JPRS ID: 8319 TRANSLATIONS ON EASTERN EUROPE AND ECONOMIC AND INDUSTRIAL AFFAIRS

• Document Type: CREST
• Collection: JPRS
• Document Number (FOIA) /ESDN (CREST): CIA-RDP82-00850R000100030022-3
• Release Decision: RIF
• Original Classification: U
• Document Page Count: 29
• Document Creation Date: November 1, 2016
• Sequence Number: 22
• Content Type: REPORTS

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' ~ FIF ~

8~ MARCH i979 C FOUO 4179 ~ i OF i
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JPRS L/8319
8 March 1975!
~ ~
TRANSLATI0~1S ON EASTEftN EUROPE '
ECONOMIC Af~D INDUSTRIAL AFFAIRS ~ S r
- CFOUO 4/79)
U. S. JOINT PUBLIC~?,TIONS RESEARCH SERVICE
r
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111dLI0GRAPHIC OA1'A . Nepote No, y J. 11eci ient'r Accc~~idn No.
~ s~,~~r JrRS L/8 ~ 19 n ,
. itc�n utuc
~ epoct �te
_ TItANSLA'I'T~NS ON EA5Z'CRN ~UItOPC -~CONOMIC ANU INUUSTitIAL 8 March 19 7~
AFFAIRS, (~'OUO 4/79) 6' M~
7. Author(s) 8. Pertorming Org~niz~tion Ilept.
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JPRS L/ 8 31.9 =
8 Marah ~.9 79
' TRANSLATIONS ON EASTERN EUROPE
. ECONOMI C AND INDUSTRIAL AFFAI RS
(FOUO 4/79)
CON7ENTS PAGE
' CZECHOSLOVAKIA -
VHJ Organization, Management Development Described
(Antonin Stanek; PODNIKOVA ORGANIZACE, No 10, 1978)..... 1
Khozraschet and Capital Investment Financing Policy
- Discussed
(Michal Pancak; EKONOMICKY CASOPIS, No lq 1978)......... 10
� a - [III - EE - 64 FOUO]
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~on orrrr,int. usL ortLY
CZCCHOSLOVAKIA
VHJ ORGANIZATION, MANAGEMENT DEVEI,OPMENT D~SCRIBED
/
, Prague PODNIKOVA ORCANIZACE in Czech No 10, 1978 pp 443-446
[Article by En~r Antonin Stanek: "Past Development of Che VHJ Organiza-
eion and Comprehensive Management"]
[Text] The process of production concentration is relaCed to the develop-
ment of productive forces and to the corresponding level of division of
labor in society. The ob~ective developmental tendency toward increasing -
production concentration is reflected in the integration processes which
consist in grouping of enterprises inCo large economic compl~;;~~ with
unified managemenr,. F'rom the standpoint of the economy as a whole, the
purpose of grouping is to embrace individual productions and all related
and supporting te;,hnical-economic activities. Production controlled by
individual enterprises so far as put under unified management within the
economic productton complex. �
In integrational grouping of enterprises into larger units, production
concentration is achieved essentially in two ways:
- --through horizonCal combination which is a supraenterprise integration
of enterprises engaged in identical or similar production based essen-
tially on khe same technology;
--tlirough ver~ical combination which is a supraenterprise integration of
enterprises engaged in dissimilar, but related production with regard to
Einal products. These enterprises are usually ir.tegrat~ed from the stand-
point of and around production which represents the foca:. ~oint of produc-
tion within the entire integration.
Horizontal concentration, on the one hand, economy by suppliers (favorable -
conditions are created for effective productio:~~ specialization), while, on
tlie other hand it frequently causes irrationzl co4ts for the customers -
(violation of production and contractual discipline by the suppliers, trans-
portation costs and maintenar.ce of inventories). The increase in norizontal
- production concentration forces the integration in question to strengthen
and exnand supplier-customer relations with the enterprises of other
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ro~t orr~crnL usc: orrLY
integratiotts. T'or the sake of b~~lancing demand witli supply, these suppli~r-
- c.uetomer relations must easenCially be centr~lly controlled.
Vertical concentration m~kea optimum ~,~se of the ~~tdvantages of production
specialization through Che division ~~f prociuction programs among ~11 pro-
ducCion units so Chat Che production prnces,g evolves smoothly along the
vertical nxis wiehin the entire integraCior:, The inr.re~~se in verCical _
producCion concenCration cons~lidaCes and increas~s division of labor -
within inCegr~Ced enterprises and reducea the number both of economic
links between enCerprises of different. integrated groupings and centrally
controlled balances. ~
The planned establishment of large ecnnomic production un.its (supraenter-
prise organisms) in the socialice counrries h.~s been the fundamenCal fea- -
ture of the orgattizational cievelopment of thc~ production-technical base
in ind~istry from the end of the 1950's. Thr pl.~~nning of production con-
centraCion and inte~ration processes is the manifestation of the ob~ective
necessity of effective use of socialist social ownership of the means of
production.
Attention in sociatist countries concentrated on forms of integration -
which would create the best possiUle prerequisites For enactment of im-
portant measures within tt~e economic reforms desi~ne~l to Strengthen cen- _
tral planned management and to increase ef�iciency of industrial produc-
tion. At the preRent time, various forms of inte~ration exist which are
due to the attained level of producrion concentration and general level
~f management of respective sectoes and branches, and specific conditions
prevailing in individual countries. The management apparatuses of inte-
grated groupings gradually assume increasing numbers of functions which
are necessary for really unified and effective manageu~ent of integration
as a whole. This concentration of functicns and the gradual improvement
of their execution represents in its sum the process of really increasing `
~ the role of supraenterprise organi~:.^.s.
From the beginnin~ of the 1970's, attention in the GDR focused on finding
those elements wh,ict~ would contribute to the solution of the fundamental
problem and rec~uirement--a gradual and consistent transformation of exist-
ing associations into khozraschet units properly equipped and staffed for
tnsurin~ an effective development of the entire production process includ-
ing the preproduction stages. A ma~or step Eorward was vertical produc-
tion concentration by the combinaeion ot different productions through the
centra.ily planned establishment of indu:,rrial combines. 'fheir establish- _
ment was designed Eor instances when rationality required the organization
of manufacture of certain products, reco~nized by the center as key and
- developmental products, in one uniformly Tanaged economic organism.
The following four types of combines became eventually stabilized in the
CAR:
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ron orricrni. usL otvi,Y
--combines with succes~ive phases of processing of raw and inJusCrial
- maCeri.als (far example, meCallurgy wi~h production of pig iron, steel,
- rolled material);
--r_ombines including basic ~nd auxiliary producrion (for example, produc-
, tion of pig iron combined with producCiott of Uuilding materials made from =
- the blast furnace alAg);
--combines for compret~en3ive utilization of raw maCerials (for example, ~
_ petrochemical combines);
--combines specialized in production of aggregaCes, groups of products
and parts which are Chen delivered to the main (~omplementing) plAnt.
This is the most frequent type in the GDR.
'The combines are either made part of the association or are managed di-
rectly by o ministry.
Generally speaking, the combines in the GDR have been favorably commented
upon ancl their basic advantages lie particularly in the possibility of
large series production, wide application of inechanizatian, automation,
concentra~ion of ineans and qualified personnel in the manufacture of im-
portant types of producCs and in Che reduction of existing cooperation
between individual sectors.
- In the USSR, in accordance with the development of productive forces and
needs of the Soviet economy, planned production concentration was carried
out both horizontally and vertically in accordance with the specific con-
ditions. Production associations and vertically organized industrial com-
bines were therefore set up in individual sectors an~ branches. The 24th
CPSU Congress called for further production concentration according to the
plan, formation of additional combines and establishment of science-
production associations.
