an Election Campaign Meeting of
the Stalin Election District of the City of Moscow on 9 February 19467,
Gospolitizdat, 1946, page 17).
Such a course of industrialization is unsuitable for the Soviet
state under conditions of capitalist encirclement. Funds for capital
investments in heavy industry must be obtained, in the shortest possible
time.
Comrade Stalin has demonstrated that under the conditions of the
dictatorship of the proletariat in the USSR there are domestic sources
sufficient to insure the industrialization of the country and the
development of the entire Socialist economy. The main factors in the
creation of these sources were the expropriation of landowners and
capitalists, the elimination of private ownership of the land, factories,
plants, transportation, banks, foreign and. domestic trade and their
transfer to public ownership. As a result, the profits made by state
factories, plants, trade and banks are directed into the further de-
velopment of the Socialist economy, in particular into industry, and.
into the improvement of the material position of the working masses.
In the early period of Socialist industrialization, funds available
for capital investments in industry were also increased as a result of
certain measures taken by the Soviet state, such as the annulling of
Tsarist debts, on which hundreds of millions of rubles were due annually
alone in the form of interest.
As a result of the elimination of private ownership of the land,
the peasantry of the nation was released of the annual payment of about
500 million gold rubles to the landowners in the form of rents. "Having
been released of these obligations, the peasantry was in a position to
help the government in building a new and mighty industry. The peasants
were vitally interested in obtaining tractors and agricultural implements"
(Istoriya Vseso uznoy kommunistichesko artii (bol'shevikov . Kratki
kurs 'History of the All-Union Communist Party (Bolsheviks). Short
Course , Gospolitizdat, 1950, page 269).
We know that the Soviet state has repaid the working peasantry a
hundredfold. for its aid in the matter of industrializing the nation and
has brought about the complete technical re-equipping of agriculture
and. the organization of the collective system.
In 1926, the 15th party conference stated that the rates of expan-
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sion of fixed. capital would depend: on the amounts accumulated by the
socialized industry, on the utilization of the revenue from other
branches of the national economy through the state budget, on the utili-
zation of the savings of the population by attracting these savings
into cooperatives, savings banks, domestic state loans, the credit
system and so forth.
Of key importance in insuring the accumulation of funds within
industry, as well as within. other branches of the economy, were and
still are increases in labor productivity, all-out reduction of all
nonproductive outlays, and the introduction of the strictest program
of economies.
Comrade Stalin in his talk with the first American delegation in
1927 described the domestic sources and stimuli for the development of
our national economy by emphasizing that these sources were not only
constantly operative but were gradually increasing.
As early as the period of the First Five-Y3ar Plan, Comrade Stalin
said that, in addition to other sources of accumulation, heavy industry
is also expected to provide profits: ..we must reach the point where
heavy industry, in particular the machine-building industry, will also
yie d accumulations" (I. Stalin, Voprosy leninizma /problems of Lenin-
ism, 11th edition, page 346). Soviet industry has fulfilled and continues to fulfill Comrade
Stalin's instructions. In the course of the Second and Third Five-
Year plans, during the Great Patriotic War, and. in particular during
the postwar period, heavy industry, and especially its machine-build-
ing component, has gradually lowered costs and. is overfulfilling plans
for the accumulation of profits.
Plans for the accumulation of profits are also being overful-
filled by other branches of the national economy. A systematic in-
crease in accumulations makes it possible to direct increasing amounts
into capital investments in all branches of the economy. All this
shows the advantages of the Socialist economic system and. the organ-
izing role of the Soviet state led by the great party of Lenin-Stalin.
The source for the expanding reproduction of both fixed and.
working capital is the national income, its fund. of accumulations.
Therefore the magnitude of resources available for capital invest-
ments depends, on the one hand, on the magnitude of the nati:r:a1
income and, on the other hand, on its distribution.
The advantages of the Socialist economic ;stem insure a system-
atic rise in the national income at rates that are not and cannot be
attained by any capitalist country. The averse annual rise in the
national income of the USSR was 16.2 percent during the First Five-
Year Plan and 17.1 percent during the Second Five-Year Plan. By 1949,
in spite of the heavy damage caused by the war, the national income
already exceeded. the prewar level by 36 percent and was 17 rent
above the 1948 level. By 1950, the national income of the USSR was
more than 60 percent above the prewar level.
In the capitalist countries, the national income rises very slowly
and even drops in times of crisis. For example, the national income of
the United States did not regain the 1929 level during the period 1930-
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1937 and in 1948 was 17 percent below the 1943 level. In 1949, the
national income of the United States (calculated in current prices)
was 5 billion dollars below the 1948 level (See the magazine Bol'shevik,
No 8, 1950, page 58). In many European countries, the national income
has not reached the prewar level.
In Tsarist Russia, the national income rose by 47 percent during
the 13-year period 1900-1913, while in the USSR it increased by 513
percent during the 13 years of the Stalinist five-year plans (1928-
1940). The high rates of increase of the national income of the USSR
result from a major increase in labor productivity and from economies
achieved in the means of production.
The advantages of the Socialist economic system, devoid of crises
and. unemployment, the patriotism of the Soviet people, who no longer
work for capitalists but for themselves, for their own Socialist state,
the systematic improvement in the material and cultural standard of
living of the working masses, the wide introduction of recent achieve-
ments of science and technology, the expansion of Socialist competi-
tion -- all these insures a systematic rise in labor productivity and.
a reduction in the costs of production.
These sources alone during the Second Five-Year Plan accounted
for a 67 percent rise of the national income. During the Postwar Five-
Year Plan, the total amount of economies achieved from reductions in
production costs in industry, in transportation, at the machine-tractor
stations, in state farms and in other branches of the economy accounted
for almost two-thirds of all centralized capital investments provided
by the plan.
The extraordinarily high rates of increase of the national income
of the USSR are creating favorable conditions for expanding Socialist
reproduction, for meeting more fully the growing needs of the working
people, for strengthening the defenses of the nation and for creating
the necessary reserves. In the USSR "the national income is not dis-
tributed in the interest of enriching the exploiting classes and. their
parasitic followers, but in the interest of systematically raising the
material position of workers and peasants and expanding Socialist pro-
duction in town and country" (I. V.. Stalin, Sochineniya follected
Works7, Vol 12, page 321). In a Socialist state the national income is
distributed according to plan, combining the interests of demand and
accumulation.
The relationship between the accumulation fund. and. the demand fund.
has varied in different periods of Socialist construction. However, the
share of the accumulation fund in the USSR thanks to the advantages of
the Socialist economic system is several times higher than in the
capitalist countries and. amounted (including reserves) to 26.9 percent
in 1932, 26.4 percent in 1937, and 27 percent according to the Postwar
Five-Year Plan (including 6 percent in reserves).
Accumulation in capitalist countries has sharply dropped. For.
example, in the United. States during the period 1921-1929 accumulation
made up an average of 10 percent of the national income, and during
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the period 1930-1937 only 1.4 percent. In Tsarist Russia, during the
period 1890-1900, the accumulation fund made up 3.3 percent of the
national income. In the capitalist countries most of the national
income (one-half or more) is appropriated by the capitalists. During
a general capitalist crisis, and especially during the postwar years,
the standard of living of the working people greatly deteriorates and
the amount of profits made by the capitalist monopolies greatly rises.
However, under the conditions of general instability of the capitalist
system, the bourgeoisie makes virtually no capital investments and, a
large part of the appropriated share of the national income is used for
nonproductive purposes.
In the USSR, national income as newly created value belongs largely
to the state, but also to collective farms and cooperatives (the share
of the private economy of the individual farmer and the individual
artisan is negligible). The distribution of the national income, in-
cluding its accumulation fund, is thus determined. One of the chief
tools for distributing and redistributing the national income in the
USSR is the state budget, which is systematically increasing in magni-
tude. The state budget accumulates most of the accumulations amassed
in state enterprises (in the form of the turnover tax and profit
deductions) and part of the accumulations amassed in collective farm
and cooperative enterprises (chiefly in the form of the income tax).
Accordingly the capital investments of state enterprises are largely
covered by the state budget. Most of the accumulations of cooperatives
and collective farms, after their fulfillment of obligations to the
state, remain under their control and are used for expanding repro-
duction, chiefly capital investments in fixed capital, in which the
state often assists in the form of long-term credits.
The use of monetary accumulations for expanding reproduction of
fixed and working capital is the real accumulation of the national
economy. Most of these accumulations are directed into the expanding
reproduction of fixed capital, i.e. into capital investments. Fixed
capital makes up nearly four-fifths of all productive funds of the
Socialist economy.
The existing forms of ownership of the tools and means of pro-
duction also determine the sources for financing capital investments.
The maintenance of these financial sources is insured by the existing
economic accountability method of administering Socialist enterprises,
which tries to stimulate the interest of enterprises in the results of
their operations. In this connection, part of the outlays envisaged
by the plan for the expanding reproduction of fixed capital are re-
lated to the financial results of the operation of enterprises -- the
making of profits.
Both the magnitude of the funds directed into expanding repro-
duction of fixed capital and the magnitude of individual sources of
financing are set in the national economic plan at the time of the
approval of the budget, the balance of income and outlays of the
branches of the economy and the financial-credit :plans of the invest-
ment banks. In this process all funds for financing and crediting
capital investments are concentrated in the investment banks.
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2. The Sources for Financing, Capital Investments in State Enterprises
and Organizations.
Budgetary Appropriations. The chief source for financing capital
investments of state enterprises and organizations are budgetary appro-
priations, which according to the 1950 plan made up 78.5 percent of all
capital investments.
The question of which budget -- all-union, republic, or local --
should supply funds for capital investments is decided on the basis
of the jurisdictional position of the corresponding enterprise and or-
ganization.
The budgetary funds are paid into the investment banks in accord-
ance with the established financing plans for the bank as a whole and
are paid out by the banks to the individual projects in accordance with
the plans for the financing of these projects.
The specific magnitude of the budgetary appropriations is based. on
the balance of income and outlays of each branch of the national economy.
The magnitude of the necessary funds is based on the volume of capital
investments set by the plan and on changes in the remaining inventory
of the project and. in its debit and credit position in the course of
the year. It should be stressed that the magnitude of the budgetary
appropriations is the difference between the total amount of funds re-
quired. for the fulfillment of the capital construction plan and the
amount of funds that the corresponding branch of the economy can itself
contribute to capital investment.
A rise in the profits of economic organizations, especially during
the postwar period., has insured an increase in the funds that they them-
selves can contribute to capital investments. For example, according
to the 1950 plan, these funds amounted to 29.1 billion rubles compared
with 9 billion rubles in 1948.
The chief sources of funds of the economic organizations them-
selves that may be directed into capital investments are amortization
deductions and profits.
Amortization Deductions.. Amortization represents the replacement
of the wear and tear of fixed capital, the gradual transfer of its value
to a unit of output.
In the USSR. the amortization of fixed capital is regulated. by law.
In the capitalist nations the amortization rate is not regulated
by law. Amortization is often used as a means of veiling the results
of the operation of enterprises, as a means of forming considerable
hidden reserves to avoid taxation and so forth. During the war years,
the United States Government decided to set a very high rate of amorti-
zation deductions on fixed capital used in war industries. The time
limit for amortization of this fixed, capital was set at five years and.
this made it possible for American monopolies to make additional profits.
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The extraordinary high rates of increase of fixed. capital in the
national economy of the USSR have resulted in a tremendous rise of
amortization funds. In the economy as a whole, amortization deductions
made up 6.3 billion rubles during the First Five-Year Plan and 20.2 bil-
lion rubles during the Second Five-Year Plan. Before the war, amortiza-
tion deductions exceeded 8 billion rubles a year.
The amortization funds in the USSR are being used by the Socialist
state for capital repairs of fixed capital, designed to insure its nor-
mal operation, and for financing new construction and. the reconstruc-
tion of existing state enterprises.
The planning of amortization deductions is based on the initial
value of the fixed capital in operation and the established amortiza-
tion rates. Since in the course of a year the level of fixed capital
may change with the opening of new buildings, installations, equip-
ment and so forth, and in some cases with the elLmination of capital
items from productive use because of excessive wear or unsuitability,
amortization is generally planned on the basis of the average annual
value of the fixed capital in operation and the-established amortiza-
tion deduction rates.
Profit. We have stated. above that in order to strengthen economic
accountability and arouse greater interest on the part of the enter-
prises in the results of their work part of the profit of economic
organizations and enterprises is used for the financing of capital
investments. The magnitude of this source of financing depends on the
balance of income and outlays of the enterprises, main administrations,
ministries and the departments of the Executive Committees of the
Soviets of working people's deputies.
It is obvious that the magnitude of the profit share used for
financing capital investments will depend on the magnitude of the
total profit and on the manner in which the plan envisages its
utilization.
The advantages of the Socialist economic system and the uninter-
rupted rise of the output of industry, agriculture and trade insure a
steady rise in profits. For example, during the First Five-Year Plan
the profits of the socialized sector of the national economy were
(before the turnover tax) 19.1 billion rubles and during the Second
Five-Year Plan 72.9 billion rubles. Profits have risen especially
since the war. In 1948, they were 39.3 billion rubles and according
to the 195C alan 70.7 billion rubles, or almost three times more than
during the first year of the Postwar Five-Year Plan (See A. G. Zverev,
0 gosudarstvennom byudzhete SSSR na, 1950 god i ob ispolnenii gosudar-
stvennogo byudzheta SSSR za 1948 1,7949 gody On the State Budget of
the USSR for 1950 and on the Fulfillment of the State Budget of the
USSR during 1948 and 19427, Gospoli.tizdat, 1950, page 24).
The profits of existing enterprises are distributed. as follows:
to replenish their own working capital, for capital investments and
for deductions for the budget and the director's fund. The magnitude
of the deductions for the budget and the amounts used to replenish the
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working capital and for capital investments are determined by the balance
of income and outlays, the minimum deductions for the. budget under any
circumstances being 10 percent of the planned profits.
A. great rise in profits during 19+9 and 1950 has made it possible
to increase the profit share going into capital investments by more
than twice compared with 1948.
Gains from the Sale-of Used Property of Existing Enterprises.
Aside from amortization and profits, existing legislation envisages the
possibility of using other sources of financing capital investments, in
particular gains from the sale of used, property by existing enterprises.
Gains from the sale of used property for use as a source of financing
capital investments of state enterprises are funds obtained from the
sale of fixed capital that has lost its productive importance or is
being transferred. to cooperatives or collective farms on order of the
government.
The magnitude of such.gains is the difference between the amount
obtained in the sale of the fixed, capital and the outlays related to
the sale.
Mobilization of Internal Resources. Budgetary appropriations,
amortization, profits and gains derived from the sale of used. property
are paid into investment banks and are used. for financing capital
construction. The sources used to pay for the capital investment plan
include in addition funds mobilized by the construction projects them-
selves. Such funds mobilized by the project itself include: (a) funds
derived from the sale (use) of surplus materials and. the recovery of
debts; (b) funds recovered within the terms of the third part of the
general cost estimate, i.e. amortization of the fixed capital of the
project and funds gained as.a result of the sale of temporary buildings,
installations and construction machinery; (c) funds obtained: from the
incidental sale of products obtained in the course of construction;
(d) the planned. profits and reductions in construction costs (this
applies to projects being built by the so-called economic method).
Under the conditions of restoration construction (especially during
the first years of restoration), great importance was attached. to the
mobilization of internal resources, such as the use of materials ob-
tained in the dismantling of buildings and installations. To achieve
better control, these sources are listed separately in the plans. The
plans for the mobilization of internal resources list only the amount
derived from the sale (use) of surplus stocks of goods and materials
and the liquidation of debts to the project minus the amounts owed. by
the project to its creditors. At the present time, when emphasis is
being put on a speedier turnover rate of funds,.the mobilization of
internal resources is especially important.
The mobilization of internal resources as a source of financing
capital investments is usually planned as follows-. the working assets
and indebtedness to creditors at the start of the plan year are calcu-
lated.; then the required amount of working assets (norms) and the
normal indebtedness (stable liabilities) at the end of the plan year
are calculated.
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If the working assets at the start of the year are called A, and
the indebtedness to creditors B, and if the required amount of working
assets at the end of the year is called C, and the stable liabilities
D, then the planned magnitude of the mobilization of internal resources
is (A-C)-(B-D).
In those cases where the actual working assets are less than the
established norm, the plan envisages no mobilization of internal re-
sources, but rather immobilization, i.e. additional requirements in
funds in excess of those required for the fulfillment of the capital
investment plan.
In addition to outlays for the erection of permanent buildings and
installations, equipment and. so forth, the estimated cost of construc-
tion also includes outlays for erecting temporary buildings and.instal-
lations, the acquisition of construction machinery, means of transporta-
tion, construction tools and so forth (within the, terms of the third.
part of the general cost estimate). Such outlays are of a temporary
nature, since after the completion of construction or after the com-
pletion of certain types of operations and construction items, there is
no longer any need for the temporary installations and construction
machines and. they can be disposed. of. The recovered sums planned within
the terms of the third Part of the general cost estimate for use as a
source for financing capital investments are calculated on the basis of
the value of the fixed. capital of the project subject to sale in the
course of the year minus outlays related to the dismantling of these
buildings and other expenses.
Furthermore, the estimated cost of construction work also in-
cludes amortization deductions on existing fixed capital, in addition
to the cost of materials and the outlays for wages. If the fixed
capital in question has been rented by the projects to the contractors,
the funds received in the form of rent can be used as a source for
financing. If the fixed capital is being used directly by the project
itself (by the terms of the so-called economic method), then the
amortization (except for the part intended for capital repairs) serves
as a financing source for the capital investment plan.
In the course of the construction of mines, the construction and
expansion of coal mines or ferrous and. nonferrous metal mines and
some other types of capital construction, minerals are mined inciden-
tally to the construction (for example, coal and so forth). The output
thus obtained. must be sold. In view of the fact that the outlays re-
lated to the mining were financed from funds appropriated for capital
investments, the gain from the sale of such incidental output minus
the outlays related to the sale must be used as a source for financing
capital investments.
The estimated cost of construction includes direct outlays, over-
head outlays and planned profits. These profits are used. by the contract-
ing organizations for the usual purposes: for replenishing working
capital; for their own capital investments, for contributions to the
budget and the director's fund. If the construction is carried out
by the so-called. economic method and the complete estimated cost is
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subject to planning, then the planned profit (except for deductions for
the director's fund) reduces the financial requirements of the project.
For construction work planned for 1950, the planned profit rate has
been set at 2,7 percent of the direct expenses or 2.3 percent of the
estimated cost of constructiono
One further source used for financing construction projects
operating by the so-called economic method is the government plan
calling for a reduction in construction and installation costs. For
example, if the planned volume of construction work to be carried
out by the economic method amounts to 100 million rubles a year in
estimated.prices,.and the plan sets the cost reduction at 6 percent
and the planned profit at 2.3 percent, then the total amount of profits
and construction cost reductions available for financing is 8.3 percent
or 8.3 million rubles.
3. The Method Used-by State Economic organizations to Deposit Funds
for Capital Investments and the Nature of Bank Control
In , accordance, with the balance of income and, outlays of individual
ministries and agencies, the Ministry of Finance USSR (or the Minis-
tries of Finance of union republics and. local financial departments)'
inform the investment banks of the annual plans for financing capital
construction (investments) with a quarterly breakdown (Form 12) list-_,.
ing the total volume of financing and the individual sources. On the
basis of these plans, the ministries and. agencies inform the head.
offices of the special banks (or in the case of republic and local
construction -- their provincial offices) of the limits of financing
(Form 5) by individual main administrations and their directly subor-
dinated enterprises, listing the total amount of financing and the
individual sources. The limits of financing by trusts and construc-
tion projects are submitted to the banks by the main administrations.
The ministries and. main administrations may retain an undistributed
reserve of 3 percent of the total amount appropriated.
The financing limits submitted by the ministries and main admin-
istrations are compared. by the banks with the financing plans (Form
12) and are then transmitted (in the form of monetary documents) to
the branch offices nearest the construction sites.
Amortization deductions (except for the part intended. for capital
repairs) are deposited. in their entirety in the banks irrespective of
whether the actual calculation of amortization is greater or smaller
than the amounts envisaged in the plan (the financing limit), depend-
ing,on whether new construction items are being put into operation on
time-or are lagging behind the planned time limits. If the actual
amortization is greater than the planned figure and only the amount
envisaged by the plan has been deposited in the bank for construction,
it means that,not all worn fixed capital has been restored and that the
enterprise has accumulated additional funds not envisaged by the plan.
If the actual amortization is less than the planned figure and the
planned amounts are being paid to the bank, it means that the working
capital is not.being properly utilized.
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Amortization deductions intended for capital repairs are usually
used by the enterprises that contribute them. The situation is dif-
ferent with respect to that part of the amortization funds that goes
into new construction or reconstruction. Amortization funds are being
contributed. by enterprises throughout the period that fixed capital is
in operation irrespective of whether capital investments are being
carried out during that period.
In the Socialist economy, free amortization funds of individual
state enterprises and organizations are being accumulated by their
superior agencies (trusts, main administrations and ministries) and
are then used. for capital investments in other enterprises of the
given trust, main administration or ministry.
Amortization deductions for capital investments are redistri-
buted through the superior agencies -- trusts, main administrations --
especially when a given enterprise altogether lacks a capital invest-
ment plan or has a plan involving smaller funds that the planned
amortization deductions of the enterprise. In the opposite case,
amortization deductions are used in their entirety or in part as a
source for financing the capital investments of the given enterprise.
The payments of amortization deductions made by an enterprise
for its own capital investments are called local payments, while pay-
ments of amortization deductions made by trusts and main administra-
tions in the course of redistribution are called. centralized. payments.
Payments of amortization deductions for capital investments are
due on the 10th, 20th and 29th of each month in the amount equal to
.one-ninth of the quarterly plan envisaged by the financing limit (Form
5). Prior to receipt of the limit (Form 5), the payments are made on
the same dates in the amount equal to one-third of the actual amortiza-
tion for the last month for which an account has been made. In some
cases affecting enterprises with highly seasonable activity the amount
of the payments can be set by agreement between the ministry and. the
corresponding long-term investment bank. The amount of the payments
varies in accordance with the actual amortization charge.
For example, if the plan of amortization payments for construction
is 990,000 rubles for the first quarter and 1,200,000 rubles for the
second quarter, and if the actual amortization charge was 380,000 rubles
as of 1 February (for January), 770,000 rubles as of 1 March (for Janu-
ary and February), and 1,200,000 rubles as of 1 April (For January,
February, and March), then the amounts of the payments should be: in
January -- one-third of 990,000 rubles or 330,000 rubles; in February --
the regular payment of 330,000 rubles plus the unpaid 50,000 rubles
(380,000 -330,000 rubles) for January, or a total of 380,000 rubles;
in March -- the regular payment of 330,000 rubles plus the unpaid
balance since the start of the year of 770,000 - (330,000/380,000) =
60,000 rubles, or a total payment of 390,000 rubles; in April the pay-
ments should amount to one-third, of the planned amount of 1,200,000
rubles, i.e. 400,000 rubles plus the unpaid balance for the first
quarter of 1,200,000 - (330,000/380,000/390,000) = 100,000 rubles, or
a total of 500,000 rubles.
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The amortization payments set by the plan can serve as a source
for the financing of capital investments of the enterprise (in our
example, 990,000 rubles in the first quarter and 1,200,000 rubles in
the second quarter); the remainder of the amortization funds, paid in
excess of the plan, is assigned. to the account of the trust of main
administration for the financing of capital investments of other enter-
prises.
If an enterprise transfers part of its amortization .to its trust,
combine or main administration for purposes of centralized redistri-
bution, then this enterprise makes a, local payment of the entire
amortization charge less that part which has been transferred. to its
superior agency. Since amortization payments are based. on the actual
charge starting with the first of the year, the excess paid during
this period. is not returned but is credited to subsequent payments.
Trusts, combines and main administrations pay amortization deduc-
tions.in.a centralized. manner, in the same amounts and on the same
dates as the enterprises locally. Centralized payments are made both
for enterprises that have no capital investment plan and thus make no
local amortization payments and for enterprises that pay part of the
amortization locally and-transfer the remainder to the trust, combine
or main administration. As regards enterprises that pay part of the
amortization locally, the trusts and main administration pay only the.
amortization funds transferred, by these enterprises; as regards enter-
prises that make no local amortization payments, the trusts and main
administrations pay the entire actual amortization charge irrespective
of the amounts transferred by these enterprises. In this way, the full
payment of all actual amortization charges is insured. Let us cite an
example of the method of centralized amortization payments.
Let. us suppose that the main administration must pay the amortiza-
tion for enterprises according to the following account (in thousands of
rubles):
Plan of Amortization deductions
Assigned for Construction
Actual
Transferred
Name of
including
to Main
Enterprise
Total
Local
Payment
Transfer to
Main
Administration
Charge
Administration
1,000
800
200
1,000
100
1,100
900 .
200
1,000
200
1,200
1,000
200
1,300
1450
1,500
--
1,500
1,500
1A00
1,600
--
1,600
1,700
1,600
1,400
. --
1, 4o0
1,300
1,400
Total
7,800
2,700
5,100
7,800
5,150
In this case, the main administration is expected to pay: for the
account of enterprises A, B, and C the entire amount transferred by
these enterprises, or 750,000 rubles (100,000/200,000/450,000), and
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for the account of enterprises D, E, and F the entire amount charged to
them, i.e. 4,500,000 rubles (1,500,000/1,700,000;1,300,000), or a total
of 5,250,000 rubles.
The amount of the actual amortization charge is determined on the
basis of accounting certificates furnished to the long-term investment
banks: by enterprises -- not later than the 20th following the reported
month, by trusts -- not later than the 27th, and by main administrations
-- not later than 40 days after the end of the reported month. For that
reason amortization payments are adjusted by enterprises and trusts in
the following month, and by main administrations one month later, i.e.
for a report on January -- in March, for a report on February -- in
April and. so forth.
If amortization payments are not forthcoming on the due dates, the
branch banks give the enterprises, trusts, and main administrations a
three-day notice to make the necessary payments. If, for some reason,
payments are still withheld., the special banks ask the superior economic
organ to issue an order to the State Bank office handling the account
of the amortization payer (enterprise, trust, or main administration)
demanding the compulsory recovery of the required amount and its trans-
fer to the special bank. If the nonpayment of amortization is noted. in
the accounting certificate, then in order to recover the unpaid amount
the branches of the special banks ask the local financial department (or
in the case of nonpayment by main administrations -- the Ministry of
Finance USSR or the Ministries of Finance of union republics) to order
the appropriate State Bank office handling the payer's account to write
off the unpaid. amortization amount. State Bank offices fulfill such
orders of economic organizations and financial organs immediately .after
the payments into the budget.
The investment banks see to it that the enterprises figure their
amortization charges for all items that have been put into operation
in their entirety or partly, starting with the 1st of the month fol-
lowing the start of operations. The banks check periodically on the
state of incompleted capital investments in order to determine the
completeness and timeliness of the amortization charges. If the banks
discover any cases where the start of operations (even though partial)
on a newly completed construction item has not been reported and has
not been included in the amortization charges, the banks have the right
to demand an additional amortization charge, if necessary through the
intervention of the superior economic organizations.
The investment bank branches do not recompute amortization pay-
ments at the end of the year. All year-end accounting is handled. by
the head. and provincial offices of the banks directly with ministries
and agencies. If, in the course of this year-end recomputing, it turns
out that a ministry or an agency as a whole has overpaid its amortiza-
tion charges, then the excess payment may with the permission of the
Ministry of Finance USSR (the Ministries of Finance of union and. auto-
nomous republics or the kray and oblast financial departments) and.
upon the request of the ministry or agency be credited to the pay-
ments of the following year, either as centralized payments or as the
local payments of individual enterprises. If the bank (the head office
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or the provincial office) finds on the basis. of the reported data that,
the ministry or agency used up all appropriations allocated for capital
investments during the year, then the excess amounts are not returned.
and the amortization payments for the following year are accordingly
reduced. If the bank finds at the end of the year that the ministry or
agency as a whole has underpaid its amortization charges, the unpaid
amounts must be paid by the main administrations, trusts and combines
upon the request of the ministry or agency. If the arrears for the
previous year have not been submitted to the bank within 10 days after
the presentation of the annual summary account to the ministry or
agency, the banks have the right to apply the current payments first
of all to the extinction of the stated arrears and enter the recovered
sums in the receipts of the corresponding budget.
Just as in the case of amortization, the actual accumulation of
profits may vary from the planned amounts as a result of the overful-
fillment (or underfulfillment) of the plan for the output and sale of
products (as a whole or by assortments), as a result of a discrepancy
between the actual,and the planned costs of production and so forth.
What then should be the amount of profits paid into the special banks
for the purpose of capital investments?- In contrast to the procedure
of paying amortization charges, profit payments for capital investments
are based on the actual accumulation of profits and the proportions
envisaged by the plan, but not in excess of the planned. amount.
Such a procedure of paying profits for capital investments pre-
serves the stimulus for the achievement of profits in excess of plan
(a large part of which, as we know, goes into the director's fund) and
makes possible the proper utilization of working capital.
The payments of profits for capital investments, like in the case
of amortization, can be made either locally or in a centralized, manner
(by the trust, combine, or main administration).
Both local and. centralized. payments are due on the same dates as
the amortization payments, but the amounts are distributed as follows:
In the first month of the quarter - 20 percent of the quarterly plan,
in the second --- 35 percent and. in the third - 45 percent. Prior to
receipt of the financing plans (limits), profit payments unlike amorti-
zation payments are paid in the amounts envisaged by the plan of the
preceding quarter. It must also be borne in mind. that profit payments
are based on the actual accumulation for each quarter separately, and
not on the accumulation since the first of the year as in the case of
amortization payments. Moreover, the following provisions are designed
to insure that no payments for construction are being made at the expense
of the working capital of the enterprise: payments for the first two
months of the quarter must not exceed, two-thirds of the quarterly plan
and. payments made throughout the quarter must not exceed the amount set
by the quarterly plan.
The amount of the profits payments allocated to construction is
regulated, as in the case of amortization, on the basis of data given
in accounting certificates that list the actual amount of accumulated
profits and on the basis of the proportions set by the plan. The local'
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payments of profits is illustrated in the following example.
Let us assume that the total planned profits for the quarter have
been set at 2,000,000 rubles, of which 800,000 (140 percent) have been
allocated, to construction. Let us also assume that the actual profits
were 700,000 rubles in the first month of the quarter, 1,400,000 rubles
in the first two months and 2,100,000 in the three months of the
quarter. In that case profit payments allocated to construction should
amount to:
in the first month 800,000 x 20 - 160;,000 rubles.
100
in the second. month, the regular payments 800,000 x 35
100
280,000 rubles plus the unpaid balance for the first month of
700,000 x 40 - 160,000 = 120,000 rubles or a total of 400,000 rubles.
100
But since payments for the first two months must not exceed. two-
thirds of the quarter plan, i.e. 800,000 x 2 533,000 rubles, and since
3
160,000 rubles were paid. in the first month, the payment in the second
month should. be only 373,000 rubles (533,000-160,000).
In the third month, the payment should amount to: 800,000 x 45
100
360,000 rubles plus the unpaid balance of the first two months
1,400,000 x 1 = 560,000 minus 533,000 rubles (160/373,000), or a total
100
of 387,000 rubles. However, since the total amount paid must not exceed
800,000 rubles (as set by the plan) and since 533,000 rubles were paid.
during the first and second months, the payment In the third month
amounts to only 267,000 rubles (800,000-533,000).
If it turns out on the basis of the accounting certificate that
the actual profit payments were less than required, then the difference
must be paid into the bank immediately. If the payments exceed the re-
quired amount, the excess may either be credited to the payment of
profits or amortization for the following period or be returned. to the
paying organization upon its request.
Centralized profit payments are made by trusts and combines in
accordance with the amount of profits (within the planned limits) made
by those enterprises for whose account such payments are envisaged by
the plan. The following example will illustrate how main administra-
tions effect centralized payments of profits allocated, to construction.
Let us assume that the main administration must, according to
plan, pay the profits for the account of four enterprises. The amount
of profits of these enterprises, both planned and actual, are shown in
the following table (in thousands of rubles):
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Share of Profit
Name of Total Planned Allocated to Total Actual
Enterprise Quarterly Profit Construction Quarterly Profit
A
1,000
400
1, 000'
B
1,500
300
1,700
C
1,250
250
1,200
D
400
100
loss 100
Total
4,150
1,050
3,800
In this case the main administration is required to pay to the
special bank 961,400 rubles, in accordance with the following calcula-
tions: The total planned profits of all four enterprises are 4,150,000
rubles, of which 1,050,000 rubles, or 25.3 percent, are allocated to
construction. Since the total actual profits of these enterprises
(including excess profits of some and losses of others) amount to
3,800,000 rubles, the total payment amounts to
3,800,0000x 25.3 - 961,400 rubles.
To insure the payment of profits on time, the banks resort to
measures similar to those used in accounting for amortization payments:
appeals to the enterprises, trusts and main administrations, the receipt
of orders for compulsory recovery of funds from the superior economic
organizations and financial organs and so forth. Requests and orders
regarding profit payments are also fulfilled by State Bank offices im-
mediately after the payments have been allocated to the budget.
It should be noted that the special banks engage in no year-end.
recalculations of profit payments. All such recomputations are handled.
only by the Ministry of Finance USSR, the Ministries of Finance of
union republics or their local organs (as far as the local economy is
concerned).
Funds obtained. from the sale of old. property of the enterprise are
paid into the long-term investment banks as such gains are being re-
alized. If the funds listed. in the financing limits (Form 5) are not
being paid, the branch banks request the enterprise to submit a certifi-
cate listing the gains realized from the sale of old. property. On the
basis of these certificates, the banks in the absence of payments pass
the matter on to the financial organs as in the case of nonpayment of
profits and amortization.
Funds obtained from the sale of incidental production are deposited
in the banks in their entirety (except for expenses involved in the sale
itself) irrespective of the amount envisaged by the financing limit
(Form 5). Projects engaged in the incidental mining of minerals submit
to the special banks monthly accounting certificates listing the
amounts actually realized from the sale of the minerals less the associ-
ated expenses. If necessary, the banks may ask the appropriate financial
organs to exact the immediate recovery of unpaid. amounts realized from
the sale of such incidental minerals.
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Funds obtained from the sale of surplus materials and equipment
and funds recovered. from debtors under the category of mobilization
of internal potentials are also deposits by the projects in the banks
in their entirety (and are credited to their accounts). Materials
and equipment used directly by the projects reduce the need for funds.
The banks carry out systematic control over the fulfillment of plans
calling for the mobilization of internal potentials.
Recovered sums envisaged by the third. part of the general cost
estimate are paid by the projects into the banks in their entirety
(except for expenses involved in dismantling and disassembly) ir-
respective of whether such funds have been listed in the financing
limit. (If the limit does not list such funds, they are credited to
the account of the trust or the main administration). On the basis
of reports submitted by the projects, the bank branches see to it that
items envisaged. in the third part of the general cost estimate are
entered on time as fixed capital, that dismantled materials are pro-
perly credited and. that all. realized. sums are deposited in the bank,
that amortization charges on fixed capital are properly calculated,
that rent payments obtained. from contractors are deposited in the
bank or, in the case of the so-called economic construction method,
that amortization is properly deducted (except for the part allocated
to capital repairs).
In addition to the enumerated sources of financing, some pro-
jects may have the benefit of so-called partial participation of other
enterprises. Let us illustrate this partial participation.
Let us assume that several enterprises in a city or district re-
quire electric :power and that a single power plant able to supply all
these consumers would be the most economical solution. For purposes
of simplified control over the construction of the power plant, one of
these enterprises would be listed in the capital investment plan, but
the funds for this project would not come only from the one enterprise
listed in the plan, but also from the other benefiting enterprises.
The various participating enterprises pay their share into a
common financing fund and the long-term investment banks see to it that
these funds are paid. on time.
The enumerated sources are used. for financing the project on the
following basis: funds derived from the payments of the enterprises,
trusts, main administrations themselves are paid out only as they are
actually being deposited in the bank (within the planned limits);
budgetary funds are paid out within the limits of the quarterly appro-
priations. At the end of the year all funds not used, for centralized
capital investments of state enterprises and organizations, irrespec-
tive of their origin (budgetary funds and funds of the economic organi-
zations themselves) are contributed. to the appropriate budget (union,
republic or local). Only projects situated in remote areas of the
RSFSR get a two-month extension for the use of funds left at the end
of the year to clear accounts for work performed during that year.
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Captial investments of state enterprises and organizations are made
on the basis of national economic plans from sources described above.,
In addition, aGovernment decree dated 19 September 1935 has made
provisions for extra-limit capital investments at the expense and within
the limit special financing sources (Decree of the Council of People's
Commissars USSR "On Outlays for Construction Carried Out Outside of the
Capital Construction Plans", Izyestiya, 21 September 1935). These
special sources include: part of the director's fund.; funds allotted
for this purpose in financial plans; profits in excess of plan and the
mobilization of internal potentials; profits realized by enterprises
from the sale of the output of shops producing consumer goods; budget-
ary appropriations for this type of capital investments; state insur-
ance funds. In 1949 and. 1950 most of the extra-limit (noncentralized)
capital investments wore included in the national economic plan.
In addition, special orders of the government have made provision
for extra-limit capital investments in certain branches of the economy
at the expense of special sources. For example, extra-limit capital
investments have been permitted. in the wine and beer industry at the
expense of deductions from the value of the sold output.
Special appropriations from amortization deductions are used to
cover expenses for capital repairs of the fixed capital of the nation's
economy.
4. Sources of Capital Investments in Collective Farms
The chief source of capital investments in collective farms are
funds of the collective farms themselves and funds granted to them in
the form of long-term credits. . The magnitude and the allocation of
state aid as varied. through the several stages in the development of
collective farms.
At the present time, the success achieved in Socialist agricul-
ture has made it possible to realize most of the capital investments
of collective farms at the expense of funds supplied by the farms
themselves.
In accordance with the Stalinist Charter of the Agricultural Artel,
the chief source of capital investments in colloctive farms is the
systematic enlar ;irig of the so-called indivisible funds.
Indivisible funds are created and enlarged. through: initial mone-
tary payments of the collective farmers; the value of part of the
socialized property of members of the artel; the value of property
granted to the collective farms at no cost by the state; deductions
from the money incomes of collective farms (amounting to 12 to 15 per-
cent in grain areas, 15 to 20 percent industrial-crop and livestock
areas and not more than 15 percent in fishery collectives); gains
from the sale of livestock for the purpose of acquiring improved breed-
ing stock; gains from the sale of livestock and livestock products and
the sale of horses (in the amounts determined by the general collective
farm meeting, taking account of the requisites for the plan fulfillment
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of livestock and horse reproduction); the replacement by state insurance
organs of damage to collective farm property caused by natural calami-
ties; gains realized from the sale of various types of collective farm
property; interest received by the collective farms from Sel'khozbank on
deposits in the capital investment accounts.
In addition, indivisible funds can be enlarged through the labor
participation of collective farmers in the construction of collective
farm buildings, installations, the production of tools, and also
through an increase in the collective farm herds.
Indivisible funds also include the value of buildings built with
agricultural credit after the loan has been extinguished with the money
income of the collective farm.
At the present time, the chief source for enlarging indivisible
funds are deductions from the money income of the collective farms.
The party plenum of February 1.917 rioted that during the five years
preceding the war the fixed capital of collective farms rose 2.5 times.
The deductions into the indivisible funds of some leading collective
farms go into the hundreds of thousands of rubles. For example, in
the Collective Farm imeni Il'ich, Dobririsk-iy Rayon, Voronezh Oblast,
annual deductions into the indivisible funds amount to 320,000-100,000
rubles, and funds allocated to capital investments 500,000-700,000
rubles a year (See Pravda, 21 June 1919). The consolidation of col-
lective farms has produced an even greater rise in money incomes and
in increase in the deductions going into the indivisible funds.
The law on the Postwar Five-Year Plan has called for "insuring
a further rise in the socialized wealth of collective farms, their
incomes, indivisible funds, buildings, livestock, tools and their in-
surance, seed and fodder reserves" (Zakon o pyatiletnem plane vosstanov-
lerii a i razvitiya narodnogo khoz ystva SSSR nal916-1950 gg. Law on
the Five-Year Plan of Restoration and Development of the National
Economy of the USSR for 1916-1950, Gospolitizdat, 1916, page 13).
The collective farms are required to deposit the money part of
their indivisible funds in their capital investment accounts at the
Sel'khozbank or, in the absence of a Sel'khozbank branch, the State
Bank as income from the various sources is received.
The task of Sel'khozbank consists in seeing to it that all money
funds of the collective farms allocated for capital investments are
deposited in their account.
The methods used by Sel'khozbank in insuring the depositing of
collective farm funds in their capital investment accounts vary from
the methods used to mobilize the funds of state enterprises and or-
ganizations for capital investments. In the case of state enterprises
and organizations, the banks may If necessary (through the financial
organs) resort to the compulsory recovery of the unpaid amounts. Sel'-
khozbank may not use any such compulsory measures in the case of col-
lective farms. It must see to it that the collective farms abide by
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the regulations. of the Charter of Agricultural Artels regarding the.
depositing in the bank of all money funds allocated to capital invest-
ments. To achieve this goal, the bank resorts, to organizational work
among the masses, aids the collective farms in. the. management of their
finances and bookkeeping, and points out potential reserves for in-
creasing money incomes. The depositing of funds in the bank insures
their safekeeping for the collective farms and. their use within the
regulations of the Charter and.-the approved. income and outlay.esti-
mates. .
The collective farms receive high interest on their bank deposits
-- 3.5 percent a year, i.e. more than the bank gets on long-term loans,
and. at the same time are able to manipulate these funds. Upon the re-
quest of the general collective farm meeting, Sel'khozbank offices can
provide funds from the capital investment account in the form of a
temporary withdrawal and for economic needs not related to capital
investments (for example, for the purchase of seed, fodder, for veter-
inary services to livestock and so forth). The repayment terms of such
temporary withdrawals are set by the collective. farm offices in agree-
ment with the Sel'khozbank branches.,
Credit is granted to. collective farms provided that they observe
the regulations regarding the formation, safekeeping and. utilization
of indivisible money funds. This condition plays a key role in the
whole matter of strengthening and enlarging the socialized wealth of
the farms. Sel'khozbank offices systematically check on the proper
handling of deductions going into the indivisible funds and on the
depositing of money funds in the banks. In case of infractions of
Charter provision regarding the organization, safekeeping and. utili-
zation of the indivisible funds, the bank offices call such infrac-
tions to the attention of the collective farm office and. the Inspec-
tion Committee and submit quarterly reports to the local Soviet organs
for the adoption of measures designed to enforce observance of the
Charter regulations.
The amount of funds to be drawn in by Sel'khozbank at the expense
of the indivisible funds of collective farms and the amount of state
farm credit to be granted and the repayment of loans are set in the
financial and. credit plan of Sel'khozbank, which is approved by the
Council of Ministers USSR.
The fulfillment of the plans of drawing in collective farm funds
for the purpose of capital investments is of great importance in the
matter of fulfilling the collective farm credit plan and. further
strengthening the collective farms organizationally and economically.
5. The Sources for the Long-Term Crediting of Capital Investments of
Cooperatives
The sources of capital investments of cooperative organizations
are as a rule the fund.s of the cooperative systems themselves. Bud-
getary funds are now being granted very Seldom for the long-term
crediting of cooperative organizations. The organization and utiliza-
tion of the funds of the,cooperatives themselves for the purpose of
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capital investments have moreover their distinguishing characteristics.
Capital investments of producer, lumbering and veterans' coopera-
tives are made in accordance with the plan on the basis of long-term
loans granted by Torgbank. These funds are granted by the bank from a
long-term credit fund that is being systematically replenished. (In
addition these cooperatives may finance capital investments relating.
to an increase in the output of consumer goods with loans granted by
the State Bank for periods not exceeding one year).
Funds for the long-term crediting of producer cooperatives were
created in Torgbank (at that time In Vsekobank and Ukrainbank) as
early as 1933. At the present time the producer cooperative system
includes a centralized long-term credit fund (TsFDK), republic long-
term credit funds (RFDK) and local funds (MFDK). The central fund is
under the control of the Central Council of Producer Cooperatives of
the USSR, and the republic and local funds are administered by re-
public and kray (Oblast) cooperative centers, respectively. The
central fund is used to replenish the republic and local funds when
the funds lack the means for the fulfillment of the established long-
term crediting plans. The central and RSFSR funds are deposited in
the Torgbank of the USSR (in Moscow) and the other republic and local
funds in the corresponding Torgbank offices.
Long-term credit funds are being systematically replenished from
the following sources: deductions from the profits of artels, associa-
tions and unions; the repayment of earlier long-term loans from these
funds; interest charged by Torgbank on such long-term loans; special
deposits made by cooperative organizations from their excess working
capital. The chief sources for the replenishing of these funds are
profit deductions.
Each artel (union) deposits in the long-term credit fund of its
system (in Tor bank) 20 percent of the distributed profit (the profit
left after payment of-the income tax), with one-fifth of-the contribu-
tion going into the central fund. The magnitude of the deductions to
be deposited in the funds is set by annual financial plans, with a
quarterly breakdown, but the deposits in the funds are based on the
actual profit, which depends on the results of the work of the artel
(union) during each quarter. Deposits in the funds are made on the
dates set for income tax payments.
In those cases where organizations after having made profits
suffer losses in a following quarter, the final accounting of their
payments into the funds is handled. at the end of the year.
Let us assume that an artel made the following profit before taxes:
by 1 April 60,000 rubles, by 1 July 100,000 rubles, by 1 October 80,000
rubles and by 1 January, 140,000 rubles. The income tax rate is 25
percent.
In that case the artel should make the following payments:
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for the :first quarter (60,000 6o, o
) x 100 = 9, 000 rubles
iou
i.e. 4,500 rubles on 20 April and 4,500 rubles on 20 May;
for the second. quarter (100,000 - 100,E 25) x 20 - 9,000 =
6,000 rubles, of -which 3,000 rubles on 20 July and 3,000 rubles on 20
August.
Since the artel suffered a loss during the third quarter (100,000 -
80,000 : 20,000 rubles), no payment is due for the third quarter.
After the end. of the fourth quarter, the artel must pay:
(140,000 - 140,00000x 25) x 20 - 15,000 -- 6,000 rubles i.e. 3,000 rubles
100
each on 5 February and 20 February.
Payments into the long-term credit funds are nonreturnable. If
the quarterly accounts of an artel have not been completed by the date
the payments are due, the payment must be made in the amount envisaged
by the plan for the given quarter; subsequently, after the account has
been completed, the actual amount due is computed.. Any unpaid. amount
must be paid at that time, while any excessive payment is credited to
the following period or is returned to the cooperative organization
upon request.
Payments into the long-term credit fund are made by transferring
the appropriate amount from the account of the cooperatives in the
State'Bank to the account of Torgbank. For this purpose, the coopera-
tive organizations give the State Bank nonrecallable payment orders in
triplicate. One copy remains in the State Bank office and two copies
(with a State Bank. notation of the receipt of the order) are sent by
the artel to its union, which submits one of these copies to the_
Torgbank office. On the basis of these data, both Torgbank and the
cooperative union check on the timely payments of the artels. If the
artels do not submit their payment orders on time, the producer co-
operative unions themselves, upon the request of Torgbank or on their
own initiative, issue the payment orders to the State Bank offices
where the artels have their accounts.
In contrast to the amortization payments and profit payments
allocated for capital investments in state enterprises, the orders of
cooperative artels and unions regarding transfer of their funds to the
long-term credit funds are carried. out in the order of priority set
for executive documents.
Torgbank receives the excess of working capital of producer, lumber-
ing and veterans' cooperatives in the form of time payments. These pay-
ments, in contrast to deductions that go into the long-term credit funds,
are returnable; they are deposited for a certain period of time, after
which they are returned to the depositors upon request. If a depositor
does not request the return of his deposit, the amount is regarded
deposited for the next period. Torgbank pays 1.5 percent annual in-
terest on those deposits.
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Producer and veterans' cooperative organizations may deposit in
Torgbank sums allocated for specific purposes in capital investments.
In certain cases budgetary funds are allocated for the long-term
crediting of cooperative organizations, as are the funds of state or-
ganizations in connection with the fulfillment of individual orders.
All these funds are paid. into Torgbank, which pays them out to borrow-
ers in the form of loans on terms set by the authorities that supplied
the budgetary funds or gave the orders to the cooperatives. Torgbank
thus controls all funds allocated for capital investments of producer,
lumbering and veterans' cooperatives and insures a uniform system of
crediting and bank control.
Only capital investments of less than 50,000 rubles a year for a
cooperative organization as a whole may be covered with funds kept in
the organization's account in the State Bank.
Funds accumulated by Torgbank in the long-term credit funds are
used for capital investments in producer, lumbering and. veterans' co-
operatives and for the granting of loans to be used as working capital
(to cover established norms) and for the restoration of the liquidity
of assets.
The method. of marshaling funds for capital investments in con-
sumer cooperatives differs from the method adopted for producer co-
operatives. The long-term credit fund. of consumer cooperatives, which
was set up in 1932 in Torgbank and was enlarged through the deposits
of funds previously created by the system, shares and so forth, is no
longer being replenished. Torgbank now grants long-term credits to
consumer cooperatives only for planned (limit) capital investments
approved by the national economic plan. For that purpose, Torgbank
receives part of the funds of the State Bank's "special fund for the
repair and. construction of commercial premises within the consumer
cooperative system".
This fund is created. in village, workers' settlement, city and
rayon cooperatives, and :in all consumer cooperative unions from the
following receipts; amortization deductions on buildings, installa-
tions equipment and so forth; appropriations for circulation outlays,
for the repair of commercial and storage premises, and so forth; pro-
fit deductions of village cooperatives not exceeding 10 percent; ad-
ditional appropriations from cooperative funds according to the annual
financial plan approved by the presidium of the Tsentrosoyuz /the
central consumer cooperative organization7.
These are then the basic sources for the financing of capital
investments of state enterprises and organizations and. the long-term
crediting of collective farms and cooperative organizations that are
accumulated by the investment banks. These banks also engage in the
long-term crediting of capital investments of state enterprises (local
industry, state farms and. others) and individual borrowers, chiefly
for residential construction. For these transactions, the banks use
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their own funds, the remainder of the funds of their clientele, and, if
necessary, budgetary funds. All transactions relating to long-term and
short-term crediting are reflected in the financial and,credit plans of
the long-term investment banks.
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CHAPTER VI
THE ORGANIZATION OF TRANSACTIONS IN CONSTRUCTION
1. General Principles and Basic Forms of the Present System of Accounts
in the National Economy
The Socialist nature of the Soviet economy hakes it possible and.
necessary to plan transactions in the national economy, with special
attention being devoted to the clearing of accounts. The planned or-
ganization of transactions speeds the turnover rate of material re-
sources and strengthens economic accountability. The most favorable
conditions for such an organization of transactions were created with
the credit reform of 1930-1931, which ended the commercial crediting
of economic organizations and set up compulsory accounting through
banks.
Economic relationships among various links of the national economy
-- among suppliers and purchasers, clients and contractors -- are built
on the principle of economic accountability as the basic method. of
administering Socialist enterprises.
Economic relationships among Socialist enterprises are based on
economic agreements, which are the best means of combining a plan and
economic accountability. Of the greatest importance in carrying out
economic accountability among various organizations and. in insuring
the planned utilization of funds is the proper anal. most rational or-
ganization of accounting relationships in the national economy.
A special role in the matter of properly organizing accounts in
the national economy and. controlling the discipline of payments be-
longs to the credit system, especially the State Bank of the USSR,
which is the nation's center of accounts. The credit system is ex-
pected not only to insure an efficient accounting technique, but to
participate actively in the organization of accounts in the national
economy.
The chief way in which the State Bank functions as the center of
accounts is by keeping the clearing accounts and, current accounts of
most of the economic, social, budgetary and other organizations. In
keeping these accounts (and, also in-granting credit to economic organi-
zations) the State Bank exercises control by the ruble over the output
and circulation of goods. However, since the financing of construction
is handled by the special long-term investment banks, the organiza-
tion and keeping of accounts relating to construction falls upon these
banks. The special banks also exercise control by the ruble both in
financing and crediting capital investments and in the process of
handling the account transactions.
The special banks open financing accounts and clearing accounts
(both ordinary and. special) to construction projects and contracting
organizations and to the supply organizations of the construction
industry and geological exploration organizations.
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If construction is handled by the economic method, all accounts
are handled. through the financing account, which is managed. by the
title holder. In the case of large (above-limit) construction projects
that have a separate office of the chief of construction (in existing
enterprises -- the chief of capital construction department (oks)), a
large part of the accounts is handled through clearing accounts opened
by the chief of construction (or of the capital construction department).
Through these accounts pass mainly transactions relating to the execu-
tion of construction and installation work, i.e. transactions involving
payment for materials, wages and so forth, while the financing accounts,
opened. by the authorities managing the appropriations for construction,
are used to pay for completed construction and. installation work and
for other types of capital work (geological, the supplying of equipment
and. so forth).
In the case of the contracting method, transactions are handled.
partly through the financing accounts of the client organizations
(which then manage the appropriations) and partly through the clear-
ing accounts of the contracting. construction organizations. The finan-
cing account is used to pay for equipment and. for construction,
installation and other work performed by the contractors.
The clearing accounts of the contracting organizations are used
to pay for the supply of materials (the supply of basic materials is
also handled through special accounts based on advances, about which
more below), wages and other operations relating to the performance
of construction and installation work. If the clearing accounts of
contracting organizations and the financing accounts lack the funds
necessary to meet all claims made on them, such claims are met from
subsequent receipts in the following order of priority set by law:
(1) payments for wages and, deductions; (2) payments into the budget;
(3) transfers of amortizations, prcfits and. other funds allocated. to
the financing of capital investments and capital repairs; (1) payments
to the bank on outstanding loans; and (5) other payments.
Upon the request of contracting organizations and. construction
projects, the banks make payments outside of the established order of
priority to meet immediate needs (post and telegraph outlays, outlays
for the unloading and delivery of goods etc). Such nonpriority pay-
ments may not exceed 5 percent of the average daily deposits in the
clearing account. during the preceding month in the case of contracting
organizations, and in the case of construction projects not more than
3 percent of the total quarterly financing limits.
The banks also open special accounts to contracting construction
organizations on the basis of advances received from the clients (these
are used to cover transactions relating to the purchase of basic
materials), as well as special accounts for capital repairs. Cash
transactions with the clients of long-term investment banks (except
for municipal banks) are handled through offices of the State Bank.
The system of accounts that has existed in the national economy
since the credit reform of 1930-1931 is based on the following:
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1. The entire system of accounts is designed to strengthen
economic accountability and. financial, planning and contracting dis-
cipline in the economy.
2. The great majority of accounts are cleared through the
banks and. are under their control.
3. Payments are made only with permission of the payer and
within the limits of his available funds.
t. Payments for goods, services and performed work are made
immediately, i.e. without the granting of commercial credit.
5. The entire system of accounts must be simple, must be
adapted to the needs of the individual branches of the national econ-
omy and must insure a speedy turnover rate of funds.
The turnover of funds in transactions among economic organizations
involves both a period. of direct payment and a period of the exchange
of documents on the basis of which payments are effected. It is clear
therefore how important in speeding the turnover of funds is the speedy
handling of documents both in economic organizations and in the banks.
Transactions handled by long-term investment banks can be divided.
into the following main groups: transactions pertaining to the shipping
of goods (the delivery of materials and equipment); transactions per-
taining to fulfilled work and performed services; and transactions re-
lating to rioncomnodity operations.
In the matter of organization, we can distinguish transactions
that pass through banks in their entirety and. under the banks' control
(which are the great majority) and transactions that are handled only
in part by banks and are based on the principle of examination of
mutual claims (transactions through the Mutual Clearing Bureaus,
periodic accounting on the basis of the net balance and so forth).
There is also a difference between inter-city and intra-city
transactions.
Inter-city transactions have the following main forms: acceptance,
letter of credit, and. special account. The main form is the acceptance
form, which insures the most rapid turnover of funds and best control
on the part of the purchaser.
Intra-city transactions of less than 1,000 rubles may be handled
with cash, checks, or payment orders, while transactions exceeding
1,000 rubles are handled with payment orders, checks, and in the form
of the collection of payment claims upon acceptance (The procedure of
the various forms of transactions and their use are studied in the
course on "Money Circulation and. Credit of the USSR").
In addition to the basic forms of transactions, there are special-
ized forms, such as the periodic accounting on the basis of net
balances, accounting through Mutual Clearing Bureaus, and so forth).
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It should be borne-in mind that, the majority of transactions;.
handled. by the long-term investment banks are of the inter-city type.
The principles of the existing system of accounts apply also
to accounts in capital construction. However, the special aspects
of this branch of the economy and the special control functions per-
formed by the investment banks must be taken into account in organiz-
ing and carrying out transactions in. construction. This applies to
transactions relating to: the ordinary delivery of materials and
equipment; payments for materials that are guaranteed. by the bank;.
imports of equipment and. materials for construction and. other central-
ized transactions; fulfilled construction and installation and other
capital work; transactions between the capital construction depart-
ment and the main operations of an enterprise; single or periodic
accounts on the basis of net balances; transactions through Mutual
Clearing Bureaus.
2. Characteristics of Capital Investment Transactions
Transactions Relating to the Delivery of Materials and. Equipment.
The basic. principles. of organizing inter-city and intra-city transactions
relating to the traffic of goods also apply to the transactiins of de.-.
livery of materials and. equipment for capital construction. Inter-city
transactions may be handled. in the form of acceptance, letter of credit
or special accounts and intra-city transactions in the form of payment
claims and orders. The form of the transaction is set by contract.
However, since the special banks are. charged with making certain that
funds. allocated. to construction are not used ,for other purposes, in
particular for the basic operations of an enterprise and vice versa,
the invoices attached. to payment claims and, orders are stamped. "For
Capital Construction". Invoices without.this stamp may not be honored
with funds allocated to capital investments. Moreover, invoices that
do bear this stamp may not be paid with funds allocated to the basic
operations of the enterprise.
Investment banks are charged with control over prices of mater-
ials and equipment. Therefore transactions relating to the delivery
of materials and equipment must be handled in the form of invoices no
matter whether they involve also payment claims or payment orders.
The .exception to this rule are transactions relating to the delivery
of materials worth less than 1,000 rubles, which are. handled simply
through payment orders or checks without invoices, since the banks do
not verify prices of such small deliveries.
To enable the banks to verify the prices of equipment and mater-
ials, the invoices covering deliveries for capital construction must
contain'the necessary data (references to price books and so forth).
Invoices for construction materials and. equipment calculated at increased
prices need not be paid in their entirety even if they have been ac-
cepted. by the payer. In those cases only the amount regarded as cor-
.rect by the bank is paid (In recent times a. check on prices for equip-
ment has been made in a number of cases at the supplier's bank (See
Chapter XII))
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As we stated above, transactions relating to the delivery of ma-
terials are handled either through the financing account or through
clearing and. special accounts based on advances. In some cases, special
short-term credits are granted to contracting organizations to cover
payments for materials. In that case, the corresponding transactions
are handled directly. through the loan account.
A number of contracting construction trusts and large construction
projects include special supply offices (Tekhsnab) working on the basis
of economic accountability. At the present time the clearing accounts
of these offices are as a rule in the branches of tie special banks and
all transactions are performed in the usual manner through these accounts.
The usual conditions of negative acceptance (acceptance by silence)
and the method of partial acceptance also apply to deliveries for
capital construction.
Payment documents that have been accepted and have not been paid
by the payer on time acquire the force of executive documents. The
payment of such documents by the bank is compulsory and is effected
in order of priority from funds received by the payer's account. It
should be stressed that only executive documents involving transactions
relating to capital investments may be paid from appropriations al-
located to capital investments.
For every day that a payment is overdue, the bank charges a fine
of 0.05 percent in favor of the seller. Measures adopted by the bank
are of course in addition to any sanctions that the seller may take
with respect to the purchaser within the terms of their contract.
