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Books by Grigory Yavlinsky
Economics and Politics in Russia
The Center for Economic and Political Research (EPIcenter)
Nizhni Novgorod-Moscow, 1992

4.1 Entrepreneurship and Property

4.1.1 Conversion of the Social Infrastructure

The conversion of the social infrastructure comprises reforms related to changes in the ownership form of public establishments, registered on the balance sheets of enterprises, organisations, institutions, and municipal administrative organs. At the same time, we will witness a change in the structure of the population's incomes and increases in housing rents and public utility rates to a level which will cover the losses incurred by the related services, owing to the removal of subsidies.


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Over the past few decades, significantly large non- production funds were formed at state enterprises and are currently recorded on their financial statements. By fixing low or zero costs for many services, the State shifted responsibility for the resolution of all social issues (principally housing, kindegartens, and medical services) to enterprises.

Such an approach was advantageous both for the state and for the enterprise managers. The state largely absolved itself of all responsibility to build and maintain public establishments. The enterprise managers obtained additional levers against the work collectives: by distributing apartments, places in kindergartens, and resort vacation packages, etc., to workers and their families. Consequently a substantial number of public establishments are listed on the balance sheets of state enterprises. In Nizhni Novgorod, enterprises hold over 50% of the city's housing stock. The financial statement of the GAZ production association alone lists 2,480,000m2 of residential space, 105 establishments for children with a total capacity for 16,807 youngsters, 13 health institutions able to accommodate a total of 3,420 people, a 1000-bed hospital, and a re-habilitation centre. In the city of Arzamas, only 14% of the housing stock is municipally-owned. The Oka ship- building plant in the city of Navashino has a large medical centre which serves the entire municipal population. In addition, the plant has a large housing stock, kindergartens, a stadium, and a cultural centre. A similar situation exists in other cities of Nizhni Novgorod oblast.

The structure of public establishments and their capacities in relation to the enterprises are disportionate. By differentiating budget allocations from profits, the state regulated the funds directed to the upkeep of these facilities. The allocation rates were numerous, varying according to the enterprises and the actual year. Budget subsidies were allocated to loss-making and marginally profitable enterprises.

After the price liberalisation campaign on January 2 1992 and the introduction of unified tax rates, the situation changed abruptly. Remaining faithful to the principle of cheap housing, public utilities and free medical services, the state was unable to work out and implement a policy which could enable enterprises to adapt to the new conditions.

Moreover, by freezing apartment rents and setting fixed rates for residential consumption of natural gas, heating, and electricity, the state put enterprises into the toughest of spots. Rates of growth in expenditure on social infrastructure exceed the population's spending on apartment rental and public utilities by factors of ten. Growing social infrastructural losses are covered by enterprises' profits.

Whereas in 1991 average monthly expenditures on the housing stock in Nizhni Novgorod amounted to 18.4 million roubles, they are projected to reach for the third quarter of 1992 461.4 million roubles. In other words they will increase by a factor of 25. At the same time, subsidies increase every month. Public utility rates grew by a factor of 6 over the past half year, but apartment rents remained unchanged. Existing legislation provides tax breaks to enterprises with public establishments on their balance sheets. However this will not salvage them. There is an ongoing reduction of expenditures on production, with a concurrent increase in the share of profits used in the form of subsidies to cover losses in the social sphere. Individual state enterprises of Nizhni Novgorod oblast already direct 80% to 100% of their profits toward the financing of such entities. The number of these enterprises is growing.

All this leads to a situation where more and more state enterprises lose interest in preserving the existing procedure used to maintain public establishments. A decree issued by the Russian President on the obligatory conversion of large state enterprises into joint stock companies stimulates change in this procedure: it stipulates that the work collectives must determine what they should do with these establishments.

We are witnessing a spontaneous, uncontrollable transfer of responsibility for housing stocks and kindergartens to the balance sheets of municipal authorities. In Arzamas, at several factories, meetings of work collectives voted to unilaterally transfer public establishments to the municipalities.

The situation is also aggravated by the production slump and worsening payments crisis: public services are consequently directly dependent on an enterprise's financial standing. At any time, enterprises may lack the requisite funds to cover losses stemming from the use of public establishments, leading to their closure and complicating the situation in the public services sector.

The conversion of the social infrastructure should involve the attainment of the following goals:

- the creation of the necessary prerequisites to transform state enterprises into joint stock companies, by removing non-production entities from their balance sheets;

- the attraction of domestic and foreign investment by expanding the enterprises' potential to use profits to modernise and develop production and pay out dividends;

- the restructuring of incomes and subsequent formation of more accurate estimates of labour costs, by including in incomes all housing and public utilities maintenance expenditure;

- the creation of a housing market; - substantial savings on the social infrastructure by using funds more efficiently and creating a competitive environment on the public services market.


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