Real Estate

During the Soviet era enterprises provided a range of social services to enterprise employees, including housing, kindergartens, recreational facilities, and health care clinics. In the middle part of this century the push to industrialize and modernize Russia led to the creation of enterprises in otherwise underdeveloped parts of the country. Because the capacity of local government (where it existed) in these areas was often insufficient to provide social services for the increasing labor force, and in order to attract employees, these areas developed into "company towns" with the enterprise providing nearly all social infrastructure. Even as these underdeveloped regions developed into urban areas, enterprises, indirectly supported by government subsidies, continued to provide these services to attract and keep employees.

The attitude of the federal government and enterprises to the provision of social services to employees has changed dramatically in the past few years with the government's efforts to reorient the Russian economy along market principles. The major program of reform affecting enterprises has been privatization of production facilities and related assets and divestiture of the enterprise's social assets. Given the amount of enterprises' resources devoted to provision of social services and maintenance of social assets, the privatization program assumes that after divestiture, substantial resources will be rechannelled into the enterprise's production and management activities, increasing the overall efficiency and profitability of the enterprise.

This article deals with housing and related infrastructure facilities, the largest social asset possessed by enterprises. Beginning in the early 1990s the federal government has mandated that privatizing enterprises divest their housing stock to local authorities. To assist local governments in absorbing the financial burden of divestiture additional tax revenue and federal budget subsidies are to be made available to local governments. Considering the potential impact on the financial position of the enterprise and the assumed resultant benefits to macroeconomic conditions as the byproduct of more productive and efficient enterprises, the federal government, enterprises and the international donor community have been eager to implement the divestiture program. On the other hand, local governments, fearing the financial burden of divestiture on their already inadequate resources to maintain the current municipal housing stock, have been hesitant to accept the stock despite the financial assistance offered by the federal government.

For reasons explored in this article the pace and process of divestiture have not been as rapid or smooth as envisioned in federal law. Much of the information presented in this article is the result of research conducted with enterprise directors and local government officials in three Russian cities (Petrozavodsk, Ryazan, and Vladimir) during the fall of 1995. In all, 35 enterprises were interviewÐ'--10 in Petrozavodsk, 12 in Ryazan and 13 in Vladimir. City officials from the Finance Committee and Committee on Housing and Communal Services were interviewed in all three cities. The objective of the research was to consider the financial and legal implications of divestiture from the perspective of the municipality and enterprises and to understand why the pace of divestiture has not been as rapid as many enterprise directors and policy makers would like.

Framing the issue

Enterprise housing was never in fact owned by enterprises, but held by them on their balance sheet under the concept of "full economic control." Management control and financial responsibility rest with the enterprise, but, because they do not own the housing, privatizing enterprises are prohibited from taking housing along with other assets into the capital of the enterprise. According to federal law, within six months of the date of privatization, privatized enterprises are obligated to transfer housing and related maintenance and infrastructure facilities from their balance sheets, that is, relinquish both control and financial responsibility, to the balance sheets of a designated government or its agent, and the designated government is legally obligated to accept the transfer. Most housing of privatizing enterprises will either be directly divested to the municipality where the enterprise is located or, after transfer to the balance sheets of the federal or regional government, will ultimately be divested to the municipality.

The group of federal laws outlining the conditions and procedures for divesting enterprise housing to municipalities is fairly straightforward. However, the implementation at the local level of federal laws and regulations related to divestiture varies from location to location depending most essentially on local economic conditions, not on any real flaws in the federal legislative framework. Although the federal government has provided financial assistance through several mechanisms to municipalities to cover the cost of divestiture, municipalities' position that these funds are inadequate to cover the costs associated with divestiture is the one of the most crucial, if not the most crucial, impediments slowing the pace of divestiture.

Municipalities are concerned that divestiture will increase the municipal housing stock resulting in a drain of municipal resources in excess of the amount of revenue the city will receive from various sources to cover the costs associated with divestiture. It should be noted that as municipal housing privatization has occurred alongside enterprise housing divestiture, the number of units in the municipal housing stock has not changed dramatically since 1991. Table 1 presents the amount of enterprise housing that has been divested to municipalities and the percentage of municipal housing privatized for the nation as a whole since 1991.

Table 1

Departmental Housing Divestiture and Municipal Housing Privatization for the Russian Federation, 1991-1995

1991 1992 1993 1994 1995

Cumulative departmental housing divested ('000) (sq.m.)

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