Russian utilities: a lot of complexities but reforms are proceeding

Russian utilities: a lot of complexities but reforms are proceeding
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What the authorities and experts were worried about in the sphere of utilities in 2016

At the end of December we started summarizing the results of the year’s end and analysed, how the construction industry felt in 2016. This article concerns the utilities sphere.

One should acknowledge that the authorities’ work in the sphere of utilities looks much more systematic than in the construction industry. As we wrote in the previous article, the RF Ministry of Construction does not seem to have a clear program regarding the construction industry, but we cannot say this about the utilities sphere.

There is a program and even an industry development strategy until 2020. And it is not by chance that the Minister of Construction, Housing and Utilities, Mikhail Menn, paid most of his attention to the achievements in this sphere at the resulting press conference which took place on December 21st, 2016.

Concession boom

Mikhail Menn started with the attraction of private investments to the sphere. And this is not by chance. The results of the communal property concession campaign are impressive.

“Within 11 months 318 concession agreements were concluded. It is 41% more than in 2015,“ the minister stressed. “An inflow of investments both to regional centres and small municipalities has started.”

According to Mikhail Menn, it became possible due to the support of the small municipal settlements by the Utilities reformation support foundation which is to start in 2017.

5 bln roubles ($83.3m) were allotted for subsidising the loan rate for private partners in towns with a population under 250,000 and for the co-financing of the communal infrastructure updating projects.

The results came quickly: the number of failures in heat supply systems decreased by 47%, in water supply systems they dropped by 21%, and the losses decreased by 18% and 14% correspondingly in the regions where concessions work.

Russian utilities: a lot of complexities but reforms are proceeding

However, many experts have considered a number of factors that prevent concessions from developing.

For example, Andrei Shirokov, Chairman of the Committee on Entrepreneurship in the sphere of utilities of the RF Chamber of Commerce and Industry, thinks that as the tariffs’ indexation has been actually frozen (the 4% increase in 2016 is irrelevant), it is not clear how investors are going to warrant their investments in the communal infrastructure.

There are other headwinds as well. According to Pavel Seleznev,  Chair of the Board of the PPP Centre, municipal authorities seriously oppose such concessions becoming widespread.  Following him, it is difficult for the local authorities to deal with private partners and, thus, excessive supervision is present.

It should also be noted that private partners do not always behave properly: not all concessioners conclude an agreement as a result of winning a tender. They declare their intention to take part in it, gain from the finance accumulation and then backpedal.

Up and resettle

Another successful issue in the industry is the resettlement of dilapidated housing. According to the minister the plan devised in 2016 (to resettle people from 2.63m mof housing) will be fulfilled.

“Unfortunately, some regions might not fulfil the plan, and the overall result will be achieved due to the regions which are ahead of schedule,” the minister added. 

The problem is not new. At the beginning of the year, Nickolai Nickolaev, Head of the “Narodnaya Expertiza” (People’s Expertise) All-Russia People’s Front Centre for independent monitoring of the Presidential charges fulfillment, remarked in his interview for our journal that the resettlement problems in 2016 are a continuation of the previous years’ ones.

There are also other problems that experts worry about. For example, Igor Shpeсtor, Chairman of the Public Council under the RF Ministry of Construction, Housing and Utilities, fears that the ministry intends to transfer the resettlement functions from the Utilities Reformation Support Foundation to regional authorities. Following him, local authorities having insufficient finances for resettlement organisation transfer dilapidated housing to the category of rundown housing and put it on the queue for capital repair.

Russian utilities: a lot of complexities but reforms are proceeding

Not enough contractors for capital repair

According to minister Menn, capital repair is also developing rather well.

“The collection rate of capital repair fees in 2016 was 83% whereas last year it was 74%. In 2015 21,000 buildings were repaired, in 2016 40,000 were planned, meaning that the repair rates were twice as high,” Mikhail Menn stressed.

Capital repair has been discussed in our pages very often. For example, Head of the “Everyday life quality” regional working party, Pavel Sozinov, thinks that regional operators of capital repair are actually monopolists: they hire contractors, control the expenses, commission the repaired object themselves and provide technical supervision. Managing companies are not admitted to the process. But if a problem arises, it is a managing company that is responsible. 

There was also a lot of discussion concerning the «common pool»-special deposit correlation. How to make the transition process simpler, what to do with the collected money, and how to make banks lend money for capital repair with adequate interest. For example, Galina Khovanskaya, Deputy of the State Duma, asserts that the CB’s credits at the 11—12% interest are not popular.

“Nobody wants to borrow money under such conditions,” she is sure. The rate should be lower, as in Germany or Spain, but we cannot do it yet. 

In June the State Duma adopted the amendments on the capital repair system improvement to the Housing Code. However, experts were not satisfied. Thus, Dmitry Gordeev, lead attorney of the “City Economy Institute” foundation, said in the interview to our observer that the adopted measures are insufficient.

According to the expert, the CB has not adopted the necessary documents and banks have a lot of questions about the deposit work. Officials also admit that the capital repair program proceeds in spite of its problems. According to Andrei Chibis, Chief Housing Inspector of Russia, in 11 regions of the RF the number of contracts for capital repair in 2016 was 30% less than in 2015. And he is afraid that the plans for 2017 may be defeated.

Management flounders

The issue of apartment houses’ management should be considered separately. The minister was laconic, having mentioned that 18,300 licenses were issued in 2016 and 212 were cancelled.

But experts are very critical about the MC’s licensing.

“It is very difficult to cancel a license with the present order of things,” Svetlana Kalinina, a member of the “Everyday life quality” working party of the All-Russia People’s Front, said. “Even if a company’s license is revoked, it continues its business without the license!”

According to the expert, managing companies invent ever-more new ways to get around the law by creating new companies “for emergency purposes”.  

This is how it is on the one hand but, on the other, managing companies are afflicted. According to Igor Shpector, the MC licensing did not change the situation for the better, only the number of court processes increased.  And the MC appeared like scapegoats because of the adopted law.  

“The number of cases with managing companies as respondents has grown, they are fined, and unwanted companies are pressed out of the market,” the expert resumes.

The relations between managing companies and residents are so complicated that AKON (Realty Servicing Companies Association) even suggested creating an additional intermediate structure, the Institute of trust management, which would help owners choose a managing company correctly via tenders. The Association even addressed the President on the issue, but the results are not clear yet.

Where are we going?

The adopted Utilities Development Strategy presented by the Ministry of Construction, Housing and Utilities in 2016 does not satisfy everybody, though. Thus, Nickolai Nickolaev considers it vague. Actually, such a document should contain a distinct step-by-step implementation of all key items in the sphere of the utilities regulation, and from this point of view the Strategy is far from being perfect. 

Andrei Shirokov supported Nickolaev and told our journal that the Strategy is nothing but Deputy Minister Andrei Chibis’s plan of work for the coming a year and a half.

And Svetlana Razvorotneva, Executive Director of the “Utilities Control” NP, thinks that on the one hand, the role of the state is enhanced, and, on the other hand, the functions of the residents’ social protection are transferred to the business. Summing it all up, we should remark that there is a lot of confusion in this sphere still and the improvement process is rather slow.


Nevertheless, we think it necessary to stress that reformation is complicated with the hard economic situation in the country, but it continues to proceed and sooner or later all experts’ constructive feedback will be taken into account by the authorities.