Timo Linkola

Association of Finnish Local and Regional Authorities


This Conference is devoted to budgetary issues of regions and local authorities in Russia. Under this general topic I like to comment one of the biggest sectors consuming both public and private funds in Russia, the housing sector. We all know, that the Russian housing sector is in a crisis in spite of the fact, that many local authorities devote some 40-60 % of their budgets to housing. This is extremely much. For example in Finnish municipalities housing and technical infrastructure may require only 5-10 % of the budgets. Several people in Russia say that It looks like the money just disappears to housing without bringing proper services to people. For the people of Karelian republic the crisis in heating was too concrete last winter. Unfortunately easy solutions for improving the situation in Russian housing sector do not exist. The necessary reform needs a combination of many efforts. Many of the solutions are not popular.

It looks, that the Russian society has not enough funds to finance the operational, repair and modernisation costs of the existing housing stock. Peoples health, working capacity and quality of life is linked with housing. Marriages of young couples suffer in lack of own apartments and babies are born less. Economic development suffers due to problems of finding apartments there where work is available. Money, energy and water is wasted. Some 60 % of the technical infrastructure is old and in poor condition. Numbers of accidents and collapses in the networks are increasing.

I had a pleasure of working in Russia in 1998-2001 in the Tacis Municipal Management Project. We studied housing services in some municipalities in Novgorod and Pskov oblasts and followed up results of some other projects. My following comments are mainly based on that experience.

Ownership of apartments

Most of the previously state owned apartments in multi storey buildings have been transferred to municipalities and from them to private ownership. Over 60 % of the apartments are now private and most of the rest owned by the municipalities. In the privatisation the inhabitants have got their apartments free of charge. The interest for further privatisation has in many cases slowed down, because the inhabitants would like to get a better apartment to be privatised. Some inhabitants are also afraid of property taxation of private apartments. The privatisation has left the roofs, external walls, corridors and lifts to problems of the municipality. In normal market economies the owners of apartments also own jointly these common parts of the buildings through the association of housing owners/condominium and local authorities have no responsibilities in the totally private buildings. In spite of existence of condominium legislation in Russia the creation of condominiums in the existing housing stock is not proceeding.

Should all of the apartments be privatised? Should creation of condominiums in the existing housing stock be promoted?

Private ownership of apartments and private rental sector in housing are the normal and approved solutions in market economies. However there are always people, which due to various social problems (poverty, disability, alcoholism, divorces etc.) can not find a private solution in their housing needs. For that reason the approach in all Nordic countries is, that municipality has a duty to provide some social apartments to the people in need. For this reason the municipality shall also own some apartments, for example 10 % of the housing stock. At the moment the Russian municipalities seem to lack legal tools to stop privatisation, when they are close to loose their social housing stock.

One of the real main reasons against condominiums in Russia in addition to certain attitude constraints seems to be the complexity of housing subsidies and privileges to wide groups of inhabitants. If the private condominium is expected to be financially responsible on housing costs of its inhabitants how are the privileges and subsidies arranged for the inhabitants ? That needs cash money from the municipality to the condominium and until now such money has not been visible. The condominium can not take the financial responsibility of privileges and subsidies.

Too little is discussed in the housing reform on the role of private villas and cottages. They were widely private already during the Soviet period and are now as well. However the social support given to inhabitants of multi-storey apartment buildings through privileges and subsidies on cleaning, maintenance, repairs and heating is mainly lacking from the cottage owners. They have to repair and heat their houses themselves even if they are in a population category allowed for benefits. They have also paid the building costs of the building, when people in multi-storey buildings have got their privatised apartments free of charge. People are not treated equally.

