People in the Know: Business Plan for Municipalities

After the well-known package of laws on housing, mortgages, etc, came into force in 2005, your fund, it seems to me, stayed in the shadows a little. But now you have started to appear "in public" more actively.

I don’t have an impression that we have now become more active. It seems to me that we work now as we always did. Really, at that time there was a splash connected with the preparation of serious changes in legislation, and now work is more routine.

How do you assess the work you were engaged in then and now?

We are mainly engaged with municipalities. Although also with regions. Work on the package of laws for increased availability of housing was the first stage in the preparation of the Accessible and Comfortable Housing for the Citizens of Russia national project. Then the really serious legislative breakthrough was made: such documents as town-planning, Housing Codes, etc. They have created an absolutely different basis for housing construction. After that realization of the national project began, we accepted participation in it as experts, and then participated in the development of a new federal target program – “Habitation”. Then there was a lot of work connected with the legislative-regulatory base. The fund also worked directly in the cities, including in the realization of specific mechanisms, models. Now at a national level we are engaged in the long-term strategy of development of mass housing construction up to 2020 as experts and we are helping mini-regions to prepare for it. The final variant should be being considered by the government. Earlier any priorities were allocated, and now they are being added in a wider, strategic context in terms of housing policy.

For example?

In 2004 when we started to be engaged in it, the share of families in Russia that could go to a bank, get a mortgage and buy a property up to social standards was 9 per cent. The goal was set that by 2010 this should have increased to 30 per cent through the development of housing construction and mortgage financing. In 2007 the share was 18 per cent. In the new strategic document the goal for 2020 is 60 per cent. We want to make it so that more than half the population can buy housing with the means of long-term credit. To do this, new tools such as the development of non-commercial forms of housing construction companies, for example, have been provided for. But our fund is not only engaged in housing and a national level, this is less than 10 per cent of our work. Besides housing construction, housing and communal services, and regulatory work we are also engaged in municipal social and economic planning, municipal budgets, social policy and other questions of development at a local level.

And what is more profitable - dealing with national or municipal problems?

We are a non-commercial organization and so we don’t have a goal to make profit. Our goal is stable work, supporting bodies, and for our employees to execute fulfil our mission - to promote the development of cities and regions.

What are you currently supporting? Projects. Projects we are realizing. We are participating in tenders, getting contracts and grants from different organizations. We have a diverse structure of financing. We work to precisely generated budgets which compensate our expenses and we make a small fixed profit on development, i.e. on the development of new strategic approaches, models which still have no customers. Therefore it’s impossible for me to say which is more profitable - national or municipal projects. They are equally profitless. It even happens sometimes that we lose contracts because we work extremely responsibly - spending a lot of time on the realization of this or that project, which, naturally, raises its cost. And some companies are involved in dumping.

Does dumping go on a lot?

Everywhere. There is much poor-quality work in the market of expert services.

It is rather difficult to assess the quality of strategic work. In fact its results would be proven after, sometime, a very long, time.

The assessment of the quality of intellectual expert work exists. Professionals can perfectly distinguish high quality strategic development from poor quality. If they look, for example, at the strategy of development of any city and understand that something is missing, be it a regulatory-legislative study or adequate projects, models, tools of realization, then the document is simply a useless piece of paper – who needs it?

Every city understands the strategy of its development differently. For example, Perm (in September in Perm the “New Metropolises: Cities They Choose” economic forum took place) is more anxious about global problems rather than, for example, road repairs. Similarly, many Russian cities operate by the same model.

No. I disagree. On the contrary, I am depressed by the fact that city authorities are mostly occupied with routine issues such as solving momentary problems. And preparing for winter is still a constant problem. 90 per cent of cities only patch up holes that will be there again tomorrow, they’re not interested in them. Results can be reached if you possess strategic vision of the development of the city. I’m not saying that Perm can be used an ideal example, but I liken the fact that the city doesn’t just live for today. It creates the energy for development which should not only support the city, but also promote its advancement. The opportunities for this in Perm are great. In the country, we have a falling population; therefore cities will constantly be competing for people. It is already not enough to only worry about a favorable environment for living the same conditions should be created for attracting business and investments. Otherwise the city will wither, a decline in population will begin - competitors will simply entice labour, and intellectual and investment resources.

Now in Russia there are only two centres - Moscow and St. Petersburg. Its not a secret that the thing stopping investors coming to Perm for example, is administrative criminal situation.

