INSTITUTE OF URBAN ECONOMICS
REVIEW OF KEY REFORMS IN THE URBAN WATER SUPPLY AND SANITATION SECTOR OF THE RUSSIAN FEDERATION
Final Report
Prepared for the OECD by Institute of Urban Economics
Moscow 2004 2
CONTENTS
Introduction ...... 3 Chapter 1. Technical and Economic Condition and Financial Standing of the Water Supply and Sanitation Sector in the Russian Federation...... 3 1.1. Coverage with WSS Services...... 3 1.2. Physical Condition and Accident Rate of Fixed Assets ...... 3 1.3. Investment in Fixed Assets in WSS ...... 4 1.4. Financing the Sector Utilities ...... 5 1.4.1. Tariff Regulation Practices...... 5 1.4.2. Collection Rate and Payment System...... 6 1.4.3. Installation of Water Meters and Switch to Billing for Services Based on Actual Consumption...... 8 1.4.4. Non-cash Payments ...... 8 1.5. Financial Standing of the WSS Utilities...... 8 1.5.1. Financial Performance...... 8 1.5.2. Arrears of the WSS Utilities...... 9 Chapter 2. Institutional and Legal Reforms...... 10 2.1. Strategic Planning of Reform ...... 10 2.1.1. Development of the Sector Development/Reform Strategy...... 10 2.1.2. Solving the Issue of the WSS Utilities’ Arrears...... 11 2.1.3. Medium-Term Planning of Capital Investment in the WSS Infrastructure...... 11 2.1.4. Decentralization: Delegation of Responsibility and Powers to Lower Level of Government ...... 11 2.2. Tariff Regulation ...... 12 2.3. Technical and Environmental Regulation of the WSS...... 13 2.4. Ownership in Fixed Assets of the WSS...... 14 2.5. Ownership Management...... 15 2.6. Private Sector Participation ...... 16 2.6.1. Emergence of a New Trend...... 16 2.6.2. Barriers to Private Business...... 16 2.7. Transparency of WSS Utilities...... 17 Chapter 3. Social Protection and Environmental Protection ...... 17 3.1. Social Protection of Population ...... 17 3.1.1. Setting Household Tariff below Economically Sound Level...... 18 3.1.2. Lowering the Cost of Services for Some Categories of Individuals below Household Tariff...... 19 3.2. Affordability of WSS Services...... 21 3.3. Public Participation ...... 22 3.4. Environmental Trends ...... 22 Conclusions ...... 23 References ...... 26 Attachment 1. EBRD-funded Projects in the WSS of Russia ...... 28
3 RUSSIAN FEDERATION
Introduction
Russian Federation water supply and sanitation (WSS) sector is for many years in a rather difficult situation. High deterioration of the infrastructure results in frequent accidents and interruptions in water supply and the system may technologically collapse rather soon. Significant arrears may lead to financial disintegration of the system as well. Efficiency of the Russian water utilities remains low. Prevalence of the administrative system of management, incomplete financing (primarily, from the budget), and inadequate tariff regulation still deprive the WSS utilities of the incentives to cut non-productive costs.
Nevertheless, over the past four years a number of negative trends have been stopped and in some cases prevailed. Further depreciation of fixed assets, increase in accident rate, and financial losses build up were successfully dealt with. The payment collection rate from the households was noticeably increased and a budget funding deficit of the sector was reduced.
Over the past four years, the legal and regulatory framework was significantly improved by establishing more advanced and fair “rules of the game,” when the Federal Subprogram “Reform and Modernization of the Housing and Communal Complex in the Russian Federation” was adopted in 2001. To elaborate on the provisions of the Subprogram, federal-level “Fundamentals of Pricing…” [32] were adopted, and Laws “On the General Principles of Tariff Control…” [18] and “On Investment Agreements…” [17] were drafted and to be ready for adoption. All the documents were developed in the spirit of the Almaty Guiding Principles; in many respects, they elaborate on principles and provide a sound foundation for the future sustainable development of the WSSS in Russian Federation.
In Russian Federation over the past two years private business has become more proactively involved in operating the WSSS. Currently at least nine large companies, including three foreign operators work in the sector and some fifteen delegated management contracts have been concluded so far. Relatively brief experience of the private sector participation has already produced positive results. However, barriers inherited from the Soviet times still hinder broader private sector participation. This proves that the implementation of the Guiding Principles has just started and that there is still a lot to accomplish in order to complete the task.
Chapter 1. Technical and Economic Condition and Financial Standing of the Water Supply and Sanitation Sector in the Russian Federation
1.1. Coverage with WSS Services
WSS services coverage in Russian Federation remains on a rather high level. In 2003 the Institute of Urban Economic (IUE) conducted monitoring of water utilities in urban areas and reported that the level of centralized WSS coverage has been increased in 2002-2003. In large cities, water services coverage reached level of 95 percent of population; in medium-sized and small cities, it went up from 86.4 percent to 88.6 percent [4]. The increase can be attributed to the replacement of wells and street standpipes with centralized water supply in each individual household (a stand-pipe in the backyard or a tap in the house)
According to the same report, sanitation services coverage has remained practically unchanged in 2000-2003, on the level of 73.3 percent in the first half of 2003.
1.2. Main Assets Physical Conditions and Accident Rate
4 In March 2003, Russian Gosstroy evaluated technical conditions of the WSS main assets. Based on the evaluation the level of water supply networks depreciation reached 65.3% and the depreciation of sanitation networks reached the level of 62.5% (as of 1 January 2003). Note that this is an “accounting depreciation” while the actual status of the main assets is extremely difficult to estimate, taking into account the insufficient financing for maintenance and operations. However, even according to accounting calculations, as of 1 January 2002 at least 29% of the water supply networks and at least 17% of the sanitation networks needed to be urgently replaced and the situation has not significantly changed over the past two years. According to the Goskomstat, 21% of the entire water pipelines needed to be urgently replaced by the end of 2003.
Water losses and the magnitude of unaccounted-for-water is on the level of 30%- 40%. In 2002, the total number of accidents in the water supply and sanitation networks in Russia was 205,000 and 31,000, respectively. In 2003, the number of accidents in the water supply and sanitation networks increased to 212,000 and 32,000, respectively. Although the increase is not very dramatic, the accidents rate remains on a rather high level
In its 2003 monitoring report the IUE also confirmed that the number of accidents in the water supply and sanitation infrastructure did not significantly increase during the same period [4]. Most probably the “unfrozen” in 2000-2001 water tariffs allowed to improve financing of repair and maintenance works in the sector and thus significantly contributed into slowing down the increase of the rate of accidents.
1.3. Investments in the WSSS main assets
In order to improve the situation and to enhance water supply and sanitation facilities and infrastructure contemporary water and wastewater treatment technologies should be introduced to the WSS sector. According to a Subprogram “Reforms and Modernization of the Housing and Communal Services (HCS) Complex in the Russian Federation” (hereinafter “Subprogram”)within the Federal Program “Housing” for 2002-2010, water supply and sanitation facilities and infrastructure enhancement and reconstruction would require Rub 210.1bn in capital investment [27]. Recently, the Russian Gosstroy estimated that the task of the sector revitalization would require approximately Rub 350bn for the same period.
It should be recognized that neither the state budget nor the population would poses financial resources of such a magnitude. Moreover, federal financing of capital investments in the communal infrastructure has been gradually decreasing. For example, the 2004 HCS capital expenditures budget is 15% less than the 2003 budgeted amount.
It should be also considered that the official investment estimates were based on the WSS utilities’ calculations. Moreover, these calculations mainly address extensive expansion of the infrastructure under budget financing with no investment returns.1 However, the budget financial resources are very limited and cannot adequately fulfill all the investment requirements of the sector. Thus, the sector modernization is impossible without: (a) appropriately set priorities; (b) coherent infrastructure optimization studies; and (c) sufficient credits or loans.
Currently, the need to attract private investment is declared politically, but in reality only minor budget resources are still available.2 Since the Soviet Union times, housing and communal economy has been developing out of the budget funds; the sector is affected by inert mentality of many managers unable to view capital investment in the communal infrastructure as commercial investment. In addition to the past
1 Furthermore, most estimate calculations were made based on the 1984 pricelists (!!) with the pattern of relative prices (dating back twenty years) known to be distorted compared to current relative prices. The estimate cost was then converted into current prices, using price indices, which are a rather rough reflection of the true change in real prices. 2 Note also that there is a gap between the owner of the fixed assets (usually, a municipality) and those who actually finance capital investment in the rehabilitation and development of the fixed assets (a lot of the capital investment comes from the budget of the constituent entities of the Federation) in most municipalities with weak revenue base of their budgets.
5 experience, this is also largely due to the nature of the capital investment itself, which often had to be made in the emergency regime without any feasibility studies conducted in advance.
It should also be recognized that lending institutions still fear to invest in the WSS projects because of the high level of the investment risk.
