.. HOUSING SECTOR REFORM PROJECT I FINAL REPORT Prepared for Prepared by ',iliO Raymond J. Struyk •.."" Housing Sector Reform Project I, Russian Federation Project 11 0-0008 U.S. Agency for International Development, Moscow .. Contract No. CCS-0008-C-00-2055-00 II THE URBAN INSTITUTE 2100 M Street, NW Washington, DC 20037 (202) 833-7200 November 1997 www.urban.org UI Project 06306 TABLE OF CONTENTS • ABSTRACT. ....................................................... .. iii EXECUTIVE SUMMARY v INTRODUCTION 1 How Has the Project Succeeded? .................................... .. 1 Conclusion 8 Organization of the Report 9 PROJECT OVERVIEW 10 SUMMARY OF ACCOMPLISHMENTS 17 Performance Indicators ........................................... .. 18 Other Measures 27 • External Evaluations 30 INSTITUTIONALIZATION 31 The Institute for Urban Economics (IUE) .............................. .. 32 Institutionalization Strategy 35 Local-Levellnstitutionalization 35 National-Level Institutionalization 36 LESSONS LEARNED ............................................... .. 36 Components of a Comprehensive Project. ............................ .. 36 Lessons 38 REMAINING TASKS 42 Communal Services Regulation and Improvement. ..................... .. 43 Further Development of the Necessary Legal Base ..................... .. 43 Commercial Real Estate Lending 44 • Promoting Housing Reform in the Regions ............................ .. 44 END OF PROJECT PRELIMINARY FISCAL REPORT 46 ANNEXES: Annex A: List of Seminars, Presentations and Conferences Annex B: Urban Institute Papers on Housing in Russia Annex C: Project Sponsored Study Visits Annex D: Principal Russian Counterparts Annex E: Institute for Urban Economics 1996 Annual Report .. ABSTRACT The Housing Sector Reform Project I (HSRP I) was a five-year project directed to reorienting the Russian housing sector from one characterized by very strong central planning and regulation to one sharply more market-oriented. The project showed early success and USAID supplemented the original project through a competitive solicitation-HSRP II-which overlapped with the original project for about two years. The project worked at the national level on policy development, with about 30 cities and regions on implementation of pilot projects and reforms, and with about 30 banks on initiating mortgage lending for home purchase. The project also carried out extensive sector monitoring and program evaluation activities. Lastly, it succeeded in achieving substantial institutionalization of the policy development and consultive aspects of the project through its mentoring of the Institute for Urban Economics, which was founded in 1995 by the senior Russian staff of the HSRP. • EXECUTIVE SUMMARY The Housing Sector Reform Project, initiated in the fall of 1992 for a five-year period, was one of the longest operating projects in the USAID/Russia portfolio. In essence, the project had as its task to transform the housing sector of the Russian Federation from one characterized by massive government intervention, a nearly total absence of a role for prices, massive subsidies distributed without regard to need, and wholesale inefficiencies to one with a greater market-orientation and sharply improved efficiency. The project has been successful in working with Russian officials in constructing the necessary legislative base and in launching the implementation of fundamental reforms including: • An increase in the share of housing that is privately owned from about 25 percent to over 50 percent. • Raising household mobility within metropolitan areas and between regions. • Increasing rents paid by tenants of buildings operated by state organizations to cover a significant share of costs, with a goal of full cost recovery set for the year 2003. • Implementing a nation-wide housing allowance program to protect the poor from the full force of these price increases. ,. • Privatizing housing construction by getting state firms out of this business and fostering the entry of new private firms. • Initiating competitions as the preferred way to select firms to maintain and renovate existing housing. • Working with cities to create the necessary local legal basis for condominium formation and helping the 'first few associations to register. • Working with banks to begin mortgage lending programs for home purchase and lending for construction period finance that meets rigorous underwriting and dispersal standards. In terms of the specific goals set for the project, in addition to a few life-of-project indicators, new performance indicators were determined for the project each year as part of the annual work plan. Of the 53 indicators defined and whose outcome could be reliably measured, the project met or exceeded 83 