Construction of new apartment buildings

The acute housing crisis is mainly linked with the existing housing stock. However also new apartments are needed. The existing buildings will sooner or later become too old for use. How to finance the construction of new homes and who should finance it ? In the market economy people buy their homes and finance their construction. Even in rich societies people have rather little cash for that and this happens mainly by bank loans, which including the interest rate are paid back slowly for example within 20-30 years. It also includes a mortgage system, where the apartment is a guarantee for the bank if the client fails in paying the loan or interest rates. The bank may take the apartment from a non paying client. At the moment the Russian bank system is unable to provide suitable housing loans for the financing of new construction of houses. The mortgage system is not yet properly in operation because the valid annual interest rates around 18 % are too high for normal people. Law on mortgage securities is in finalisation in the State Douma. Most of the municipalities can neither afford construction of new apartments. The new rich business men of Russia seem to be at the moment the only population group, which can finance new apartments. An operational mortgage credit system has to be created to finance the construction of new apartments for normal population. The ones to pay this system will be the people themselves, but hopefully with public support to decrease the interest rates of the loans.

Renting of apartments

In spite of clear existence of private rental markets of apartments in Russia most of the Russian citizens are not yet fully familiar with market economy of rental apartments. The possibility for municipalities to collect rent is still very new and the marginal rents of municipal apartments are still far from real rents in the market economy. Some people may still think that the rent means only payment on heating, water and maintenance of the house. The rent however is income to owner of the apartment to cover his investment in the apartment and a profit for this capital. If you are a private investor, who can either own and rent an apartment or keep the money in a bank and get an interest for this saving or perhaps buy profitable shares to a company you shall get such incomes from renting that it is worth of doing. For example a 5 % annual interest on the money invested in the apartment is not yet much in the rental market. In order to be able to invest on housing also the municipality shall get a rent which covers the interest costs of the money invested in housing. Increase to municipal rents on top of costs of heating, water etc. is a necessary way to increase municipal investments in housing.

Municipal housing enterprises

Heating, water supply, waste management, maintenance and cleaning of buildings are in general in Russia provided by municipal enterprises. Often they also take care on urban roads and parks. Electricity, gas and telecommunications are often provided by regional state owned enterprises or in some cases by private enterprises.

The municipal enterprises on housing sector are in huge difficulties. In general their incomes do not cover the costs and the difference is financed by growing debts. In many of the enterprises the debts are much higher, than annual costs of the enterprise. No way seems to be out from these old and growing debts. With Russian financial results most of the housing enterprises would be in bankrupt in Western Europe.

The enterprises in general are managed by a director appointed by the head of administration of the municipality. No board advises nor controls the enterprise. Citizens are not involved in the discussions nor control of their housing services. In spite of certain state supervision no annual financial audit is obligatory in these enterprises. Poor auditing promotes corruption and financial miss management in these enterprises. Their management, planning, reporting, financial administration and invoicing needs modernisation. The Russian housing sector enterprises have in general 5-10 times bigger staff than relevant western enterprises serving same amount of population. Cost savings and increased effectiveness are urgently needed in these enterprises.

The technical know how in municipal enterprises varies. In general an external and independent technical audit of the service systems now and then for example every three year might increase the effectiveness of these enterprises. Waste of water through leakage, waste of heating energy through leakage of hot water pipes, poor heating isolation of buildings, lack of thermostats in heating batteries, lack of measuring of production of water and heat, lack of measuring of energy- and water consumption of clients, poor automatisation etc. are among the technical details, which may need profitable improvements. Leakage of water in the network is typically 20 % of the water consumption, sometimes more. Water consumption in Russian water supply is 20-40 % more, than for example in the Finnish water supply networks. Energy consumption in Russian buildings is due to poor isolation 2-4 times higher, than in Finland. Many of the Russian service providers do not even measure their water or energy production nor consumption and they are unable to calculate real leakage nor to identify their waste of resources.