The following main barriers (risks) to private investment in the WSS should be noted:
• Objectively low income of the population could render unaffordable tariff increase necessary to repay the credits and loans taken by the utilities • Inadequate tariff policy is fraught with the risk that refusal to raise tariffs out of political considerations will make it impossible to pay back the capital investment out of the tariff proceeds3 • Political risks related not only to the tariff policy, but also to the local governments’ interference in the day-to- day management of the utilities (widespread at present) • Large arrears of the sector utilities, many of which are on the verge of bankruptcy • Weak local budgets within the framework of the current sector utilities financing scheme might prevent the utilities from generating adequate income so that they could pay back to their lenders • Inadequate awareness of the true state of fixed assets of the WSS utilities is fraught with the general risk of accidents and sharp (abrupt) increase in the need for additional investment • Absence of medium- and long-term planning of capital investment in the local and regional levels makes it difficult to calculate investment requirements from extra-budgetary sources, which has accounted for high uncertainty in the sector.
As a result, as regards extra-budgetary sources of funding, private financing of the capital investment in the WSS infrastructure lags much behind the concessional loans extended by the international lending institutions (EBRD,4 World Bank, etc.). When financing investment projects in the WSS, the latter aim to reform the sector relations (primarily, “to decentralize”, “to commercialize” and “to involve private sector”). In particular, before a loan agreement (US$ 16 mln) is signed for the implementation of the Program of Priority Investment in the WSS of the City of Yaroslavl, at the order of the EBRD major efforts are made to develop Yaroslavlvodokanal institutionally with a view to turning it into a financially viable market-oriented enterprise.5
1.4. Financing the Sector Utilities
1.4.1. Tariff Regulation Practices
Over the past four years, utility tariffs, including the WSS tariffs, were growing faster than inflation rate measured in terms of the consumer price index (CPI). This is due to higher recovery of the housing and communal services costs by the tariffs for households as envisaged by the HCE Reform Strategy (see Table 1.1).
Table 1.1. Price/Tariff Indices for Some Housing and Communal Services Compared to CPI, December-on-December (In percent)
Growth Rate 2000 2001 2002 2003 Water tariff 145.6 163.4 n/d n/d Sanitation tariff Electricity tariff 154 133.6 n/d n/d Communal services as a 144.7 153.8 148.3 n/d
3 As already noted, tariff setting does not take into account the interests of potential investors, tariff regulation procedures lack transparency and are unclear for potential investors. 4 The list of the projects funded in Russia is shown in Attachment 1. 5 The efforts include development and implementation of a plan of immediate actions and plan of corporate development of Yaroslavlvodokanal, as well as training.
6 whole CPI 120.2 118.6 115.1 106.2 Note: CPI – consumer price index. Source: Guides “Prices and Tariffs in the Housing and Communal Economy («Цены и тарифы в жилищно- коммунальном хозяйстве») Issue 2(16), 2003.
Study of the tariff regulation practices in the municipalities of Russia conducted by the Institute of Urban Economics in 2003 detected the following typical problems suggesting a delay in the reform of the tariff regulation by the WSS utilities:
• Overall, tariff regulation is a belated response to changing external environment for utilities (for example, increase in prices for used inputs)
• Overall, tariff regulation relied on the “cost + standardized profitability” formula, which does not encourage the regulated utilities to reduce non-productive costs or to save resources
• Practically in all the municipalities, review and approval of tariffs for the regulated utilities was not linked with the budget process
• In most municipalities, there are no formalized transparent tariff regulation procedures. Procedures establishing an unambiguous link between tariffs and production and investment programs of the WSS utilities are practically non-existent; there are no formalized grounds for tariff revision; tariff validity is not stipulated (in most municipalities tariffs are set for an unlimited term); and there are no procedures for review of tariff revision applications filed by the utilities or those for matching utility needs with user capacity
• Due to absence of formalized procedures, the tariff issue is often the tool used by the heads of the local self-governance or members of the parliament to achieve their political agenda. As a result of populist decisions, municipal utilities do not receive funding adequate for their normal operation, which impairs the technical condition of their fixed assets and lowers the quality of the housing and communal services [11]. Formatted: English (U.S.) 1.4.2. Collection Rate and Payment System
А. Collection Rate from Households
The Guiding Principles identify higher collection rate for water as a priority objective [10]. In Russia, the collection rate increased markedly over the past four years. As of 1 October 2003, actually- collected-to-assessed-payments ratio was 85.3 percent for water supply and 90 percent for sanitation against 40 percent to 60 percent in late 2000. In some periods the collection rate in a number of utilities was even above 100 percent, i.e., in addition to paying the current bills, users also cleared the arrears.
Higher collection rate is primarily due to an increase in people’s income as well as improved collection practices, such as prosecution of, and psychological pressure on, fraudulent non-payers (for example, putting up the lists of debtors at the entrances to apartment blocks). Unlike in the Republic of Armenia, in Russia the installation of individual meters did not have any major impact on the increase in the collection rate from the households.
It is also noteworthy that higher collection rate sharply improved the turnover of both accounts payable and accounts receivable. According to the IUE monitoring, the sample-average turnover of accounts receivable was 7.3 months in 1999 and 2.5 months in mid-2003, i.e., it improved almost 3-fold [4].
B. Budget Component in the WSS Utilities’ Income
7 Payment for the WSS services provided to the population is not limited to tariff payments. Under the current legislation, income of the WSS utilities depends on the budget transfers and, therefore, on the inter-budget relations and political sentiment of local and regional authorities.
The following facts confirm that the shortfall in budget financing of the sector utilities reduced markedly since the Almaty Conference. Pilot conversion of the housing subsidies into cash payments to individuals has had additional positive impact on the financial sustainability of the water utilities.
1. Compensation for Housing Subsidies for Low-Income Families. The Guiding Principles recommended switching from subsidies for the WSS utilities to targeted subsidies for low-income population. The transition has been implemented consistently in Russia. Over first nine months of 2003, actual subsidies for the population amounted to Rub 1.24 bn for water supply and Rub 1.07 bn for sanitation; and compensation from the budget, to 85 percent of the utility needs. Pilot conversion of housing subsidies into cash payments to individuals has been introduced successfully in more than ten regions of Russia. Hopefully, the entire housing subsidies scheme will be converted into cash payments to low-income families in 2005 (see Chapter 3).
The main idea of the pilot was to re-channel the budget funds from the WSS utilities to the population. Thus, transition to the payment of “housing subsidies” using social accounts enhances the accountability of the public authorities of the constituent entities of the RF and the LSG authorities to the public.6 In this context, timely and complete funding of the subsidy scheme is a prerequisite for successful pilot implementation of the personalized social account scheme. The fact that the budgets do not allow for a shortfall in the funding of subsidies for the population undoubtedly has a positive impact on the financial standing of the WSS utilities.
2. Budget Compensation to the WSS Utilities for the WSS Service Privileges Granted to Various User Categories. By various estimates, total housing and communal service privileges granted in 2003 are worth from Rub 50 bn to Rub 79 bn.7 Unfortunately, accurate figures are unavailable because there is no straightforward system of granting and accounting for the privileges. The privileges are to be compensated from the federal and regional budgets. In 2003, compensation to the WSS utilities for the privileges granted amounted to approximately Rub 40 bn.8 The size of the privileges has been going up each year due to an increase in the cost of communal services.
In view of the representatives of the private business involved in the WSS, it is the existence of, and inadequate compensation for, the WSS service privileges granted to the population which is the main threat to financial sustainability of the WSS utilities at present (after the tariff policy, of course). The way out of the situation is to streamline the social obligations of the state and to “monetize” the privileges granted. The task is for the utilities to stop performing the social support function not inherent in them and for all the social support tools to be arranged within the “state – individual” framework. The solution appears obvious from the common sense viewpoint. However, politically, it would be very difficult to accomplish. It is expected that in 2005 pilot monetization of the housing and communal services privileges will be introduced similarly to the pilot transition to the personalized account scheme.
3. Subsidies to the WSS Utilities for Gap between Household Tariffs and Full Tariffs for Communal Services. Financing of the subsidies is a responsibility of the local governments (municipal budgets). Over first nine months of 2003, actual financing amounted to Rub 3.16 bn for water supply and Rub 2.37 bn for sanitation. The relative size of the obligations has been going down each year. The federal standard level of payment for the housing and communal services by the households is 90 percent in 2004. Thus, the budgets are to compensate just 10 percent of the cost of services in the form of
6 Demand for subsidy funds does not decrease because it depends on the prices and tariffs on the housing and communal services set in the municipalities and people’s income. 7 By way of comparison, in 2002, Rub 173.6 bn worth of subsidies was financed with actual services worth Rub 180 bn; Rub 26 bn worth of privileges out of those actually granted worth Rub 50 bn; and Rub 12 bn worth of housing subsidies out of those actually paid worth Rub 15 bn. 8 Over first nine months of 2003 Rub 1.42 bn worth of privileges was compensated to the water utilities; the sanitation privileges amounted to Rub 1.20 bn.