When transactions are handled. in the form of a letter of credit,
the bank branch situated near the seller sees to it that the condi-
tions of the letter of credit are observed. by the project or the con-
tracting organization. The letter of credit form is used. chiefly in
transactions relating to deliveries of equipment, means of transporta-
tion and other acquisitions.
In view of the fact that unused appropriations for capital invest-
ments are transferred, to the budget at the end of the year, all unused
letters of credit (and. special accounts) to be met from financing
accounts and the clearing accounts of the chiefs of construction (or of
the capital construction departments) must be paid not later than 31
December.
The present method of paying for the delivery of materials and
equipment calls for payment after unloading (delivery) of the goods
to the purchaser. In the case of delivery of complex equipment requir-
ing longer periods of manufacture, the payments may be effected in
stages as the order is being filled.
Transactions Relating to Individual Materials for which Payment
is Guaranteed by the Bank. The letter of credit form of handling
transactions was formerly used quite commonly for the delivery of
materials (lumber, metals and others) that are consumed. in large
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quantities. But shortcomings in the letter of credit method (such as the
slow turnover of funds) made it necessary to restrict its use. However,
the interests of the seller of the stated materials and his.need for
prompt payment for the shipped materials had to be taken into account.
With this in mind, the government has provided for a method of guaran-
teed payments by the bank for a number of materials (lumber, metals and
others) that are supplied to the contracting organizations of certain
ministries, with the letter of credit transaction being converted into
the acceptance form. Payment is effected in the ordinary manner from
special accounts based on advances and from clearing accounts or from
loans granted by the special banks for the seasonal accumulation of
materials. If, however, all these sources should turn out to be in-
sufficient to cover fully the accepted payment claims, then the bank
issues to the purchaser a short-term loan (guaranteed credit) for the
balance of the due payment, which is then used to complete the trans-
action with the seller.
Transactions with guaranteed credit are restricted. to certain
materials shipped to contracting organizations that are listed in
special decisions of the Soviet Government relating. to these payments
guaranteed by the bank.
Centralized Transactions Relating to the Delivery of Equipment and
Materials for Construction. Transactions are termed centralized when
they are handled by trusts, main administrations and. ministries.
Centralized transactions apply to the delivery of rolling stock
to the railroads of the Ministry of Railroads, the delivery of tractors
and combines to state farms and machine-tractor stations, small ship-
ments to trade and cooperative organizations, and deliveries of im-
ported equipment and materials for construction.
Transactions with foreign suppliers of equipment and materials
are handled through Soviet foreign trade organizations. Ministries,
main administrations, combines and trusts carry out transactions for
the delivery of foreign goods directly with the Soviet foreign trade
organizations. Such transactions are handled through the special banks
and apply only to those imports of equipment and materials that are
shipped. (or are surrendered. by documents) to the purchaser from Soviet
ports or, in the case of overland movement, have passed, through a
Soviet border point.
Transactions involving imports are generally handled. through a
special clearing credit account granted by the bank.
3. Transactions Involving Completed Construction and Installation Work
and Other Types of Capital Work
The investment banks handle transactions involving construction;
installation, geological exploration and other types of capital work
in connection with their function of financial control, which also
determines the methods of handling such transactions.
Since the special banks keep both the accounts of the client or-
ganizations (the financing accounts) and the clearing accounts of the
contracting organizations that fulfill the work, transactions can be
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effected very simply.
Transactions for completed work are as a rule of the intra-city
type. Inter-city transactions occur only when the contracting organi-
zation sends brigades of workers to do some work in another city.
Transactions for completed construction work are based on the
quantity of finished parts of the construction elements according to
unit prices listed in the cost estimate. In recent times payment for
construction work in certain ministries, in particular.the coal in-
dustry and rail and water transportation, has been effected on the
basis of special price books that give, for example, the cost of a
cubic meter of a building of a certain type.
Payment for installation work is effected on, the basis of price
books after the installation of a certain item or a part thereof has
been completed.
In the contracting method, construction work performed during
the first 20 days of the month is paid for on the basis of invoices
and payment orders or payment claims, while invoices, payment orders
or payment claims presented at the end of the month must be accompan-
ied by an acceptance list of the work completed in the course of the
month.
Payment has been simplified for completed work covering construc-
tion items that are finished in less than three months. Within that
period the completed work is paid for without itemized lists, simply
on the basis of invoices and payment claims (or orders), not exceed-
ing, however, 90 percent of the cost estimate of the item. After
construction has been completed, the payments are checked on the basis
of the acceptance lists then supplied.
Construction work completed by contractors can be paid for either
in the form of payment orders or in the form of payment claims pre-
sented to the bank for collection by the contracting organizations.
In contrast to transactions involving the tetra-city delivery of
equipment and materials, the time limit for the acceptance and payment
of payment claims in intra-city transactions involving performed work
is three days, instead of two days. This time limit also applies to
inter-city transactions involving performed. work.
In the so-called economic method of construction, payment for
completed. construction and. installation work in above-limit projects
is made once a month. Payment is based on acceptance lists and pay-
ment orders of the manager of the appropriations allocated to con-
struction, i.e. the director of the existing enterprise or the enter-
prise under construction. In the case of small items (for industrial
enterprises with a cost estimate of less than 75,000 rubles), payment
is made upon the completion of such items.
If certain sectors of the contracting organization or of the
construction project are themselves operating on the economic.account-
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ability principle, then payment for work performed by these sectors is
also made upon presentation of the acceptance lists, payment orders or
payment claims.
It should finally be pointed out that transactions between general
contractors and subcontractors are handled in the same manner as trans-
actions between clients and contractors.
Payment for work performed by contracting organizations and by.
the chiefs of construction (or the capital construction departments)
is made by transferring to their accounts the necessary amounts from
the financing accounts of the clients or title holders..
Payment for geological work is also made upon presentation of
lists giving the volume of the performed work. This information is
checked against the rates given in the itemized. construction lists
and the estimated cost of geological work listed in the cost estimate.
In addition. to payments for performed work, other types of trans-
actions are likely to occur often between clients and contractors
(involving, for example, the granting, of. advances, payment for pre-
fabricated construction parts and subassemblies, payment for services
and so forth), which are also handled through the investment banks..
As far as the payment for services mutually rendered is concerned,
that is handled in the usual manner upon presentation of invoices and
payment claims or payment orders, with due attention being given to
the established, method of control.
4. Transactions Between the Construction office (or the Capital Con-
struction Department) and the Basic ojerations of an Enterprise
Economic and financial relationships arise often between the
basic operations of an enterprise and its construction project. For
example, the basic operations may render services to the project, in-
cluding the supply of steam, water, electric power, and may in.some
cases supply materials, pay amortization and profit deductions into
the project and. so forth. The capital construction department of the
enterprise may in turn render services to the basic operations, for
example, regarding repair work. Transactions between the two parts
of the enterprise thus arise in accordance with the nature of their
economic relationships.
Such transactions must be based on the principle of economic
accountability and of the separate use of funds allocated for regular
operations and for construction. This requires that transactions be
handled on a systematic basis, once every ten days or at least once
a month. These transactions are handled through the investment banks
and are under their control. Due attention must be paid to the ob-
servance of established prices for materials, services, and rates for
construction and other types of work.
Payment for services rendered by the basic operations of the
enterprise to the construction project is made upon presentation of
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payment claims or orders with attached invoices. Steam, water, power
and other utilities are paid for at the prices of the planned plant
calculation, which must not exceed. the cost estimate prices, while
transportation services are paid for at the tariff rates prevailing
in the given area.
Payment for construction materials supplied by the basic opera-
tions is also effected upon presentation of payment claims or orders
and invoices based on current price-book prices.
Payment for performed construction work is made at cost estimate
rates upon presentation of acceptance lists, invoices and. payment
orders or claims.
The construction office (capital construction department) has the
right to refuse acceptance or partial acceptance of invoices and pay-
ment claims made out by the basic operations of the enterprise.
It happens sometimes that the basic operations are behind in
their amortization and profit payments and. that at the same time the
construction project owes the basic operations money for services
rendered (water, steam, and so forth). In such cases., the transactions
are best handled on the basis of mutual claims along the lines stated
in Section 5.
5. Single and Periodic Settlements of Mutual Claims
The nature of the economic relationships between the capital
construction department and the basic operations of an enterprise,
between a client and his contractors and among the various economic
accountability subdivisions of the construction and installation
trusts makes it necessary to effect mutual settlements of accounts.
To speed and simplify these transactions and to eliminate (or reduce)
the number of nonpayments, settlements of mutual claims are effected.
Mutual claims may arise between two organizations (for example be-
tween the capital construction department and the basic operations of
an enterprise) and among several organizations (for.example, the special
supply office of a trust, its construction and, installation adminis-
tration, the transportation office, auxiliary enterprises and so forth).
Accounts may be settled in a single transaction or periodically.
Accordingly, the following forms of settlements are distinguished.:
between two economic organizations -- (1) one-time, or single,
settlements and (2) periodic balance settlements;
among several economic organizations (of the same or different
ministries --. (1) one-time, or single, settlements, and (2) the Mutual
Clearing Bureaus.
The simplest form of mutual settlements are the one..-time, or
single, settlements of mutual claims (of two enterprises in the same
branch of the economy or in two different branches).
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One-time, or single, settlements occur in those cases where mutual
payments are episodic and occasional.in nature; periodic settlements of
balances are used, in constant, regularly repeating mutual payments.
In the case of a single settlement of mutual claims of two organi-
zations one payment,--,that of the balance -- is made instead of two.
For example, an enterprise supplied. its capital construction depart-
ment with materials worth 200,000 rubles and. at the same time owes the
construction amortization and profits payments of 160,000 rubles. In
that case, instead .of two payments -- the transfer of 160,000 rubles to
the construction department and the transfer of 200,000 rubles to the
main operations of the plant -.- only the difference of 40,000 rubles is
transferred. to the enterprise, while the remaining 160,000 rubles are
regarded as amortization and. profit payments.
If mutual payments between the capital construction department and
the basic operations of an enterprise (or among clients, contractors
and other Construction organizations) are likely to recur, then the
accounts of the various sides are settled periodically on the basis of
the balance in accordance with agreements that must have the approval
of the appropriate investment bank office. These agreements list the
dates and the manner in which the balances are settled and also deter-
mine which. side will be responsible for the keeping of the balance,
the making of excerpts and the settling of the accounts.
The settlement of balances does not release the investment banks
from their obligations of financial control. Therefore any payment
orders or claims relating to balance settlements must be accompanied
by,the necessary reference documents: a list of the shipped materials
and. equipment with price data, acceptance lists of performed. work, and.
so forth.
In tae settlement of mutual claims between the basic operations
and the construction sectors of an enterprise, the bank must see to it
that no working capital of the enterprise is illegally invested in
capital construction. If the bank uncovers the illegal investment of
working capital in capital construction not envisaged by the plan, the
bank riot only does riot replace the illegally expended funds, but re-
duces the remainder of the cost estimate limit of the construction
project by the amount involved..
Intra-ministry settlements of mutual claims are handled by the
investment banks if the economic organizations of a single ministry
have mutual claims. When the mutual claims are among organizations
of different ministries, a single inter-ministry settlement of 'balances
is effected.
These settlements may be handled on the basis of special govern-
ment decisions. When mutual claims are settled between. ministries (and
sometimes even within a single ministry), the branch banks may be asked.
by their head office to open special settlement accounts. These
accounts are used to pay the claims of the participants in the settle-
ment and.receive the funds transferred, from the accounts of other
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participants in the settlement. To extinguish the credit balance thus
formed., the banks (either locally or at the head office) sometimes grant
short-term loans.
6. The Organization of Settlements through the Mutual Clearing Bureaus
Attached to the Administration of Construction-Installation Trusts.
A major part of the debits and credits of contracting construction
trusts is related. to transactions among their economic accountability
subdivisions. The construction and construction-installation adminis-
trations of trusts, their auxiliary enterprises and special supply
offices have constant economic and accounting lir.tks. Although these
relationships are not always of a mutual nature, there is usually a
series of consecutive claims.
To speed intra-trust settlements, eliminate mutual debits and
credits of subdivisions of trusts and thus simplify transactions with
outside sellers, Prombank in 19+8 organized mutual clearing bureaus
(BVR) attached to the administrations of trusts. All participants in
these bureaus settle their accounts only through such bureaus. Accounts
between participants in these bureaus and outside contractors are han-
dled in the usual manner through the bank.
The members of these bureaus are the economic accountability sub-
divisions of trusts that have their independent balances and clearing
accounts in Prombank or in the State Bank. They includes construction
and construction-installation administrations, auxiliary production
enterprises, special supply offices, transportation offices and so
forth. The bureau members within a trust may also include construction
a d.irastalltation organizations that.pnerform work for the trust and its
a minis r ion on a su con act basi .
Having shipped materials, performed work or rendered services, the
bureau members make out invoices that bypass the bank and are sent
directly to the mutual clearing bureau (the second copy is retained by
the seller and a third copy goes to the purchaser). If the purchaser --
a member of the bureau -- should refuse to honor 'the invoice, the mat-
ter is settled by the head of the trust or his delegate.
Settlements among the members of the mutual clearing bureaus are
handled for the sum-total of all transactions at :intervals subject to
agreement with the Prombank office, but in any case at least once every
five days.
Thus, if the special supply office on the basis of .invoices sent
to the mutual clearing bureau within a period. of five days (the estab-
lished settlement period) is to receive the amount of 800,000 rubles
from the other members, and if that office in turn has to meet claims
totaling 300,000 rubles, it receives the difference of 500,000 rubles
from the bureau.
On the basis of the invoices received during the established period,
the mutual clearing bureau makes out a balance report and submits it
(with the signatures of the head of the trust and the chief accountant)
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to the Prombank office for settlement. The ..report lists. the, .sums and..
the bureau members involved in the settlements. All settlements based
on these reports are handled by the Prombank office within the limits
of the funds available.in a special,mutual clearing bureau account
opened to the trust.
In view, of the fact that the chief. payers within mutual clearing
bureaus are construction-installation administrations whose income
consists chiefly of payments by clients for performed work, each con-
struction-installation administration participating in a mutual clear-
ing bureau must give the bureau of the trust part of the amounts paid
by the clients for the performed work. The magnitude of these amounts
(in percent).is based on a quarterly calculation of income and outlays
that must be approved by the head of~t.he trust for. each construction
and construction-installation administration not later than 10 days
before the'start of the quarter.
In these calculations, the construction-installation administra-
tions list the expected income: for performed work (including work done
in the preceding quarter and excluding work to be done in the last 10
days of the last month of the plan quarter that will be paid for during
the following quarter); from the recovery of debts; from the sale of
above-norm supplies of material resources,.and so forth. The calcula-
tions also list the expected outlays, including those not related to
settlements among bureau members (Section A), such as wages of workers
and. administrative-economic personnel; payment of bills from outside
suppliers; extinction of debts (except debts to the bureau account),
and including (Section B) outlays for settlements within the system,
transportation and other service, the extinction of debts to the bureau
account and. deductions going to superior organs.
The difference between all incomes and the outlays not related
to the mutual clearing bureau is paid. by the construction administra-
tions into the bureau account at the bank out of the amounts received.
from clients in payment for, performed. work. .
For exanrycle, if the calculation of income and outlays of the
construction administration shows expected. income for performed work
of 2,000,000 rubles and other income of.500,000 rubles, or a total of
2,500,000 rubles, and if the expected outlays not related to the
bureau's activities (Section A) are 1,100,000 rubles, then the bureau
should receive 1,400,000 rubles (2,500,000-1,100,000), which means 70
percent. on the basis of performed. work worth 2,000,000 rubles.
Accordingly, in the course of the given quarter, 70 percent of
all income received from clients for performed work is paid into the
bureau account, while the remaining 30 percent goes into the clearing
account of the construction administration. Appropriate instructions
are given in the payment claims and invoices made out by theconstruc
.tion administration. .
Funds received from clients for work performed.. by subcontractors
who are members of the bureau are paid in their entirety into the
bureau account (and, as we will see below, are transferred entirely to
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the account of the-subcontractors at the time of the settlement of the
bureau account).
If invoices presented by construction administrations for performed
work are honored only In part (for reasons of financial control), then
payments into the bureau account and the clearing account of the con-
struction administration are made from the reduced amount in the pro-
portions originally set by the calculation of income and outlays.
The bank branches check on the correctness of all these trans-
actions, in particular: the indicated amounts received for performed
work (using as their basis the approved. working plans); outlays for
wages (using the labor plan data); receipts from debtors and from the
sale of above-norm remainders of material resources and outlays for the
extinction of debts (using bookkeeping and inspection data).
In the case of transactions that require correction, the bank
branch makes its suggestions to the head of the trust. The required
corrections must be made by the trust within a 10-day period.
It may happen that bureau members keep their accounts in different
Prombank or State Bank offices. In those cases, the chief Prombank
branch handling the trust's account informs the other branches of the
percentage of deductions from the income derived from performed work
that is to be allocated to the bureau account. All branch banks that
handle accounts of construction administrations that are members of
the bureau see to it that the administrations fulfill these instruc-
tions.
A change in the established percentage in the course of the quarter
is permitted in extraordinary cases in agreement with the Prombank
branches serving the trust and after the branches verify the justifica-
tion of this change.
As we stated, above, all settlements of the balance report submitted
by the mutual clearing bureau are handled by the bank within the limits
of the available funds in the bureau account. The bureau account may
also be used. (to the extent of 50 percent of the balance in the account)
for extinguishing overdue payments on short-term loans granted by the
bank to the trust (or the special supply office) and for covering the un-
provided part of advances obtained by the trust (of the supply office)
from its clients, if these amounts cannot be recovered from the regular
clearing accounts of the trust, the supply office and the construction
administrations,. The bureau account is also used to transfer to the
bank the trust's share (amortization, profits and so forth) of the funds
allocated. to capital investments and capital repairs (amortization).
If the balance available in the bureau account is sufficient to
cover all claims by its members on the basis of the balance report and
the bank's claims for overdue loans and unprovided advances, then the
amounts due the various members of the mutual clearing bureau are fully
transferred to their accounts. In those cases where the balance in the
bureau account is insufficient to meet all the claims, the claims are
met in the following order of priority: overdue loans to the bank and
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the unprovided part of an advance (stall within the, limit of 50 percent
of the available balance)t then the claims of subcontractors, and the
remainder is then distributed among the other bureau members in propor-
tion to the amounts due to them. If the trust instructs the bank to pay
the: bureau members funds for immediate needs, then such funds are paid
in their entirety out of the bureau fund within the. limits: of 5 percent
of the balance in the fund. Let us now illustrate the preceding in the
following example.
The balance in the bureau account at the time a settlement is
due is 2,800,000 rubles. The bureau members according to the balance
report are supposed to receive 2?,400,000 rubles, of which the supply
office 1,400,000 the woodworking combine 500,000, the transportation
office 100,000 and subcontractors 400,000 rubles. Overdue payments on
bank loans amount to 300,000 rubles and the unprovided part of an ad-
vance 400,000 rubles. The trust gives the bank the instruction of pay-
ing.140,000 rubles to bureau members for their immediate needs, includ-
ing 90,000 to the supply office and 50,000 rubles to the woodworking
combine.
Since in this case the balance available in the bureau account is
insufficient to meet all claims, the settlement proceeds as follows:
Not. more than 50 percent of the balance, i.e. 1,400,000 rubles,
may be used to extinguish overdue loan payments and unprovided advances.
Since these two items in the given case amount to only 700,000 rubles,
they can be fully met. If these two items exceed 50 percent of the
balance, then overdue payments on bank loans are met first. The remain-
ing amount of 2,100,000 rubles (2,800,000-700,000) Is used. first of all,
to meet the claims of subcontractors (400,000 rubles) and immediate
needs (140,000). The remainder of 1,560,000 (2,100,000-400,000-140,000)
must be applied to the amounts due to the other bureau members (outside
of the contractors), or 2,000,000 rubles, i.e. in the ratio of 78 per-
cent. The transfers to the accounts of bureau members are then as
follows:
to the supply office 1'4000000 x 78 = 1,092,000 / 90,000 for
immediate.need.s;
to the woodworking combine 500,00000 x 78 = 390,000 / 50,000 for
immediate needs;
to the transportation office 100100000 x 78 = 78,000.
The branches of.Prombank check periodically on the spot whether
the invoices submitted to the mutual clearing bureau are correct,
whether they are made out on time, on the calculation of mutual settle-
ments, on agreement between the balance reports submitted to the bank
and the bookkeeping records of the bureau, and. take measures to elimi-
nate any uncovered shortcomings. It is advised the State Bank exper-
ience be used. when members of the mutual clearing bureaus must be
granted temporary clearing credits.
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7. Organization of Transactions and the Strengthening, of Payments Dis-
cipline of Contracting Construction. Organizations and. Projects
The planned system of the Socialist economy creates the best condi-
tions for organizing transactions and makes it possible to insure the
required payments discipline. Soviet economic organizations, including
contracting construction organizations and projects, are able to meet
their obligations to banks, suppliers and so forth in their entirety
and on time when they fulfill the quantitative and qualitative indicat-
ors of the established plans.
The national struggle for the achievement of profits above plan
and for the speedier turnover of funds that has become widespread in
recent years insures the settlement of accounts not only on time, but
in a number of cases even before the due date.
These early payments effected. by leading enterprises throughout
the nation deserve general support and encouragement since they are
instrumental in providing a speedier turnover of funds in the economy
and in freeing funds for the additional output of production. At the
same time, however, individual economic organizations still are guilty
of failure to make payments, a failure that can be ascribed to infrac-
tions of the payments discipline.
The banks must endeavor to organize transactions in the most
rapid and accurate way possible so as to eliminate or reduce as much
as possible any d.ebits and credits. This aim is supported by the system
of settling accounts on the mutual claims principle, which should be
further expanded. But this is not sufficient to end failure to make
payments.
The investment banks are able to determine the reasons why debts
to suppliers arise for performed work and. are able to take measures
designed. to reestablish the purchasers' ability to meet payment obliga-
tions. For example, failure on the part of contractors to pay for
deliveries on time often results because the contractors themselves
have not been paid for performed work by the clients, and that in turn
may be the result of overdue documentation of the performed work or
the overdue presentation of bills. Failure on the part of the con-
struction projects to make payments may arise in the fact that the
enterprises have failed to contribute their own funds to construction
as provided by plan. It often happens that failure on the part of both
construction projects and. contractors to make payments results from the
diversion of funds into above-plan reserves of material resources and
the extinction of debts. Failure to make payments may result from a
general lack of funds on the part of contractors, the existence of
financial losses and so forth; improper distribution of the working
capital among contractors may also be one of the causes of failure to
make payments.
The careful and. systematic study of the payment schedule of pro-
jects and contractors and the taking of necessary measures to insure
the timely settling of accounts are major tasks of bank operations.
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The investment banks are not only executors and organizers of
accounts in construction, but also state controllers of these accounts.
The. construction projects settle their accounts for performed. work and,
for the delivery of materials (if construction is.hand.led by the so-
called economic method) from funds provided by the banks in the nature
of nonreturnable. investment financing or long-term credit. The contract-
ors, on the other hand, settle their accounts with s1upplierslargely
from funds received from their clients in the form of advances or in
the form of payment for performed work and also with the aid of short-
term bank credits. The investment banks are therefore charged with
careful and'systematic control of the transactions of projects and
contractors and.must take measures designed to prevent failure to
make payments. This in turn requires familiarity with all financial
and economic operations of the projects and the contracting organiza-
tions.
payments discipline can be strengthened and,failure to make pay-
ments can be prevented or eliminated by the banks if they see to it
that, projects are provided with the required designs and estimates
dossier; enterprises, trusts and. main administrations pay their own.
funds allocated to capital investments on time as provided. by plan;
material reserves of projects and contractors are in good condition;
.completed construction and installation work is properly-documented.
on time; financial work is being properly handled by. projects and con-
tractors; financial and cost estimate discipline is being observed;
uneconomical operations are eliminated, the work of the investment
banks themselves is:-accurately organized and the best forms of trans-
actions are being used.
Investment banks can further speed. transactions by granting ad-
ditional short-term credits on favorable terms to projects and con-
tractors who have fulfilled. their volume and cost plans and have well.,
organized their finances. On the other hand, if projects are found to
mismanage their finances, the investment banks are in a position to
apply financial sanctions, i.e. they stop the financing of the pro-
jects. In this case it is up to the banks to take measures designed
to eliminate the mismanagement and to resume financing and re-establish
the projects' ability to meet obligations. (Payments for the delivery
of equipment do not cease even when financial sanctions for mismanage-
ment are being applied).
The payment documents presented to the bank for payment are kept
in special files, analysis of which can also help in working out the
measures necessary to eliminate failure to make payments. At the
present time, Prombank keeps three such files: one for payment docu-
ments that are still not due, a second for all overdue payment docu-
ments that have acquired the force of executive documents, as well as
all executive, legal and arbitration orders, a third. for documents
that have not been paid because of infractions of financial control
requirements (absence of cost estimates or exhaustion of the cost
estimate limit and so forth).
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THE WORKING CAPITAL OF CONTRACTING CONSTRUCTION-INSTALLATION ORGANIZATIONS
AND CONSTRUCTION PROJECTS
1. Structure of the Working Assets of Contracting Organizations
As we have stated previously, construction can be carried out by
the contracting or the economic method, or a mixed method. To carry
out their work, contractors and construction projects therefore need
both fixed and working capital. The working capital of contracting
organizations consists of the value of the working capital (basic and
other materials, prefabricated construction parts and subassemblies,
and. so forth) and the circulating capital (monetary funds and funds in
accounts). .
In a Socialist economy, the movement of material funds and. the
magnitude of the necessary reserves are set by plan, which is based on
a study and generalization of the work of the best enterprises with due
attention given to the special aspects of the circulation of funds in
various branches of the national economy.
The organization and sources of the working capital of contract-
ing organizations and projects differ. In the first place, contracting
organizations are permanently operating enterprises with an uninter-
rupted process of production, while construction projects operating by
the so-called economic method. limit their process of production to the
work to be done on a certain construction site. Secondly, the produc-
tive functions of contracting organizations are limited to the per-
formance of construction and installation work, while construction
projects engage in an entire complex of capital work, including in
addition to construction and installation work also the acquisition
of equipment, geological exploration and other operations. We will
therefore examine separately the organization of the working capital of
contracting organizations and construction projects.
The organization and structure of working (as well as of fixed.)
capital in the construction industry (contracting construction and in-
stallation organizations) are dictated. by the technical and economic
aspects of this branch of material production. The production of the
construction industry is as a rule not of the mass-production type
that is concentrated in a certain place; its production sites keep
changing and-the production process itself, even with the development
of speed-up methods, is relatively prolonged.
The absence of a fixed production site requires special mobility
of the means of production, which should be designed for rapid adjust-
ment to new working conditions in new production sites. For example,
tow-thirds of the fixed capital of construction-installation trusts
consists of construction machinery and means of transportation, i.e.
mobile capital. The fixed capital of the construction industry, like
that of other branches of the economy, keeps growing rapidly from year
to year. However, the ration of fixed to working capital in the con-
struction industry varies from that in other branches of the economy.
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While in the industry of the USSR as a whole, fixed. capital makes up
about 75 percent and. working capital 25 percent, in the construction
industry fixed capital in spite of its steady growth makes up only
4+0-50 percent.
The advantages of the Socialist economic system make it possible
to carry out the production process with a minimum of working capital.
The organization of the working capital of contracting organiza-
tions varies from that in industrial enterprises in that it is reflected.
both in the structure of the assets and. in the make-up of the financial
sources of the. construction organizations.
Industrial enterprises must insure a continuous production process
and use the funds allocated to them by the state to create the neces-
sary reserves of raw materials and. supplies. Although these reserves
do not enter directly in the production process, they are a necessary
prerequisite and form.part,of the production sphere of operations.
Subsequently the acquired raw materials and. supplies do enter in the
production process, which results in finished output that is then avail-
able for sale; with the funds realized from this sale, more supplies are
acq uired. and. the working capital.thus completed its full circuit.
The circuit of the funds of contracting construction organizations
is quite different. The contracting organizations, like the industrial
enterprises, use the funds allocated. to them for the purchase of the
necessary supplies. Then the supplies enter in the production process.
As construction items are completed, the client pays the contractor for
the completed work. The funds thus obtained are used. by the contractor
for the purchase of more materials.
The working assets of industrial enterprises can be divided, into
the following groups: (1) productive reserves; (2) funds involved
directly in the production process (incompleted production); (3) fin-
ished products; (4) money and account items. The first three groups
are standardized, while the money and account items are not standardized..
The structure of the standardized assets of the contracting.con-
struction organizations varies somewhat from the foregoing. These
organizations lack altogether one of the group of assets of the indus-
trial enterprises, namely the finished products. Instead., standard.iza-
tion prevails among the contracting organizations with respect to the
remainder of money funds (including the balance in clearing accounts
and. letters of credit) and the funds in statements of performed work.
Standardization of these items is explained by the existing system of
billing for performed work (every 10 days) and especially by the fact
that in contrast to industrial enterprises contracting organizations
do not receive any special short-term credits for the making of let-
ters of credits and special accounts or for their transactions with
their clients.
The standardized assets of contracting construction organizations
can be grouped. as follows:
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1. Basic materials
2. Other materials, including fuel and fodder
3. Low-value and rapidly depreciating items
4. Prefabricated construction parts and subassemblies
5. Reserves of auxiliary agriculture
II. Incompleted Production
1. In construction-installation work
2. In auxiliary enterprises that do not carry their separate
accounts
1. Cash, clearing accounts and. other monetary items
2. Letters of credit and special accounts
3. Outlays subject to distribution
4+. Accounts receivable for performed work
The relative data on the structure of standardized assets of con-
tracting construction organizations anc: other branches of industry, in
particular, the machine-building industry, are given below (as of 1
January 19+0) (See Sovetskiye finansy foviet Finances], No 4, 1948,
page ll+) :
Productive
Industry Reserves
Incompleted
Production
Finished
Production
Other
Standardized
Assets
Total
General Machine
Building
46.8
33.9
11.5
7.8
100
Heavy Machine
Building
1+0.0
14.0
11.9
4.1
100
People's Com-
misariat of
Construction
57.7
1+.0
--
38.3
100
These data show that in the machine-building; industry standardized.
assets consist chiefly of goods and materials, while in the. construction
industry goods and resources make up less than two-thirds, with more
than one-third consisting of other standardized. assets. The low share
of incompleted production in the construction industry is due to the
existing system of billing for performed work by completed parts of
construction items.
The chief role in the structure of standardized, assets of contract-
ing construction organizations is played by productive reserves and.
accounts receivable from clients for performed work, both of which make
up 70-80 percent of all standardized. assets.
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It should be borne in mind that the smaller the remainder of work-
ing capital the speedier is the turnover of funds and, the greater is
the volume of work that can be accomplished, with the available capital.
2. Method of Standardizing the Working Assets of Contracting Organiza-
tions
The task of speeding-the turnover of funds calls for constant im-
provement in the practice of standardizing both individual elements of
the working capital and the total amount of working capital.
The norms of working assets for contracting organizations are
generally established. in percent of the value of the construction-
installation work to be performed.
Norms for productive reserves are calculated in percent of the
annual program and depend chiefly on previously reported data; in a case
of major changes in the expected. work plan, the necessary corrections
are made in these data.
Norms for basic materials are calculated in percent: of the annual
work plan on the basis of, first, the share of these stated materials
in the value of the annual volume of construction-installation work
and, second, the required. reserve of these materials in terms of days.
The share of the materials in the total volume of work depends
chiefly on the structure of the planned work. For example, for the ful-
fillment of earth-moving operations, the need, for materials is very
limited -- not more than 10-15 percent (chiefly in the form of timber
supports). On the other hand, for the fulfillment of reinforced. con-
crete work, the share of materials may amount to 70-75 percent.
A major factor affecting the magnitude of the required material
reserves is the method adopted in the construction work. For example,
in the speed-up method a number of operations are performed simultan-
eously and a large range of reserve materials is required for a rela-
tively short time.
Of major importance in determining the magnitude of the reserves
( in days) necessary to insure the uninterrupted work of contracting
organizations are the frequency and the regularity with which materials
are delivered and. the conditions of their manufacture and. transporta-
tion. If, say, by the terms of the contract cement arrives only once a
month, then the required reserves should. amount to 30 days. In the
calculation of the norms (in days) necessary to insure uninterrupted
production, account must also be taken of the length of time materials
are en route (from the time they are paid for until they arrive) and
of the emergency reserve. Thus, if the interval between deliveries is
30 days, and the length of time the materials are en route (after pay-
ment) is 5 days and the emergency reserve is for 3.d.ays, then the total
reserve in days should. be 38 days. When necessary, this reserve can be
enlarged by adding the number of days required to prepare the material
for use (for example, the assembling of prefabricated parts).
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Since the conditions of delivery and other factors affecting'the
magnitude of the norms vary for different materials, norms must be cal-
culated for each material or for each group of materials. This is also
advisable because some of the materials are being produced in auxiliary
enterprises and are delivered to the construction site on a daily basis
and need virtually not be accumulated in reserves.
According to data reported by the contracting organizations, the
share of materials in the total value of performed construction-instal-
lation work is 50-60 percent and the average material reserves 50-60
days.
Let us illustrate how the norms for individual elements of the work-
ing assets are calculated.
Let us assume that the annual program of the contracting organiza-
tion involves 7,000,000 rubles worth of construction-installation work,
of which 60 percent is made up of the cost of materials (without pre-
fabricated, construction parts).
In this case, the 50-day reserve norm of basic materials would be:
7,000,000 x 600X 50 = 583,300 rubles or 8.3 percent of the work
100 x 360
If the share of basic materials in the total annual work program
were 30 percent instead of 50 percent lprobably misprint for 60 per-
cent], which can happen for example in the case of large earth-moving
operations, then the norm would be;
7,000,000 x 30 x 50 = 291,700 rubles or 1+.2 percent of the
loo x 36o
annual program.
The norm for fuel, fodder and other materials is calculated as
22-27 percent of the value of the reserve norm of basic materials.
Thus, in our example, if the basic materials norm is 583,300 rubles,
the norm for other materials (taking 24.7 percent) would be:
583,300 x 24.7 = 144 000 rubles or 2.1 percent of the annual
100
volume of construction-installation work.
A major part of the total material reserves of contracting organ-
izations is taken up by low-value and. rapidly depreciating items, such
as special clothing and tools, and production and domestic utensils.
The reserves of these items vary from one contractor to another.
Reserves of tools and production utensils are usually greater in in-
stallation organizations than in general construction organizations.
As for domestic utensils, their reserves are generally greater in
general construction organizations and depend on the number of beds
in dormitories. The reserves of special clothing depend on the nature
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of the work to be performed..
The norm of a given item can be calculated, most accurately..by
using the value of a set of items (special clothing, tools) per worker,
and the rate of depreciation. Reserves of low-value and rapidly de-
preciating items make up an average of 3-4 percent of the annual pro-
gram of construction-installation work.
In our example, the norm for low-value and rapidly depreciating
items would be:
7,000,000 x 4 = 280,000 rubles.
100
As far as prefabricated construction parts and. subassemblies are
concerned, their norms are usually calculated for three months' use
and payment to-the suppliers is effected within those limits.
If the share of prefabricated parts in the total volume of con-
struction-installation work is 10 percent, then their normal three-
month reserve would be 2.5 percent of the annual work program, or in
our example:
7,000,000 x 2.5 = 175,000 rubles.
100
Industrialization of the construction business requires the maxi-
mum use of prefabricated parts and subassemblies, which in turn raises
the amount of assembly and. installation work on the construction site.
In that case the share of the reserves of prefabricated parts would
increase at the expense of the reserves of materials.
The magnitude of the norm for incompleted construction and in-
stallation work depends directly on.the method of delivering the com-
pleted. work to the client and effecting the accounts. At the present
time, the contractors deliver to the client completed parts of con-
struction items. It follows that the larger the construction items,
the greater would be the share of incompleted production, all other
things being equal. It also follows that if accounts cover entire
construction items (rather than their component parts), the incompleted
production share would. be even greater.
It must be remembered. that although completed parts of construc-
tion items are being delivered to the. client they still do not con-
tribute an increase to the fixed. capital of the national economy.
These completed parts of construction items upon delivery to the client
are regarded by the latter as incompleted. capital investments. Only
after the construction of an entire item (say, a workshop) has been
completed., is it put into operation and. is it added to the fixed capi-
tal of the enterprise. Therefore, a reduction of the length of con-
struction time of items as a whole is of tremendous economic importance.
, Items that are completed, in less than three months are delivered.
by the contractors to the clients only upon their full completion and
.therefore completed parts of such items are still included. in incom-
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pleted production.
The magnitude of incompleted production depends on the make-up of
the construction items to be completed and the length of construction
time on each item. The length of construction time in turn depends on
the quantity and. degree of complexity of the construction operations.
If, for example, the annual volume of construction-installation
work is 10,000,000 rubles and the length of time required for the com-
pletion of all work on the construction items is six days, then the
norm for incompleted construction would be:
10,000,000 x 6 = 166 600 rubles, or 1.6 percent (approximately)
360
of the annual volume of construction-installation work (Because of the
small magnitude of the remainder of the incompleted production there is
actually no need to take account of the gradual growth of losses).
However, generally the norms for incompleted production are calcu-
lated. on the basis of the preceding period.
Let us assume that during the preceding period. the average remainder
of incompleted.production (on the basis of the balances on the lst of
each month) was 180,000 rubles and the average monthly volume of con-
struction and installation work was 900.000 rubles. Therefore, the
average daily volume of completed construction and. installation work
during the preceding period was:
09 0,000 = 30,000 rubles.
30
But since the average remainder of incompleted. production was
180,000 rubles, the average length of construction time was:
180,000 rubles = 6 days.
30,000 rubles
If the structure of the expected work program during the coming
year remains substantially unchanged, then these data can be used in
calculating the norm for the following year. In our example, the norm
would be:
7,000,000 x 6 = 116,700 rubles, or 1.6 percent of the annual work
360
program.
It should be borne in mind that the actual remainder of incompleted
production in construction and installation work varies from 0.5 to 2
percent.
As far as the norm for the incompleted production of auxiliary
enterprises (that do not keep their own accounts) is concerned, and
the norm for reserves of any auxiliary agriculture (if the latter does
not form part of the workers' supply department), these are based, on
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the actual working conditions of theso enterprises and on their programs.
The norms for. the.incompleted production of auxiliary enterprises
are set at 15 percent of their. annual production program.
Norms for outlays subject to distribution are set on the basis
of reported. data at 0.3-0.5 percent of the annual volume of construc-
tion and. installation work. These outlays consist chiefly of expenses
for the construction of temporary installations that are used until
the completion of construction and also of expenses involved. in hiring
workers.
As we said. above, the practice of planning the working assets of
contracting construction organizations also envisages norms for money
funds (including letters of credit and. special accounts). This norm
is set at. one percent of the annual volume of construction and instal-
lation work.
The standardized ..working assets of contracting construction organi-
zations also include accounts receivable from clients for completed.
work. These accounts are settled every 10 days. Accordingly this norm
is set in the amount due to the contracting organization for work com-
pleted in the course of 10 days, i.e. 136 of the annual volume of con-
struction and installation work, or 2.8 percent. In our example,
where the annual program of construction and. installation work amounts
to 7,000,000 rubles, the norm for accounts receivable from the clients.
would be:
7,000,000 x 2.8 = 196,000 rubles.
100
Thus, the total norm of working assets in our example, taking the
annual work program to be 7 million rubles, would be:
In thousands of
In percent
rubles
Basic materials
8.3
583.3
Other materials
2.1
111+.0
Low-value and. rapidly depreciating items
1+.0
280.0
Construction parts and. subassemblies
2.5
175.0
Incompleted production on construction
and. installation work
1.6
116.7
Money funds
1.0
70.0
Outlays subject to distribution
0.5
35.0
Accounts receivable from clients for
completed. work
2.8
196.0
22.8
1,600.0
If there are auxiliary enterprises and reserves of auxiliary.
agriculture,. the appropriate amounts are also added. If, say, the
capital requirements for that purpose. are 15,000 rubles, then the total
norm would. be 1,615,000 rubles.
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Both for the contracting organization as a whole and for indivi-
dual items, the norm is calculated in percent of the annual work program,
i.e. on the basis of even working capital requirements throughout the
year. In those cases, where because of the seasonal increase of work
or the need for seasonal purchases of certain types of materials,
material reserves in excess of the norms must be created., the contract-
ing organizations are granted short-term credits for that purpose.
3. Financing Sources of the Standardized Working `Assets of Contracting
Construction and. Installation Or ?arLizations
In contrast to other branches of industry where the financing
sources of standardized assets are only the working capital and stable
liabilities (in the machine-building industry also short-term bank
credits), the contracting organizations dispose of the following sources;
(1) their own working capital; (2) the so-called stable liabilities,
which are tantamount to their own. funds; (3) advances obtained from
clients; (4+) funds obtained from clients for the payment of prefabri-
cated parts and subassemblies (to the extent of three months' need).
With a view to introducing economic accountability into the work
of the construction organizations and strengthening state control over
the fulfillment of their plans, the government decided in 1933 that
the working capital of these organizations would consist of their own
funds and of advances obtained from clients. It also set the magnitude
of these funds and their special purpose. Although subsequent govern-
ment decisions changed the magnitude of the working capital and. the
advances, the principle that the working capital of the contracting
organizations be made up of their own funds and of advances received
from clients has remained in effect to the present time.
Why does the organization of the working capital of the contract-
ing organizations differ to such an extent from that of the other
branches of industry? It is because contracting organizations work
only for definite clients, who are charged with the control over the
fulfillment of the work that they have ordered.. In view of the length
of the production process and the need for strengthening control on
the part of the client, the government decided on this method of or-
ganizing the working capital of the contracting organizations, which
in effect played. a major role at the time when the construction in-
dustry was set up as an independent branch of industry.
Existing directives of the Ministry of Finance USSR envisage the
advances of clients as designed for the creation of standardized re-
serves of basic materials and. incompleted production of construction
and installation work. In practice, therefore, the norms of these
items are set at the time the amount of the advance is agreed on in the
contract. Funds submitted. by the clients for the payment of prefabri-
cated parts are used by the contractors to cover their outlays in
accumulating reserves of these items. All other standardized assets
are covered from the funds and the so-called stable liabilities of the
contracting organizations themselves.
The following shares of their own working capital contributions
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were set up in 1936 for contracting construction organizations: for in-
dustrial construction organizations working on a single construction
site -"- 10.3 percent of the annual produ'btion program, and for those
working on several construction sites -- 11.7 percent; for residential
construction trusts --- 11.3; for spec 4'lized and. installation trusts --
14 percent In connection with the`.re`calculation of all construction-
installation work (as well as-of 4.% capital work) in 19+5 prices, the
percentages listed above were re;"bQ'd by 12-15 percent as of 1 January
19+6.,.,,
This working capital'(which includes the so-called stable liabili-
ties) is used to cover the remainder of the following standardized asset
items: other materials; low-value and rapidly depreciating items; money
funds; outlays to be distributed; accounts receivable from clients for
performed work; reserves of agriculture and the remainder of incompleted
production in auxiliary enterprises that do not keep their own accounts.
The stable liabilities, i.e. funds that can be"used legally by the
contracting construction organizations on a steady basis, includes
carry-over wage indebtedness to workers and employes, calculated
(in accordance with the established wage pay periods) in terms of a 7-
day wage bill;
carry-over indebtedness with regard to deductions for social
security in terms of the established deduction percentage (5-6 percent)
of the 7-day wage bill;
a reserve of impending payments, largely for holidays of workers
and. employes, calculated. on the basis of previously reported data and
corrected for changes in the wage bill;
accounts payable to suppliers on accepted invoices in terms of 25
percent of the total debt (the rest must be taken into account in the
calculation of the advance and the determination of the amount of credit).
Thus, if the wage bill of a contracting organization with an annual
work program of 7,000,000 rubles is 500,000 rubles in the fourth quarter
and the volume of. inter-city deliveries of materials for the entire year
is 1,500,000 rubles, the stable liabilities would be:
Carry-over wage indebtedness
Deductions for social securi"-
ty
Reserve of impending payments
(based on data reported for
the past year with correc-
tions for changes in the
wage bill)
500,0
0
x 7 =
38
900 rubles
0
0
,
38,900 x 6
_
2,300
100
17,000
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Accounts payable to suppliers 22,100 x 25 7,200
(1,500,000 x 7 = 29,100) 100
366-
0 Total 65,400 rubles
As we stated above, advances furnished by the clients (their
limit was set by the government in 1938 at 15 percent of the annual
contracted volume of construction-installation work) are used to
cover the standardized reserves of basic materials and the incom-
pleted construction and installation work. (In those cases where the
contractors complete construction items within less than three months
and receive from the clients partial payment (up to 90 percent of the
cost of the work) without making delivery, the amount received from
the clients on intervening bills must be deducted from that part of
the advance which is allocated to incompleted production).
Thus, the financing sources used to cover a contracting organiza-
tion with working assets totaling 1.,615,000 rubles would be:
Own working capital
671+,600 rubles or 9.6 percent of the
annual program
Stable liabilities
65,400
0.9
Clients' advances
Clients' funds for
700,000
10.
the acquisition of
a three-month reserve
of prefabricated
items 175,000 2.5
1,615,000 23.0 percent
The available working capital can be properly distributed among
the various construction organizations since ministries and main ad-
ministrations have the right to redistribute these funds among the
trusts. Thus, main administrations have the right to instruct the
banks to debit the clearing accounts of organizations under their
jurisdictions. Ministers have the right to redistribute excess work-
ing capital among the organizations under their jurisdiction, both at
the end and in the middle of the year.
If the working capital at the disposal of a contracting organiza-
tion at the start of the year is less than the required amount (in our
example 674,600 rubles), then it must be replenished at the expense of
the profits of the plan year, and if that should be insufficient, at
the expense of the funds of the main administration or the budget. If
the working capital available at the start of the year exceeds the
stated amount, the excess amount is returned to the budget (or may be
redistributed by the main administration). The required changes in
the amount of own working capital and stable liabilities of construc-
tion organizations are also reflected in their balances of outlays and
income.
The contracting construction organizations are fully responsible
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for maintaining and replenishing the fixed and working capital: granted
to them by the state.
4. Calculation of the Turnover Rate of Funds of Contracting Organiza-
tions
One of the key indicators.of the work of construction organiza-
tions and. other industrial enterprises is the turnover rate of funds.
The turnover rate is calculated in days and is the time in which the
total working capital completes.one circuit. A high turnover rate
means a greater volume of construction-installation work per ruble of
working capital, An increase in the rate releases funds for greater
rates for Socialist reproduction.
Indicators of the turnover rate of construction organizations are
calculated on the basis of the cost of the construction-installation
work delivered to and. accepted by the clients and the actual remainder
of working capital in the reported balances. The state budget for 1950
envisaged an increase in. the turnover rate of working capital in the
national economy by 3.3 percent. Control over the observance on the
part of the contracting organizations of the established turnover rate
norms and. their acceleration is one of the key tasks of the investment
banks.
The turnover rate is calculated both for the assets of contract-
ing organizations as a whole and for the standardized assets separately.
The makeup of standardized assets of contracting organizations (and the
method. of calculating their norms) have been discussed above. The non-
standardized assets include overdue accounts receivable from clients
for performed. work and. other debts. Nonstandardized assets also. include:
excess amortization payments to the bank; outlays for capital repairs and
own capital investments made over and above the available financing
sources; an increase in the indebtedness of workers and employes on
loans for.ind.ividual.residential construction and other needs over and.
above loans obtained from the special banks for that purpose; over-
expenditures from special funds and other special sources; losses suf-
fered outside of the plan.
The turnover rate in days is the ratio of the average remainder
of working capital for a given period to a day's turnover of work to
the clients. The turnover rate is calculated by means of the following
formula: W AR x D .
ARo D , or W
where
AR is the average remainder of working capital (assets);
W is the cost of the work delivered to and accepted by the client;
D is the number of days in the given period -- 90 for a quarter or
360 for a year.
Thus, if the cost of all construction-installation work (W) delivered
to and. accepted by the client in the course of a year is 3,600,000 rubles
and. the average remainder (AR) of working capital (assets) was 900,000
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rubles throughout the year, the turnover rate of funds would be:
900,000 rubles x 360 days Z 90 days.
3,600,000 rubles
The number of circuits performed by the funds in the course of a
year (in our case 4) is called the turnover rate coefficient.
Actual average remainders of working capital. are calculated; for
a month -- by adding the remainders at the start and at the end of
the months and dividing by two; for a quarter -- by adding the three
average monthly remainders and. dividing by three; for a year -- by
adding the four average quarterly remainders and dividing by four.
For example, the working capital remainders were: as of 1 January
200,000 rubles, as of 1 February 210,000 rubles, as of 1 March 250,000,
and as of 1 April 230,000 rubles.
In this case the average monthly remainders are (in thousands of
rubles):
for January
200
240 =
220
2
for February
240
{
250 =
>1~5
2
for March
250
230 =
'?IL
2
The average quarter remainder for the first quarter would be:
220 / 21+5 / 240 = 235, 000 rubles.
3
If the average quarterly remainders, similarly calculated., are 265,000
rubles for the second quarter, 2115,000 rubles for the third. quarter and.
255,000 rubles for the fourth quarter, then the average annual remainder
would be (in thousands of rubles):
235 / 265 / 21+5 / 255 = 250,000 rubles.
4
It should be borne in mind. that in industry, where money funds are
not standardized, the funds remaining the clearing accounts are not in-
cluded, in the actual remainders of working assets. Therefore, in calcu-
lating the turnover rate of all funds of contracting organizations, the
amounts in clearing accounts must be neglected altogether. These amounts
are included within the limits of the norms only in the calculation of
the turnover rate of the standardized assets (in comparison with the plan).
The funds remaining in a special account based on advances must be
neglected altogether.
In any analysis of the turnover rate of funds of a contracting or-
ganization for a given period (a month, a quarter or a year), the turn-
over rate must be compared with the indicators of the preceding period
and the corresponding period of the preceding year, as well as with the
planned indicators.
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An actual turnover rate is compared with a planned rate only with
respect to standardized assets. When such a comparison is made for
contracting organizations that have a seasonal accumulation of construc-
tion materials, fodder and fuel. The planned norms must be increased
by the seasonal reserves within the limits of the remainders of loans
actually granted. by the special banks for that purpose. Nonseasonal
remainders of materials in excess of the norm, even though credited by
the bank (in the form of guaranteed credit, at the expense of loans
granted for less.than a quarter, and so forth) are not added to the norms.
The average planned remainders of standardized assets are calcu-
lated on the basis of the norms and the seasonal reserves in the
amounts stated above., for a quarter - by adding the remainders at the
start and the end of the quarter and dividing by two, and for a year
by adding the average quarterly norms and the seasonal reserves and
dividing by four. .
An increase in the turnover rate of the working capital of con-
struction organizations results in the release of this capital. If
we want to calculate the funds released as the result of an increase in
the turnover rate for a given period. (say, a quarter), we must calculate
the working capital required. for the fulfillment of the actual volume
of work delivered to and accepted by the clients in the given period on
the basis of the turnover rate in days during the preceding period and
compare these data with the actual working capital (assets) available.
Thus, if the volume of work delivered to and accepted by the
clients was 1,200,000 rubles in the first quarter and 1,800,000 rubles
in the second quarter, and..the average remainders of working capital
during the first quarter 1,000,000 rubles and during the second quarter
1,300;000 rubles, then the funds released in the course of the second
quarter amount to 200,000 rubles, as follows:
Turnover rate during the first quarter
g0 days x 1,000,000 rubles , 75 days.
1,200,000 rubles
Working capital required for the fulfillment of the second quarter-
ly plan, based on the actual turnover rate in the first quarter.
1,800,000 rubles x 75 = 1 500,000 rubles
9o
Amount of released.fund.s.
1,500'000 - 1,300,000 = 200,000 rubles.
This result can also be obtained in another way.,
The actual turnover rate during the second. quarter was.-
90 days x 1,3009000 = 65 days. The turnover rate during the
1,800,000
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second quarter is therefore 10 days shorter than during the first
quarter, which for an average daily turnover of 20,000 rubles (1,800,000)
90
yields 200,000 :rubles.
That is how the actual turnover rate is compared with the planned
Study of the changes in the indicators of the turnover rate for a
number of periods and correlation of these indicators among a number
of construction organizations may make it possible to uncover the
reasons for a slow turnover rate in some organizations and suggest
measures designed to speed up the rate.
The data presented at the start of this chapter on the structure of
the working assets of contracting construction organizations show that
the most important working assets after reserve materials are other
standardized assets, in particular, accounts receivable from clients for
performed work. An increase in the turnover rate of funds invested in
material resources and current transactions is the most important and
immediate task of the construction organizations. The investments banks
should adopt all measures required to achieve a maximum speed-up of
transactions, in particular the wider utilization of mutual clearing
bureau transactions.
It should. be rioted that leading groups of builders have made
pledges to speed up the turnover rate and thus release additional funds.
The investment banks face the task of assisting in every way possible
in the fulfillment of these pledges and of uncovering additional ways
of speeding the turnover rate. In addition, the 'banks should take all
financial sanctions envisaged by the plan toward contracting organiza-
tions guilty of overstocking, of excessive indebtedness and. other in-
fractions that tend. to slow the turnover rate of funds.
7. The Working Assets of Construction Projects
In conducting construction-installation work by the so-called
economic method, the construction projects, like the contracting or-
ganizations, must dispose in addition to their fixed capital (con-
struction machinery, transportation and so forth) of working capital
(minimum reserves of basic and other materials, prefabricated construc-
tion parts and so forth. Any calculation of the required amount of
such reserves must be based on the norms of the contracting organiza-
tions and on the special. aspects of financing construction work by the
economic method.
If construction-installation work is carried out by the economic
method, the projects are financed either on the basis of individual
outlays or on the basis of completed work, i.e. on the same basis as
the contracting organizations. If individual outlays are financed,
then the projects are paid for the acquisition of materials, the wage
bill, and so forth, directly from the financing fund made up of appro-
priations allocated to construction.. In that case), the project has no
remainders of incompleted construction and installation work and no
clearing accounts, and the standardized remainders of money funds in-
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elude only funds in letters of credit and in special accounts. Conse-
q uently, the total amount of minimum working assets must be smaller
than in contracting organizations performing the same volume of work.
Projects using the economic method need far smaller reserves of
low-value and rapidly depreciating items than contracting organiza-
tions, since they do not operate on a permanent basis.
Projects operating by the economic methods and. financed on the
basis of completed work handle their accounts in the same manner as
the contractors (i.e. for completed. parts of construction items) by
having the corresponding amounts transferred. from the financing account
to'theclearing account of the chief of construction (or of the capital
construction department). Therefore the minimum remainders of incom-
pleted production and money funds of such projects correspond. to those
of the contracting organizations.
When projects are financed on the basis of completed work, the
funds in accounts receivable for completed work exceed the correspond-
ing'funds in contracting organizations. This is due to the fact that
such accounts are settled once a month, rather than every 10 days, and
that the accounts are payable to the construction project (or the capital)
construction department) by the enterprise, which is accumulating an
equivalent debt. Consequently, in the project as a whole no demand,
arises for funds to cover accounts receivable for completed. work. In
addition, projects using the economic method may, like the contract-
ing organizations, require funds for incompleted production in their
auxiliary enterprises. This is usually set at 15 percent of the an-
nual work program. Consequently, the amount of working assets required
to fulfill the same work program (in our example above, 7,000,000
rubles) by the economic method and by the contracting method will vary,
as shown in the following table.
Contracting Projects Financed Projects Financed
Construction on the Basis on the Basis of
Working Assets Organizations of Outlaysll Completed Work
Amount Percent Amount Percent Amount Percent
Basic. materials 583.3 8.3 563.3 8.3 583.3 8.3
Other materials 14+.0 2.1 144.o 2.1 144.o 2.1
Low-value and rapidly
depreciating items 280.0 4.0 210.0 3.0 210.0 3.0
Prefabricated parts 175.0 2.5 175.0 2,5 175.0 2.5
Incompleted construc-
tion and installation
work 116.7 1,6 -- -- 116.7 1.6
Outlays subject to
distribution 35.0 0.5 35.0 0.5 35.0 0.5
Money funds 70.0 1.0 35.0 0.5 70.0 1.0
Accounts receivable
from clients 196.0 2.8 -- -- -- --
Total 1, 00.0 22.8 1,18+.0 1 .9 1,33+.0 19.0
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[Amount column is expressed in thousands of rubles; ercent column is ex-
pressed in percent of the total annual work program
(')This column has been added in this case only for illustrative
purposes.
A construction project with an annual work program of 7,000,000
rubles would have to be financed on the basis of completed work).
Construction projects operating by the so-called economic method
sometimes have part of the construction-installation work done by a
contracting organization on a contract basis. In those cases the pro-
jects give the contracting organization an advance provided in the
contract, but not exceeding 15 percent of the annual work program con-
tracted for.
For example, if a project, in addition to its own work program of
7,000,000 rubles, asks a contracting organization to do 2,000,000
rubles' worth of work, with an advance agreed at 12 percent, then it
would. need additional funds of: 2,000,000 x 12 = 240,000 rubles, as
100
well as funds sufficient to pay for a three-month reserve of prefabri-
cated parts and subassemblies.
The amount of working capital required by construction projects
is not limited. by the requirements of the established.plan of construc-
tion and installation work. The capital investments of the construction
project also cover: equipment that needs to be installed; the purchase
of tools, means of transportation, and. equipment that can be set up im-
mediately, without the need. of installation work;, geological explora-
tion work; outlays that do not expand the fixed capital, i.e. outlays
for the maintenance of the director's office of the enterprise under
construction, for the training; of personnel of the future enterprise,
for melioration and other land-improvement work, and so forth.
The structure of the individual types of capital investments
varies in different branches of the economy. For example, in the machine-
building industry a large part of the capital investments is absorbed
by outlays for equipment that must be installed. A large amount of
installation work is also required in capital investments in the chemi-
cal industry and in the construction of power plants. A different
structure of capital investments prevails in residential construction.
To fulfill such capital investments as purchases, including the
purchase of equipment that does not require installation and outlays
that do not increase the amount of fixed capital, there is no need for
creating special reserves (The cost of the equipment that does not re-
quire installation and other purchases is included. in the amount of
capital work completed as soon as such items are paid for and received).
Reserves of equipment that do require installation should be created
at the construction site at an early stage so that installation could
begin as soon as the site is sufficiently prepared. On the other hand,
however, excessive reserves of equipment should, not be permitted to
accumulate and such equipment should, not be delivered too far ahead of
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time. Sometimes certain reserves of equipment must be accumulated. be-
cause it arrives in parts to be assembled. Therefore the normal reserve
of equipment requiring installation must be set separately for each
construction project. As an average such reserves are generally cal-
culated at not more than 2- percent of the annual needs. It should be
borne in mind in this connection that the above applies only to equip-
ment of domestic origin. For the purchase of imported equipment, the
investment banks grant short-term credits to the projects and the re-
mainders of the imported equipment are not included in the norms.
Let us now illustrate how the amount of normal working capital of
a project is set up.
Let us assume that the annual plan of capital investments of the
project is 35,500,000 rubles, having the following structure.
1. Construction-installation work,
(a) performed_by contractoz?s 20 million rubles
(b) performed by the economic
method and. financed on the
basis of completed work 7
20 Equipment that requires installation
(of domestic origin) 5
3. Purchases (including equipment that
does not require installation) 3
1.e Outlays that do not increase the
amount of fixed capital (maintenance
of the director's office of the enter-
prise under construction, outlays for
the training of personnel for the
future enterprise, and so forth)
Total 35.5 million rubles
Let us now calculate the required working capital for this pro-
ject, making use of the norms listed above.
'If we are to use the data listed in the preceding example, it
appears that the working capital required, for the fulfillment of
construction-installation work by the project itself if it is financed
on the basis of work completed. is 1,33+,000 rubles.
The reserves of domestic equipment should amount to 20 percent of
5,000,000 rubles, i.e. 5,000,000 x 20 = .1,000,000 rubles..
100
In addition the project-client must give an advanoe.to the contract-
ingorganization; at the rate of 12 percent, this advance would be:
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20,000,000 x 12 =
100
2,400,000 rubles.
To that amount must be added the funds paid to the contractor for
the creation of a.three-month reserve of prefabricated parts.
