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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

Public Services Sector

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Conversion of the public services sector can be split into two principal sections. The first involves institutional changes:

the removal of housing stock from the balance sheets of enterprises and municipal administrative authorities, and the subsequent creation of housing partnerships and co-operatives;

and the establishment of joint stock companies from existing housing stock services. The second section includes the transfer of housing subsidies from enterprises and the local budget to personal incomes.

The general scheme used to convert the public services sector will change perceptibly, depending on the section -- the institutional reforms or the restructuring of personal incomes -- which is used for the "start-up" and which continues the process.

The initial transfer of housing studies to personal incomes is technically simpler and more logical. Once this measure has been carried out, institutional transformations can be implemented. If the institutional reforms precede the transfer of public services subsidies to personal incomes, one is faced with the problem of financing the housing stock. If the city (or region) fails to set up a special fund for these purposes before the end of this year (i.e. to provide for corresponding funds both in the local budget and enterprise finances), then there is little chance that such resources will be set aside in the following year.

By that time, state enterprises will no doubt have been transformed into joint stock companies. One can already imagine what the shareholders will decide to do about the use of profits to finance non-production expenditures. Of course additional local enterprise taxes could be imposed. However, the choices open to municipal authorities are considerably limited. Local budgets now provide virtually the only sources of financing for a city's entire housing stock.

However, this plan is feasible in principle. Given certain factors (mostly, strict privatization deadlines), it could be used to convert the social infrastructure. When drafting proposals to determine the subsidies which may be included in personal incomes, we propose the following steps.

1. The formation of a database. Here, one should bear in mind that the existing statistical report form (Housing Stock Form No.1) is submitted once a year, on January 1. Consequently we need access to the information submitted by enterprises and the municipality to analyse the public service expenditure of enterprises and the municipal budget and estimate the resources to be channelled to the financing of housing stock losses for every quarter and half year. Moreover, comprehensive data on the structure of the city's housing stock (municipal property, enterprise or institution property, or private property), the number of residents, average living space per capita, and other information is essential.

2. Estimation of the rise in incomes (per capita), engendered by the removal of housing and public utility subsidies. This requires:

- forecasts of public utility charges;

- forecasts of average monthly housing subsidies (including subsidies to the housing stock, from both the city budget and enterprises);

- the establishment of the numbers and categories of individuals entitled to compensation for increases in apartment rents and public utility charges;

- estimation of the housing subsidies per capita.

Information submitted by enterprises on public utility subsidies should be subject to meticulous analsyis, especially if it differs substantially from the average figures. Preliminary estimates indicate that housing expenditures per square metre vary from 95 kopecks to 28 roubles depending on the enterprise. Such discrepancies should be attributed to the fact that many enterprises write off housing expenses as production cost.

3. Determination of the rise in incomes according to the average housing space provided to the population. Consequently, if residents of Arzamas are allotted an average of 15.3m2 of housing space per capita, then the compensation is determined on the basis of this figure. Any surplus space this will be paid for from personal incomes. When housing is privatised, citizens become the owners of the apartments they occupy. Consequently the existing housing differentiation is reinforced (in terms of quality, size, prestigious districts, etc.). Such distinctions were formed over decades: it is therefore unlikely that the situation can be radically changed in the near future. Naturally, one can try to "streamline" the situation by distributing subsidies according to the average income increase.

4. The development of approaches to determine the numbers and categories of individuals entitled to compensation for increased apartment rents and public utility charges. Here, two principal approaches should be examined:

a) subsidies averaged out per adult resident. This scenario is comparatively simple to implement and consequently preferable. Total housing subsidies are divided by the number of working people, pensioners, unemployed, housewives, and other categories of the population. This amount is then included in wages, pensions, unemployment benefits, or is paid in the form of special grants. A special fund should be created at municipal level for the special grants and to support low-income earners. However, it will be insignificant;

b) subsidies averaged out for all residents. This scenario is harder to implement. In this case all the subsidies are distributed among all the city's residents, including dependents (children, students, etc.). This amount (of course, less than in the preceding scenario) is also included in wages, pensions and unemployment benefits. As for dependents, the corresponding payments are effected monthly from a special municipal fund. In terms of social justice, such a scenario seems preferable, as it would enable large families in poor living conditions to receive funds exceeding their actual apartment rents. This would create the requisite conditions to enable them to save money to acquire housing or rent more living space, and would speed up the development of a secondary housing market (i.e., redistribution of the existing housing stock). In any case, such an approach may be considered as partial compensation by the state for poor living conditions.

However, this scenario has a number of drawbacks: its technical complexity, and the need to create a large special fund, with appropriate sources of financing.

5. Estimation of the ability of the city's enterprises to give their employees a one-off pay raise in the amount of the calculated standard wage increase. Consequently, the accumulation of information on changes in their financial indices related to income growth.

