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Mikhail Khazin: Make the mortgage loan rate 2%, and construction will bloom. But our officials do not need this.

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Mikhail Khazin: Make the mortgage loan rate 2%, and construction will bloom. But our officials do not need this.

Economist Mikhail Khazin answers questions from our journal

The famous economist Mikhail Khazin shares his standpoint on the solution to the problems of the Russian economy and the construction sector in his interview with Construction.RU.

Mr Khazin, what reasons do you see for the current problems in the construction complex, the condition of which seems to be the worst of all Russia’s basic industries?

— There are several reasons for this. The first is that the construction sector rose considerably in the previous years. It depended less on the state than did other sectors and was a real market sector where people paid money for realty purchasing and renting.  

After December 2014, the population’s income decreased sharply and the cost of construction grew, as a significant amount of finishing materials are of foreign origin, i.e. they are imported. This means that the rouble’s cost has grown, and the demands of those who charge the industry with very strict administrative rent have not decreased.

The result is that the demand for housing and commercial realty has fallen sharply. I travel round the country a lot, and I see how business centers in the regions are losing their tenants. That is, people trying to preserve their businesses have no means to pay for a good office.  

Besides this, new tax legislation was adopted, and now allocations for realty are very big. All these factors have created a burden on the construction sector. I don’t think that these problems are unsolvable, but they must be managed by professionals.

It is not about higher leadership: for example, the head of the Ministry of Agriculture knows agriculture very well, and his deputy, who does not, is a so-called ‘efficient manager’. Efficient managers cannot solve problems - they were taught to manage financial flows. So, do not doubt that the finance coming into the sphere will be managed efficiently, but the finance itself has dropped, and the managers do not know how to increase it.  

The problems with governmental contracts should be mentioned here. It has become the officials’ favourite sport lately to include an item in state contracts that if the budget financing is not spent by the end of the year, all obligations are cancelled. A surprise, right?

That is, for the security of the state budget, somebody is to start construction and to undertake some obligations, then by the end of the year, it appears that the guarantees are not worth the paper they are written on. This also causes serious problems.

 

М. Khazin: «it has become the officials’ favourite sport lately to include an item in state contracts that if the budget financing is not spent by the end of the year, all obligations are cancelled»

 

Besides, it is necessary to do something about credit provision. What do we see at present? Small- and medium-sized banks, having entered into equity participation at their own risk, are closing, and large banks are acting tough: as there is no alternative, they may “nick” as much as possible.  In fact, it relates to the Russian modern management system being incapable of working in minimal crisis conditions. They can manage financial flows when they are exhaustive, and they are absolutely helpless as far as real work is concerned. 

 

Can constructors influence the situation? Might the decisions of the recent State Council help?

— Concerning the State Council, I’d say that, as it was prepared by the Ministry of Construction, its main task was to avoid all sticky items.

As elections will take place in September, one may try to change something: for example, to decrease the number of different fraudulent structures acting in the sphere of construction and utilities. Something must be done with all those managing companies, etc.  

 

— And what does the Housing Inspectorate do? Fraudsters must be stripped of their license.

— Housing inspectors do not work with management companies, and they are irritated with residents. I know that from the example of our own house. We are at war with the managing company. We held an alternative meeting, and the MC falsified the data of another meeting in response. One of the residents connected with the company applied to the court, and the judge locked down the process. As a result, the MC raised rates and tariffs, and those who do not agree pay according to the city’s prices, and the MC keeps silent…

The problem is that our legislation connected with managing companies is such that it is impossible to struggle with them within existing formal procedures. It demands great time and effort. People with free time or experienced lawyers are required. It is necessary to alter the law. The state should be very strict with unconscientious MCs, take their licenses and punish the guilty people personally.

 

And meanwhile, companies affiliated with municipal authorities take the place of the MCs who have lost their licenses…

— Yes, it is an integrated group, the municipal authorities and their object managing companies, feeding on financial flows. The situation should be changed and the state should deal with it, and with private individuals but only within large associations.

 

— It happens sometimes that there is nobody to make a claim to concerning unfinished work in apartment houses: the constructors have left, and the MC does not want to deal with the defects...

