Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Freeing Factories Of Social Burdens

RODNIKI, Central Russia -- It was once a joy for children and courting couples, but the creaking ferris wheel in the formerly grand amusement park of Rodniki, some 300 kilometers northeast of Moscow, is now just one more headache for management of the local textile factory.

Rodniki Tekstil, the main employer in this town of 34,000 in the Ivanovo Region, owns the ferris wheel and the city amusement park. But the park is not a paying proposition.

With their local industry depressed, residents cannot afford to pay the 1,000 rubles (20 cents) it costs for a ride. For Rodniki Tekstil, itself deep in financial crisis, the last thing it can afford to do now is subsidize carnival rides. What it needs is to extricate itself from a vicious circle that has the amusement park -- and Rodniki Tekstil -- grinding to a halt.

The creaking ferris wheel in Rodniki is symptomatic of a much bigger problem for thousands of Russian companies.

In company towns throughout Russia, social services that were once funded and administered by the town industry are struggling to survive in a post-Soviet economic landscape. Factories are loath to continue supporting the services, which hang like millstones around the necks of industries striving for fiscal health. And city administrations are reluctant to take over the projects, as they themselves are struggling to make ends meet in the face of failure by the local industry, the cities' main tax base.

Rodniki Tekstil -- which at its peak employed more than 11,000 people, only half of which now remain -- has an array of social services on its balance sheet that would, in the West, be owned and funded by the city. The list includes most of the housing in Rodniki, 11 kindergartens, a hospital, several health clinics, libraries, a house of culture, a pioneer camp, a botanic garden, public baths -- and the amusement park. These create a drag on a company, scaring away investors who see that the company will be never be profitable.

"As long as we are being bogged down by housing, kindergartens and other social programs it cannot be profitable for outside investors to deal with us," said Tatyana Zakatnova, the company's deputy director for commercial affairs.

Negotiations with potential European partners from Britain and Sweden have been broken off, she said, because "the numbers on our balance sheet don't add up."

"The social programs are a huge burden for the enterprise," Zakatnova said.

Rodniki Tekstil is in the same deep financial crisis as much of Russia's textile industry. Today 90 percent of productive capacity at the plant is idle, and it can no longer pay for a whole network of non-municipal services that it owns and runs.

"We had hoped the crisis of the textile industry would be short-lived, but unfortunately those hopes have been shattered," said Viktor Otlyotov, head of the local administration. "Now, we will have to take on the social responsibilities."

The plight of Rodniki is not an uncommon one in a country where 70 percent of the urban population live in medium-sized or small towns often dominated by one or a few large enterprises, said Alexei Pankin, a project manager with the Russian Privatization Center, or RPC, the state agency dealing with issues of post-privatization restructuring.

"When the enterprise that dominates a company town enters a crisis, the whole existence of the town is threatened," Pankin said.

One of the first things that is cut is often the company's social objects that represent an economic dead-weight for the enterprise, but are vital for its employees and other local citizens.

In Rodniki, most of the plant's kindergartens were closed when the economic crisis started biting in 1991-92, while others reduced work to only four hours a day, said Valentina Rybina, the deputy head in the local administration responsible for social affairs.

The scaling down of the social sector, whose services were a key component of the Soviet-era "social wage," hit hard in depressed Rodniki where many families were dependent on hidden subsidies in the form of free health-care and child-care facilities.

But Russia's large companies, virtually sinking under the burden of their social obligations, are simply not able to foot the bill anymore.

"The costs connected to programs in the social sphere often eat up 30 percent or more of a company's profits," Pankin said.

That has made social programs an important target for investors taking on restructuring of large privatized companies.

In its effort to restructure the Norilsk Nickel, Uneximbank has, for example, identified the separation of the company's social assets as one of the first tasks it must undertake to turn around the downward trend of the enterprise.

But according to a survey carried out by researchers from Moscow's Higher School of Economics and Institute for Economic Analysis, the process is only slowly gaining momentum.

By the end of last year, 61 percent of the enterprises polled still had all pre-school institutions on their books. Even more were supporting cultural and health-care institutions.

In an attempt to set some of the resources bound up in the social sector free for the actual restructuring of privatized companies, the Russian government has allocated $20 million of a World Bank post-privatization restructuring loan for a two-year program that transfers a total of 170 kindergartens in nine cities to the municipal authorities.

While housing is the single largest social expense for Russian enterprises, pre-school education ranks second and is typically a more "socially sensitive" issue, said Pankin of the RPC, which disburses the money to the regions and manages the project.

The World Bank program helps the municipalities to finance the kindergartens in the difficult transition period. The support depreciates along a sliding scale from 80 percent of total costs in the first six months of the two-year program to 20 percent in the final six months, after which the municipality itself will have to take over all expenses.

In the process the kindergartens, which for the first time have to keep their own accounts, are becoming aware of the need to cut costs and raise money, for example through increased user payments -- skills they will need when the program ends, Pankin said.

The regions receive the money as a grant; the federal government will later repay the loan to the World Bank.

The authorities in Rodniki participate in the project, which includes 11 of the 14 kindergartens in the town, which serve 1,160 children. Several of these kindergartens were closed for up to two years before the project got underway, Rybina said.

In a program that runs parallel with the kindergarten project and is financed by the European Bank for Reconstruction and Development, a group has been working with municipal authorities in eight of the nine regions to work out recommendations on how to manage the social sphere most efficiently.

"The municipalities will be faced with the task of maintaining the quality of social services, while keeping expenses down," Pankin said.

The Rodniki local administration has been hesitant to take over Rodniki Tekstil's social obligations -- amusement park and all -- but starting Jan. 1 the remaining social assets will be transferred.

"We have to relieve the enterprise of this burden," Otlyotov said. He added that the town could only raise the additional 10 billion rubles ($1.9 million) it needs to take over the social programs -- which amounts to 25 percent of the town's current budget -- from increased federal subsidies.

It is vital for the local authorities that the company gets back into shape. In the past, Rodniki Tekstil contributed from 75 to 80 percent of all tax revenue, and it still accounts for some 50 percent of all local tax revenue, Otlyotov said.

The local administration hopes the transfer can finally close a vicious circle.

"The enterprise will work better without the social objects, meaning it will pay more taxes," Otlyotov said. "After all the mill should produce textiles and make clothes -- and the municipal authorities should take care of the social issues."