� These tasks were gradually impl~mented in the USSR. More than 1,200 pro-
cluction associations existing in 1966 were gradually integrated into more -
than 600 large associations by 1972.
:~cience-Procluction associations represent a new form of organization of
production-technical complexes essentially involving an organic and ef-~
fective fusion of research with production in order to manufacture new
c~uipment as soon as possible. The productiun section of the association
is organized accor3ing to the needs and requirements of the association's
research base. The research section thus becomes the dominant unit of
the organization and it determines the nature and structure of production.
_ 7'here are three types of science-production associations:
--associations specialized primarily in research and testing of new types
of products;
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~ --associatiuns engaged in research and manuf~cture of inech~nizaCion and
uuComation devices;
~
--F?ssociations speci~lizing in the inCroduction of new Cechnological proc-
esses.
Taking into accounC Che fundamettta.l t~slcs and goals, Chere is a consid-
erable variety of types of these science-production associations. Ex-
_ perience wiCh t11es~ associations has been very positive so far.
Atl-union and republic indusCrial associations have recently begun to be
set up. They are organized from t}~e atandpoinC of one or several inter-
- relared branches as large, comprehensively equipped and unified economic
production units. 'I'hey include primarily appropriate production associa-
tions, combines and organiz~~tions active in preproduction stages (scien- _
tiEic research institutes, desl.gn and clevelopment organizations).
Supreenterprise Organisms in CSSK
One of the basic preiequisites for the application of principles of an �
improveci system of planned management in the CSSR was the reorganization _
of the production basis Chrough the eseablishment of comprehensively
equipped l~~rge economic production units. Individual enterprise integra-
tions have full responsibility for the satisfaction of the planned needs
- c~E the national economy by their products, and a~athority derived from the
above responsibility ancl delegated by the cotitrol center to make decisions
on the f.undamenral problems arising out of their aceivities. _
Economic production units (VHJ)--supraenterprise or enterprise integra-
- tions--set up in 1958 assumed one of the following three organizational
forms:
~ --associations of enterprises; _
--main enterprise with its own plants and branches;
--individual independent enterprise--with planCs--which is controlled di-
rectly by a ministry.
Some 383 VHJ were established (including the enterprise sphere of the then
existing Ministry of Agriculture and Forestry) 67 of which were associa-
tions of enterprises.
[:conomic production units of 1965 (government decree No 132/1965 of SBIRK!`.)
c:~ere set up in two forms only:
--associa~ions of enterprises (enterprise trust) and
--sectoral enterprises.
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~
'1'hc toraJ. number oE VHJ w~e reduced to one-Chird and eubatantial7.y
' larger economic production units were formed gt Che time. The previous
254 VH.I in lndustry and building were integraCed into 90 VHJ.
The clarificatio?~ and setting of some additional tasks in connect�ion with
the requirement of strengChening the VHJ's posiCion were, togeCher with
the propnsals r~dopted for improvement oF the r~ystem of planned manng~ment,
, included in governmenC resolution No 204/1971 ns "The Principles of _
= Planned DlanagemenC of National Cconomy" which became effective in 1972.
They provided, among other things, for Che amendmenC, on the basia of pasr
experience, of government decree No 132/1965 which a].lowed further differ-
enCiation of VHJ nnd enterprises including cembinea and concerns.
Government decree No 9.l/1974 on the organization of economic production
- units and Ctieir statutes inCroduced, in addition to the two already exist- -
ing types (truats and combines] the third ~r~anizaCional form---the concern--
effective 1 January 1975.
T}ie 15th CPCZ Congress paid great attention to management, planning and
- organizational work. It set the task of improving the system of planned
- m~nagement and p].anning, increasing efficiency of economic i.ncentives,
improving the organization of the production-technical basis, raiaing the
standard of management and organization, and broadening Che workers' par-
_ ticipation in management.
- It lay special emphasis on the following important tasks of ministries in
- charge of individual sectors and of the middle levels of management (VHJ):
--conceptual development of individual secCors and branches; -
7 _
--formulation ~nd implementation of uniform technical and investment
_ policy;
--satisfaction of the national economy's needs by ttieir producta;
--development of external economic relations; ~
- --organization of the plan fulfillment. ~
- In the report c,n the main directions of the economic and social development
of the CSSR during the 1976-1980 period which was read by Comrade L.
Strougal, the principal role of VHJ was formulated as follows:
"The increase in output and complexity of production, control over the
_ reproduction of basi.c assets and the solution of problems of technical
, development and international cooperation and integration within CEMA
necessitate making the VI~J a comprehensive unit operating according to
the principles of khozraschet, and differentiated in accordance wiCh the -
conditions an3 nature of product'_^n.
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"Iiest conforming to these req~iirements is the concern type ~f economic
pr~duction uniC and secCoral enterprise, including Che use of combina-
tion grouping whenever it is expedient. These organizational forms
mnke it possible to rationally control acid economically or~anize the ~
management app~ratus. Af.Cer a careful organizational and political
preparation, we shall Cherefore, carry ouC these changes while keeping
in mind thaC higher economic efficiency of new production units remains _
- the ultimate goa1."
In accordance with the tasks seC by the 15th CPCZ Congress and efforts -
- to improve the system of planned management, a"Comprehensive ~xperi-
ment in Efficiency and Quality Control" has been designed which wi.ll be
verified by some VHJ during the 1978-1980 period.
' Among the ma~jor features of general rules governing ttiis experiment which
were approved by ~he resol ution of the CS5R govc.~rciment presidium
- No 279/1977 are the following ones:
--conditions are created for VH,1 to become the b~~sic unit oL management
_ in the enterprise sphere;
--VHJ as a whole is the subject of the experiment. It acts as the basic
unit of management regardless of the organizational f.orm;
--the five-year plan is the basic tool of management. The fulfillment of
basic ;:asks is evaluated for the entire five-year period, in individual =
years cumulatively from the beginning of the five-year plan;
- --enhancing the tasks of technical development in the system of VHJ man- -
agement (creatio~n of conditions for cooperation between individual depart- -
_ ments of VHJ from research phase to finishing phase);
--introduction of obligatory planning indicators from the area of innova-
tions and higher technical and ecenomic standards of products.
Improvement of Present Forn~s of VHJ
The main reasons for establishing large, economically strong, comprehen- -
sively equipped production-economic units (VHJ) fully operating according
to the khozraschet principles can be summed up as follows:
--objective tendencies toward productinn concentration and combination
which stem from technical and eco~lomic production expansion;
--increased importance of long-term pla:~ning and economic forecasting _
_ which sCems from the decisions on the techni~al and innovation develop-
ment, international socialist integration and structural changes;
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--incrensing scope and complexity nf certain acCivities (technica:L com--
plexity of rroduction and supplier-customer rel.ations resulring from iC;
reqiiiremenls for Che concentration of research and development capaciCies
due to Che constantly acceler~ting rare of scienCific progress; implemen-
tatiun of research and development results requires the concentration ot� -
invesrment funds for the priority pro~ects); -
--economy brought about by the concentration or ~oint pursuance of certain -
~ctivities in one place, -
Generally speaking, the following fundamental features are L�ypical of mt~n-
agement on Che VHJ level: a conceptual approach, long-term nature and
concentration on the fundamental comprehensive conCexts. The essenCial
pnint is thaC the enterprises integrated into VHJ must be able to sa*isfy
society's needs and develop,better Chan individual separ~te enterprises
~zre.