Privatisation of housing services and increasing competition in service production is a way to increase efficiency in the housing sector. Cleaning and maintenance of buildings is the easiest sector to privatise. Water supply and central heating services are due to necessary networks always monopolistic. If you privatise water supply and central heating, the enterprise naturally has to cover its costs and to collect a profit. In Britain this has resulted to high increases to tariffs and poor services. In Russia privatisation is extremely difficult due to complicated Russian tariff, privilege and subsidy system and lack of payment to cover them. Privatisation of cleaning and maintenance suffers on the same problem. In Finland cleaning and maintenance is totally private so that the condominiums as clients ask tenders for it. Urban water supply is provided by municipality or municipal enterprise. Central heating in Finland is provided by municipal or private heating enterprises, which often produce electricity simultaneously.

Who pays the housing

The public discussion on housing reform in Russia at the moment seems to concentrate on the ways and timetable of getting population to pay their housing costs. At the moment the housing costs like heating, water supply, waste management and maintenance of buildings are shared between population, enterprises, state and municipal budget organisations like schools hospitals etc., state and municipal budgets and the municipal housing sector enterprises. Too much of the costs are not covered at all, which means increasing debts to housing enterprises and poor services.

The enterprises may have some 3-6 times higher water tariff per m3, than the population. The enterprises however normally are the most reliable payers of the bills, because water and heating can be cut from them in lack of payment. The worst clients, who in several cases paid not at all their bills on water or heating, seem to be the municipal budget organisations like schools, hospitals etc. They lack funds for these payments in their own budgets. Population is often blamed on poor payments, but in the municipalities, which I know, they pay rather well. Perhaps 70 % of the population pay properly the bills sent to them. However the tariff, privilege and subsidy system is constructed so, that bills sent to them do not cover their real costs. The difference between cost of population and the bills sent to them was supposed to be paid by the municipality, but they have not been able to cover fully their expected share of costs. This has left the housing enterprises to growing debts. These debts are not debts to banks. Instead they are unpaid energy bills, unpaid taxes etc.

What in fact are the real housing costs, how they are shared and are there ways to save these costs is not easily answered. The ways of calculating them is not transparent for population nor for politicians.

In the ongoing discussion on transferring the housing costs to population, the people should be provided with reliable information on what these costs consist and is everything done to reduce these costs. Consumers representatives should be involved in the management of housing services.

World Bank has in its several projects tried to promote housing reform in Russia. It has offered loans for repairs of buildings, for municipal water supply and for municipal heating. These projects have not proceeded according to plans due to financial difficulties of selected pilot municipalities and lack of central state interest to guarantee the repayment of these loans. The poor progress of these loans is a negative symptom for other local and international financial sources as well. Who will finance the repairs and modernisation of utilities networks in Russia in the future ?

Tariffs, privileges and subsidies

In Finland the tariff system on housing services is in principle very simple. Clients pay all costs of the services. Unit prices are the same for all clients inside a municipality. Consumption is measured and services are cut if the bill is not paid. The European Community is trying to promote competition is housing services and this means, that municipal enterprises shall not be financed with municipal money if the same benefits can not be given to private enterprises. World Trade Organisation requests the same. Our new Finnish water supply law clearly commands, that the tariffs have to cover all costs. In our system the poor people, which exist in all societies, are helped with targeted social support, not through the tariff, subsidy nor privilege system. Some 10-15 % of our population receive some way of social support for their housing.

The Russian system of housing tariffs, privileges and subsidies is extremely complicated. A lot of social support to population is already included in the tariff system. If enterprises pay 3-6 times higher price on m3 of water than population this means, that water supply tariff is an additional tax on enterprises and this money is distributed to all of the population equally, not targeted according to their social needs nor poverty. If the tariff is not even supposed to cover the costs of the service, like the tariff may be designed to cover only 60 % of the costs, the rest of costs 40 % is also a social benefit to all consumers without any kind of targeting to people in the real need.

In general the Russian housing tariffs do not properly include the costs of investments to the equipment and networks. Those are expected to be financed by the municipality from its own budget outside the budgets of the municipal housing enterprises. However municipalities have too little money for investments and as a result necessary repairs, modernisation of equipment and enlargements to network do not proceed. Instead the networks are getting old, they break down and in the cold Karelian winter the heating may stop. In Finland the tariffs include the investment and repair costs of networks. We have an additional tariff for new clients, when they join the network, so called connection tariff, which covers much of the enlargement of the network.

