Residential sector reform: Ukraine at the crossroads

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Reform of the residential and utilities sector in Ukraine is now imminent, as much as the modernization of law enforcement or reform of the public health care system. In fact, Ukrainians deal with these areas on a daily basis and, historically, reforms in the residential sector were usually postponed until better times. First, it is important to explain why Ukraine finds itself in this situation. After gaining independence, Ukraine received, among other things, a tremendous amount of state-owned residential property.
 
Residential district in Kiev, Ukraine
Residential district in Kiev, Ukraine

Ukraine opted for a simple, and more enjoyable, approach - free privatization of homes by their residents.

Contrary to the common perception of reforms as a painful process, privatization of homes in the 1990s is a good example of the opposite experience. It is hard to think of a more popular reform. Was there a chance to take a different path? Quite possibly so. Let’s take, for comparison, East Germany, the former GDR, where the home ownership system was similar to the Soviet one and which preserved state ownership to residential property, and providing it to its citizens (primarily, low-income families) for lease. On the other hand, privatization of homes similar to the Ukrainian experience was undertaken in Russia. The latter cannot boast the quality of its utility services either.

Let us look at more successful examples of reforms in the utilities sector, which may be followed by Ukrainians.

While reforms in Ukraine, including in the utilities sector, were slow, such changes were implemented very quickly in Poland. Reforms in the residential sector began in 1995 and it took only 4 to 5 years to introduce all the key innovations. Today, 71% of apartments in Poland are under the ownership of individuals (private homes and apartments are members of associations "Wspólnota mieszkaniowa"). Another 19% of apartments are organized in cooperatives. A similar situation is observed in other European countries. Here it is important to note that the prevailing majority of these countries decided that home owners must be united in some kind of a community (in the form of a homeowners association or a condominium). At the end of this post, we will see why this is important.

Ukraine has chosen a different scenario. On the one hand, Ukrainian privatization was optimal, since residents obtained ownership of their apartments and everything else provided by their building. In other words, all residents of privatized apartments in a building jointly own its basement, roof, elevators and heating and sewage systems. At least that is what article 282 of the Civil Code states. Under this article, homeowners jointly own and manage all common areas in a multi-apartment building.

Judging from legislative provisions, the national government and municipal authorities have stepped back from managing residential property. They no longer own such buildings and don’t have to bother about their maintenance and repair.

In practice, however, we see quite often that buildings remain on balance of a municipality (or on balances of local communal enterprises), which in essence is unlawful.
 
Therefore, having made the first step, the government put further reform of the residential sector on hold. To date, residential property has been managed as if it had not been privatized at all. Meanwhile, the government wasn’t in a hurry to take on more responsibility, the gruesome outcomes of which we can now see with our own eyes.

In over 20 years of Ukrainian independence, dwelling stock has declined into a woeful condition, making the need for reform ever more relevant.
 
What can be done in relation to this?

To begin with, we should be reminded of a very simple principle: ownership implies both rights and responsibility.
 
Therefore, it is the responsibility of co-owners of a multi-family building to care about the whole building, not only about their apartments. The building is theirs, and nobody else’s!

It's true that maintenance of an entity as complicated as a multi-apartment building takes a lot of time and effort, and special expertise.

That’s why co-owners ask for outside help - from property management companies. A property management company is contracted by co-owners and takes over responsibility for technical maintenance of the building for a fee.

Here we are talking not only about maintenance of a building, however. The same applies to all other services consumed by residents of the building, such as heating, water supply and sewage, waste removal and capital repair.
 
All Eastern European countries have gone through such reforms. Most of them experienced their most painful reforms during the initial period from the mid to late 1990s. Ukraine is starting its reforms just now.
 
It is important to note that the legislation to underpin reform is already a work in progress. For example, law № 417-VIII, covering specifics of decision-making in multi-apartment buildings, is fully aligned with European practices. Under this law, decisions in such buildings should be adopted by a majority of residents, not unanimously. Given the unanimous vote requirement, as was the case for the last 25 years in Ukraine, residents might not be able to adopt any meaningful decision. Results of this practice speak for themselves.
 
With adoption of the law, residents receive a chance to become a driving force in the municipal market of utilities. They receive legitimate power to stand against natural monopolists and demand that they provide high quality services at affordable prices. The law came into force on July 1, 2015.
 
There is, however, one important reservation. Adoption of the law does not mean that reforms in the residential sector will happen automatically. To a significant extent, the success of the reforms will depend on the residents. The law gives them one year to decide whether they want to set up a HOA or select a management company. Should residents fail to do so, the local municipal authority will make a choice and assign a management company. Again, common practice over the last 20 years was for the city to hire contractors to repair multi-family buildings. And, everyone knows that the outcomes were far from spectacular. This would continue until co-owners finally understand that there is no one but themselves to take care about their buildings, and by jointly adopting decisions.
 
This is a great challenge, and we should keep in mind the example of Russia here. Similar to Ukraine, resident associations in Russia are voluntary! In this situation, everything depends on the initiative and commitment of the residents.

What did this lead to in Russia? They adopted quite progressive laws, but failed to get the message across to the public.

As a result, reforms in the housing sector transformed into profanation. Under the sign boards of management companies, they have the same old and inefficient ZHEKs (utility companies) appointed from the top by municipal authorities. Homeowners may change their ZHEK, but do not do so because they fail to understand the process and overall inertness.

Therefore, the saying that everything is in the hands of residents is not just lip service.

I will refer to Poland as an example also. It is a common belief that the system of homeowner associations is more advanced in Warsaw because the reforms there began earlier and progressed faster than in other places.
 
As a result, residents of the Polish capital pay one of the country’s lowest utility rates, although average salaries in Warsaw are higher than Poland’s average!

This may happen in Ukraine, too. And those who begin work first are likely to take management of their property under their control and, a few years from now, will find themselves in a better position than their less agile compatriots. 

Authors

Grzegorz Gajda

Project Manager, International Finance Corporation

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