The role of VHJ as the middle unit of managemenC reaulting from the verti-
cal division of management of the economy can be described as follows:
--it elaborates on the decisions of the center and authorizes individual
enterprises to carry them out;
, --it integrates management of individual enterprises and puts it on a uni-
form basis in order to achieve higher efficiency;
--it controls r~lutively independently the entire integrated unit. _
The secCorial or t~~~anch principle of production organization has been and
is the underlying s~nd dominant princtple in the organization of produc~
tion basis and VHJ position in Czechoslovak industry. The application of
the sectorial principle, which resulted in the establ3shment of predomi- ' -
- nately horizontally organized VHJ, followed the fundamental purpose of
this principle, namely:
1. creatiun of fav~rable conditions f or effective intensification of the
division of labor through production specialization;
- 2. direct management of industrial production by the central argans by
individual branches and sectors.
On the other hand, the sectorial principle:
1. promotes the intensification of production specialization within the
respective sector or branch only. If, however, individual sectors and
branches of the national economy do not develop in the desired propor-
tionality, from the standpoinC of the societywide production process, pro-
duction specialization increases disproportionally;
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2, within the trust, it gives rise to a serious problem--how the inCe-
gration as a whole ~.ould be acCually and effecCively managed. Management
. lies in achieving harmony between the khozraschet (that is, econom3caJ.ly
relaCively independent) sC~tus of individual enterprises and the require-
_ ment that V}IJ as a whole also must operate as a khozraschet unit. ' -
When enterprises of the sarne sector or enterprises manufacturir,g products
of relaCed sectors amalgamate into a VHJ, it. is a combination of enter- :
prises of different size, with different fund structure, different age of
basic assets, differert level of intraenter~rise management and hetero-
genous production programs (even if related producCion sectors are in-
_ volved)--in other words, enterprises w:':h different production conditions. -
This lay~ great demands on Che Crust management in relation to individual
- enterprises.
One of the possibilities of improving the preser~t organizational produc-
tion structure of VHJ in question :!s to improve the application of the
sectorial principle by restricting the negative consequences associated
- with its application so far. A wider application, according to the plan,
of rational combination elements in a11 forms of VHJ appears to be expe-
dient. -
_ In the present organizational structure of engineering VHJ, the elements
- of vertical combined production organization are represented on two dif-
. ferent planes:
1. there are isolated insta:~ces when a long hl.storical development led to
- a vertical coTbination of production organization anc this organization
was preserved when a VHJ was set up (for example, VHJ Skoda, VHJ CKD
_ [Cesko~r.oravska-Kolben-Danek)). For the manufacture of complex final
, products (particularly piece producCion according to the customer's speci-
= ficaCions), the VHJ manufactures itself ~he key element~, subassemblies
and grouFs of products--from metallurgical products to conventional groups
of machinery to the complementary products wt~ich are not manufaczured in
series by specialized producers (electric drives and accessory equipment, -
, hydraulic elements, gear boxes);
2. combination elements are used also in Che enterprise trusts which are
regarded as typical representatives of horizontal production organization.
= In this instance, either the reapective VHJ has its own metallurgical base, ~
manufacture of cor~plementary products for the main final production and ~
possibly also its own sales organization (for example, VHJ CAZ [Czechoslovak -
Automobile Work~], V~iJ TST [Plants for Lngineering Machinery], VHJ ZTS
[Heavy Engineering Plants~) or individual enterprises of VHJ are producers
of part of capital goods or technologie.; which are subsequently put together
by VHJ into a complete unit (for example VHJ Chepos, VHJ IVTAS).
The enterprise trusts based on the sectorial principle are to strengthen r
their relatively comprehensive nature, it appears expedient to apply in
their production proce~s the following combination elements: ~
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~-For cnmptex finnl products or complete pl.ant equipment ~~ncl large techno- -
lo~ic~al unit~ which ~~epresen~ t}ie focal poitit of VfiJ production, to use [
rro~luct~ manuf~~ctured by ic~dividual en~erprises as a share in the cnmmon
mtssion of V}IJ;
--to promote and increase cooperation wiChitt Che VFiJ by setrin~ up spe-
cialized departments for manufacture of parte ar.d sub~ssemblies which are
used iil several production stctors of tfle VHJ or are tectinological.ly sim-
ilar (for exampl~, purts of conveyors, framea, axlea, cubins and cliagsis
, of working machines);
~
--seCtin~ up of spectulized departmentg for mnnufacture of elements ur
completion of. groups of products and aggregates which are not generally ~
used and cannot be supplied by the apecialized producers (suct~ ~s hydraulic
face rams, electric distribution and control hoxes); ~
--to create within the ViIJ ~n organization for h:gher aupplier activity;
--~'FIJ's own manufacture of machinery and equipment to be used in the VHJ's
own basic production (only certain atypical machines and equipment).
Ttiese combination elements must be applied in VHJ as a whole in order to
make che VfiJ a comprehensive, integrated and self-contained economic pro- -
duction uni.t.
BIBLIOGRAPHY
_ 1. IIavlnka, Josef "Uloha a postaveni vyrobne hospodarskych jednotek"
(Role anC Status of ~conomic ProducCion UniCs~, Academia Prague 1977.
2. Taksir~ K. .T. "Podstata a formy spo~eni vedy s vyrobou za socialismu"
[Fssence and ~orms of Fusing Science with Production under Socialism], -
Czect~ Central Committee of Czechoslovak-5oviet Friendship League~
1976.
3. "Sbornik hlavnich dokumenCu h'V, sjezdu K5C" (Collection of Principal
Uocuments of the lSth CPCZ Congress~, Svoboda, Prague 19'?6.
4. NOSPODARSKE NOVINY No 31 and No 50, 1977.
5. "RaR~cova pravidla komplexniho experimentu rizeni effektivnosti a
kvality" [General Rules Caverning the Comprehensive Experiment in
L�'fficiency and Quality Control] approved by the CSSR government reso-
lution No 279 of 8 December 1977 Supplement to HOSPODARSK~ NOVLNY
;~0 2 , 1978.
COPYRICIIT: Si~"fL--Statni Nakladatelstvi Technicke Literatury, n. p. Prague
I978
10501
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CZ~CHOSLOVAKIA
K1i0zRA5CllE'r AND CAPITAL IIWE5TI~MT ~INANCING I'OLYCY DISCUS5Eb
Prague ~KONOMICKY CASOPIS in Slovnk No 10, 1978 pp 940-949
[Article by Michal I'ancak]
[Te:ctJ The Guidelin~s f or the ~conomic and Social Davelopment of the CS5R
during the period 1g76-1980 ~nd the March 1978 meetings of ~he Central Com-
m~.tCees of Che CPC2 and CPSI called upon investors to enhance the efficiency
of their capital spending acCiviCies by gaining betrer control over the en-
tire cycle encompassing the management, planning, and implementation of
capital projecta. It is therefore easential that they should make pro-
visions for the timeLy completion of preliminary.and final design plans and
for their compliance eaith high technLcal and economic atandards, enhance Che
cost-effectiveneas of capital, architectural, and urban-plann:ng designs, -
and eliminate excessive amounts of in-process construction work both in
productive and non-productive indusCries. The realization of this goal
should be furthered by the more meticulous performance of consulting work
and by more responsible capital-inveatment decision making at all management
leve ls.
All capital construction plans and all design work musC comply with the high -
standarda that have been set in the area of efficiency. ALlocations of fi-
nancial resources, as determined by public agencies and within the limits
_ necessary for the attainment of assigned targets, must be made available to
all participants in the capital coastruction process.