If we use the data given in the calculation of the norms of
working capital of a contracting organization and if we assume that
this reserve is equal to 2.5 percent of the annual work program, then
this item of the working capital of the project amounts to:
20,000,000 x. 2?5 = 500,000 rubles.
100
The normal remainders of working assets of the project as a whole
amount to 5,234,000 rubles, of which 1,334,000 rubles are funds under
the direct control of the chief of construction (or of the capital con-
struction department, 2,900,000 rubles must be paid to the contracting
organization, and 1,000,000 rubles are funds required by the director's
office of the enterprise for the creation of equipment reserves requir-
ing installation.
6. The Financing Sources of the Working Assets of Construction Projects
In the case of contracting organizations, the financing sources of
the standardized working assets are their own working capital (including
the so-called stable liabilities) and the clients' advances, seasonal
rises in working assets being covered by special bank credits. Since
contracting organizations are permanently functioning enterprises, it
is quite natural that they should have their own working capital. Ad-
vances are granted by the clients for the entire period of contracted
work and, as far as the contractors are concerned, are essentially
stable in character.
The regulation of the amount of the contractors' own working
capital and the granting of client advances in accordance with changes
in the work program, as well as the granting of short-term credits for
seasonal needs, tend to reduce to a, minimum the material reserves
needed for the fulfillment of the contractor's program.
When construction is performed by the so-called economic method,
the need for material reserves is irregular and is limited to the period
of work on the given site. The government does not regulate the amount
of working capital of construction projects. The financing sources of
the working assets of construction projects are only the stable liabili-
ties and. funds allocated for the construction of the corresponding items.
The stable liabilities in the so-called economic method are cal-
culated in the same manner as in the case of the contracting organiza-
tions, except that the normal indebtedness to suppliers on accepted
invoices is taken as the full amount (100 percent) rather than as 25
percent in the case of the contracting organizations. Moreover, if
all or part of the construction-installation work is done by a contractor
then the stable liabilities of the construction project also include the
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constant indebtedness of the contracting organizations in the amount
of 2.8 percent of the annual contracted. construction-installation work.
Making use of the calculations on Page 121 .Lof this translation],
we obtain the following data.
The amount of stable liabilities of a construction project that
performs 7 million rubles' worth of construction-installation work by
the economic method should be:
Carry-over wage indebtedness 38,900 rubles
Deductions for social security 2,300 rubles
Reserve of impending payments
(chiefly for holidays) 17,000 rubles
Accounts payable to suppliers
(100 percent) 29,100 rubles
Total 87,300 rubles
If in addition the project contracted out an annual work program
of 20,000,000 rubles, then its stable liabilities must includes
20,000,000 x 2,8 = 560,000 rubles.
100
The stable liabilities further include the normal indebtedness
to suppliers of equipment on accepted. invoices.
If in the course of the year, inter-city deliveries of equipment
amount to 3 million rubles, then the stable liabilities must include:
3,000,000 x 7. = 58,300 rubles.
360
The total amount of stable liabilities of the project thus is
705,600 rubles (87,300 / 560,000 / 58,300).
Thus the financing sources of the working assets required by the
project at 'the end. of the year in the amount of 5,234,000 rubles should
be,.
Stable liabilities 705,600 rubles
Financing from budget appropriations,
amortization, profits, and so forth 4,528,400 rubles.
If construction with an annual capital investment plan of 35.5
million rubles starts in a given year and is carried over into the
following year, with the remainder of the working assets available at
the start of the following year (with the exception of 705,600 rubles
in stable liabilities) being 1+,528,400 rubles, then the total amount
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of financing of such a project for the given year is:
35, 500, 000 / 1,528,0o = 4o,028,400 rubles,
of which 4,528,4+00 rubles make up the so-called immobilization, i.e.
the amount in excess of the capital construction plan.
If this construction began and ended in the given year, then the
amount of financing would coincide with the amount allocated by the
capital investment plan, or 35.5 million rubles.
If the construction was begun in the preceding year and the re-
mainder of the working assets at the start of the year was 5 million
rubles and if it ended in the current year, then the realization of
a 20-million-ruble investment program would require only 15 million
rubles in funds, since the other 5 million rubles must then be mobilized
by the construction project itself.
Finally, if the stated. project began in the preceding year, con-
tinued. in the current year and was carried over into the following year,
then the difference between the working assets remaining at the start
and. at the end. of the year must be taken into account in calculating
the amount of financing required for the current year.
In making this calculation, it must be borne in mind that payment
for work performed in the last ten days of the preceding year must be
effected in the course of the plan year and that work performed during
the last ten days of the plan year must be paid for during the follow-
ing year.
7. The Plan of Mobilizing; Internal Resources.
If we are to determine the amount of planned mobilization (or im-
mobilization) of internal resources for a year, we must know:
(1)
the actual remaining working assets at the start of the
year;
(2) the actual outstanding credit indebtedness at the start
of the year;
(3)
the standardized remainder of working assets at the end
of the year;
(4) the amount of stable liabilities at the end of the year.
Let us examine these data in a number of alternatives (in thousands
of rubles):
Variant I Variant II Variant III Variant IV
1. Actual remaining working
assets at the start of
the year 4,000 4,l00 3,900 4,000
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2. Actual outstanding in.
d.ebted.ness to creditors
at the start of the year 400 420 380 330
3. Standardized.remainder of
working assets at the end
of- the.. 3,000 4,200 3,700 1,100
4. Stable liabilities at the
end, of the year 300 37.0. 400 350.
In the first alternative, the working assets must be reduced by
1,000,000 rubles (+,000,000 - 3,000,000), the indebtedness to creditors
is reduced by 100,000 rubles (+00,000 - 300,000), and the amount of
mobilization of-resources is 900,000 rubles.
In the second alternative, the working assets must increase by
100,000 rubles, indebtedness to creditors must drop by 50,000, and. the
amount of immobilization is 150,000 rubles.
In the third alternative, the working assets must drop by 200,000
rubles, indebtedness to creditors must rise by 20,000 rubles and the
amount of mobilization is 220,000 rubles.
In the fourth alternative, the -working assets mutt rise by 100,000
rubles, indebtedness to creditors rises by 20,000 rubles, and. immobili-
zation amounts to 80,000 rubles. (There are also cases where the assets
of a project include material resources, in particular individual equip-
ment, that cannot be used in the plan year. The indebtedness to
creditors may also include amounts not subject to payment (for example,
illegal investment of funds in the basic operations of the enterprise).
All these factors must be taken into account when setting up plans for
the mobilization of internal resources).
When the mobilization of internal resources is being planned for
the following year (planning usually is done during the fourth quarter
of the preceding year), use is made of the data reported, as of 1 October
and. the data expected at the start of the following year. The formula-
tion of the plan for the mobilization of internal resources is of course
not limited to the arithmetical computations: the planning process must
uncover any excessive materials at the projects, set up the specific
make-up of debtor and creditor indebtedness and work out measures de-
signed to eliminate the excess of materials and the existence of in-
debtedness. The mobilization of internal resources may be calculated,
in the following form (the amounts of standardized. assets and. stable
liabilities are taken from the calculations made above).
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Name of Working Asset 1949
1950
in 1950
1951
1. Equipment to be in-
stalled
2,000
1,400
100
1,000
2. Basic materials,
cluding prefabri-
cated parts
in-
870
810
758.3
3. Other materials
170
150
--
144.0
4. Low-value and rapidly
depreciating items
200
190
--
210
5. Outlays subject to
distribution
38 35
6. Incompleted construc-
tion and installation
work 130 120
7. Incormpleted production
of auxiliary enter-
prises
8. Money funds 80 75
35
Decrease (-)
-300
- 51.7
- 6.0
/ 20
116.7 - 3.3
9. Accounts receivable
from contractors on
advances 2,300 2,300 -- 2,400 /100
10.Accounts receivable
from contractors on
paid parts prefabri-
cated. 450 450 -- 500 { 50
11.Accounts receivable
from suppliers on the
payment for equipment
as it is being com-
pleted --
Total standardized
assets 6,238 5,530 100 5,234 -196
12.Other debtors 220 70
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WORKENG ASSETS (in thousands of rubles)
Includ-
Remainders ing re-
Actual mainders
as of Expected that can-Norms
1 Oc- as of not be as of 1
tober 1 January achieved January Increase (/)
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13.Inter-balance trans-
actions subject to 60 30
distribution
Total'assets 6,518 5,630
30 .
100 5,234 -296
The data in this table show that the construction project must in
the course of the plan ,year reduce the remainders of equipment, basic
and other materials, incompleted production and money funds by a total
amount"of 366,000 rubles; recover debts amounting to 100,000 rubles;
increase the remainders of low-value and rapidly repreeiatine items
(bringing them up to the norm) by 20,000 rubles; give the contracting
orgaizationan additional advance of 100,000 rubles and an additional
amount-of 50,000 rubles for the purchase of prefabricated: parts.
With a total reduction of the remainders of some items amounting
to 466,000 rubles and the total increase of the remainders of other
items amounting to 170,000 rubles, the project must mobilize internal
resources amounting to 296,000 rubles "(466,000 - 170,000).
Let us now examine the change that must take place in the make-up
and. amount of the indebtedness to creditors
INDEBTEDNESS TO CREDITORS
Name of Item
Actual Expected. Including Stable
as of as of those liabili-
1 Octo- 1 Januarythat need. ties as
ber 1949 1950 not be of 1 Jan- Increase M
paid off uary 1951 Decrease(-)
1. Workers and employes,
including reserves
for holidays and
social security de-
ductions 42.0 48.2
2. Suppliers on accept-
ed, invoices 82.0 82.4
3. Suppliers on overdue
invoices 45.0 35.0
4. Suppliers on unbilled
deliveries 20.0 5.0
5. Contractors on bills
for completed work 500.0 500.0
6. Other creditors 220.0 110.0
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58.2 10.0
87.4 i 5.0
-- - 35.0
-- 5.0
560.0 1 6o.o
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7. Inter-balance trans-
actions subject to
distribution 85.0 45.0 20.0
- 25.0
Total 99+.0 825.6 20.0 705.6 -100.0
The data above show that in the course of 1950 the project may in-
crease (in connection with an increase in the contracted work) the nor-
mal (10-day)'indebtedness to the contracting organization for completed
work, increase up to the normal level the carry-over indebtedness to
workers and employees and to suppliers on accepted invoices (a total of
75,000 rubles) and must extinguish the indebtedness to suppliers on
overdue invoices and unbilled deliveries and to other creditors and to
the basic operations of the enterprise on inter-balance transactions
(a total of 175,000 rubles). Creditor Indebtedness as a whole, there-
fore, must be reduced by 100,000 rubles in the course of the year.
The share of the mobilization of internal resources as a financing
source of the capital investment plan in the financial plan of the pro-
ject would thus be 196,000 rubles (296,000 - 100,000). That amount is
envisaged in the financing limits (Form 5).
The mobilization of internal resources as a source of financing
capital investments is calculated on the basis of changes in the work-
ing assets and. the credit indebtedness. Therefore, the financing limits
list in addition to the total amount of internal resources to be mobil-
ized (or immobilized) the envisaged change (increase or decrease) in
the working assets. Thus, in our example, the financing limits would
say that mobilization of internal resources amounts to 196,000 rubles,
including a reduction of working assets by 296,000 rubles. That would
imply that the plan envisages an extinction of 100,000 rubles worth of
creditor indebtedness. If the financing limits were to say that 230,000
rubles of internal resources were to be immobilized, including an'in-
crease in working assets by 200,000 rubles, it would imply that the
financial plan of the project envisages the extinction of 30,000 rubles
worth of creditor indebtedness.
The financing limits and the plan for the mobilization of internal
resources are set up on an annual basis with a quarterly breakdown.
Thus far, in discussing the methods used to determine the amount of
mobilization of internal resources, we have based ourselves on the needs
in material reserves in accordance with the annual work program, i.e. a
uniform fulfillment and uniform needs of materials throughout the year.
Actually in practice the volume of work completed varies in dif-
ferent quarters of the year, with the greatest amount falling into the
third quarter. In a number of cases, projects also require seasonal
shipments of materials depending on. the method of transportation (for
example, the use of waterways for the shipment of lumber and so forth)..
For the seasonal accumulation of materials (in connection with a season-
al construction peak and shipments of materials), the contracting or-
ganizations are granted. short-term bank credits. But the seasonal
needs of construction projects must be taken into account when the
quarterly plans for the mobilization of internal resources are being
formulated.
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Thus, the annual plan for the mobilization of,internal resources
used, as an example above would be broken down as follows by quarters.
(in thousands of rubles):
1950
Plan.
First
uarter
Second.
uarter
Third
alrter
Fourth
Quarter
Mobilization of internal
resources
196
45
40
50
61
Including a reduction of
assets by
296
80
60
50
106
The amount of working capital required by the projects is not
regulated by the government and changes in the amount are only regulated
by the plans for the mobilization (immobilization) of internal resources.
In this connection, special importance must be attached to investment
bank control over the proper planning of the mobilization of internal
resources and the fulfillment of the terms of the plan.
of Plans for the Mobilization of
Internal Resources
Plans for the mobilization of internal resources aremade up by the
construction projects, main administrations and ministries in terms of
the indicators listed, above. The task of the investment banks in this
field consists chiefly in verifying: the data on the assumed. remainders
of working assets and, creditor indebtedness at the start of the plan
year (and making a correct assessment); the correct calculation of
norms for individual working assets and stable liabilities; the justifi-
cation} of the calculations of the economic organizations regarding .ma-
terials that cannot be sold and used. by the project during the plan
year; the correct planning of the amount to be mobilized (immobilized)
by internal resources.
Any conclusions regarding the plans for the mobilization of in-
ternal resources of projects with corresponding calculations are sub-
mitted by the investment banks to the Ministry of Finance USSR and the
Ministries of Finance of the union republics, and (in the case of kray,
oblast and. city projects) to the corresponding financial departments.
The ministries and. main administrations distribute their approved
financing limits and. assignments for the mobilization of internal re-
sources among the individual projects. The financing limits set for
the projects are communicated by the head, offices of the investment
banks to their branches.
In these financing limits, the assignments for the mobilization
of internal resources are shown in the form of a balance, including
changes in working assets. In this connection, the projects work out
detailed plans for the mobilization of resources by individual items,
list the materials and equipment available in excess, set deadlines for
the sale (or utilization) of these surpluses, list the make-up of
debit indebtedness, and set measures and dates for the recovery of the
debts. The branch banks make a careful analysis of the project reports
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and use their own investigation data to verify the plans (schedules)
made up by the projects for the mobilization of internal resources,
following which the banks systematically check on the proper fulfill-
ment of these plans.
The results of the fulfillment of plans for the mobilization of
internal resources are calculated on the basis of project reports sub-
mitted. at the start and. the end of the given period. The results of
comparing the reported. data with the plan are shown in the following
table.
WORKING ASSETS (in thousands of rubles)
Remainders
Changes (increase (f)
At start At end
or decrease (-)
Name of Item of reported period
Actual
Planned
1. Equipment to be in-
stalled (domestic) 1,1+00
1,150
-250
-300
2. Basic materials, includ-
ing prefabricated parts 820
770
- 50
- 51.7
3. Other materials, low-value
and rapidly depreciating
items 350
372
{ 22
f 14.0
1+. Outlays subject to
distribution 30
33
/ 3
--
5. Incompleted Production 11.0
115
ii 5
- 3.3
of which:
Construction and
Installation Work 110
115
/ 5
- 3.3
6. Money funds
80
75
- 5
- 5
7. Contractors on advances
and prefabricated parts
2,750
2,800
/ 50
/150
8. Suppliers on payment for
equipment as it is being
completed --
--
--
--
9. Other debtors and inter-
balance transactions
110
30
- 80
-100
Total 5,650
5,345
-305
-296
10. Workers and employes 43 50 / 7 / 10
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11. Contractors on bills for
completed work
500
54O
/ 40
/
60
12. Suppliers on accepted
invoices
83
9o
1 7
71
5
13. Otber creditors and inter-,
balance transactions 324
Total 950
250
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The data of 'this table show -the plan for the mobilization of in-
ternal resources. has been overful.filled, both in its entirety and, with
respect to a reduction of the working assets. However, the plan was
overfulfilled. in spite of the failure to liquidate fully the credit
indebtedness as envisaged by the plan; that is a negative aspect and,
the project must be required. to settle its accounts with all creditors.
With regard to the data on the fulfillment of the plan for the
mobilization of internal resources at. the expense of a reduction of
the working assets, we note that fulfillment is largely due to the
fact that the project did not pay its contractors the additional advan-
ces envisaged by..the plan. In 'addition, the plan for a reduction in
the remainders of equipment to be installed was underfulfilled (the
remainder was reduced by 250,000 rubles instead of 300,000), as was the
plan for the recovery of debts. The investment banks must uncover the
reasons for the underfulfill:ment of the plan in individual items and.
on the basis of their investigation and, calculations work out the neces-
sary proposals for the project (These questions are treated in detail
in the course on "Analysis of Economic Operations").
The liquidation of surplus reserves of materials, the reduction of
the remaining incompleted production, and the liquidation of debit
indebtedness reduce the needs of the projects for capital investments
and thus release budgetary and other funds for the fulfillment of other
capital investment plans.
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CHAPTER VIII
FINANCING OF CONSTRUCTION CARRIED OUT BY THE CONTRACTING METHOD
1. Organization of Contracted Construction and the Terms of the Contract
Contracted construction is carried out by permanently operating
construction organizations that execute construction and installation
work envisaged by the state plan on the basis of contract agreements.
The contracting construction organizations (trusts, construction-
installation administrations and so forth) are the productive units of
the construction industry, operate on the basis of economic accounta-
bility and. constitute the basis of the mighty construction industry
created in the USSR during the Stalinist five-year plans.
Contracted. construction has become widespread in our country both
before and after the war. At the present time about three-fourths of
the total volume of construction-installation work is handled by con-
tracting organizations on the basis of contract agreements.
Comrade Molotov as early as 1931 stressed the role and the im-
portance of agreements in the Socialist economy: "The system of contract
relationships is the best way of combining the economic plan and the
principles of economic accountability.." jV. Molotov., V bor'be za
sotsializm Tn the Struggle for Socialism/, Partizdat, 1935, page 258).
The method of concluding contracts is described in the "Regula-
tions on Contract Agreements in Construction", approved by the govern-
ment in 1938. These regulations lay the basis for all basic relation-
ships between the sides concluding agreements for construction-instal-
lation work to be performed by the contracting method.
The clients in the contracting method. of production are enter-
prises and organizations (in the case of industrial construction, the
director's offices of the existing or future enterprises) to whom
appropriations for construction have been allocated.
The client is responsible for supplying the project with all
documents required for its financing by an investment bank, including
technical plans, cost estimates and working plans, which are trans-
mitted to the contracting organization together with documents that
grant the right to start construction (permit to build., land allotment
certificate, plan of underground. communications and installations and
so forth). In addition the client also supplies the construction pro-
ject with technical and. other equipment envisaged by the plan.
In those cases where funds for construction materials are granted
directly to the client, he transfers these to the contractor on the
dates set in the contract agreement (contracting organizations of the
Ministry of Construction of Heavy Industry Enterprises, the Ministry
of Construction of Machine-Building Enterprises and a number of other
industrial ministries receive the funds for construction materials
directly through their ministries).
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The client is expected to render productive services to the con-
tractor within the limits of his available material resources. In par-
ticular, when there are intra-plant railroad lines, the client supplies
the contractor with the required railroad shipments; when the client
has its own water, steam or power sources, he is required to supply
these utilities to the contractor at rates of the planned plant calcu-
lation, but not higher than the rates envisaged by the cost estimate.
Furthermore, the client supplies the workers of the contracting organiza-
tion with cultural, living and other facilities (creches, kindergartens,
dining rooms, clubs, public baths, laundries, medical stations and so
forth).
Funds envisaged under the terms of the third part of the general
cost estimate.for the purchase of construction machinery, means of
transportation, construction tools and property (to the extent that it
relates to the contracted work) are transmitted to the contractor. This
amount is added to the capital work plan of the contracting main admin-
istration and. subtracted from the plan of the client main administra-
tion. If the stated- materials have been purchased. directly by the
client, they are transferred at no cost to the. contractor and ad.d.ed to
his fixed capital.
At the same time, the client is required to include in his annual
itemized lists residential construction (at the expense of the third
part of the general cost estimate and. at the expense of residential
space being built for the client) sufficient to accommodate the workers
and other personnel of the contracting organization. With the permis-
sion of the minister, the contractor has the right to use for the con-
struction of permanent residential structures funds of nearby projects
allocated to temporary residential construction.
In the course of construction, the client effects technical in-
spection and control,~ articipates in the drawing up of documents for
"skrytyy" concealed la,/ work, accepts completed construction-installa-
tion work completed. construction items and. effects the transactions
with the contracting organization. In addition, the client organizes
(in the approved manner) the putting into operation of new fixed capital
and new productive capacities. .
To make it possible for the client to fulfill his responsibilities
in construction projects, a.special unit is set up -- the director's
office of the enterprise under construction, The cost of maintaining
this office is envisaged in the second part of the general cost esti-
mate of the project and should. not exceed the limits set up for that
purpose. The limits set up for the maintenance of the director's office
(including technical inspection) differs according to the estimate cost
of the construction (usually within the range of 0.38 to 1.09 percent
of the estimate cost of construction). In the case of independent
residential and..cultural-social construction projects, these limits are
reduced by 30 percent.
In existing enterprises, and in economic organizations, the func-
tions of the client are performed by the management of the enterprise
(organization), usually through a special unit -- the capital construc-
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tion department (oks). This department is maintained at the expense of
the funds of the basic operations of the enterprise and not the appro-
priations allocated to construction..
The above list of basic functions of the client shows the key role
of the client and his responsibility for the progress of construction
in the contracting method.
As far as . the... contractor is concerned, he organizes the entire
construction process and is fully responsible for the fulfillment of the
construction-installation work within the time set by the plan and by
the contract agreement.
On the basis of the contract agreement, the client charges a single
-- general -- contractor with the fulfillment of the entire work program
envisaged by the project. The general contractor, who usually handles
the basic construction work, is fully responsible for the entire work
program (including any special work)'. The general contractor in turn has
the right to subcontract part of the work to other contractors. In that
case, the general contractor concludes agreements with the subcontrac-
tors in his own name and performs with respect to the subcontractor
the same functions that the client performs with respect to the general
contractor (including supervision over the plans and estimates dossier,
acceptance of completed work and so forth).
Work connected with the installation of equipment may also be
passed on to a general contractor -?- with his agreement. In those
cases where the general contractor refuses to accept installation work,
the client has the right to give this part of the work to special in-
stallation organizations or to the plant that manufactured the equip-
merit.
The "Regulations on Contract Agreements" make the contracting sides
materially responsible for any infractions of the agreement. For
example, if the work is not completed within the time set by the agree-
ment, the contractor must pay the client a penalty of 0.05 percent for
each overdue day, and in the case of a delay exceeding 30 days a for-
feit in addition to the penalty of 2 percent of the contracted cost of
the unfulfilled. work. Similar sanctions are applied to the client if
he commits any of the following infractions: overdue payments to the
contractor, holding up working plans and other documents to be passed
on to the contractor; failure to meet the dates of transfer to the con-
tractor of funds or of materials and equipment in kind; holding up the
transfer of the construction site to the contractor.
In addition, the client is required to pay the contractor a fine
of 1,000 rubles daily for failure to accept promptly a completed con-
struction item and is required to cover the contractor's losses arising
as a result of the client's failure supply on time residential space
for the workers of the contractor.
There are two types of contracts in construction: general contracts
and annual contracts.
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A general contract is concluded for the entire construction pro-
gram envisaged by the approved technical plan and associated cost
estimate and sets the dates of the start and end of construction for
each major construction item. No general contracts are made for pro-
jects that start and. end in the same calendar year.
The general contract must be accompanied by the technical plan,
which forms the basis of the agreement, with its general cost estimate,
explanatory notes and general regulations regarding the organization
of construction (with a general construction plan), In addition the
general contract must be accompanied by. a-list of items to be-construct-
ed, with the dates of the start and end of construction; an agreement
regarding the nature, the period., the method. of utilization and. the
conditions of payment by the contractor for buildings, services and
material and property resources supplied by the client; and special
conditions.
Agreements on the manner in which the client will render produc-
tive and other services to the contractor, transfer material resources,
and account for these services and resources and so forth serve to
delimit more precisely the mutual obligations of the two sides that
may arise under the specific construction conditions. Under special
circumstances, agreements, establish the specific interrelationships
of the two sides that are not covered by existing regulations on
contract agreements (this may occur in connection with work on the
territory of an existing enterprise, in case special production con-
ditions prevail in existing workshops and so forth).
An annual contract agreement, concluded. within the framework of
a general contract agreement, envisages the volume of construction
and installation work involved. in the itemized list of the construction
project (Form 1). The cost.of the work envisaged. by the annual contract
is calculated in terms of the prices of the cost estimate of the tech-
nical plan. The annual contract must be accompanied by: an approved.
itemized list of the work; data on the volume of work to be performed
by the contractor during the current year on each item (with unitary
rates); a.prod.uction schedule for the. current year; the financing plan
with a quarterr breakdown; the schedule of transfer by the client to
the contractor of working plans and equipment. In addition, annual
contracts must be accompanied by special conditions that must not dup-
licate the special conditions appended to the general contract, but may
contain corrections or additions pertaining to the current year.
The annual contract sets the amount to be advanced by the client
to the contractor and, the dates on which the advances must be paid. and
repaid, The limit of the advance is 15 percent of the annual work
program. But in concluding the contract the two sides should not auto-
matically agree on the maximum advance. The amount of the advance
actually needed by the contractor should be calculated on the basis of
the funds required. to cover the stand.ard.ized,reserve of basic construc-
tion materials and. the remainder of the incompleted. construction and.
installation work. The method of calculating the funds required. to
cover these standardized assets was discussed in Chapter VII.
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The.dates on. which advances will be paid to the contractor are
set by the two sides on the basis of the production schedule and the
need for timely delivery of the basic construction materials. As a
rule the annual contract calls for payment of the advance during the
first quarter in a new construction project or an expanding old pro-
ject, and. in certain cases, within 3 to 10 days after the conclusion
of the contract agreement.
The manner in which the contractors extinguish the advances de-
pends on whether construction will be completed during the current
year or carried over to the following year.
In the case of construction due to be completed in the current
year, extinction of the advance begins as a rule after 50 percent of
the contracted work program has been fulfilled.. The advances are
extinguished by the withholding of the corresponding amounts at the
time of the payment of the bills of the contracting organization so
that the advances will be completely extinguished when the work is
completed.
In the case of construction carried over to the following year,
two cases of the extinction of an advance must be distinguished. If
the volume of contracted work of the current year is less than or
equal to the volume of work carried over, then no part of the advance
is withheld during the current year. In the following year, the ex-
tinction of the advance is then recalculated on the basis of the new
annual contract. In the second case, where the volume of contracted
work of the current year is more than the amount carried over, the
advance is reduced. during the fourth quarter (by the withholding
method) down to the amount corresponding to the remainder of the
work carried over to the following year.
In addition to general and annual contract, contracts for pre-
liminary work can be concluded, in the construction business. Initial
preliminary work is permitted only in the case of projects that are
included, in the capital construction plan and have approved plan
specifications and preliminary cost estimate. Such initial prelimin-
ary work includes: the purchase of construction machinery and means
of transportation, the preparation of construction materials, the
clearing of the construction site and other work that can be carried
out without plans; this type of work is carried out on the basis of
preliminary cost estimates. Initial preliminary work includes more-
over installations that cannot be carried out without approved. plans
and cost estimates for individual items. These include: spur lines,
auxiliary enterprises and installations, the power supply of the con-
struction project, storage facilities, residential premises, quarries,
and so forth.
In the case of construction that is to be handled. by the contract-
ing method, the initial preliminary work is usually entrusted to the
future general contractor. In that case the client and the contractor
conclude a separate contract agreement for the preliminary work. In
content and in the nature of the appended documents, such an agreement
is similar to the annual contract agreement.
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2. The Method of Financing Contracted Construction
.The investment banks finance construction carried out by the
contracting method, provided all the usual financing requisites are met.
The banks are supposed. to receive copies of the concluded. con-
tract agreements (whether general or annual) and. submit them to a
careful check.
Special attention must be devoted to the annual contracts since
these serve as the basis for the current financing of contracted con-
struction.
The. annual contract and its appendices are first of all compared.
with the annual itemized list of the construction project (Form 1).
The bank verifies whether the total volume of work envisaged by the
contract agrees with the data in the itemized list (insofar as it
applies to contracted. construction). This check is repeated for each
construction item included, in the contract.
If the bank finds discrepancies, it requests that the necessary
corrections be made in the contract. Until such corrections are made,
the.bank finances the contracted, construction on the basis of data in
the annual itemized list of construction items.
Using available data (including the certificate on Form 6 regard-
ing the existence of a plans and. estimates dossier and the statement
of verification of the dossier), the bank checks whether the construc-
tion items listed in the annual contract are all supplied with a tech-
nical plan. The bank will not finance any construction items that
have no-approved plans and, cost estimates and so informs the client
and the contractor.
The bank also checks on the legitimacy of the agreements and
special conditions appended to the general and the annual contracts,
especially whether such agreements and conditions contravene the
"Regulations on Contract Agreements in Construction" and whether the
principles of economic accountability are being observed. The bank
also sees to it that the agreements and special conditions call for
the payment by the contractor for materials and truck and cart trans-
portation furnished by the client at the established state prices and
payments for other productive services (water, steam, power supply,
spur lines and antra-factory rail lines and. so forth) at the prices
of planned. plant calculations, but not exceeding the cost estimate
prices. The agreements and special conditions must set the rent pay-
ments of the contractor for temporary buildings and installations that
have been erected under the terms of the third part of the general
cost estimate and. for residential space provided. by the client. The
rent is based on the existing amortization rates.
If the bank finds either in the contracts themselves or in the
appended. documents any infractions of existing law, regulations and.
instructions, the bank so notifies the two contracting sides and sets
a.time limit (usually not more than 15 days) for the proper corrections
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The banks verify the amount of the advance agreed to in the con-
tract. Aside from not allowing an advance in excess of the legal
limit (15 percent of the annual contracted work program), the bank
checks whether the advance corresponds to the actual requirements of
the contractor in normal reserves of basic construction materials
and the standardized remainders of incompleted construction and instal-
lation work. For this purpose, the bank actually makes the calcula-
tion of the working capital required to cover the standardized remain-
ders of the two stated assets.
If this calculation shows the advance to be less than that set
in the contract, the bank-requests the client and the contractor to
reduce the contracted. advance accordingly. However, the bank does
not have the right to reduce the amount independently of the two con-
tracting sides. If necessary, the bank passes its own calculations on
to its superior office for settlement of the question directly between
the head office and the ministries of the client and. the contractor.
Until the question of the advance is finally settled, the bank is
guided by the conditions set by the contract agreement. In this con-
nection, the advance is paid to the contractor out of the financing
account of the client independently of the plan for the mobilization
or immobilization of internal resources envisaged by the financing
limit of the project (Form 5).
In addition to the contracted. advance, the client pays the con-
tractor the estimated cost of prefabricated construction parts deliver-
ed to or manufactured. on the construction site to the extent of three
months' requirements. This procedure stimulated the development of
industrialized. methods in construction, insures the production of pre-
fabricated parts and subassemblies by factory methods and their sub-
sequent utilization (installation) in the course of the construction
work. The client may pay the cost of prefabricated parts that have
been shipped by the manufacturer but have not yet arrived. at the con-
struction site; in that case the contractor presents the supplier's
invoice directly to the bank.
The cost of the prefabricated parts is withheld. at the time of
the payment of the monthly bill for completed construction and instal-
lation work that includes the installation of the prefabricated parts
paid. for by the client. The banks verify the correctness of the with-
holdings on the basis of the balances of the contracting organizations.
Transactions for construction and installation work completed
in accordance with the terms of the contract are handled on the basis
of the contractor's monthly bills accepted by the client. These monthly
bills must be accompanied by work acceptance documents (Form 2) drawn
up separately for each construction item.. These documents are signed
by the representatives of both the contractor and the client. A single
bill may be accompanied. by several work acceptance documents provided.
they apply to the same contract.
The acceptance document includes (for each individual construction
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element) a list of the work performed by the contractor during the pre-
ceding month and. accepted by the client. The cost of the completed
construction work is based on the unitary rates of the cost estimate.
Completed, work may be included. in the acceptance document only upon the
completion for each construction element of all operations listed in
the appropriate paragraph of the norm handbook, on the basis of which
the given unitary rate had been calculated.
For example, Paragraph 16 of the SUSINla norm handbook] requires that
the assembling of a truss consist of the following series of operations:
preparation of the wallplates and beams with an "ostrozhka"; installation
of the wallplates with tarpaper insulation; assembly and installation of
the beams; installation of the necessary fastenings (braces, bolts);
vertical and horizontal transportation of materials within the working
area. Consequently, the installation of a truss cannot be paid for
until after the entire list of operations has been completed.
.If we assume-that the truss has been installed, but without the
necessary fastenings, then the work is regarded as incompleted and,
cannot be included. in the acceptance document (Form 2).
However, it should not be concluded from the foregoing that for
inclusion in the acceptance document all operations must be completed
on the construction element of a construction item (in our case, the
installation of all truss beams). Payment for completed. construction
work is made for a complete cycle of operations within a completed part
of a construction element (for example, for a cubic meter of brickwork,
a square meter of plaster work, a cubic meter of installed timbers in
the construction of a truss, and so forth).
Thus, the basic principle of payments for contracted construction
work is payment by the client for the cost of parts of construction
elements completed in accordance with the working plans and values at
the unitary rates of the approved cost estimate. As an exception
separate payment may be made for certain construction elements (rein-
forced concrete, wooden inter-floor and, roof structures, and a number
of other operations),
Accounts for fulfilled installation work are handled after the
completion of the installation of the unit or its parts on the basis
of existing price books for installation work. In the case of equip-
ment for which the cost of installation is not listed in the price books
and has been determined. on the basis of individual cost estimates or
preliminary cost estimates, payment for completed installation work
may be effected on the basis of the percentage of completion, as estab-
lished by the acceptance document (Form 2).
In addition to the monthly statements based on the documents of
acceptance of completed work (Form 2), the contracting organizations
also present to their clients intermediate 10-day bills. These 10-day
bills need. not be justified by work acceptance documents, and if ac-
cepted by the client these bills are paid by the bank. The amounts
paid to the contractors on their 10-day bills are then withheld. at the
time of the payment of the monthly statements.
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A simplified payment method exists for construction items that
are to be completed. within three months. In those cases, the work is
paid for by the client only upon the completion of the entire item.
Up to 90 percent of the cost of the item may be paid on intermediate
bills accepted by the client. If construction on such an item is not
completed within the three months, the work completed is certified by
an acceptance document (Form 2) and further accounts between the con-
tractor and the client are hand.l.ed. in the usual manner.
Accounts for work completed by the subcontractors are handled
similarly. As a rule, representatives of the general contractor, the
subcontractor and the client participate in the formulation of the
monthly work acceptance documents relating to work completed by the
contractor. This way repeated acceptance of work done by the sub-
contractor can be avoided.. Subcontractor statements after having been
accepted. by the general contractor are paid directly from the financing
account of the client, with the funds transferred directly to the clear-
ing account of the subcontractor, 'by-passing that of the general con-
tractor.
3. Bank Control over the ecific Utilization and Guarantee of Advances
The investment banks are charged with control over the payment of
clients' advances to the contractors for the amount of the materials
actually purchased. In this connection, the banks check systematically
on the specific utilization of the advances and see to it that these
advances are converted into paid materials.
As a means of checking of the specific utilization of advances,
the banks open for each contractor, in addition to his clearing account,
a special account on advances. Upon the client's instructions, the bank
transfers the contracted advance from the financing account of the client
to the special account of the contractor. Subcontractors are also given
such a special account, but in that case the contracted advance is
transferred from the special account of the general contractor to the
special account of the subcontractor.
The titleholder of such a special account may dispose of its funds
only in a strictly regulated manner. Funds of the special advance
account are used to pay supplier bills for basic construction materials,
including the cost of transportation, and form the basis of letters of
credit and special accounts for the payment of basic construction
materials. Auxiliary materials are paid for from the special account
only in the exceptional case where they are billed together with the
.basic materials. The advance account is further used for the transfer
of funds for the following purposes: for the payment of advances to sub-
contractors; for repaying previously received. advances by transfer to
the financing account of the client (similar repayments are effected by
subcontractors to the special accounts of general. contractors); to cover
overdue bank loan payments; to restore funds to the clearing account of
the contractor as a result of the check on the guarantee of the advances.
The basic materials paid for from the special account are used by
the contractor in the course of the construction work. After the com-
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pleted work has been accepted and paid for by the client, funds rep-
resenting the cost of the used materials are transferred as part of
the total paid amount to the clearing account of the contractor and are
not returned to the special account. Consequently, in order to guar-
antee the advances in terms of materials, the contractor is required.
to replenish his reserves of materials at the expense of his clearing
account. Therefore preliminary bank control over the specific utiliza-
tion of advances is supplemented by a system of subsequent control, in
which certificates (Form 4-a) regarding the guarantee. of advances and
short-term loans are submitted, to a check. These certificates must be
submitted. by the contractor, to the bank not later than the 5th of every
month (giving data as the 1st of the month); contracting organizations
with a wideflung network may submit these certificates by the 10th of
the month. The certificates must be'signed by the chief and. the head
accountant of the construction organization.
Contracting trusts that carry out construction in a single city
may submit to the bank one certificate (for the trust as a whole),
listing data on the remainders of materials in the main storage premi-
ses of the trust. In those cases, the bank may upon the request of
the trust open a single special advance account (in the name of the
trust administration). The single special account is then credited.
with all advances received. by the construction organizations of the
trust and is used. to pay for all basic materials intended for the
construction organizations and other economic units of the trust. A
similar procedure exists with respect to trusts that are operating
through the mutual clearing bureau system. In those cases, the
single special account is opened in the name of the special supply
office of the trust and. the bank receives a general certificate (Form
4-a) for the entire trust.
If this certificate is not submitted by the due date, the bank
withholds payments from the special account for bills, letters of
credit and special accounts covering the purchase of construction
materials. These outlays can then be met only from the contractor's
own clearing account.
. Let us now give an example of such a certificate (Form 4-a) in-
sofar as it affects the check of the guarantee of the clients' advances.
L?ee Form No 4-a next page
The certificate on the guarantee of advances and, short-term loans
.is made up along balance lines. Section A lists the working assets
that have been formed. through the expenditure of the advances obtained
from the clients and serve as a guarantee of these advances.
Item 1 "Remainder of construction materials" includes the cost of
all basic materials in storage or en route, whether paid for from any
source (clients' advances, bank loans and so forth) or not paid. for.
Item 2 includes the incompleted construction and installation
work, except incompleted. construction of residential houses and inter-
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Form No. 4-a
To the Tula Office of Prombank
(name of bank, office, branch or agency)
CERTIFICATE
ON THE GUARANTEE OF ADVANCES AND SHORT-TERM LOANS
as of 1 November 1950
by the trust Tulnromstroy
(name of contracting organization)
Section A
(in thousands of rubles)
Amount
1. Remainder of Construction
Materials
including:
(a) seasonal delivery of
materials
(b) ....................
2. Incorroleted construction
and installation work
Remainder of advances
-ranted to subcontractors
4. Remaining funds in the
sj?ecial advance account
5. Remainder of letters of
credit and. special accounts
advanced for the payment
of construction materials
.Section B
1. Amount of clients' advances
1E,220 according to the norm 3,200
2. Actual remainder of advances
received t om the clients 4,120
540 3. Payments due on bank loans:
(a) for the seasonal accu-
mulation of construction
materials in connection
420 with extra seasonal work 210
(b) for the seasonal aceu-
320 mulation of construction
materials in connection
with seasonal delivery
-- conditions
(c) .......................
4. Actual indebtedness to
168 suppliers for construction
materials in the following
categories:
405
(a) Accepted invoices 264
(b) Overdue invoices '1293
(c) Unbilled deliveries _ 49
6. Total (1/2/3/4/5) 5,128 5. Total (2/3a/3b/3c/4a/4b/4c) 5,341
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mediate bills paid by the client for items to be completed in less than
three months.
The items in Section A are totaled in Item 6, which does not include
Item 1-a since that item is already included in Item 1.
Section B (the liabilities side of the certificate) includes in ad-
dition to the actual remainder of clients' advances the payments due on
bank loans for the seasonal accumulation of materials and the actual
indebtedness to suppliers for construction materials received. These
items must be included since Section A includes the cost of all basic
materials, those paid for as well as those not paid for from the clients'
advances. Actually, only basic materials that have been paid for can
serve as:a real guarantee of the clients' advances (together with the
other working assets listed in Section A)0
Items listed in Section B are totaled in Item 5; this does not
include Item l (the norm of the clients' advances), which is used only
for checking the guarantee of bank loans.
Within 'two 'days of the receipt of the certificate (Form u-a),
the bank verifies the guarantee of the advances by comparing the total
of Section A with the total of Section B. If the working assets (Item
6 of Section A) exceed the liabilities (Item 5 of Section B), it means
that the advances are fully guaranteed by paid material resources. In
that case the bank has the right upon the contractor's request to trans-
fer from the special advance account (to the extent that funds are
present therein) to the contractor's clearing account the amount cor-
responding to the excess of the guarantee. The purpose of such a trans-
fer is to replace outlays effected at the expense of the contractor's
working capital.
If the remainder of the advances obtained from the clients plus
the indebtedness on bank loan payments and on supplier accounts (Item
5 of Section B) exceeds the working assets (Item 6 of Section A), it
shows the lack of guarantee of the advances obtained by the contractor.
In that case, the bank requests from the contractor the transfer from
his clearing account to his special advance account of that part of
the clients' advances which has been illegally used as working capital
and is not backed up with existing material resources. If that request
has not been met within three days, the bank has the right to effect
the transfer of funds (subject to the established priority of payments).
In our example, we have a case of lack of guarantee of the clients'
advances:
Total of Section B (Item 5)
5,3+1,000 rubles
Total of Section A (Item 6)
5,128,000 rubles
213,000 rubles
Thus, the client's advances are not guaranteed. to the extent of
213,000 rubles; that sum must therefore be transferred from the clear-
ing account to the special advance account of the contractor.
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Contractors that fail systematically to guarantee clients' advances
may be required. by the banks to submit certificates (Form 4-a) on a
10-day basis. In those cases, the bank moreover has the right to effect
payments for construction materials from the contractor's clearing
account rather than from the special advance account.
Although the certificate (Form l-a) is a bookkeeping document,
it is nevertheless preliminary in character since it is drawn up prior
to the monthly balance. The banks must therefore verify the data in
the certificate against the information in the contractor's monthly
balance sheet.
I. Bank Control over Correct Payment for Construction-Installation Work
one of the chief functions of the investment banks is control
over the correct expenditure of state funds in transactions involving
completed construction-installation work. That is quite understandable
since excess payments product a rise in construction costs, reduce the
amount of appropriations allocated by the state to expanding Socialist
reproduction of fixed capital in the national economy, and disturb the
principle of economic accountability in client-contractor relationships.
The great importance of bank control over the correct accounting
of completed construction-installation work has been stressed by a
number of government decisions. The investment banks are charged with
responsibility for insuring constant, rigid control over correct pay-
ments for completed work to prevent the possibility of any overpayment.
Therefore a preliminary bank check of bills presented for completed,
construction-installation work is especially important in construction
performed by the contracting method.
Irrespective of the acceptance of the bill on the part of the
client, the bank checks whether the documents presented by the contractor
have been properly drawn up and effects payment only after a detailed
check of the legitimacy of the payment. The check covers especially
the qu estion of whether the financing of the construction items covered
in the bill is legitimate. In making the check, the bank must determine:
whether financing for the given project has been approved and whether
the items under construction are listed in the contract agreement that
the bank has accepted. for financing and, whether there is a free re-
mainder of the cost estimate limit for the given project as a whole
and for the individual items. Subject to this check are both the
monthly bills, which are based. on the work acceptance documents, and the
10-day bills, which need not be accompanied by such work acceptance
documents.
In the case of the monthly bills, the banks check the acceptance
documents (Form 2) drawn up separately for each construction item.
Lee Form No 2, next page
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Client -- Plant Presented monthly to the financing
bank branch with the statements of
Contractor -- Tulpromstroy trust completed work
Contract No 49 of 18 January 1950 Construction item -- Forge Shop
Act No x+72
of Acceptance of Completed Work
for,October 1950
Order tary
No Type of Work Rates
Total estimated cost of item --
12,428,300 rubles
Cost of work performed since the start
of construction in estimated prices
(excluding the work reported in the
present document) -- 5,349,800 rubles
Number
of Uni-
1 Columns, reinforced concrete,
rectangular, up to 1.8 meters
in perimeter -- preparation
and laying of the concrete
(calculated at 50 percent of
the unitary rate) 381
2 Ceiling, reinforced concrete,
ribbed, above the ground,
more than 30 square meters in
area -- preparation and in-
stallation of casing and rein-
(calculated at 45
percent of the unitary rate) 367.
3. Laying of smooth brick walls
of red brick on a lime mortar 291
I. Coverings of blind embrasures
covering an area of more than
5 square meters. (with two
coverings and. one frame) 188
5 Preparation and installation
of steel girders weighing up
to 4 tons 1+56
Work completed from
1 to 31 October 1950
Cost of
Price per
unit (in
work as
estimat-
ed (in
Unit Quantity
rubles)
rubles)
cubic
meter 348
196.21
68,281.00
cubic
231.45
281 1+, 43.00*
meter 1,216
102.11
121+,166 00
cubic
meter 484
square
201.97
97,753.00
meter 212
137.02
29,01+8.00
ton 28
1,869.70
52,352.00
Total 528,877.00
121+,166.00
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Z Form No 2 -- continued,?
Overhead Expenses
for construction work
17.2 percent of 476,525 rubles 81,962.00
for steelwork installation
9.4 percent of 52,352 rubles
4,921.00
Grand Total 6l 60.00
12+,1 .00
Submitted (signature) Accepted (signature)
(*The numerator lists the full cost of the work and
the denominator the cost of materials recovered)
As will be seen from the form of the act reproduced above, the
upper right corner contains data on the total estimated cost of the
construction item and the cost of -the work performed since the start
of construction. (excluding the work certified. in the present act).
The acceptance act presented, with the bill may be paid for only with-
in the amount of the unused. remainder of the estimated cost of the
construction item (including the cost of the equipment installed and
other outlays incurred in accordance with the cost estimate of the
technical plan of the given item).
Then the bank ascertains whether all the work listed in the'act
is actually of the construction and installation type. Contracted
work that is not properly construction or installation may not be paid
against acceptance acts. The type of work to be excluded from the act
includes the repair, manufacture, purchase and delivery of equipment;
the purchase of tools, trucks and construction machinery and so forth;
outlays related. to the acquisition of land, the resettlement of persons
living on the construction site, and so forth (this type of work and
outlays are paid for against separate bills).
Special attention must be devoted to the proper description of
the types of work listed in the act. For each construction element
and each type of work, the bank must verify the completeness of the
description and. its correspondence with the data of the unitary rates
of the approved cost estimate. Let us illustrate this point with a
specific example.
Let us assume that one of the work descriptions in an acceptance
act presented for payment is as follows: "Earthwork with a straight-
blade excavator and associated truck transportation". Such a work
description is incomplete, since the appropriate paragraph of S[.TSN
Jost estimate norm handbook7(Paragraph 1-D) lists a whole series of
norms for this type of earthwork. These norms vary in accordance with
the capacity of the excavator shovel (0.75 - 0.57' - 0.35 cubic meters),
the type of soil (sandy or clayey), and the distance over which the
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earth is moved (up to 097 - 1 - 2 - 3 - 4 - 5 kilometers). This type of
work is covered by 36 different unitary rates,,with the cost of excavat-
ing and moving 1 cubic meter of earth at the maximum rate being almost
three times the cost of the work calculated at the minimum rate.
Therefore the work item thus described in the acceptance acts can-
not be paid for by the bank until the character of the work has been
described in a more precise manner.
For the same reason, the bank may not effect payment for reinforced.
concrete or rock-filled concrete work as long as, in accordance with
Paragraph 25 of SUSN, the act does not list the volume of the individual
concrete units (less than 25, from 25 to 100, more than 100 cubic meters).
Similar conditions prevail with regard to inter-floor coverings (Para-
graph 39 of SUrn) if the act does not list exhaustively the character-
istics,of the covering, its span in meters and so forth.
The bank is not required to pay for work items in the acceptance
act for which no unitary rates are listed. in the unitary rate folder
of the approved cost estimate. Such work items may be paid after the
authorities that approved the original cost estimate approve the addi-
tional unitary rates involved.
In addition, the bank checks the rates per unit of work as listed
in the acceptance act against the unitary rates of the approved cost
estimate as given in the unitary rate folder or in the work list
appended, to the contract agreement.
The check of the correct application of unitary rates is more
complex and requires familiarity with cost estimate handbooks. This
check is designed to eliminate duplicate payments for the same work:
once as part of total series of operations listed by the appropriate
paragraph of the cost estimate norm handbook and the second time on
the basis of a separate fractional unitary rate.
Let us assume that the acceptance act (Form 2) lists the follow-
ing work items.:
1. Digging of foundation pits, up to 3.5 meters in depth, with
a cross section of 3 square meters, in dry heavy soil.
i1
2. Timbering of the. walls of foundation pits, up to 3.75
meters in depth, in dry heavy soil.
3. Filling of pit after the laying of the foundation, includ-
ing ramming and watering.
In the given case, payment is made only for the work item relating
to the digging of the foundation pit, while the two other work items
must be excluded from the act. This is because the work of digging a
foundation pit includes (according to the norms in Paragraph 3 of SUSN)
the timbering of the walls and. the refilling after the. laying of the
foundation.
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The norms of the cost estimate norm handbooks and the installa-
tion rate books also exclude outlays for the horizontal and vertical
transportation of materials, prefabricated parts and equipment within
the working or installation zone, i.e. from the storage site to the
working site.
-Naturally the banks do not allow payment against acts on Form 2
of outlays that are expressed in the calculations of the cost of
materials or in the cost of machine-shifts and, are therefore already
included in the corresponding unitary rates. Such outlays include
expenditures for the delivery of materials and. prefabricated parts to
the storage site, outlays for the delivery assembly and dismantling
of construction machinery and so forth.
The bank in checking the acceptance acts must bear in mind that
existing regulations permit the separate payment of certain construc-
tion processes required in some construction elements. In reinforced
concrete work, for example, separate payment may be made for the instal-
lation of timber casing, the preparation and. installation of the rein-
forcement, preparation and. laying of the concrete, removal of the
timbering and finishing of the concrete surfaces,.
In connection with temporary installations listed. in the accep-
tance act, the bank employes must check whether these installations
have been envisaged by the approved general cost estimate and the
annual itemized list of construction items and whether they are not by
nature so-called nonitemized temporary installations. Such temporary
installations may by existing regulations not be included in the item-
ized lists (whence the name "nonitemized.'") because they are included.
in-the established limit of overhead expenses.
The bank checks furthermore on the legitimate inclusion in the
act (Form 2) of the cost of timbers used in a number of operations
(such as reinforced. concrete work), which are already included. in
the work description envisaged. by the cost estimate norms and cannot
be paid for separately. Additional- payment for timbering is permitted
only in certain construction elements and. types of work that are so
identified in the corresponding paragraphs of the cost estimate hand-
books.
A major element of the control. work of the tank in transactions
.with contractors is a check over the correct calculation of work cost
increases related to winter conditions. The cost of the winter work
factor generally stated directly in the acceptance act (Form 2). The
amount of the cost increment is given by special handbooks covering
the norms of construction and. installation work performed in winter
conditions.
The winter cost factors vary with the location of the construction
site (the USSR being divided into six temperature zones) and the nature
of the performed work. For example, the winter cost factor in earth-
work is determined by the depth to which the ground freezes and the
outer air temperature; in stone, reinforced concrete and other types
of construction work, the winter cost factor is based on the location
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of the project and conditions under which the work is performed, in the
open air or within roughly. completed buildings.
The winter norms include all additional outlays related to winter
conditions. Therefore no additional winter cost coefficients may be
added to the winter norms listed in current handbooks. In particular,.
no separate payment may be made for the clearing of snow from the con-
struction site and associated passages and roads, the heating of tem-
porary nonitemized installations and so forth.
Special care must be exercised in checking the legitimacy and
correct application of coefficients allowed by current legislation and.
norm handbooks. The.check must cover, in particular, the existence of
acts justifying the legitimate application of wage coefficients when
construction and. installation work is performed together, when construc-
tion work is performed in existing or unsafe workshops, under cramped
conditions and so forth.
Also subject to a careful check is the legitimacy of the payment
of extra charges for small amounts of work. Such. surcharges are per-
mitted.by the norm handbooks in cases where the total volume of work
for the project as a whole (i.e. where the estimated cost of construc-
tion, sewage and special types of work on all construction items) is
less than the following minimums: in industrial construction, exclud-
ing the cost of steel construction elements, 2.5 million rubles, and,
in civil construction one million rubles. Surcharges may be levied on
small amounts of installation work when the total cost of installation
work on the project is less than 300,000 rubles (excluding the cost of
equipment).
The bank check of acceptance acts further covers the correct cal-
culation of the recovered cost of materials. Materials are recovered
in a number of construction operations, for example, the recovery of
timber casings in concrete and reinforced concrete work, the dismant-
ling of trench supports, and so forth. The total amount of the unitary
rate is shown. in the form of a fraction, with the numerator including
the complete cost per unit of work and the denominator the cost of the
recovered materials. In checking the acceptance acts, the banks must
verify whether the cost of the recovered materials has been properly
calculated. in accordance with the unitary rate data on which the cost
of the performed work has been based..
In.the case of restoration operations, the acceptance acts must
be checked especially for the proper calculation of the cost of wreck-
ing work (the dismantling of construction parts that cannot be restored,
the clearing of ruins, the removal of rubble, and so forth). According
to existing regulations, this type of work is paid for in the following
way:superf1cial work is included in the acceptance. acts (Form 2) and-is
paid for on the same basis as other construction work in accordance with
the rates of the approved cost estimate; underground and underwater
wrecking work is paid for in terms of the actual cost on the basis of
special acts listing the volume of performed. work and its actual cost
based on accounting data.
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Of major importance is a check of the correct calculation of over-
head expenses in the acceptance acts (Form 2). The government approves
separate overhead norms for construction work, the installation of
steel construction, the installation of equipment, underground capital
mining work and marsh-preparation work in peat workings. Construction
overhead norms are further differentiated by ministries and agencies.
In the course of checking the acceptance acts (Form 2), special attention
must be paid to the grouping of the performed types of work and the
proper application of the overhead. norms. Except for cases for which
provision is made in special government regulations, construction work
overhead expenses are based on the norms that have been set up for the
client ministries, irrespective of the jurisdiction of the contractors
that perform the work. Overhead. outlays related to the installation
of equipment and steel construction that are based on norms listed in
installation rate books are already included in the cost per unit of
installation work and should not figure in the acceptance acts. This
must be carefully verified in the course of the bank check.
Finally, the acceptance acts are verified with regard to their
arithmetical computations, after which the bill accompanying the acts
is verified. In the cases where several acceptance acts are covered
by a single bill, a separate register of the corresponding act numbers
and total amounts must be appended to the bill.
The bill presented by the contractor includes the total cost of
the work covered. by the acceptance acts, various surcharges permitted
by law and. various types of withholdings. Monthly contractor bills
must provide for the withholding of the amounts paid on the inter-
mediate 10-day 'bills and part of the client's advance (if the with-
holding date set by the contract is due), as well. as the cost of the
prefabricated parts and subassemblies that have been used in construc-
tion and. were paid for by the client in addition to the advance.
The bills are checked by the banks not only from the point of
view of the correct listing of the data mentioned above but also from
the point of view of the arithmetical 'computations. Having checked
the bills and the appended acceptance acts (Form 2),'the bank employes
note the amount to be paid on the documents. With the approval of the
head of the bank office or specially delegated bank employes, the
bank's accounting department effects the payment of the bills in the
amount indicated by the checker.
A penalty of 5 percent of the overstated amount can be levied by
the banks on the contractors (a list of the overstated items on which
penalties can be levied. has been drawn up by the Ministry of Finance
USSR).
Bank control over payment of performed construction-installation
work is not limited to the preliminary check of bills and appended
acceptance acts (Form 2). Not even the most careful check of the acts
can ascertain whether the work has actually been performed. Therefore
bank employes periodically carry out an inspection on the spot of the
completed. work.
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This inspection is a very effective method of preventing over-
payment of state funds for completed construction and. installation
work.
By the terms of existing regulations of the Ministry of Finance.
USSR, on-the-spot inspection by the bank must cover not less than 35
percent of the construction-installation work paid for on the basis
of acceptance acts in the course of a year.
This inspection is designed to establish whether the work paid
for by the, bank has. been carried out in strict accordance with the
working plans and the plans and estimates dossier; whether the certi-
fied. and. paid amount of work corresponds to that actually performed,
and whether the composition and nature of the work has not been al-
tered. compared with the unitary rates of the approved cost estimate;
whether all the construction parts and types of work paid.for have
actually been completed and whether any incompleted construction or
installation work has been paid for.
Before leaving for the construction site to carry out an inspec-
tion, the bank employe usually draws up a summary of the work that
has been paid for. This list summarizes on the basis of the accep-
tance acts (Form 2) the quantity and. cost of the work to be inspected,
particularly the largest and most costly items.
Furthermore this summary lists for each construction item the
quantity and cost of work on each separate construction element or
type of work. Separate columns are provided in the list for each
month of the current year; in addition there are two special columns
that give the quantity and. cost of work paid for prior to the start
of the year.
These summary data exclude work that has been previously inspected
and include only the work that is to be checked on the present inspec-
tion trip. The summary lists separately the indicators of the work
that was paid. for prior to the start of the year.
We can illustrate the above with an example.
Let us assume that the following situation is found to be the
case at-the time such a summary list is being drawn up. On the basis
of acceptance acts (Form 2) paid by the bank on a construction item
to be inspected, the following work has been done in laying brick
walls of a complex architectural form using lime mortar at the rate
(unitary rate of the approved. cost estimate) of 201.60 rubles per
cubic meter of brick works
Prior to the start of the year 2,045 cubic meters
at the cost of 412,272 rubles
In January 520
In February 545 it
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In March 280 cubic meters
at the cost of 56,4+8 rubles
Total 3,390 683,424
The last inspection
covered (in November
of last year) 1,620
326,592
Consequently, the present
inspection must cover 1,770 cubic meters
at the cost of 356,832 rubles
Including the following
work paid for prior
to the start of the
year (less the work
inspected the last
time)
4.25
85,680 rubles
The example given above is taken directly from the established
form of the summary list discussed. previously; such a calculation is
made for every construction element or type of work that is to be in-
spected. The preliminary summary list thus contains all the data
regarding quantity and cost of work required for the inspection.
Representatives of the client and the contractor are invited to
be present in the inspection and must be given at least one day's
notice of the time and place of the impending inspection. Failure
of these representatives to appear does not interfere with the carry-
ing out of the inspection.
The inspection involves an examination on the spot and measurement
of the construction-installation work paid for on the basis of the
acceptance acts. The quantity and the physical volume of the work
actually performed is measured on the spot. The volume and make-up of
work on certain construction elements that cannot be easily measured
on the spot are verified on the basis of available primary construc-
tion documents. These documents include: work progress registration
journals, reporting on pile driving, concrete laying, drilling and so
forth; geodesical and. mine survey data; various types of acts covering
"concealed" work; primary documents on material stores, instructions
to workers, routings of truck and cart drivers, and so forth.
The results of the inspection are certified in a form provided
by the Ministry of Finance USSR. A list with the recalculation of the
cost of the work must be appended to this report. This list compares
the quantity, rates and. cost of the work as given in the paid acceptance
acts with the data found in the course of the inspection.
The total amount of excess charges uncovered in the course of the
inspection is broken down in the recalculation by types of infractions.