8 subsidies. In reality, household tariffs accounted for an average of 83 percent of the full cost of housing and communal services in mid-2004. However, it should be underscored that the local budgets have subsidized the utilities in an orderly fashion and practically in full. Moreover, as required by the federal standard, the level of payment for the cost of housing and communal services by the households is to reach 100 percent in 2005 (see Chapter 3).
1.4.3. Installation of Water Meters and Switch to Billing for Services Based on Actual Consumption
The Guiding Principles claim that “enhanced efficiency and transparency of metering of the water consumption in apartment blocks should become a first step towards achievement of the ultimate objective – installation of water meters for individual users. The meter installation costs should be comparable with the economic benefits from their use” [10]. As regards the latter, with deflated tariffs the payback period for hot and cold water meters is still longer than their useful life.
According to the IUE monitoring, the sample-average share of metered connections increased considerably – from 8.6 percent in 2000 to 20.2 percent in mid-2003 [4]. It should be noted that the installation of meters in most municipalities is initiated by the municipal authorities, but often they are installed by the population at their own expense.
Importantly, meter installation does not mean that the payments to the service provider are based on the meter readings. The example of the City of Moscow is representative. As of end-2003, more than 350,000 apartment water meters were installed in Moscow, but billing was not based on meter readings and households still paid for the water based on the approved standards (in Moscow, 384 lcd of total water consumption).
The well-known problem of payment for water for the general building needs should be specifically highlighted as an objective issue of the water service payments by users in apartment blocks based on actual water consumption volume.
1.4.4. Non-cash Payments
Russia has fully eliminated regular non-cash payments the Guiding Principles focus on. This is one of the few recommendations of the Guiding Principles fully implemented in Russia. The causes of success are: the Federal Government stopped accepting non-cash payments for taxes and charges and the energy sector, for the electricity.
1.5. Financial Standing of the WSS Utilities
1.5.1. Financial Performance
As a whole in Russia, the financial performance from core activities amounted to Rub 4.9 bn of losses from the water supply services and Rub 976 mln of losses from the sanitation services over nine months of 2003. Main causes for the sector utilities’ financial problems still are: shortfall in budget financing, imperfect tariff regulation, and inefficient management. Given that total losses in the HCE sector amounted to approximately Rub 300 bn, one can conclude that the situation in the WSS is not so bad and some trends have even been reversed in the field.
Moreover, the IUE monitoring shows that the water utilities in many large cities are profitable [4]. However, the factors identified above cause their non-productive losses and thus affect their financial performance.
During the period under consideration, the WSS utility bankruptcy proceedings were initiated in some small municipalities. This is not so much due to the creditors’ desire to get liquid assets of the municipalities (fixed assets of the utilities) against debt as, on the contrary, due to the local governments’ attempts to transfer fixed assets into newly established enterprises with a clean balance sheet. In the latter case, the local government, using its ownership rights, transfers the WSS facilities to other users with the
9 debt remaining in the previous enterprise. Often this includes signs of premeditated bankruptcy or false bankruptcy punishable by law. In any event, this does not solve the issue of current payments or accumulated arrears. In this context, financial rehabilitation of the WSS utilities assumes special importance, a component of which is measures to prevent the liquidation of the aforementioned utilities.
1.5.2. Arrears of the WSS Utilities
Considerable accounts payable and accounts receivable of the sector utilities are one of the most acute and still unresolved problems of the WSS in Russia which have impeded its reform. According to official data, as of 1 January 20049 the accounts payable and accounts receivable of the WSS utilities were as follows:
Table 1.5.2. Arrears of the WSS Utilities as of 1 January 2004 (In thousands of rubles)
Water Supply Sanitation Total accounts payable 28,638,129.6 21,316,948.8 Of which to the budget 8,202,688.3 5,509,426.8 Accounts receivable 28,472,642.1 21,046,999.5 Of which Budgets of all levels 6,247,644.2 4,802,923.6 Households 7,362,205.1 5,559,646.5 Source: Goskomstat of Russia.
Such huge arrears have had a very negative impact both on the current financial and economic standing of the sector and its development outlook. It is common knowledge that the debt burden limits the activity of private entrepreneurship in the WSS and renders it unattractive for investment. It should also be taken into account that the past due accounts payable divert large amounts on fines and late payment interest, which aggravates even further the already difficult position of the debtor utilities. As noted above, the debt burden renders the sector utilities unattractive for private investors.
Table 1.5.2 shows that Russia-average accounts payable exceed accounts receivable by Rub 165 mln for the water supply services and Rub 269 mln for the sanitation services. It is an indication of extreme financial instability of most water supply and sanitation utilities in Russia. Indeed, in such a situation, even if the accounts receivable are cleared in full, the utilities will be unable to settle with their creditors.
The following causes for such a negative situation should be highlighted: (1) low collection rate with rapidly growing costs while the WSS tariffs are “frozen”; and (2) shortfall in budget financing not recorded in the accounting statements of the water utilities as “accounts receivable” although the latter have legal grounds to collect relevant amounts from the budgets.
9 Unfortunately, appropriate data as of early 2001 was unavailable, but chances are that not only the arrears built up, but also the negative gap between them increased over the past four years.
10 Chapter 2. Institutional and Legal Reforms
General conclusions of the Almaty Ministerial include a statement that “despite acute investment requirements, capital investment alone is not enough to solve the problem of degradation of the urban water supply sanitation systems… Moreover, the inflow of funding with the current institutional and regulatory setup preserved would only maintain the existing practices with all their shortcomings, divert attention from the urgent need for reform, and increase future costs on rectifying the existing situation. Without major structural reform in the urban water supply sector it will be impossible to attract funding necessary to solve such large-scale problems” [6, p. 18]. This Chapter of the Report describes key areas of the legal reform and institutional change in the WSS over the past four years and those planned.
2.1. Strategic Planning of Reform
2.1.1. Development of the Sector Development/Reform Strategy
Current scenario of the sector reform is set forth in the Subprogram “Reform and Modernization of the Housing and Communal Complex in the Russian Federation” of the special-purpose Federal Program “Housing” for 2002-2010. It determines main approaches to, and economic principles of, the reform. Based on the document, the constituent entities of the Federation and municipalities had to develop their own reform and modernization programs, based on which concrete projects on energy saving, fixed assets retrofitting, elimination of tariff cross-subsidies, transition to targeted social protection of the population as regards payment for housing and communal services, etc., were to be developed. Monitoring of the progress of the HCE reform conducted by Gosstroy shows that most of the constituent entities of the Federation have respective regional programs.
Main objectives of the Subprogram are: enhanced efficiency, sustainability, and reliability of operation of the utilities; attracting investment in the housing and communal sectors; improved quality of services with concurrent cost reduction; and targeted social protection of the population as regards payment for the housing and communal services [27].
Key provisions of the Subprogram:
- Debt restructuring - Introduction of the international accounting standards - Improved financial management - Tariff reform - Introduction of management and service contracts - Attracting extra-budgetary financing - Issuance of guarantees to investors with a view to lowering risks [27].
In particular, the following priority activities were planned at the first stage of the Subprogram:
- Introduce contractual relations in the HCE - Eliminate cross-subsidies for tariffs for the housing and communal services - Simplify and improve efficiency of the mechanisms of social protection of population as regards payment for the housing and communal services - Eliminate subsidies for the HCE - Make an inventory of, restructure and clear, the arrears of the budget, spending entities, and other users (including households) to the HCE utilities [27].
Thus, the federal level detailed what was to be done. Relevant federal-level legislative acts and regulations had to determine how it was to be done; and the regional and local levels, by virtue of the distribution of powers, had to elaborate on the definitions and to decide where and when it was to be done.
It should be specified that the Government did not formulate a stand-alone WSS reform strategy – it is a component of a broader HCE reform strategy.
11 2.1.2. Solving the Issue of the WSS Utilities’ Arrears
Restructuring the accounts receivable and accounts payable of the WSS utilities in Russia and their subsequent elimination are of paramount importance for rehabilitation of the financial standing of the WSS. Therefore, the Subprogram defines the issue of settlement of arrears as a key element of reform of the entire WSS [27].
Note that the Guiding Principles recommend that the local and central public authorities “develop mechanisms of solving issues concerning the water utilities’ arrears… As regards accounts payable, public authorities can restructure or write off debt” [10].
Consistent with the Guiding Principles, on 25 September 2003 Gosstroy and the Ministry of Finance drafted and submitted to the Government of the Russian Federation debt restructuring program, which provides for the write-off of Rub 23.3 bn worth of accounts receivable impossible to collect and Rub 34.2 bn worth of late payment interest and fines on the utilities’ arrears to the budgets and extra- budgetary funds, as well as clearance of the spending entities’ arrears for communal services worth Rub 24.2 bn.