The Russian government has expressed its commitment on reform, where tariffs of housing services are based on full coverage of costs. It has also expressed its willingness to target the social benefits to the people in need. The practical implementation of this reform is both politically and technically not easy. Its key legal solutions are still under discussion in State Douma. This year before Douma elections is not ideal for decisions, which increase the peoples housing costs.

More than 20 federal laws provide to various groups of population privileges to housing payments. Normally this means, that they can pay only 50 % of the costs according to housing tariffs. War veterans, disabled people, victims of Tsernobyl and heros of the state are examples of these population groups. Some 40 % of the population, too much, get privileges. These privileges are valid independent of the social need or poverty of the recipient. In several cases the whole family gets the privilege, even if only one family member belongs to the special group. If the changes to law on principles of housing policy are finally approved in State Douma the Russian privilege system will be abolished after year 2005.

The Russian social support system to housing costs of the poor is in principle included in the subsidy system. People do not need to pay more than 18 % of family incomes to housing. The bills are reduced if incomes are small or housing costs are high. Some 4-8 % of the population gets these subsidies, and the municipalities are expected to finance these to the municipal enterprises. Unfortunately many of the municipalities are unable to cover these costs. This means debts to enterprises.

The system of tariffs, privileges and subsidies has been created by federal legislation and federal bodies. Simultaneously the municipalities have not received incomes to implement these laws. Thanks to better situation in the Russian economy the federation seems to be now more ready than earlier to provide better funds for local authorities to support peoples housing costs.

In the reform a clear direction for future is towards targeted social subsidies. In principal it sounds good, but there are a number of technical problems in the targeting. After the laws are cleared at federal level a lot of technical challenges will appear. In order to direct subsidies to poor households, you need to know who are the members of the household and what are their incomes and what is their property. The Russian system of population registration, apartment registration, tax recording of incomes and property of the people, computer systems, software, transfer of data between authorities etc. need to be developed to manage the data needed for targeted social support. In order to manage the invoices and payments, also the bank system and financial systems of the housing enterprises need modernisation. It is a big task.

Towards the future

The Russian government approved in November 17, 2001 a subprogram Reform and Upgrading of the Housing and Utilities Sector in the Russian Federation. In this program some key elements are restructuring of old debts of municipal housing enterprises, full responsibility to population on their housing costs and targeted social support to poor in their housing problems. The programme costs for period 2002-2010 were estimated to be 510 470 million roubles. The federal budget is expected to provide only 1% of these funds. Costs of the reform are left to people and to local and regional authorities. During spring 2003 amendments to law on guidelines of housing policy are in State Douma under finalisation.

The responsibility on arranging debts of the housing enterprises is given to municipalities, which until now have been too poor to cover their expected share of the costs and which in fact are locally in charge of creation of these debts. We all know, that the municipalities are not able to cover the old debts, good if they can stop the increase of new debts. The old bad debts should perhaps just be cancelled and forgotten.

Increased role to population on their housing costs and better targeting of social support shall proceed simultaneously. Technically it needs a lot of work but I can not see any alternative to this. After operational costs in the existing housing stock are in an order solutions to the even bigger challenge of financing new housing construction have to follow.

If incomes and costs in housing are not in balance I see, that also everything possible is needed to decrease the unnecessary costs. The municipal housing sector enterprises will need increased efficiency, modern management, independent financial and technical auditing, costs savings and transparency towards inhabitants.

We all need a home. Housing reform also concerns all of us. Many of us may actively participate in the reform. Gosstroi alone can not implement this reform. It is implemented by central, regional and municipal administrations, by their politicians, experts and enterprises and by the inhabitants all together. I hope the best success for every participant of this reform.