The most serious infraction is an increase in the quantity (physical
volume) of completed. work, which is tantamount to charging for incom-
pleted work.
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In the example above, 1,770 cubic meters of brickwork had been
paid, for after the last inspection. Actually inspection established
the completion of only 1,620 cubic meters. The excess amounted to
150 cubic meters, or 30,240 rubles worth of work at the rate of 201.60
rubles per unit (cubic meter) of brickwork.
The next most serious infraction is the outright inclusion in the
acceptance acts of incompleted production, since payment for incomplete
series, of operations described in the cost estimate norms is illegal.
For example., according to the acceptance acts 420 square meters
of corrugated iron roofing were said to have been laid, but upon
inspection the roofing is found. to lack gutters, smokestacks and sky-
lights required, by the terms of Paragraph 69 of SUSN post estimate
norm hand.book7. Therefore the laying of the 420 square meters of
roofing must be regarded as incompleted construction and the amounts
paid for this work must be regarded as overpayments.
The recalculation list also identifies separately excess payments
due to the incorrect application of unitary rates.
For example, according to the acceptance acts, the digging of
trenches to a depth of 2 meters and a width of 1.5 meters in heavy
wet ground with a total volume of 452 cubic meters was paid for at
the rate of 17.50 rubles per cubic meters, or at.a cost of 7,910
rubles. Actually inspection uncovered, the fact that the trenches had
been d.ug in heavy dry ground, for which the corresponding unitary rate
is 5.10 rubles per cubic meter. The excess charge due to the wrong
application of the unitary rate is therefore
(17.50 rubles x 452) - (5.10 rubles x 452) = 5,605 rubles.
Other types of excess charges include., the illegitimate inclusion
in the acceptance acts (Form 2) of temporary installations that are
already covered. by overhead. expenses; the listing in the acceptance
acts of work that was not envisaged by the plans and. estimates dossier
of the given construction item, and so forth.
After all the inspection data have been listed in the recalcula-
tion report, the total amount paid, on the acceptance acts and the
amount due according to the inspection are noted. The difference is
the total extra charge that is broken down in the report by types of
concealed infractions. Then the overhead expenses are calculated for
each of the two total amounts, after which the total extra charge is
corrected. for coefficients converting the cost of construction into
current prices.
The volume of inspected work and the total amount of excess pay-
ments made during the current year are then listed. in the text part
of the inspection report. These data are required. for the appropriate
reduction of appropriations allocated to the inspected project for the
current year.
If the representatives of the client and the contractor do not
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agree with any of the facts in the inspection report they may make
appropriate notations in the report and present their own views to
the bank within five days.
The inspection act is regarded to have legal force after its
approval (within 10 days) by the chief of the bank branch. The
approval, entered on the title page, must contain the'final data on
the total amount that has been overpaid and is to be withheld, with
separate listing of the amount relating to the work paid for prior
to the current year. The approval must also cover the amount of the
penalty, which, as in the case of acceptance acts and, bills, is set
at 5 percent of the total excess charges uncovered through inspection.
The amount of the excess charges uncovered through inspection
and the amount of the penalty are transferred from the contractor's
clearing account under the usual terms of payment priority; if there
are no funds in the clearing account, the amounts are withheld at the
time of the next payment for completed work.
The penalty levied by the bank must be recovered from the work-
ers of the contracting organization who are personally responsible
for the infractions.
The bank must see to it that the necessary corrections result-
ing from the inspection be made in the reported indicators of the
contracting organizations and the projects.
Major importance must be attached to the question of raising
the quality and effectiveness of inspection since the struggle against
overpayment of state funds and the strengthening of financial discipline
in construction are the main functions of the investment banks. One
of the best methods of checking on the quality of inspection is to
carry out a second inspection as verification. The second, inspection
is usually handled by chief engineers of the bank branches on the con-
struction items that have recently been inspected by the bank employes.
5. Bank Control over the Financial and Economic Operations of Con-
tractors
The financial control function of the banks must insure observance
at the projects of the strictest system of economies, the thrifty
handling of state funds, the rational and correct expenditure of ma-
terial and money resources and the fulfillment of the most important
of all national economic tasks -- the reduction of the cost of con-
struction-installation work and of construction in general.
In the case of contracted construction, the reduction of construc-
tion costs depends chiefly on the management of the contracting
organizations. The reduction of costs envisaged by the plan can be
achieved only when the contracted work is properly organized, advanced
technology and Stakhanovite labor methods are introduced, economic
accountability and a system of economies are being observed. and mis-
management and nonproductive losses are eliminated. The investment
banks that are concerned with the clearing operations and the short-
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term crediting of contracting organizations must therefore effect day-
to-day control over their financial and economic operations.
Bank control must be designed, to prevent in time any possibility
of infractions in the plans and estimates, financial and. payments
discipline of contracting construction organizations and to assist in
their fulfillment of the cost reduction plans. To achieve this task,
investment banks must study on a systematic basis the operations of
contracting organizations, combine preliminary and subsequent control
methods, and carry out specific measures and requirements to eliminate
the uncovered deficiencies.
In connection with their control functions, the investment banks
have the right, without interfering in the economic operations of pro-
jects and contracting organizations, to carry out investigations, demand
the presentation of all required documents, and examine construction
audits.
Following analysis of accounts and an on-the-spot investigation,
the.. bank branches work out specific measures designed to eliminate
the shortcomings and insure fulfillment of the plan.
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SHORT-TERM CREDITING OF CONTRACTING ORGANIZATIONS AND PROJECTS
1. Basic Short-Term Credit Items
The existing system of short-term crediting in the field of capital
construction is based on the general principles of Soviet crediting,
including due dates, repayments, specific purpose of loans, and guaran-
tee by equivalent material resources.
Short-term crediting of construction organizations by investment
banks was established by the Council of People's Commissars USSR and
the party's Central Committee in a decree dated 11 February 1936.
That key document in the field of capital construction gave rise to
the short-term crediting of contractors for the seasonal deliveries
of construction materials and fodder and was instrumental in creating
a real basis for the development of credit relationships between the
investment banks and the contractors, while exercising "control by the
ruble" over the operations of economic organizations in.the field of
capital construction.
Subsequently short-term credit operations in the field of construc-
tion were regulated in detail by the Regulations of Construction
Financing approved by the government in 1938. The basic provisions
of these regulations were also extended to the other investment banks
by decision of the People's Commissariat of Finance USSR.
According to these regulations, short-term credit can be granted
to contractors for the purchase of construction materials, fodder and
fuel for seasonal upswings in work and because of seasonal shipping
conditions (in 1949, the crediting of seasonal purchases was broken
down into its two component parts). One additional form of short-term
credit permitted by the regulations a loan for less than 6 months for
capital repair of construction machinery and means of transportation
at the expense of impending amortization fees.
Short-term credit items permitted by subsequent government deci-
sions include: (1) loans granted against clearing documents en route
in connection with the sale and shipment of goods and excess reserves
no longer needed by the contractor and. loans against clearing documents
en route in connection with the shipment of goods to the supply or-
ganizations of the contracting trust; (2) loans for the payment of
supplier bills for basic materials (lumber, meta]., cement, roofing)
shipped to contracting organizations of those ministries that may use
guaranteed bank credit by permission of the Council of Ministers USSR;
(3) loans granted by municipal banks to the supply organizations of
construction-installation trusts to cover planned remainders of ma-
terials in excess of norm.
In addition to these loans, the investment banks may be separate
government decisions grant credit to contractors for temporary needs:
for the payment of overdue debts to suppliers in general inter-ministry
settlements; for the settling of overdue wages; as temporary financial
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assistance to the construction organizations of certain ministries,
and so forth.
In cases set out by law, investment banks may also grant short-
term credit to client projects. But this type of credit differs in
principle from the loans granted to contractors for temporary addi-
tional working capital needs envisaged by the plan. The credit granted
to client projects is essentially a form of advance granted by the
investment banks until the client obtains funds from sources determined
by the financing plan.
Short-term credit is granted to the client projects for the follow-
ing purposes. for the payment of overdue debts to contracting organiza-
tions of certain ministries (on the basis of separate government
decisions); to prepare state farms for the next year's operations and
in part for outlays related. to the replenishing of the main herds.
A special type of short-term credit are loans granted by the
investment banks for the payment of bills presented. by foreign trade
units of the Ministry of Foreign Trade USSR for imported materials and,
equipment.
The Method of Planning, Granting and Extinguishing Short-Term Loans
The total short-term credit needs of contracting organizations
and. the sources to be used for such credits are listed in the invest-
ment bank credit plans approved by the government. Since the content
and the procedure of drawing up and approving these credit plans are
discussed. in Chapter XIX, the present chapter will be restricted. to a
discussion of the procedure of setting up the short-term loan limits.
The credit limit is the maximum limit of indebtedness for a given
type of loan that has been properly approved and was derived from the
planned temporary need of the credit organization in additional work-
ing capital.
The amount of the short-term credit limit is based on quarterly
requests presented by ministries and agencies to the investment banks.
The calculation of planned credit needs varies in accordance with
the specific purpose of the loan. For example, in the case of credit
for the purchase of construction materials, the required limit is cal-
culated for the ministry as a whole; that also applies to credit needs
for capital repairs of construction machinery and. transport. As far
as the seasonal shipment of construction materials, fodder and fuel is
concerned, the limit for that type of credit is calculated. separately
for each contracting organization.
Once the credit limits have been approved. by the Council of Minis-
ters USSR, they are distributed among the construction and installation
trusts by the ministries, agencies and main administrations in conjunction
with the investment banks. After the head offices of the investment banks
have checked. the total amount of the credit limits granted. to individual
trusts against the limits approved by the government for a given ministry
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or agency, they inform their, appropriate offices of the quarterly credit
limits allotted to each trust. The trusts in turn distribute these
quarterly limits among their economic subdivisions -- construction ad-
ministrations, offices, sectors. The bank offices, after having checked
the proper distribution of the limits within the trust, inform the ap-
propriate bank branches of the credit allotted. to each economic sub-
division of the trust (making use of the form provided for that purpose).
Trusts that use mutual clearing bureaus do not distribute their credit
limits allotted. for the purchase of construction materials, fodder and
fuel. In those trusts the credit limits are allotted in their entirety
to the special supply offices.
The credit limit may be disposed of in a similar manner by trusts
where all or part of the credited construction materials are kept in
storehouses of the supply office.
The credit limits allotted to contracting organizations under
republic or local jurisdiction are communicated by the head offices
of the investment banks to their offices for the republic, kray or
oblast as a whole. The credit is then distributed. among the republic
and local contractors by the appropriate bank office in conjunction
with the superior agencies of these contractors (republic ministries,
Councils of Ministers of autonomous republics, Executive Committees
of kray and. oblast Soviets of working people's deputies and. so forth).
Loans to state farms for the preparation of next year's operations
or to cover the gap between the receipt of funds and outlays for the
replenishing the herds are granted within the limits set by Sel'khoz-
bank or its republic offices.
The credit limits are effective only for the quarter for which
they have been allotted. The part of the limit that remains unused
at the end of the quarter is closed and cannot be used during the fol-
lowing quarter.
Unlimited credit, i.e. credit not provided by the limits of the
head. offices of the investment banks, can be granted to contractors
against clearing documents en route and for the payment of supplier
bills in the form of guaranteed bank credit (in the case of ministries
entitled. to such credit).
Unlimited credit may also be granted to client projects for the
payment of overdue debts to contractors of certain ministries for
completed work and. unlimited loans may be granted against impending
payments of investment contributions (in the form of financial bonuses).
Twenty-five percent of the quarterly credit limits may be used by
the heads of bank offices to grant loans covering temporary needs of
the contracting organizations. These loans must be extinguished within
the same quarter.
When the crediting of construction organizations is authorized
by separate decrees of the Council of Ministers USSR (for the settling
of inter-ministry accounts, the extinction of wage indebtedness, and
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so forth), the head. offices of the investment banks thus inform their
appropriate branches.
For each type of credit, the bank offices open separate loan
accounts to the borrowers upon the receipt of the loan application and
a statement of repayment obligations. The granting of a short-term
loan requires the written authorization of the head of the bank office
that grants the loan. This authorization is based on the recommenda-
tion of the credit inspector who.. investigated the legitimacy of the
loan and on the proper execution of the documents presented. by the bor-
rower.
The bank offices are required to see to it that the loans issued
are used for the purpose intended and that they are guaranteed by the
material resources for the payment of which they had been granted. This
control is carried out through the monthly certificates on the guar-
anteeing of advances and short-term loans (Form l-a) that must be sub-
mitted by the credited contracting organizations. Failure to submit
the certificates on the due date leads to the withholding of further
credit. In that case, previous.loans must be recovered immediately (in
the established order or payment priority) and. the borrower gets a 10-
day notice to that effect.
If a check of the certificates (Form l-a) discloses that the
short-term loans are not fully guaranteed by the credited material re-
sources, the bank has the right to recover the nonguaranteed. part of
the loan from the clearing account of the contracting organization in
the usual order of priority of payments. The transfer of the non-
guaranteed amount of the loan from the clearing account to the loan
account must be approved by the head of the bank office.
Upon the receipt of the-regular balance sheets from the credited.
contracting organizations, the investment banks check on the correct-
ness of the data in the certificates on the guaranteeing of advances
and loans (Form l-a). If discrepancies are found between the certifi-
cates and the balance sheets, the reasons for such discrepancies must
be established. If malpractices are established, the persons responsi-
ble for the false certificates must be made to answer for the acts in
court. If on the basis of the balance sheet the bank finds lack of
the proper guarantee for a short-term loan that had not been established.
at the time of the checking of the certificates, the bank has the right
to transfer the appropriate amount from the clearing account.
The banks' use of short-term credit for control by the ruble over
the economic and. financial operations of credited. construction organ-
izations is a very important state matter.
In the case of overdue payments.on short-term loans, the banks
have the right to transfer the overdue amount from the clearing account
of the borrower under the established order of payment priority; if
funds are lacking in the clearing accounts, the amount may be taken
from the special advance accounts.
If the payments of certain borrowers are regularly overdue and
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if mismanagement is established upon investigation, the banks may apply
credit sanctions up to the complete withholding of credit.
In the case of overdue payments, the banks may raise the credit
interest rate to 4 percent annually from the usual 2 percent.
As for contractors who fulfill their construction plans and pro-
perly handle their finances, the banks have the right to offer easy
credit terms. They may cut the interest rate in half and increase
the credit limits on seasonal deliveries of construction materials on
the basis of the increased requirements related to the overfulfillment
of the plan.
5 Credit for the Seasonal Deliveries of Construction Materials, Fodder
and Fuel
Credit for the seasonal deliveries of materials falls into two
types of short-term loans: loans for the delivery of construction
materials in connection with a seasonal upswing in the volume of work,
and credit for the delivery of construction materials, fodder and fuel
related to seasonal shipment conditions.
The first of these loans is designed to make it possible for the
contractors to accumulate material reserves at the start of the construc-
tion peak period. The need for material accumulation in excess of the
planned norms arise from the fact that the work program of the contract-
ors is distributed unevenly through the year while the advances supplied
by the clients for the purchase of materials are calculated on the basis
of average annual requirements.
The peak of construction usually comes during the most favorable
weather conditions. It must be emphasized, however, that the technical
level of the Soviet construction industry makes it possible to carry
out construction work under any natural, climatic and atmospheric condi-
tions. Our construction industry has lost its seasonal character and.
has become a year-round operation making use of all the achievements of
science and technology. The fact is that the execution of certain types
of construction would be irrational in the winter time and therefore
the peak of the work occurs during the summer. This accounts for the
quarterly fluctuations in the work programs.
Under these circumstances, bank loans for the seasonal accumulation
of materials are granted when the work program of the next quarter is
expected to exceed the average quarterly program.
Let us assume that a contractor has an annual work program of 40
million rubles (without any subcontracts). Let us assume further that
this program is broken down as follows by quarters: first quarter --
8.4 million rubles, second quarter -- 9.6 million rubles, third quarter
-- 11.6 million rubles, and fourth quarter -- 10.1+ million rubles.
In this case, the work program of the third and fourth quarters, which
makes up respectively 29 and 26 percent of the annual program, exceeds
the average quarterly program of 10 million rubles.
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Credit in preparation for these peak periods may be granted during
the second. and third quarters so that appropriate accumulations of
materials will be available at the start of the following quarters (the
third and fourth).
The credit requirements for this purpose are calculated. on the
basis of a number of documents submitted by the credited organization:
the report on the cost of construction (Form 28-cc), report on the re-
ceipt and outlay of construction materials in capital construction
(Form 27-cc), and the balance sheet of the contracting organization
(Form 36-cc).
Let us calculate the share of materials in the cost of construction-
installation work in planning for credit during the third quarter of
1950.
Let us assume that during the first four months of 1950 the
credited contracting organization did work worth 12 million rubles,
with the cost of the expended materials, according to Form 28-cc,
amounting to 6,960,000 rubles or 58 percent of the total cost. On
the basis of the annual report (Form 27-cc) for 1949, the total cost
of materials expended in that year was equal to 214.2 million rubles,
of which 2,904,000 rubles or 12 percent were spent for prefabricated
construction parts. This information is used to correct the data
based on Form 28-cc.:
58
- 58-12 = 51
100
This percentage is used to calculate the material requirements
for the fulfillment of the work program of the following quarter (in
this case the fourth) and the average daily expenditure of materials
during that quarter. With the planned fourth-quarter program being
10.4 million rubles, the quarterly requirements in materials would be:
10,1+00, 00o xl = 5,304,000 rubles
100
The average daily expenditure of materials (based on a 90-day
quarter) is-.
5,304,000 = 58,930 rubles.
90
The planned reserve of construction materials in days is deter-
mined by the amount of the basic part of the advance received from the
client in accordance with the annual program of contracted construction
installation work. Given the total amount of the advance received for
the purchase of materials (i.e. not including that part of the advance
which is designed to cover incompleted construction work and the ad-
vances transferred to subcontractors) and given the average daily
expendtiture of materials during the year, we can calculate the average
planned. reserve of construction materials in days for all contracts
concluded by the given contracting organization.
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Let us assume that the part of the clients' advances intended for
the purchase of materials amounts, according to the contracts and the
balance sheet (Form 36-cc), 8 percent of the annual work program of 40
million rubles, or 3.2 million rubles. In this case the average daily
expenditure of materials is calculated from the annual work program of
40 million rubles, the percentage share of 51 percent and. a 360-day
year:
40,000,000 x 51 = 56,670 rubles.
100 x 360 Whence the normal reserve of construction materials in days (cal-
culated from the average annual needs for reserves covered by the
clients' advances of 3.2 million rubles) is:
3,200,000 = 56,47 days.
56,670
Given the planned reserve of materials and their average daily
expenditure in the next quarter, we can calculate the planned reserve
of materials at the end of the current quarter. In the given case,
this amounts to:
58,930 x 56.47 = 3,328,000 rubles.
If we now compare the calculated amount with the average annual
reserve of materials covered by the clients' advances (3,200,000 rubles)
we can determine the temporary need of the contracting organization for
additional funds for the purchase of construction materials in connection
with the seasonal construction peak. In the given case, the short-term
credit requirement for that purpose amounts to:
3,328,000 - 3,200,000 = 128,000 rubles.
The information sent to the bank offices on the quarterly credit
limits set for each contractor does not include all the calculations
of the loan needs for the purchase of seasonal materials. The limit
data on this type of credit includes only the following indicators:
the remainder of construction materials planned for the end of the
current quarter; the standard remainder of materials covered by clients'
advances and the credit limit, which amounts to the difference between
the two previous indicators.
In our example, the credit needs would be expressed. as follows
in the limit data (in thousands of rubles):
1. Remainder of construction materials planned. for
the end of the current quarter 3,328
2. Standard remainder of construction materials
covered by the clients' advances 3,200
3. Limit of bank credit (Item 1 minus Item 2) 128
Credit needs related to seasonal shipment conditions arise when
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construction department) is the advance transferred upon the instruction
of the director of the future or existing enterprise to the chief of
construction (or of the capital construction department). The amount
of the advance is based on the norms of working capital established for
contracting organizations. If the project is to make the most effective
use of the working capital granted. for the uninterrupted course of con-
struction, it must properly organize its finances and prevent overstock-
ing and indebtedness.
Projects operating by the economic method. and financed in accordance
with work completed are headed. by a chief of construction (in the case
of new projects) or the chief of the capital construction department (in
the case of existing enterprises). Although the chief of construction
(capital construction department) is subordinated to the director of
the future (existing) enterprise, his functions are not circumscribed.
Economic relationships between the director of the future (existing)
enterprise and the chief of construction (capital construction depart-
ment) are based. on the same principles as relationships between client
and contractor in contracted construction.
The director, like the client, is the side that accepts the work,
while the chief of construction is the side that executes and delivers
the work. The director as the person in charge of the allocated. appro-
priations fulfills the functions of technical inspection of the
construction and sees to it that the construction items are completed
on schedule. He supplies the project with properly approved. plans and
cost estimates, procures the equipment, construction machinery and
transportation and takes measures to train personnel for the future
enterprise.
The chief of construction, on the other hand, fulfills the con-
struction and. installation work assigned to him, being guided in this
case'not by a contract agreement but by a special list of construction
work (Form 3) to be handled. by the economic method. The chief of con-
struction procures construction materials, hires workers and adminis-
trative and, economic employes and organizes their work, and. takes other
steps related to the fulfillment of the work program.
The project that operates by the economic method and is being
financed on the basis of work completed gets two bank accounts: the
financing account of the director and the clearing account of the chief
of construction. Payments from these accounts are made in accordance
with the functions assigned to the director and to the construction.
chief.
The financing account is used to pay for completed. construction-
installation and geological exploration work, equipment, construction
machinery, means of transportation, outlays for the training of per-
sonnel and the maintenance of the director's office of the future .
enterprise, advances to the chief of construction and to contractors
who have agreements with the director, and other outlays related. to
operations handled. by the director.
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The clearing account is used to pay for materials, prefabricated.
construction parts, low.-value items, special clothing, transportation
of materials and related services, overhead outlays, bills for work
completed by contractors on the basis of agreements concluded with the
chief of construction, wages and. other outlays related to the fulfill-
ment of the work program assigned to the chief of construction.
Work completed by the chief of construction is usually paid for
on the same basis as contracted work. The basis for the payment is
the work acceptance act (Form 2) signed by the director and the chief
of construction. Only the completed parts of construction elements
may be listed in the act.
There is, however, a certain difference in the procedure of pay-
ing for work done by the economic method. This difference is due to
the fact that the project operating by the economic method. and being
financed. on the basis of work completed. is actually a part of the
future (or existing) enterprise. As a result the system of trans-
actions between the chief of construction and the director can be
simplified..
It should be noted in the first place that acceptance acts of
work done by the economic method are submitted only once a month,
while contracted. construction is also paid for on Intermediate bills
presented. on a 10-day basis. In addition, acceptance acts do not re-
quire any accompanying bills and. are paid merely on the basis of the
director's payment instructions. It should also be borne in mind
that projects financed by Prombank and Tsekombank with a total cost
estimate of not more than 75,000 rubles and projects financed by
Torgbank with a total cost estimate of not more than 25,000 rubles
are paid for only upon final completion of the work.
When payment is made for completed. work, the bank withholds any
planned accumulations and the amounts envisaged by the construction
cost reduction plan insofar as these are taken into account in the
financing limits.
In addition the bank withholds part of the amortization deductions
on the fixed capital of the project. This is done because the unitary
rates at which payment is made for completed work include the total
amount of amortization on construction machinery, transportation and
other fixed capital, while only part of that amount is used for capital
repairs. The difference between the total amortization fee and the part
allotted to capital repairs is therefore withheld by the bank. Here is
an illustration.
Let us assume that the value of the fixed capital of the project
is 2,520,000 rubles, and the average amortization rate (excluding the
capital repair part) is 3.3 percent. The amount of amortization allot-
ted to the financing of construction is therefore:
per year 2,520,000 00 x 3.3
1
83,200 rubles
per quarter 20,800 rubles.
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If the construction program fulfilled during the quarter is
2,000,000 rubles, then the amortization rate allotted to the financing
of construction in connection with this program is:
20,800 x 100
2,000,000
1.o4%.
Let us assume further that the planned accumulations of the pro-
ject are 46,000 rubles a quarter, or 2.3 percent of the work program
(46,000 x 100 = 2.30 and that the construction cost reduction plan
2,000,000
was 6 percent. Consequently, 9.34 percent of the cost of the completed
work is subject to withholding.
Accordingly, when acceptance acts for the amount of 800,000 rubles
are presented, the amount withheld is:
800, o2o x 9.34 74,700 rubles,
100
or 9.34 percent of the completed work.
The system of financing projects on the basis of completed, work
strengthens preliminary control on the part of the investment banks.
In addition to the control function inherent in the payment of bills
for materials, and the issuing of funds for wages and other outlays,
the banks also check the acceptance acts of completed work (Form 2).
This check is made, as in the case of contracted construction, both
before and after payment (in the form of on-the-spot inspection).
The banks check the acceptance acts against the list of construc-
tion work (Form 3) received from the project and make certain that
the acceptance acts contain only construction items that are listed.
in the itemized lists and that the cost of the completed work does not
exceed the remainder of the cost estimate limit and. the appropriations
for the corresponding items. No payment is made for acceptance acts
covering completed, work that has not been supplied with properly ap-
proved. plans and cost estimates.
One more special feature of the payment for completed work
handled by the economic method remains to be noted. In those cases
where the clearing account of the chief of construction lacks funds
for the payment of wages, the director may use the financing account
(in the order of priority for the payment of wages) to pay the chief
of construction for completed work the amount necessary for the pay-
ment of wages. If the amount covering completed work is insufficient
to cover the wage bill, then the director has the right to take from
the financing account the amount necessary to pay the wages. The ad-
ditional funds thus paid to the chief of construction must then be
withheld from the payment of the following month's acceptance acts.
Of key importance in introducing and strengthening economic ac-
countability in construction is the organization of internal economic
accountability sectors. Such sectors are organized as a general rule
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in large projects that contain isolated construction items. Upon the
request of the chief of construction, the banks may open separate clear-
ing accounts to such internal economic accountability sectors. In those
cases, transactions between the chief of construction and the sectors
are handled in the same way as in the contracting method of construction.
2.. The Formation of the Working Capital Granted to the Chief of Construc-
tion
If the chief of construction is to insure a normal progress of con-
struction and installation work, he must dispose of sufficient reserves
of construction materials, prefabricated construction parts, tools,
special clothing and other materials. In addition, part of the capital
of the project is constantly frozen in the remainder of incompleted con-
struction and installation work.
In this connection. the necessary working capital is allotted. to the
chief of construction. The capital takes the form of an advance that
is granted by the director of the enterprise and. is credited to the clear-
ing account of the chief of construction.
Inasmuch as the enterprise and the construction project are part of
the same economic operation, the advance is granted from appropriations
based. on a combined financing plan of the project.
In view of the fact that all the financial requirements of the pro-
ject are covered by the amounts provided by the financing plan, any un-
used funds in clearing accounts and in the financing account of the pro-
ject are returned to the budget at the end. of the year.
As the construction work is being completed, the advance must be
gradually returned so that it will be extinguished at the completion of
the work.
Thus, unlike the contracting organizations with their permanent
working capital, projects operating by the economic method and financed,
on the basis of completed work receive only temporary working capital.
This difference is due to the organizational and. economic features of
projects operating by the economic method. Contracting organizations,
which operate on one or more construction sites, do not cease their
operations at the end of the operations on those sites, but continue to
operate elsewhere in accordance with their work program. Therefore
contracting organizations must dispose of permanent working capital.
Projects operating by the economic method, on the other hand, carry
out their work on a given site and. terminate their operations upon the
completion of the construction.
As we have pointed. out in Chapter VII, there are no substantial
differences between the structure of the working assets of projects
operating by the economic method. and finances on the basis of work com-
pleted and the structure of the working assets of contracting organiza-
tions. There are only individual differences in the remainders of low-
value and rapidly depreciating items (they amount to less than 3 percent)
and in the manner of paying for work completed.
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Payment for work completed by the economic method is-made once.a.
month and consequently the chief of construction requires sufficient-
working capital to tide him over until the next payment date. The
funds allotted for that purpose amount in an average to 5.6 percent of
the annual work program..
However, the requirement in funds for that purpose is not taken
into.account.in the planning of the mobilization of internal resources.
for the project as a whole since it corresponds to an equivalent credit
in the director's account. Therefore the stated. requirement in funds
must be covered.by the advance issued to the chief of construction.
Projects operating by the economic method, unlike the contractors,
d.o not use bank credit for the seasonal accumulation of materials, a
factor that must be taken into account in the calculation of the ad-
vance., Since the quarterly advance is calculated. on the basis of the
annual work program (the quarterly program multiplied by. four), addi-
tional funds must be advanced. for the seasonal purchase of materials.
The amount of these additional funds is calculated in the same manner
.as,if credit were to. be granted to a contracting organization.
Projects financed by Prombank and within the Tsekombank system on
the basis of work completed also required fund to cover remainders of
incompleted construction on. items with a total cost estimate of less
than 75,000 rubles (in the case of Torgbank financing, less than 25,000
rubles)., for which payment is made only upon completion of the entire
item. The magnitude of the remainder of such incompleted construction
depends chiefly on the number of such items and their estimated cost.
The advance issued. to the chief of construction also includes the
working assets shown on the balance sheet of the project as of 1 January
of the current year (insofar as they refer to work completed. by the
chief of construction). The amount advanced must also take into ac-
count the need for termination of any abnormal indebtedness to the pro-
ject. Finally the advance must include the cost of the work completed.
in December of the preceding year, payment for which is made during the
current year.
Let us illustrate the calculation of the advance with an example.
The annual work program assigned. to the chief of construction will
be 6 million rubles. The quarterly breakdown of this program is:
first quarter -- 1.2 million rubles, second quarter--- 1.5 mil-
lion rubles, third. quarter -- 1.7 million rubles, fourth quarter
1.6 million rubles.
The need for seasonal shipments of lumber during the fourth quarter
amounts to 150,000 rubles.
The project is expected to start work during the second quarter and.
complete work during the third quarter on three items with an estimated
cost of less than 75,000 rubles. In accordance with the work schedule,
two items worth 125,000 rubles must be started 1 May and completed 15
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July, while the third item must be started 10 May and completed 20 July.
The construction time on the first two items is 75 days, and. on the third
item 70 days.
Consequently, during the second. quarter the project will require
funds to cover the following outlays: on the first two items 125,000 x 60
75
= 100,000 rubles and on the third item 70,000 x 50 = 50,000 rubles, or
a total of 150,000 rubles. 70
According to the balance sheet as of 1 January, the project had a
credit, exceeding the normal credit by 50,000 rubles, for work previously
completed.
The amount of material resources and other working assets issued. to
the chief of construction was 900,000 rubles as of 1 January. And pay-
ment for work completed last year and. effected during January amounted
to 500,000 rubles.
On the basis of a norm of 19 percent (which takes into account funds
required to cover the cost of prefabricated construction parts and out-
lays for incomp:Leted construction and installation work) and. on the basis
of the work program of each quarter, which is converted into the annual
program by multiplying by four, we can calculate the working capital
requirements of the chief of construction:
in the first quarter, 1,200,000 x j x 19 = 912,000 rubles.
100
in the second. quarter 1,500,000 x 4 x 19 = 1,140,000 rubles
100
in the third quarter 1,700,000 x 4 x 19 1,292,000 rubles
100
in the fourth quarter 1,600,000 x 4 x 19 1,216,000 rubles.
100
The part of the advance allotted for outlays pending payment for
completed work is:
for the first quarter 4,800,000 x 5.6 269,000 rubles
100
for the second quarter 6,000,000 x 5.6 = 336,000 rubles
100
for the third quarter 6,800,000 x-5.6 = 381,000 rubles
100
for the fourth quarter 6,1+00,000 x 5.6 = 358,000 rubles
100
On the basis of these data, the advance to be issued to the chief
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of construction (in thousands of rubles) is:
for the first quarter 912 / 269 / 50 = 1,231
for the second, quarter 1,140 f 150 f 336 =1,626
for the third quarter 1,292 f 381 = 1,673
for the fourth quarter 1,216 / 150 / 358 = 1,724
If we now take into account the existing working assets as of 1
January of 900,000 rubles and the amount of 500,000 rubles paid in
January for work completed in December of last year, the advance to
be issued. to the chief of construction for each quarter must be cor-
rected. as follows-..
in the first quarter --a reduction by 169,000 rubles
(900,000 t 500,000 - 1,231,000)
in the second quarter -- an increase by 395,000 rubles
(1,626,000 - 1,231,000)
in the third quarter an increase by 47,000 rubles
(1,673,000 - 1,626,000)
in the fourth quarter -- an increase by 51,000 rubles
(1,721,000 - 1,673,000).
This is, however, only the preliminary calculation. As we stated
above, the director and the chief of construction are essentially part
of the same operation and, base their financial transactions on a com-
bined financial plan approved, for the project. The ministries and main
administrations may establish for projects under their jurisdiction
plans for the mobilization of internal resources that exceed the plan
indicated. by the amount of the advance based on average norms. This
would mean that the ministry or the main administration establishes
lower norms for the given project. In calculating the amount to be
advanced, the director must therefore be strictly guided by any changes
in working assets and credits provided. by the approved financing plan
(Form 5)a
The plan for the mobilization of internal resources and changes
in working assets are expressed in the financial plans (financing limits)
by a single amount. This amount must be apportioned by the director in
accordance with the division of functions between the chief of construe-
ti on and himself e
Using the example given above, we will now illustrate the procedure
followed in calculating the advance in accordance with the apportionment
of the plan for the mobilization of internal resources between the chief
of construction and the director.
Let us assume that the financing plan (Form 5) provides an annual
immobilization of 350,000 rubles (including a rise in working assets
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by 300,000 rubles and. the extir.ction of debts to the project of 50,000
rubles), with the following quarter:Ly breakdown: I - 60,000 rubles,
II - 240,000 rubles, III - 25,000 rubles, and IV ?- 25,000 rubles.
In accordance with the director's apportionment of the plan for
changes in working assets and debts owed to the project, of the 350,000
rubles 300,000 are allotted to the chief of construction and 30,000 to
the director. The quarterly breakdown of the chief of construction's
share would be 60,000 rubles in the first quarter and 240,000 rubles in
the second quarter, and the quarterly breakdown of the director's share
25,000 rubles each in the second and third quarters.
If we now take into account the data of the preceding example
regarding the January payment for work completed in December and the
amount advanced pending payment for completed. work, the advance for
the first quarter would have to be reduced by 171,000 rubles 500,000 -
(269,000 { 60,00017, instead of 1.69,000 rubles, as shown in the pre-
liminary calculation, and the advance for the second. quarter would
have to be increased by 307,000 rubles 1201+,000 { (336,000 - 269,00017,
instead of 395,000 rubles, as shown in the preliminary calculation.
For the second semester, when no change is envisaged in the work-
ing assets and the credit of the chief of construction, the advance
need be corrected. only insofar as it affects the outlays pending payment
for completed work, as_follows: the advance should be increased by 45,000
rubles in the third quarter and reduced. by 23,000 rubles in the fourth
quarter, instead of the increases by 47,000 and 51,000 rubles shown in
the preliminary calculation.
The bank verifies the calculation of the advance to be issued to
the chief of construction and then transfers the amount to the clearing
account of the chief of construction upon receipt of the appropriate
instructions from the director. In. making its check, the bank must also
be guided by the procedure described above for apportioning the ap-
proved plan for the mobilization (immobilization) of internal resources
as given in the financing limit. If too large an advance has been is-
sued to the chief of construction, the director instructs the bank to
transfer the excess amount from the clearing account to the financing
account within a set time period. If such an instruction is not forth-
coming from the director, the bank may effect the transfer on its own
initiative.
If as a result of its check the bank finds that the advance issued
to the chief of construction exceeds the existing norms, the bank asks
the director to reduce the advance accordingly. If the director re-
fuses to reduce the amount of the advance, the bank may pose the question
to the ministry or main administration.
It should be noted that these financing and control procedures
apply to the offices of Prombank and Tsekombank.
The procedure followed by Sel'khozbank differs somewhat. As we
stated above, all projects under the jursidiction of Sel'khozbank that
have an annual work program of more than 150,000 rubles are financed on
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the basis of work completed. In the case of projects financed by Sel'khoz-
bank no chiefs of construction are designated and, therefore acceptance
acts of work completed (Form 2) are signed only by the director of the.
enterprise, the person in charge of the work and the bookkeeper. These
projects also.have a clearing account and a financing account in Sel-
`khozbank, both being under the control of the director. No lists of
work to be done by the economic method (Form 3) are compiled. for these
projects. The Selpkhozbank offices check payments against the itemized.
list of work (Form 1) and. the unitary rates used. In the cost estimate.
Projects financed by Sel?khozbank on the basis of work completed
get a.maximum advance of 25 percent of the annual work program. If con-
struction is to be completed in the given year, the advance must be paid
off in proportion to the work completed; if the projects carry over into
the 'following year, no part of the advance is withheld during the cur-
rent year. Additional advances may be issued for the seasonal purchase
of materials. Such additional advances must be paid off not later than
1 November of the current year.
3. Financing on the Basis of Individual Outlays
Below-limit projects and above-limit projects with an annual work
program of less than 500,000 rubles (in the case of state agricultural
enterprises, less than 150,000 rubles) that are operated by the economic
method. are financed on the basis of individual outlays.
In that case the bank issues funds to the projects within the
limits of the financing plans (Form 5) for the payment of supplier
bills for materials, equipment, prefabricated construction parts, tools,
special clothing and. so forth, for wages and administrative and other
expenses.
In issuing funds for the payment of individual items, the banks
carry out preliminary control of the same type as in any other construc-
tion method, i.e. they check the prices of materials and equipment, the
wage fund. and the limits of administrative outlays. Such a check of the
individual outlays is the only form of preliminary bank control, and the
system of financing on the basis of individual outlays is therefore in-
ferior to the system of financing on the basis of work completed. In
the case of projects that are financed on the basis of work completed,
the banks can combine preliminary control of outlays with a check of
bills and acts for completed work and make payments on the basis of
work completed in accordance with the unitary rates established in the
cost estimates.
When projects are being financed on the basis of individual out-
lays, it is therefore especially important that the banks also maintain
subsequent control over the utilization of funds by investigating and.
analyzing the audits of the projects. In such an analysis, they should
compare the volume of work completed. with the amounts paid for the
financing of the project, check on the fulfillment of plans for changes
in the remainders of working assets and. credits and. verify the stocks
of materials and. the accounting items of the project. Such an analysis
should be designed to uncover any excessive and unnecessary stocks of
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materials and any abnormal debits and credits; if such a situation
exists, measures should be taken to release the excess stocks and to
bring order into the transactions with suppliers.
In investigating the projects and analyzing their audits, the
banks should devote attention to the fulfillment of plans of construc-
tion and the inauguration of newly completed construction items and
uncover any construction that is not backed up by plans and cost
estimates, any mismanagement or other infractions of financial dis-
cipline.
As a result of such subsequent control, the bank must determine
whether the project has fulfilled its plan for the reduction of con-
struction costs. To that end the bank checks how the project has been
implementing measures designed to improve the organization of construc-
tion, increase the degree of mechanization, introduce industrialized
construction methods, economize in the expenditure of construction
materials and wages, and. reduce transportation and overhead outlays.
It is thus only after subsequent control that the banks can deter.-
mine whether the funds issued to the projects have been used for their
specific purposes.
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CHAPTER XI
BANK CONTROL OVER TEE EXPENDITURE OF THE WAGE FUND AND OVERHEAD OUTLAYS
1. The Importance of Control over the Cost of Construction in Issuing
Funds
Bank control over construction has one basic purpose, and that is
to obtain a systematic reduction of construction costs. This key task
of the banks stands out both in the controlled issuing of funds for
individual construction costs and capital investment items and in the
process of analyzing economic operations on the basis of audits and on-
the-spot investigations.
Of the individual construction cost items, bank control extends
in the first place.to the wages of the construction workers.
An economical expenditure of the wage fund compared with the cost
estimate appropriations is reflected by a rise of labor productivity,
better organization and improved mechanization of the work, the intro-
duction of industrialized, construction methods and general improvement
of the construction business,
In controlling the payment of funds for wages and its relationship
to the completed work program, the investment banks improve the organi-
zation of construction and reduce its costs.
A major part of the workers in construction are engaged, in auxiliary
enterprises that produce prefabricated. parts and perform a variety of
services. Control over the economical expenditure of wages in those
enterprises also leads to a reduction in the cost of materials, services
and construction work in general.
About one-sixth of the cost of construction work is made up of
overhead, chiefly administrative expenses. These outlays are strictly
regulated. by special government decisions. Bank control over observance
of the overhead norms when payment is made for completed construction
work and the proper and economical expenditure of the wage fund for
administrative personnel produces a reduction of these outlays as a
share of the total construction cost.
The most important share of outlays is for materials required for
construction (construction materials, equipment, auxiliary materials,
fuel, tools and implements, and so forth). Adherence to established
prices for these products and to the transportation rates is of key im-
portance in the final cost of capital construction. Therefore control
over prices for these materials and equipment, the transportation rates
and rates for loading and unloading operations is an important part of
over-all bank control over the cost of construction.
Of the other outlays, the most important for the cost of construc-
tion are rent for construction machinery and charges for steam, power,
compressed air, water and so forth. Overexpenditures and increases in
the cost of construction can be eliminated if these outlays are properly
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checked and payment is made strictly according to established rates.
A list of all the control functions of the investment banks shows
that most of the outlays can be checked at the time payment is made by
the banks. Strict execution of these control functions is of key im-
portance for the economy of funds spent in capital investments.
The preliminary check of capital investment outlays on the part of
the banks does not exhaust their control over the cost of construction.
Of just as much importance is subsequent bank control consisting of an
analysis of audits and verification of outlays on the basis of primary
documents and bookkeeping entries. Both types of control actually make
up a single control system.
2. The Procedure of Planning the Wage Fund in Construction
Outlays for wages are the second most important element (after con-
struction materials) of the cost of construction, with their actual
share depending on the organization of the construction work and the
degree of industrialization and mechanization of construction operations.
The construction industry has been encouraging the maximum intro-
duction of mechanization in construction processes (especially labor-
consuming processes) and industrialized working methods through the use
of prefabricated construction parts and subassemblies. Highly industri-
alized construction requires a smaller number of workers with higher
skills and tends to cut the share of wages in the total construction
outlays.
Highly industrialized., high-speed construction consists chiefly of
the assembling and. installation of prefabricated parts with the aid of
cranes and machines, with most of the prefabricated parts being manu-
factured off the construction site and delivered in finished form.
The Socialist principle of labor organization provides for three
forms of payment -- individual piece rate, collective piece rate, pro-
gressive premiums -- that are now being applied to nearly all workers
in construction. These forms of payments are based on existing output
norms and wage rates per-unit of production of a certain quality. These
relationships are used in planning the wage fund. and. for the control of
wage payments to projects and construction organizations.
The progressive premium and bonus system used in construction
stimulates a rise in labor productivity and. insures fulfillment and
overfulfiliment of output norms.
Hence the need. for bank control over the issuing of bonuses to
workers and-engineers who fulfill and. overfulfill production plans and
insure the completion of construction items on time.
Construction workers are divided into those engaged in basic con-
struction, i.e. actual construction and installation work, and those
engaged in auxiliary activities. Auxiliary activities include: the min-
ing and. processing of construction materials, the manufacture of pre-
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fabricated parts and. subassemblies, the production of power and steam and
the supply of water; transportation of all types, security, storage and
residential-municipal work.
Workers engaged both in basic and auxiliary activities are grouped
into workers, engineers and technicians, employes and junior assistants.
The wage fund is set up separately for each worker category and.
each type of operation according to labor plans approved. for each pro-
ject and each construction organization by the superior agency.
.The wage fund covers both the wages of the workers listed in the
payroll and those not listed, the so-called non-payroll wages.
The wage fund, of workers engaged. in basic construction depends on
the&.number of workers, the number of working days in the plan period. and
the average daily output and wages per worker.
The average daily output per worker in money terms is the estimated,
cost of his construction work performed in the course of a working day.
The wage outlay corresponding to the estimated cost of the average
daily output is the average daily wage per worker.
The average daily output and the average daily wage.per worker are
the key indicators needed in planning the wage fund.
The relationship between the average daily output and the average
daily wage varies in different projects according to the make-up of the
construction work. The greater the consumption of prefabricated parts
and high-cost materials (brickwork, reinforced concrete, marble and so
forth) the greater is the value of output and the lesser the amount of
wages. On the other hand, the greater the. share of labor consuming
operations and the use of few or cheap materials (earthwork, finishing
work, repair work), the smaller is the value of the output and the
greater is the amount of wages.
Mechanization of construction and installation work and the use of
industrialized construction methods (use of prefabricated parts and sub-
assemblies) in all cases tends to raise the average daily output per
worker and reduces the share of wages.
The share of wages in the total cost of construction thus reflects
the degree of labor consumption, mechanization and. industrialization in
construction.
The average daily output norm per worker is set by the labor plan
on the basis of the actual output achieved by leading workers, the
planned rise in labor productivity, the planned structure of the con-
struction work and its labor-consuming nature.
The wage fund is calculated for the project as a whole on the basis
of the average daily wage per worker, which is set by the labor plan to-
gether with the average daily output norm on the basis of the cost
estimate rates and the planned. rise in labor productivity.
Given the approved work program and the approved average daily out-
put, we can calculate the number of man-days and the planned number of
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workers required to fulfill the program. Here is an example.
Given a work program of 2.1 million rubles and. an average daily
output of 75 rubles, the required number of man-days would be
2,100,000 = 28,000 man-days and the number of workers (based on 75
75
working days in a quarter) would. be 28,000 man-dam = 373 workers.
75 days
If we multiply the planned average daily wage of 15 rubles by the
calculated number of man-days, we get the wage fund: 15. rubles x 28,000
420,000 rubles, or 1+20,000 x 100 = 20 percent of the work program.
2,100,000
The planned wage fund includes, in addition to the basic wage also
the additional wages and bonuses paid. in the progressive premium system
or provided by special sources approved-for the given project.
To obtain the total wage fund of workers engaged. in basic construc-
tion, we must add 6 to 7 percent for additional wages and bonuses on
the basis of the planned overfulfillment of output norms and the rise
in labor productivity. In our example, additional wages of 6.5 percent
would. amount to 27,000 rubles and. bonuses based on the planned over-
fulfillment of output norms would be 10 percent or 42,000 rubles, thus
raising the total wage fund, to 1+89,000 rubles.
In contrast to basic construction, auxiliary activities are made up
by a complex of nonhomogeneous operations that complicate the planning
of the wage fund for these activities.
Enterprises and operations included in these auxiliary activities
can be divided into the following groups: (1) enterprises engaged in
mining, processing and. manufacturing construction materials and, pre-
fabricated parts; (2) auxiliary enterprises related to the supply of com-
pressed air, power, steam, water and. so forth; (3) transportation and
loading and. unloading operations; (1+) repair enterprises.
In the first group, output is planned by quantity or weight on the
basis of fixed prices for the given product. The wage fund. is there-
fore planned in the same manner as for basic production.
In the second group, electric power, water and. steam services are
values at approved rates or calculations (per unit of power, water or
steam). The wage fund. of workers employed here is based. on the planned
number of workers and the average daily wage according to approved norms.
Transportation services are valued per ton-kilometer according to
established state rates or approved calculations. The wage fund of
workers in transportation is based on the planned number of workers and
the established. average daily wage.
Loading and unloading operations are valued in terms of the value
per ton of the handled freight based on approved calculated. rates. The
wage fund in this case is based on the planned number of workers and
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the planned average daily wage.
Repair work is planned in money terms and the related wage fund. is
based on the number of workers and their planned average output and wage.
The total planned output of production in money terms, the cost of
services and the wage fund of all auxiliary activities is therefore the
sum total of the plans of the groups listed above.
The share of wages in the value of the production and services of
each group tend to vary: in transportation, wages exceed. 50 percent of
the cost of a ton-kilometer, while in the mining and processing of con-
struction-materials, wages are less than 20 percent.
Unevenness in the fulfillment of the plan of certain auxiliary
activities tends to produce artificial overexpend.itures or economies in
the wage fund.
In other auxiliary activities, such as residential and storage
services that are not planned on, the basis of an annual program, the
wage fund is based on the planned number of workers and the average wage.
The table of organization (the make-up of and relationships among
individual administrative subdivisions), the personnel (numbers and titles
of duties) and, the fixed monthly pay rates in projects and construction
organizations are all subject to approval by the State Personnel Com-
mission for basic construction and auxiliary activities. The personnel.
and the pay rates; including extra pay (such as bonuses for length of
service, personal rates, bonuses ordered by special government decisions
for certain branches of industry and of the economy), are registered in
the organs of the Ministry of Finance USSR.
In the case of major ministries, the government approves model
tables of organization and pay rates by categories of construction
organizations in accordance with the completed work program.
The wage fund of administrative and technical personnel is based.
on the approved number of employes and the average pay rate, calculated.
separately for engineering and. technical personnel, employes and junior
assistants both in basic construction and in auxiliary activities.
All these labor indicators (number of workers of all categories,
output, average wage) and the wage funds are reflected, in the labor plan,
which is the basic planning document in construction.
As part of the national economic plan, the Council of Ministers
USSR approves annual and quarterly labor indicators for each ministry
and. central agency. Using those indicators, the ministries then work
out the labor plans for main administrations, independent projects and
independent construction organizations and the main administrations work
out the plans for the trusts and projects under their jurisdiction. The
trust, in turn, draws up labor plans for the primary construction or-
ganizations under its jurisdiction.
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The labor plans should serve as the guiding documents for projects
and construction organizations and are the basis on which the investment
banks issue funds for wages and carry out their control functions.
3. Bank Control over the Exp enditure of the Wage Fund
We have previously stressed. the key political and economic task of
the banks in insuring control over the expenditure of wages as one of
the most important ways of cutting construction costs.
The banks use a variety of methods to that end: they analyze the
labor plans; they carry out a periodic check of the proper distribution
of the wage funds of ministries and. main organizations among their
subordinated. organizations; they control the expenditure of wages
directly at the time the corresponding funds are issued; they make a
subsequent check of labor and wage audits; they investigate the causes
for overexpenditures and economies in wages by use of primary. documents.
Let us now discuss the operational control system used by the banks
in the payment of wages to the construction workers.
The Procedure of Issuing Funds for Wages in Above-Limit Construc-
tion. -- The wages of workers engaged in the basic construction and
auxiliary activities of above-limit projects and contracting organiza-
tions working on above-limit projects (or simultaneously on above-limit
and below-limit projects) are issued. by the investment banks on the
basis of the submitted labor plans) and wage payment certificates only
insofar as the work program is being completed. Upon receipt of the
labor plans the bank branches verify the proper approval of the plans
and the listing of all required indicators.
The final issuing of funds for the monthly wages is based on wage
payment certificates that are drawn up in the following form.
L"ee "WAGE PAYMQJT CERTIFICATE" next page?
Upon receipt of the certificate, the bank checks the information
first of all against documents available at the bank as follows.
The approved quarterly work programs and. wage funds relating to
construction-installation work and auxiliary activities are checked
against the approved annual labor plan and its quarterly breakdown.
The services of residential-municipal activities, supply and storage
and so forth are not planned and the bank in this case ascertains only
whether the wages of these activities correspond. to the fulfillment of
the construction-installation plan.
The fulfillment of the work program, in the case of projects and
contractors financed on the basis of work completed, is checked. against
the work acceptance acts of the given month. The amount of work com-
pleted according to the acts is corrected. for the remainder of incom-
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Name of Construction
Organization .........
Clearing Account No. 137,203
To the Moscow City Office
(Branch) of the Bank
WAGE PAY= T CERTIFICATE
for October 1950
(in thousands of rubles)
Auxiliary Residential-
Enterprises, Municipal,
Transport, Supply-Storage
Construction- and Other and
Installation Auxiliary Other
Work Activities Activities Total
2 3 I.
1. Approved quarterly work
plan
2,1+00
300
2. Completed during the
month
600
120
3. Percentage of fulfillment
25
1+0
4. Approved quarterly wage
fund
1+00
90
11.o
530
5. Wages due according to
plan on the basis of
completed work
100
36
10
11+6
6. Actual wages paid
98
36
9
143
7. Advance received, from bank
50
8. Withholdings and transfers
9. To be paid by the bank
83
Chief (signature) Chief Bookkeeper (signature)
pleted construction at the start and the.end of the given month.
In the case of contractors and, projects financed on the basis of
work completed, the incompleted. construction includes both incompleted
parts of construction elements and entire incompleted construction items
to be completed within three months (in the case of contractors) or hav-
ing anestimated:, ost of less than 75,000 rubles (in the case of projects).
In the case of construction elements, the amount of incompleted con-
struction as of the lst of each month is based on the corresponding
unilateral acts, and in the case of entire incompleted. construction items
on the total amount paid. thus far by the clients on bills for completed
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work. On the basis of these acts and the paid bills, the amount of
incompleted production is then calculated. in the balance sheets of the
contractors and projects.
If the value of incompleted work as of the 1st of the following
month is greater than the value of incompleted work as of the 1st of
the given month, then the volume of completed work must be increased
by the difference in the two amounts. In that case the payroll certifi-
cate is corrected accordingly since the wages must be calculated on the
basis of all work performed. during the given month, both completed and
incompleted.
On the other hand, if the value of incompleted. construction has
dropped in the course of the payroll month, the volume of performed
work must be reduced by the difference between the amounts of incom-
pleted work at the start and. the end of the month, since the incompleted
work that was completed in the course of the month had been paid for
during the preceding month. Let us illustrate this with an example.
The quarterly work program of a contracting organization is one
million rubles and the wage fund of workers engaged in basic construc-
tion is 200,000 rubles or 20 percent of the work program. In the
first month of the quarter, the work performed and delivered to the
client amounted to 300,000 rubles, or 30 percent of the quarterly plan,
and the corresponding wages are 200000x30 = 60,000 rubles. Incom-
100
pleted construction as of the 1st of the second month was valued. at
50,000 rubles, corresponding to 10,000 rubles in wages.
The certificate should. therefore show the total volume of per-
formed work as 350,000 rubles (300,000 / 50,000), or 35 percent of the
quarterly plan, corresponding to 70,000 rubles in wages.
In the second. month of the quarter, the work performed amounts
again to 300,000 rubles, or 30 percent of the plan, corresponding to
60,000 rubles in wages. There was no incompleted construction as of
the 1st of the third month and therefore the difference in the remaind-
ers amounts to 50,000 rubles.
The 60,000 rubles allocated for wages during the second month thus
include 10,000 rubles for work that was completed in the course of the
month and. for which wages had been paid, during the first month.
Since the wage payment certificate must show the wages that have
actually been allocated. to the second month, the volume of performed
work must be reduced by the difference in the remainders of incompleted
construction, or 300,000 - 50,000 250,000 rubles. The quarterly plan
fulfillment during the second month was thus 25 percent, corresponding
to wages of: 200,000 x.25 = 50,000 rubles.
100
The wages for construction-installation work for a given month are
thus allocated on the basis of the percentage of the quarterly work
program performed during that month.
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The value of output of auxiliary enterprises and the services of
transportation and auxiliary enterprises are listed in the wage payment
certificate. in planned prices and are checked against the audit data
of the project.
Wages for auxiliary activities can be allocated in two ways. If
the project or the contractor has an approved plan for the output of
production and services in auxiliary activities, wages are allocated
as in the case of construction-installation work, except that they may
not exceed the wages actually paid. If there is no plan for output of
production and services, the wages are allocated on the basis of the
percentage of construction plan fulfillment, but again not exceeding
the amount actually paid. .
The reason why the allocated wages may not exceed the amount
actually paid is that, according to existing regulations, wage econo-
mies in auxiliary activities must not be covered. by overexpenditures
for construction and installation work. On the other hand, economies
achieved in basic construction may be covered by overexpenditures in
auxiliary activities. The banks. charged with control functions must
therefore prevent. overexpenditure of wages for basic construction and
see to it that such overexpenditures are not covered by incidental
economies in auxiliary activities.
As for residential-municipal services, supply and storage and other
activities, the wages are in all cases allocated on the basis of the
percentage of construction plan fulfillment.
The wage payment certificate also shows the calculation of the
wages due by the bank: the wages actually paid are reduced by the ad-
vance previously received from the bank and by any noncash transfers.
(state loan and. social security deductions), with the remainder being
the amount to be paid by the bank.
After the correctness. of the execution of the certificate has been
checked, the bank calculates the amount to be paid to the construction
organization for wages and draws up a statement about the payment condi-
tions. If the amount actually paid is less than the amount calculated
by the bank on the basis of the volume of work performed (according to
the wage payment certificate), payment is made without any difficulties.
If the amount actually paid. exceeds the amount calculated. by the
bank, the bank for the time being pays the lesser amount, pending
authorization for the payment of the difference.
An overexpenditure of 6 percent of the total quarterly wage fund.,
if incurred for the first time in the current year, may be authorized.
by the head of the bank branch (provided the project explains the reasons
for the expenditure and pledges elimination in the future).
Overexpenditure by second offenders may be authorized only by the
chief of the main administration or, in the case of projects directly
under a Ministry, by the Minister himself (or a deputy). At the same
time the project must be instructed to end such overexpenditure and.
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improve the organization of labor.
Any overexpenditure exceeding 6 percent in the course of the year
may be authorized only by the Minister himself and the construction
organization must state what measures have been adopted to eliminate
wage overexpenditure in the future.
When the amount of the overexpenditure is calculated, the follow-
ing must be borne in mind-. economies in the current month's wage fund
for construction and installation work can be taken into consideration
in paying any wage overexpenditure for auxiliary activities; economies
in the total wage fund achieved during previous months of the same
quarter may be taken into consideration in the payment of overexpenditure
during the current month. Achieved economies may not be transferred from
quarter to quarter. Let us use the following illustration.
Suppose that the wages paid. for auxiliary activities are 46,000
rubles instead. of 36,000 rubles fs listed in the payroll certificate
on page 2057. The resulting overexpenditure of 10,000 rubles would be
partly covered by an economy of 2,000 rubles in basic construction
(98,000 rubles charged against 100,000 rubles allocated by plan) and
the over-all overexpenditure thus amounts to 8,000 rubles (10,000 -
2,000), or 1.5 percent of the total. quarterly wage fund of 530,000
rubles. The economizing of 1,000 rubles in "other activities" (9,000
as against 10,000) may not be used. to cover overexpenditure in auxil-
iary activities.
If the overexpenditure in this case is the first during the cur-
rent year, it may be authorized by the head of the branch bank, pro-
vided the project states the reasons for the overexpenditure and, the
steps that will be taken to eliminate it.
Suppose that the overexpenditure of 8,000 rubles was incurred in
August, i.e. in the second. month of the third quarter, and that wage
economies of 8,000 rubles had been achieved in July.
In that case the overexpenditure in August is covered by the
economies in July and no overexpenditure is registered-
If , however, the economies achieved in July amounted to only 4,000
rubles, then the remaining 4,000 rubles of August overexpenditure, or
0.75 percent of the quarterly wage fund, would be registered as an over-
expenditure.
The overexpenditures and economies in wages discussed. above are
called. relative since they are obtained by comparing the wages actually
paid with the amount allocated to the performed output of work or the
production and services of auxiliary activities. A relative overex-
penditure may thus occur even before the quarterly wage fund has been
expended.
However, when the wages actually paid exceed the amount of the
wage fund and the work plan remains underfulfilled, then the over-
expenditure is called. absolute.
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If an absolute wage overexpenditure has been incurred. with an under-
fulfillment of the plan, then the project must submit a certificate on
additional wage funds (which may be allocated through redistribution of
the wage fund within a main administration or Ministry).
An. overfulfillment of. the construction plan or of the plan of
auxiliary enterprises and. transportation services usually results in
wages being paid in excess of the approved wage fund.
If the amount of the paid. wages is proportional to the overfulfill-
ment of. the plan, i.e. if the wages are calculated with the same per-
centage (or less) as the overfulfillment of the plan, then the banks
make payment without any difficulties.