However, current legislation does not solve the issue completely; therefore, additional legal regulation of the issue is necessary. That is why the Gosstroy of Russia drafted a federal law on Financial Rehabilitation of Utilities of the Housing and Communal Economy of the Russian Federation, which will be submitted to the State Duma for review in the near future. The draft law sets forth the fundamentals, principles, and prerequisites for the activities aimed to eliminate the causes for arrears of the HCE utilities and to preclude conditions for building them up in the future; it solves the issues of recognition and assessment of the housing and communal economy’s arrears to respective budgets and establishes legal debt restructuring mechanisms [20].
2.1.3. Medium-Term Planning of Capital Investment in the WSS Infrastructure
A number of constituent entities of the Russian Federation (Novgorod Oblast, Pskov Oblast, Kaliningrad Oblast, Rostov Oblast, and Yaroslavl Oblast) developed the so-called financial strategies for the WSS sector over the past four years, establishing more realistic objectives regarding the quality of the WSS services and balancing financial requirements of the sector with their sources of funding. The program has also revealed financial non-viability of a number of ambitious investment projects and programs that provided for major capital investment in the fixed assets without any link with financing opportunities.
By way of reminder, General Conclusions of the Almaty Ministerial included a statement that, “furthering the current policy relying on the ambitious objectives regarding the level and quality of the water supply services combined with the financial mechanisms providing for low user tariffs and allocation of limited funding for capital investment is inconsistent with the sustainable development requirements and might result in further disastrous fall in the level and quality of services” [6, p. 17].
However, broad spread of the practices of medium- and long-term planning of capital investment in the WSS infrastructure has been impeded by acute shortage of skilled specialists and high level of legal and economic instability.
2.1.4. Decentralization: Delegation of Responsibility and Powers to Lower Level of Government
The Guiding Principles recommend that the federal public authorities “carry out the decentralization process by delegating the power to provide WSS services to the municipal authorities” [10]. Relevant Federal Law was passed in Russia back in 1995. Thus, Federal Law No. 154-FZ of 28 August 1995 on General Principles of Local Self-Governance that provides for the division of responsibilities between local and government (regional and federal) authorities attributes maintenance and development of urban
12 water supply and sanitation to the issues of local importance10 [14, Article 6(2)(13)]. Ownership rights in the fixed assets of the WSS were transferred by the central government to the local self-governance authorities back in the early 1990s.
2.2. Tariff Regulation
The Guiding Principles pay special attention to the issue. Indeed, the previous section suggests that inadequate tariff regulation has become the main reason for financial instability of the sector utilities and has been and still is a key risk factor of the extra-budgetary investment in the sector. However, there have been major changes in the legal framework on tariff regulation at all the levels of government over the past four years.
As a matter of fact, the aforementioned Subprogram formulated for the first time the task of developing a tariff control scheme for the WSS services (and the housing and communal services in general) at the municipal level. The Subprogram discussed for the first time the need for targeted control (i.e., a tariff should be justified by production and investment programs of the regulated utility). It declared for the first time the need to develop tariff control procedures at the municipal level, to match tariff control at the municipal and regional levels, consistency of the tariff pattern with contractual relations scheme, etc. It is this Decree that formulated for the first time the task of reforming the tariff control scheme for the housing and communal services at the municipal level and identified key areas of such reform [27].
In order to elaborate on the ideas set forth in the Subprogram, Government Decree No. 89 of February 2004 approved the Fundamentals of Pricing in the Housing and Communal Economy (hereinafter “Fundamentals of Pricing”), which, among other things, identify the following key principles and methods of setting prices for the water supply and sanitation services:
a) balancing the economic interests of the housing owners, …communal service providers, and users
b) affordability… of communal services for users and protection of their rights
c) compensation of economically justified costs of service providers and generation of profit with a view to implementing production and investment programs
d) dovetailing the tariff setting process into the budget process11
e) openness of information about prices and tariffs and their approval procedure
f) separate accounting by the entities for income from, and expenses on, controlled and other activities [32].
The Fundamentals of Pricing also determine an exhaustive list of grounds for price and tariff revision and set a 30-days deadline for review of the tariff application filed by a utility [32].
Paragraph 5 of the Fundamentals of Pricing sets forth that “method of economic soundness of expenses is a pricing and tariff-setting method. The pattern of expenses, including those on repayment of borrowed funds, and appraisal of their economic soundness are determined consistent with a methodology
10 The provisions were maintained practically unchanged in the new version of the Law on the General Principles of the Local Self-Governance Setup that enters into force in full on 1 January 2006. Thus, the provision was reflected in Articles 14 and 16, which refer arrangement of public water supply and sanitation within a human settlement (municipal district) to the issues of local importance of the human settlement (municipal district). 11 Paragraph 8 of the Fundamentals of Pricing reads that “prior to approval of the local budgets and those of the cities of Moscow and Saint-Petersburg for next year, prices and tariffs are set and production and investment programs of the entities are approved. Such prices and tariffs can be changed during the year, but with the introduction of relevant changes in the budget laws and regulations [32].
13 developed by a federal executive authority…” [32]. Indexation method is an additional [alternative] method of pricing and tariff-setting [32, paragraph 6].
Indeed, aforementioned Decree No. 89 provides for development of a tariff-assessment methodology for communal services within six months, which should be binding on relevant regulators [25]. Unfortunately, new Methodology of Control over Water Supply and Sanitation Prices has not been developed yet, but is expected in the nearest future because the delay in its development has been largely due to review by the State Duma of the draft Federal Law on the General Principles of Control over Tariffs of the Communal Economy Utilities that also provides for development of the tariff-assessment methodology at the federal level (within a year since its effective date) [18].
Nevertheless, a number of gaps should be highlighted in the current legislation on tariff control in general and tariff control for the WSS utilities in particular:
• Level of tariff control is dependent on the legal status of a water utility. Thus, tariffs for municipal unitary utilities are controlled at the local level while those for utilities with other ownership forms, at the regional level.12 At the same time, local self-governance authorities will still be responsible for providing relevant communal services to the population of municipalities. Clearly, such a situation does not facilitate sustainable development of the sector and increases risks of private capital investment. • Current legislation does not govern the process of interaction among various authorities as regards tariff control at various levels of control.13 • Current control principles fail to direct utilities towards non-productive costs reduction or resource saving. • Legislation does not govern mandatory requirements to tariff-approval procedure at the municipal level, due to which the procedure is extremely politicized, lacks transparency, and varies considerably by municipality.
The legislation being drafted is intended to fill the gaps. In particular, this is the idea behind the aforementioned draft Federal Law on the General Principles of Control over Tariffs of the Communal Economy Utilities expected to take effect in January 2005 the earliest.
As regards the procedural support for the reform, currently there are several guidance documents on pricing for the WSS services:
- Methodology of Planning, Accounting for, and Estimate of, Cost of Services in the Housing and Communal Economy [29]
- Handbook on Setting Economically Sound Tariffs for Services in the Housing and Communal Economy
- Guidance on Financial Justification of Prices for Water and Wastewater Collection [30].
All the documents are of advisory nature for tariff control authorities at the local and regional levels. Nevertheless, since there are no alternatives, they have been used actively on site (especially in small municipalities).
2.3. Technical and Environmental Regulation of the WSS
The environmental quality standards scheme in Russia, just like in other NIS, is comprehensive – it covers hundreds of pollutants and requires compliance with extremely low concentration of pollutants in receiving bodies. Unlike the OECD countries that use risk management approach to setting the standards,
12 Such an approach to tariff control at the municipal level means the following: if a private management company rather than a municipal company is involved in the management of municipal infrastructure facilities (such as water supply and sanitation networks, treatment plant, etc.), tariff control passes on from the municipalities to a constituent entity of the Russian Federation. 13 For example, formally speaking, revision at the regional level of tariffs directly affecting municipal tariffs is not a cause for automatic change of tariffs for municipal utilities.
14 Russia uses “zero risk” approach – the environmental quality standards are determined exclusively based on complete elimination of risk to human health. Standard setting does not take into account technical or economic feasibility of a standard or its affordability, i.e., risk management factors.
This results in a set of standards many of which are unfeasible technically, financially, or economically. For example, requirements to the post-treatment concentration of some pollutants in the discharged effluents are more stringent than the drinking water standards, and many of them are much more stringent than the European Union (EU) standards (see Table 2.3).
Table 2.3. Comparison of Some EU and Russian Environmental Standards
Allowable concentration, mg/l Parameter EU Russia BOD 25 30 (total) COD 125 15 Suspended solids +0.25 35 to current Total phosphorus 2 0.2 (as P) 1 Total nitrogen 15 - 10 - Ammonia nitrogen - 0.39 Nitrate nitrogen - 9.1 Source: Urban Water Sector Reform in EECCA Countries: Progress since the Almaty Ministerial Conference, OECD, 2003.