— Just so! For example, in our house, the developer is being closed down, and the MC working with the house is not giving the residents the opportunity to make demands of the constructors as far as defects are concerned.

 

М. Khazin: «It is impossible to struggle with them within existing formal procedures correspondence. It demands great time and effort. People with free time or experienced lawyers are required»

 

Meanwhile, the plastic facing coverage is starting to fly down from the façade of the 30-storey building. Can you imagine where it might fly to or if it might land on somebody’s head, for God’s sake? Who will be responsible for that? There is no one to deal with it – except the constructors-members of the SRO to which the company belonged.

In this way, the problems of fraud are transferred to the industry, and it must have mechanism of protection against unconscientious constructors.

 

— That’s why the Ministry of Construction has prepared the bill draft on the reformation of the SRO system in construction, which was supported by Andrei Molchanov, the new president of NOSTROY, having presented the project at the recent State Council. Not everybody agrees with this approach. For example, Novosibirsk constructors think the bill draft on the easing of SRO regulations introduced to the State Duma to be “raw”. According to their assessments, the proposed measures will not improve the work of the construction industry, but will lead to a situation whereby houses will be built by disreputable companies. The Chairman of the “Strizhi” GC (one of the largest developers of the region) Viacheslav Ilyukhin, claimed that the document “threatens the steady work of the industry”.

But you know this well yourself, you were present at the round table and supported the Novosibirsk constructors…

— Indeed. From the Construction Ministry’s standpoint, a large number of SROs is a problem: they come, write letters, demand something or ask to do something, etc. The Ministry does not know what to do, does not want to know, as there are few professional constructors there.  That’s why they are trying to reduce the number of SROs by enlarging them. Then it will be more convenient for the Ministry to interact with them. 

 

And ideally, to integrate constructors, designers and surveyors in one vast national association?  

— Yes. It is quite evident that such an integrated structure will be a kind of Soviet ministry managed via external procedures. That’s why Minstroy wants only general contractors to stay in the SRO, and anybody can become a contractor, and he won’t be responsible for anything. And besides this, they want to collect additional money (1 – 25m roubles) from those who construct to pay for an SRO’s failure to fulfill its commitments for governmental contracts.

ВЫНОС-3: М. Khazin: «The integrated structure will be a kind of Soviet ministry managed via external procedures. That’s why Minstroy wants only general contractors to stay in the SRO, and anybody can become a contractor, and he won’t be responsible for anything» КОНЕЦ ВЫНОСА-3

 

And all this increases the administrative load on constructors: not only do they have to pay for everything, but they will have to wait to see if the budget will allocate the money. If we add insurance payments which are to be done before the construction begins, start-up companies are driven out of the industry.

Imagine: a company starts work, it has no free money. It wants to enter a SRO, to become a general contractor (let’s say, of a small object) – and it has no idea that somebody has committed fraud or done poor quality work. Thus the company’s money will not compensate for its mistakes, but it must give it away to pay for the wrong doings of others.

 

— The opponents of the Construction Ministry’s bill draft, represented by the aforementioned Mr Ilyukhin, stand for the fact that such a system lets people with big money come to the market, pay for admission and hire anybody and everybody. They forecast the following results: a sharp drop in the quality of work, industry monopolization, small- and medium-sized businesses failing, and the appearance of occasional construction brigades like in the 1990s.

— Exactly. Within such a system, small- and medium-size companies automatically become unprofitable, as they have to pay for safety arrangements and precautions, employees’ training, etc: that is, to spend and spend without any guarantees.

In that way, the whole construction industry will turn into a great army of jobbing workmen not controlled by anybody. I know what this is: in our cottage settlement, a house burnt down not so long ago. Some jobbing workmen did the electrics there, they did the wiring wrongly, it gave off a spark, and the wooden house caught fire. And who will be responsible for that?  

 

It is very sad. But it is also wrong to let the self-regulation system stay as it is. What’s going on with it? Admissions are bought and sold. In the West, self-regulation organizations, not legal entities (which may be established in any quantity), are responsible for any wrong-doings, as are individuals, specific people, for whom entry to the market will be denied. This is quite another level of responsibility.

