Housing and Communal Services in Ukrainian Legislation
By Dmitriy Kreynin
Guaranty
The Ministry of Housing
and Communal Services
of Ukraine (hereinafter
— the Ministry) is a young
and rapidly developing body
of national government for the
Ukrainian legislation. Its work
is coordinated by the Cabinet of
Ministers of Ukraine (hereinafter
— CMU). The main document that defines the objectives
and functions of the Ministry of Housing and Communal
Services is Regulation No.717 of 12 May 2007, as approved
by the CMU.
It is the standard legislative base that regulates the activity
of the Ministry including: the Constitution of Ukraine,
Presidential Decrees, and Decisions of the Parliament,
CMU Decisions, and the Regulation on the Ministry.
First and foremost, it should be said that the main tasks
of the Ministry that determine its policy, include: reform of
housing and communal services; regulation of activity of
natural monopolies in the sphere of centralized heat and water
supply and sewage; protection of consumer rights, etc.
Novelties of Legislation
The dynamics of housing and communal services are
growing and by the end of this year experts of the Ministry
developed a Draft Act determining the Order of Corporatization
of Municipal Enterprises in the Sphere of Water, Heat
Supplies and Sewage. This legislative initiative proposes to
regulate the Order of Formation of the Charter Capital of
Corporatized Enterprises consisting of municipal property
and establishes the features of use of municipal property that
is not subject to privatization by the corporatized entity.
Another legislative initiative is to transfer municipal
facilities of heat and water supply and sewage in concession.
The Draft Act of Ukraine On the Peculiarities of Lease
and Concession of Municipal Facilities of Water, Heat Supplies
and Sewage was approved by the CMU on 8 November
2007.
There is already positive experience of such processes.
One example is the Odessa municipal enterprise “Odessa
water works” that has been leased for 49 years to a leading
Ukrainian oil dealer, the Kiev-based Infox Company. Concession
is efficient at problem enterprises that require major
capital investments, and upon termination of the contract
(30-50 years) they will remain the property of the city in
question and the concessionaire redeems investments made
from the profits.
Investment options are a promising form for the modernization
of housing and communal services. In this way
it is easier for an investor to receive annual dividends at a
rate of 10-40% from the economic results of installing new
energy saving and high production equipment at municipal
enterprises. The establishment of a fund of investment options
would be an essential factor in this area as the funds
would consider and determine the most promising projects
for their further implementation, since local and the state
budgets cannot provide for the technical re-equipment of
the area within a short period.
The negative thing is that water supply, sewage, and heat
supply services are provided by regional monopolies: water
works and heat supply enterprises. As municipal property,
they are planned loss-making entities, and local officials and
businessmen control their money flows. And many such enterprises
do not require subsidies. Moreover, they are very
attractive businesses.
In the last three years both Ukrainian and foreign investors
have targeted municipal monopolies. In most cases, the
private interest is due only to the desire to simply control the
flow of money rather than by the desire to attain increasing
efficiency of the assets entrusted to them. It is not a matter of
good faith; it is the rules of the game that provide much freedom
of actions without explicit requirements of the state.
Capital, and first of all private capital, should be attracted to
the development and reform of housing and communal services,
as the growth of the market in future depends greatly
on this.
In its turn, the state should be interested in such investments
as they yield budget proceeds that could be used for
other economic purposes. It can be assumed that minimization
of budgetary expenditures and use of efficient patterns
of public-private partnership enables the structure of branch
and related expenses to be minimized. Housing and communal
services are an attractive market as experts forecast
that the market would make more than UAH 30 billion.
The first injections of investments have already been
made by the above-mentioned Infox Company. According
to the contract between the city and the investor, the
company shall invest UAH 500 million in 2008-2010 in the
development and modernization of Odessa’s water works.
During this period the lessee is obliged to reconstruct and
construct new sewage systems in the Southern area of Odessa
with UAH 82.9 million, to finish construction of sewage
treatment facilities at the Northern treatment plant with
UAH 95.2 million and carry out other works. Under the contract,
all property that is purchased or reconstructed at the
expense of Infox is transferred to the company’s ownership.
However, formation of water tariffs remains the exclusive remit
of local government.
However, it should be remembered that it is feasible to
lease an enterprise when the latter does not have a critical
need of investments, and the result can be achieved through
proper management. It is only necessary that an enterprise
concludes an agreement with the municipality with a detailed
investment plan of the enterprise, areas of expenses, and expected
results. It would enable the management of municipal
companies to be protected from the arbitrary actions of local
officials.
The transformation of housing and communal services
consists of improving the quality of services and their accessibility
for all strata of the population.
That is the principle of the Ministry which has already
developed the program for reform and development of housing
and communal services through 2011. According to the
program of reforms in housing and communal services, the
cities of Ukraine are to be divided into 4 groups. “Pilot” cities
are in group one. In 2 years, it is planned to take measures
to reform housing and communal services in such pilot
cities. In particular, these are regional centers and some
cities in regions. The second group of cities are cities with a
nation wide approach, and the third group consists of small
cities. The Ministry will propose to local administrations to
develop their programs on improving the situation in housing
and communal services. The fourth group of cities are those
cities that will be subject to an individual approach. It should
be mentioned that the program sets out 6 tasks, including organization
of the growth of housing and communal services,
creation of a competitive environment in the market, technical
re-equipment of the branch, attraction of investments,
and cooperation with international organizations, etc.
The Minister of Housing and Communal Services announced
the planned transition to target financing. Twelve
state programs have been developed with this aim in mind.
There are also programs to replace outdated fleets of transport
vehicles that run on electricity. For example, one of the
programs provides subsidies from the state budget to cover
interest rates under credits or credits themselves.
Another stage of transformation can be so-called stimulating
regulation. A similar system works in England and
Wales, where all water supply companies are privatized. The
regulator, the “Office of water supply” (Ofwat), sets the maximum
permissible water price once every five years. Ofwat
also specifies the rate of annual rise or reduction in water tariffs.
The rate is calculated as the difference between the cost
growth and the growth of efficiency of an enterprise. During
the period when the companies update fixed assets, the tariffs
grew 2-5% per annum. As soon as the effect of the new
equipment is tangible and savings exceeded the growth prices
for resources, tariffs began to decrease approximately by 2%
per annum. A similar pattern can work also in Ukraine, but
for this purpose it is necessary to take some important measures.
A complex financial and technical audit is necessary to
start with. Before private companies are allowed to run water
supply companies or heat supply facilities and to establish
new tariffs, it is necessary to understand the situation of each
such enterprise.
The main thing is not to fall into a trap, as Ukraine is not
the first country that faces the problem of management inefficiency
of municipal monopolists. The example of French
company Veolia Water shows how varying and flexible models
of management at such enterprises can be. It is necessary
to allow private capital to come to the municipal sector, but
it should be done in a responsible way - the shock therapy
would not cure housing and communal sores.
The correct approach towards development can be consideration
of all promising options of cooperation, including
joint ventures, lease or any other form. In any case, enterprises
of most different types of ownership will work in the
municipal sector. Flexibility in ownership, transparent tariffs,
and strict contracts on management will allow consumers to
feel an improvement in the quality of services.
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