The situation is similar with the construction standards and rules (SNiP) that encourage the WSS utilities to construct over-sized infrastructure inconsistent with the actual needs. The situation is exacerbated by the fact that established procedure of determining the estimated cost of construction based on the indexation of prices taken from the long outdated price lists of 1984 allows for the overstatement several times over of the estimated cost of facilities and equipment compared to the actual cost of construction and market prices for relevant equipment. This results in the inefficient use of very limited investment resources.
Since extremely stringent quality standards for drinking water and discharged effluents and requirements of the construction standards and rules hamper even further the sector reform and investment in it, the Guiding Principles recommend that that “national standards which are more stringent and lead to higher costs compared to the internationally recognized norms should be revised with a view to lowering expenses required for their implementation to an acceptable level” [10].
Efforts in that direction has just started in Russia. It is expected that in lieu of SNiPs, GOSTs, and Sanitary Rules and Norms (SanPiN) Technical Rules of Procedure will be introduced; however, it is unclear at this point whether their adoption would soften current technical and environmental requirements.
It should also be noted that new Environmental Protection Law No. 7-FZ of 10 January 2002 was passed in 2002, under which the WSS utilities pay for the environmental pollution [15]. The law was passed to replace Law of the RSFSR No. 1060-1 of 19 December 1991. Also new Water Code is being actively drafted. Adoption of a new Water Code is expected to facilitate the integration of the urban water services in the integrated systems of basin water resources management.
2.4. Ownership in Fixed Assets of the WSS
In the overwhelming majority of cases, municipalities are the owners of all the fixed assets used for public drinking water supply and sanitation. In other words, all the engineering infrastructure of the WSS,
15 including water intakes and water treatment plants, networks and pumping stations, wastewater treatment plants, etc., are usually owned by the municipalities.14
Over the past four years, the following problems emerged due to growing private sector interest in the communal infrastructure facilities:
First, unclear definition of assets (some of the technical documentation is often missing) and absence of ownership title in such assets, as well as absence of clear-cut limits of decision-making responsibilities create major impediments to efficient management and financing of the sector.
Second, the fixed assets of the WSS have been privatized in some municipalities. Since the phenomenon could have a negative impact on the users of the WSS services within the current regulatory setup, the Ministry of Industry and Energy of Russia is drafting Federal Law on Limiting the Turnover of Municipal Property that would ban the privatization of the communal infrastructure facilities (networks, plant and equipment) [19].
2.5. Ownership Management
А. Unitary enterprise is prevailing legal form of the USS utilities. On the one hand, a unitary enterprise as a business entity is aimed to generate profit; on the other, property the enterprise disposes of belongs to it as of limited right in rem (business management). The in rem rights of business management and day-to-day management are limited due to the need for an owner – primarily a public (government or municipal) agency – to exercise stricter control over purposive operation of non-owner legal entities created by it. This is exactly why one of the major drawbacks is a lot of room for abuse of the economic freedom granted to such entities (more exactly, their managers) by the owner by virtue of their weak accountability limited by the labor legislation. Experience has also shown that a state or municipal owner of a unitary enterprise is usually unable to bear the burden of subsidiary liability for the property it owns or to maintain the enterprise solvent in the permanently difficult financial conditions.
The Federal Law on State-Owned and Municipal Enterprises was intended to correct such a situation. The Law includes an exhaustive list of events when an enterprise can be created based on state or municipal property [16]. It does not stipulate enterprises of the communal economy (including WSS). Nevertheless, the Law does not include any explicit instructions to liquidate municipal unitary enterprises in the Russian communal economy.
The Concept of Business Entry in the Communal Sector reviewed by the Government of the Russian Federation in early 2004 suggests to eliminate the right of business management and to switch to other legal forms.
B. Importantly, there are quite a few examples when the WSS infrastructure is managed by de jure private companies in Russia. However, most of such enterprises are 100-percent owned by the municipalities. Note that, just like in the event of unitary enterprises, municipal ownership in an enterprise gives additional levers for political interference in its activities. Consequently, administrative methods of management of the sector utilities by the municipal/public authorities prevail in most municipalities.
C. Property owners do not have contractual relations with utilities. Due to unitary ownership local governments are unwilling to formalize the distribution of rights and duties of the parties. As a result, in most cases statute is the only instrument governing the municipality’s relations with the water utility. Only some municipalities, including those implementing or preparing for the implementation of an investment project funded by the international financial institutions (for example, in Surgut and Yaroslavl), develop the so-called service contracts, determining the rights and duties of the parties –
14 There are state-owned water supply and sanitation systems in a number of constituent entities of the Russian Federation. As a rule, such facilities are used to supply drinking water to entire region from one or several large sources due to absence of drinking water sources in the immediate vicinity of municipalities.
16 municipality and water utility. Relevant agreements are also concluded when a private management company comes into the sector.
2.6. Private Sector Participation
2.6.1. Emergence of a New Trend
Private Russian financial and industrial groups displayed profound interest in the communal services market (especially water supply and sanitation) in 2003. At present, at least nine large and medium-sized private companies, including three foreign ones (Veolia, Ami Water, and WTE Wassertechnik) operate in the Russian WSS. There were sporadic cases of the private sector participation in the 1990s as well, but at present one can say that a trend has already emerged in the area.
According to the available data, private companies operate in the WSS (provide services, participate in tenders, or conduct direct negotiations with the local governments) in the territory of 38 Russian municipalities that account for 16.6 percent of the total urban population of the Russian Federation.
Survey conducted at the request of the OECD in the summer of 2004 has shown that at least fifteen contracts on delegated management of the WSS fixed production assets have already been concluded in Russia [9]. Respective fifteen municipalities have population of approximately 8.7 mln people, accounting for approximately 8.2 percent of the urban population of the Russian Federation. Short-term lease contract usually valid for 11 months are the most common form of private sector involvement in the WSS [9]. There are also long-term lease contracts, trust management agreements and packages of agreements intended to replace non-statutory BOOT-type (build, own, operate, transfer) contracts. With very few exceptions, the utilities concluded such agreements without appropriate tenders.15
There is another noteworthy feature of the market of communal services management emerging in Russia. Many of the companies that entered it chose a policy of information openness. This should be encouraged in every way because lack of adequate transparency in the sector and the procedures applied, first, increases room for political interference. Second, key actors in the process might have concerns that their interests are impaired.
Most companies pronounce their willingness to operate under long-term delegated management contracts with large investment obligations. However, there might be major barriers to broader private sector participation in the management of the WSS infrastructure (both extensive and intensive).
2.6.2. Barriers to Private Business
First of all, absence of relevant legislation impedes conclusion of long-term agreements that provide for major investment obligations to be repaid from a utility’s proceeds rather than from the budget. Adoption of the Federal Law on Investment Agreements in the Area of Communal Services [17] could resolve the problem.
Conclusion of long-term delegated management contracts is also impeded by the immovable property being unregistered (under current legislation, municipal property transferred into delegated management must be registered), as well as high regulatory and political risks and outstanding arrears of municipal unitary enterprises.
Entry of private companies in the WSS under delegated management agreements without investment obligations is hampered by high political risks, which consist primarily in the breach of the concluded
15 The Guiding Principles underscored that “making decisions on the choice of a private service provider should rely on the tender results” and their selection should be made “in the conditions of openness and transparency, with relevant public participation” [10]. Adoption of the Federal Law on Investment Agreements in the Area of Communal Services will make mandatory a tender for the right to conclude an investment agreement with the municipality [17]. Unfortunately, the provision would not affect other forms of delegated management, such as lease or trust management.
17 agreements by the local governments and threat of their interference in the day-to-day management of the WSS utilities. Inadequate tariff regulation (which might prevent the management company from achieving the objectives set by the delegated management contract) as well as weakness and imbalance of the local budgets (which could delay payment to the company of remuneration for its efforts) also keep playing a major negative role.
Private companies seek to operate in a predictable environment. Companies investing in the WSS should rely on the appropriate and stable legal and regulatory framework that would enable them to get back their long-term investment within useful life of the tangible assets they create. In this respect a package of draft laws on the affordable housing market, currently under review in the State Duma, will undoubtedly facilitate lowering of investment risks in the communal economy.
However, it is to be expected that, even once the entire package of laws on affordable housing market takes effect, private operators would avoid conclusion of full-fledged concession agreements because even institutionalization of this form of delegated management does not save the private companies many other risks, some of which are discussed above.
The aforementioned Concept of Business Entry in the Communal Sector envisages establishment of a guarantee agency with a view to lowering the risks of private investment in the communal infrastructure [3]. However, at this point it is difficult to identify even tentative timeframe for implementation of such an intention.
As regards foreign private operators, the entry of potential investors is impeded, in addition to persistent foreign exchange risk, by stringent construction and environmental standards (see above) because they believe that – although domestic companies do not comply with such high standards – foreign private investors would be required to comply fully with all the standards, rules, and norms.