It will not be possible to insure an increuse in the cost-effectiveness oE
- fixed asseta and the sustaiaed growth of eEficiency unless more effective -
use is ~de of cost accounting methods. Managers and decisioa makers in
- the capital construction sphere should weigh the benefits that are derived
from the expenditure of every single koruna, and it is in this l.ight that
they shoUld measure the effectiveness of cheir decisions.
For this reason, the concepta of khozraschet and fiaancial management must
play a mnre active role and be employed on a Wider scale as integral parts
of the capital investment process. The khozraschet system and the entire
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credlt nnd ~inancial man,~gement gysCem should employ thcir leverage m~chttn-
l.~ms c~o a~ to play u mure ~f[~ctive rol~ in all areas wherc public funds aru
buici~; u>>ene ine[fectf.vely, i~n~~onomtcully, or in u nwnncr that violaCug prin-
ci~~leg c~f ct't'icir.ncy.
~Jhile underscoring thc import~nea ~.E Wiozr~schet and financial cnanagemenC iC
should also be poinCed out Ch~t in tt?e re~lm of capie~l congeruCtion it is
,just as necengary, if not more 11CC059~I')? to upgr~tde Che quality of direct
n~anagemene and planning work, sinre the plan is ehe only ingtrumenC thae
can be used to atrike u bal~nc~ bntween the outpuC of c~pital goode and tha
ouCpuC of consumer goods (which are a poinC of departure for capital con-
strucCion not only when it comes to their productinn, buC c~lso Co Cticit
disCribution).
- In ehis arCicla, however, we will be concerned solely with the probleme of
khozr~schet nnd financi~l m:inagem~nC in the realm of capitul consCrucrion.
We will ntteropt to shed soine light on certain aspects of theae prot~lema and
_ to indicaCe waye in which financial managemenC in the area of capiCal con-
struction can be improved preciaely from the st~ndpoint of the more consis-
tent ~pplicatic~n of khozraschet princtptes.
We will describe the essentiul characteristics of khozraschet ~a thi~ con-
cept is now being inCerpreted during the preaent phase of our work on the
conaCruction of an advanced socialist society.
K}~oaraschet ia an economic concept and a method used for the planned man-
agemettt of socialist enterprises. The easential characteristica of this
economic cvncept and management method are defined by the economic relation-
ships tllat obtain within the contexC of discrete socialiat capital replace- '
ment (whicl~ ure of course a function of collective socialist capital re-
placement). According to this definition, then, kho~raschet is a mani-
festati~n of the general laws and specific characteriatics of diacrete
socialist capisal replacement, which in turn is the basia for the view
which holds that the individual enterprise may be regurded as the main
v~hicle of thi,s process of discrete capital replacement, but this does not
~t all prevent us from regarding VHJ's or even entire branchea as vehiclea
~ of discrete capital re placement.l
Tt~is gives rise to the follvwing question: name ly, what are the boundaries
of discrete socialist capital replacement or what Are the boundariea of
khozraschet? To aive the reader a general understanding of our approach to
1� "...discretc capital replacement is not a function of khozrascher; on
the contrary, the oyjectives of khozraschet activity are a function of dis-
cretc capital replacement...." Bunich, P. G. "Upravleniye, ekonomicheakiye
tychagi, khozraschet" [M~nagement, Econo~nic Levers, and Kl~ozrasche[~,
Moscow, Nauka, 76, p 13.
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. this ~~roblem su~fi~r it to ~ay rhat these bounJ~ries nre defined by Che in-
ter~xt~ o~ thc national economy or also by 1.hose nrg~niz~Cinnal and economic "
rel~:tion~htps which do the begC job of inguritlg th~ gr~nrer ~Fficiency or
digcrete socialigt c~pie~1 replacement.
The egseneial churncteriaticx of khozrnschet ar~ ~ m~ni~estuCion of iCg
underlying principlea. Khoxruachet, is ~n eccm omic concept and at the same
time as a mc:Chod for the planned man~gement of socialisC business enter-
prises, is based on the use oF ievenues eo pay o~er~ting cosCs and ehe at-
tainux:nC of a specified level of profitability, on ehe rel~tive economic
and dper~tionnl autonnmy of khozra~cher esCablishm~:nts, on the utiliz~eion
' of comencaiiCy-monetury rel~Cions, und on the nutcriul sclf-interest of
khozraschet establishmenCe. In effect khozrascheC aC the enterpriae ~evell -
is intended Co endow business enterprises with ~ certnin degree of economic
and operational auConomy. We know Erom ex~rience ChaC this is a very com-
plex task. ~
I3y employing the direct and indirect management levera at its disposal the
socialist state assigns tasks to the khozraschet sphere of the economy thaC
alsn take into account Che utilizatifon of planned socialist commodiCy-
monetary relations, but in most cases it does so in a manner that in indi-
cative of its desire to bring the interests of society into harmony with Che
intexests of enterprises, work collectives, and individual workers.
The interesCs of society and the staCe and hence the interests of Che public
at large as reflected by the plan are not always in complete accord with the
interests of enterprises and their work collectives. To be sure, steps must ~
be taken to eventually harmonize these disparate interests (that is, their
non-antagonistic differences).
To soaie extent enterprise khozraschet, by virtue of iCs principles and their
im,~lementation in actual management of enterprise affairs, acts as a coor- -
dinator of these two groups of interests. That is, it mandates the assign-
ment of tusks and the spheres of interest pertaining Co decision making
processes reluted to the selection of production factors and their most ef- -
ficient combination. Under certain conditfons enCerprise khozraschet is
able to coordinate these t~ro areas and thereby brinb the interests of enter-
priu~s, work collectives, and indiviJual workers into harmony ~ith general
soctal interestQ.
The principles of khozruschet managemenC deEine the relations that exist -
betWeen ~ given enterprisc and (li the state (also represented by the baak- -
ing sys[em), (2) other so~ialfst ec~terprises, and (3) a given enterprise's
own employees. Of course, in actual practice the relationships triat ~xist
2. D~lineating the boundaries betWeen the khozraschet spheres of enter-
prises, VNJ's, and branches is another problem which we will not deal with
in this article.
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between a socialiyC business enCcrprise and Che oUtside world are much more
complex and Ear-reachin~. In addition to its r~lationship to the stnte
budg~:t, a khozragct?et enterprise also mainC~ins relaCions with it~ organi-
r.ation~lly superior orgatts, economic: production uni.t~, and so on.
L~bor rel~tions are ~lso noC confirmed to Che relationships that exisr
_ bctween individu~l enterprise employees ~nd the khozrascheC enterprise
proper. I�ibor relations develop within enterprises b~tween indi.vidual work
arcas, whict~ m~y be workshops, operaCional divisions, plnnts, ~nd so on, and
in tl~ia context auch rQlz~tione exiat Uetween work areas ae collective en-
tities and beCween them and individual workers. _
7'l~e points which we made in our analysis of thc essenCial characterietica
- anc: principles of khozrascheC are obviously r~lso applicable Co capital con-
struction. IIut we should realize that under an economic system where the
m~~ans of production are socially owned rhe capital construction sphere must
be sub,ject to the directive mandates of the plan to a much greaCer extent -
Chan any other spliere of the capiCal replacement process.
We will now proceed Co discuss certain problems th~t have a bearing on the
improvement of the capital construction process L-rom the stAndpoint of
khozraschet and financial management. We have wiCnesaed aome signs of im- ~
provement in the performance of management work in this area even during
the course of the Sixth Five-Year Plan and in particular in connection with
ttie co~npreher~sive experiment in efficiency und qualiCy management, which to
a certain extent is al~o focused on the realm of capital consCruction. Some
of its basic ideas are very closely relaCed.
