- 3-

# 1. **THE SCOPE OF THE PROBLEM**

This section provides some macro estimates concerning the overall scale of Russian enterprise involvement in delivering social services. It could be argued that while being quite substantial, enterprise social spending is still much lower than some earlier estimates that were derived from small enterprise surveys. In particular, such spending did not surpass a level of 15% of GDP (Alm and Sjoquist, 1993) not did it amount to 40% of the wage bill (Commander and Jackman, 1993).

Table I provides some estimates of the value of social assets at the disposal of Russian enterprises before the intensification of the divestiture process in 1994. By the end of 1993, total social assets amounted to 5% percent of the total fixed capital assets accumulated by the enterprise sector. Assets in housing and utilities made two thirds of this total, and assets in education and health exceeded 20% of total social assets. (This data is derived from Goskomstat's regular annual statistics (form No. 1 I).) Due to high inflation in Russia and the unsatisfactory way in which the accumulated stock of fixed capital has been revalued, the quality of the provided data is not very high. In particular, it is not comparable across stock (accumulated social assets) and flow (new construction of social assets in 1992-93) variables. Despite these deficiencies, this information is useful in considering the structure of the social assets' accumulated stock. Table 1 also suggests that divestiture was very slow in both 1992 and 1993.

As reported by Goskomstat,<sup>3</sup> total social spending by the enterprise sector amounted to about 3.1% of GDP in 1993 and 3.5% in 1994. Social spending in 1993-94 decreased by 30% (in real terms) compared to its 1992 level. Enterprises did not make any additional reductions in real social spending in 1994, despite the partial divestiture of social assets occurring during this year and the general deterioration of the overall financial position of the enterprise sector. This can be explained by continuation of cash wage restrictions in the form of the excess wage tax, which, together with relatively high rates of payroll taxes in Russia, encouraged enterprises to makes shifts within their benefit packages towards more non-cash benefits, including social services. As a result, 1994 social spending constituted a much larger share of gross profit in the economy than in 1993. About 30% of the overall 1994 social expenditures was spent on housing maintenance, 22% on education and health services, and about a quarter on new investments in social assets (Table 2). More than 60% of the total amount in 1993-94 was spent by industrial enterprises employing less than 30% of the total Russian labor force (Table 3).

Enterprise social spending as a whole was the equivalent to a little more than 25% of total consolidated budget spending on social purposes and housing in 19934. This share dropped to 22% in 1994 due to a relative decline in enterprise spending on both housing and health. Enterprise contributions to financing housing maintenance were equivalent to almost 30% of the actual budgetary spending on this purpose in 1993. They declined to 23% in 1994.

3 The numbers are derived from Goskomstat's official publication (form No. 10f) of financial indicators for various sectors in the Russian economy. The quality of these data is discussed below.

_4_ This does exclude transfers from extra-budgetary funds, i.e. government expenditures on social protection.