If the plan is overfulfilled and the paid wages exceed the amount
allocated on the basis of the performed work program, then the wages
are also paid by the banks in their entirety, but the organizations are
required. to submit to the banks certificates from the main administra-
tion on the allocation of additional wage funds equal to the amount of
the relative overexpenditure. If such a certificate is not submitted.,
the banks may withhold the amount of the paid. overexpenditure from the
funds issued for wages for the first month of the following quarter.
For example, let us take a project that has for the third quarter
a construction. program of 500,000 rubles and. a production and services
plan in auxiliary activities of 150,000 rubles, with a corresponding
quarterly wage fund. of 100,000 rubles for construction, 30,000 rubles
for auxiliary activities and 15,000 rubles for other activities.
During July and August, 400,000 rubles worth of work was performed.
and 80,000 rubles in wages were paid. In auxiliary activities, output
worth 120,000 rubles was. produced. and 25,000 rubles in wages were paid.,
while 10,000 rubles in wages were paid for other activities.
The corresponding figures for September were 150,000, 300,000,
40,000, 10,000 and 5,000 rubles.
Thus, for the third quarter as a whole the construction work amount
ed to 550,000 rubles, or 110 percent of the plan (plan -- 500,000 rubles,
fulfilled. 400, 000 plus 150,000) and the corresponding wages amounted. to
110,000 rubles or 110 percent of the fund (wage fund. - 100,000 rubles,
actual wages 80,000 plus 30,000 rubles). Funds for these wages may be
paid by the bank without any difficulties as the overexpenditure of wages
is proportional to the overfulfillment of the plan.
In the case of auxiliary activities, the output plan was over-
fulfilled by 106.7percent .(plan -- 150,000 rubles, fulfilled 120,000
plus'40,000 rubles equals 160,000 rubles), while the actual wages
amounted to 116.7 percent (wage fund -- 30,000 rubles, actual wages
25,000 plus 10,000 rubles equals 35,000 rubles) or an overexpenditure
of 10 percent. For this overexpenditure of 5,000 rubles in wages. the
project must subsequently submit a certificate on additional wage funds.
In connection. With their wage aOcounts, the banks keep special
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files in which they note both the approved wage funds and. the amounts
actually paid out to the construction organizations. Unused remainders
of the wage funds are closed at the end of the quarter and. may not be
carried. over to the following quarter.
The Procedure of Issuing Funds for Wages in Below-Limit Construction
Below-limit projects operating by the economic method and contract-
ors who work only on below-limit projects receive wage funds from the
banks within the limits of the approved wage fund and. within recal-
culation on the basis of performed work. Such organizations submit
to the banks the approved labor plan with the statement of the wage
fund, for the current year and. a quarterly breakdown. To receive pay-
ment for wages they submit monthly wage payment certificates (see form
below)
Name of Project
Clearing Account No. 101,206
WAGE PAYMENT CERTIFICATE
Charged for Wages Paid to Workers in October 1950
Advance from Withholdings
Paid Wages the Bank and. Deductions Due from the Bank
19,387.81 rubles 20,000 rubles 7,237.31 rubles 22,150.50 rubles
Approved quarterly wage fund ??- 150,000 rubles
Wages paid,.since start of year. -- 367,189.19 rubles
Chief of organization or institution (signature)
Chief bookkeeper (signature)
Moscow
10 November 1950
The amounts paid. by the bank are recorded in special wage payment
files. As soon as the wage fund is exhausted, the banks cease wage pay-
ments. These can be renewed only upon receipt of a new labor plan in
which the wage fund for the current quarter has been increased.
Even though the banks pay out wages only within the limits of the
wage fund., they do check the wage outlays against the fulfillment of the
construction program. In case of overexpenditure, the bank asks the
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projects and contractors to take appropriate measures..
If the overexpenditures do not cease, the banks are required to
use financial sanctions and accordingly inform the superior construction
agency and, if necessary, the local government authorities.
Wage payments are made to geological prospecting organizations
on the same basis as to below-limit projects.
The Procedure of Issuing Funds for Bonuses. Funds for the grant-
ing of bonuses to construction workers for the overfulfillment of
work plans are issued by the banks on the following basis: according
to the results of All-Union Socialist Competition or according to special
government decisions outside of the wage fund; or from special, permanent
sources within the wage fund.
The granting of bonuses to engineering. and technical personnel
and employes for the fulfillment of monthly construction plans is regu-
lated by a uniform decree that applies to all ministries and agencies.
The granting of bonuses is contingent upon the submission of data con-
firming the fulfillment of the work plan, the plan of inauguration of
new construction items and the plan for construction cost reduction.
Bonuses are granted from the wage fund of the administrative and. economic
personnel provided there are economies in excess of plan.
Bonuses for the inauguration of key construction items on or ahead
of schedule are granted to engineering and technical personnel and em-
ployes according regulations applicable to all ministries and. agencies,
provided the estimated cost of construction and all construction quality
requirements have been observed.
In both cases bonuses are granted outside of the limit of adminis-
trative-economic outlays.
Bonuses to geological prospectors are granted on the basis of a
bookkeeping certificate listing the actual bonuses charged within the
limits of the wage fund..
The investment banks check of course systematically on the grant-
ing of bonuses and. require immediate correction of any deviations from
the rules.
4. Subsequent Bank Control.oyer the Issuing of Funds for the Payment of
Wages
Independently of the control related. to the actual issuing of
funds, the investment banks also carry out subsequent control over the
expenditure of these funds. These control activities include verifica-
tion of the certificate on charged wages, observance of the established
rates and output norms, and the utilization of the wage funds for their
intended. purpose. The combined. preliminary and. subsequent control should.
insure the proper charging, accounting, issuing and expenditure of the
wage: funds.
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The main task in subsequent control is to verify the basic indicator
that determines the amount of wages to be allocated on the basis of the
monthly certificate. That indicator is the construction program per-
formed. in the course of the month in terms of cost estimate prices.
The magnitude of this monthly volume of construction depends on the
proper calculation of the physical units, the application of the proper
unitary rates corresponding to the various types of construction opera-
tions and construction elements and, the charging of the established
overhead outlays.
The monthly volume of work for which wages are issued consists
of the volume of construction work listed. in acceptance acts (including
only the acts accepted by the banks for payment) plus the difference
between the remainders of incompleted. construction.
In the certificate on charged wages, the bank checks first of all
the volume of performed work by comparing the data with periodic audits
and the paid work acceptance acts. If the certificate lists work that
has not been paid. for by the bank or if inspection uncovers an excess
in the work volume listed, then the performed work volume and. the corres-
ponding wages must be recalculated. Any excess wages that have been
paid are then withheld from the next wage payment.
The same periodic audits and accounting data are used to check the
data on the output of production and services by auxiliary enterprises.
Any discrepancies must be recalculated and any excess payments are then
subject to withholding.
In the case of projects that do not keep separate accounts of the
output of auxiliary enterprises, the banks calculate the wages on the
basis of the performed construction work.
The amount of wages actually charged in the certificate is checked
against reports on wage payments and. bookkeeping data.
The paid bills of organizations that have supplied the project
with labor are also included. in the charged wages (as part of the basic
and the additional wage).
Wage funds issued by the bank must be used only for that specific
purpose. Funds that have not been expended within three days must be
returned to the bank, but remain at the disposal of the depositor. The
use of wage funds for other purposes, such as travel, economic and other
outlays, is a gross infraction of financial discipline.
Depending on the magnitude of the infractions uncovered in the
certificate on charged wages and the amount of wage funds used for other
purposes, the banks may use financial sanctions and submit the evidence
to the public prosecutor for legal steps against the responsible parties.
When projects and contracting organizations are being investigated.
with regard to the use of wage funds, the banks also verify the proper
application of norms and wage rates in the payment of wages to construc-
tion workers, installers and other trades of such payments are included
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Such a check can be carried. out only on the basis of primary docu-
ments, in this case job instructions. These job instructions are
checked (systematically or at random) for proper job descriptions, the
proper application of norms and rates, the time of execution of the in-
structions and the work actually performed.,
The struggle waged by the banks for the timely and proper issuing
of job instructions and the use of legal output norms and rates, as well
as the whole complex of control functions related to the expenditure of
wages, are of first-rate importance in strengthening the Socialist prin-
ciple of wage payments and in keeping within the estimated cost of
construction.
The timely and proper issuing of job instructions is also of major
importance for the timely payment of wages to the workers. All control
operations performed, by the banks with regard to wages always involve
a check of the schedule of wage payments. Delays in wage payments are
not tolerated in our country and reasons for such delays must be care-
fully investigated by the banks. Any mismanagement, accounting mal-
practices or absence of wage funds must be reported to the legal organs
for appropriate steps against those responsible.
The issuing of wage funds by the banks requires a combination of
preliminary and subsequent control that takes into account both the
interests of the state in preventing wage overexpenditures and reducing
construction costs and the interests of the workers in getting paid the
proper wages on time.
Verification of the primary documents for proper use of the
approved output norms and wage rates must be combined with a study
of the organizational and economic factors that affect the fulfill-
ment of the plan.
A final step in bank control over the expenditure of wages in-
cludes an analysis (either on the basis of"periodic audits or in an
on-the-spot investigation) of the operations of the project or the
contracting organization with regard to the organization of labor and
the introduction of mechanization and industrialized. working methods.
5. Overhead Outlays in Construction
The calculation of the cost of construction items differs from
the calculation of the output of industrial enterprises. This is true
especially of the system of overhead. outlays in construction, both in
regard to their make-up and the methods of setting norms.
The cost of each unit of construction or installation work (a
cubic meter of brickwork, a cubic meter of concrete, a square meter of
flooring and, so forth) includes wages, the cost of the construction
materials, the cost of the work of the construction machines and the
cost of transportation and. auxiliary services (steam, water, electric
power, and so forth),
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All these outlays are calculated, either in physical terms or in
monetary units, on the basis of existing norms for the outlay of labor
and materials, the wage rates and the cost estimate rates for construc-
tion materials and services.
The number of units of construction work is directly proportional
to the outlay of labor, materials, the work of the machines and the
services of auxiliary enterprises. These expenses, called direct out-
lays, are an integral part of the cost of the performed work. But
direct outlays do not account for all construction costs.
A normally functioning construction project involves a whole
series of additional outlays related to administration, planning, ac-
counting, security, the care of workers and administrative-technical
personnel and so forth. These outlays, which are added. periodically
to the cost of construction in proportion to the direct outlays, are
called overhead outlays.
Outlays for the maintenance of the administrative staff and, fire-
fighting and security guards and municipal outlays are not directly
proportional to an increase or a reduction in the monthly or quarterly
volume of construction. The distribution of a fixed overhead over
varying volumes of construction work therefore either raise or lower
the cost of construction.
Overhead differs from direct outlays in one more respect -- it
depends greatly on the organization of the construction project. A
good organization, economies in outlays, and. the elimination of exces-
sive overhead expenses may greatly reduce the cost of construction.
The very nature of overhead expenses often makes them the chief
factor in increased. construction costs and therefore requires bank
control over overhead outlays.
In fighting for a reduction in, construction costs, the banks must
therefore carry out systematic control over overhead outlays, both in
a preliminary fashion at the time funds are issued to the projects and
subsequently through an analysis of the audits and investigation of the
projects on the spot.
Overhead outlays are not uniformly included in the final cost of
construction. For example, overhead in basic construction (the actual
construction work) is calculated into the cost of construction as a
separate item, overhead related to the purchase of tools, fuel, fodder
and other materials and equipment is included, in the cost of the ma-
terials, the overhead in auxiliary enterprises is included in the cost
of production of those enterprises.
Basic overhead in construction and installation work includes:
social security deductions, additional wages (in excess of the basic
wage), administrative-economic outlays, municipal outlays (the payment
share of the enterprises for housing and municipal services and. the main-
tenance of residential and municipal enterprises 'belonging to construc-
tion projects or construction-installation organizations); outlays
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related to the hiring and transfer of workers;. amortization of temporary
structures (which are excluded from the itemized list of construction
and from the construction items within the terms of the third part of
the general cost estimate); maintenance of firefighting and security
guards; outlays for the protection of workers and safety devices; out-
lays for rationalization, the setting of labor norms and the testing
of materials; outlays for improvement of the construction site; other
overhead. expenses (travel expenses for highly skilled installers, in-
terest on bank loans and so forth).
Overhead related to the purchase of materials and equipment in-
cludes the maintenance of the purchasing, receiving and stock depart-
ments.
The staff of the supply office or section for part of the staff
of the trust or office and comes under administrative-economic outlays
for construction and. installation work.
Auxiliary enterprises that keep their own books operate.. on the
basis of the usual industrial production norms and their overhead'
consists of the usual items in industrial production.
The overhead of enterprises whose activities are on the books of
the construction project is figured in the same way as for construction-
installation work and includes chiefly additional wages, administrative-
economic outlays, and the cost of maintenance of buildings.
The Limiting of Overhead Outlays. In the case of direct outlays,
norms are based on the technological construction process and. precise
norms can be set up per unit of construction-installation work.
The setting of'norms for overhead. outlays is far more complex
since their magnitude depends on the. organization of the administrative
apparatus, the nature of the work performed, the number an,d. skills of
the labor force, the location of the construction site, the organization
of supply functions and. other factors.
The structure of the direct outlays varies with the types of
operations. In the case of construction work, materials and.prefabri-
cated.construction parts make up more than half of the outlays. On
the other hand, in installation work the share of the wages is usually
much higher than in construction work.
The norms of overhead, outlays have therefore been set in separately
on the basis of the amount of direct outlays, the cost of equipment and
construction materials, wages and. the estimated cost of construction.
The construction overhead norms have been set by special government
decisions. The following norms have been set up for various types of
operations.
Overhead norms related to direct construction outlays are set as
follows (in percent of the estimate cost of production in 1950 prices):
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(a) in actual construction work (except the installation of steel
construction) ranging from 15.8 percent (in the Ministry of Forestry
USSR, the Ministry of Cinematography USSR and projects under republic
jurisdiction) to 20 percent (in the Ministry of Coal Industry USSR).
(b) in the installation of steel construction for all ministries
-- 9.4 percent.
. (c) in the installation of steel-span construction of railroad
and. highway bridges -- 11.6 percent.
(d) in mine-construction work: for all ministries: 27 percent
for above-limit construction and 19 percent for below-limit construc-
tion.
Overhead norms related to the basic wage:
(a) in the installation of equipment of all types, except the
installation of power-transmission lines and electric substations --
85 percent.
(b) in the preparatory work of peat bogs of all ministries and
agencies -- 67.5 percent.
Overhead norms related. to the cost of materials and equipment in
1950 prices:
(a) preparatory storage outlays of all ministries and agencies --
1.94 percent (of the cost of the construction and engineering materials
f.o.b. warehouse);
(b) preparatory storage outlays related to the equipment of all
ministries and. agencies -- 1.25 percent (of the cost of the equipment);
(c) preparatory storage outlays related to steel construction of
all ministries and agencies -- 0.8 percent (of the cost of the steel
construction).
Overhead norms related to the estimated cost of construction apply
to overhead outlays for the maintenance of the director's office of the
future enterprise, including the technical inspection of contract work;
they range from 0.38 percent (if the estimated cost of construction
exceeds 500 million rubles) to 1.09 percent (if the estimated cost of
construction is less than 5 million rubles).
The overhead norms also include the following planned accumula-
tions expressed in percent of the direct outlays:.in regular construc-
tion and mine-construction work -- 2.7 percent; in the installation of
steel construction and steel bridge spans -- 1 percent; in the instal-
lation of equipment 2.2 percent.
These norms constitute the maximums. The ministries and agencies
have the right to adjust their overhead. outlays in their financial
plans within the norms listed above. (In the case of projects situ-
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ated in remote areas, the ministries may (with. the agreement of the Min-
istry of Finance USSR) set up special overhead, norms).
Control over Overhead Outlays. Overhead. includes a whole series of
differing outlays. Consequently bank control over overhead. outlays
assumes a number of forms, all of which however consist basically of the
following steps: preliminary control over the established norms for
overhead and the salaries of .the administrative-economic personnel;
control over the established norm at the time of payment for completed
construction work; control over the expenditure of the limit of admin-
istrative-economic outlays; subsequent, control over the over-all over-
head norm and. the norms for.different types of outlays.
Preliminary control over established norms is carried out in the
course of the verification of the construction cost estimate. It in-
volves a careful check of the correct calculation of direct outlays and
of the total overhead corresponding to the established norms.
When the banks pay bills for completed. construction work, they
verify the overhead outlays that are listed as a separate item in the
appended work acceptance acts.
When the banks issue funds from the accounts of projects and con-
tracting organizations, they can make a check at random on a number of
overhead expenses, including social security deductions, cash outlays
or remittances related to the hiring and, transfer of workers, the pay-
ment of vacation pay to workers, the travel expenses of highly skilled
installation workers and so forth, using the payment instructions and
checks submitted. by the projects and. contracting organizations.
The basic method used by the bank for checking actual outlays
against the established norms is subsequent control by means of periodic
and, annual audits and on-the-spot inspection of the project's accounts
and statistical data. This control involves two phases: (1) a check of
the planned and cost estimate appropriations for overhead- against the
established, norms and. (2) a check of actual outlays against the estab-
lished norms.
As we have seen, the overhead norms vary for individual ministries
and. agencies and, may in turn be differentiated for individual projects.
The first step, in the check therefore is to ascertain to what extent
the norms adopted for a given project differ from the ministry norms
both for the project as a whole and. for individual operations.
Construction-installation organizations often work for projects of
different ministries and must be guided by the cost estimates approved.
for each of these 'projects. The overhead norms of such contracting or-
ganizations would be weighted accordingly, as shown in the following
example.
A construction office has contracts with three projects of dif-
ferent ministries: the first with a work program of one million rubles
and. an overhead. norm of 18 percent, the second with a program of 2
million rubles and an overhead, norm of 17 percent and the third with a
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program of I million rubles and an overhead. norm of 16 percent.
If we now recalculate the overhead norms, which are based on
direct outlays, in terms of the work program (by dividing the norm by
100 plus the norm, i.e. in the first case 18:118, and so forth), we get
15.2 percent or 152,000 rubles for the first project, 14.5 percent or
290,000 rubles for the second, and 13.8 percent or 552,000 rubles for
the third, or a total overhead. of 991+,000 rubles against a total work-
ing program of 7 million rubles, which yields a weighted overhead norm
of 14.2 percent.
The setting of overhead norms also varies with types of operations,
such as actual construction work, the installation of steel construc-
tion, mine construction work and so forth. Consequently projects with
identical volumes of work but different work structures may have dif-
ferent overhead norms.
The final stage in bank control of overhead. norms is a check of
.the actual outlays for individual expenditure categories. The check is
carried out on the basis of periodic and annual audits, chiefly on-the-
spot analysis of books and. is designed to establish the correctness of
the calculations of overhead, norms, the proper listing of actual outlays
under the various types of overhead, the legitimacy of these outlays,
and the factors that affect overexpend.itures and, economies in the over-
head.
6. Control of Administrative-Economic Outlays
The largest overhead item (amounting to about one-third of the
total overhead) are administrative-economic outlays, i.e. outlays for
the maintenance of the administrative staff of the project.
Like all other overhead, administrative outlays are broken down
into those applying to basic construction and those related to auxiliary
activities. The first category is limited, just like the total overhead.,
by central authorities and is included in the cost of the construction
and installation work. The second type of administrative overhead is
included, in the value of the output of auxiliary enterprises, services
rendered by transportation and. auxiliary enterprises, the value of pur-
chased materials and equipment (purchase and. storage outlays) or is
listed. as a separate type of overhead (as in the case of firefighting
and security guards).
The norm of administrative outlays for actual construction work
is based. on the estimated cost in 1950 prices and ranges from 5.2 to
6.2 percent of the direct outlays; for the installation of steel con-
struction -- 3.9 percent; for the installation of railroad and, highway
bridge spans -- 5.7 percent; for underground. mine construction work --
10 percent for above-limit construction and 5 percent for below-limit
construction; for the installation of equipment up to 29 percent of
the basic wages; and. for peat bog preparation work -- 22.5 percent of
the basic wages.
The administrative outlays of auxiliary activities are not limited
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in this fashion. There the superior organizations determine the total
amount of administrative outlays within the overhead limits, either on.
the basis of the cost estimate or of a special calculation.
The administrative outlays of basic construction include: the sal-
aries of the engineering and technical personnel, employes and junior
assistants, maintenance of the administrativepremises, travel, postal
and telegraph and similar outlays.
The administrative outlays of auxiliary activities include: the
salaries of the administrative personnel (engineers and technicians,
employes, junior assistants) of the auxiliary enterprises, transporta-
tion, residential-municipal and, purchase-storage services, the main-
tenance of the office of the director of the enterprise under construc-
tion and the firefighting and security guards.
All these outlays are independent of the course of fulfillment of
the capital investment and. construction-installation plans by quarters
or by months and. are affected by the work programs only over longer
periods of time.
The administrative outlays in construction are under the constant
supervision of the investment banks and occupy a key place in the whole
matter of control over construction cost reduction.
The labor plans that are approved. by the superior agencies for
each construction project and. each contracting organization include
a limit (or maximum) for the administrative outlays in basic construc-
tion and. in auxiliary activities. These limits are given for a whole
year with a breakdown by quarters.
. In addition the superior agency approves a cost estimate of ad-
ministrative. outlays by expenditure items.
These cost estimates are then registered, in the local organs of
the Ministry of Finance USSR on the basis of the approved personnel
lists.
As. part of their control functions, the investment banks check
systematically all periodic and annual audits with regard. to outlays
for the salaries of the administrative personnel and the individual
expenditure items in the administrative overhead..
The whole series of documents at the disposal of the bank (limits,
cost estimates, registration files, wage payment certificates, report-
ing forms) and the data submitted to the bank on the structure of the
administrative apparatus and its functions in the construction project
enable the bank to analyze the operations of the administrative staff
and find. room for further overhead. reductions.
Similarly to the total overhead in basic construction, adminis-
trative overhead is limited on the basis of ministerial jurisdiction,
types of operations, territorial location and. the specific features of
individual projects.
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The annual administrative overhead limits are broken down by
quarters in accordance with the annual and the quarterly work plans.
The investment banks are expected. to verify the calculation of
the administrative overhead. limit, taking into account the ministerial
jurisdiction of the project, the structure of operations planned for
the current year and the norms established for the given project.
In verifying the limit for auxiliary activities, the banks use
data from previous years and the operating experience of model pro-
jects.
The construction ministries make use of standardized personnel
lists approved. by the government, according to which the structure
of the administrative staff, the number of administrative posts and
the salary rates are assigned to individual trusts and. construction
offices.
These standardized personnel lists also provide for the structure
of auxiliary enterprises and provide a basis for setting the adminis-
trative overhead limits for these activities.
Salaries, which make up the largest part of the administrative
overhead, range from 70 to 75 percent for trusts and from 75 to 85
percent for construction offices and sectors.. The share of the salaries
in the over-all administrative overhead is also subject to verification
by the investment banks. If the bank finds that the administrative over-
head exceeds the norm, the bank must ask the project to reduce its over-
head. and. at any rate issues funds only within the established overhead
limit.
The banks check the expenditure of funds on the basis of reports
submitted by the construction projects and contracting organizations.
If they find. that the quarterly limit has been exceeded., the excess is
withheld by the banks from the limit of the following quarter (includ-
ing the first quarter of the following year).
In the course of controlling the overhead outlays, special atten-
tion must be devoted to the salaries of the administrative personnel.
The banks issue funds for the payment of salaries only if the
given economic organization (construction project, contractor or
geological prospecting unit) is supplied with a labor plan and certifi-
cates showing that the personnel and the salary fund have been regis-
tered with the local financial organs both for basic construction and
auxiliary activities.
The labor plan breaks the quarterly salary funds down by months.
If the monthly salaries shown in the labor plans are less than the
salaries registered with the financial organs, then funds are issued
by the banks within the limits set by the labor plans.
For the first half of the month, funds for salaries are issued
by the bank within the limits of the quarterly salary fund. But in
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the final monthly accounting, funds are issued only upon presentation
of the salary payment certificate (shown below).
Name of Organization
Financing Account No. 1500
To the Moscow City Office
Branch
of Prombank
SFILARY PAYMENT CERTIFICATE
for October 1950
For Construction and.
Installation Work
Number of
Employes at
End of Month
Monthly
Payroll
in Rubles
2
3
1. Planned by the Financial
Organ or the Superior
Agency
36
32,500
2. Vacancies in the Planned
Personnel Apparatus
2
1,800
3. Salaries Due for the Actua
Administrative Personnel
l
3l.
30,700
4. Vacation Salaries Due from
the Funds Allocated to the
Following Months
5. Previous Vacation Salaries
Paid from the Fund Allocated.
to:the Current Month
6. Tax and loan deductions
7. Previously Received from
.the Salary Fund. of the
Current Month
8. Salaries Due on the Final
Monthly Account
For Auxiliary
Activities
Number of
Employes Monthly
at End. of Payroll
Month
in Rubles
4
5
18
16,200
18
16,200
1,500
1
950
3,800
--
1,600
15,000
--
8,000
13, bOO - - 7,550
Chief of Organization (signature)
Chief Bookkeeper (signature)
2 November 1950
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Salary funds due on the final monthly accounting may be paid. only
for the personnel actually present within the limits of the salary fund
registered with the local financial. organs for basic construction and
auxiliary activities without regard. for economies or overexpenditures
in either operational category.
The certificate lists the number of employes assigned to basic
construction and auxiliary activities and. registered with the financial
organ. In the case where the salary fund and the number of employes in
the labor plan is lower than the registered figures, the certificate
must list the data according to the labor plan.
The banks verify the number of employes and the salary fund and in
case of discrepancies request that the proper corrections be made. The
amount listed. as an advance from the monthly salary fund is also veri-
fied by the banks against their own books.
The salary funds in the final monthly accounting are calculated
as follows. The salaries due to the actual personnel present (after
all corrections have been made) is increased by the vacation salaries
due from the funds of the following months and is reduced by vacation
salaries previously paid from the fund of the current month. The
advance already received for the current month and any deductions for
taxes and loans are then deducted and the rest is the amount due on the
final salary account.
Salary economies achieved in preceding months cannot be applied
to subsequent months.
Funds for the salaries of outside employes are issued by the banks
separately (on the basis of the wage payment certificate) within the
limits of the non-payroll fund registered. with the local financial or-
gans and only for work that cannot be handled by the employes of the
given organization or by other state or cooperative contractors.
The investment banks are expected to maintain a constant check
over the personnel and wage data listed in the salary payment certifi-
cates. This check is carried out on the basis of reports submitted by
the organizations and by on-the-spot investigations of the books of
the organizations.
If the banks uncover discrepancies in the salaries listed in the
payment certificate and in other sources, the banks list the discrepancy
in their salary payment files for later settlement. If the banks find
that the number of employes exceeds the figures listed in the labor
plan or registered with the appropriate authorities, the banks are ex-
pected to ask the organization to reduce its personnel to the proper
size. Independently of these checks, the banks constantly keep an eye
on the structure, the functions and, the work load, of the administrative
construction staffs with a view to eliminating any excess posts and
applying the best experience of some organizations to others, with the
standardized personnel lists approved by the government serving as the
model.
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CHAPTER III
BANK CONTROL OF THE PRICES OF MATERIALS AND EQUIPMENT
1. The Importance of Bank Control Over the Observances
Capital investments in the national economy involve a tremendous
amount of materials, such as nonmetallic minerals, construction mater-
ials, prefabricated parts, equipment, implements, tools, fuel and so
forth, which must be transported from the place of production to the
place of storage and must be sorted, assembled and transported. to the
work site. All these materials, whose cost is rising with the increase
in capital investments, are paid for through the investment banks. One
of the key tasks of these banks is to prevent any increase in the prices
of materials in the course of their production and transportation to the
construction site.
A number of economic organizations operate on the construction
site.. They include the client (the director's office of the project
under construction or the director of an existing enterprise), the
general construction contractor and his specialized subcontractors,
special supply organizations and, so forth. All these organizations
and enterprises manage the capital allotted to them, make their own
purchases, produce and. process materials in their own auxiliary enter-
prises, and supply one another on a contract basis. The purchasing
functions of each economic organization,, involve additional outlays
related to the maintenance of the staff, storage, sales, transportation
and so forth.
As a result of the transportation of materials from the place
of production to the place of consumption (the construction project),
the price at the project (at the project warehouse) consists of the
following elements: the industrial sales price; the cost of packing
and wrapping (except when that is already included in the sales price);
transportation to the loading point (if the price is f.o.b. plant,
f.o.b. quarry or if the manufacturer has its own rail siding); loading;
the railroad. or waterway freight rate; unloading; the charge of the
distributing organization; the truck or cart carriage rate.
The estimated cost of construction materials, equipment, prefabri-
cated. parts and other materials intended for the construction project
is figured on,the basis of the industrial sales prices and the most
rational geographical distribution of suppliers according to the state
supply plan.
In checking all bills presented. for the payment of materials and
equipment_and making payment only on the basis of legal prices, the
banks are expected to prevent any infractions of Soviet price policy
on-the part of individualenterprises and organizations.
Control of the cost of transportation and of loading and unloading
operations involves a constant struggle against irrational shipments
and excessive transshipments that not only raise the price but also
affect the quality of the product.
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Bank control of bills presented for materials and equipment thus
improves the transactions among suppliers, consumers and distributors
and inculcates on the employes in the construction project a spirit of
thrift with regard to state funds.
2. The Procedure of Setting Prices for Construction Materials and
Equipment.
Sales prices of basic industrial products under union and republic
jurisdiction are approved, by the Council of Ministers USSR and are
listed in the price books that furnish the basis for all transactions
relating to the purchase of goods.
Other products and. union and republic products manufactured
in small amounts are priced by the corresponding union ministries or
the Councils of Ministers of union republics and autonomous republics.
Sales prices of local, state and cooperative industrial products
not covered by the price books approved by the Council of Ministers
USSR are approved by the Councils of Ministers of the union republics.
Sales prices of brick, lime, roofing board, roofing tile, paper
roofing materials, asbestos-cement and ceramic materials, prefabricated
houses, plumbing materials, and nonmetallic minerals produced by local
industry, producer cooperatives and. veteran cooperatives are approved
by the Councils of Ministers of union republics having no oblast divi-
sion and by the Executive Committees of oblast and kray Soviets of
working people's deputies on the basis of planned, production costs.
However these prices may not exceed, by more than 20 percent the corres-
ponding prices set for state industry..
Auxiliary enterprises of construction projects and, contracting
organizations produce a considerable amount of construction materials
and prefabricated parts for the projects' own use. The prices of
these products are set by price books approved. by the Council of
Ministers USSR. Only when the giver, product is not covered by the exist-
ing price books can the price be set by the Minister having jurisdic-
tion over the project.
In addition to established mass production items, the enterprises
under union, republic and local jurisdiction also develop and produce
new products and machines. If these now items were previously produced
(or are being produced) elsewhere in our industry, they are sold at the
established, prices. Prices must be approved in the usual manner for
items not covered by the price books.
Items that have been newly developed and are to go into mass pro-
duction are priced by agreement between the supplier ministry and the
client ministry on the basis of planned production costs. These prices
are in effect for 6 months after the date of delivery of the first
item or the first lot. After that period products may be paid for only
at prices approved. by the Council of Ministers USSR. If the item is
not one of the items for which prices are set by the Council of Minis-
ters, the price set by mutual agreement remains in force.
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A similar..proced.ure,applies to the setting of prices of items that
are slated for production in small quantities or in single units.
Enterprises sometimes produce individual items by special order
(experimental samples of items, separate parts for equipment and machines,
semi-finished-goods, intermediate items, and so forth).. If there are no
existing prices for such products and no existing prices can be applied
by analogy (because of discrepancies in the over-all weight or volume),
then prices may be set by the Minister (of the supplier ministry) or
with his approval by the. chief of the main administration or the director
of the plant by a contract with the client. The same procedure applies
to individual items produced by enterprises for their own capital con-
struction.
Railroad, waterway and air freight rates are subject to approval by
the Council of Ministers USSR, truck freight rates by the Councils of
Ministers of union republics and. cart freight rates by the Councils of
Ministers of autonomous republics and the Executive Committees of kray
and.oblast.Sovlets of working people's deputies.
The cost
shipment of pr
to the regular
cars. or ships,
f additional services rendered in connection with the
ducts (concentration of gravel, delivery from the quarry
railroad. station or river landing, fastening in railroad
maintenance of an industrial rail spur, and so forth) is
paid on the basis of calculations approved by the main administration or
the ministry.
The prices approved for industrial products are listed in price books
published by the ministries. The price books list the designation and
brand., the precise characteristics and the f.o.b. and. sales prices.
The price books also list all sales conditions relating to assortment
and. quality --)surcharges, reductions and. other calculations that enter
into transactions (payment and refund for packing and. additional wrap-
ping, rigging, fastenings and so forth).
The approved. freight rates of the various union and. republic minis-
tries are issued in the form of handbooks.
Many organizations compile their own price manuals using data from
a number of price books to simplify their work when making cost estimates
and.. accounting for materials available at the project sites. These
price manuals sometimes list average prices for individual types of pro-
ducts, thus further simplifying calculations, even within large enter
prises. Some price manuals further contain the average cost of addi-
tional outlays related. to the shipment of materials, i.e. the price
f.o.b. project warehouse.
3. The Rates of Distributing and Supply Organizations
In a number of industrial ministries, a large part of the output is
sold. through a system of specialized distributing organizations.
These distributors sell the merchandise either by shipping it
directly from the producing plant to the consumer (transit operations)
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or by shipping it from its own warehouses where the goods have been
temporarily shipped from the producing plant (warehouse operations).
For these commercial services the distributing organizations
charge the consumers a fee, called "natsenka" J'urcharge7, a per-
centage rate based on the cost of the shipped merchandise at the sales
price.
Except for these surcharges, the distributors may charge only for
the cost of the packing in cases where that cost is not included in
the sales price and for the railway and waterway freight costs from
the point of origin to the point of destination. Naturally, in the
case of goods for which the sales price is f.o.b.. point of destination,
the distributors have no right to charge the consumer for the trans-
portation cost from the point of origin.
The realization of centrally allocated assets and independent
decentralized purchases of ministries are handled. through a system of
,main supply administrations and subordinated supply organizations.
The supply organizations of the main supply administrations of the
ministries and central agencies, like the distributing organizations,
handle transit and warehouse operations and. charge the so-called sur-
charge fees to cover their administrative outlays.
Like the distributing organizations, moreover, the main supply
administrations and their organs have the right to charge the consumers
for. the cost of transportation from the point of origin -- the site of
the warehouse of the supply organization -- to the point of destination
whenever the sales price is f.o.b. point of origin.
If the merchandise on its way to the consumer is handled by two
or more supply organizations, only the last organization making the
actual delivery has the right to levy -the warehouse surcharge, which
it must then use to compensate the other supply organizations.
When goods are sold at fixed. retail prices, the supply organiza-
tions instead of levying surcharges must cover their costs through
trade discounts.
A maximum surcharge of 0.4 percent of the sales price applies to
all transit operations of the supply organizations of all ministries
and agencies.
For warehouse operations there are two surcharges, both maximum
and average surcharges, which the ministries may in turn vary accord-
ing to the supply organizations under their jurisdiction and according
to the types of materials and equipment handled..
Supply organizations for which. maximum surcharges have been set
have no right to levy warehouse charges for materials and equipment
handled in transit or received from the warehouses of distributing
organizations (coal, lumber, cement, trucks and. trailers, tractors and
heavy equipment).
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The:mainsupply administrations and their local organs handle
mainly transit operations; warehouse operations are not supposed to ..
exceed 20-25 percent of their total turnover.
Construction-installation organizations (trusts, construction
administrations, all-union offices and so forth) and. large construction
projects organize their own supply organs,.which keep their own books
and. have a clearing account in the bank. These supply organs realize
their assets and make decentralized purchases within the-limits of their
organization. They do not enter into the system of the.main supply
administrations of ministries and have no right, to levy the surcharges.
approved for the main administrations and their organs.
The surcharges that may be levied by the special supply organs of
construction projects and. construction-installation organizations are
not regulated. by generally applicable norms. However, these surcharges
must keep within the norms set for the purchase and warehouse outlays
in construction, which are 1.94 percent of the cost of construction
and plumbing materials,.1..25 percent of the cost of equipment and. 0.8
percent of the cost of steel construction in 1950 prices.
Control of the proper levying of surcharges and the handling of
goods. in the distribution and supply system is a major segment of the
functions of the investment banks.
4. Checking the Prices of Materials and Equipment
For checking the prices of materials and equipment, the investment
banks must have at their disposal specially trained workers and, a
special unit -- the price-control bureau.
The organization of the price-control bureau at bank branches
involves two conditions that determine the successful performance of
price control over materials and equipment.
The first condition is the acquisition of all required price
books, price manuals and other reference materials on the approval of
individual prices and on surcharges approved for distribution and. supply
organizations, as well as freight rate handbooks. These acquisitions
must be insured. on a systematic day-to-day basis so that all new price
books and. newly approved price data promptly arrive at the bureau.
A filing system designed to facilitate the use of the reference
materials lists data on the approved prices of materials and equipment
and makes reference to the price source books.
The second.. condition is the proper organization of the circulation
of documents within the bank branch. Bills for materials and. equipment
that are submitted. for payment, bills of local suppliers that require
an on-the-spot check and. bills accompanying payment instructions
should all be sent to the price-control bureau and be cleared within
the established. time limits for refusal to accept, control and payment.,
if the.bank is supposed to check the sales prices and the other
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elements of the price f.o.b. project site, the document subject to
control must contain the necessary data. That requirement is met by
the form of the invoice set up by the Ministry of Finance USSR, which
contains all the payment data required by the buyer and the controlling
bank.
The basic data used in price-control work include:
Detailed designation of the supplier; this makes it possible to
determine the category of the supplier and preferential terms that have
been approved for the supplier (manufacturing enterprise, distribution
or supply organization, organization reselling surplus stocks and so
forth).
Point of origin and point of destination; this makes it possible
to establish the transportation distance, the proper freight rate and
so forth).
Reference to the shipping document, mentioning the method of
transportation.
Full designation of the shipped merchandise, with exact tech-
nical characteristics based. on the price book, brand and grade (these
are the most important data for checking againstthe price book).
Unit of measurement of the merchandise, based on the price book.
Quantity of merchandise shipped., in the appropriate units.
Sales price per unit according to the price book.
Total cost of the merchandise, the product of the price per
unit and. the quantity.
Reference to the price book or decree on which the invoice
price is based.
Cost of wrapping and packing, unless this is included in the
sales price.
Cost of loading and unloading.
Freight costs.
Distance of truck or cart transportation.
Surcharge of the supply and distribution organizations.
Total cost of the shipped merchandise.
Proper listing of all the requisite data makes it possible for
the bank to carry out its functions.
Control over the proper documentation of shipped. merchandise is
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one of the key tasks of the price-control bureaus. The,more complete
the invoices, the rarer-are payment refusals and requests for explana-
tion and. consequently the more rapid is the turnover of funds both at
the supplier and the buyer.
The cost of construction depends to a large degree on. the cost of
the basic construction materials, equipment and prefabricated parts, of
which the prices are subject to control by the bank.
The basic method of price..control consists of preliminary verifica-
tiQn (before payment).of the bills submitted to the bank in the city
of the., customer or, the. city of the supplier.
In the first case, preliminary control extends to bills that are.
submitted to-the bank branch for payment from the accounts of the
financed. projects and., construction organizations (either by the supplier
or with the customer's payment instructions). Verified bills are then.
paid in the established. fashion from the customer's account.
In the second case, the suppliers. submit their bills for a pro-
liminary check to the . bankin their city; the approved bills are then,
sent for payment to the bank,in the customer'scity.
Price control by the bank in the supplier's city has the advantage
of permitting any questions regarding prices and other invoice data to
be settled. on the spot within time consuming correspondence that tends
to hold up. transactions and freezes funds. At the same time the, bank
branches can exert influence on suppliers that submit faulty invoices
and thus prevent price infractions. However, the price-control method.
excludes the customer, who may conceivably raise objections regarding
the invoice that require additional correspondence in.any case.
In the course of their preliminary control, the banks check the
sales prices of every one of the basic materials that appear on a
special list supplied to them. Other items are checked at random.
The check is based either on price books and. other price data or on a
notation in the invoice regarding previous price control.
The surcharges of distribution and supply organizations are checked
in all invoices both from the point of view of legitimacy and amount.
Freight rates on railroads and waterways are checked on a random
basis for large amounts or long hauls.
All other price elements are carefully and fully investigated,
since price increases in the course of shipping are likely to occur
precisely in various supplementary charges (the maintenance of an in-
dustrial rail spur, loading and unloading, additional beneficiation
operations, -truck and cart haulage, outlays related to purchases, re-
sales and so forth).
According to the rules applying to the financing of construction,
the banks are not permitted to make payment on invoices that included
prices exceeding the -,pproved prices.
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In order to speed the turnover rate of funds, the banks are re-
quired whenever practicable to make partial payment of invoices, ex-
cluding any increases either in the sales price itself or in either
elements of the delivery price.
The banks keep a record of all paid invoices (both checked and.
unchecked) and of all refusals to pay because of price increases and
other infractions.
These data and. the systematic control of all invoices presented
for payment make it possible for the banks to uncover any infractions
in established prices, surcharges and. fees, in the handling of distri-
bution and supply to the retail trade, illegal sale of materials and
equipment on the side, irrational and excessively long hauls, the sub-
mission of invoices in the absence of shipments, the sale of incom-
plete products and other shortcomings in the supply and distribution
system.
A large number of auxiliary enterprises of construction organiza-
tions deal with their customers (construction offices and sectors)
directly through mutual clearing bureaus without presenting their
invoices to the bank. This makes It necessary for price-control
bureaus of the branch banks. to make on-the-spot checks of the prices
listed in invoices that are cleared through the mutual clearing
bureaus.
Auxiliary enterprises are required to sell their output at gener-
ally established prices and, in the absence of such prices, at prices
approved in the usual manner adopted for all industrial enterprises.
Bank control of the prices of products manufactured by auxiliary enter-
prises is therefore of extremely great importance since these enter-
prises account today for a large part of prefabricated construction
sections and parts.
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CHAPTER XIII
FINANCING OF GEOLOGICAL PROSPECTING OPERATIONS
Geological prospecting operations are of key importance for the
development of the national economy of the USSR. All geological pros-
pecting for minerals is under the direction of the Ministry of Geology
USSR, which through a wideflung network of subordinated organizations
handles a large part of the geological prospecting of union-wide sig-
nificance. In addition, geological work is also handled by the
Ministries of the Coal, Petroleum and. Metallurgical Industries, the
Ministry of the Construction Materials Industry and so forth.
Geological work includes, in addition to prospecting, exploration,
surveying and engineering and hydraulic work, also related geodesic,
cartographic, publishing and, monograph-writing work. Geological work
also includes the assaying of new mineral finds and investigation of
archive materials.
Long-range. geological work designed to uncover unexplored mineral
reserves outside of operating enterprises is financed directly from the
state budget. Geological work carried on within existing enterprises
or on the territory of enterprises under construction with a view to
defining the extent and the reserves of the given deposit are financed
out of capital investments.
Geological exploration carried. on as part of the running opera-
tions of existing mining enterprises is financed out of the funds of
the basic operations of the enterprises,
The Council of Ministers USSR approves as part of the annual
national economic plan a plan for the execution of geological work by
individual ministries (with a quarterly breakdown). That plan contains
indicators of the planned volume of geological exploration both in
money terms and. in physical units. Annual itemized lists approved by the
government show the volume of work and the rise in reserves to be un-
covered.for each mineral resource subject to exploration.
The more detailed breakdown of the geological plan for each pros-
pecting organization lists the basic indicators for each geological
work item.- the category of minerals and the nature of the work; the
name of the deposit, prospecting party, group and expedition; location
of the deposit, by republic, bray or oblast; specific purpose, time
limit and. expected results of the exploration work; approximate cost
of the work. These plan indicators are approved by the chiefs. of the
main administrations of the appropriate ministries for the geological
administrations, trusts, offices and. so forth under their jurisdiction.
Prombank handles the financing of geological. work on the basis of
the usual financing prerequisites; these do, however, vary in connection
with the specific nature of geological exploration work. The pre-
requisites include: an annual work plan for the geological exploration
organization, a financing limit, an annual itemized. list, a certificate
on the existence of designs and cost estimates, a certificate on the
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registration of the work (to be submitted by the industrial ministries).
The annual plan of the geological exploration organization is broken
down by types of work, minerals and so forth. The plan indicators
are set by the main administrations of the corresponding ministries on
the basis of approved. plan assignments. After a proper check, the head
office of Prombank forwards the geological work :plans (Form 7-a) to the
branches that are to handle the financing of the geological exploration
organization.
These plans differ somewhat from the usual form of the capital
work plans (Form 7). In addition to the total amount of the annual
work program, they also contain plan indicators (in thousands of rubles)
for each major site and type of geological work (with a breakdown by
geological administrations, trusts and offices).
The financing limit (in its usual form) is sent to the Prombank
branch by its head office.
The annual itemized list of geological work is submitted by the
geological exploration organization that is to be financed.
These itemized lists must have the approval, as appropriate,
of the chiefs of geological administrations, the chiefs of geological
exploration trusts, or the directors of enterprises that undertake
the exploration work.
The itemized list contains a complete catalogue of all work to
be performed.. It includes: the names of the individual geological
exploration parties., the names of the deposits to be explored by each
party and the nature of the work (detailed exploration, prospecting
exploration, study of the geological structure at depth, and so forth).
The work items and outlays for each deposit are usually listed. as fol-
lows: planning, field work (by types); temporary structures (by items);
excavation work; travel to the work site and back; bonuses and so forth.
One distinguishing characteristic of the itemized list of geological
work is the listing of the estimated cost per unit of field work opera-
tion (a meter of manual or mechanical drilling, a square kilometer of
geological survey, and. so forth) and of the cost of each temporary
structure.
In addition the itemized list contains data on the total estimated
cost, the work fulfilled prior to the start of the year, and the planned
amount and. cost of individual operations and outlays. Such an arrange-
ment of the itemized. list makes it possible for the bank to use the data
as a check of the proper payment of completed geological work, both with
regard to the cost per unit and the total cost of individual operations
and outlays.
A completed form of the itemized list of geological work by items
and outlays is shown below.
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Form 1-A
Ministry of Geology
Main Western Geological Administration
Geological Administration .............
Approved
Chief .......................-
Geological Administration
27 January 1950
ITEMIZED LIST OF GEOLOGICAL WORK BY INDIVIDUAL ITEMS AND OUTLAYS FOR 1950
1. Total estimated cost 14,21+1,500 rubles
2. 1950 work program 8,236,000 rubles
Total Prior to
Estimated Start.of
Name of Items Cost (in Year (in
(Deposits, parties thousands thousands
and types of work) of rubles) of rubles
Completed
I. Ferrous Metals
1 October Party
Total for the party 1,133.0
including:
Planning
(a) Compilation 4.1
(b) Drafting 3.1
Core boring 459.1.
Preparation and set-
ting up of bench
marks
Erection of derricks 50.4
Moving of derricks 179.7
Digging of ditches 11.1+
Digging of trenches up
to 10 meters deep 25.1
Digging of trenches more
than 10 meters deep 18.8
3.3
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Total
Amount
Unit (in
Cost (inthousands
Unit Quantity rubles)of rubles)
-- 1,121.1
percent 100 11.1.01+ 4.1
percent 100 30.72 3.1
meter 3,000 153.11 459.4
piece 75 1+3.77 3.3
derrick 9 5,598-80 50.1+
derrick 66 2,722.91 179.7
cubic 500 28.73 14.4
meter
meter 210 118.78 25.1
meter 157.5 119.30 18.8
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Testing
21.5
test
200
107.63
21.5
Organization
12.5
percent
100
124.80
12.5
Liquidation
11.6
percent
100
116.26
11.6
Travel to work site
114.7
percent
100
1,147.00
114.7
Travel from work site
67.0
percent
100
670.15
67.0
Office work
11.6
indices
--
--
--
Chemical analyses
23.0
indices
99
10.00
23.0
Temporary structures
47.0
cubic
meter
504
93.31
47,0
Bonuses
35.8
percent
99
357.93
35.5
Premiums for Length
of Service
Total for ferrous metals 1,133.0
II. Fuel
Total 14,241.5 3,472.4
Chief of Planning Department
...............Geological Administration (signature)
8,236.0
The certificate of the existence of designs and cost estimates
for the geological work at the construction project is submitted by
the geological organization. The designs and cost estimates for geologi-
cal exploration work are approved in the manner prescribed for the
various ministries. In most ministries, in particular the Ministry of
Geology USSR, designs and cost estimates for geological work items cost-
ing less than one million rubles are approved by the chiefs of the geo-
logical exploration organizations (the chiefs of geological administra-
tions, the heads of trusts and so forth), while in the case of items
costing more than one million rubles approval must come from the chiefs
of the main administrations of the ministries. For some types of work
(for example, rotary drilling by organizations of the Ministry of
Geology USSR), the designs and cost estimates must be approved by the
chiefs of the main administrations of the ministries irrespective of
cost.
The certificate on the registration of the geological exploration
work. must be submitted when the work: is to be done by organizations of
industrial ministries. The work is registered by the geological adminis-
trations of'the Ministry of Geology corresponding to the location of the
work site. The certificate lists the name of the geological exploration
organization, the name of the deposit and the total volume of work.
Following the usual procedure, the Prombank offices check all the
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financing prerequisites furnished by the geological exploration admin-
istrations. The banks must establish in particular the legitimacy of
approval of the itemized lists, their agreement with the data of the
annual work plans and the plan.assignments, and the supply of approved
designs and cost estimates for all the work items listed in the item-
ized list. Following the usual procedure, the.banks verify the certifi-
cate on the existence of a designs and estimates dossier and spot-check
the quality of the cost estimates. Cost estimates for most of the
geological exploration work are based. on existing cost estimate norm
handbooks of the Ministry of Geology USSR (with the use of the proper
coefficients); overhead is calculated. into the cost estimates within
the established. legal limits.
The bank offices submit the annual itemized lists to a detailed
analysis and require the elimination of any outlays that cannot be
financed from appropriations allocated to geological work. Such outlays
include; work related to the construction of equipment and. the testing
thereof; outlays for the compilation of handbooks and instructions; the
cost of maintenance of museums,. the replenishing of technical libraries,
the execution of time-study operations and. related standardization opera-
tions; and so forth, when they are not related to specific geological
work items. Monographs and other publications listed. in the itemized
list must include the titles of the papers.
Like other organizations, geological organizations are supplied .
with their own working capital to pay for the normal remainders of assets
in circulation. In addition, organizations subordinated to the Ministry
of Geology USSR, the Ministry of Construction Materials USSR and. the
Ministry of the Petroleum Industry USSR receive in the course of the
year advances amounting to 10-12 percent of the annual work program to
cover their seasonal needs. These advances are treated. in the financing
limits as immobilization of internal resources and. are paid out as the
need for funds arises in the course of the first semester; they must be.
paid back, however, not later than 1 December (in the Ministry of the
Petroleum Industry not later than 1 November).
Organizational outlays and expenses for travel to the work site
.(productive personnel and freight) are paid. by the bank up to 50 per-
cent of the corresponding preliminary estimates that form part of the
approved cost estimate, provided a certificate on the departure of the
party.: (expedition, group) for the work site is submitted. to the bank; the
balance is paid by the bank upon presentation of an act confirming the
completion of the organizational period. and. the start of field work.
The bank pays for fulfilled geological work on the basis of monthly
bills accompanied. by acts listing the amount of work fulfilled; the
acts list (in physical units) the actual volume fulfilled in various
types of geological operations, including the following indicators:
work fulfilled since the start of the year, with a breakdown of the work
fulfilled prior to the current month and during the current month; the
acts also. list the planned volume of work for each operation. The ful-
filled geological work is valued in the bills or in the accompanying
reports in terms of the unitary rates shown in the itemized list. The
cost of the work fulfilled during the first and the second, ten-day
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periods are paid., as usual in construction, on the basis of intermediate
bills without the requirement of the acts of work fulfilled.
Outlays for the erection of temporary buildings and structures are
paid for items costing less than 75,000 rubles on the basis of acts con-
firming the completion of construction, and. for items costing more than
75,000 rubles on the basis of acts of acceptance of completed construc-
tion elements.
Liquidation outlays and expenses for return transportation are
paid in the amount of the preliminary cost estimate after the party
(expedition, group) has actually been liquidated, which must be con-
firmed by an order of the geological exploration organization.
Office, report-writing, cartographic and. other work that cannot be
measured in physical units is paid for on the basis of readiness; in the
case of office and report work, 10 percent is withheld by the bank from
each bill until receipt of a certificate confirming submission of a re-
port on the fulfilled geological work to the State Geological Archives.
When paying for fulfilled geological work, the banks verify the
justification of these bills and their agreement with the data in the
annual itemized lists. In the course of an on-the-spot inspection, the
banks spot-check the amount of geological work completed. This inspec-
tion is organized, executed and reported in the same manner as inspec-
tion of construction-installation work.
Geological work is financed by the Prombank offices through the
financing account opened to the corresponding titleholders of the item-
ized lists -- geological administrations, trusts and, so forth. These
accounts are then used to pay for the cost of completed geological work,
advances in the course of the year, and so forth. In addition to these
financing accounts the geological organizations also open clearing
accounts for the payment of outlays directly related to the execution
of the geological work (wages, the purchase of materials, transportation
needs and so forth). When the geological work is handled on the basis
of a contract concluded between the titleholder of the itemized list and
an outside organization, the completed work is also paid. for out of the
financing account.
Capital investments related to the work of the geological explora-
tion organizations (the construction of permanent buildings and struc-
tures, the acquisition of equipment and means of transportation, and
so forth) are financed. in the usual manner from separate capital invest-
ment financing accounts opened for that purpose.
The investment banks that handle the clearing accounts of geologi-
cal exploration organizations effect in addition to the preliminary and.
subsequent control of the proper documentation of completed work and the
justification of the billed. items a check over the expenditure of the
funds in the clearing accounts of the geological agencies. Both in
method and purpose, the check is similar to the bank control of the clear-
ing accounts of contracting organizations. The banks check the prices of
materials, issue funds for the payment of wages within the limits of the
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approved labor plans and the salaries of the administrative personnel
within the limits of the number of employes and. the salary fund regis-
tered with the local financial organ.
By analyzing the periodic audits and making their own investiga-
tions, the banks carry out systematic control of the financial and
economic operations of the geological exploration organizations,. lend
assistance in improving their economic accountability, speeding the
turnover rate of funds and so forth. One major aspect of this bank
control is fulfillment by the ministries, agencies and their subordin-
ated geological exploration organizations of the government decision
regarding the reduction as of 1 July 1950 (by 7 percent for each
ministry and, agency) of the estimated cost of geological exploration
work effected. at.the expense of the state budget and funds allocated
to the financing of capital investments.
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CHAPTER IIV
FINANCING CAPITAL, REPAIRS
1. The Importance of Capital Repairs
The fixed capital of enterprises (buildings, machinery) is grad-
ually worn out in the process of production by transferring its value
to the' finished product.
The time limits and the degree of wear of individual elements of
the fixed capital, are not uniform, thus accounting for the varying
character and time limits of their renewal. The individual construction
elements of buildings and. installations, for example, do not all wear
out at once. In order to keep the buildings and installations func-
tioning normally, the worn construction parts must be replaced in time.
The same applies to equipment, in which individual parts are worn out
at various times and therefore require periodic replacement.
Individual elements of the fixed capital are replaced by enter-
prises or organizations by capital repairs. For that purpose the
enterprises accumulate amortization funds from deductions included. in
the cost of production.
In addition to capital repairs, enterprises and organizations
also effect ordinary repairs to prevent the premature wear of parts
of buildings, installations and. machines. In contrast to capital re-
pairs, ordinary repairs are not financed from the amortization funds,
but rather as part of the production outlays (the ordinary repairs of
commercial premises as part of the circulation outlays).
The length of use of fixed capital, its safekeeping and normal
operations depend on the prompt execution and. the quality of capital
repairs. Party and government are therefore devoting special atten-
tion to the problem of capital repairs and in their decisions have
repeatedly stressed. the responsibility of economic organizations in
the matter of capital repairs in the enterprises under their juris-
diction.
The resolution of the 18th All-Union party conference following
Comrade Malenkov?s speech said:
"We must further reach the point where industrial enterprises
and. transport will preserve all material wealth intact and in good
condition and where the heads of enterprises will be solicitous with
the state property entrusted to them: buildings, equipment, tools,
and materials.
"We must put an end to such negligent and noneconomic attitudes
toward the national wealth-where delayed or low-quality repairs of
equipment, buildings and installations and the rolling stock of the
railroads merely serve to break them down ahead of time and put them
out of operation" (Rezolyutsii XVIII Vsesoyuznoy konferentsii VKP(b)
ffiesolutions of the 18th All-Union Conference of the All-Union Com-
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munist Party (Bolshevik47, Gospolitizdat, 1941, pages 8-9).
2. The Procedure of Planning Outlays for Capital Repairs
Before 1938, the national economic plans did not list any separ-
ate outlays for capital repairs of the. fixed capital of industrial,
transportation and. other enterprises: these outlays were included. in
the total capital investment plan and were financed from appropriations
allocated to investments.
That situation led. to a weakening of responsibility on the part
of the head of enterprises for the timely execution of capital repairs.
In many cases the appropriations necessary for that purpose were not
allocated and amortization deductions were used. for other than their
specific purpose. The heads of enterprises did not have the right to
dispose of.the amortization deductions intended for capital repairs and
deductions that remained unused by the end of the year were returned to
the budget.
Since 1938 major changes have taken place in the system of plan-
ning and financing capital repairs in industry. The government has
adopted average norms of annual amortization deductions, differentiated
by individual agencies, and average norms for annual appropriations
allocated specifically to capital repairs. The norms are expressed in
percent of the initial cost of the existing machines, equipment, struc-
tures and installations involved. As of 1 January 1950, ministries and
agencies have been given new (temporary) norms of amortization deductions
and appropriations for the capital repairs of all types of fixed capital,
except automobile transportation, for which the norms established in
1945 are still in effect.
In connection with the varying rates of wear of equipment and
installations, the government has required the heads of agencies to set
up for each enterprise differentiated amounts of-amortization deductions
and separate appropriations for capital repairs within the limits of the
deduction and. appropriation norms approved for ministries and, main ad-
ministrations.
Appropriations for capital repairs are not included in the capital
investment plan and are now being planned separately. The national
economic plans list the annual volume (and a quarterly breakdown) of
capital repairs in money terms for individual ministries and agencies.
In the case of industrial ministries, quantity indicators are also
planned for the capital repair of the main types of equipment and in-
stallations.
In accordance with these plans, ministries and. agencies then ap-
prove both capital repair plans for their subordinated main administra-
tions and appropriation norms for capital repairs for each enterprise.
The main administrations in turn set for their enterprises the annual
capital repair plans (with a quarterly breakdown) within the limits of
the appropriations approved by the heads of agencies.
The plans for main administrations, enterprises and organizations
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are expressed in money terms with separate listing of the types of fixed
capital (production buildings and installations, equipment, residential
buildings, transportation and so forth) and contain quantitative plans
for the repair of the chief types of equipment and installations.
No quarterly breakdown of appropriations is given for enterprises
with an annual capital repair plan of less than 100,000 rubles.
3. The Procedure of Financing Outlays for Capital Repairs
Outlays for capital repairs are financed from the amortization
deductions of enterprises insofar as these are intended for that pur-
pose. Such funds may not be used for other purposes. With a view to
insuring the specific utilization of these appropriations, amortiza-
tion deductions are credited to special capital repair accounts of
enterprises and organizations. These accounts are then used exclusively
for the payment of outlays related to repair work.
Funds intended for capital repairs cannot be redistributed. by
ministries, agencies and main administrations among various enterprises.
Exceptions to that rule must be the subject of special government
decisions.
Capital repairs funds that remain unused by the end of the year
are not returned to the budget but remain at the disposal of the director
of the enterprise and may be used for that purpose during the following
year.
The capital repairs of industrial enterprises are financed from
special accounts opened in the State Bank. Outlays for the capital
repairs of construction-:Installation contracting organizations and.
geological exploration organizations are financed in the same manner as
for industrial enterprises, except that their special capital repair
accounts are opened. in the investment banks that handle the clearing
accounts of these organizations.
