Restructuring of Enterprise Social Assets in Russia: Trends, Problems, Possible Solutions
44 Pages Posted: 20 Apr 2016
Date Written: August 1996
What to do about social services that Russia's state enterprises have traditionally provided is a major issue in enterprise restructuring and public policy reform. If taxes and the provision of social services are rationalized at the time those social assets are divested, pioneering steps could be taken in restructuring the social sector.
Public enterprises in the formerly socialist countries have provided many social services to employees and the public, services that divert them from their core activities, raise their costs, and keep them from being competitive. How to deal with these social assets is a major problem in enterprise restructuring: Large insolvent enterprises that provide many social services in a community often have the bargaining power to delay bankruptcy procedures and force the state to continue subsidizing them. But users of social services are not protected from enterprise managers' arbitrary actions or from a general deterioration in the level of services provided.
As enterprises are restructured, the public sector must become involved in (1) protecting critical services, such as kindergarten, that might otherwise disappear as enterprise funding is reduced, (2) facilitating reform of housing and health services, among others, (3) guaranteeing citizens' access to public services, and (4) reducing costs by rationalizing the management and provision of services. Freinkman and Starodubrovskaya analyze policy options in the restructuring of enterprises' social assets.
They argue that the options differ depending on the benefits. Some benefits should remain as part of a traditional labor compensation package, and others should be privatized or transferred to municipal governments. Housing, especially, and child care facilities are services enterprises should not be in the business of providing, they contend.
Divesting enterprises of housing is a transitional strategy on the way to transferring its ownership and management to the private sector.
Unfortunately, the rules of the game under which municipal governments divest enterprises of housing are nontransparent and entirely under municipal control, and vested interests have many ways to postpone or block divestiture - even though most enterprise managers welcome it because it will reduce their costs and administrative burden.
Social spending by Russian enterprises represents as much as 20 percent of gross wage costs. Shifting and reducing those costs requires smart financial and tax planning, sound regulations, and housing reform (including greater cost recovery), among other things.
This paper - a product of Country Operations Division 2, Europe and Central Asia, Country Department III - was first prepared for the International Institute for Applied Systems Analysis conference in Vienna, February 1995.
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