In the first place, there is a clear emphasis on long-range forecasting as
the basic prerequisite for the Rttainment of higher efficiency rAtings in
the performance of management work and especially in the performance of
planning work. Equal emphasis is being placed on the more effective uCili-
- zation of khozraschet, ineluding ttiose of its aspects based on material aelf-
interest. For this reason, VHJ's participating in the experiment will be
Laced with ma,jor mand~tory tasks under the Cerms of the five-year plan that
will have to do with the ratio of profitability Co productive asaeta and the
system of norms for personal, collective, and enterpriae incentive payments. _
Tt~e greater emphasis on material incenCives will also be accompanied by the
increased use of economic sanctions.
A capital development fund is being set up to serve as a mechanism for estab-
lishing a correlatfve relationship betc�:~en capiCal spending and the formati.on
of earnings. This amounts to a major shift in capital spending policy, since
tl~e former small-scale ent:erprise capital investment fund, even though it
cssentially reflected a si?nilar line of thinking, was incapable of bringir~
mucl~ influence to bear on this area by virtue of the fact that it accounted
- for less than 10 percent cf th~ total volume of enterprise capital spending.
(hi the ott~er hand, in most cases the capital development fund is supposed to
meet apprc~ximately 50 percent of overall enterprise capital spending needs or
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us much us 8U to y0 percnnt of Chese cnpi~ul ~pencling neede in some
brunches. The c:sCublishmane of capital dev~lopment funds on this acnle is
already reminiscenC of ehc decentralized c~pit~l consCrucCion policy thue
prevuiled in ehe CSSit during the 1960's, a policy which, as is well-known,
was one oF Che reasons thnC led to the holdittg up of the economic reform
- in Che CSSit. Based on the leasone learned from Czechoslov~kia's exper-
iences in the 1g60's, it will be necessary to uvoid the seumbling blocks
rhat stood in the way of rhis economic reform.3
At thc same time, Chere has been an ineensification of ehe trend whereby
enCerprises are being consolidated inro VtIJ's, which in accordance wieh the
guidelines laid down by the 15th Congress of the CPCL are suppased to become
Ch~ linchpin of the management system at the busfness enterpriae level. _
In ltgl~t oE our preceding remarks concerning khozraschet it followa thaC the
most important principle of khozraschet, which is an expreasion of its es-
sential nature and purpose, is the fact that an enterprise's expenses are
to be ~sid for with revenucs earned from tt~e sale of iCs producCs and that
this forms the basis for the realization of its net income. According to
this principle, an enterpris~_is not only supposed to pay for all of its own
expenses, but is nlso supposed to make a profiC. This approach is based on
the relative autonomy~of enterprises, which in turn stems from the relaCive
isolation of the basic components of tt~e national economy, i.e., business
enterprises, commodi.ty manufacturera. We call the principle whereby an
_ enterprise draws on its own revenues to pay for its expenses self-financing.
The significance and purpose of this principle do not consist solely in the
fact that an enterpriae is supposed to meet its current operating expenses
by drawing on its own earnings. The application of this principle is dedi-
cated to seeing to it, especially during the present era of the scientific
and technological revolution, that gross earnings are also used to meet ex-
penses associated with Che expansion of c~n enterprise, capital expenditures,
and expenditures on scientific research work within an enterprise~s particular -
field of endeavor. This is aC the same time an expression of the ambitious
and increased direct responsibility of an enterprise for its modernization -
- and growth.
- Credit funds also come into play in conjunction with the use of an enter-
prise's own funding s a.?rces. As far as the prLnciples of khozraschet are
concerned, consideration may be and should be given to the utilization of
funds obtained from the state budget only after these two categories of
funds have been exhausted.
3. By this we do not mean to compare the 1978 experiment With the economic -
re:form of 1960 no[ only because of the fact that the approach taken at that
time was systematically and methaiotogically different, but also because of
the fact that today~s national economy differs from that oz 1960 in terms
of its structure and rate of grvarth.
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I'rotiC.~ sh~uld be tl~e cnain source oi khozraseheC funds Char_ is to be drawn
upo7 co a~cet Che expunded c~~pi.tnl repl~~tcem~nC tteeds o� cnCcrpri~eg, Tl~e
degree to whic}~ prufits ar~~ ueilized in this manner Is ~ messure oF ehe yuc-
_ c~gsful application oE Ch~: principle~ of khozrascheC. According to r.hc~
:~tcitis~ics Eor tlie 1976 state b~dgeC, proEi~s covered b~~rely '10.9 ~ercenC
uE th~ Cotal fin~ncial requirements (working capikal and inves~menC capital)
oC centr~?lly ~dministered enterprise~, and, as a result oE nc~ largc volum~~
oE income redieCribution achieved by means uf the state bud~;er, 40,9 pcrctnt
uE ehese tot~l Einancial requirements was covered Uy subc~iaies Erom the sCaCe
bud~et. Miscellaneous neade w~:re meC by depreciaCion allo~vancec aC u ratc:
oE 23.7 percent c~nd by crc:dtts aC A r~r.e of only 14.3 p~rcent.
Th~re are two ways Co put profits to work for ~he financing o}~ cupitftl coci-
- struceion.
The first t~chnique can be used i~i con~unceion with any scheme for the
centralizatiol of capiCal construction policy along lines laid down by ttte
pl~n itsclf so thaC the c~zCegorizurfon of cupital pro,jects under thc~ Cerms
of ttie plan does nor correspond to categories of fundin~ sourceg; Chis me,~tts
tha[ even centr~?lly administered capital projects can be financed in a de-
~ centrnlized manner by drawing on an enterprise's own sources of funds.
, The decentralized financing of capital consCruction, i.e., khozraschat fi-
nancing based on the use of intraorganizational funding so~rces, does not
conflict with the requirement calling for the centraJ.ized management of
capital construction, for which provisions must always be made in one form
or anott~er in the n.itional economic plan.
Erom tf~is standpoint, then, it is possible to broaden the scope of the de-
centralized �inancing of capital construction; indeed, this cnn be done
wtttiout in any way impinging upon the central obligati.ons and rules of in- -
dividual branches or enterprises. _
Tl~e other way to make increased use of profits is be establishing a closer
rclationship betwaen categories of capital pro,~ects and the source of funda
ttiat are tapped to finance these projects, as was done in 1976 with the
establiehment oE the small-scale enterprise capital investmenC fund, the
thrust of which was greatly extended in 1978 in the form of the co:nprehen-
siv~ experiment. In this case financing mechanLsms became planning mechan-
isms as we11. The second question has to do with the extent to which this
khozraschet financing arrangement was put in[o practice. This may be a
q:iestion of scope, which in terms of tt~e number of en[erprises involved was
not v~ry noteworthy und hence not very effective, but it may also be a
question of the fact that this scheme violates the principles of centralized
msn~~,ement .
'i'i~e C55R has considerable Axperience in dealing with this problem. The
m~cho.lolo~y of the 1959 plan creaCed separate areas of centralized and de- =
centralized capital construction. Centralized capital construction was
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guppo~e~l tn ~cr the main proporeiong for the b~lanced growel~ ot the n~Cional
econnmy.
~
I~or example, within the ~urisdiceion of the Ministry ot Construction in ehe ~
building indugtry branch cere~in kinds of machinery ~nd equipment, which
were listed in ~n annex Go the plgn~s meChodological instructions, were the
sub~ects of centralized capital construction policy. At Clie same time,
these provisions were inrended to serve sCrictly ~s ger~eral guidelittes.