The amortization deductions are credited to the special accounts
of enterprises and contractors on the payment dates for amortizations
intended for construction, i.e. every ten days in the amount of one-
ninth of the quarterly capital repair plan. Payment instructions call-
ing for the transfer of the stated amounts from the clearing accounts
are honored by the investment banks as soon as all, budget claims have
been satisfied.
Agreement between the amounts paid into the special capital repair
accounts and the actual amortization charges must be checked by the in-
vestment banks on the basis of data submitted by enterprises and con-
tractors regarding fulfillment of their capital repair plan. These data
must contain the amount of amortization actually charged since the start
of the year and the amount paid into the special bank account.
If the payments into the account are found to be less than the
actual amortization fees, the bank requests the economic organization
in question to transfer the missing sum from its clearing account, and
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in the absence of such payment instructions effects the transfer on its
own initiative with the approval of the head. of the bank branch. If the
bank finds that the payments have exceeded the actual amortization fees,
then the excess is deducted from the subsequent payments at the time
they fall due.
The financing of outlays for capital repairs must be contingent
on the receipt from the enterprises and organizations of a certificate
confirming the existence of, an annual capital repair plan (with
quarterly breakdown) and of preliminary cost estimates for individual
capital repair items. The preliminary cost estimates are expressed. in
current prices and. are subject to approval by the head of the enterprise
or the contracting organization.
Funds for capital repairs are issued. from the special bank ac-
counts only within the limits of the available balance.
. The procedure by which the State Bank or the investment banks
finance outlays for capital repairs d.eperids on the manner of the repairs
-- by the enterprise itself or by a contracting organization.
When the enterprise handles the repairs itself, the work is
financed by outlay elements, i.e.. the special accounts are used, to pay
bills for materials and services rendered, for the payment of wages and.
so forth. In that case, outlays made by the basic operations of the
enterprise may be refunded from the special bank accounts upon payment
of bills for completed repair work.
When capital repairs are contracted. out, the special accounts are
used to grant advances to the contractors in the amounts agreed. to in
the contract and to pay for ten-day and monthly bills for completed
repair work; the monthly bills must be accompanied, by work acceptance
acts signed. by the clients and the contractors.
If the banks present requests for the regular payment of the
amortization deductions intended for capital repairs, the enterprise
or contracting
organization may make a counter-request for payment of
bills for repair work completed. Such bills (after a proper check)
may be used for the unpaid amortization payment.
It was previously stated, that contracting organizations may be
granted. short-term credits in view of the time lag between the making
of capital repairs of construction machinery arid. means of transporta-
tion and the payments of amortization deductions for that purpose.
The procedure of the use of amortization deductions and. financing
capital repairs, established in 1938 for industrial enterprises, was
subsequently applied to other branches of the national economy (trans-
portation, municipal services and so forth).
Let us now discuss certain special aspects of the financing of
capital repairs of individual branches of the national economy.
Capital repairs of municipal enterprises and trusts are financed
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from special accounts opened. in municipal banks or in the State Bank (in
the absence of a municipal bank). No special bank accounts are opened
for municipal enterprises and. trusts that have annual capital repair ap-
propriations of less than 5,000 rubles. In those cases, funds for capital
repairs are taken from the clearing accounts of the municipal enterprises
and trusts under the supervision of their superior agencies.
Capital repairs of the housing of local Soviets of working people's
deputies are usually financed from special accounts in municipal banks.
Capital repairs of the housing of enterprises and, organizations are
usually financed by the State Bank. In certain cases, capital repairs
of the housing of enterprises and organizations, where separate books
are kept for such housing, are financed by municipal banks provided
current accounts for such housing units have been opened in the municipal
banks.
Capital repairs of the fixed capital of consumer cooperatives are
financed. from special accounts in the State Bank, which in turn are re-
plenished from special funds allocated to the repair and. construction
of commercial premises within the consumer cooperative system.
Capital repairs of the fixed capital of producer, lumbering and
veterans cooperatives are financed from amortization deductions paid
into the clearing accounts of these organizations in the state Bank.
In certain cases, these organizations, in accordance with their plans,
may be granted credit in the form of long-term loans from Torgbank for
making their capital repairs.
No amortization deductions are made in budgetary organizations
and. institutions. Capital repairs of the fixed capital in those organ-
izations are financed from budgetary appropriations issued, as a rule,
through the State Bank, and in part through municipal banks.
Amortization deductions paid for the fixed capital of construc-
tion projects that are being financed as capital investments are usually
not credited to special capital repair accounts of the investment
banks. Capital repairs of the fixed capital of such projects are fi-
nanced from.their financing accounts, and, in the case of projects
being financed. on the basis of work completed. (see Paragraph iI of the
Regulations), from the clearing accounts of the chiefs of construction
(or of the capital construction departments).
Capital repairs of the fixed capital of collective farms are
financed from the indivisible funds kept in the capital investment
accounts of Sel'khozbank.
the Financing of Outlays for Capital Repairs
The investment banks are responsible for the scheduled. payment
by the economic organizations of the total amortization charges intended
for capital repairs and the proper expenditure of these funds for their
specific purpose.
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In checking the expenditure. of capital repair funds, the banks
follow the instructions of the-,State Bank, approved by the government
in 1938, and in the case of the municipal enterprises the instructions
of Tsekombank. The Tsekombank instructions provide a uniform procedure
of financing capital repairs of municipal enterprises irrespective of
which bank does the financing.
Before issuing funds for capital repairs, the bank checks whether
an annual plan with a quarterly breakdown has been approved for the
enterprise, whether its data agree with the capital repair appropria-
tions approved by the Minister for the given enterprise, and whether
the director of'the enterprise has approved. a preliminary cost esti-
mate for the individual capital repair items. When capital repairs
are handled. by a contractor, the bank also checks whether the contracted.
items and their cost correspond to the approved plans and preliminary
cost estimates.
In connection with its verification of the plan approved. by the
main administration, the bank must receive from the enterprise or con-
tracting organization a certificate listing the following: data on
the volume of capital repairs planned. for the year and. by quarters for
the enterprise as a ghole, with a breakdown for the outlays for indi-
vidual types of fixed capital (buildings and installations,equipment,
means of transportation and so forth) and for the major capital repair
items; the total amortization deduction norm approved by the.Minister
for the given enterprise, including the amortization norm and the
amount of appropriations allocated to capital repairs; data on the wage
fund allocated to capital repairs (this fund. may be included in the
total wage fund of the basic operations of the enterprise).
The certificate confirming the existence of preliminary cost
estimates for individual items generally contains data on the estimated
cost of repair work on each item, the date of approval and. the scheduled
starting and completion dates of the repair work. In those cases where
preliminary cost estimates are not being made at the same time for all
items, certificates may be submitted. to the bank as the cost estimates
are being received, but cost estimates must be submitted. at the latest
by the scheduled. starting date of the repair work on the corresponding
items. The banks are expected to see to it that the total estimated
cost of the repair work listed in the certificates for the current year
remains within the limits of the planned appropriations for the current
year.
Before issuing funds for capital repairs, the banks must also
chock the data listed in the certificates against the capital repair
plans and, the preliminary cost estimates in the possession of the enter-
prises.
When capital repairs are to be financed by individual outlay
elements, the banks must check the construction material prices listed
in the bills against the fixed existing prices. Funds for the payment
of wages of repair workers may be issued by the banks within the limits
of the wage fund. set up for that purpose. In those cases where a capital
repair wage fund has been included, in the total wage fund of the enter-
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prise and has not been approved separately, wage funds for capital repair
workers are issued from the clearing account of the enterprise rather
than from a special account.
When the repair work is handled by a contractor, the banks check
whether items listed in the capital repair plans have been included in
the contract agreement and whether the cost of the completed repair of
these items corresponds to the preliminary cost estimates.
The banks also carry out subsequent control over the proper ex-
penditure of funds issued. for capital repair purposes. In this connection,
they make use of periodic and annual audits of capital repair work done
by the enterprises and the contracting organizations and carry out on-
the-spot investigations. The check must cover the proper documentation
of the completed repair work, the actual cost of the work and its agree-
ment with the approved preliminary cost estimates. If the actual cost
is found to differ from the estimated cost, the banks must determine the
causes for the discrepancy and take the proper measures.
If in the course of their investigations, the banks uncover mis-
management of capital repair work, such as discrepancies between the
outlays of funds and the fulfillment of the capital repair program,
the illegal use of working capital and other infractions of financial
discipline, the banks may impose financial and credit sanctions on the
mismanaged organizations.
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THE LONG-TERM CREDITING OF. THE CAPITAL INVESTMENTS OF STATE ENTERPRISES
Capital investments of state enterprises and organizations in all
branches of the national economy of our country are financed on a ,non-
repayable basis.
Long-term credits granted by the investment banks serve as an
additional source of financing for enterprises producing consumer goods
and products based on local raw materials, for auxiliary enterprises of
state enterprises and state farms, for the capital repairs of municipal
housing and the construction of municipal power plants.
The loan thus granted is extinguished within a definite term from
the accumulations of the enterprises that are put into operation.
The long-term loans of municipal banks in most cases are granted
against the future income of the housing administrations and thus make
it possible to expand the volume of capital repairs.
In all these cases the beneficiaries of the long-term credits are
small enterprises that can be constructed, organized and. repaired within
.a short time and at relatively little expense.
The large number and the geographical scattering of the credited
enterprises and organizations have been a factor in assigning a large
share of the long-term crediting to the offices of the State Bank, which
handle not only operations related. to the granting of loans and the exe-
cution of transactions, but also check on the specified utilization of
the funds issued.
1. Thy--Term Crediting of Rayon and Oblast Industries
The offices of the Prombank and the State Bank grant long-term
loans for the construction and expansion of enterprises in rayon, city
and. Oblast industries that produce consumer goods or products and, fuels
based on local raw materials.
Prombank grants three-year loans, while the State Bank grants one-
year loans. An enterprise may therefore obtain a Prombank loan for one
line of production and. at the same time get a shorter loan for the or-
ganization or expansion of another line of production.
. Prombank offices granted long-term loans to rayon, city and oblast
industrial enterprises provided that the capital investments of these
enterprises are not included in the state's capital investment plan.
Long-term loans are being granted for the organization and con-
struction of new or the expansion of existing enterprises producing
consumer goods or food, fuel and construction materials based on local
resources. Such enterprises may also include plants engaged in the
mining of local raw materials and the processing of semi-manufactured
goods and. packaging materials used. in the production, processing and
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packaging of the consumer goods and local products referred to above.
In order to be granted a long-term loan, a borrower must be able
to guarantee the extinction of the loan from accumulations to be achieved
by the new or the expanding enterprise. If the accumulations are not
expected to be sufficient to extinguish the loan within the term, credit
may be granted anyway if the Executive Committee of the local Soviet of
working people's deputies guarantees extinction of the loan through the
redistribution of accumulations among the enterprises under its Juris-
diction.
Enterprises of rayon, city and oblast (including ASSR) industries
may be granted loans within the limits of the approved, credit plans.
The following approvals are required. in the case of long-term loans
granted by Prombank: loans up to 50,000 rubles upon application by the
enterprise and with the approval of the head of the branch bank; loans up
to 200,000 rubles upon application by the oblast ()way) executive com-
mittees or the Councils of Ministers of autonomous republics and with
the approval of the oblast (kray or ASSR) offices of Prombank; loans up
to 500,000 rubles upon application of the Councils of Ministers of union
republics and with the approval of the republic offices, and in the case
of the RSFSR and the Ukraine with the approval of the head office of
Prombank.
The credit terms for the construction and expansion of rayon, city
and oblast industrial enterprises are set in accordance with the expected
ability to pay of the planned enterprises, but with a maximum of three
years. The enterprises are expected to submit to the bank a calculation
of the expected profits of the projected enterprise based on the cost of
a unit of output.
On the basis of the cost of a unit of output, the profit per unit
of output can be calculated. The expected monthly output then yields
the expected. monthly profit for the total volume of production and,
after the necessary deductions, the monthly amount of profit that may
be used. to pay off the loan.
With a view to speeding up the rates of construction of new enter-
prises financed. with long-term loans, the following payment terms have
been set up: loans up to 50,000 rubles must be fully issued by the bank
within four months of the first payment, loans up to 200,000 rubles
within eight months of the first payment and loans up to 500,000 rubles
within one year of the initial payment.
The bank payment terms may be extended by the oblast or kray
office of Prombank for loans less than 200,000 rubles and by the head
office for loans of more than 500,000 rubles Previous references are
to loans of less than 500,000 ruble,.,-,7. Extensions of the loan terms
require an application by the enterprise with enclosure of the decree
of the Executive Committee calling of measures to speed up construction
or complete it within the newly established term.
The maximum term for the extinction of the loan is calculated
starting with the first of the month following the receipt of half the
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bank credit. Consequently, the total term allowed. for the extinction of
the loan includes half the number of months allowed for the payments
by the bank plus the loan extinction term based on the monthly profits,
with the total not exceeding three years.
If, say, an enterprise has received'a loan of 50,000 rubles for
construction and is expected to have a monthly profit of 2,000 rubles
(after deductions), then the loan extinction term is 25 months. Since
the maximum bank payment term is four months (half being two months)
the over-all time period., for the extinction of the loan is 27 months.
It was stated above that in cases where the expected. monthly pro-
fit will be insufficient to pay off the loan within the maximum three
years the bank will issue the loan against a guarantee by the Executive
Committee regarding extinction of the loan through redistribution of
accumulations among the enterprises under its jurisdiction.
As in the case of all construction, designs and. cost estimates
must be worked out and approved prior to the start of construction if
loans are to be granted..
To make it as easy as possible for the industries considered here
to,build or expand. their enterprises, the required designs and cost
estimates have been greatly simplified and shortened. The designs must
contain the necessary' calculations of the capacity of output,.a list of
the required'equipment, buildings and installations, their specifications
and location within the construction site.
The cost of the construction work is formulated. in preliminary
cost estimates using aggregate indicators (such as cubic meters of
buildings or installations). The cost estimates are based on the
adopted output norms and wage rates, state prices for construction
materials.and prefabricated parts, and the overhead norms set up for
the construction of local industrial enterprises.
Designs and preliminary cost estimates require the following ap-
provals: for enterprises with an estimated. cost of up to 100,000 rubles
--'.chiefs of main administrations and trusts; an estimated cost of up
to 300,000 rubles -- chiefs-of republic ministries and agencies; an
estimated cost of more than 300,000 rubles -- the republic Councils of
Ministers.
Both preliminary and subsequent control is associated. with the
granting of long-term loans by the Prombank. Prior to granting the loan,
the bank.checks all the credit prerequisites- purpose of the loan; con-
fovmity of the planned. enterprise or line of production and. the estab-
lished credit conditions;.the existence of approved designs and prelim-
inary cost estimates; calculations of the cost of the future unit of
output and the expected profits.
The following documents are required before credit can be granted:
application by the enterprise; certificate confirming the existence of
designs and. cost estimates; the permission of the head, of the appropriate
Prombank office for the granting of the loan.
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With the granting of the loan., a separate loan account is opened
to the enterprise. Funds are issued either in payment for contractors'
bills or for individual outlays, such as the purchase of materials and
equipment, the payment of wages and salaries. Bills for materials and
equipment are honored after verification of prices and funds for the pay-
ment of wages are issued within the limits of the actual payments (with-
out labor plans and. administrative'expense limits).
If all outlays are made by the enterprise from its clearing
account in the State Bank, these outlays may be replaced from the loan
account on the basis of acts for completed. work priced in accordance
with the preliminary cost estimates.
After the credit has been exhausted. and construction has been
completed, the loan extinction procedure begins to operate and the pay-
ment amounts and dates are set.
The extinction of the loan is handled in the form of equal quar-
terly payments within the adopted maximum term. The borrower's first
payment falls due within six months of the completion of construction
and usually coincides with the end of the bank payment term.
If the payments of a loan fail. to reach the bank on the due dates,
the bank has the right to debit the clearing account of the enterprise
with the missing amount within the usual order of priority for overdue
loan payments. If the loan is extinguished ahead. of the final payment
date, the bank reduces the usual percentage (3 percent annually) by 25
percent if the extinction is six months early and by 50 percent if the
loan is extinguished one year ahead of schedule.
As part of 'their credit functions, the banks check on the progress
of construction and. on the specified, utilization of the credited funds.
Analysis of the construction work and the expenditure of funds and on-
the-spot investigations serve to rationalize construction, reduce costs
and insure extinction of the loan within the scheduled term.
If the banks uncover improper utilization of funds, they withhold
further funds and demand the payment of previously granted. amounts pend-
ing prosecution of the responsible persons.
2. The Long-Term Crediting of State Farms
Se.l'khozbank grants long-term credit to state farms for the con-
struction and equipping of workshops producing horse-drawn carriages,
sleds and. harnesses, for the organization and construction of auxiliary
enterprises producing local construction materials and fuels (brick,
tile, lime, stone, roofing materials, coal, peat).
State farm loans are granted, for up to five years at 3 percent
interest. The loan extinction term depends on the ability of the planned
enterprise to make payments. Payments are made in equal parts starting
with the second year.
In case of overdue payments, the state farms lose the right to
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obtain further loans until the overdue debts are extinguished.
When applying for loans, the state farms must submit to the bank
branches all the documents called for by the construction financing
rules (itemized lists, cost estimates and, so forth).
Long-term loans are issued by the bank branches in the usual
manner applying to the financing of construction, including the usual
preliminary and subsequent control provisions.
The branches of Sel'khozbank systematically check the specified
utilization of the funds on the basis of audits and investigations.
If they uncover improper utilization of the credit, a lag in the construc-
tion schedule or other infractions, the banks cease further crediting and
call back the amounts already granted..
All infractions of rules must be communicated by the bank branches
to the superior agencies of the state farms.
3. Long-Term Crediting of Local Soviets for Housing Repairs
The basic sources of financing capital repairs of the housing of
local Soviets are the funds of the housing administrations and the
city's funds. These funds are made up of 95 percent deductions of the
rent payments for nonresidential buildings under the jurisdiction of
the housing administrations and of 100 percent of the rent payments of
residential and nonresidential buildings under the jurisdiction of rayon
or city housing administrations.
In some cities the amounts at the disposal of the housing admin-
istrations and the city's funds are generally short of their require-
ments for capital housing repairs. In those cases additional appro-
priations may be allocated from the local budgets or long-term loans
may be granted by the municipal banks.
The municipal banks do not grant their loans for housing repairs
to the city Soviets, but directly to the housing administrations if
these administrations are in a position to repay the loans out of their
income of the following year.
In exceptional cases, with'the permission of Tsekombank, loans
may be'granted to the housing administrations with extinction provided,
from the city's funds for the financing of capital housing repairs.
Such loans are not granted. to housing administrations, but instead are
regarded as assets of the city's funds for the financing of the capital
repair plan approved for the local Soviet. The long-term loans are
granted only for the capital repairs listed in the itemized. lists of
the housing administrations and if a certificate confirms the existence
of an approved cost estimate or a rated description of the work.
The funds of the housing administrations themselves and the loans
granted by the municipal banks are allocated firmly to the individual
housing administrations and cannot be redistributed. However, in ex-
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ceptional cases, by decree of the Executive Committees of the local So-
viets, the funds of profit-making housing administrations may be used
for the repayment by losing housing administrations of long-term capital
repair loans granted, for a maximum of five years.
Such loans are granted by the banks if the housing administration
has some surplus funds during the current year in accordance with its
plan; or if housing administrations that lack such surplus funds may
extinguish the loan anyway within the stated, term. Long-term loans for
capital housing repairs are granted by the municipal banks at one per-
cent annually, with the interest rising to 6 percent on overdue loans.
When granting the loans, the banks must receive a statement of the pay-
ment obligations on the part of the housing administration.
The loans granted by the municipal banks are credited to special
capital repair accounts of the housing administrations. The municipal
banks carry out both preliminary and subsequent control over the ex-
penditure of funds in those accounts.
4. Lon,-Term Crediting of the Construction of Small-Capacity Hydro-
electric Stations.
On the basis of the annual credit plan of Tsekombank, which is
drawn up on the basis of data furnished by the Ministry of Agriculture
USSR and the Ministries of Municipal. Services of the republics, the
municipal banks grant long-term loans for the construction of small-
capacity hydroelectric stations in workers' settlements, populated
places of the urban type and in rayon centers situated in rural areas.
The crediting of these hydroelectric stations is contingent on
a construction cost of less than one million rubles, including the cost
of the high-voltage transmission line to the rayon center and transformer
substations.
Loans are granted for up to five years with extinction provided
from the operational incomes of the hydroelectric stations, or, if the
latter should prove insufficient, from the funds of the local budget.
The funds granted in the form of long-term loans are issued to
the construction projects of the hydroelectric stations together with
the general funds allocated to their financing (on the basis of the
rules for the financing of construction by Tsekombank and the municipal
banks).
In addition, the municipal banks also grant credit for measures
designed to increase the capacity of existing municipal enterprises
(power stations, water lines, laundries and so forth).
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CHAPTER XVI
TI LONG-TERM CREDITING OF COLLECTIVE FARMS
1. The role of Agricultural Credit in the Organizational and Economic
Strengthening of Collective Farms
As a result of the implementation of the Stalinist policy of col-
lectivization and the liquidation of the kulaks as a class, our agri-
culture has been transformed. from a formerly backward. branch of our
economy into the world's leading and largest agriculture, equipped. with
:first-class machinery.
Summarizing the results of the Socialist reconstruction of agri-
culture; Comrade Stalin said at the 18th Party Congress that the col-
-lestive farms had been strengthened and. consolidated and that the
Socialist system of agriculture had become the only form of agriculture
in the USSR. The advantages of the collective system are that it per-
mits the use of the most recent machinery and. the findings of agronomic
science and that it insures the development of agriculture according
to the laws of expanding Socialist reproduction.
The party and the Soviet Government have done much to strengthen
the organization and the economy of the agricultural artels and this
has insured. a steady rise in the collectivized holdings of the farms,
improvement of the material well-being of the farmers and. a rise in their
cultural level.
Farm credit has played a major role in the organizational and
economic strengthening of the collective -farms. Finances arid. credit are
being used by the party and. the Soviet Government as one of their most
powerful instruments in the Socialist reorganization of agriculture and
its further development. In the first few years after the October
Socialist Revolution, the state granted regular credit assistance to
poor peasants and farm cooperatives that were being organized and de-
veloped. along the lines of Lenin's brilliant cooperative plan.
The first farm credits were granted in 1922 and 1923 in the amount
of 16.6 million rubles, chiefly to poor peasants. After that the amount
of credits rapidly grew. From 1921/25 to 1927/28, farm credits (exclud-
ing nonrepayable state investments from the budget) amount to 1,398,300,000
rubles, including 657 million rubles to state farms, collective farms,
cooperative and public organizations, and 300.2 million rubles to poor
peasants.
Following the victory of the collective system, investments in the
fixed capital of Socialist agriculture increased by several times. The
state's financial assistance to agriculture took the form largely of
nonrepayable budgetary appropriations for the construction and technical
equipment of machine-tractor stations, state farms and other state enter-
prises.
At the same time, the state rendered financial assistance directly
to the collective farms in the form of long-term farm credits. During
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the First Five-Year Plan, the farm credit system Issued 2,610,500,000
rubles in long-term loans, including 1,417,700,000 to collective farms.
During the Second Five-Year Plan farm credit rose to 3,032,500,000
rubles, including 2,620,500,000 rubles to collective farms. Alone dur-
ing the three years of the Third Five-Year Plan (1938-1940), credit
worth 3,462,900,000 rubles was granted to collective farms and collec-
tive farmers. These credits aided in the growth of the collectivised
holdings of the farms and increased. their money incomes and indivisible
funds, as a result of which the collective farms made out of their on
resources capital investments amounting to tens of billions of rubles.
During the First Five-Year Plan large amounts of credit were grant-
ed for the purchase of agricultural, machinery and implements, but dur-
ing the Second Five-Year Plan and later when machine-tractor stations
began to be established in large numbers long-term credits were intended
chiefly for the development of collectivized livestock holdings, elect-
rification, irrigation and melioration projects, soil improvement and
resettlement, the development of industrial crops and fruit and
vegetable gardening.
The strength and vitality of the collective system manifested
themselves especially during the Great Patriotic War. Overcoming all
obstacles, collective and state farms managed to supply enough food to
the army and the population and raw materials to industry.
The German-Fascist occupiers inflicted tremendous damage to our
Socialist agriculture. Losses suffered alone by the collective farms
amounted to 181 billion rubles. But even during the war, as the Soviet
Army was gradually liberating the temporarily occupied areas, the
Soviet state started to render assistance to the collective farms in
the restoration of their collectivized holdings.
After the victorious conclusion of the war, our nation !hoed the
task of rapidly restoring and developing the national economy.
On the basis of the resolutions in February 1947 of the plenum of
the party's Central Committee, the collective farms, machine-tractor
stations and state farms started to engage in Socialist competition mad
successfully fulfilled the postwar Stalinist Fiver-Year Plan.
The rise of agriculture during the postwar period has resulted In
an increase of the collective farm incomes and collectivized holdings,
and in an increase in the income in money and in kind that is d1atribu-
ted among the farmers on a labor-day basis.
Farm credits played a key role in the rise of the collective tars
in the postwar period. The longterm credits granted each year during
this period were several times greater than during the prewar years.
The credit granted alone during 1949, for example, exceeded the total
credit granted during the Second. Five-Year Plan.
More than half of all the credit granted during the postwar years
was intended for the restoration and development of collectivised live-
stock holdings, the purchase of livestock, the construction of livestock
pens, the mechanization of livestock farms and the purchase of seed for
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the expansion of perennial 'asses. Almost one-fifth of the credits
went into rural electrification, chiefly the construction of new power
stations. Large credits were also 'anted for melioration, irrigation,
afforestation, the expansion of subtropical and industrial crops, fruit,
vineyards, and vegetable gardening. Credits granted for the purchase of
mineral fertilizer greatly increased compared with prewar years. A
sharp rise was also recorded in credits granted for resettlement pur-
poses in connection with the development of new farm lands and the,
establishment of collective farms there.
The transition from the first to the second phase of communism
has made it necessary to saturate our nation with consumer goods and
create an abundance of products. In this connection the Bolshevik
party and the Soviet. Government have confronted Socialist agriculture
with new tasks. On the initiative of Comrade Stalin, a grandiose plan
of the transformation of nature, a three-year plan of development of
collectivized. livestock holdings, and. a reorganization of the irriga-
tion system are now under way.
New gigantic projects of communism are under way in our country.
The construction of the hydroelectric stations on the Volga and the
Dnieper and. the Main Turkmen, South Ukrainian and North Crimean canals
will insure the irrigation and watering of millions of hectares of arid.
lands in the Volga and Caspian regions, Turkemia, the Kara-Kalpak AS,
the Ukraine, and the Crimea, thus raising and stabilizing crop yields,
strengthening the fodder base for livestock and yielding water power
for~the needs of agriculture.
To insure a further organizational and economic strengthening of
the collective farms, increasing their collectivized holdings, their
incomes and their materials and cultural well-being, our party is tak-
ing steps to merge small collective farms that are in no position to
apply mechanization and. scientific techniques to their limited. land
holdings.
The tasks faced by agriculture and the steps being taken by the
party and. government to strengthen the collective farms' organization
and economy are increasing the role played by Sel'khozbank and will
require its active contribution in the form of collective farm credit,
the.accumulation.of the indivisible monetary funds, control over the
specified use and scheduled. extinction of the credits and assistance to
the farms in their financial management and accounts.
Soviet farm credit differs fundamentally from its capitalist
counterpart. Under capitalism, farm and cooperative credit serves to
enrich the large land owners and the rich farmers and inevitably leads
to the ruin and the impoverishment of the small and middle farmers.
Soviet farm credit, on the other hand, renders aid. to the collective
farmers in the matter of strengthening and increasing their collecti-
vized holdings, bringing prosperity to collective farm life and insuring
abundance and a high cultural level on the part of the collective farm-
ers.
.
2. Basic Principles of the Long-Term Productive Crediting of Collective
Farms.
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The long-term farm credit granted to collective farms is intended
for the realization of capital investments and the fulfillment of state
agricultural plans.
One of the key principles in the long-term crediting of collective
farms is the parttoiration of the farms in tiro credited undertakings with
their own contributions. These contributions consist of the annual de-
ductions from the collective farm money incomes that go into the in-
divisible funds, the receipts from the sale of draft livestock, interest
received from Sel'khozbank on farm deposits, and so forth.
The Government sets up average credit-norms in percent of the
cost of the credited. undertakings or the total amount of money required.
to insure a proper distribution of credits and the farms' own contribu-
tions in the credited undertakings. These norms may be increased or
reduced depending on the financial position of the farm. Moreover, with
a view to avoiding a scattering of credits granted. to the farm, the loan
may be issued to pay entirely for one undertaking while the farm's own
contributions are applied. entirely to another undertaking.
In all cases, however, the credit granted by the bank must be
sufficient to insure the complete realization of the credited under-
taking in conjunction with whatever contributions the farm itself can
put up.
A scattering of credit tends to keep the farm from completing an
initiated project or realizing another undertaking and thus immobilizes
funds in incompleted capital investments. On the other hand., if the
credit granted by the bank exceeds the amount required by the farm to
pay for a given project, then the farm has a surplus in funds that are
tantamount to unused credits.
Another matter of major importance is the strict adherence to the
government's payment schedules in the extinction of the long-term farm
credits. The schedule varies with the nature of the credited under-
taking and the financial position of the farm, but is generally designed
to enable the farm to repay the loan from the income derived from the
credited undertaking. The repayment of the loan therefore depends
largely on the time of completion of the credited project. Too short a
payment term would prevent the farm from extinguishing the loan on time
and. would. produce overdue indebtedness and completed the financial
position of the farm. An excessively long payment term, in the other
hand, tends to slow the turnover rate of the farm credit and reduces
the bank's resources.
In setting the credit term designed to speed. the completion of the
credited projects, the bank must therefore be guided by the government-
approved payment scale that lists maximum credit terms and the starting
time for the repayment of loans for every kind of undertaking. On the
basis of this scale, the Sel'khozba.nk offices are able to determine the
specific credit terms in accordance with the characteristics of the
given collective farm, the time required for the credited. undertaking,
the income expected, the status of the farm's collectivized holdings and
its financial position.
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When the. loan is granted, the collective farms submit a statement
of their payment obligations,'listing the payment schedules not only by
years but also by months.
Before determining the payment schedule, the bank must be familiar
with the approximate farm income by seasons of the year, the outstanding
loans and payment schedules of the farm, and other liabilities and their
extinction terms. The credit terms are then adjusted to the farm's
money income.
The farms' payment obligations are drawn up in accordance with the
manner in which the credit is. granted by the bank. When the credit
is granted in one or two amounts (for example, for the payment of a
bill for purchased livestock) the farm's payment obligations are drawn
up at the time the loan is granted. But when the credit is used up
gradually, in several payments, the farm's payment obligations are drawn
up once every quarter, during the first ten days of the new quarter. If
the farm fails to draw up its obligations within the stated period,
Sel'khozbank may withhold further. granting of credit until the documents
are submitted.
Sel'khozbank grants credit upon presentation of a copy of the de-
cision of the collective farm meeting giving the farm office the right
to apply for credit; the decision should list the amount of credit de-
sired and the undertaking for which it is requested. In all cases,
the Sel'khozbank office determines the purpose of.the credit, the amount
of credit and the share of the farm's own contribution within the ap-
proved credit plan only upon application by the farm itself.
The Soviet state grants long-term farm credit at the very favor-
able terms of 3 percent interest. If payments are overdue, the inter-
est rate may rise up to 6 percent. Interest is calculated. on a quarter-
ly basis and is paid. by the farm at the end of each quarter.
The granting of Sel'khozbank loans is associated. with preliminary
and subsequent control of the proper and specified utilization of the
credit. Loans are granted as needed for the payment of purchased
materials or for the payment of actual outlays on the credited under-
taking. For such undertakings as the purchase of livestock, construe-
tion,materials, fertilizer, machines, equipment and. so forth, the bank
pays the suppliers' bills on the basis of the usual forms of transac-
tions (payment instructions, invoices according to the acceptance
method, letters of credit and so forth). When paying such bills, the
bank verifies the existence of receiving or delivery acts or statements
in the invoices confirming the shipment of the supplies purchased by
the collective farms.
When granting loans, the bank should transfer the amount of the
loan to the farm's account to facilitate preliminary control over the
proper utilization of the credit. Only if other transaction forms can-
not be used., may the bank issue the loan in cash.
Planning of the Long-Term Productive Crediting. of Collective Farms.
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The destination and the amount of long-term farm credits are set
by the annual government-approved credit plan of Sel'khozbank.
The distribution of credits by types of undertakings and ter-
ritorial distribution are in turn set by the state agricultural plan.
When planning long-term credits, the authorities must avoid their
mechanical distribution without regard. to the real needs of individual
areas and collective farms. The proper planning of farm credit and
their timely availability to the collective farms insures the proper
utilization of the loans and insures the completion within schedule
of the credited undertakings envisaged by the state plan.
In compiling the credit plan the head. office of Sel'khozbank
must be guided by the following documents: government decrees regard-
ing the development of agriculture; government instructions on the
crediting of certain branches of the economy; Plans of the Ministry of
Agriculture for the development of output and capital construction in
the collective farms, credit applications from the republic, kray and
Oblast offices of Sel'khozbank. Sel'khozbank submits its draft credit
plan to the Ministry of Finance USSR for approval, and the Ministry and
the State Planning Committee USSR base their comments on that draft.
In compiling the credit plan, Sel'khozbank also makes a note of
the contemplated. financing sources; these consist of the free assets
of Sel'khozbank, the payments on previous loans, other sources that
can be mobilized. by the bank, and reinforcements of the bank's credit
resources from the union budget.
The government-approved credit plan is then communicated by the
Sel'khozbank head office to its republic offices.
The republic offices of Sel'khozbank (in the Ukrainian SSR the
representative of Sel'khozbank, and in the RSFSR the head office it-
self) submit their credit plans for approval to the Councils of Min-
isters of the union republics. These plans are broken down by types
of undertakings, and by autonomous republics, krays and. oblast in the
republic or directly by rayons if there are no oblasts.
On the basis of these republic plans, the Sel'khozbank offices
then draw up credit plans by oblasts, with a breakdown by undertakings
and rayons, and submit these for approval to the kray (oblast) Execu-
tive Committees.
With a view to preventing a mechanical and uniform distribution
of credits and. their excessive dispersion, the oblast (kray) offices
of Sel'khozbank must carefully study the credit needs of the col-
lective farms in each rayon.
Of major importance in this connection is an analysis of the credit
applications of the rayon offices of Sel'khozbank and the production
plan submitted to the Sel'khozbank office by the oblast (kray) farm
administrations. The production plan must list for each rayon the
planned construction and other capital outlays, including their volume
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and cost. The bank offices must also investigate the ability of the col-
lective farms to make their own contributions to the planned capital
investments. This requires familiarity with the economics of the
collective farms of each rayon, their incomes, the contemplated deduc-,
tions from their money incomes into the indivisible funds, the existing
possibilities of obtaining local construction materials, purchasing
livestock and so forth.
The bank offices must grant credits in the first place to the more
important undertakings and therefore must be familiar with all major
construction projects in the collective farms of a given rayon. They
must be familiar with the construction plans of collective farm power
stations, large irrigation and melioration installations and so forth.
The credit plan is broken down by the bank's head office and its
republic, oblast and kray offices by rayons and the following groups
of und.ertakings:
I. Animal husbandry
II. Crop raising (subtropical and industrial crops, fruit,
vineyard.s and vegetable gardens.)
III.Rural electrification.
IV. Melioration, irrigation, afforestation.
V. Other productive undertakings.
VI. Fertilizer purchases.
The lower Sel'khozbank offices (branches and agencies or, in their
absence, State Bank branches) are charged with the preparatory work of
drawing up a rayon credit plan even before the receipt of the plan ap-
proved by the oblast (kray) Executive Committee.
In preparation for the drawing up of the rayon credit plan, the
Sel'khozbank agencies examine the credit applications submitted by the
collective farms and. make the necessary notations. Approval of the
credit application must be based on the annual audits of the farm for
the preceding year, its production plan and the estimated incomes and
outlays for the current year. Except for the credit applications and
reports on the utilization of previous loans, the bank agencies have
no right to request the submission of any other materials or reports.
Therefore, the bank must base its decisions on random visits to col-
lective farms making the largest credit applications and. on the annual
reports, production plans, income-outlay estimates and. other data
forwarded. by the farms to the rayon's farm department.
The estimated income and. outlay report of the collective farm must
list in the columns relating to capital investments the sources from
which funds for capital investments are to be obtained and the under-
takings for which they are to be spent. In examining the farm's credit
application, the bank must not only examine carefully each item relat-
ing to the.income and expenditure of the funds for capital investments,
but must also verify the computations.
The sources that can be marshaled. for capital investments include:
the remainder of the balance in the capital investment account in
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Sel'khozbank at the start of the year; any funds that have been deducted
for the indivisible fund and the receipts of previous years for capital
investments that have for one reason or another not been deposited in
the capital investment account; deductions for replenishment of the in-
divisible fund. from the current year's money income; receipts from the
sale of draft livestock; interest to be paid by the bank on funds de-
posited in the capital investment account.
The expenditure section of the estimate lists the capital invest-
ment outlays for the following items: purchase of materials for con-
struction and capital repairs; wages of the hired construction labor;
purchase of machines and motors and outlays for their capital repairs;
purchase of productive livestock.
The credit needs will be determined by the difference between the
income and the outlays of the collective farm for capital investments.
That amount may be greater or lesser depending on the correctness with
which the income sources and. the capital investment outlays have been
calculated.
While the bank office judges the merits of the credit application,
it uses the production plan of the farm to check whether the income that
can be used for capital investments has been properly calculated and.
whether the cost of each investment item has been properly calculated
on the basis of existing outlay norms, cost estimate norms, prices for
materials and equipment, and so forth.
When the bank is verifying the amount required for capital invest-
ments, the bank must check whether all appropriate financial sources at
the disposal of the collective farm have been included in its potential
contribution to the capital. investments. The balance in the investment
account at the start of the year is checked against the bank's own
books. Any amounts that still remain to be paid into the investment
account are checked, against the farm's annual financial report.
In checking the deductions for the indivisible fund. from the money
income expected during the plan year, the bank must establish whether
the amount of the deductions corresponds to the regulations of the Farm
Charter and whether it corresponds to the intended volume of capital
investments. For example, if a farm plans large investments and yet
provides only a minimal deduction for the indivisible fund, then the
bank must suggest that the deduction be increased, in keeping with the
financial potentialities of the farm, but not exceeding the maximum
deduction allowed by the Charter.
The receipts to be obtained from the sale of draft livestock are
checked against the production plan, which lists the number of head to
be sold. and their value at current prices.
The bank's comments, including any suggestions regarding an in-
crease in the farm's own contribution to the capital investments or
regarding changes in the estimated incomes and outlays, are submitted.
to the rayon executive committee when it is about to examine the pro-
duction plans and the income and outlay estimates of the collective farms.
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On the basis of their decisions with regard to the credit appli-
cations, the bank offices then calculated not only the total amount
of credit to be granted. to each farm, but also the specific destination
of the credit by major undertakings and the amount to be contributed by
the farms themselves. In this connection the banks must constantly
bear in mind that credits are not to be scattered among several under-
takings. Credit should be used to complete the most important projects
that are envisaged by the state plan for agriculture and should also
serve to strengthen the collectivized. holdings of the farm.
Using the credit plan approved for the rayon and. any instructions
submitted by the oblast or kray bank offices, and using the credit
applications submitted by the farms, the rayon bank offices then draw
up their credit plans with a breakdown by collective farms and pro-
jects and submit them to the rayon executive committee.
The procedure of approving and. granting the loans varies for dif-
ferent investment undertakings with regard to the amount of credit,
the contribution of the farm itself, the terms of payment, and account-
ing method, and so forth.
4. Farm Crediting for Animal Husbandry
Long-term credits for animal husbandry are designed to aid in the
development of the collectivized. livestock holdings. This type ac-
counts for most of the farm credits granted by Sel'khozbank. In 1947
and 1948 it made up about 50 percent of all the credit granted to col-
lective farms.
This type of credit has assumed. even greater importance in con-
nection with the three-year plan for the development of collectivized
livestock holdings.
The state is granting a large amount of credit to the farms in
connection with the three-year plan. Credit granted. for the develop-
ment of livestock holdings in 1949 exceeded the credit granted in 1948
by more than three times and the credit granted in 1947 by more than
five and a half times. Livestock credit accounted for 56.2 percent
of all credit granted to collective farms in 1949. This type of credit
is granted for the following undertaking: purchase of pedigreed pro-
ductive and draft livestock, and. the development of rabbit, poultry,
bee arid fur farms; the building of all kinds of livestock structures;
mechanization and water supply of livestock farms, including the purchase
of machines for the harvesting and processing of fod.d.er; purchase of
grass seed for the improvement of meadows and pastures, and for the
field. seeding and seed selection of fodder and hay grasses. Credit for
each of these undertakings has its own'average credit norms, payment
terms, and. issuing and accounting conditions.
The chief way of increasing collectivized livestock holdings is
the natural reprod.uction of the stock itself and. contracting for young
stock. At the same time, an increase can be achieved by the purchase
of stock, chiefly pedigreed. Loans for the purchase of livestock are
issued for 40-60 percent of its cost at state prices for three to five
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years. Payments may start with the second. year, except for loans
issued for poultry and. rabbit farms where payment must start in the
first year. As an exception to the rule, loans for 80 percent of the
cost of the purchased stock are granted to replace "malleinschik" and.
anemic draft horses and livestock :infected with undulant fever.
Pedigreed stock is sold to the collective farms in accordance
with the livestock supply plan. On the basis of that plan, the Livestock
Procurement Office of the Ministry of Agriculture USSR concludes a
contract with each collective farm, listing all purchase conditions and,
the adopted accounting procedure. The collective farms must be informed
in writing of the time and place of delivery of the purchased. stock.
Receipt of the stock must be confirmed. in an act or a bill listing the
veterinary and. pedigree certificate, the receipt for the livestock etc.).
The acts are drawn up by the Livestock Procurement Office in three
copies, one for the collective farm and one for the Sel'khozbank office
that granted the credit.
Bills are paid by Sel'khozbank within the limits of the credit
granted to the farms and the balance in the farm's own account. Pay-
ment is made as provided in the contract concluded between the farm and
the Livestock Procurement Office, either through payment instructions
of the farm or through a letter of credit issued upon the farm's
instructions.
Before payment is made, however, the bank must verify the docu-
ments submitted for payment; the established. livestock prices; the
receipt of the stock; and. references to veterinary and pedigree certifi-
cates. The overhead charges of the Livestock Procurement. Office are
.checked separately. The Livestock Procurement Office has the right to
levy a surcharge on the cost of the stock at the rates prevailing in
the given republic, oblast or kray (an average of 8 percent) and in
addition may list its actual outlays (within the established norms) for
keeping the stock at its stations until picked. up by the farm, but not
longer than 15 days.
Bills are paid. only after the livestock has actually been delivered
to the farm and the granting of advances to the :Livestock Procurement
Office is strictly prohibitied.
In addition to its dealings with the Livestock Office, the farm
may also use its credit to pay for stock purchased. from individual
collective farmers, workers and employes and. at markets.
Loans for contracting or purchasing stock from collective farmers,
workers and employes are issued in cash upon the farm's request. The
request must list the names of the persons who sold or contracted the
stock and itemize the animals (cattle, sheep, hogs) with their weight
and. cost.
Loans for the purchase of stock at markets are also issued. in cash
upon presentation of a list itemizing the proposed. livestock purchases
and their approximate cost.
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Loans for the construction of cow and. calf stalls, silos, and horse,
pig, sheep and poultry pens are granted for up to 75 percent of the
money outlays. for a period of 10 years, with the first payment due in
the third year.
When credit is granted for the construction of livestock pens,
the. bank must check the construction schedule and prevent funds from
being immobilized in incompleted.projects. If the farm: has had: an in-
completed project for. a number of years, the bank must see to it that
any new credit is used for the completion of that item.
If the tasks posed by the three-year livestock plan are to be
'ulfilled., the farms must erect livestock structures that correspond
to modern needs and, permit mechanization. The construction of new
structures must therefore follow standard designs worked out by the
Sel'khozproyekt Jarm designing organizatio7 and. approved. by the
Ministry of Agriculture USSR. Construction must be carried out econ-
omically, with maximum use of the collective farm labor and. local
construction materials prepared. by the farm itself.
In granting credit for construction, the bank expects the farm to
submit cost estimates of all construction work exceeding 30,000 rubles.
The procedure of granting credit for construction depends on the
nature of the outlays for which the loan is needed. In most cases,
the farm needs money to pay for construction materials that it cannot
produce itself and also to pay skilled labor hired from the outside.
Accordingly, the bank would. pay for the construction materials by
honoring bills accompanied by the farm's payment instructions after
the actual shipment of the materials or their receipt by the farm has
been verified..
In those cases where the farm produces the construction materials
and requires a loan for the purchase of equipment or auxiliary mater-
ials, for the payment of woodcutters, and so forth, the loan is granted
against bills or other documents confirming the actual outlays.
Loans for the payment of outside workers and, specialists are
granted on the basis of work contracts or wage payment certificates,
provided that these outlays are included in the income and. outlays
estimate approved. by the general collective farm meeting.
Credit for the purchase of grass seed is granted. for 60 percent
of the cost (as an average) for a period of three years, with payments
starting in the second. year. The loan is granted by paying bills for
the purchased seed..
Credit for the purchase of fodder harvesting and processing machines
and, also for the mechanization of livestock farms is granted for 50 per-
cent of the money outlays for a six-year term with payments starting in
the second. year. Upon petition by the oblast or kray executive commit-
tees, credits for the mechanization of livestock farms may be granted
for 100 percent of the money outlays for a ten-year term.
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5. Farm Crediting for Electrification
Farm electrification plays a key role in the improvement of vil-
lages and. the increase of labor productivity in farm production.
Thousands of collective farms, machine-tractor stations and state
farms have been electrified. thus far.
Rural electrification is being furthered chiefly through the
construction of hydroelectric stations and steam power plants designed
for the use of local fuels. The construction of hydroelectric stations
is sometimes linked with irrigation undertakings that are designed to
increase the crop yield.
Credit for the construction and equipping of power plants, high
and low voltage transmission lines and substations is issued for 75
percent of the money outlays envisaged by the cost estimate for a ten-
year term with payments starting in the third. year.
Power plants are the largest items in rural construction, requir-
ing precise technical calculations, correct designs and. cost estimates.
Sel'khozbank must therefore carefully verify the existence of properly
approved designs and cost estimates.
For power plants costing less than one million rubles, the designs
must be approved by the Ministries of Agriculture of the union republics
and the chiefs of the oblast or kray farm administrations. (The Minis-
tries of Agriculture of the Ukrainian, Georgian, ]tazakh, Belorussian
and Uzbek SSR's have the right to approve designs for projects costing
up to 2 million rubles).
For power projects costing up to 3 million rubles, the designs
must be approved by the chief of Glavsel'elektro ~CMMain Administration
for Rural Electrification? of the Ministry of Agriculture USSR (he also
approves all standardized designs), while the Minister of Agriculture
USSR must approve the designs for projects costing more than 3 million
rubles.
Many hydroelectric stations and irrigation projects are designed
for more than one collective farm plus any state organizations in the
area. This requires a special credit procedure.
The construction of power plants and high-voltage transmission
lines is financed as follows: for hydroelectric stations serving one
or more collective farms -- from the farms' own contributions plus
farm credit; for hydroelectric stations that also serve state enter-
prises -- from the collective farm contributions (including the labor
of the collective farm members), Sel'khozbank farm credit plus the
contributions of the state enterprises in proportion to their expected
power consumption.
The cost of power plants shared, by several consumers is apportioned
on the basis of the money and labor investments of each consumer.
When planning the construction of inter-farm power stations, each
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farm must determine its investment share of.labor_, materials and:money.
After the investment share has been settled at a general meeting of
the collective farm, the farm concludes appropriate contracts with the
other farms sharing in the. power project. The member farms then elect
a joint power project council charged with the, construction. and re-
lated. transactions and. the operation of the. station after its comple-.
tion.
Sel'khozbank in accordance with the approved construction and
credit plans grants loans to each collective farm individually and so
informs the bank branch nearest the site of the construction project.
Before credit is granted, each collective farm must submit the following
documents to Sel'khozbank: excerpt from the decision of the general
collective farm meeting regarding participation in the power project;
credit application of. the collective farm management, listing the amount
of credit desired and the amount of the farm's own contribution to the
investment; certificate of the farm management confirming inclusion
of the project' in the farm's production plan and income and outlay
estimate; certificate of the chairman of the joint power project coun-
cil confirming.participation of the given collective farm in the pro-
ject and listing the farm's share of money and. labor outlays and the
schedule and amounts of its own contributions to the project. The
certificate submitted by the council chairman should also confirm the
inclusion of the given project in the construction plan.of the local
office of the Main Administration for Rural Electrification and. the
existence of properly approved designs and cost estimates for the pro-
ject.
The bank nearest the project site then opens two accounts for the.
project council: a passive account for the contributions pledged by
the member farms and an active account for the issuance of funds within
the limits of the granted credit.
Before these accounts can be opened, the project council must
submit a copy of the contract concluded among the collective farms, a
copy of the protocol confirming election of the council chairman, a copy
of the contract with the local office of the Main Administration for
Rural Electrification (if the construction work is contracted, out), and,
the designs and, cost estimates for the project with an accompanying
statement of the money outlays of the collective farms.
Funds from the active account are issued, only after all farms have
made their first contributions to the passive account.
The construction expenses are then paid by Sel'khozbank upon in-
structions from the project council first from the passive account,
and. after that has been exhausted, from the active account.
Upon completion of the construction (or if construction is not
completed in the given year, not later than 15 December) the project
council submits a statement to the bank listing the distribution of
all the credits used by the individual collective farms. The bank
nearest the project site then informs the respective collective farm
branches of the amount of credit used by the respective farms so that
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these farm branches can proceed to draw up the payment terms.
With a view to assisting the farms in the construction of such
complex installations as hydroelectric stations, the government has
set up special construction organizations -- the local offices or
trusts of the Main Administration for Rural Electrification -- that
can carry out the work for the farms on a contract basis. The construc-
tion can be handled in its entirety or only in part by the contracting
organization; in the latter case it contributes chiefly technical
assistance, installs equipment and so forth.
When concluding a contract with the local office or trust of the
Main Administration for Rural Electrification, the project council
must specify the obligations of the two parties and. the method of
paying for the completed work. The existing standard contract agree-
ment provides for the obligations on the part of the contractor in
accordance with existing contract regulations and government decisions
relating to rural electrification.
When the project is to be built by a contractor, the Sel'khozbank
branch on instructions of the project council grants an advance of up
to 15 percent of the current year's project cost to the contracting
organization. After that the bank the contractor's bills for completed
work (in cost estimate prices) after their acceptance by the project
council. Funds from the passive and active accounts are issued for
the following operations: compilation of the technical designs and cost
estimates; compilation of blueprints and. related research; salaries of
the technical management; cost of the equipment or any prefabricated
steel, reinforced concrete and timber sections,; excavation and trans-
portation outlays; wages of skilled hired labor; bills for purchased
construction materials; advances granted to the contractor and the con.-
tractor's bills for completed work.
If a collective farm is having a power plant built for its own
needs exclusively, the credit granted by the bank is charged entirely
to that farm and. the credit is issued. in the same manner as discussed
above.
6. Farm Crediting for Melioration, Irrigation and Afforestation
The Stalinist plan for the transformation of nature envisages a
grandiose work program of afforestation and melioration that is now
under way. About 1.3 million hectares have been afforested in the
last two years.
A major role in the program of afforestation, melioration and
irrigation by the collective farms is being played by the state's
financial aid in the form of farm credits. The credits are intended
to pay for the following types of work:
1. Irrigation -- the construction of dams, embankments, dikes,
spillways, irrigation canals, irrigation mechanisms and sprinkler
systems, capital repairs, equipment, reconstruction and planning of
old. irrigation systems.
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2. Farm water supply (watering) -- construction of wells, ponds,
water pipelines, watering canals and other installations and their
capital repairs..
3. Drainage -- construction of drainage systems (ditches, canals),
regulation of reservoirs, capital repairs, reconstruction and planning
of old drainage systems.
1.. Stubbing and clearing of the land.
5. Afforestation work.
Average norms and. credit terms for irrigation and melioration
projects vary with the type of undertaking and the area.
Collective farms of the Central Black-Earth Oblasts and. the south-
ern oblasts of the Ukrainian SSR can get irrigation work credit to the
extent of 1,000 to 2,000 rubles per hectare to be irrigated for eight
years at 2 percent. interest.. These credits are issued irrespective of
any outstanding loans. Collective farms of these areas (upon approval
of the oblast executive committee) may get supplementary loans (in
excess of the irrigation credit norm) for the purchase of equipment
and. machinery needed for the irrigation work.
Cred.it.is granted under similar conditions to farms of other
areas that are engaged. in irrigation work in accordance with the
decree of the Council of Ministers USSR and the party's Central Com-
mittee regarding the shelter belt plan.
Farms of the steppe and wooded steppe areas of the European part
of the USSR may get loans for the construction of ponds and reservoirs
for 75 percent of the money outlays and a ten-year term, with payments
starting in the third. year.
Afforestation credit is granted for the following undertakings:
preparation of the soil and. purchase of seed for tree nurseries in the
amount of 90 percent of the outlays involved, purchase of planting
material in the amount of 50 percent of the total cost. The credit
terms for steppe and wooded steppe farms are ten-year loans with pay-
ment starting in the fifth year. In a further effort to assist the
farms, Sel'khozbank has been given the right to grant credit for the
purchase. of acorns and other tree seeds for the planting of shelter
belts in the amount of 50 percent of the total cost (as an average) and
a five-year term with payment starting in the second year.
The credit regulations provide that loans granted for melioration
and irrigation (except for the undertakings discussed above) may amount
to 60 to 80 percent of the money outlays with the following terms: 8
to 10 years for the construction of irrigation and. melioration systems
with payments starting in. the third year; and 3 to 7 years for the
cultivation of new land, improvement of meadows and pastures, farm and.
forest melioration and. other work, with payments starting in the second
or third year.
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Credit for irrigation and melioration projects may be granted only
on the basis of properly approved designs and cost estimates. As a
further move to assist the collective farms of the Central Black-Earth
oblasts and the wooded, steppe areas of the European part of the USSR,
the government budget pays for all designing and research work, the
compilation of designs and technical management of irrigation, pond-
construction and. pump-installation projects.
Moreover, to speed the irrigation work in the collective farms of
the Central Black-Earth oblasts and.. in all farms of the steppe and
wooded steppe areas of the European part of the USSR, the government
has balled for the construction of dams and pumping installations on
the basis of standard. designs accompan:Led. by preliminary cost estimates
instead of the actual construction cost estimates. Individual technical
designs are however required for the construction, of the actual irriga-
tion networks. '
The credit granted to the farms for irrigation and melioration
work is then used to pay for: the work of construction machinery and
hired means of transportation; materials, equipment, technical assis-
tance and other work, as well as labor hired from the outside.
When the irrigation and melioration work is handled by contractors,
the credit is granted. to the farms for the payment of advances to the
contractors, for the payment of the contractors' bills for completed
work, and. for the purchase of equipment and prefabricated steel and
timber parts.
7. Credit for Crop Raising, Fertilizer Purchases and. Other Needs
The Soviet Government is rendering much assistance to the collec-
tive farms in the matter of crop raising and increasing crop yields
through its machine-tractor stations. However, some crop-raising
branches (fruit, vineyards, vegetables, citrus and: subtropical crops)
require long-term investments for which the state grants long-term
farm loans.
During the Postwar Five-Year Plan, more than 500,000 hectares of
fruit, berry, vineyards, citrus and tea areas were added.
On Comrade Stalin's initiative, special undertakings are now
under way to introduce subtropical and. citrus crops into the Northern
Caucasus, the Crimea, the southern Ukraine and. Moldavia.
Outlays for the expansion of fruit, berry, subtropical, citrus
and. other perennial crops are capital outlays and are therefore credited
by Sel'khozbank. The average credit norms, expressed in rubles per
hectare of new plantings, are designed. to insure the completion of
the project with the use of modern agricultural technique.
The credit terms for perennial crops depend on the time the new
plantings start to bear fruit. Loans for the expansion of vineyards
for champagne production are granted for 7 years with payment starting
.in the fifth year; other types of vineyards -- for 7 years with payment
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starting in the fourth year; for vine nurseries, which bear fruit much
earlier -- for 3 years with payment starting in the second year.
Loans for the expansion of fruit orchards are granted for 7 years
with payment starting in the fourth year, and. in the case of berry
gardens for 3 years with payment starting in the second year.
Loans for tea plantings are longer-term. Loans for the preparation
of the soil, the planting of the tea and. its cultivation are granted
for 12 years with payment starting in the sixth year, and in the case
of tea nurseries, for 4 years with payment starting in the second year.
Loans for citrus plantings are granted, for 11 years with payment
starting in the seventh year, and in the case of other subtropical
crops, for 6 years with payment starting in the fifth year.
The loans for all these undertakings are intended to pay for
the planting material purchased by the collective farms and the cost
of the mechanized work involved in planting and. cultivation.
Loans for the maintenance of tea plantations are intended to pay
for work performed by the machine-tractor stations, other money out-
lays of the collective farm, and the work done by the collective farm
members.
Loans for vegetable, tobacco, flax, essential oils, medicinal and
other crops are issued for capital outlays related to the introduction
and. development of those crops. In vegetable gardening, this includes
the purchase of hothouse equipment and the construction of hotbeds
and. hothouses;. in tobacco growing -- the construction of drying
facilities and. the.purchase of hothouse equipment for the growing of
young plants; in flax and hemp growing -- the construction and equip-
ping of braking and drying stations and the purchase of equipment for
the preliminary processing of flax and hemp; in sericulture -- the
planting of grown mulberry trees, the construction of silkworm nur-
series,.and the seeding of mulberry trees; in essential-oil and medicinal
crops -- the planting of the crops, the construction of hothouses and
so forth.
The credit terms for all these undertakings vary with the start
of exploitation of the structures or plantings. Loans for the construc-
tion of hotbeds and hothouses are granted for 6 years with payment
starting in the second. year; the construction of tobacco-drying instal-
lations for five years with payment starting in the second year; the
planting of grown mulberry trees for 8 years with payment starting in
the fourth year, the planting of lavender for 5 years with payment
starting in the fourth year, the construction of geranium hotbeds for
8 years with payment starting in the fourth year and so forth.
In addition, Sel'khozbank grants loans to farms for other capital
investments, such as the installation of radios and the construction
and equipping of auxiliary enterprises (tile and brickworks, flour and
gristmills, various processing plants). Loans for these undertakings
are granted for 7 years with payment starting in the second. year. Loans
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are also granted for the purchase of farm machinery, tools and carts.
Separate credits are granted for fish hatcheries and fisheries.
These loans are granted to farm artels for the construction of dams
for ponds, the cleaning of :ponds, stocking them with fish, and the con-
struction of hatcheries. The terms are for 4-5 years with payment
starting in the second year.
Large loans are granted to specialized fishery collectives and
farms having special fishery brigades. The loans in this case are
granted for the construction of fishing boats, shore installations,
cultural-social and municipal-residential construction, melioration
and, hatching, purchase of tools, trucks and other capital outlays.
Mineral fertilizers play a major role in raising crop yields,
especially in industrial crops. To aid the farms in the purchase of
fertilizer, the Soviet state has set aside large credit funds. Since
loans for this purpose are granted for from one to two years, they are
included in the credit plan of Sel"khozbank.
Outlays for the purchase of fertilizer are not part of capital
investments and must be paid for as part of the production outlays.
Fertilizer purchases in the income and outlays estimates are there-
fore listed under production outlays rather than under capital invest-
ments.