One should pay particular attention to enterprises, whcih did not include the housing stock in their financial statements and consequently did not bear any expenses for its upkeep. Increased incomes and product cost could lead to a substantial decrease in profits, or make an enterprise loss-making. Therefore, one should consider the potential provision of additional tax breaks or special subsidies for such enterprises for a certain period of time (for example, up to 6 months). Such a measure would help them adapt more easily to the new situation.

Enterprises which listed housing stock on their balance sheet could subsequently discover that available resources had been freed up, as they no longer had to cover the losses of the public services sector. These funds could be channelled by the enterprises to works which should have been financed from the local budget (road construction and repair, purchase of medication for municipal health establishments, etc.).

The balance would enable enterprises to determine additional financial requirements (if and when necessary). To make such calculations, one should consider:

- the amounts set aside for the Pension Fund in connection with the rise in average wages. These funds could serve as a source for a raise in pensions; and

- the increased tax base related to the enterprises' loss of tax breaks (current legislation stipulates that profits channelled to the social infrastructure are tax-exempt). Another factor could influence the results of such calculations for specific enterprises. Public utility charges are regulated by the government or local authorities. They are set at far lower levels than their actual cost. To compensate for enterprise losses (heating stations, water intake, etc.), production tariffs have been set at excessively high levels for industrial enterprises and other consumers.

This leads to a substantial increase in production costs at enterprises which use these services. Consequently the population ends up having to pay.

6. Determination of the resources required to cover wage increases for employees of budget organisations. Funds set aside in the city budget to cover municipal housing stock losses could constitute a main source of such additional payments.

7. Calculation of the adjustments to be made to the flow of money from the "enterprise - local budget". This entails tax privileges for recipient enterprises, and agreements with donor enterprises over the financing of municipal expenditures in the amount of the "surplus" freed up by the removal of public services subsidies, etc., in order to balance the enterprises' financial potential and the municipal budget, ensuing from the conversion of city subsidies for public services to personal incomes.

8. The institutional conversion of the social sphere: the creation of joint stock companies and housing co-operatives and partnerships, based on the public services sector. Privatization plans must all costs consider the the future of the housing stock listed on enterprises' balance sheets. The creation of close joint stock companies or limited partnerships from the public services administrations or enterprises' departments would seem to be the most acceptable scenario. Their founders could be state enterprises, local authorities or other interested parties. At the same time, a decision must be taken on the transfer of housing ownership to their occupants, regardless of whether they are employees of the given enterprise or not. This is necessary, as the enterprises' maintenance of housing stocks currently grants them full economic management of the housing: such enterprises alone may sell or transfer them to individuals. In future, individuals themselves will decide whether to privatise their housing. Local authorities or joint stock companies will register the housing transfers.



Technical networks, separate buildings (stores, consumer service enterprises, etc.), and other material and non- material assets are transferred to the balance sheets of joint stock companies. The housing stocks not included in their statutory capital are entered onto the companies' balance account.

The issue of land sales to the newly created enterprises must be considered separately. The joint stock companies may not have to produce a profit during the first two years of operations. The main sources of revenue will be provided by the resources remitted by house owners or tenants, rental fees for provision of non-residential housing stock or plots of land, and funds from heating stations to partly pay for the transportation of heating substances through the technical networks belonging to joint stock companies, etc. Residents will be able to choose whether to register the appropriate documents to become owners of the housing they live in, or retain the status quo.

In the first case, the flat owner pays the cost of public utilities (heating, water supply, etc.), signs a maintenance contract with a joint stock company or other legal entity or private individual, and advances the requisite funds for routine repairs and general overhaul of the building. In the second case, a joint stock company signs a rental contract with the resident, specifying the cost of the housing, the rights and obligations of the parties, and other terms.

In both cases, housing payments for housing are set at sufficient levels to cover housing expenditure, including routine repairs and general overhaul. Consequently, residents are motivated to obtain ownership rights, as they thereby enjoy the right to dispose of them at their discretion: to sell them, give them away, bequeath them, etc.

As flats are privatised, residential buildings are removed from the balance accounts of the joint stock companies and entered onto the balance sheets of the new housing cooperatives and partnerships. The formation of alternative structures to provide public services should be stimulated in every possible way.. This will increase competition and enhance quality on the services market.

When joint stock companies are created, particular attention should be paid to the issues of a socially equitable "divorce". Employees of the public services sector, included on the staffs of enterprises, which list housing stocks on their balance sheets, enjoy access to an entire set of additional services (medical services, food orders, discount travel packages, places for their children in preschool establishments, etc.). Moreover, they may have their names placed on waiting lists for receiving apartments. Contracts on all these issues should be signed by the staff who are being transferred to the joint stock company and the enterprise's administration and trade union. One could consider separately employee participation in the privatization of the enterprise where they worked.


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