OCher major building pro~ecrs thaC have an important impact on the growch
of the nattonal economy or tor any other re~son dict~Ced by the public in-
teresC coul.d also be cl~sailied as falling wir}~in the ,jurisdiction of
centrnlized capital construc~ion policy. becisions to cl~ssify such build-
ing pro,jectg as targets of centralized cupi~al constructiott policy were al-
ways mad~ on a case-by-case basis, usually in response to recommendarions
mtde by :~ppropriate central organs. All other building pro,~ects were covered
by decentralized capital construction policy.4
'This kind of ratio betwecn centralized and decen~ralized capital construc-
~ tion led to disproportions in th~ economy's ~rowCh.
_ Attcr 1959 t}~e norms governing enterprise material sclf-interest were sup-
posed to serve as the must important mec.hanism of decentralized khozraschet
financing. In essence, these norms defined ttic limits of an enterprfse's .
financi~l base, since they constituted the source of funds to be used for
the financing of both wurkfng capitul and fixed capital expenditures. At
ttic same time they served as one of the principal econo~nic incentives by
means of which enterprises were supposed to encourage to take a direct in-
terest in their own sustained growth, in the setting ot high plan targets �
an3 the maximal fulfillmant of these targets, and in the increasingly better
satisfaction of social needs. Enterprise material self-interest norms were
also supposed to serve as a mechanism for setting proper proportions in the
nstional economic development plan and for strengthening and enforcfng these
proportions, especiully in the area of capital construction. An tnterde-
pendent relationship was established between the payment of an enterprise's
opciating expenses and its earnfngs performance. The application of these
norn~s presupposed a certain amount of functional and organizational stabil-
_ ity. To the extent that the national econo:ny was affected by unexpected
inEluences (in the area of foreign trade for example) which disrupted this
stability, provisions were also made for the taking of emergency correctfve
m~~asures, including m~:asures of a directive nsturc.
- No~~cver, in responding to the needsoE individual enterprises and branches
this prtnciple was not put into practice in a manner that coincided with
- the actual onset of fluctuations and problems or in the manner provided for
pursuant to nppro~riate govern:n~nt resolutions.
4. During tt~c pt:riod 1959-1965 the shaxe of centralized capital construc-
tion in the total volume of capital construction in the state sector of the
CSSR fluctuated within a range of 59.9--70 percent.
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As sourc~c~ oi fin,~ncin~ to pay for r.;tpital consrrucrion co~ts ~nd the cosCs
of t,enGral. ovcrh~~u13 firyt ConsideratLon was gi.ven ~o utilizing a p~rCidn
c~� thc acci~Led prnfirs quoCa share, or dividenas, and the depr~CiaCton quor~
~h~re. Oth~r typical, supplementary sources oF financing might take the
turin o� capiL�~1 conytrucCion credits, subsidies furni~l~ed by higher-rankiug
organs or by rhe sCate Sudget, idle internal working capiral, y~1~8 ~arn-
ings and returns from the reeiremenC of unnecessary or idl.e fixed assets,
cr unspenC funds left over in capit~l invesCment ~ecounts.
Thc lessons th~C were learned from the ~pplicaCion of this methodology in
the ~rea oI
decenrr~tlized capital conaCruction up Co the end oE 1961 showed
that under these circumst~nces it was neces~ary for organiz~~Cionally supc:r-
~ ior org.~ns tu do a more Chorough ,~ob of carrying out their performance re-
view dutics in conneceion witli capie~,l construction planning in order to
enhance the efficiency of c~pieal constructio~t activities and, consequently, -
in order to begin to enforce compliance wLCh ktiozrascheC management practices
on tlie p;~rt of cconomic orgunization~.
- Thc problem uf the proportions and ratios between cenCrali�~ed and decentr~l-
ir.ed capit.~l construction has not yeC bcen resolved. In essence, the Cask -
of insuring ttie proportional growth of the different branches of the n~~-
tional economy has been relegated to the realm of de~entrulized capital
construction policy. B~t ehis wa~ not thc right thing to do in view of the
provisions and nature of decentrAlized capitnl consCruction.
The 12th Congress of the CPCZ decided to place c~pital construction and tt~e
planning and design of capital Projects under strict central control.
In view of tl~e circumstances that existed during this period this course of
actfon proved to be correct, since it cleared up the problems that resulted
iro;n the breakdown of central authority in the management of capital con-
structton.
- I3t~t the m~:asures that were taken in accordance with thfs policy were to a
certain extent one-sided, since they failed to take into account the valid
asrects of khozraschee mana~ement that are also applicable to capiCal con- ~
struction. -
'1'liis is t~recisely why wc believe that the lessons learned by the CSSR dur-
inp the L960's in the area oE setting capital cottstruction financfng quotas -
iiced to bc ~tudied with special care both because of the fact that the con-
cept of quotas has been rightly incorporated, among other places, into the
system Coc the financing oE capital construction during the Sixth Five-Year
I'lan and is now being Kiven broader subgtunce wlthin the context of the
comprehensive experiment and also because of the fact that we want to avoid
r`reatink thc mistakes that were rn~de during the 1960's.
In o:~r vicw one of thc prLncipal flaws of ttie System of Long-term *ta[erial
Incentive Nurms of the 1960's was the resultin g distortion of the pro~er
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nroporeional relutionship beCween decEnCrnlized and cenCralized cupieal con- '
- struceion, n problem which nleo hgd un impact on Che degree n~ thornughness
th~e w~s uchieved at thttt time in spc311ing out the sy~t~m's cnncepCual frame-
tirork ~nd on rhe fe~sibiliCy oF plun t~rgets.s
The basic proporCions governing alloc~tions of cgpiCal-forming resourceg in :
_ the national econ.omy must be set by cenCrnlly determined capital consCrucCion
- policy and noC by decentralized capitul construction policy over which the
center ha~ liCtle control. Ae we pointed out before, to be effective the
proportionul relntinnships between decenCralized and cenCralized capitAl
conatruction should be completely reversed.
After profits, depreciaCion allaw~nces consCituCe Cha second source of
khozraschet financing.
bepreciation allowances are the financial manifestation of the process -
through which fixed ~ssets become used up and devalued. The degree to which '
ttiese assets are used up has an impact on the total cost~ of goods produced
and ~~lso performs a capital ctccumulation function. Depreciation allowances
are therefore an important tool of khozraschet management, primarily in _
termq oC costs and, hence, th~ esCimation of costs, ~uC also in terms of the
replacement of fixed assets and the financing of this replacement process.
There ure essentially two cnethods that are used to determine 3epreciation
allowance quotas. According to the first meChod, which is used in Chfs
country, these quotas are set by central auChorities according to categories
of Eixed assets, whereas under the terms of the secand method these quotas
are set by central authorities for entire branches. _
Both the extent to which the system of depreciation allowance quotas corres- '
ponds to optimal definitions of the physical depreciaCion of fixed assets
and the nature of the correlation between the depreciation of fixed assets
and plans for their replacement wi1Z have an important impact on khozraschet.
The advar,ttages of the system of quotas set according to categories oF fixed
assets as opposed to the system of industry-wide, aggregate quotas are most
~~vident in light of the fact that the former system makes it possible for -
5. It should be realized that the application of khozraschet management
' principles has to be approached in a different way in an economy where de-
m;ind excceds supply. In situationa such as this it needs to be seen that
even where khozraschet is concerned the machinery of vertical relation-
- stiips can be used to some extent to help solve problems. Thus, we cacu~ot
re:ly solely on the rt~chinery of horizontal relationships, which Would be
more in tine With the requirements of khozraschet. Under present condi-
tions too it might be useful to bear in mind this correlatfon between
khozraschet and changing economic conditions.