percent. Failure to meet the other goals were generally caused by factors beyond the project1s control, such as the inability to get the necessary legislation passed or the judgement of the team that there was insufficient ., • Russia = vi Housing Sector Reform Project I 'I'I'1'II' demand for repeated offerings of the same course in certain regional cities and therefore • using these training resources elsewhere. The project had an aggressive dissemination program. It produced 144 papers and reports, including 53 guidelines and handbooks for local officials, condominium associations or banks on how to carry out reforms. Over 400,000 copies of project • documents were distributed. During its five years, the project organized or participated in 257 seminars, in 49 cities, sponsored by about 80 different government and private organizations. The project also helped to organize and/or sponsor 40 study visits to the U.S. involving 376 participants. .. Perhaps the most noteworthy accomplishment of the project was the creation of the Institute for Urban Economics (IUE). The IUE was founded by six senior members of the project staff in 1995 to continue work on reform in housing and other areas of urban management after the USAID program winds down. In 1996 the Urban Institute began subcontracting to IUE. IUE boasts a small but prestigious Board of TrusteE~s and has .. shown remarkable development in its two year life. It has developed a solid administrative base and in the summer of 1997 had a highly professional staff of about 42, including 27 analysts. The IUE will remain a subcontractor to the Urban Institute during (US) FY1998. But it is working hard at diversifying its funding base and expanding its areas of expertise. ., .. • HOUSING SECTOR REFORM PROJECT I FINAL REPORT INTRODUCTION The Housing Sector Reform Project, initiated in the fall of 1992 for a five-year - period, was one of the longest operating projects in the USAID/Russia portfolio. In essence, the project had as its task to transform the housing sector of the Russian Federation from one characterized by massive government intervention, a nearly total absence of a role for prices, massive subsidies distributed without regard to need, and wholesale inefficiencies to one with a greater market-orientation and sharply improved efficiency. How Has the Project Succeeded? To respond, in this chapter a series of questions are posed about specific aspects of housing market operations and the record of accomplishment reviewed. 1. To what extent is housing allocated by the market as opposed to administrative procedures? How are prices set, i.e., have rent controls been reduced in the private sector and in the public sector? To address the question of rent controls first, such controls on privately owned housing were eliminated early in the transition. We have no information that regions or municipalities have acted against the Law on Fundamentals of Housing Reform in trying to reimpose them. However, controls do exist on fees for maintenance and communal services in municipal and housing on the balance of enterprises that was constructed before the start of the transition. Fees have been increased by localities since 1994 and Federal law mandates that by 2003 they be sufficient to cover operating costs, rehabilitation and some capital replacement charges. Thus, in 2003 rents will likely be quite close to market levels. At least 70 percent of all households have experienced the increases in fees for maintenance and communal services or are subject to the freely-set rents on private units. 1 Of these, about 15 percent-heavily concentrated among those with the lowest incomes-are receiving housing allowances that cushion the impact of these increases on their standard of living. Nevertheless, the share of incomes going to rent payments has increased since 1993 for nearly all households, and overhoused lower income families are being encouraged by their higher payments to move to smaller, more affordable units. 'lit 1 At the beginning of the transition two-thirds of all housing was state owned. So at least this share of housing has been effected by Federal rent policies. The available data suggest that a few percentage points of all housing is rented from private owners. • Russia : 2 Housing Sector Reform Project I 11'I'I'I'I'I' Market allocation of housing has increased sharply during the transition, judging by • the ways in which households who have moved to a new unit have found their new housing. Table 1 shows the search methods used by relocating households in Moscow during the 1992-1995 period.2 As early as 1993, more than half of households moving to units in which no one was living when they moved in relied upon market methods to find their units; by 1995 some 65 percent