Fertilizer loans are granted for 25 to 90 percent of the total
cost. The farms usually buy fertilizer from the warehouses of Sel'-
khozbank he Farm Supply Organization, which is charged with the
sale of fertilizer stocks allocated to it by the state plan. The
Sel'khozbank branches open special accounts to the farms, which then
transfer their own fertilizer funds from their current account in the
State Bank to the special fertilizer account.
Fertilizer bills are then paid upon the farm's payment instruc-
tions from the special fertilizer account and the loans granted by the
bank for that purpose. In the case of out-of-town transactions, the
Sel'khozbank branches honor payment requests from the Farm Supply
Organization upon receipt of a written payment order from the farm.
Letters of credit issued. upon the farm's instructions may be used in
the payment for fertilizer.
In contrast to the usual forms of transactions, the farm has the
right to issue a single payment instruction covering all fertilizer
shipments, although the actual payments of the Farm Supply Organiza-
tion's bills are made by Sel'khozbank only upon the shipment of each
fertilizer lot. In this connection, Sel'khozbank must verify the
existence of shipping documents or the receipt of the fertilizer by
the farm. Payments for fertilizer prior to shipment by the Farm
Supply Organization is strictly prohibited.
In addition to long-term credit. Sel'khozbank also issues short-
term loans to collective farms. The need for short-term loans arises
because the execution of capital investments in the course of a year
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often does not coincide with the receipt of farm funds slated. as its
own investment contribution.
The short-term loans are granted within the limits set for the
rayon branch of Sel'khozbank for the long-term loans planned for the
fourth quarter of the given year. These short-term loans can be
granted to farms that pay for the entire planned capital investment
out of their own funds, but which expect the receipt of these funds
after the completion of the given investment project.
The short-term loans are extinguished out of the farm's ordinary
money income, but these payments are made at the expense of the in-
divisible fund. since the loan, was used for capital investments.
The short-term loans are granted during the first semester, with
the last payment due not later than 1 October, in the case of the
Central Asian and. Transcaucasian republics not later than 1 November.
The interest on the short-term loans is 4 percent.
8. Sel'khozbank Control of Loan Payments
The scheduled. payment of loans is of key importance for uninter-
rupted credit operations and the fulfillment of the state-approved
collective farm credit plan.
The organizational basis in this connection is furnished by the
annual loan payment plan. This plan is drawn up by the head office
of Sel'khozbank and is communicated to its republic, kray and oblast
offices, which in turn make up the plan for their respective rayon
branches.
The annual loan payment plan includes the following: the
scheduled, payments based on the payment obligations of the individual
collective farms; the overdue loan payments at the start of the year;
and payments on short-term loans to be issued in the course of the
year.
In the rayon branches of the bank the annual loan payment plan
furnishes the basis for payment reports listing the expected payments
by months and by individual farms. These data are then used to send
notices to each farm before the start of the year and not later than
1 January informing them of the impending payments due to the bank.
When the rayon executive committee then examines the income and
outlays estimate for the current year, the bank ascertains whether the
impending payment obligations have actually been taken into account.
According to the Collective Farm Charter and. existing legislation,
the farms are required to give first priority to the payment of any
loan installments out of their general funds. The loan payment is
made when the farm instructs the State Bank to transfer the given
amount from the farm's current account to Sel'khozbank.
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Whenever, the farm management for one reason or another withholds
payment of a loan installment, the bank requests the rayon executive
committee to prod the farm management with regard to the payment.
If necessary, the payment may be forcibly seized only by a court
order. But recourse to a court must be regarded as the last step and
should be taken only in extreme cases. The court order is implemented
by transferring the given amount from the farm's current account in
the State Bank to Sel'khozbank. The law provides that not more than
70 percent of the balance in the farm's current account may be forcibly
seized. If that amount is not sufficient to pay for the overdue loan
installment, the remainder may be seized from subsequent receipts
credited to the current account, but still within. the 70 percent limit.
The proper organization of loan payment collections on the part
of the Sel'khozbank requires mass-explanation work in the collective
farms, thorough familiarity with the financial position of individual
collective farms and practical assistance in overcoming any financial
difficulties of the farms.
9. Sel'khozbank Control over the Proper Utilization of the Loans and
Assistance to the farms in their Financial Matters
In connection with its credit work, Sel'khozbank must seek to
attract the farms' monetary indivisible funds into their capital
investment accounts and render assistance in their financial problems.
Sel'khozbank must moreover effect preliminary and subsequent control
over the proper utilization of the granted loans,
In the course of their preliminary control, the banks check the
existence of documents confirming the specified utilization of the
loans, but that control alone does not insure the proper utilization
of the credit. For example, in connection with construction loans,
funds are allocated. for the payment of bills for purchased construc-
tion materials. It may turn out, however, that these materials remain
unused or that they are being consumed for other purposes than the speci-
fied construction. In another case, cash issued on the basis of work
agreements or payment reports for the payment of workers hired. from
the out side may actually have been used for some other purpose and so
forth. Therefore however strict the preliminary control, it must be
supplemented by subsequent control.
Subsequent control over the specified utilization of the loan
takes the form of a check of the audit submitted by the farm and an
on-the-spot investigation of the actual utilization of the loan.
The farm audit submitted to Sel'khozbank is limited. to a quarterly
report on the utilization of the loan during the preceding quarter. The
bank has no right to require additional forms of reports. The report
must state specifically how the loan was used, how much was spent al-
together and what part of the credited undertaking has been fulfilled.
Using these reports, the bank's own books and the reports submit-
ted by the farms to the rayon farm department, the bank can establish
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the specified utilization of the loan and in. case of infraction take
the necessary measures.
A more reliable test is only an on-the-spot investigation, which
enables the representative of Sel'khozbank to familiarize himself with
the pertinent documents, the course of construction and the realization
of other investment items credited by the bank.
Such an on-the-spot investigation must take place at least twice
a year. The_bank must check the specified utilization of the loan,
whether the volume of completed work is in accordance with the funds
spent and whether the respective undertakings have been fulfilled in
accordance with the farm's production plan.
The Sel'khozbank representatives may ask the farm's own review
commission to participate in the on-the-spot investigation.
When visiting the farm, the bank agent must establish first how
the loans have been utilized. on each investment item, with particular
attention to the cash received by the farm..
When the agent finds improper utilization of a loan, he must
establish the amount and the purpose for which the loan has been mis-
used and, how this misuse has affected the progress of the credited
undertaking.
If it turns out that the farm has made no use of the loan, then
the bank agents must establish the reasons for that situation and,
together with the farm management, take the appropriate measures to
insure full utilization of the loan; if necessary changes in the farm's
credit plan may be proposed.
The bank agent on his visit to the farm must not limit himself
merely to a check of the utilization of the loan; he must also es-
tablish what progress the credited undertaking is making and whether
the farm's own investment contribution is being utilized.
In determining thedegree of fulfillment of the capital invest-
ments financed with the bank's loan and the farm's own contribution,
the bank agent must examine the various investment items (structures,
plantings, seedings) and inspect their progress.
At the same time the bank agent must inspect the safekeeping and.
the utilization of the farm's indivisible funds and the payment
schedule on Sel'khozbank loans.
The bank agent then draws up a report on his visit to the farm,
on the basis of which Sel'khozbank takes measures designed to remove
any shortcomings that have been uncovered.
According to existing credit regulations, Sel'khozbank has the
right to withhold further credit if it establishes: (a) misuse of the
granted loan (in that case, in addition to withholding further credit,
Sel'khozbank may take steps to recover the misused loan funds before
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their regular payment); (b) mismanagement and discrepancies between the
funds spent and the fulfillment of the investment program:
Sel'khozbank must give 10-day notice to the farm regarding the
withholding of credit and inform the rayon executive committee of the
reasons for that step. Credit may be restored after the farm has
eliminated the shortcomings in question.
The Sel'khozbank offices render constant assistance to the farms
in their financial problems, such as the recovery of debtors' payments,
the proper organization and keeping of accounts, the safekeeping of
cash, and the proper handling of monetary operations, especially in
capital investments, and. the proper organization of transactions with
buyers and suppliers.
Sel'khozbank's role is especially important in the farms' proper
creation, safekeeping and expenditure of their indivisible funds.
Deductions into the indivisible monetary fund are kept in Sel'khozbank
in a special capital investment account opened to each farm; this
insures the proper utilization of the fund in accordance with the
farm's production plan and the income and outlays estimate. Ex-
penditure of these funds under the control of Sel'khozbank insures
the proper utilization of the indivisible funds, thus strengthening
the collectivized holdings of the farm.
In connection with the vast amount of work involved in rendering
assistance to the farms in their financial matters, the bank tries to
attract the interest of the collective farm members themselves to
these matters.
Once a quarter, the Sel'khozbank offices report to the rayon
executive committee on the course of the farm credit operations, the
results of their investigations of the specified utilization of the
loans and the progress of the credited. investment undertakings, as
well as the fulfillment of the loan payment plan and the growth of the
farms' indivisible funds. In connection with these reports to the rayon
authorities, the banks also make their suggestions designed to eliminate
any shortcomings uncovered at the farms and to regularize their finan-
cial dealings.
The head office of Sel.'khozbank has provided a special form used.
by the branches to report on their control work regarding farm loans
and individual loans at the end of each quarter. These reports make
it possible to improve the control work and to generalize the practical
experience of managing and handling farm loans.
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CHAPTER XVII
LONG-TERM CREDITING OF COOPERATIVE ORGANIZATIONS
l.- Long-Term Crediting of the Capital Investments of Producer and
Veteran Cooperatives
The party and Government are constantly concerned with the problem
of satisfying the population's need for food and consumer goods
"In contrast to the capitalist economic system, socialism is
unthinkable -- and therein lies the law of its development -- without
the state's day-to-day concern for the well-being and the cultural
level of the working people" (G. M. Malenkov, 32-ya godovshchina
Velikoy Okt abr'sko sotsialistichesko revolyutsii JTe 32nd Anni-
versary of,the Great October Socialist Revolution/, Gospolitizdat, 1949,
page 11)
A major factor in the satisfaction of the population's need for
consumer goods is the output of local industry and the producer,
woodworking and disabled veteran cooperatives (hereafter called pro-
ducer cooperatives for brevity).
With a view to facilitating. the tasks that confronted the producer
cooperatives, the government even before the Great Patriotic War granted
them a number of financial privileges, a procedure for selling their
output and aided in the organization of the cooperative systems. At
the present time all producer cooperatives are under the jurisdiction
of the Central Council of Producer Cooperatives of the USSR. In addi-
tion there are republic, Oblast (or kray), and a number of city councils
of producer cooperatives.
The expansion in the output of consumer goods by the producer
cooperatives requires large amounts of capital investment and working
capital. As stated in Chapters II and IT, all funds intended for capi-
tal investments and working capital of the producer cooperatives are
handled by Torgbank, which also grants long-term loans to the coopera-
tives for appropriate purposes. Only when the annual volume of capital
investments of the cooperatives is less than 50,000 rubles, can the
funds be taken directly from the cooperative's clearing account in the
State Bank (provided, of course, that the cooperative has excessive
working capital).
The magnitude of the long-term loans. issued by Torgbank to pro-
ducer cooperatives is shown by the following figures: 1,661,000
rubles during the Second Five-Year Plan and 2,330,200 rubles during
the three years of the Third Five-Year Plan (1938-1940) (see
Finansirovaniye i kred.itovani e ka ital 'n kh vlozheni fFinancing
and. Crediting of Capital Investments/, Gosfinizdat, 1941, page 189).
Measures designed to restore and further develop the activities
of producer cooperatives and to achieve a maximum increase in the
output of high-grade consumer goods during the postwar period have
made serious demands on Torgbank in the matter of accumulating funds
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in its long-term credit reserves and carrying out control over the most
effective use of the investment and. working capital loans granted to
cooperatives.
Torgbank grants long-term loans to producer and veteran cooperatives
for their capital investments and working capital needs in accordance
with the credit plan approved by the Council of Ministers USSR.
Long-term investment loans are granted to individual artels and
unions by Torgbank's offices in accordance with the credit plan. Loan
applications, which are presented by the title holders of the long-
term credit funds, must list the name of the applicant; the name of
the Torgbank or State Bank branch granting the loan; and. an itemized
list of the proposed capital investments and their amounts. Credit is
allocated on the basis of these applications at the expense and. within
the limits of the reserves in the local long-term. credit funds; when
capital investments are to be financed from the applicant's own contri-
butions (his special funds), the loans are granted within the limits of
the payments of such funds into the Torgbank offices.
Before approval can be granted. for loans for projects with an
estimated. cost exceeding 100,000 rubles, the applicant must submit to
Torgbank the annual itemized. lists, a copy of the general cost estimate
and a certificate on the approval of designs and. cost estimates. In
the case of projects costing less than 100,000 rubles, the applicant
must submit the itemized. list, stating when and by whom the cost esti-
mate of the technical design has been approved (this eliminates the
need for submitting a separate certificate).
The procedure of approving annual itemized. lists depends on the
estimated cost of construction.
The construction, organization and expansion of producer co-
operative enterprises producing consumer goods and. foods from local or
surplus state-owned raw materials or from by-products need only an
abbreviated designs and estimates dossier (as in the case of local
industrial enterprises) if the estimate cost of the project does not
exceed 500,000 rubles.
The procedure of granting loans to cooperatives for capital in-
vestments depends on the construction method. In the case of contrac-
ted construction, Torgbank requires a copy of the contract agreement
and funds are then granted. in the usual manner: in the form of a 15-
percent advance to the contractor and payment for completed parts of
construction elements at the cost estimate rates. The equipment is
usually paid for by the recipient of the loan, the cooperative organiza-
tion itself. In the economic construction method, funds are also
issued in the usual manner: on the basis of individual outlays or,
in the case of above-limit projects, on the basis of completed work.
Cooperative organizations have the right to purchase construction
materials and equipment produced by local and cooperative industry at
the established. sales prices.
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Incidental small construction outlays are covered. by small advances,
the disposition of which must be reported by the loan applicants to the
Torgbank offices at least once a month. If the bank finds that these
small advances have not been used for their specified purpose. related.
to construction, say, for the payment of wages, it may withhold further
advances-and. call for the return. of previously granted and misused
amounts.
The funds issued by Torgbank to the artels are usually not credited
to their clearing accounts in the State Bank, except when the basic
operations of an artel supply materials and render transportation and
other services to the project.
Above-limit projects carried out by the economic method, are
managed by a chief of construction (or of the capital construction
department), who is the recipient of the bank's advance (following
the procedure stated in Chapter X)a
When approving the credit, the Torgbank offices require, in add.i
tion..to the cooperative charter (registered by the financial organ),
the power of attorney and. the signature samples, the borrower's obliga-
tion, for which the amount is fixed. after the completion of construc-
tion and the granting of the funds; that amount also appears in the
statement drawn up by the Torgbank offices that accompanies the
obligation and. constitutes a component of the loan obligation. The
payment terms on investment loans are fixed by the titleholders of the
local long-term credit funds in accordance with the amortization
schedules, the operation conditions of the new project, the financial
position of the borrower and. the payment schedules of previous out-
standing loans. The maximum term for investment loans granted. by Torg-
bank to cooperatives is eight years. In certain cases, the payment
terms may be extended. by agreement between the producer cooperative
council and, the head office of Torgbank. Payments are usually due on
a quarterly basis. The interest set by the government on such Torgbank
loans varies from one to 2 percent a year. Except for commission
fees designed to replace the outlays of the bank, the interest is
credited to the central long-term credit fund. of the bank.
With a view to stimulating capital investments, the Torgbank
offices follow the course of construction and the utilization of the
loans. If the borrower makes no use of the credit within a month after
it has been granted or if in the course of two months he uses up less
than 40 percent of the quarterly allotment, the Torgbank office may
call back the unused, credit unless the titleholder of the local
credit fund takes measures to speed, up the construction project. Both
the borrower and the titleholder of the credit fund must be notified
in advance of any decision to call back unused credit.
In addition to its preliminary control functions at the time the
credit is approved and granted, Torgbank also carries out subsequent
control by analyzing the audits of the artels and unions making on-the-
spot investigations. .
It should, be. noted. that capital investments of less than 500,000
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rubles a year are handled as part of the balance of basic operations of
the artel. These balances, as well. as reports on the fulfillment of the
capital construction plan with explanatory notes, must be submitted to
Torgbank once a month.
Capital investments exceeding 500,000 rubles a year are accounted
for on a separate balance sheet, which must be submitted periodically
to Torgbank together with the plan fulfillment report (Form 6-b) and
explanatory notes.
The Torgbank offices may impose the usual incentives and sanctions
(see Chapter XX) on both cooperative projects and. contractors working
for cooperatives.
One of the major functions of Torgbank is the scheduled recovery
of granted loans. The total amount of loan payments is set in the
Torgbank credit plans approved by the Council of Ministers USSR. The
cooperatives make their loan payments from their clearing accounts in
the State Bank. The Torgbank office starts the payment procedure by
forwarding the borrower's payment obligations to the appropriate State
Bank office some time before the loan payment is due. Actual payment
by the State Bank is made either upon the borrower's payment instruc-
tions or on the basis of the documents forwarded, by Torgbank. If the
borrower's clearing balance is insufficient to cover the payment on
the loan, the unpaid. remainder may be recovered. later in the estab-
lished order of priority. Higher interest may be levied on overdue
loan payments.
This then is essentially the procedure of granting and extinguish-
ing loans issued by Torgbank for cooperative capital investments from
long-term credit funds on the basis of instructions from the title-
holders of those funds.
In the rare cases when capital-investments of cooperative artels
and unions are financed by clients, who pay these funds to Torgbank in
the form of specified deposits (see chapter V), the loans are still
issued under the usual control procedures in strict accordance with the
instructions Of the client organizations.
If the artel's investments are financed from its own funds d.e-
posittd in Torgbank for that purpose out of excessive working capital,
then the funds are issued by the bank in the usual manner and. under
the established. control procedures. However, after the construction
project has been completed, the granted, amount is not regarded as a
scheduled loan, but is merely debited from the special deposit account,
the unused balance of which is then returned to the depositor, the co-
operative organization itself.
Nonrepayable loans are also granted to construction projects that
serve a cooperative system as a whole, for example, the construction
of scientific, educational and cultural institutions, and in some cases
construction of an industrial nature that is of system-wide importance.
The financing of such projects is planned at the expense and within the
limits of the appropriate financing sources under the usual bank control
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procedure.
2. Crediting of Producer and Veteran Cooperatives for the Replenishment
of Their Working Capital and. Fixed Capital
The organization of new cooperative artels, unions and crafts and
their expansion requires not only capital investments but also the
creation or increase of working capital. The working capital norm of
state enterprisesjand organizations originates in profits, with the re-
mainder being made up by nonrepayable budgetary allocations. The work-
ing capital of producer cooperatives, on the other hand. is replenished.
or organized is also made up of profits, with the remainder of the mini-
mum norm being made up by funds from the long-term credit fund of the
appropriate cooperative system. This working capital is furnished. on a
repayable basis in the form of long-term loans, and sometimes short-
term loans (as will be shown below), issued by Torgbank upon the
instructions of the titleholder of the long-term credit fund.. These
loans are granted in accordance with Torgbank's government-approved
credit plan, which lists separately the credit volume allocated to the
replenishment of working capital.
Long-term loans are usually granted. in connection with a substan-
tial increase in the activities of the cooperatives, the organization
of new crafts, the formation of new artels and unions, and as a result
of damage caused by natural calamities. Loans may be granted to going
concerns that, according to the financial plan approved. by a superior
agency, lack the funds necessary to make up the working capital norm
based on their production program or their retail trade plan.
While the titleholders of the long-term credit funds authorize
the Torgbank branch to issue loans to the given cooperatives, the lat-
ter must submit their balance-sheet reports with annexes, their annual
financial plans and. the calculations showing their loan requirements.
Torgbank checks these documents and in some cases carry out on-the-
spot inspections.
As a result of their investigations, the Torgbank offices may
offer suggestions designed to regularize the finances of the artels
and unions, making the granting of the loans contingent upon the prompt
elimination of shortcomings in financial discipline. If the bank finds
neglected accounts, the absence of a balance-sheet as of the lst of the
month preceding the granting of the loan, a insolvent balance, or
systematic losses and immobilization of working capital, no loan is
granted. If the balance is found to be insolvent, the bank must first
of all consider the question of granting a loan to return the coopera-
tive to solvency, and only then the question of replenishing its work-
ing capital. Nor are loans granted for the replenishment of working
capital if the cooperative is unable to cover losses with its own funds.
The amount of the long-term loan to be granted to cooperatives on
instruction of the fund titleholder is calculated as the difference be-
tween the available working capital and the norm as reported in the
last balance-sheet, but not exceeding the lacking amount of working
capital based on the annual financial plan. Let us illustrate this.
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According to the last reported balance-sheet, the artel's own
working capital, loans granted to replenish the working capital and
the stable liabilities make up 250,000 rubles, while the norm in this
particular case is 285,000 rubles. In this case the lacking amount of
working capital is 35,000 rubles.
If according to the annual financial plan of the artel, the work-
ing capital at the end. of the year is planned to be 30,000 rubles short
of the norm, then the loan granted for the replenishment of working
capital should amount to 35,000 rubles, of which 30,000 rubles are to
be paid back in subsequent years and 5,000 rubles must be paid back
during the current year as a short-term loan.
Newly created artels may receive loans for the replenishment of
working capital within their first three months merely on the basis of
certified, calculations drawn up on the basis of their production pro-
gram. Trading organizations of producer cooperative systems that get
credit in the State Bank on the basis of their trade turnover can be
granted loans for the replenishment of working capital-in the amount
necessary to insure their own planned capital contribution in the trade
turnover.
Long-term loans for the replenishment of working capital are
granted by Torgbank at 2 percent interest a year for not more than 5
years and are extinguished on a quarterly basis as the borrower's funds
increase once again. The first loan payment is due not earlier than
three months after the issuance of the loan. The payment schedules
are set by instructions from the titleholder of the local long-term
credit fund. The procedure of making payments on, loans for working
capital is similar to the procedure adopted for investment loans.
In addition to these long-term loans, producer cooperatives may
also apply to Torgbank for short-term loans to cover a shortage of
working capital in the course of the year. These loans are granted if
according to the financial plan the lack of working capital in the
course of a quarter is greater than that planned for the end of the
year or when the financial plan does not provide for a shortage of
working capital and such a shortage does occur in. any given quarter. If
the shortage of working capital in the course of the year is due to
deficit operations or an immobilization of funds, no loans are granted
for the replenishment of working capital.
Loans for the stated, purpose are granted. when the available working
capital is less than the established norm. However, a cooperative artel
may lack its own working capital altogether, a situation that occurs
when its own working capital and. loans received for capital investments
and the replenishing of working capital are insufficient to cover the
non-circulating assets. In that case, the organization needs first of
all funds to replenish its fixed capital to restore solvency.
Loans for the fixed capital of artels are granted by Torgbank on
the basis of petitions. These petitions must be accompanied by an
audit for the preceding year, the balance-sheet for the preceding month,
a copy of the current year's financial plan, a certified calculation
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of the loan requirements, and a certificate listing the capital invest-
ments made during the current year. All these documents must be care-
fully examined before a loan is granted. No loans for fixed. capital
can be granted if the accounts have been neglected, or when the artel's
own funds are insufficient to cover its losses.
The amount of the loan should usually be sufficient to restore a
solvent balance under the terms of the annual financial plan. The
issuance of such a loan is usually associated with the granting of a
loan designed to replenish the organization's working capital up to
the norm level. Loans for the replenishment of fixed capital are ex-
tinguished as the borrower is once again creating surplus working capi-
tal. Payments are arranged on the basis of -the final balance-sheet
for each year, but must not extend over more than 10 years. If the
balance of the artel briefly becomes insolvent in the course of a year
and. the financial plan provides for solvency to be restored by the end.
of the year out of internal resources, then the artel may receive a
short-term loan to cover the temporary insolvency irrespective of
whether a long-term loan has been granted for the replenishment of the
fixed, capital.
Loans designed for the replenishment of working capital and. fixed
capital are credited to the clearing accounts of the cooperatives in
the State Bank and may not be used for capital investments. If such
loans are used. for capital investments, the amounts thus misused may
be recalled before they are due.
With a view to restoring the credit standing of artels that lack
the necessary funds to make up for losses suffered in previous years,
Torgbank was given the right in 1950 to grant special loans without
interest to such organizations. Such loans are issued. upon the instruc-
tions of the titleholder of the local long-terra credit fund within the
limits of the annual government-approved credit plan for not more than
10 years with extinction adjusted. to the borrower's gradual formation
of working capital. If in the course of the year following the loan
the artel still does not manage to operate without losses, Torgbank may
with the permission of the Councils of Ministers of the union republics
demand recovery of the granted loan.
Crediting of Capital Investments by Consumer Cooperatives
All capital investments of producer cooperatives are financed.
from long-term loans granted by Torgbank. Most of the capital invest-
ments of consumer cooperatives, on the other hand, are financed from
the repair and construction funds that the consumer cooperative system
deposits in the State Bank (see Chapter V). If these funds prove to
be insufficient in some lower links of the cooperative system, say,
village cooperatives, the superior consumer cooperative unions may grant
them six-month to 3-year loans out of their own repair and construction
funds. These loans are credited to special accounts of the village
cooperatives that are reserved. for the repair and construction of trade
premises.
Torgbank grants loans to consumer cooperatives only for major
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capital investments slated by the state plan. These loans are granted
from repair and construction funds transferred to Torgbank or from
unused funds in the long-term credit reserves of the consumer cooperative
organization.
Such loans are granted for not more than 10 years with payments
starting one year after the crediting of the construction project has
been completed. Payments on loans are made in the same manner as in
the case of producer cooperatives.
In some cases money from the funds reserved for the capital in-
vestments of consumer cooperatives are granted. by Torgbank on instruc-
tions of Tsentrosoyuz fentral Consumer Cooperative Union7 on a non-
repayable basis.
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CHAPTER XVIII:
TANG-TERM CREDITING OF INDIVIDUAL HOME CONSTRUCTION;.AND OTHER UNDERTA CENGS
1. Crediting Individual Home Construction of Workers and Employes of.
Enterprises
The problem of improving the material.and cultural well-being of the
working people of our country is closely :linked with the improvement of
their housing conditions.
In addition to state construction of urban and. industrial workers'
housing, the state is also rendering assistance to workers, engineering
and technical personnel, employes and collective farmers who wish to
build their own homes. One of the major types of aid, is the long-term
credit granted to workers, employes and collective farmers at favorable
terms.
Long-term home. loans:areplanned by the annual state plans and.
are granted. through Tsekombank (the Central Municipal Bank), local
municipal banks and Sel.'khozbank.
? Tsekombank loans are based on the plans of industrial ministries
and the local Soviets of working people's deputies. The amount of
credit to be granted. is listed annually in the credit plan of Tsekombank,
which breaks down the credit by industrial ministries. Within these
limits, each ministry distributes the credit among its industrial enter-
prises and accordingly informs Tsekombank.
The home loans are granted to workers and employes through their
enterprise. Relationships between the enterprise and the loan-issuing
bank are based on a contract agreement. Home loans are granted up to
10,000 rubles for 7 years with equal quarterly payments starting in
the quarter after the completion of construction. Construction by the
borrower must be completed within one year of the issuance of the loan.
Both the amount of the loan and the payment terms may be increased.
in certain cases by special government decisions.
Home loans are granted at 2 percent interest a year, with the
interest being paid. at the time of the regular loan payment.
The credit granted by Tsekombank is distributed. by the management
of the enterprise in cooperation with the factory committee. The
credit regulations provide that the home loan borrower must cover at
least 30 percent of the cost of construction out of his own funds. This
contribution may be either in the form of cash or the labor of the bor-
rower-or members of his family.
The enterprise furnishes to the bank a list of the workers and. em-
ployes to whom loans have been granted., listing the amount of the loan
for each borrower. Each borrower, in turn, must furnish to the bank
through the enterprise a certificate on the piece of land. that has been
allotted to him for his home construction and a statement of his loan
obligations (in the established form). The statement must list: the
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standard design and the building schedule of his home; the amount of
living space in the home and any outbuildings; the total cost of con-
struction and the amount-, of his own contribution; the date of the
first loan payment and the subsequent payment dates; insurance of the
home and the outbuildings (for at least the amount of the loan) and
so forth.
When the loan is granted, the bank requires that the home and its
outbuildings may not be sold before the extinction of the loan and so
informs the appropriate notary offices. These notices sent to the
notary offices have the force of a lien on the property built with the
bank's loan.
The home loans granted by the banks are designed to meet the hous-
ing requirements of workers employed in industrual enterprises. If the
borrower quits his job or is dismissed because of infractions of labor
discipline, the following procedure goes into effect.
If the borrower's own contribution plus the part of the loan that
has already been repaid make up at least 50 percent of the cost of con-
struction, then the borrower retains ownership of the home, but must
extinguish the balance of the loan within six months. If the balance
of the loan is not repaid wi-hin that time, ownership of the home is
transferred to the enterprise, which must then pay the remaining bal-
ance of the loan and within three months reimburse the worker or em-
ploye for his home-building outlays.
If the borrower has paid less than 50 percent of the construction
of the home, he loses ownership of the home. In this case also, the
home passes to the enterprise, which must complete payments on the loan
and within three months reimburse the worker or employe for his outlays
on the home.
If the worker or employe leaves his job under circumstances
beyond his control (army draft, transfer to another job, disablement
and so forth), then no change in the loan conditions takes place, he
remains owner of the completed. home and continues, his loan payments
as originally listed in his obligation statement.
The bank must insure the specified utilization of home loans and
therefore institutes control over course of the construction itself.
Since cash loans can easily be misused for other purposes, the credit
regulations provide that the borrower gets at first'-4:;10 to 15 per-
cent advance, with subsequent parts of the loan issuec``on the basis
of the actual fulfillment of construction.
If the borrowers are able to purchase all the materials required
for the construction of the home in a single lot and require funds in
excess of the 10 to 15-percent advance, the bank will issue the needed
amount, but only against the documents that confirm the actual outlay
(bills for the purchased materials and. so forth).
The municipal banks do not grant loans directly to the borrowers,
but through the enterprise in which they are employed. Before a loan
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can be approved, the administration of the enterprise must inform the
bank of the funds previously received for loans, the loans actually
paid to borrowers and. the unused balance. Each enterprise must more-
over furnish a monthly loan accounting to the bank, listing the follow-
ing information for each borrower.- name, first name and patronymic;
number of loan obligation; amount of loan; amount issued to the bor-
rower during the reported month and the cumulative amount issued. since
the start of construction.
On the basis of these reports of the enterprise, the bank verifies
the proper disposition made of the credit and makes an on-the-spot
investigation (of the enterprise as a whole and. of individual borrowers).
If the bank uncovers misuse of credited funds, it may demand the im-
mediate return of the loan, and may raise the interest from 2 percent
to 12 percent.
The bank is required to insure the scheduled. completion of.each
home-building project. The enterprise is expected. to furnish to the
bank so-called building-completion acts within 15 days of the end of
construction. These acts must list the technical inspection data re-
garding the new home, including the nature of the building materials,
the size of the home, the number of rooms, the available living space,
fencing, outbuildings, quality of the outbuildings, and so forth.
If the construction of the home is not completed. on schedule, the
bank is expected to urge on the enterprise and the borrower the prompt
completion of construction.
A major part of the bank's functions in the home-loan field is the
control over the scheduled repayment of loans.
According to the contract between the bank and the enterprise, the
enterprise is expected to insure the scheduled payment of the loan by
the borrower. The enterprise has the right to levy 4 percent interest
on overdue loans.
A simplified procedure of granting loans has been set up for workers
and. employes of lumbering, timber-floating and, auxiliary enterprises of
the Ministries of the Lumber and Paper Industry, Railroads and the Metal-
lurgical Industry, and. enterprises of the gold. and platinum industry. In
those cases, the municipal banks handle all loan transactions with the
enterprises, which submit the loan payment obligations and extinguish
the loans granted irrespective of the status of the transactions with
the workers or employes. These borrowers in turn handle their trans-
actions only with the enterprise, submitting to them their own payment
obligations and making their regular payments on the loans.
Home loans of workers, employes and. specialists employed in state
farms, machine-tractor stations, machine-tractor repair shops and. other
rural state enterprises are financed by Sel'khozbank, which uses the
same procedure as the municipal banks in the case of industrial workers.
The amount of long-term credit that can be granted to these rural
home builders is set by the annual credit plan of iel'khozbank. This
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plan provides a distribution of the credit by ministries that have juris-
diction over state farms, machine-tractor stations and, repair shops and
other agricultural enterprises. On the basis of the distribution of
these ministries Sel'khozbank then passes the credit limits on to its
republic, oblast and. kray offices and down to the local bank branches.
Like the municipal banks, Sel?khozbank grants the loans to the individual
borrowers through their place of employment. The amount of the loan may
vary from 5,000 to 15,000 rubles for up to 10 years at 2 percent inter-
est a year.
2. The Procedure of Granting Credit to Enterprises for Construction of
Homes to be Sold to Workers and. Emplo es
A major part of the credit plan of Tsekombank is taken up by the
crediting of enterprises, projects and. institutions for the construction
of homes that are to be sold to their workers, employes and specialists.
Such homes are built on the basis of standard designs within fixed esti-
mated cost limits.
Before the bank can grant such credit it requires the following
documents from the enterprise-. a list of homes under construction
listing their cost and types; deed for the piece of land. allotted for
the construction of the homes; copies of contracts if the construction
has been contracted out or copies of the instructions to the capital
construction department if such construction is handled. by the economic
method. The enterprise must also submit an obligation statement in the
established form, listing: the number of homes and their completion
schedules; within what period (at most a month) the homes are to be so;Ld.
and. at what price; the manner in which the loans are to be used up and
extinguished and so forth.
The loans are granted in the form of an advance of 15 percent (for
contracted construction.) and 30 percent (for construction by the enter-
prise itself) of the total cost of the homes to be built during the
current year. Subsequent parts of the loans are issued on the basis
of work completed. by the contractor or by the capital construction de-
partment of the enterprise itself. Payment is made against acts of
acceptance of completed. homes or the following types of partial comple-
tion: earthwork, foundations and plinth; walls; rafters and roof;
ceilings, floors and inter-floor partitions; windows and doors; oven
(including foundation and pipes); outside and inside finishing work.
When payment is made for completed work, the bank withholds a
certain percentage of the previous advance from each amount charged
for completed work.
Tf the enterprise is setting up prefabricated homes for sale to
the workers and employes, the loan is issued in the form of payment
of the suppliers' bills for the prefabricated house sections. The
remaining amount of the loan provided by the cost estimate for the
assembly of the house is paid to the enterprise Against acts of ac-
ceptance of the assembled homes, but within the :Limit of the government-
approved cost estimate of the homes.
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Loans are granted for the period-required to build. and sell the
homes at one percent interest a year. The loan is extinguished. with:
the cash proceeds of the sale of the completed home; the down-payments
of the purchasers if the home is bought on installments; and, the pay-
ment obligation of the purchaser, drawn up in the name of the loan-
issuing bank.
If the loan is not extinguished on schedule, the enterprise must
nevertheless pay the bank the outstanding balance of the loan even if
the homes have not been sold.
The completed homes may be sold on an installment basis within
the limits of the state plan. The installment plan provides for pay-
ments during 2 to 3 years with a cash down-payment of at least 20 per-
cent of the purchase price. The remainder is paid in regular install-
ments through the enterprise within a maximum 3 years and at 2 percent
interest.
The purchaser may occupy the home only after the down-payment of
20 percent in cash and. after having submitted. the installment payment
obligation in the name of the loan-issuing bank. As in the case of
loans for individual homes, the bank by appropriate notices to the
notary offices prohibits the resale of the home before the loan has
been repaid.
The purchaser assumes full ownership of the house only after the
bank loan has been extinguished or, in the case of a.cash purchase,
after the full payment has been made.
If the purchaser fails to meet two regular installment payments,
the enterprise is required to ask for a court order canceling the sales
contract, dispossessing the purchaser and calling for compensation for
losses suffered. Homes thus repossessed must be sold to another worker
or employe under the regular conditions or the enterprise must pay the
bank the outstanding loan payments that the purchaser owed on his in-
stallment plan.
If homes built by enterprises with Tsekombank credit are occupied
prior to their sale or if they are not completed within the fixed
construction schedule, the bank has the right to recall the loan granted
to the enterprise.
3. Crediting Individual Home Construction and Capital Repairs at the
Expense of the Credit of Local Soviets
The credit plan of Tsekombank provides credit for individual home
construction through local Soviets. This credit is intended for issuance
to workers, employes and specialists of enterprises that are not covered
by credits extended through industrial ministries, to soldiers and
officers discharged from the Soviet Army, disabled. veterans, families
of dead. warriors, partisans, and families of men in service.
On the basis of the government-approved credit plan of Tsekombank,
the Councils of Ministers of union republics distribute the credit
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among krays, oblasts, autonomous republics and. cities and allot the
credit to the corresponding municipal banks.
In contrast to the crediting procedure in the case of industrial
ministries, home loans granted through local Soviets are issued directly
to the borrowers. This requires a high degree of organization and
orderly accounting on the part of the municipal banks.
The home loans are issued by the municipal banks within the
assigned credit limits. The loans are granted on the basis of lists
approved by the city and rayon housing administrations (in cities)
or settlement Soviets (in settlements).
During the process of drawing up these lists the bank makes certain
that loans are being allotted to those working people who really need
them and. at the same time are in a position to pay off the loan with the
terms called for by the regulations.
At the time the loan is granted, the borrowers must furnish to the
municipal bank the usual obligation. statement listing the conditions
of the loan and the payment schedule. The rest of the loan procedure
is the same as in the case of the industrial ministries except in all
transactions, such as the granting of the loan, the submission of the
obligation statement and the making of payments, the borrowers deal
directly with the bank.
Loans to discharged officers and soldiers, disabled veterans,
families of dead warriors, partisans and families of men in service
are granted on favorable terms, including larger loans, longer terms
and lower interest.
The credit plan of Tsekombank also provides for loans for the
capital repair of homes. These loans are also granted on the basis of
lists drawn up by the city, rayon, and settlement Soviets.
After the usual obligation statements have been approved, the
municipal bank issues capital repair loans upon the borrower's request.
At first 50 percent of the :Loan Is issued, with subsequent amounts
following on the basis of the borrower's needs for his capital repair
outlays.
As in the case of home loans, one major requisite for the granting
of capital repair loans is the borrower's own contribution. In the
case of capital repairs, the borrower is expected to contribute at
least 30 percent of the total cost, either in money or in labor, in-
cluding that of members of his family.
One requirement in capital repair loans is that the home not be
sold before the extinction of the loan. The bank accordingly informs
the notary's office of the loan that has been granted. Another require-
ment for capital repair loans is fire insurance in the amount of the
loan. In case of fire, the insurance payment for the balance of the
loan payment must be paid to the bank.
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The bank ascertains the specified utilization of the loan. If
the bank finds any misuse of funds, the bank may recall them immediately
and levy up to 12 percent interest on. the misused. amount (as in the case
of home loans through industrial ministries).
The bank is also responsible for the maintenance of the payment
schedules. Four percent interest may be levied on overdue payments and
if payments are more than six months overdue, the bank may ask for a
court order requiring payment of the entire balance of the loan pay-
ments.
4. Loans Granted to Workers for the Purchase of Livestock
In some cases, on the basis of special government decisions, Sel'khoz=
bank grants long-term loans to industrial workers for the purchase of
livestock. The loans are up to 3,000 rubles for a three-year term with
payments starting three months after the issuance of the loan.
Loans of this.type are granted to workers whose names appear on
a list compiled. by the,management of the enterprise in cooperation with
the factory committee, and submitted to Sel'khozbank. The list includes
detailed data regarding the borrower (name, first name and patronymic,
occupation, average monthly wage), the type of livestock purchased, the
time and place of the purchase, approximate cost, and the amount of the
loan desired.
The loans are issued. to the enterprise, which in turn passes them
on to the individual borrowers. The borrowers in turn submit their
payment obligation statements to the bank through their enterprise.
Loan payments are also made through the enterprise, which is re-
sponsible for.the scheduled installment payments to Sel'khozbank.
The Sel'khozbank offices in turn check on the specified utilization
of the loans and their scheduled payments.
5. Loans to the Rural Population for the Buildings of Homes and Livestock
Purchases
The credit plan of Sel'khozbank provides for long-term loans to
collective farmers for the building of homes, the moving of homes and
outbuildings to new settlements, and for the purchase of cows and
heifers.
These loans are granted within the limits set annually in the credit
plan of Sel'khozbank.
Since the war, home loans have been granted. to collective farmers
chiefly in areas that had been occupied by the enemy. These loans are
up to 10,000 rubles for up to 7 years at 3 percent interest.
The loan procedure in this case differs considerably from the grant-
ing of loans to industrial workers because the bank deals directly with
the collective farmers, who are moreover scattered through many villages.
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The credit operations must therefore be designed to establish the
credit needs of the farmers and maintain loan-granting and payment
transactions by mail. .
If a farmer wishes to obtain a home loan, he makes his application
directly to the Sel,'khozbank office that serves his rayon. The appli-
cation must list the address of the borrower, the name of his collective
farm, the purpose of the loan and the amount desired, the name of the
village where the home is to be built or rebuilt, the scheduled, don-
struction time, and the volume and approximate cost of the construction.
The application must be accompanied by a petition of the farm
management supporting the application for a loan. That petition should
list the number of labor-days worked by the applicant within a certain
period of time, his functions in the collective farm, and the property
that he owns.
The application must also be accompanied by a certificate of the
village Soviet allotting a piece of land to the applicant for the build-
ing of his home. If the home is to be rebuilt, then the village Soviet's
certificate must list the type of work required.
The Sel'khozbank offices, after having examined the application and
judged it on its merits, forward it with their comments to the rayon
executive committee. The ultimate decision on a loan to a collective
farmer thus rests with the rayon executive committee.
Upon receipt of the loan list approved by the rayon executive com-
mittee the bank proceeds to issue the loan.
Each collective farmer must submit a statement of his payment ob-
ligations, stating the payment terms and other loan conditions (the
completion of the construction within one year, compulsory fire insur-
ance, prohibition of sale prior to the complete repayment of the loan,
and so forth).
The actual loan is granted on the basis of the needs arising in
the course of construction. An advance of 15 percent of the loan is
issued, with subsequent amounts based on acts confirming the progress
of construction that are drawn up on the spot by representatives of
the bank (or upon the bank's request by tax agents of the rayon finan-
cial department), employes of the village Soviets or representatives
of the collective farms.
Similar loans are granted by Sel'khozbank to teachers, doctors,
agronomists, veterinarians, and. assistant veterinarians, employes of
budget-financed offices, and discharged. soldiers and officers who live
in rural areas. .
These loans are granted. for from 5,000 to 10,000 rubles for terms
from 5 to 10 years. Loans are granted within the credit limits on the
basis of lists approved by the rayon executive committee.
Loans are granted to the listed specialists upon receipt of their
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credit applications. The application must be accompanied. by a peti-
tion from the institution where the specialist is employed and. a cer-
tificate stating his occupation and salary.
When collective farmers move from one rayon to another, the state .
grants them long-term loans through Sel'khozbank for the building of
homes, the purchase of livestock and other acquisitions. In a number of
cases, part of the building of the home is financed by the state.
Home loans and capital repair loans are at first granted. to a
collective farm for 9 months. Within that time the farm must build or
repair the homes and transfer them to the new settlers together with
the loan payment obligations.
Home loans are granted by Sel'khozbank on the basis of the actual
progress of construction. At first the bank grants an advance of 20 to
25 percent of the total cost of construction. for the purchase of con-
struction materials, payment for means of transportation and other out-
lays. Thereafter. funds are .slued. within the cost estimate limits on
the basis of bills for completed work accompanied. by acts confirming
the inspection of the completed construction work. The advance is then
withheld from the new payments in proportion to the cost of the com-
pleted. work.
If the homes are being built by a construction organization, the
bank issues the funds on the basis of the contract agreement concluded.
between the collective farm and the contractor. The funds are then
issued on the basis of payment instructions from the farm asking for
the issuance of the contracted advance to the contractor, with subse-
quent payments being hhade against the contractor's bills for completed
work accompanied by acts confirming completion of parts of the project.
After the construction of the homes and their outbuildings have
been completed they must be transferred. to the new settlers. The trans-
fer is certified. by an act of a commission consisting of the chairman
of the village Soviet, the chairmen of the farm's administration and
review commission, and a representative of the appropriate Sel'khoz-
bank'offIce.
The transfer act, drawn up in triplicate (for the settler, the
farm and the bank), must state the condition of the home and its out-
buildings, the actual cost of the home and the quality of construction.
Having received its copy of the transfer act, the bank proceeds
to transfer the loan obligation from the farm to the settler. The
amount of the transferred loan must not exceed. the estimated cost of
the home. If the actual cost exceeds the estimated cost, the farm must
pay the difference to the bank.
In connection with the transfer of the loan, the settler submits
to the bank his obligation statement pledging payment of the loan within
the fixed terms. The amount of the loan is then debited to the set-
tler's account and credited to the farm's loan account.
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When the bank issues loans for capital repairs of homes to be
transferred to new settlers, the farm must submit to the bank a re-
port on the nature and cost of the required repairs and. the decree
of the rayon executive committee transferring these homes to the set-
tlers.
The bank then gives the farm an advance for 70 percent of the
repair cost, with the remaining 30 percent following upon completion
of the repairs and certification by the village Soviet. The homes
and the loans are then transferred to the new settlers in the same
manner as newly built homes.
The farm may also use bank loans to purchase homes for the new
settlers from private persons or organizations, but in that case the
price of the home may not exceed the cost assessed. for insurance.
The usual loan conditions apply to home loans transferred from
the farm to new settlers: compulsory insurance of the home; prohibi-
tion of sale prior to repayment of the entire loan and so forth.
Loans for the purchase of livestock are also granted through the
collective farm. At first these loans are granted to the farm for
two months, in the course of which the farm must purchase the stock
and hand it over to the farmer.
Stock-purchase loans are issued either in cash or against the
suppliers' bills, depending on the method. of purchase.
Upon receiving the loan, the farm must give the bank a list of
the settlers for whom the stock is being purchased. That list must
be accompanied by statements from the settlers' previous village
Soviets certifying that the settler does not own any livestock.
When transferring the stock to the settlers, the farm draws up a
transfer act or transfer lists and receives from each settler a state-
ment pledging repayment of the loan within the fixed terms. On the
basis of these payment obligations, the Sel'khozbank office then trans-
fers the livestock loans to the settlers' accounts.
In those cases where part of the cost of the new homes is covered
by a budgetary appropriation, the bank proceeds as follows in trans-
ferring the loan from the farm's to the settlers' accounts: It ar-
ranges for the appropriate part of the farm's debt to be covered by
the amount allotted from the budget; and transfers the rest of the debt
to the settlers' accounts.
The granting of loans to settlers involves considerable work to
insure scheduled payments of the loans. That work must be organized
in the same manner as in the case of home loans directly to collective
farmers.
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CHAPTER XIX
THE FINANCIAL;AND CREDITPLANS OF THE LONG-TERM INVESTMENT BANKS
1. General Characteristics of the Financial and Credit Plans of the
Long-Term Investment Banks
The long-term and short-term credit operations of the investment.
banks are based.on financial-credit and, credit plans that. are a com-
ponentof the national. economic plan.
The financial-credit plans list:.. the volume and the . nature of
long-term credit,granted chiefly to collective farms, cooperatives.
and. individual.borrowers, as well as for capital investments of local
industry and other. purposes, the volume and nature of short-term
credit granted to contractors, municipal enterprises and the main ad-.
ministrations 'of ministries, enterprises and construction projects for
settling import 'transactions.; the sources used by the banks for,their
,,long term a.nd short-term. credit.
The volume and nature of nonrepayable financing of capital invest-
ments are not ;.listed, :in the financial-credit plans.
The financial-credit plans of the investment banks are based. on
the;production and, financial, plans of the credited organizations. For
example, in,:planning the-long-term credit for.collective farms the bank
bases itself, on the production plans of .,the farms and the planned. capi-
tal,investment~- as well as the income and outlays estimates. Long-
term credit tq,cooperatives Is planned on.the basis of the capital
investment :and the financial plans of the cooperative organizations.
Sbort-term credit, in particular. to contractors, is based on the planned.
volume of;constr?ucti.on-installation work, the movement of the remainders
of construction'mat'erials and. other supplies and so forth.
The planning of credit sources is also based on financial plans
and on ;data. regarding the turnover of payments. For example, the plan-
4' as '
ning.of-the remainders of funds of collective farms in their investment
ace,ountss an increase or a reduction of funds).'is based on the farms..'
income and outlays estimates. ..The planning'ofthe balance of funds, in
the clearing accounts of .contracting organizations, and other.(for
example, municipal) enterprises and organizations whose clearing ac-
counts are kept in. the investment banks, is based. on the turnover of
payment and, clearing transactions of these organizations.
..
The financial-credit plans are nbt merely passive reflections of
the",production and financial plans of the economic organizations, on
the"con'trary,'in the process of drawing up and implementing these plans
the banks actively influence the economic processes. For example, in
planning., (and. then in controlling the. implementatipn.of the plans of)
the balance in the investment accounts of. collective farms, the bank
requires. the deposit of all money receipts in the indivisible fund
accounts,the deduction of,.the indivisible fund. contribution in the
ajuount called. for by the Farm Charter, the thrifty expenditure-of funds
only for. purposes envisaged by the production plans and the income and.
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outlays estimates in accordance with the requirements of the Charter and
the decisions of the general farm meetings, and so forth. This kind of
planning affects the economic development of the collective farms and
insures an increase in the collectivized holdings.
Experience has shown that the resources at the disposal of Bel'-
khozbank, Prombank and Tsekombank are insufficient to cover all their
credit requirements, and the balance is therefore financed from the
budget. It is quite clear therefore how important is the proper and
fullest utilization of all resources at the disposal of the banks.
The long-term credit plans of the investment banks are drawn up on
an annual basis with a quarterly breakdown, while the short-term credit
plans are drawn up for each quarter. In the Tsekombank system, the
short-term credit plans are also drawn up for the entire year with a
quarterly breakdown. However, when either the short-term or the long-
term credit share is relatively small, a single financial-credit plan
is drawn up. In Prombank, for example, where long-term credit (to
local industry for increased output of consumer goods) plays a relatively
minor role, a single financial-credit plan is drawn up each quarter,
including both long-term and short-term credit. In Torgbank, where the
short-term credit share is small, a single annual credit plan is drawn
up.
In practice therefore, the following system of financial-credit
plans has developed in. the investment banks: in Sal'khozbank -- an
annual financial-credit plan for long-term credit and a quarterly plan
for the short-term crediting of contracting organizations; in Tsekombank
-- an annual combines long-term and short-term credit plan; in Torgbank
-- an annual credit plan and quarterly plans for the short-term credit-
ing of contracting organizations; in Prombank -- quarterly financial-
credit plans, including both short-term and long-term credit.
2. The Financial-Credit Plan of Sel'khozbank
The major function of the financial-credit plan of Sel'khozbank
is the long-term crediting of collective farms. The credit plans are
based. on the national economic plan, the plans for the development of
collectivized livestock holdings, afforestation, irrigation, rural
electrification and the plans for the development of certain branches
of agriculture.
In accordance with the three-year plan for the development of col-
leotivized livestock holdings the largest amount of credit has been
allocated to undertakings designed to insure the increase and qualitative
improvement of the livestock herds and the construction and mechanization
of livestock farms.
In fulfilling the goals of the Stalinist plan of the transformation
of nature, the collective farms are also doing a large amount of work
in the planting of forest shelter belts, for which a large amount of
credit has been allotted. Large amounts of credit have also been al-
lotted to rural electrification measures, and the credit plans also pro-
vide for the expansion of industrial and subtropical crops, melioration
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and irrigation, fruit and vine cultivation.
The financial-credit plan of Sel'khozbank also reflects loans to
individual borrowers, particularly home loans to collective farmers,
disabled. war veterans, and workers, employes and specialists living in
rural areas. The plan also provides a reserve that can be used by
Sel'khozbank for long-term credit in excess of the amounts provided
for individual purposes. The plan also lists the credit balance that
Sel'khozbank is expected to have at the end of the year.
The financial-credit plan lists the sources to be used for long-
term credit and all expected payments on loans previously granted by
Sel'khozbank. The total amount of impending payments is calculated. on
the basis of the expected outstanding debtor indebtedness at the start
of the.plan year and the payments scheduled to be made in the course
of that year.
Another credit resource of the bank is the potential increase in
the indivisible money funds.of the collective farms in their Sel'khoz-
bank accounts. The bank bases its calculation on the expected balance
of these funds at the start of the plan year and. the payments due dur-
ing the plan year. If the plan envisages an expenditure of funds from
the farm accounts exceeding the planned receipts, then the outlays
section of the credit plan must list a reduction in the balance of the
farms'_ind.ivisible funds. After all credit sources have been d.etermined,
the bank calculates the expected balance of available funds at the start
of the plan year.
We have noted. above that the sources at the disposal of Sel'khoz-
bank usually are not sufficient to cover the credit needs and that the
state budget is used to cover the balance of the requirements.
After the bank has surveyed. all the credit sources at its disposal,
it calculates the amount required from the budget.
A typical form of the financial-credit plan of Sel'khozbank follows:
fSee FINANCIAL-CREDIT PLAN OF SEL'KHOZBANK next page?
The head office of Sel'khozbank receives draft plans from-its offices
in the union republics, oblasts and krays.
The financial-credit plan of Sel'khozbank is submitted for examina-
tion.to the Ministry of Finance USSR and is then submitted for approval
to the Council of Ministers USSR after having been examined by the
State Planning Committee and, the Ministry of Agriculture USSR.
After government approval, the head offices communicates the
annual credit limits to its offices. The latter draw up annual credit
and loan payment plans with a breakdown by oblasts, krays and autonomous
republics and submit them to the Councils of Ministers of the union
republics for approval. The annual credit plans by autonomous republics,
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FINANCIAL-CREDIT PLAN OF SELICHOZBA] X
Source of Funds Amount
1. Funds available at the
start of the plan year
2. Loan payments
3. Rise in the balance of
the farms' indivisible
(a)
(b)
funds in their invest-
ment accounts
(C)
4. Other sources
5. Budgetary contribution
(d)
(e)
Purpose of Funds Amount
1. Long-term credit
including:
collective farms
resettlement
home loans to
collective farmers
home loans to
workers, employes,
and specialists
in rural areas
reserve
2. Funds available at the
end. of the plan year
oblasts and krays with a breakdown by rayons are then drawn up by the
appropriate bank branches and submitted for approval to the Councils
of Ministers of autonomous republics and the kray and oblast Soviets
of working people's deputies. The rayon branches of Sel'khozbank then
draw up the annual credit plans for collective farms within the credit
limits assigned. to each rayon. The rayon plans arc based. on the credit
applications of the farms and the production plans of the rayon farm
departments. The credit applications in turn are based on the produc-
tion plans of the farms and their income and outlays estimates. The
rayon bank branches are required to grant. the credit to the collective.
farms within two days after the approval of the credit plans by the
rayon executive committees.
The Credit Plan of Torgbank
The credit plan of Torgbank is based on the goals set by the
national economic plan in the matter of the further development of
cooperative activities, the expansion of production and an increase
in the fixed capital with a view to better serving the needs of the
population.
In contrast to the Sel'khozbank plan, the Torgbank credit plan
usually plans the crediting of cooperative organizations from the
cooperatives' own funds without the contribution of budgetary appro-
priations.
Torgbank grants long-term credit for capital investments, and
for replenishing the working capital and the fixed capital of co-
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operative organizations.
The credit plan is based. on the financial income and outlay plans
of the cooperative systems (including producer cooperatives, woodwork-
ing cooperatives and disabled veteran cooperatives). These plans contain
the basic production indicators (value of gross output and market out-
put, expenditure of raw materials, supplies, fuel and so forth), which
in turn determine the norm and. the total amount of required. working
capital and. the profits expected. in the course of the plan year.
The credit plan further lists in detail the receipts and expendi-
ture of the cooperatives by individual items and sources, including
in particular:. profit deductions (nonrepayable deductions into the long-
term credit fund, income tax deductions and so forth); the cooperatives'
own funds and the equivalent funds in circulation; the capital invest-
ment plan with a listing of financial sources.
In checking. and. analyzing the, financial plans of the cooperative
.systems, Torgbank must make certain that they take account of all in-
dome sources and. that the profit deductions have been properly calcu-
lated. in accordance with the norms set by the government. Torgbank
also verifies the calculation of the working capital norm and the total
requirements in funds, since these calculations determine the amount of
credit to be supplied. by Torgbank.
In addition to the profit deductions into the long-term credit
funds, Torgbank can also use payments on previous loans as a credit
source. Torgbank calculates the impending loan payments on the basis
of the summary financial plans of the cooperative organs at the repub-
lic level and. on the basis of reports received from its branches.
The credit plan also envisages the use of the surplus working
capital of the cooperative organizations. While there are cooperatives
that are short of working capital, others accumulate surpluses in work-
ing capital. These surpluses are used first of all to pay off all out-
standing loans; in the absence of such obligations, the surplus working
capital can be directed into capital investments within the limits en-
visaged by the plan. Surpluses that are to be used for capital invest-
ments are deposited in special Torgbank accounts, which are then used to
finance the investments of the given organization.
Surplus funds are also deposited, in Torgbank by those organiza-
tions that have no outstanding loans and require no investment funds.
These deposits can be used by Torgbank together with the long-term
credit fund as a source for crediting other organizations. The outlay
section of the credit plan in that case envisages the return of these
special deposits to the cooperative organizations.
The Torgbank credit plan separately lists funds due on outstanding
loans from consumer cooperatives.
Another source listed in the credit plan is the profit of the bank
itself and'interest on loans granted from the long-term credit fund.
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On the basis of the planned resources, the bank then plans their
utilization for the appropriate purposes in the outlay section of the
plan. The major part of the section is taken up by loans for capital
investments and the replenishing of the working capital or cooperative
organizations.
Loans are planned, for new construction, reconstruction, the pur-
chase of equipment and other supplies in accordance with the investment
plan approved for the cooperative systems.
A major share of the credit plan is taken up by loans for the
replenishing of working capital of cooperative organizations. Cooper-
ative organizations with insolvent 'balances may also receive loans for
the replenishing of fixed capital.
Torgbank also grants short-term loans (up to one year) for the
replenishing of working capital from the deposits of cooperatives that
have surpluses of working capital. Such loans are granted within the
limits of the norms to bridge gaps within the year, arising particularly
when the cooperative starts new consumer goods items and expands exist-
ing production lines, thus requiring more working capital, or.when the
cooperative sets up auxiliary enterprises to provide its own raw mater-
ial base.
No matter how carefully credit needs are assessed. in the credit
plan, additional fund requirements inevitably arise in the course of
the implementation of the plan. The Torgbank credit plan therefore
provides a reserve that may be used for such additional needs with the
permission of the Council of Ministers USSR.
A typical form of the Torgbank credit plan follows.
Sources of Funds
1. Balance in the correspondence account at the start of the year
Receipts from Cooperatives
2. Deductions into the long-term credit fund:
from producer cooperatives
from woodworking cooperatives
from disabled veteran cooperatives
3. Loan payments:
from producer cooperatives
from woodworking cooperatives
from disabled. veteran cooperatives
4+. Deposits of working capital surpluses
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from producer cooperatives
from woodworking cooperatives
from disabled veteran cooperatives
5. Loan payments of consumer cooperatives
6. Interest collected on loans from the long-term credit fund
7. Bank profits
8. Other receipts
Purpose of Funds
1. Financing of capital Investments:
producer cooperatives
woodworking cooperatives
disabled veteran cooperatives
2. Credit for the replenishing of working capital
producer cooperatives
woodworking cooperatives
disabled veteran cooperatives
3. Refunding of deposits to consumer cooperatives
4. Payment of profit deductions into the budget
5. Refunding of special deposits to cooperative organizations
6. Reserve
7. Balance in the correspondence account at the end. of the year
The Torgbank credit plan is subject to approval by the Council-
of Ministers USSR after examination by the Ministry of Finance USSR.