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ceneral authoritics tn set these quoCas in a rel.uCively ~~ccuraCe m~~nner. -
Ho~~ever, it is precisely in Chis con~exC rhat this system also reveals iCs
- digadvanCagea. Cenrr~l ~uChnritiea find Chis system rather unwieldy, since
it cannoe eake into ~ccount ~11 changing conditiona such as decre~sed or
incrE~used ~lemanda for generttl overhaul work, Che need to speed up the re-
pl~tcement of some lcinda of fixed ~aseCs as a regult of technologic~l
I~rogress, requirements wriCCen into cupit~l ;.onstrucCi.on plans with respect
to simple capital repl~~tcement, and so on.
C~pital construcCion planning experCs do not always take inCo account ttie
Fact that some enterprises make better use oF their machinery stock, and,
ignorLng the faaCer rute of Chis machinery's physical deCerioration, Chey
= do not make pr~visions that will enable tliese enCerpriges to purch~sc more
muchinery. These complex issuea may eventu~tlly be plnced on our wo.rking
agenda and sub~ected Co a thorough invesCigation. .
Thc CSSK t~as udo~Ced a measur~ as a part of its depreciation allowance
_ policy tohereby iC is not permitted to claim deductions for fully depreci- -
~ted fixed assets (but in price schedules fssued since 1977 assets have been
efepreciated in excess of 100 percent) .
We ehink that Czeclioslovakia's depreci.ation allowance policy is thcoreti- -
cally sound, since it can hardly be argued that it is right to continue to
c1Aim de preciation al~owances for un asset which is already fully depreci- -
aCcd and which no longer exists For accounting purposes. Indeed, it is
argued to the contrary rhat to do so would be tatttamount to giving enter-
prises an incenCive to maintain obsoleCe fixed assets, since fully depre-
ciuted and working fixed a~sets would not be encumbered by the cost entry
represented by depreciation allowances. However, this may be the case only
in siCuations where the paracr,eters of new fixed assets are no betCer than -
the parameters of old fixed assets that have already been fully depreciated. -
Regardless of this, however, the fact remains that we are faced with the
general problem oE how to go about retiring old and obsolere fixed assets,
assets wl~ich at the same time are already fully depreciated. So, insofar
as it would no longer be permitted to claim depreciation allowances for
fixed assets in excess of 100 percent of their nominal value, which would be
thc right thing to do in our view, we would then think that it would be
~~ssible for central Authorities (and this would also be consistent with the
~~rinciples of khozraschet management) to apply sanctions to discourage the
co~tinued use of fully depreciated fixed assets in the form of a penalty
tax, which would apply only to fully depreciated and, hence, obsolete fixed
~~ssets. In contrast to depreciation allowances, this penalty tax sh ould be -
chsrged not to costs, but rather to gross earnings so that it would have an
im~~act on payrt~nts into material incentive funds.
Tl~is is related to another specific feature of Czechoslovakia's depreciation
allowance pollcy. Depreciation allowance quotas do not include the cost of
generul ovcrhauls. General overhauls are financed in the same way as normal
rrnintenance by dra~ring on working capital funds. There are various opinions
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abouL this. There can be no doubt buC that Czechoslovakia's present system
in this regnrd is a simple one~ However, we think hhat in the interests of
kliozraschet, in Che inCereses of intelligible costitig, and, finally, in the
i~:terests of efficiency, ~his system ia not necessarily satiafactory in all
of its aspects. To be sure, nearly one-Chird oF all functioning fixed as- ~
sets are fully depreciated, but at rhe same time they are still in service
and Chey are s till undergoing general over~hauls.6
- In our opinion the validity of Chis policy is questi~nable both from Che
standpoint of coating and also from the standpoint of financial management.
Therefore, it seems to us that it would be advisable Co conside r increas-
ing depreciation allowances by whatever amount is chargeable to general over- . ~
hau ls . ~
In connection with the increased emphasis on the tapping of inCernal fund-
- ing sourceQ for the financing of capital construc~ion, as an important pre-
requisite for the application of khozraschet management principles, a prac- �
ticnl problem arises having to do wiCh the optimal structure of an enter-
prise's internal financial base, especially in terms of the normative
standards governing profits, depreciation allowattces, and, aomething which
can also be considered in this context, investment credits. -
This problem is a product of the natural imbalaace between material and fi-
nancial resources in the realm of capital consCrucCion. For example, if
. they are not the beneficiaries oF capital development investments, new
- enterprises cannot claim depreciation allowances chargeable to the period
in which they were under construction.
- This is the first reason why it is objectively necessary to undertake a
general redistribution of these resources, which in the case of many enter-
prises will have an impact on both profits and depreciation allowances. _
In our view the second reason which is making it increasingly necessary to
redistribute de preciation allaaances, especially under present conditions,
_ is the economic nature of profits and depreciation allowances.
- As a source of financing that is also used in the realm of capital construc-
tion, profits should be viewed as a stimulative mechanism, especially so at
- the enterprise level. It is in th is sense that the redistribution of pro-
- fits, regardless of whether this is accomplished through the state budget
by means of progressive taxation or ~:hrough the VHJ's by means of supple-
mentary levies, should be curtailed, and precisely because of their wide-
ranging stimulative potential profits should be allowed to play a larger
role in the financing of capital construction.
6. Novotny, Karel. "Pricing F'ixed Assets Under the Te mis of the Program
for Comprehens ive Re~tructuring of Wholesale Prices," FINANCE A UVER, No
12, 1977.
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~ Insofar as long-range rules are laid down to govern the structural uCiliza-
tion of profiCs, depreciation allawancea, and invesCment crediCs in the Pi-
nancing of capita 1 construction, i~ would then be possible to give enter-
pri~es parrial or.complet~ control over the disposition of depreciation
allowances, regardless of whether or not it is planned rhat these funds
wLll be spenC in a given current year, and to regulate the spending o~
these funde in accorddnce with the rules that apply to the use of Chese
funds in future years. This would Cake care of the third reason why de-
preciation allowances should account for a smaller share of funds used Co
- finnnce capital construction so that a larger role could be played by in-
vestmenC credits as a capital construction funding source in cases where =
- no ~xcess profits are available Eor the financing of capital constructfon. ~
' Accordingly, profiCs and investment credits may be regarded as the principal ~
Iunding sources f or the financing of capital construction in economic ox-
- ganizationa. Depreciation allvwances m~y be drawn upon as a funding source -
for the financing of capital construction only after all resources in the
form of prafits and investment credits have been used up.
- As a sovrce of funds for the financing of capital construceion the state
btidget plays an indispensable role, and some priority capi~al projects are
paid for eith~r entirely or at least partially with state budget funds. As
far as khozraschet reZations are concerned, state budgeC funds are always
used whenever internal funds or credit are not available.
_ For various reasons, long-term investment credits supplied by banks are not
fully appreciated or utilized.
Uiider socialism credit is a function of the existence of planned commodity-
monetary relations. The need for credit arises due to the circulation of
_ capital among khozraschet organizations and due to irregularities in this -
circulation process. During the course of this circulation process the
capital of khozraschet organizations invariably is transfotmed into money.
Moreo~er, current accounts receivable and payable are not always paid up.
An enterprise draws on its revenues to gradually build up a depreciation
_ fund, but this fund is also subject to redistribution. To be sure, the cir-
culation of capital is not confined to the business enterprise sphere,
rather capital is circulaCed with a view to the redistribution of Che na-
tional income (or social product) through the various channels of the finan-
cial system. Funds which are tempcrarily not tied up in the circulation of
capital among socialist khozraschet enterprises (which are of course supple-
mented~by other kinds of funds, e.g., private funds, idle funds in the state
budget, and so on) are used to build up reserves in accordance with the
credit plan for the granting of all kinds oF credits, also including invest-
- ment credits.