2.7. Transparency of WSS Utilities
In the absolute majority of municipalities the WSS utilities are not monitored yet, and, although all the water utilities report on their activities on a regular basis, current financial and statistical reports fail to include a number of important indicators of their technical and economic standing. Rapid decentralization of the sector management led to disruption of the system of regular collection, aggregation, and analysis of performance information about the WSS utilities at the regional and national levels. Local governments and potential investors, as well as managers of the water utilities themselves often do not have a clear picture of some crucial aspects of their performance.
Improving accounting and reporting is important because lack of data on the sector impedes seriously its development planning, improvement of their management, as well as attracting investment in the sector. Moreover, lack of transparency makes all the stakeholders concerned about their interests being impaired.
Therefore, the task of improving accounting and reporting in the WSS utilities and creating appropriate managerial information system in them remains unresolved and topical. In this regard, it should be noted that the draft Federal Law on the General Principles of Control over Tariffs of the Communal Economy Utilities passed in the first reading by the State Duma provides for development of a uniform federal-level monitoring methodology for the WSS utilities [18].
Chapter 3. Social Protection and Environmental Protection
3.1. Social Protection of Population
As noted in Chapter 1 of the Report, given objectively low income of the population and weak local budgets, the WSS utilities were forced to perform the function of social protection of the population not
18 inherent in them both before and after the Almaty Conference.16 Nevertheless, there have been major developments in the area over the past four years.
As of end-2000, the following social support mechanisms were actively employed: communal service privileges, housing subsidies, direct budget subsidies for utilities to cover the tariff differences, and cross- subsidies between industries and households. Let us see what is going on in the area at present.
3.1.1. Setting Household Tariff below Economically Sound Level
In order for this phenomenon not to jeopardize financial sustainability of the utilities, respective losses were compensated to the utilities by: (a) cross-subsidies (i.e., setting tariffs for other user groups above the economically sound tariff); and (b) budget subsidies for tariff differences.
Cross-subsidies. As a rule, individual prices are set for each user category: for the households – below cost; for budget-dependent users – at cost; and for industrial users – considerably above cost. However, such an approach is socially unfair because the subsidy is received by all the households, regardless of their income level; and the Government of Russia announced that the cross-subsidies would be eliminated effective 1 January 2004.
Elimination of cross-subsidies was envisaged by the Subprogram. Decree on Measures to Eliminate the Cross-Subsidies Scheme for Users of Water Supply, Sanitation, and Heating Services, Elimination, Recovery, and Disposal of Municipal Solid Waste envisages transition to payment for housing and communal services by all the users at their real value [21].
According to the Goskomstat of Russia, in January-March 2004 Russia-average ratio of tariffs for enterprises and entities to that for households was 2.20 for the water supply services and 2.26 for the wastewater collection services.
Table 3.1.1. Comparative Trend in Cross-Subsidies for WSS in Russia, Q1 of Each Year
(In Rubles)
January-March 2002 January-March 2003 January-March 2004 No. Tariff Water Sanitation Water Sanitation Water Sanitation 1 Households 2.52 1.87 3.63 2.91 4.9 3.95 2 Business entities 8.31 7.04 9.78 8.39 10.79 8.91 Economically 3 3.93 3.02 5.11 4.14 6.3 5.16 sound tariff Line 3-to-Line 1 4 3.30 3.76 2.69 2.88 2.20 2.26 Ratio Source: Directory “Prices and Tariffs in Housing and Communal Economy” («Цены и тарифы в жилищно- коммунальном хозяйстве»), Issues 2(12)’2002, 2(16)’2003, 2(20)’2004.
As of mid-September 2003:
- Cross-subsidies for communal services tariffs were eliminated in the municipalities in nineteen constituent entities of the Federation; in those of twenty-nine constituent entities of the Federation the elimination of the cross-subsidies was to be completed by 1 January 2004
- In the municipalities in Kostroma Oblast, Kurgan Oblast, Astrakhan Oblast, Tula Oblast, Nizhny Novgorod Oblast, Tomsk Oblast, Chelyabinsk Oblast, the Republic of Kalmykia, and Altai Region cross-
16 By way of reminder, under the Guiding Principles, “it is the state, and not the water utilities, which should be responsible for equal provision of the WSS services to low-income and vulnerable groups of the population. To assist those groups, transparent, targeted, and effective subsidies should be introduced, taking into account the value of other communal services and the entire range of the households’ needs” [10].
19 subsidies for tariffs increased compared to 2001. Current gap between household and industrial tariffs ranges from 2.0 times to 6.5 times.
Analysis of the situation has shown that the population’s limited ability to pay has been one of the main impediments to the introduction of a single tariff for communal services for all the user groups in the sector. Indeed, elimination of cross-subsidies on average doubles the tariffs, which might cause pressure on site if not accompanied by respective increase in people’s income.
Subsidies to the WSS utilities for tariff differences and 100-percent payment for services. In early- 2003, regional standard level of payment for services by the population went up to 81.1 percent, which represents 10.1-percent increase compared to this year-beginning. The 2001 data is shown for comparison purposes.
Table. Cost-Recovery Level by WSS Service Type for the Russian Federation as a Whole, 2001
(In percent)
Set Actual Indicator QIV, 2001 QI, 2002 QIV, 2001 QI, 2002 Wastewater 63 62 48 43 collection Water supply 62 64 45 44 Heating 53 61 37 43 Source: Directory “Prices and Tariffs in Housing and Communal Economy” («Цены и тарифы в жилищно- коммунальном хозяйстве»), Issue 2(12)’2002.
While during the Almaty Conference the situation with the subsidies for tariff differences did jeopardize the financial stability of the WSS utilities, currently the problem is less acute in the WSS compared to other subsectors of the HCE, such as heat supply.
3.1.2. Lowering the Cost of Services for Some Categories of Individuals below Household Tariff
Privileges, i.e., social support to the population for housing and communal services, are set by category and professional background. Until the early 1990s the number of beneficiaries was 26.8 mln people; in 2001-2002, 48 mln people.
As of April 2003, there were an average of 2.1 privileges per beneficiary. Under the law, each beneficiary was entitled to one privilege only. In 2002 approximately Rub 40 bn worth of privileges for housing and communal services were provided.
Housing subsidy is targeted social support provided to the population for housing and communal services set based on property ownership. Its introduction started in 1994, and it is applied in all the regions of Russia. In 2002 Rub 13.8 bn worth of subsidies were provided to 10 percent of the Russian households.
The two forms of the social protection overlap on site. Privilege is a priority form of social protection of the population. In the current scheme of housing and communal services privileges, 15 percent to 20 percent of the population entitled to a subsidy never apply for one [12]. The calculated share of the population that could apply for a subsidy if there were no privileges could be as high as 42.6 percent.
Figure 1-2 shows the distribution of privileges for housing and communal services by income bracket, depending on the size of the housing and communal services bill, and the number of individuals applying for a privilege. We can see that the distribution of beneficiaries by income bracket is uneven (Figure 1). Most of them are in the income bracket from Rub 500 to Rub 2,000. These are pensioners and veterans.
20
Figure 1. Beneficiary Distribution (47.9 mln people) by Income Bracket as of 1 January 2003 (According to Form 26-ZhKH Data) Percentage of beneficiaries in average per capita cash income brackets, % Distribution of population by average per capita cash income (Goskomstat data), %
Source: Chernyshov L. N., HCE: Island of Socialism, Economy of Russia – 21st Century (Чернышов Л.Н. ЖКХ – Островок социализма//Экономика России: XXI век), Issue 11 (April 2003).
Consistent with the Subprogram and Decree of the Government of the Russian Federation on Pilot Application of the Economic Model of the Housing and Communal Economy Reform [24], pilot scheme of personalized social accounts was introduced in a number of Russian regions in 2002-2003.
The main idea behind the pilot was to re-channel the flow of budget funds from the HCE utilities to the population. Thus, transition to “housing subsidies” using social accounts enhances the accountability of the public authorities in the constituent entities of the RF and the LSG authorities to citizens.17 In this context, timely and full financing of the subsidies scheme is a prerequisite for successful implementation of the personalized social accounts scheme on a pilot basis.
In August 2002, Resolution of the Government Commission for Housing Policy approved a list of eight constituent entities of the Federation and municipalities for participation in the pilot. Later the list was extended to nineteen regions. According to the monitoring data, by the end of the first six months of 2003 in five regions out of nineteen the preparatory stage was completed that included development of the regulatory framework at the regional and local levels and elaboration of the interaction schemes, and practical activities started to make a transition to the social accounts scheme.
Pilot implementation of personalized accounts in the municipalities of pilot regions over the past 1.5 years validated their efficiency and propriety because the budgets do not allow for a shortfall in the funding of subsidies for the population, which has had a positive impact on the financial standing of the HCE utilities.
Privileges for housing and communal services. The privileges scheme, not so much social, as professional, “caste-based”, and not supported by the adequate system of compensation for foregone income to the economic entities keeps destroying the WSS of Russia. In our view, the privileges should be eliminated rather than monetized because current system of funding the privileges does not target exclusively the poor and is not economically justified. However, the system of funding and granting the privileges is determined by the federal legislation and cannot be changed independently in a region. At present, there is strong political opposition to their elimination even when a budget cannot finance such schemes.
