Energy efficiency in municipal infrastucture 29 July 2010

Municipal infrastructure and utilities are in a catastrophic state Energy inefficiency is burning up Ukraine’s roadways, hospitals, schools and all efforts to modernize the country

Reason #1 - CORRUPTION!

Alchevsk, 2006 On 22 January 2006, a state of emergency was declared in Alchevsk: an accident on the heating pipes left nearly 60,000 residents without water, heating and sewage for a month in - 38ºC weather. UAH 26 million is what it cost the State Budget to recover from the Alchevsk breakdown in Another UAH 200 million of public money went to update the residential services system in Alchevsk.

Alchevsk in 2006: Who’s next?

Why Alchevsk could happen again Inefficient, outdated infrastructure that is burning up taxpayer money Lack of normative and institutional reforms in the residential services sector (RSS) Poor quality residential services Political games with utility rates A management system that does not meet the needs of the market

How does the market influence the way utility companies operate?

A soviet heritage Government = CPU+ State – Residential owner RSS Maintenance Repairs POLITICAL CONTROL OF RESIDENTS Residents receive homes from state: as political collateral as a political favor Delegates powers to Centralized funding

ВЛАДА = ГРОМАДА ДЕРЖАВА Government = CPU + State – Homeowner Completed changes in form of ownership and system of government RSS Утримання Ремонт ПОЛІТИЧНИЙ НАГЛЯД ЗА МЕШКАНЦЯМИ Apartment owners set up Owner Associations RSS Renamed but not reformed

Working in market conditions Government - Community Infrastructure owner Promotes strategic changes Ensures social protection Controls residential quality Services market Service providers: community private Professional managers hire service providers Apartment owners set up Owner Associations, hire managers

Economic Reform Program for Ukraine for Residential Services Sector reforms “The current system of managing the utilization of residences… is outdated and inefficient.” “The quality of residential services meets neither the needs of consumers nor technical standards.” “RSS enterprises are in a critical financial and commercial state.” In 2009 alone, they lost UAH 1.93 billion.

Patching or modernizing? How to pay for modernizing?

State Budget Private sector IFIs Modernization How to pay for modernization?

What does the RSS cost Ukraine? State Budget How to pay for modernization?

National Program to Reform and Develop the RSS for UAH billion – technical upgrading of RSS UAH 20 million – legal and technical support to reach the Program’s objectives UAH 8 million – attracting investment and cooperation with IFIs and donor organizations UAH 9 million – gaining public support for the development of the RSS UAH 2.1 million – training government officials in local government bodies

UAH 90.3 million allocated to modernize the central heating system over How much will actually be disbursed? State Targeted Program to Modernize Central Heating System for

How to pay for modernization? Current Ukrainian law makes it impossible for foreigners to invest at the municipal level Private sector IFIs

Guaranteeing municipal borrowing UkraineRussiaPoland Are municipal guaranties subject to approval by the State? Yes. Municipal guarantees are subject to Ministry of Finance approval No. Municipal guarantees are not subject to approval by the Federal or regional governments. No. Municipal guarantees are not subject to Ministry of Finance approval. How does the State oversee off-balance sheet municipal liabilities? The Ministry of Finance approves and monitors direct and contingent municipal debt. Municipal guarantees are consolidated in a regional register. Municipal budgets are overseen by the Regional Audit Chambers under the Ministry of Finance. What are the caps on statutory debt for municipalities? Servicing direct debt and guarantees may not exceed 100% the forecast development budget. There are no statutory caps on individual municipal guarantees. Municipalities may incur direct debt plus guarantees up to 60% of the total annual revenues Is there a statutory obligation for the borrower to issue counter-guarantees to the municipality (Guarantor)? Yes. The borrower is required to pledge fixed assets and provide a bank guarantee. There is no statutory obligation for the borrower to issue a counter-guarantee in favor of the municipality (Guarantor). There is no obligation for the borrower to issue a counter- guarantee in favor of the municipality.

What has to be changed? Decentralize municipal budgets Establish procedures for the Government to oversee municipal borrowing Increase caps on the issuing of municipal debt guarantees Cancel requirements for borrowers to issue counter- guarantees to municipalities

How does the market affect the work of utility companies? Alchevsk, 2006: Who’s next? Patching or modernizing? How to pay for modernization? What legal changes are needed to get investment? For discussion