Together with the Torgbank credit plan the Council of Ministers
USSR also approves the planned receipts and utilization of the local
and republic long-term credit funds of each cooperative system (pro-
ducer, woodworking and. disabled veteran cooperatives) by union re-
publics, as well as the planned. receipts and utilization of the centra-
lized long-term credit funds of the producer cooperatives and the
disabled veteran cooperatives. These plans list: on the income side:
receipts of nonrepayable deductions into the long-term credit funds;
interest on the long-term credit funds; repayment of loans previously
granted. from the centralized. long-term credit fund, and the balance
in the funds at the start of the year; on the expenditure side -- the
granting of loans for the replenishment of the republic long-term
credit funds; a reserve arid. the balance at the end of the plan year.
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1 The Credit Plan of Tsekombank
Tsekombank has annual plans for long-term and short-term credit.
In their constant concern for the material well-being of the work-
ing people, the party and government are devoting special attention to
the construction and restoration of housing. In addition to the major
housing effort financed by state enterprises and the executive commit-
tees of Soviets of working people's deputies, an increasing amount of
individual home construction is being financed with long-term state
loans.
A. key section of the Tsekombank credit plan is therefore devoted
to home loans in cities and workers' settlements In accordance with
the plans of ministries and agencies and local Soviets, as well as to
the construction of homes for sale to workers, employes and specialists.
In addition, the Tsekombank plan also lists long-term capital repair
loans to local Soviets, individuals and. municipal enterprises.
The credit needs for home loans to workers and employes of enter-
prises and organizations are based on plans submitted by the corres-
ponding ministries and agencies. In compiling these plans, the minis-
tries and agencies in turn base themselves on credit applications
submitted by the enterprises, which list the number of workers and
employes desiring home loans and. the amount of credit required..
Using the state plan goals for the development and expansion of
production and the related increase in the labor force, the ministries
and agencies also draw up credit requirements for the construction of
homes to be sold to workers for cash or on installments. In contrast
to individual home building, which is financed jointly by state loans
and the borrower's own funds, the construction of homes for sale is
financed entirely from Tsekombank loans.
The amount of credit required for the construction of individual
homes and capital repairs is based on the plans of the local Soviets.
On the basis of these plans, the local municipal banks-inform the head
office of their credit requirements, which include the expected ful-
fillment of the credit plan by the start of the plan year and the
amount of credit planned. for the plan year both for new construction
and continuing construction. In examining the local Soviets' draft
plans for individual home building and the related credit requirements,
the municipal banks must bear in mind the need for a high degree of
credit effectiveness and. must make certain that the credit granted for
home loans will actually speed construction and expand available hous-
ing.
On the basis of the draft plans submitted by the local Soviets,
the municipal banks also calculate the long-term credit needs for
capital repairs of municipal enterprises, hotels and housing.
The resources envisaged by the long-term credit plans of Tsekom-
bank include first of all payments on loans previously granted., as well
as available fund.s at the disposal of Tsekombank. Such unused funds
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may be listed in the long-term credit plan only to the extent that they
are not required for short-term credit. If the long-term credit plan
requires funds that have already been allotted to the short-term credit
plan, the long-term credit plan must provide for the refunding of such
funds (under the heading "Purpose of Funds").
All the sources listed above are insufficient to cover the credit
requirements of individual home building, and the state is making up
the balance from its budgetary appropriations.
A typical form of the long-term credit plan of Tsekombank follows:
LONG-TERM CREDIT PLAN OF THE TSEKOMBANK SYSTEM
Sources of Funds
1. Payments on long-term loans.
2. Payments on loans granted in 19.. for the construction of homes for
sale on cash terms.
3. Payments on loans granted in 19.. for the construction of homes for
sale on installment terms.
!+. Appropriations from the union budget.
Purpose of Funds
1. Long-term loans for :
(a) individual home loans within ministry and. agency plans.
(b) individual home loans within the plans of local Soviets.
(c) construction of homes for cash sales.
(d) construction of homes for installment sales.
(e) capital repairs of individual homes.
(f) capital repairs of municipal enterprises and the housing
of local Soviets.
3. Refunding of funds borrowed from the short-term credit reserve.
The short-term credit plans of Tsekombank list loans granted to
municipal organizations and enterprises and contracting organizations.
In drawing up the short-term credit plan, Tsekombank makes use
of the credit requirements submitted, by the local banks, which in turn
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calculate the needs of municipal enterprises, housing and supply
organizations on the basis of the financial plans and applications of
the credited organizations. The credit needs include loans for: the
seasonal accumulation of materials, particularly fuel; the bridging
of the gap between capital repair expenditures and the receipt of the
corresponding amortization payments, and other needs.
The credit needs of individual municipal enterprises and con-
tracting organizations are determined by the banks on the basis of the
production plans of the enterprises and organizations, their working
capital norms and the need. for speeding the turnover rate of the work-
ing capital.
Short-term credit sources are funds available in the clearing,
current and special capital repair accounts of municipal enterprises,
housing administrations and other enterprises and organizations in the
municipal banks, with the balance being made up by budgetary appropria-
tions.
Annual credit plans of Tsekombank for long-term and short-term
credit are submitted by the Ministry of Finance USSR to the Council of
Ministers USSR for approval. After approval, Tsekombank communicates
the credit limits to its local municipal bank brariches.
The Financial-Credit Plan of Prombank
In contrast to other investment banks, the financial-credit plan
of Prombank is drawn up and approved for each quarter rather than for
the year as a whole. The Prombank plan also differs from the other
plans in its structure. While the :iel?khozbank, Torgbank and Tsekom-
bank plans break down their credit operations into the loans to be
granted and the payments on loans due during the plan year, the Prombank
plan only lists the indebtedness limit planned for the end of each
quarter on various types of credit. The different make-up of the Prom-
bank plan is due to the dominance of short-term loans in Prombank opera-
tions.
The formulation of the financial-credit plan is preceded by the
drawing up of the short-term credit plan of contractors for the pur-
chase of construction materials, which breaks down this type of credit
by ministries. This plan is drawn up on the basis of credit applica-
tions submitted by the ministries to the Prombank head office (organi-
zations under republic and local jurisdiction, except for the RSFSR,
submit these applications to the republic offices of Prombank). The
credit applications of the ministries are in turn based on the production
and financial plans of the construction organizations. The ministries
break down their applications into credit for the seasonal purchase of
materials required by the seasonal interruption in transportation and
credit for the seasonal purchase of materials required. by the seasonal
construction peak, but the financial-credit plan of Prombank and the
accompanying short-term credit plan combine these two types of credit
into a single amount.
In addition to credit for the purchase of construction materials,
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the financial-credit plan also lists credit to be granted to contractors
against bills en route and for the guaranteed payment of supplier bills.
The amount of credit is planned by Prombank on the basis of available
data on the outstanding indebtedness on these types of loans and data on
impending deliveries of construction materials in accordance with the
construction program of the contracting organizations.
In addition to its short-term credit operations, Prombank also
grants long-term credit. Long-term credit is granted. to local industry
for the expansion of consumer goods production in accordance with the
decree of the Council of People's Commissars and. the party's Central
Committee of 7 January 1941 (Izvestiya, 12 January 1941). The planned
credit is based on the credit requirements reported by the republic and
oblast (kray) offices. The statements list: the amount of credit re-
quired for the construction of carry-over and newly started items; data
justifying the suitability of granting credit to this or that enterprise;
the outstanding loans on which payments are due during the plan quarter.
The local Prombank offices base these calculations on the local plans
for the development of local industry producing consumer goods.
In addition the financial-credit plan also lists credit for the
payment of imported goods and for other purposes.
The financial-credit plan also lists the credit sources. Since
these sources are essentially the working capital of the bank itself,
with the remainder being supplied from the budget, the main task in the
drawing up of the financial-credit plan is the proper distribution of
the bank's available working capital. The bank makes use of the bal-
ances in the clearing accounts of contracting organizations and. con-
struction projects that are being financed on the basis of work com-
pleted, the balances of letters of credit and special accounts and
other funds-available to the bank. The bank estimates possible changes
in the balances in the course of the plan quarter, on the basis of pay-
ments for completed. work credited to the contractors' accounts in
accordance with their quarterly work program and on the basis of the
planned expenditure of funds from these accounts for the purchase of
materials, the payment of wages and so forth.
A typical form of the financial-credit plan of Prombank follows.
FINANCIAL-CREDIT PLAN OF PROMBANK
for the ... quarter of 1950
------------------------------------------------------------------------
Type of Credit Amount Credit Source Amount
-----------------------------------------------------------------------
1. To Contracting organizations 1. Balance of funds in the
clearing accounts of
(a) for the purchase of contracting organizations
construction materials and other liabilities of
the bank
(b) for bills en route
2. Funds of the union budget
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(c) for the guaranteed. payment
of suppliers' bills
2. To client projects for the pay-
ment of contractors' bills
3. To ministries and agencies for
the payment of imported equipment
and materials for capital con-
struction
ii. To local industrial enterprises
for the expansion of consumer goods
industries
5. Balance of funds in the State Bank
account
The financial-credit plan of Prombank and the accompanying short-
term credit plan of contracting organizations for the purchase of
construction materials is submitted by the Ministry of Finance USSR
to the Council of Ministers USSR for approval. After approval, the head
office of Prombank informs its branches of the credit limits of con-
tractors for the purchase of materials and the credit limits of local
industry for the expansion of consumer goods production.
Together with the short-term credit plans of Prombank, the
Council of Ministers USSR also approves the short-term credit plans
for contracting organizations that have their clearing accounts in
Sel'khozbank and Torgbank.
6. Bank Control Over the Fulfillment of the Financial-Credit Plans
The tasks of the investment banks are not limited to the drawing
up of the financial-credit plans and the communicating of the credit
limits to the local branches. The banks also control systematically
the fulfillment of these plans. The proper organization of such control
determines to a large degree the effectiveness of the granted credit
and the scheduled payment of funds used by the bank to maintain its
credit operations.
The banks control the fulfillment of the financial-credit plans
on the basis of periodic (quarterly, monthly) and annual reports
submitted. by their branches. These reports list the status of scheduled
and overdue payments by types of loans and the receipts of funds in the
form of loan payments and from other sources envisaged by the plans
(deductions of funds into the indivisible funds of collective farms,
the long-term credit funds of cooperative organizations and so forth).
On the basis of these reports, the banks make certain that loans
are being granted only within the limits approved. by the credit plan.
If a large part of approved credit is found to remain unused, the bank
seeks to establish the reasons for that situation: whether credit
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applicatiins were for amounts that exceeded the actual requirements or
whether there has been any delay in the granting of credit as a result
to a delayed. breakdown of the credit plans by borrowing organizations
(enterprises, collective farms, cooperative artels and so forth).
Of special importance is bank control of the scheduled loan pay-
ments within the amounts envisaged, by the credit plans and the recovery
of overdue payments. The existence of any overdue indebtedness indi-
cates the poor financial condition of the borrowing organization and
the need for proper measures to restore financial stability and insure
the payment of the loans. With this in mind, the banks analyze the re-
ports received from the borrowers, carry out on-the-spot investigations,
work out the necessary remedial measures in cooperation with the bor-
rower and supervise the implementation of such measures. The offices
of Sellkhozbank check the income and outlay estimates of collective
farms and see to it that these estimates include the funds required
for the payment of loan installments.
Individual types of credit are listed in the financial-credit
plans on the basis of their specified purpose. The banks must carry
out systematic control of the specified utilization of the loans, mak-
ing on-the-spot investigations and studying the reports of the bor-
rowers. Of special importance is the check of the specified. utilization
of loans granted. to individual borrowers.
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ORGANIZATION OF THE CONTROL WORK OF THE INVESITMENT BANKS.
FINANCIAL INCENTIVES AND SANCTIONS
1. General Tasks of Bank Control Work
The work of the investment banks in financing and crediting
capital investments and handling the accounts relating to construction
is closely linked with the control of all these operations. Financial
control is designed. to insure proper accounting in construction, the
legitimacy of individual operations, the utilization of funds accord-
ing to the approved state plan and agreement between the actual outlays
and the approved estimated cost subject to the planned cost reduction.
This control is handled by the investment banks both in a pre-
liminary and a subsequent manner. Hence we differentiate two types of
financial control - preliminary and subsequent, both being directed.
toward the same purpose.
Preliminary control involves the receipt and check of the docu-
mentary prerequisites for financing and. crediting (itemized. lists,
certificates on Form No. 6 and Form No. 3, credit limits and. so forth),
plan and operational documents (contract agreements, labor plans and
so forth), statistical and bookkeeping reports (wage payment certifi-
cates, certificates confirming the existence of credited. supplies and.
so forth), and. accounting documents (bills for completed. construction-
installation, geological exploration and other work, bills for purchased.
materials and equipment, letters of credit and. special accounts and so
forth).
As we have noted above, the receipt and check by the investment
banks of the basic prerequisites for financing -- capital investment
plans, financing plans, itemized lists -- are designed to insure the
utilization of funds according to the state's capital investment plan.
The receipt of certificates on Form 6 confirming the approval of the
technical designs and cost estimates and the check of the existence of
these documents at the construction site are designed to insure the
financing of work and outlays only for construction items that have
approved. designs and. cost estimates.
The planned utilization of funds is also the reason for the check
of contract agreements for construction-installation work and of Form
3 in case the construction is handled by the 1so-callef economic
method.
Bank control of bills and acts for completed construction-instal-
lation work, the granting of advances for the purchase of basic con-
struction materials and prefabricated parts and. sections, and control
of bills for the delivery of materials and. services rendered should
insure the proper and legitimate handling of transactions among clients
(purchasers), contractors and. suppliers.
On the other hand, the making of payments for completed construc-
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tion-installation work at the fixed. rates with overhead charged at the
established norms, preliminary control over the issuance of fund.s for
the payment of wages within the limits of the approved. funds and to
the extent that the work program has been completed., control over the
issuance of funds for the payment of salaries of administrative-execu-
tive personnel and. the payment of bills for materials and, equipment
delivered. and, services rendered to the construction project at current
prices, all these steps insure the projects' adherence to the estimated.
cost of construction and the fulfillment of the cost reduction plan.
Preliminary bank control, together with the check of the legitimacy
and the amounts of funds paid from the accounts of the financed projects
and the clearing accounts of contracting and geological organizations,
thus insure fulfillment of the key objective of financial control over
construction, and that is the utilization of funds according to plan
and. a reduction of construction costs.
Subsequent control involves an analysis and. check of all plans,
operational documents and reports received, by the banks, and aD
analysis of all periodic and annual statistical and bookkeeping reports,
as well as on-the-spot investigations of the economic operations of
construction projects.
Both types of control are closely linked, and. supplement one another.
The results of preliminary control (the uncovering of overexpendi-
tures of the wage fund or the administrative outlays, the existence of
bills for work completed on items not listed on the itemized, list or
lack cost estimates and so forth) will give the proper direction to
subsequent control work; on the other hand, conclusions drawn from an
analysis of reports from the credited. organizations can be used to
limit or withhold funds for certain types of outlays at the following
time of preliminary control.
In practice, both preliminary and subsequent control functions are
handled by a single employe or group (department).. Only in large
branches do separate departments or groups handle such functions as
the check of prices for materials and equipment or the check of acts
for completed construction-installation work.
The data obtained. in the course of subsequent control make it pos-
sible for the banks to become thoroughly familiar with the operations
of contracting organizations and construction projects, including spe-
cific aspects of their work.
In the course of this study of the operations, the banks must
check on the fulfillment of the state capital investment plan and the
plan for the inauguration of completed construction items, the ful-
fillment of the cost reduction plan and the financial condition of
individual projects and contracting organizations.
In addition to this analysis designed to study all aspects of the
economic and financial operations of construction organizations, the
banks also use the results of their control work in checking the opera-
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tional documents of their clients and estimating the indicators of the
financial operations of projects.
Control methods, such as subsequent control of wage payment certifi-
cates on the basis of reported data, control of the certificates con-
firming the existence of credited. supplies on the basis of balance
sheets, checking the indebtedness of contractors on advances against
their balance-sheet data, and so forth, constitute an organic and im-
portant part of the control work of the investment banks.
2. Organization of the Control Work on the Basis of Reported. Materials
All projects, construction-installation and geological organiza-
tions and their superior agencies are required to submit to the invest
ment banks statistical and bookkeeping reports, both periodically and
annually.
Both types of reports are drawn up in accordance with instructions
issued. by the Central Statistical Administration (TsSU) of the Council
of Ministers USSR and the Ministry of Finance USSR on the basis of the
statistical and bookkeeping records that must be kept by the projects.
Periodic reports on the construction of the main ministries must
cover the following points: fulfillment of the plans of capital invest-
ments, construction-installation work and the inauguration of completed
items (Forms Nos. 20-cc, 21-cc, 22-cc, 26-cc); the effect of certain
factors on the fulfillment of the construction-installation work program
(Form No. 25-cc "Report on the Utilization of Construction Machinery"
and Form No. 27 "Report on the Receipt and Consumption of Construction
Materials"); labor and wages (Forms Nos. 26-cc and 29-cc); cost of con-
struction (Form No. 28-cc); monthly balance sheet of capital investments
and. of the basic operations of contracting organizations (Forms Nos.
35-cc and 36-cc).
The annual report of projects and. construction organizations must
cover, in addition to the periodic topics, changes in the fixed capital,
profits and losses, and. the operations of auxiliary enterprises, and,
truck transportation and means of communications at the construction
site.
The reports received by the investment banks from the projects and
contracting organizations are then analyzed along various lines. In
using the reported. data in their current control work, the banks check
the certificates and, documents submitted by the projects, draw conclu-
sions regarding the progress of construction, its cost, the financial
status and turnover rate of the working capital, compare individual
indicators in various reports to check the records at the construction
site, draw up their conclusions and participate in annual meetings of
the auditing commissions of ministries and agencies, and. so forth.
This utilization of the reported data makes it possible for the
investment banks to study the condition of the projects, assess certain
operations and. expendituresin terms of the fulfillment of the plan, and
by imposing sanctions or offering incentives to affect the course of
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construction, the mobilization of internal resources and the elimination
of infractions in cost estimating, planning and. financial discipline.
Any analysis of the reported data is possible only if the appropriate
forms have been completely and. properly filled out. The banks must there-
fore check periodically on the submission and the proper execution of the
reports. A systematic struggle for high quality of reporting is also
the best way of insuring the proper keeping of records by the project
itself.
Of major importance is the statistical-economic processing of
the reported data, the keeping of tables for individual indicators of
the operations of projects and accumulating such indicators for a number
of years. The keeping of tables of indicators expressing the progress
of construction, the cost of the work and the financial position of the
projects facilitates the analytical work and makes it possible to get
the required data without additional work.
Analysis of the economic operations of projects on the basis of
their reported. data covers the following aspects:
(1) fulfillment of the plan of construction-installation work
and, other types of work and the inauguration of completed items;
(2) the effect on the fulfillment of the plan of the proper
organization of labor, the operations of the construction machinery
and the supply flow of basic construction materials;
(3) the cost of construction as a whole, by types of operations
and by outlay elements;
(4+) factors affecting the cost of construction;
(5) fulfillment of the financing plan of the project and. its
financial condition;
(6) the working capital, its turnover rate, the profitable-
ness and transactions of contracting organizations.
The operations of each construction project and. each contracting
and-geological organization are judged first of all in terms of the ful-
fillment of the state plan of capital investments, construction-instal-
lation work and other types of work. Therefore the analysis of opera-
tions starts with a study of the fulfillment of the plan.
For projects and construction organizations the plan sets the
annual volume of capital investments or construction work with a break-
down by types of work (construction, installation, equipment, installa-
tion of equipment, purchases and. other types of work); by purpose of
project (industrial, housing and so forth); by method of construction
(contracting, economic); by construction sites and by construction items.
The reports contain data on the fulfillment of the capital invest-
ment-plan with the above breakdown, and in the case of contractors
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with a breakdown by construction and installation work completed by the
contractor itself and. by subcontractors. This makes it possible to
assess the fulfillment of the plan as a whole and within its parts and
at the same time to determines which organizations fulfill and overful.-
fill their plans and which ones lag behind; whether secondary work is
being fulfilled at the expense of key items; or whether the plan is
being overfulfilled at the expense of the acquisition of equipment.
Assessment of the fulfillment of the plan of inaugurating completed
construction items yields the final result of the operations of con-
struction projects and is a major part of the analysis of the reported
data. Only after completed items have been put into operation does the
level of fixed capital rise and the output of production increase.
The reported data on the fulfillment of the plan of inaugurating
completed items must include data on the changes in the balance of in-
completed construction items that still await inauguration (data taken
from the audit sheet Form No. 35-cc).
The reported data on plan fulfillment are used by the banks in
their control work to verify the following data: the amount of con-
struction-installation work completed during the month; the wages paid
to workers; the fulfillment of the construction and inauguration plans;
the issuance of bonuses to administrative-executive personnel of pro-
jects and contracting organizations. These data are also used in the
calculation of the unused remainder of the cost estimate limit of cer-
tain construction items.
The fulfillment of the capital investment plan is affected by a
large number of factors related to the organization of the construction
work. However. the existing system of reporting on labor includes only
the main factors: the number of workers in basic and auxiliary con-
struction work; turnover of the labor force; an accounting of working
time; fulfillment of the output norms and. the plan for the average daily
output per worker in money terms.
Comparison of all these indicators with the plan indicators makes
it possible to determine the effect of labor organization on the ful-
fillment of the plan. These factors include: the number of workers
compared with the planned labor force; the actual output per worker
compared with the planned output; the number of days worked per worker
during the month; the total number of man-days, actual and planned., and
so forth.
Of major importance both in speeding and improving construction
and in fulfilling the plan is the mechanization of labor-consuming
operations, the introduction of the most modern types of machinery and
their proper utilization in construction. The periodic reports reflect
the degree of mechanization and the operations of the machines compared
with the plan. Analysis of data on the utilization of machinery en-
ables the banks to determine how the construction organizations are
fulfilling the instructions of the party and government of achieving
maximum mechanization and industrialization of construction methods.
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The supply of basic construction materials to the projects is
described in Form No. 27-cc, which lists the actual amount of materials
received and the consumption of materials and prefabricated parts com-
pared with the norms.
Another factor in the assessment of the operations of construction
projects is the fulfillment of the plan for the reduction of capital
construction costs, which is set in percent of the approved estimated
cost of construction.
The data in Form 28-cc make it possible to analyze the fulfillment
of the cost reduction plan both for the completed work as a whole and.
for individual parts.
However, a full assessment of the fulfillment of the cost reduc-
tion plan also requires analysis of outlays by elements (wages, mater-
ials, overhead., and so forth).
Data on the outlays for wages and salaries and on overhead ex-
penses are given in Forms Nos. 26-cc and 28-cc.
Outlays for wages are compared with the approved wage funds and
the volume of completed. construction work. This makes it possible to
uncover any absolute or relative overexpenditures or economies and to
determine the effect of these outlays on the cost of construction.
Overhead. outlays are compared with the norms corresponding to the
volume of completed construction work and. this makes it possible to
determine overexpenditures or economies, in particular for administra-
tive expenses, which make up the largest overhead.
As was stated in preceding chapters, the investment banks carry
out preliminary control of the estimated cost of production when issu-
ing funds for wages, paying bills for materials, equipment and so
forth. A continuation and organic part of this control function is
the analysis from the reported data of the actual outlays for con-
struction compared. with the estimated cost of the construction as a
whole and. its individual operations and outlay elements.
Such an analysis makes it possible to determine deviations from
the cost estimate, to make on-the-spot investigations of the reasons
for such deviations and to take appropriate measures in cooperation
with the projects and their superior agencies.
The reported. audit sheet lists the amounts received. by the pro-
ject in the way of financing and the disposition made of these funds.
The listed data can be used. to construct a table showing the relation-
ship between funds received. and expended, particularly in terms of the
completed. volume of work. Such a table when supplemented with planned.
indicators gives a clear picture of the fulfillment of the plan for the
mobilization of internal resources, both material and. monetary.
Study of the materials and monetary items of the audit also makes
it possible to judge how planning and. financial discipline was main-
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Special attention in the analysis of the audit must be devoted, to
the components and amount of working capital and its turnover rate.
Systematic control of the turnover rate of funds is a major part of the
control functions of the bank.
Study of the financial condition of the construction organizations
is one of the most important tasks of the control work of the investment
banks. Attention must be devoted particularly to the status and the
make-up of the working capital and. its turnover rate.
In participating in the national patriotic movement to speed. the
turnover rate of working capital, the contracting organizations have
pledged themselves to speed the turnover of their funds and thus re-
lease large amounts for the needs of the state.
The turnover rate of funds reflects the status of the supply re-
serves and the proper and timely handling of transactions. The audit
sheet lists the data necessary for any analysis of these aspects of the
operations of the contractors.
The audit sheet is also the basic document for a whole series of
bank control operations, such as checking the guaranteeing of loans
with material reserves, advances to contractors for the purchase of
construction materials and prefabricated. construction sections, and so
forth.
The annual audit is analyzed in the same manner, but in greater
detail and including the operations of auxiliary enterprises, trucking
and other communications. Additional reports list the status of the
fixed capital and profits or losses.
The results of the analysis of periodic and annual audits are used
by the banks both for operational control in the process of financing
and crediting construction projects and for subsequent on-the-spot
checks of the operation as a whole or of its parts.
The analytical data can be presented. in the following form: special
tables with appended comments; written report, including the results
of the study of the reported indicators; suggested.. measures designed to
eliminate any shortcomings, or other documents containing conclusions
and. suggestions.
The results of the analysis of reported data are also used by the
banks to raise questions regarding the progress and cost of construc-
tion with the appropriate superior agencies and local authorities.
The results of the analysis of the annual audits are drawn up in
the form of a detailed written report, since they serve as basic refer-
ence material for the annual. meeting of the auditing commissions.
The checking and. analysis of annual reports is a responsible and
laborious task that the investment banks must fulfill each year in
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assessing the operations of construction projects and. contracting or-
ganizations and in summarizing the results of their own control work.
3. Make-Up and. Organization of the Control Work on the Basis of Investi-
gations of Construction Projects and Contracting Organizations
The indicators listed. in periodic and annual reports encompass
the basic and most important aspects of the operations of projects and
contractors' However, such reports cannot provide an exhaustive ex-
planation of any deviations from the plan.
Detailed and specific study of the projects and verification of
the reports can be achieved only by on-the-spot investigations, which
are the most effective means of subsequent bank control.. Investigations
do not replace analysis of reports and are an independent financial
control method, supplementing the results of the analytical work.
Analysis of reports constitutes an essential part of the preliminary
work of on-the-spot investigations. Only as a result of such analysis
can the banks outline the aims of the impending on-the-spot investigation.
Planning documents submitted to the banks and entries in the
financing and clearing accounts are studied and generalized in the
course of the financing and. crediting process. This body of informa-
tion is supplemented by the periodic audits listing the progress of
construction, the inauguration of completed construction items, and
the cost and financial condition of construction.
The objective of the on-the-spot investigation depends on the con-
clusions derived from the analysis and generalization of the control
work data and the periodic audits.
An on-the-spot investigation must be contingent upon. a clear
and. specific formulation of the purpose of the investigation, derived
from the available data on the state of the construction project; a
program and working plan, stating what specific questions are to be
investigated., the amount of work involved. and. the time allotted; the
composition of the inspection group by occupations and. skills (econo-
mists, bookkeepers, engineers, and so forth); the time limit for the
investigation.
.The on-the-spot investigation involves the following operations:
checking the reported data by comparing them with the bookkeeping and
statistical records at the construction site or with the physical re-
sults (inspection of the work and so forth); study of operational
documents (correspondence and others); study of primary records; in-
spection and estimate of material reserves and installations; checking
and. recording of means of transportation and machinery at the project
site; talks with workers and administrative personnel designed. to obtain
facts that are not reflected. in records and. documents; checking of
clearing documents and. records from the point of view of the legitimacy
of the expenditures and their proper recording.
Materials and facts established in the course of the investigation
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must be confirmed. in the form of documents and acts signed by the respons-
ible persons. For any infraction of cost-estimate and financial dis-
cipline, the specific guilty parties must be identified, and the extent
of their responsibility determined.
In the course of their investigations of projects and. contracting
organizations, the investment banks must maintain close ties with public
and party organizations.
The investigative task is not limited merely to the uncovering of
shortcomings and infractions in the course of construction and its
financing. The investigators must also study the achievements of the
project in the financial field and, by analyzing them, apply the posi-
tive results to-the financial. operations of other projects.
We have stated, above that investigations, unlike analyses of
reports, deal chiefly with primary documents and. facts and thus sup-
plement and expand the analyses.
Investigations make it possible, in particular, to establish reasons
for wage overexpenditures. Such reasons may be:
(a) Payment for work that must be rejected, because of incorrect
design or improper supervision.
(b) Payment for idle time due to poor work organization (lack
of materials, power, transportation, tools; breakdowns and so forth).
(c) Payment in excess of the norm because of unusual working
conditions, overtime, use of highly-skilled labor for work that could,
be done by less skilled labor, and so forth).
(d) Infractions of wage norms and payment rates.
It follows that such reasons can be established only as a result
of the careful study of instructions given to the workers, the daily
work record and other documents, and through personal talks of the in-
vestigators with workers and. supervisors. The specific purpose of such
investigations is to work out specific recommendations designed to im-
prove the construction work and reduce its cost or study any advanced
working methods for application to other construction items. Each
investigation must therefore result in practical suggestions based on
all the data accumulated in the course of the analysis and. the investi-
gation.
The final stage of each investigation, and. consequently of a suc-
cessive series of analyses, is discussion of all the results with the
supervisors and workers of the construction project.
4. Use of the Analytical and Inspection Data for the Summary Analytical
Work of the Banks
The data obtained in the analysis of the periodic and annual re-
ports of projects and contractors and. in the course of investigations
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(both general and specific) are used mainly to work out measures designed
to improve the course of construction, reduce its cost and strengthen
its financial condition.
Depending on their importance, such suggestions are submitted. to
ministries, main administrations, the projects and contracting organiza-
tions themselves or to the local Soviet authorities.
The implementation of these recommendations is also supervised
directly by the banks. The analytical and investigative work can be
considered completed only after the suggestions have been implemented
and the original shortcomings have been removed..
The analytical data are also used. by the head. offices or branches
of the investment banks to summarize the operations of a certain branch
of the economy or of the banks' clientele as a whole. Data may be sum-
marized for a certain branch of the economy (by ministries, main admin-
istrations or central institutions) or for a certain topic (to work out
general problems of the economics of construction and its financing).
The data regarding the operations of projects and contractors that
the investment banks accumulate in the course of time serve as the
basis for recommendations to the government designed to improve the state
of construction and its financing and to improve the financial manage-
ment of construction and contracting organizations.
Coordination of the operations of individual bank offices with re-
gard. to their analytical work is achieved in quarterly summary plans
that outline the checking and. investigative work to be performed. in
projects or groups of projects.
This analytical work, when performed according to a combined. plan
within a fixed time limit, yields valuable data for assessing the state
of the construction industry and its parts.
Independently of such over.-all coordination, individual bank
branches and, oblast offices may also work out their own summaries and
recommendations for presentation to the local Soviet authorities.
This economic summarizing work, using thedata of individual pro-
jects and contracting organizations, is performed in the investment
banks by the planning and. economic departments if it applies to general
construction and. financing problems, and by the industrial departments
if it applies to specific branches of the economy.
5. Financial Incentives and Sanctions
The investment banks have been given the right by. law to reward.
well-operating projects and construction organizations and impose
sanctions on organizations guilty of infractions of financial d.is-
cipline and. mismanagement in construction.
Such rewards and sanctions must not be confused. with the banks'
refusal to grant certain funds or withholding funds for certain types
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of outlays as a result of the exhaustion of the appropriated amounts,
the failure to meet financing requirements and so forth.
The very complexity of the study of all aspects of the operations
of projects that must precede the granting of incentives or the imposi-
tion of sanctions gives special significance to the analytical and,
investigative work of the investment banks.
Before any financial incentives can be granted to projects and,
contracting organizations, the latter must have: fulfilled and over-
fulfilled the capital investment plan in terms of volume; fulfilled
the plan for the reduction of construction costs; properly organized.
their financial operations.
Incentives for good work may take the following forms:
Projects may be given the right upon overfulfillment of the
quarterly plan of obtaining financing in excess of the quarterly plan,
though still within the annual appropriations, and of obtaining short-
term loans at the expense of impending payments of their own invest-
ment contributions when guaranteed by their main administrations.
Construction organizations may, in accordance with their needs
as a result of the overfulfillment of the plan, be granted higher
short-term credit limits for the seasonal purchase of construction
materials made necessary by seasonal transportation conditions or a
seasonal construction peak.
Interest of short-term loans may be cut in half.
Projects that overfulfill their plan thus obtain funds to cover
their additional outlays. Similarly, contractors are paid for com-
pleted. work from additional financing sources, and greater needs for
construction materials are met by additional favorable credit terms.
The heads of the investment banks and. municipal banks have the
right to stop the financing of projects that have been found. guilty
of mismanagement in the form of overexpenditures in excess of the
cost estimates, large and systematic overexpenditures on certain types
of outlays and. overstocking of supplies.
Mismanagement can be uncovered and clearly demonstrated. only as
a result of thorough analysis and. on-the-spot investigation.
Investment banks may not impose sanctions merely on the basis of
their analysis of records without backing up their conclusion through
an on-the-spot investigation.
A ten-day notice of any impending sanctions must be given to the
superior agency of the construction project. The purpose of the ten-
day warning is to enable the head of the superior agency to take
immediate remedial measures and. thus avoid the sarnctions.
The notice of impending sanctions must contain the grounds for
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that step and outline the measures that the bank regards as essential
for the elimination of the mismanagement,
Sanctions may be removed. and financing resumed. only upon the
receipt by the bank from the superior agency of a detailed plan and
specific measures designed. to eliminate the mismanagement.
Depending on the seriousness of the mismanagement, the banks at
the time of the imposition of sanctions so inform the local party
and Soviet authorities, and if necessary call for court action against
the guilty parties.
Both rewards and sanctions imposed by the investment banks must
be formulated. as an order listing all the circumstances and. reasons
that led to their imposition.
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RELATIONSHIPS BETWEEN THE LONG-TERM I:NVESTMLIVT BANES AND THE STATE BANK.
MUTUAL SERVICES AMONG THE LONG-TERM INVE9111ENT BANKS
1. Distribution of Clearing and Control Functions between the State
Bank and the Long-Term Investment Banks
Branches of the investment banks are found only in areas of con-
centrated capital construction. Some of the enterprises, organiza-
tions and collective farms engaged in capital construction must there-
fore be financed and. credited through the State Bank by means of
instructions issued by the investment banks.
The investment banks have agreed to cooperate with one another.
On the basis of that agreement the offices of one bank finance the
clientele of another bank upon instruction. However, this type of
cooperation has not become widespread. and. most of the transactions of
the investment banks in areas without investment bank branches are
handled through the State Bank agencies.
There are three types of relationships between the State Bank
and, the investment banks.
In a place that has an investment bank branch, the State Bank
office opens a correspondence account for the funds of the given
investment bank branch. The State Bank then handles all cash trans-
actions and clearing operations affecting the correspondence ac-
counts of the investment banks (except the municipal banks). The
clearing operations of the organizations financed and credited by the
investment banks and financial control of these organizations are
however handled by the investment banks themselves.
In places that have no investment bank branches but do have
agents or inspection groups of investment banks, the State Bank
handles both cash and clearing transactions of the clients of the
investment banks. However, both preliminary and subsequent control
are handled. by the investment bank agents or inspection groups.
In places that have neither investment bank branches nor agents
or inspection groups, the State Bank offices handles not only cash
and clearing transactions of the investment bank clients, but also
part of the preliminary and. subsequent control functions.
The State Bank branches handle the nonrepayable financing of
the capital investments of stale enterprises on instructions of the
investment banks, as follows: cash and clearing transactions upon
presentation of the bills of the financed, organizations; subsequent
control at the time the bills of these organizations are submitted
for payment; certain subsequent control functions, when the required
check relates to the responsibilities of the State Bank offices.
The State Bank offices do not carry out control in the sense of
investment rank control, especially as regard.s the analysis of re-
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ports submitted, by the clients and on-the-spot investigations. That
part of the work is still handled by the appropriate investment bank
branches.
Nor is preliminary control handled to the fullest extent by the
State Bank. Therefore the investment bank branches that issue pay-
ment instructions to the State Bank offices are still responsible
for a check of the State Bank operations insofar as they relate to
the financing and crediting of investment bank clients and must ren-
der the necessary assistance in matters of control.
2. Collection of the Investment Contributions of State Enterprises
and Organizations
The contributions of organizations that are being financed through
State Bank offices on instructions of the investment banks are paid
directly into subcorrespondence accounts of the investment banks within
the limits of the financing plans.
The organizations must submit to the State Bank office monthly
statements containing the amount of the amortization and profits.
These statements are made out in duplicate, one copy going to the
investment bank and the other to the State Bank. The statement gives
the State Bank the right to ask for forcible payment of the amortiza-
tion and profit deductions in case of overdue payments.
In the same way the State Bank is able to insure the scheduled.
payment of other planned investment contributions derived by the
economic organizations from the sale of surplus property, the sale
of incidental production of minerals and so forth.
Also credited to the subcorrespondence accounts of the economic
organizations are appropriations from the local budget and funds re-
covered, from debtors and. from the sale of supplies.
All other fund.s, including funds in excess of the amounts listed
in the investment bank instructions (according to the financial plan),
are transferred to the investment banks and are not credited to the
accounts of the economic organizations.
3. State Bank Control Procedures and Forms Used in Nonrepayable
Financing on Instructions of the Investment Banks
The State Bank office opens a so-called subcorrespondence account
to each organization financed, on instructions of the investment banks.
This account contains the funds allocated to the economic organization
by the financing plan.
Financing from thesubcorrespondence account begins by order of
the investment bank. It is contingent upon receipt of the following
prerequisite documents: (1) a copy of the general cost estimate or,
in appropriate cases, copies of the cost estimates for individual
construction items; (2) the certificate confirming approval of the
technical designs and their cost estimates or, when appropriate, the
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preliminary cost estimates; (3) the itemized list. The State Bank
offices check these documents only with respect to form and complete-
ness and then forward them to the investment banks.
The investment banks check these documents thoroughly as if they
handled the financing of the projects directly.
In the case of contracted. construction work, the State Bank of-
fices must get a copy of the annual contract agreements and any
special contract conditions plus a list of the contracted work stat-
ing the volume of work for each item in money terms and the unit
rates of the approved cost estimate.
The contract agreements and any special conditions are forwarded
to the investment banks for a check and analysis, while the State Bank
retains the work list and the unit rates for control purposes.
On the basis of the contract agreements, the State Bank offices
issue advances to the contractors for the purchase of construction
materials and prefabricated construction parts and sections. However,
the State Bank does not open any special advance account, and instead
credits the advance to the contractor's regular clearing account.
For purposes of control. of the disposition made of the advance,
the State Bank makes use of a certificate submitted by the client
project, listing the amount of contracted construction work, the
amount of the advance (in percent and in absolute terms) and any out-
standing indebtedness of the contractor on previous advances. A
record of the amounts paid out is then kept by the State Bank in a
special file.
Bills for completed construction-installation work are paid by
the State Bank in the usual manner.
The State Bank offices must verify whether the work included in
the acceptance acts had been envisaged in the contracted work list
appended. to the contracted agreement and whether the cost of the
work was based on the unit rates of the cost estimates, in the case
of construction work, and. on current rate books, in the case of instal-
lation work. The State Bank further checks whether amounts paid on
intermediate bills have been deducted in the bill that accompanies
the acceptance acts, and whether the appropriate partial return pay-
ment of the advance has also been withheld. All other control func-
tions are handled by the investment banks on the basis of the
documents forwarded by the State Bank and the periodic reports re-
ceived from the clients. Any operational orders resulting from the
investment bank check are then communicated. to the State Bank for
execution.
In the case of construction projects using the so-called economic
method, the investment bank determines the financing method to be used
(on the basis of individual outlay elements or on the basis of work
completed) and accordingly informs the State Bank office.
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When financing is based on the work completed by the project, the
State Bank opens a subcorrespondence account to the director of the
enterprise under construction or the existing enterprise and a sub-
clearing account to the chief of construction (or of the capital con-
struction department). The titleholders of these two accounts are
responsible for their respective operations and all bills presented
for payment to the State Bank must indicate the account from which
payment is to be made.
The State Bank offices are also responsible for the proper pay-
ment of funds from the subcorrespondence and subclearing accounts of
projects that are being financed on the basis of work completed.
When financing of such projects is approved, the State Bank gets
a list of the work (in duplicate) to be handled by the economic method,
which must be signed by the director of the enterprise (existing or
under construction) and by the chief of construction (or the capital
construction department) and must be accompanied by the unit rates
given in the approved. cost estimate. The work list and the unit rates
furnish the basis for transactions relating to completed work between
the director and. the chief of construction and for control of these
transactions on the part of the State Bank.
The second copy of the work list is forwarded to the investment
bank for analysis and check against other documents that guide the
financing of the given project. Any results of that check are com-
municated to the State Bank for its information and appropriate
action.
When making payment for completed work against acts submitted by
the chief of construction, the State Bank office checks the work
against the planned work list and verifies the cost of the work on the
basis of the unit rates for construction and the installation book
rates.
The State Bank gives the chief of construction an advance for
the creation of working capital on instructions from the director
of the enterprise and without checking the calculations.
The verification of the amount of the advance and all p?elimin-
ary and subsequent control functions are handled by the investment
banks.
In the case of projects that are being financed on the basis of
individual outlay elements, the State Bank uses the subcorrespondence
account to pay for materials, equipment and other supplies and for the
wages and salaries of workers and employes.
When making payments from the subcorrespondence accounts of con-
struction projects, irrespective of the method of financing, the State
Bank does carry out some preliminary control over individual opera-
tions. For example, bills for construction materials and equipment
are paid. by the State Bank only upon verification of prices and sur-
charges.
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The investment banks are expected to supply the State Bank with
price books for basic materials and equipment and with data on approved.
surcharges. In addition, the State Bank offices are expected to obtain
price and. rate books for materials that are being supplied locally and
for which prices are set on a local basis.
The State Bank offices verify the prices and. surcharges of ma-
terials and equipment only in the locality of the purchaser.
In making payment to construction organizations for wages, the
State Bank offices are guided by approved labor plans, which must
be supplied by the organizations in duplicate. One copy is forwarded
by the State Bank to the investment bank, which is responsible for the
analysis of labor plans. In the way of control over the issuance of
funds for wages, the State Bank offices keep a special record of the
approved, wage fund. and the amounts actually paid for wages. Part of
the control functions of the State Bank are periodic on-the-spot checks
of the wage payment certificates from the point of view of the correct-
ness of the amounts and their agreement with the bookkeeping data. In
addition the State Bank also checks systematically on the specified
utilization of any cash payments.
The State Bank informs the investment banks of the results of
its control measures and at the same time takes remedial measures to
eliminate any infractions.
The State Bank offices carry out a number of other control measures
of construction project transactions, whether of the contract or the
economic type. When paying for geological exploration work, for ex-
ample, the banks see to it that the outlays allocated to this purpose
do not exceed the appropriations shown in the annual itemized list.
When paying for administrative outlays and, the maintenance of the
office of the director of the enterprise under construction, the banks
see to it that such outlays do not exceed the annual limit. For pur-
poses of control, the projects are expected to indicate on the reverse
side of their payment instructions or bank checks the unused balance
of the limit or of the appropriation in the itemized. list. In the
case of out-of-town transactions, the project must submit a separate
certificate of the unused. balance within the time :Limit allowed for
acceptance.
Contracted. geological exploration work is paid by the State Bank
on submission of the annual contract agreement for such work and the
appended. approved payment rates. Geological work is paid for on the
basis of special acceptance acts calculated at the contracted. unit
rates. Copies of the contract agreements with the unit rates are for-
warded to the investment banks for checking and analysis.
The State Bank offices are also responsible for transactions
between the basic operations of an enterprise and its construction
project.
Projects that are being financed, by order of Torgbank can get
advances for minor outlays from the State Bank in the form of cash
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(the amount of such cash advances being at the discretion of the head
of the State Bank office. At least once a month, such projects must
submit a report signed by the chief of construction and the chief
bookkeeper, accounting for the expenditure of such cash advances.
On the basis of these reports, the State Bank determines whether the
expenditures were justified and whether the correct prices were paid
for purchased materials.
In the case of the construction subdivisions of trusts that use
the mutual clearing system, the State Bank upon notification by the
appropriate investment bank transfers to it any funds to be credited
to the account of the mutual clearing bureau.
The State Bank offices are expected to keep the investment banks
informed. of any infractions of financial discipline and mismanagement
at the construction projects.
4-. The Credit Operations of State Bank on Instructions of the Invest-
ment Banks.
All investment banks have in common the crediting of contracting
construction-installation organizations for the purchase of construc-
tion materials, fuel and fodder for seasonal needs and for capital
repairs of construction machinery.
The State Bank offices take over these operations on instructions
of the investment banks and within the limits communicated by these
banks. Without the limit information, the State Bank can grant only
guaranteed credit within the terms outlined in Chapter IX.
The municipal banks can instruct the State Bank to grant short-
term loans to residential-municipal organizations and enterprises for
the seasonal purchase of supplies and so forth. These loans are grant-
ed from funds transferred for that purpose from the municipal banks to
the subcorrespondence account and are handled like the short-term
loans to contractors.
. One of the most common types of credit granted by the State Bank
on instructions from the head office of Prombank is long-term credit to
rayon and oblast industrial enterprises for expansion and organization
of the production of consumer goods, food, construction materials and
fuel (according to the procedure described in Chapter Xv)o
State Bank carries out subsequent control over the specified
utilization of such loans, checks on the fulfillment of the construc-
tion plan and the organization of production within the scheduled time
limit and in accordance with the approved designs and estimates dos-
sier, and so forth.
The State Bank offices are expected to investigate the credited
organizations and in case of mismanagement take their own remedial
measures without.having to inform the appropriate branch of Prombank.
On instructions from the municipal banks, the State Bank grants
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loans for individual home building and for capital repairs of individ-
ual homes. Such loans are granted and controlled in the manner describ-
ed in Chapter XVIII. Al]. loans must be formulated in the form of pay-
ment obligations made out by the borrowers in the name of the municipal
banks.
Long-term loans for capital investments or for working dapital
are granted on instructions from Torgbank from the subcorresporidence
accounts against payment obligations drawn up in duplicate in the name
of Torgbank.
The widest credit operations are handled by the State Bank on
instructions of Sel'khozbank.
On instructions of Sel''khozbank:, the State Bank offices grant
short-term loans to the state farms of the Ministries of Agriculture,
Meat and Dairy Industry and Food Industry, issue loans to individuals
for the building and reconstruction of homes and the purchase of live-
stock, and also grant long-term loans to collective farms.
The short-term crediting of state farms is handled by State Bank
in the same manner as by S"el'khozbank. Loans are granted to cover the
time gaps in the utilization of amortization deductions, outlays for
the formation of herds and preparation for the coming year.
Home loans to individuals in rural areas are granted by the State
Bank on instructions from Sel'khozbank in the same manner as in the
case of home loans to industrial workers on instructions from the
local municipal 'banks.
The State Bank offices are responsible for operational control
over the specified utilization of home loans. In case of credit in-
fractions, the State Bank may stop credit and recover previous parts
of the loan at 12 percent annual interest.
The State Bank grants long-term loans to collective farms for the
same undertakings and according to the same procedure as Sel'khozbank
itself. In addition to approving and issuing the loans, the State Bank
offices also draw up the long-term credit plans for the collective
farms in their areas.
The State Bank grants loans for, the construction of hydroelectric
stations, melioration and so forth involving more than one farm on the
basis of the agreement concluded among the participating farms.
In some cases, the bank grants short-term loans to collective
farms to bridge the seasonal gaps between the accumulation of their
own funds and their capital outlays. Such short-term loans are granted
within the total limits of the long-term loans.
The State Bank offices carry out systematic and subsequent control
over the specified. utilization of loans granted. to farms. If the loans
are found. to have been misused., further credit is withheld and is not
resumed until the infractions have been eliminated. The farm management
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and the rayon Soviet must be given ten days' notice of any impending
withholding of credit. Loans are controlled on the basis of the
quarterly reports submitted by the, collective farms and through on-the-
spot investigations.
All operations carried out on instructions of Sel'khozbank are
recorded in a special section (XIV) of the State Bank balance sheet.
2. The Accumulation of Funds of Cooperatives and. of the Money Part of
the Indivisible Funds of Collective Farms.
Capital investments of cooperative organizations are financed al-
most entirely in the form of long-term loans from the contributions
of the cooperative systems themselves.
The long-term credit funds of the cooperative systems are made
up of the contributions of the lower cooperative organizations and.
their collection is the responsibility of the branches of Torgbank.
However, the State Bank plays a major role in-the collection.
Funds are transferred to the long-term credit funds by the State
Bank offices on noncancelable payment orders of the payers themselves
or on payment instructions of their superior agencies.
The State Bank offices accumulate the money part of the indivis-
ible fund of collective farms on the same basis as the branches of Sel'-
khozbanka
6. State Bank Reports to the Investment Banks on the Fulfillment of
Instructions.
After having fulfilled the instructions of the investment banks,
the State Bank offices must submit bookkeeping and statistical reports
to the banks.
The branches of Prombank, Torgbank and the municipal banks are
expected to receive from the State Bank offices extracts from their
subcorrespondence accounts. The branches of Prombank, moreover, must
receive.- monthly telegraphic reports on the changes in the accounts
and, on the balance at the end of the month; a monthly report (Form
No. 010) on the utilization of the wage fund. for above-limit projects,
based on the monthly wage payment certificate submitted by the pro-
jects themselves.
The branches of Sel'khozbank are expected to receive a monthly
report on Section XIV of the balance sheet (which includes all opera-
tions transacted on instruction from Sel'khozbank) and a statistical
report by types of operations.
The State Bank offices are responsible for improper issuance of
funds from the accounts of the investment banks.
Correspondence Relationships the Investment Banks.
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On the basis of existing agreement, the branches of the investment
banks may handle the operations of one another. Such an agreement exists
in particular between Prombank and. Tsekombank.
Unlike the State Bank offices, the investment banks that handle the
affairs of other banks take care not only for the clearing operations
and preliminary control, but on instruction also carry out analysis of
reports and on-the-spot investigations of projects and construction
organizations.
The bank that ordered the financing or crediting of any particular
project or organization is expected to send. to the executive bank the
appropriate extracts from the itemized list (capital investment plan)
and. the financing plan.
All funds allocated according to the financing plan either from
the budget or from the industry's centralized, contributions are trans-
ferred to the executive bank.
The accumulation of local investment contributions is the responsi-
bility of the bank that orders the financing.
The branches of the investment banks are responsible for the im-
proper issuance of funds in the course of operations handled for another
bank.
The bank that issues the financing instructions has the right to
investigate the work of the executive bank insofar as it concerns its
own operations.
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Chapter I. Capital Investment and the Fixed Capital of the National
Economy of the USSR
1. General Characteristics of Capital Investment in the Economy
of the USSR
2. Capital Investment and Fixed Capital of the National Economy
of the USSR During the Five-Year Plans
3. Capital Investments and Fixed Capital of the National Economy
of the USSR during the Great Patriotic War
4. Capital Investments and Fixed Capital of the National Economy
of the USSR during the First Postwar Five-Year Plan
5. Organizational Forms of Construction and. the Development of
the Construction Industry in the USSR
Chapter II. The Chief Tasks and Methods of Financial Control Over Con-
struction. Organization of Long-Term Investment Banks, Their
Structure and Functions
1. Separate Financing and Crediting of Investments in Fixed and
Working Capital of the National Economy of the USSR
2. Financing and Crediting of Capital Investments Before the
Credit Reform of 1930-1931
3. Organization of Long-Term Investment Banks in the People's
Commissariat of Finance of the USSR.
1. Control Work of the Long-Term Investment Banks during the
Period of the Great Patriotic War
5. The Long-Term Investment Banks during the Postwar Five-Year
Plan
6. The Organizational Structure of the Investment Banks
Chapter III. The Method of Planning Capital Investments and the Control
Functions of Banks. The Formal Approval of Financing
1. The Method. of Making Up and Approving Capital Investment Plans.
2. The Method of Formal Approval of Project Financing
Chapter IV. Bank Control Over the Designs and Estimates Dossier and. the
Estimated Cost of the Construction Project
1. The Importance of Designs and. Estimates in Capital Construction
and, the Role of Bank Control
2. Make-up and Method of Approval of the Designs and Estimates
Dossier
3. Bank Control over the Provision of Projects with Designs and
Estimates
4. Bank Control over the Quality of the Cost Estimates Dossier
5. Bank Control over Observance of the Cost Estimate Limit of
Financing
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Chapter V. Sources of Financing and Crediting Capital Investments
1. Funds for Capital Investments in a Socialist Economy
2. The Sources for Financing Capital Investments in State Enter-
prises and Organizations.
3. The Method Used. by State Economic Organizations to Deposit
Funds for Capital Investments and the Nature of Bank Control
4. Sources of Capital Investments in Collective Farms
5. The Sources for the Long-Term Crediting of Capital Investments
of Cooperatives
Chapter VI. The Organization of Transactions in Construction
1. General Principles and Basic Forms of the Present System of
Accounts in the National Economy
2. Characteristics of Capital Investment Transactions
3. Transactions Involving Completed. Construction and. Installa-
tion Work and Other Types of Capital Work
4. Transactions Between the Construction Office (or the Capital
Construction Department) and the Basic Operations of an
Enterprise
5. Single and Periodic Settlements of Mutual Claims
6. The Organization of Settlements through the Mutual Clearing
Bureaus Attached, to the Administration of Construction-
Installation Trusts
7. Organization of Transactions and the Strengthening of Pay-
ments Discipline of Contracting Construction Organizations
and. Projects
Chapter VII. The Working Capital of Contracting Construction-Installa-
tion Organizations and Construction Projects
1. Structure of the Working Assets of Contracting Organizations
2. Method of Standardizing the Working Assets of Contracting
Organizations
3. Financing Sources of the Standardized. Working Assets of Con-
tracting Construction and Installation Organizations
4. Calculation of the Turnover Rate of Funds of Contracting
Organizations
5. The Working Assets of Construction Projects
6. The Financing Sources of the Working Assets of Construction
Projects
7. The Plan of Mobilizing Internal Resources
8. Bank Control over the Fulfillment of Plans for the Mobiliza-
tion of Internal Resources
Chapter VIII. Financing of Construction Carried Out by the Contracting
Method
1. Organization of Contracted Construction and. the Terms of the
Contract
2. The Method. of Financing Contracted Construction
3. Bank Control over the Specific Utilization and Guarantee of
Advances
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4. Bank Control over Correct Payment for Construction-Installa-
tion Work
5. Bank Control over the Financial and Economic Operations of
Contractors
Chapter IX. Short-Term Crediting of Contracting organizations and Pro-
jects
1. Basic Short-Term Credit Items
2. The Method of Planning, Granting and Extinguishing Short-Term
Loans
3. Credit for the Seasonal Deliveries of Construction Materials,
Fodder and Fuel
4+. Credit for the Capital Repair of Construction Machinery and
Transportation
5. Loans Granted Against Clearing Documents en Route
6. Credit for the Payment of Supplier Bills Guaranteed by the
Bank
7. Other Credits Granted to Contracting Organizations
8. Short-Term Credits Granted to Client Projects
Chapter X. The Financing of Construction Under the So-Called Economic
Method.
1. Financing in Accordance with Completed Work
2. The Formation of the Working Capital Granted to the Chief of
Construction
3. Financing on the Basis of Individual Outlays
Chapter XI. Bank Control Over the Expenditure of the Wage Fund and
Overhead Outlays
1. The Importance of Control over the Cost of Construction in
Issuing Funds
2. The Procedure of Planning the Wage Fund in Construction
3. Bank Control over the Expenditure of the Wage Fund
4. Subsequent Bank Control over the Issuing of Funds for the
Payment of Wages
5. Overhead. Outlays in Construction
6, Control of Administrative-Economic Outlays
Chapter XII. Bank Control of the Prices of Materials and Equipment
1. The Importance of Bank Control Over the Observances of Prices
2. The Procedure of Setting Prices for Construction Materials and
Equipment
3. The Rates of Distributing and Supply Organizations
1. Checking the Prices of Materials and Equipment
Chapter XIII. Financing of Geological Prospecting Operations
Chapter XIV. Financing Capital Repairs
1. The Importance of Capital Repairs
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2. The Procedure of Planning Outlays for Capital Repairs
3. The Procedure of Financing Outlays for Capital Repairs
4. Bank Control of the Financing of Outlays for Capital Repairs
Chapter XV. The Long-Term Crediting of the Capital. Investments of State
Enterprises
1. The Long-Term Crediting of Rayon and Oblast Industries
2. The tong-Term Crediting of State Farms
3. Lois-Term Crediting of Local Soviets for Housing Repairs
1. Long-Term Crediting of the Construction of Small-Capacity
Hydroelectric Stations
Chapter XVI. The Long-Term Crediting of Collective Farms
1. The role of Agricultural Credit in the Organizational and
Economic Strengthening of Collective Farms
2. Basic Principles of the Long-Term Productive Crediting of
Collective Farms
3. Planning of the Long-Term Productive Crediting of Collective
Farms
4. Farm Crediting for Animal Husbandry
5. Farm Crediting for Electrification
6. Farm Crediting for Melioration, Irrigation and. Afforestation
7. Credit for Crop Raising, Fertilizer Purchases and. Other Needs
8. Selfkhozbank Control of Loan Payments
9. Sel'khozbank Control over the Proper Utilization of the Loans
and. Assistance to the farms in their Financial Matters
Chapter XVII. Long-Term Crediting of Cooperative organizations
1. Long-Term Crediting of the Capital Investments of Producer
and Veteran Cooperatives
2. Crediting of Producer and Veteran Cooperatives for the Re-
plenishment of Their Working Capital and Fixed Capital
3. Crediting of Capital Investments by Consumer Cooperatives
Chapter XVIII. Long-Term Crediting of Individual Home Construction and
Other Undertakings
1. Crediting Individual Home Construction of Workers and Employes
of Enterprises
2. The Procedure of Granting Credit to Enterprises for Construc-
tion of Homes to be Sold to Workers and Employes
3. Crediting Individual Home Construction and Capital Repairs at
the Expense of the Credit of Local Soviets
4. Loans Granted to Workers for the Purchase of Livestock
5. Loans to the Rural Population for the Buildings of Homes and
Livestock Purchases
Chapter XIX. The Financial and Credit Plans of the Long-Term Investment
Banks
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1. General Characteristics of the Financial and. Credit Plans of
the Long-Term Investment Banks
2. The Financial-Credit Plan of Sel'khozbank
3. The Credit Plan of Torgbank
4. The Credit Plan of Tsekombank
5. The Financial-Credit Plan of Prombank
6. Bank Control Over the Fulfillment of the Financial-Credit
Plans
Chapter XX. Organization of the Control Work of the Investment Banks.
Financial Incentives and. Sanctions
1. General Tasks of Bank Control Work
2. Organization of the Control Work on the Basis of Reported.
Materials
3. Make-Up and Organization of the Control Work on the Basis of
Investigations of Construction Pr.Qj-ects and. Contracting Or-
gani zations
4. Use of the Analytical and. Inspection Data for the Summary
Analytical Work of the Banks
5. Financial Incentives and Sanctions
Chapter XXI. Relationships Between the Long-Term Investment Banks and
the State Bank. Mutual Services Among the Long-Term Investment
Banks
1. Distribution of Clearing and. Control Functions between the
State Bank and. the Long-Term Investment Banks
2. Collection of the Investment Contributions of State Enter-
prises and Organizations
3. State Bank Control Procedures and Forms Used. in Nonrepayable
Financing on Instructions of the Investment Banks
4. The Credit Operations of State Bank on Instructions of the
Investment Banks
5. The Accumulation of Funds of Cooperatives and of the Money
Part of the Indivisible Funds of Collective Farms
6. State Bank Reports to the Investment Banks on the Fulfill-
ment of Instructions
7. Correspond.ence Relationships Among the Investment Banks
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