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the boiler on a ship running out of fuel'. But at the same time, government needs revenues now. Selling **aM** later may improve yields, but such yields will come at a time when other local financing sources<sup>will also be</sup> available. Complicating this decision is the fact that many locally-owned properties are presently costing<sup>much more</sup> to operate and maintain than they are realizing in rents an, hence constituto a major drain on subnational<sup>public</sup> finances. Getting rid of this burden is a high priority. Unfortuately, in almost all countries, the<sup>pocem of saeling</sup> locally-owned enterprises, and especially housing, is slow, impeu by the absence of credit (especially mort finance), and the absnce of a legal framework.

# Revenues from Privatization

221. What should local goverments do with the proceeds from the privatization of public enteprise and tdo sale of other assets? First, it is importnt to remember tha hes rvenues are 'non-recurring' and do not rpret permanent sources of financing for any local govemment Efforts thus have to be made to develop adequae tx sources in addition to user charges for the future, when the revenues from asset sales disappear. That said, should such asset revenues be capitalized in special funds or invested on capital projects, or should they be used to finance current expenditures?

222. In practice, there appear to have been no special strings attached to the use of revenues from privatization. Te unsurprising result is that the most common practice appeass to be the use of these funds as an additional source of revenue in the recurrent budget. This is not all bad: indeed, it may be both distributily attractive as well economically efficient (less dead-weight loss) to raise revenues from privatization than from taxes. But, as noted earlier, one cannot live forever by selling the furniture. Sometimes such revenues have been kept in exrabudgetay accounts. in Hungary, for instance, rents from locally-owned housing accrue to off-budget accounts, while sles proceeds from locaUy-owned housing accrue to the general budget, but are not earmarked for any partculwr purpose. In the case of privatization of locaUy-owned enterprises, the proceeds also accue to the budget, with no restctions on use. In Poland and Russia, revenues accrue to the budget, with no restrictions on their use.

223. A more conservative principle of public finance would cal for the investment of these proceeds in longterm assets to alow local govenmerts to draw income from assets over a long period of time. Altenatively, revenues could be used to repay debt.44 In Hungary, revenues from privatization involving foreign joint ventr and generating foreign exchange are channeled through the State Property Management Agency (SPMA) to repay Hungary's external debt. In the Russian Federation, where most privatization has been domestic, it has<sup>been</sup> recommended that the stock of domestic govemment Treasury debt should be reduced this way. In Poland, revenu from privadzation are being used to finance current operations, and to compensate for inadequate tax yields. In China, no commitment to privadzadon is as yet apparent.

# IX. CONCLUSIONS

224. Subnational finance and local government policies are emerging as crucial elements of the ongoing refors in transitional economies. Subnationai governments play a large role in overall economic activity, account for a large share of public sector outlays, and own a significant share of public enterprises and the public housing stok Recent attempts to strmlne government budgets have led to increased local government responsibility for such crucial matters as health, education and safety net expenditures, including unemployment and entepis.

X'See Newbery, D. 'Reform in Hungary: Sequencing and Privatization,' E Economic Review. No 35, 1991, pp 571-580. Newbery argues against a rapid, 'fire-sale' or giveaway approach becas many of the assots may have been financed with debt (as noted earlier, many local govemments in transitional economies have<sup>substantial</sup> liabilities), in which case the proceeds should be used to pay off this debt, rather than burdening preset and<sup>future</sup> local taxpayers with debt service.