— Right. Why is there personal responsibility in the banking business, and there is none in construction? It must be everywhere.  

Do you know what is to be done? Instead of discussing the bill draft on the website of the Construction Ministry for a long time without any guarantee of the proposals being registered, a real conference of constructors should be held to discuss the issue publicly, and then prepare, adopt and publish a document determining the problem’s solution. 

Only after discussing the integrated proposals of the construction community may the corresponding law be adopted.

Self-regulation is the right idea, but the SRO must have real powers and opportunities. And it is evident that it is impossible to unite everybody in one organization: different regions have different conditions. It is impossible to tar everyone with the same brush. An organization may not become a local SRO member unless it constructs in the region.  

 

— Now let’s discuss mortgage loans. It is not the only tool, is it? Some experts say that, in copying the American model, we made a strategic mistake. We needed to develop a system of savings banks for construction, like in post-war Germany. Do you agree?

 — It is a complicated question. Saving programs do not work with such high inflation as ours, because money is simply lost, and this is so all over the world. We could have developed savings banks about five years ago – they could have worked then. Now, it can’t be done without budget support.

As far as mortgage loans are concerned, of course they are not the only instrument, but they should still be developed. To remind you, there were mortgage loans during Stalin’s days: not in all regions, but in the Far East, and they were lent at the rate of 2% a year, and they helped to resettle people there after the war.  

So, mortgage loans are not an American invention. The other thing is that American financial schemes are used, and they do not work with us now.

 

M. Khazin: «Theoretically, the state should finance the mortgage loan rate. Let it be 2%, and construction will flourish, economic growth will start in the country, and money will appear in the budget. But our officials do not need it. Their task is not to provide for economic growth, but for themselves»

 

Besides, we have quite a different situation as compared with the USA. There, you may reject a flat if you cannot afford to pay the mortgage, and with it you automatically cancel your debts. With us, the flat as a rule is owned by the bank, and until you pay your debts you cannot reject it. If you stop paying for some reason, you not only cannot reject it, as you don’t have it, but you also get wild penalties and fines for non-payment. But this is - sorry for my straightforwardness – total idiocy!

More than that, they are trying to forbid paying the mortgage loan before the full term. That is, you must overpay for the flat three- or four-fold. That beats everything...

And bankers claim that if everybody pays the mortgage loan on time, it is possible to create long-term financial forecasts, and it will result in the decrease of the mortgage loan cost. I claim that this is a lie. They will not decrease the cost of credit!

 

The mortgage loan cost cannot be decreased until we have such a key rate and such inflation...

— Theoretically, the state should finance the mortgage loan rate. Let it be 2%, and construction will flourish, economic growth will start in the country, and money will appear in the budget. But our officials do not need it. Their task is not to provide for economic growth, but for themselves.

 

And how may the mortgage loan be supported now?

— There is only one way: decrease the rate sharply.

 

But it is impossible: banks cannot work at a loss for such key interest.

— Banks cannot, but the state can. And it must subsidize the rate.

 

But it does: the rate has been decreased to 12%.

— And it should be 5-6%.

 

And lowering the initial payment has been suggested...

— That is right, they are decreasing it, as they understand that there is no other way: people do not have so much money.

 

— What is your attitude towards the mortgage bonds issue?

— It works when the financial market works properly, and we do not have this. Before the crisis of 2008, in 2005 – 2007, such refinancing could work: banks lending mortgage loans and selling securities on the secondary market.

By the way, this is just what Fannie Mae and Freddie Maс, fully state-run enterprises, dealt with in the USA. Americans did not give it to private banks.  To remind you, Fannie Mae and Freddie Maс were privatized rather late, when they were working in full swing. Then they were nationalized again when it became clear that they had advanced too far.

Unfortunately, in Russia, officials are not responsible for the results of their work, so we cannot hope they will do something reasonable. In the majority of cases they just lobby for the interests of the large market players.

 

— The last question, Mr Khazin. What does tomorrow hold for the economy and the construction sector?

— I cannot say anything good. As our Government is not going to change its policy in any significant way, the decrease will continue this year.

 

Andrei CHERNAKOV

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