17 Demand for subsidy funds does not decrease because it depends on the prices and tariffs on the housing and communal services set in the municipalities and people’s income.
21 At present, the so-called “monetization of privileges” is planned, i.e., privileges in the form of discount prices for housing and communal services will be replaced with cash compensations. As a result, instead of eliminating this form of support for the population, similarly to the transition to personalized account scheme, pilot monetization of the privileges is planned in 2005.
3.2. Affordability of WSS Services
The Guiding Principles recommend “developing a program of gradual increase of tariff rates so that user payments cover operational, maintenance, and infrastructure rehabilitation costs and ultimately capital investment costs. Restrictions related to the users’ ability to pay should be fully taken into account…” [10].
It is useful to have some affordability criterion in order to make a judgment about affordability of a service. Maximum share of household income/expenses on communal services without any detriment to the consumption of other vital goods and services often serves as such criterion.
Table. Share of Water and Some Other Housing and Communal Services Bill in the Households’ Consumer Expenses Depending on Average Per Capita Disposable Income
(In Percent of Total Consumer Expenses)
Expenses on Decile water and some other communal 1 2 3 4 5 6 7 8 9 10 services 2000 2.7 2.4 2.1 2.1 1.9 1.5 1.3 1.3 1.0 0.7 2001 3.5 3.0 2.6 2.4 2.3 2.0 1.8 1.5 1.4 1.0 Q1, 2003 4.5 4.8 4.4 3.8 3.5 3.2 2.6 2.4 2.2 1.5 Q1, 2004 5.7 5.4 5.1 4.7 4.0 3.8 3.0 2.9 2.6 1.8 Comment 1: First decile has lowest disposable income. Comment 2: Other communal services include wastewater collection and disposal and recovery of solid municipal waste and do not include heating, electricity supply, gas supply, or hot water supply. Sources: Goskomstat of Russia (2002), Housing Economy of Russia in 2002: Statistical Digest (Жилищное хозяйство России в 2002 г: Статистический сборник), Goskomstat of Russia (2004), Population of Russia (Население России).
In 2003-2004, expenses on the housing and communal services and water were growing faster than people’s income. As a result, according to the above data, 50 percent of the population pay for water and other services (mostly, solid municipal waste payment for which is about one-forth of that for water) above the maximum adopted as criterion of affordability of the WSS services.18
Non-affordability of services is often linked with an increase in households’ arrears. However, experience does not confirm the thesis about the population’s inability to pay and pending decrease in tariffs. Analysis carried out by the Institute of Urban Economics in 2003 has shown that the upward trend in tariffs for the housing and communal services does not reduce sharply the collection rate from households; on the contrary, it improves the individuals’ payment discipline.
The same analysis has also confirmed that increase in tariffs for the housing and communal services does not have any major impact on the number of low-income families claiming housing subsidies. The trend in the number of beneficiaries in the housing subsidy scheme is determined by a set of various factors, including the principles the subsidy scheme builds on, social and psychological factors, and performance of the subsidy services.
18 The OECD experts consider the WSS services to be quite affordable for the population if expenses on them do not exceed 1.5 percent of the household expenses and very expensive if households spend from 3 percent to 5 percent of their income on the bills. To determine the affordability of the WSS services, the US Environment Agency uses 2- 2.5 percent of expenses before taxes as a criterion. The international financial institutions rely on the 4-percent of average household income.
22
At the same time, there is an example of Pskov where tariff for the WSS services went up by 150 percent for households and doubled for other user categories. This led to a rapid decrease in the collection rate and rapid increase in the water utility’s accounts receivable (accounts receivable went up by 34 percent between January and June 2002, which was higher than their growth rate of 24 percent throughout 2001) [5]. Marked decrease in the collection rate from the households might indicate that the tariffs did reach the affordability threshold for the population (it should be taken into account that the ability to pay of approximately 40 percent of Pskov’s population is low with disposable income below the subsistence minimum).
3.3. Public Participation
User and public participation in the decision-making processes in Russia has been underdeveloped so far, which threatens the public support for the water sector reform in general. In addition to general concerns related to growing prices, such as poor quality of drinking water and unreliable services, users also complain about lack of information about decisions made in the sector and difficulty of settling conflicts with the water sector utilities.
The Guiding Principles state that “the public should be directly involved in the reform process” and “the public entities and water utilities should ensure efficient public participation in making key decisions concerning the water supply and sanitation” [10]. In this regard, public entities were charged with “developing legal framework for public participation” and the local governments, “with constantly providing to the general public information and opportunity to solve key issues of the water supply and sanitation, in particular, by organizing meetings with the public…” This area has been a complete failure. However, possibly, this means that the objective is unachievable within a short timeframe.
3.4. Environmental Trends
At present, only a very small share of the population (less than 0.6 mln people) get drinking water from 1st-class surface sources which require minimum treatment. Most of the surface water bodies used for drinking water supply are 3rd-class sources, requiring costly high-tech treatment.
The public water supply system that exists in the country fails to comply with the current requirements. More than 40 percent of the water supply systems with intake from surface water bodies that account for 68 percent of the water demand in the cities and towns and approximately 65 percent in rural areas do not have necessary treatment facilities and fail to ensure complete disinfection and treatment of water; many water intakes do not have sanitary protective zones; in most zones breach of the regime has been detected.
Another problem with the WSS in Russia is shortage of treatment plants amounting to approximately 9 mln m3 a day. According to the Gosstroy of Russia, 60 percent of the operated wastewater treatment plants are overloaded and 38 percent have been in operation for 25-30 or more years and need to be reconstructed. Approximately 12 bn m3 of untreated or half-treated wastewater (effluents) is discharged in open water bodies and rivers.
23 Table 3.4. Sanitation Indicators in Russia, 2003
(In thousand cubic meters)
Of which: Share of Through treatment plants treated Total Of which (from line 13): waste- water in Complete biological Compliant Under- total Annual treatment treatment treated wastewater waste- flow water, % Total With additional treatment
Urban 14,908,914 13,140,779 12,415,906 1,746,653 3,863,387 6,761,309 88.1 settlements
Rural areas 517,482 347,646 267,048 30,437 126,240 177,719 67.2 Urban settlements 15,426,396 13,488,426 12,682,954 1,777,090 3,989,627 6,939,028 87.4 and rural areas Source: Goskomstat of Russia
Coverage with the sanitation services being markedly below that with the water supply services and inadequate wastewater treatment leads to accelerated environmental pollution. In particular, poor and inadequate level of wastewater treatment by the sector utilities causes pollution of surface water.
On the other hand, there has been a positive trend in the water treatment for public water supply because higher tariffs allowed the utilities to purchase necessary amounts of chemical reagents, which improved the quality of supplied water.
Conclusions
As a whole, WSS reforms in Russia have progressed in line with the Almaty Guiding Principles, laying a sound foundation for future sustainable development. Important factors of positive developments and cessation of negative trends have been: (a) “unfreezing” of WSS service tariffs during the period under consideration; and (b) reduction in the shortfall of budget funding of the sector. Institutional and legal reforms have progressed very slowly without any marked acceleration until 2004.
Let us review the WSS reform in Russia for consistency with the Almaty Guiding Principles:
1. National-level Strategic Planning. Reform of the WSS is not a stand-alone task in Russia and it is implemented in the overall context of the HCE reform. Federal-level strategic planning has been impeded by absence of the system of monitoring and collection of reliable information about the WSS utilities both at the national and local levels.
Subprogram “Reform and Modernization of the Housing and Communal Complex in the Russian Federation”, which elaborated on many of the recommendations of the Guiding Principles and comprised a plan of immediate actions consistent with them, should be specifically highlighted among the key strategic instruments adopted at the federal level following the Almaty Conference. However, many of the activities envisaged by the plan have not been implemented yet.
2. Decentralization. Law on General Principles of Local Self-Governance passed in 1995, i.e., long before the Almaty Conference, attributes maintenance and development of the urban water supply and
24 sanitation to the issues of local importance. Ownership rights in the fixed assets of the WSS were transferred by the central government to the local self-governance authorities back in the early 1990s.
3. Improvement of Legal and Regulatory Framework. At the federal level, creation of legal and regulatory framework is under way to ensure sustainable development of the water utilities; mechanisms for solving the issue of the water utilities’ arrears are being developed; and relevant draft laws have been prepared. However, the efforts are far from being complete in those areas.
4. Managerial Autonomy of the Water Utilities. Prevalence of the administrative system of management is observed practically in all the municipalities, and the water utilities are deprived of financial autonomy. Moreover, oblast water utilities – in Stavropol, Primorye, Tver Oblast – are created in order to enhance the administrative control. Contractual relations between the water utilities and the local self-governance authorities are practically non-existent.
