Russian Federation: Cost of Social Benefits by Enterprise Size

Data and Source

The gross cost of social benefits in the Russian Federation at mid-1994 were about 18 percent of the wage bill on average, with relatively little variation across the ownership forms. The share does rise, though not monotonically, with firm size and with degree of concentration in employment. There is also fair dispersion across branches. But costs data are misleading because firms will tend to underestimate the true costs of provision. This occurs because the prices used to evaluate benefits are based on operational costs and hence ignore the implicit subsidies obtained by using facilities owned by the firm. An obvious example would be inappropriately low attribution of rental costs.

Arriving at a better valuation is difficult. One crude way of better estimating the market value of benefits would be to contrast the cost figures for de novo private firms with those for state and privatized firms, in the belief that the former's costs will likely lie closer to current market values. When you do this the average cost of benefits per employee for a comparable basket of benefits rises strongly with the degree to which the firm is private. The average cost of benefits in remaining state firms was around 25 percent and around 47 percent in privatized firms relative to de novo firms.

Given the size of shocks to Russian industrial firms -- by mid-1994 on average firms in the survey were operating at around 50 percent of capacity levels in 1990/91 -- and the associated deterioration in profitability, we can imagine that firms have been increasingly more interested in cost savings. Indeed, we know that cost recovery levels have been historically very low, particularly for housing. What is striking, however, is that whether under firm or municipal control, the level of cost recovery on housing has remained very small. For firms in the process of divesting their housing, average cost recovery on housing in 1993 and 1994 -- including maintenance and communal services -- was below 20 percent, but the median was just under 10 percent. More globally, estimated rental and utility charges levied on tenants came to barely 18 percent of financial cost and 12 percent of economic cost at mid-1994. With further liberalization of energy prices, World Bank estimates suggest that the cost of operating the housing stock will rise by around 50 percent. Moving to greater cost recovery has been impeded by the current structure of compensation. With money wages low, the ability of consumers to pay for services has been duly restricted.

Part of the reason why cost recovery has remained low has been restrictions on pricing imposed by local governments and by the continuing flow of financial supports to firms providing benefits. For example, firms have not only been permitted direct tax credits on housing expenditures of up to 1.5 percent of turnover, but additional, often non-trivial, tax breaks on their profit tax liabilities. As a consequence, divestiture of housing to municipalities may not have a large direct budgetary effect. Aside for explicit offsetting support through tax relief, there is evidence that social benefits costs have also been offset by government transfers. The compensation that results, however, appears to be both partial and concentrated among the larger firms in terms of employment.

Enterprise Restructuring in the FSU