Therefore, under a socialist system credit is more than just an objective
necessity dictated by the actual circulation of capital in the national
economy. Credit per se is moreover a prerequisite for the proper organiza- -
tion of this process of capital circulation.
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IIy its very naCure the khoxrascher sCatus of socialisC business enterprises `
presupposes, in addition to a degree of rel~tive autonomy, Chat the staCe
will have some say in the conduct of enterprise affairs. Investmenr crediCs
~re a lso one of Che tools used by the central government to exercise this
control and bring its influence to bear. The granting of investment credirs
on a broader acale may be xegarded as a direct concomiCant of the expansion
_ oF Che khozraschet authoriCy of business enCerprisea.
It was not untfl after 1967 th~t investment credi.ts began to be used on a -
larger scale in the state sector of'Czechoslovakia's economy. In 1967 the
total value of outst~nding investmenC crediks cAme to Kcs 13,41 billion,
whereas in 1970 this figure rose t;o Kcs 53.32 billion, and in 1975 it went
~ as high as Kcs 74.99 billion.
In addition to performing distributive and investment proCection functions,
investment crediCs can also be u:ied to perform a very wide range of conCrol
functions. Indeed, we are of th~a opinion that investment credits are sup-
posed to complement the performance review powers exercised by enterprises
in the area of decentralized capital construction into line with the needs
~ oF society as a whole. In this sense investment credits are one of the
tools used to promote general sacial inCeresCs.
Investment credits perform control functions in two ways. On the one hand,
this is done by making certain demands that make the granting of investmenC
credits contingent upon the likelihood of increased efficiency, and, on Che
_ other hand, this is accomplished by virtue of the fact that an investment _
credit may not be granted at all or only in a limited amount. The criteria ~
that govern the allocation of investment credits make it possible to exer-
cise coi.trol over the way in which funds are spent that are otherwise not
subject to central control even if these funds are dis persed in several
different directions. Moreover, these criteria make it possible to exercise
control in the area of fixed assets utilizaCion, especially in terms of the _
manner in which these assets are utilized and the quality standards that
should be adhered to in decid ing on the purchase of new fixed assets, as
wcll as to assess the recoverability of investment credits. The control
functions of investment credits co:ne into play not only in connection with
the granting of these credits, but also in connection with their repayment.
Thus, investment credits are noe only exceptionally wide-ranging, but also
exceptionally effective control mechanisms. The stronger emphasis that is
being placed on material incentives for enterprises, work collectives, and
individual workers is making it more necessary than ever before for enter-
prises to be mindful of all of these aspects of investment credit policy.
It is our opinion that as far as the impact of interest rates are concerned
- the effectiveness of investment credits could ~e increase~l by taking a more
selective approach whereby interest rates will be raised under circum- _
s tances which are appraised in a critical light in terms of the public ~
interest and whereby interest rates will be lowered under circumstances
which are appraised in a positive light in terms of the public interesC.
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'1'hts kind of gelective nppro~ch will have ~n i~npact on the incentive of
enterpri~es nnd individu~l workers, ns we h~ve ,~een eg a re~ule of ehe
_ limtted appliration of this Cnchnique ~inc~ 1976 in connecrion wieh the
- fulfi.llmenC di the Sixrh ~ive-Ye~r plan.
= I~ur c~xample, such shortcomingg thc substand~rd planning and execueion of
. capttnl congtruction pro3ecCg, the squ~ndering of regources, and Che misuge
of fixed asseC~ are groundg for ecottomic e~nCtion~ in the fnrm of l~igher
inCer~st rates.
In recenC yeurs the econa.nic litQrature of the C~MA counCries has been plac-
ing greater emph~sis dn ~he incregsed eEficiency df credit financing.
On the other hand, so~ne Chedreticigttg ~nd pracCical expereg as well express
doubtn a bd~t the effeceiveness of inve~tmenC credits, since they claim ChaC
th~y neceasiCate incre~sed paperwork and, in compa.rison wltl~ budgetary fi-
_ nancing methods, do not produce better resulCs. And even though they do
print out the pogiCivc aspects of investroent credies, they atill ign~re the
overriding need to utilize investment crediCs ag a so~rce of funds for the
f.inancin g of capitAl construcCion.
We think that it needs Co be atressed Chat invesCment credits are suppn~ed
to work in tandem wiCh the laws governing the planned and balanced growCh
of the national economy. Under certain condiCtons investment credits mtght
even prove to be useful as technical planning instruments, and to some ex-
tent Chey could be used, �or example, to take Che pt~ce of the "nutomatism"
of the c urrent investmenC limits, mosC of which are scheduled and assigned
witliout any att~tched condiCions whatever.
By granting investment credits and regulating the m~nner in which they are
spent or repayed the banks have access to an important instrument for exer-
cising social control, in the broadest aense of the term, over the formation
and disposition of social resources.
'T1~e principle calling for the planned development of the socialist national
economy in accordance with the dictaCes of social efficiency also presup-
poqes thnt econo,nic growth will take plnce in those areas where internal
resources are not available, where no arrangemQnCs can be made for the re-
clistribution of reaources, and where, based on the rules of banking policy,
investrtx=nt credits cannot be provided at all or to the full extent that is
required.
_ In these cases we deem It to be advisable that the state budget sho+:id re-
sort to [he granting of investrt~nt subaidies in order to contribute to the
financing oE capital construction. We refer to this principle Which jus[i-
Cics the role of the state budget in capital co:tstructior~ as the revenue-
bas~d principle, and we cunsider it to be a useful supplement to khozraschet
tinancing. In certatn respecta the financing of capital construction by
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drawing on the resources of the gtate budgee in accord~nce wiCh the revenue-
b~~~ed rrinciple im Compatible with elie principl~s uf Wiozr~g~het m~nagemene.
In addition ec~ eh~ rev~nue~b~~ed pt~inaiple, there nre certain other reggon~,
equally proper and even degir~ble, which jugtity the financing of c~pital
constructton with staee budgee funds. Thig is primarily in ref- attce to
subgidieg for capieal pro3ectg spelled out in the b~~lgeeary plan, for civil -
defense, gnd for military rese~r~h and development .3g provided for in the
appropriaCe gpecial secCfons of ehe pl~n.
bigparitieg in the infragt~ucCural diseribution of pl~nt ~ttd equipm~ne among
khozr~achet organizaeidn~ con~Citute ~noCher rnte of the re~gor~s ~ahy the st~te
bud~et musC ~nswer the call to provide fundg for the financing of c~pital
cdnstruction in theae organizations. Ici a socialigt society Chis reasnn _
justifying the ullocation of cApital investment subsidiea from the etate
budgeC to khoarnschet organizationg is nn integral element of Che overall
thrust of [he economic poliCies o~ tt~e sociali~t state.
_ One of t}~c important tasks endoraed by Che 15Ch Congress of Che CI'CL calls
for an increase in the efficienry of fixed capital stock and~ accordingly,
for tl~e resolution of problems in the area of capital conetrucCion. The
fulfillment of thfs t~sk means thut we will have to address ourselves eo
some very complex problems. In this nrticle we have indicared gome of the
im,~ortant ways and techniques by means oE which we cnn improve the capital
construction process with respect to the financial requirements of
kt~ozr~scheC organizations.
COPYRICHT: VEDA, Vydavatelstvo Slovenskej academic vied, $ratislava 1978 ~
11813
CSO: 2400
END
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