5. Financial Autonomy of the Water Utilities. A number of decisions made by the federal and local public authorities have facilitated enhanced financial sustainability of the WSS utilities. They concern reduction in the shortfall of budget funding of the sector and drafting a law on restructuring the utilities’ arrears to the budget. However, complete financial autonomy has not been achieved yet due to shortcomings in the tariff policy, persistent shortfall in the budget financing of the privileges granted to the population and subsidies for housing and communal services, and incomplete collection of payments for WSS services.
6. Tariff Policy Improvement. Consistent with the Guiding Principles, federal-level legislative acts and regulations have been drafted and adopted, or will be adopted in the near future, determining the underlying principles of pricing for WSS services, including the principle of full recovery of the water utilities’ economically sound costs by tariffs for all the user categories and requiring development and introduction of transparent tariff approval and revision procedures.
At the same time, tariff regulation methodology has not been developed yet consistent with the principles set by the federal legislation and binding on the regulators.
In absence of transparent and clear tariff regulation methodologies and procedures, the heads of the local self-governance and members of the parliament keep using tariffs for communal services (including WSS) to achieve their political agenda. As a result, neither cross-subsidies have been eliminated nor truly sustainable financial base for the WSS has been created in Russia yet.
7. Relieving the Water Utilities from the Social Protection Function Not Inherent in Them. Many water utilities are forced to keep performing the function of the social protection of the poorest individuals not inherent in them and to bear the financial associated with it. However, pilot conversion of the housing subsidies into cash payments to individuals has been successfully accomplished in recent years. Hopefully, the entire housing subsidies scheme will be converted into cash payments to low- income families in 2005. Also, pilot “monetization of privileges” for housing and communal services is planned for 2005.
8. Elimination of Non-Cash Settlements. Elimination of non-cash settlements used broadly and regularly was one of the few recommendations of the Guiding Principles fully implemented in Russia.
9. Installation of Meters and Transition to Payments Based on Actual Water Consumption. No national meter installation program has been developed yet. Although the number of connections with individual water meters has been growing, installation of individual meters often does not lead to reduction in water consumption or water losses because, even when a water meter is in place, water and sanitation bills are often issued based on the so-called “standard consumption.”
10. Private Business Participation. Private companies started displaying proactive interest in the Russian WSS. At least fifteen delegated management agreements have already been concluded and first positive results have been obtained. Generally speaking, involvement of private companies facilitates
25 formalization of the water utilities’ relations with the local self-governance authorities, their managerial autonomy, and enhanced financial autonomy.
However, contrary to the Almaty Guiding Principles and with a very few exceptions, private companies get involved in the WSS infrastructure management without relevant tenders.
Short-term lease contract has been the most common form of the private business involvement in the WSS. Although most companies pronounce their willingness to do business under long-term delegated management agreements with major investment obligations, there are objective barriers to more advanced forms of private sector partnership with municipal/government authorities. Overcoming the barriers could be quite time-consuming.
11. Public Participation. With a very few exceptions, the general public in Russia is not involved in making key decisions on water supply and sanitation.
12. Monitoring. The WSS utilities monitoring system is underdeveloped both at the national and local levels. Moreover, local governments, potential investors, and the water utility managers themselves often do not have a clear picture of various aspects of operation of their companies.
26
References
1. Госкомстат России (2002), Жилищное хозяйство России в 2002 г: Статистический сборник.
2. Госкомстат России (2004), Население России. Статистический сборник.
3. Дронов А.А. (2004), Концепция вхождения частного бизнеса в жилищный и коммунальный секторы муниципальной экономики //Жилищное право, №1, стр. 37.
4. Институт экономики города/ОЭСР (2003), Мониторинг предприятий водоснабжения и водоотведения России. Итоговый Отчет.
5. КОВИ (2002), Оценка приемлемости долгосрочной программы капитальных вложений в водопроводно-канализационное хозяйство города Пскова. Аналитический Отчет.
6. ОЭСР (2001), Управление и Инвестиции в секторе водоснабжения Новых Независимых Государств. Материалы Консультативной встречи министров экономики/финансов и охраны окружающей среды, 16-17 октября 2000, Алматы, Казахстан.
7. ОЭСР (2002), Ключевые аспекты реформирования тарифов городского водоснабжения в странах ВЕКЦА.
8. ОЭСР (2003), Реформа муниципального водоснабжения и канализации в странах ВЕКЦА. Отчет о ходе выполнения реформ со времени проведения конференции на уровне министров в Алматы.
9. ОЭСР (2004), Обзор российских и иностранных частных компаний, работающих в коммунальном хозяйстве России.
10. Руководящие принципы реформы сектора городского водоснабжения и канализации в ННГ (одобрены на Конференции на уровне министров в г. Алматы в октябре 2000 года).
11. Практика реформы жилищно-коммунального хозяйства: Аналитический доклад / Под общ. ред. С.Б. Сиваева. – М.: Фонд «Институт экономики города», 2004.
12. Справочники «Цены и тарифы в жилищно-коммунальном хозяйстве» № 2(12)’2002, № 2(16)’2003, №2(20)’2004
13. Чернышов Л.Н. ЖКХ – Островок социализма//Экономика России: XXI век. №11 (Апрель 2003).
Laws of the Russian Federation
14. Федеральный закон от 28.08.95 №154-ФЗ «Об общих принципах местного самоуправления»
15. Федеральный закон от 10.01.02 №7-ФЗ «Об охране окружающей среды»
16. Федеральный Закон от 14.11.02 г. №161-ФЗ «О государственных и муниципальных предприятиях»
17. Проект Федерального закона «Об инвестиционных соглашениях в сфере коммунального обслуживания»
27 18. Проект Федерального закона «Об общих принципах регулирования тарифов организаций коммунального комплекса»
19. Проект Федерального закона «Об ограничении оборота муниципального имущества»
20. Проект Федерального закона «О финансовом оздоровлении организаций жилищно- коммунального комплекса Российской Федерации»
Decrees of the Government of the Russian Federation
21. Постановление Правительства от 21.08.01 №609 «О мерах по ликвидации системы перекрестного субсидирования потребителей услуг по водоснабжению, водоотведению, теплоснабжению, а также уничтожению, утилизации и захоронению твердых бытовых отходов»
22. Постановление Правительства РФ от 17.09.01 г. №675 "О федеральной целевой программе "Жилище" на 2002 - 2010 годы" (с изменениями от 14 февраля 2002 г., 26 июля 2004 г.)
23. Постановление Правительства от 17.11.01 г. №797 "О подпрограмме "Реформирование и модернизация жилищно-коммунального комплекса Российской Федерации" Федеральной целевой программы "Жилище" на 2002-2010 годы"
24. Постановление Правительства от 01.07.02 №490 «О проведении эксперимента по применению экономической модели реформирования жилищно-коммунального хозяйства»
25. Постановление Правительства от 17.02.04 №89 "Об утверждении Основ ценообразования в сфере жилищно-коммунального хозяйства"
Programs, Subprograms Implemented in the Russian WSS
26. Программа приоритетных инвестиций в ВКХ г. Ярославля
27. Подпрограмма «Реформирование и модернизация жилищно-коммунального комплекса Российской Федерации» федеральной целевой Программы «Жилище» на 2002-2010 гг.
28. Федеральная целевая программа «Жилище» на 2002-2010 годы
Other Legislative Acts and Regulations
29. «Методика по планированию, учету и калькулированию себестоимости услуг жилищно- коммунального хозяйства» (утверждена Постановлением Госстроя России от 23.02.99 №9)
30. «Методические рекомендации по финансовому обоснованию цен на воду и отведение стоков» (утверждены Приказом Госстроя России от 28.12.2000 №302).
31. «Пособие по формированию экономически обоснованных тарифов на услуги жилищно- коммунального хозяйства» (рекомендовано Госстроем России – протокол НТС от 13.11.98 №23-16/2)
32. «Основы ценообразования в сфере жилищно-коммунального хозяйства» (утверждены Постановление Правительства от 17.02.04 №89)
33. Санитарные нормы и правила (СанПиНы)
34. Строительные нормы и правила (СНиПы)
28
Attachment 1. EBRD-funded Projects in the WSS of Russia
(As of 31 December 2003, in thousands euros) (€ 000) Year of Project Total EBRD Name Loan Equity signing Value Finance St Petersburg South-West 2003 188,749 35,450 0 35,450 Wastewater Treatment Plant St Petersburg Water & Environmental Services 1997 44,611 8,692 0 8,692 Improvement Program Arkhangelsk Municipal Water 2003 24,694 9,394 0 9,394 Services Development Kaliningrad Water and 1999 48,178 14,287 0 14,287 Environmental Services St Petersburg Northern Wastewater Treatment Plant 2003 49,400 23,800 0 23,800 Incinerator Surgut Municipal Services 2002 71,650 36,652 0 36,652 Development Program Source: EBRD