The main problem is that except for Moscow and St. Petersburg there are no points of an attraction in the system of city development. We could include Yekaterinburg which has set itself some ambitious tasks. The others don’t come close. And this is dangerous. Experience elsewhere shows that word centres are not just the largest agglomerations but also cities with a population of a million people.

That’s a lovely idea. But in Russian conditions something also gets in the way. It is possible to set a strategic goal. But then the time comes to give a report, you start to stretch the figures, or to explain why the problem has not been resolved. Are there no fears that this time everything will be the same?

I don’t understand this approach at all. We sit here, we plan the development of the city, the country, it is not important if we are scared. With any strategy risks are miscalculated. But you need to work with them, reduce them, or consider and struggle with them, rather than sitting and complaining that everybody is stealing everything and so we won’t exceed. You won’t succeed if you don’t open your eyes to the problems. And now they are starting to open their eyes, that’s obvious to me. For example, in the housing sector many potentially corrupt channels have been uncovered. It is clear that is impossible to completely beat corruption, but doors have been opened that previously were locked. I mean, first of all, the system of land auctions in the sphere of housing construction that functioned back them. Previously land was distributed by the principle of "whoever wants it gets it." And this was established by a federal law. Now it’s the same - except for in housing construction. You might say: I know of these auctions. But all the same it is better than allowing some officials distribute the land "to whoever they want." Now it has been made more difficult. Furthermore, we had 10 kinds of state expert appraisals for design documentation. And everyone knew how to pass them. Now these examinations have been reduced into one, and the subjects have been limited, for example, in housing construction to just three stages. So nine potentially corrupt channels have been extinguished. It is not necessary to think that these are easy, insignificant measures. And this often happens? You need to either do something straight away to get a result or recognize the business is very complex and not undertake it. I prefer to see a problem and try to solve it. It doesn’t always happen but sometimes we succeed.

So sometimes you can’t see a problem? Or solve it?

More likely solve it. You say that we like to draw whatever figures for which we then need to report. I think that’s good. Not just investing money somewhere where it is then dissolved without any visible result. But to say yes, we are investing and we want to reach a result. If we do not reach it, it is necessary to explain why. In other words, it is necessary to count on the efficiency and productivity of investments. And that all of us build build build but we get nothing at the end. In the end will people be able to by housing?

This question is more often asked

The Soviet authorities were always building something; only the queue for housing didn’t disappear. And it still hasn’t now. I, for example, am less interested in the figures concerning new housing when a normal person cannot buy it. I like another goal - to reach a ratio between the cost of housing, mortgage terms and the incomes of our citizens, in order that 60 per cent of the population can buy an apartment. It is necessary to do everything simultaneously: raise the incomes of the population, build more housing, and develop mortgages, including reducing interest rates.

They feel already and are rising again

It is necessary to constantly monitor the market, to look at why rates have begun to increase. Now rates are rising in connection with the financial crisis, money is becoming more expensive and banks are experiencing a deficit in long term resources for mortgages.

And they are not giving credit at all

They give to anyone who is in a position to return it. Only banks have been charged more for these funds. And if the bankers have taken expensive money how can they give cheap mortgages? But this isn’t terrible. It is possible to influence this process. I, for example, do not understand why accumulative funds of the Pension fund are not put into mortgage securities? I also don’t understand why they don’t place them at an annual rate of 4-5 per cent per annum, 2 times below inflation.

These securities do not have state guarantees.

What here has state guarantees? Why would they be necessary if mortgage securities are designed to be reliable and with ratings of some potential issuers not lower than issuers in the Russian Federation? It is possible to choose securities provided by the most reliable credits (with LTV no more than 70 per cent, with borrowers with confirmed incomes, etc.), this would be a stable income to the accumulative pension system. In all countries it is a source of financing long-term mortgages.

Using pension and insurance funds in this way has been spoken about for a long time. You included.

Now is just the right time. It would be the correct reaction to occurring events. There will always be fluctuations in the market, but they need to be thought about in advance. When we wrote the law on mortgage securities, that the credit cannot be more than 70 per cent of the cost of an apartment, we assumed that prices for real estate may go down. But our bankers did not consider this, just like in America. They started giving out mortgages at a rate of 90 per cent and even 100 per cent of the cost of an apartment.

The fund for the assistance of housing and communal services places available assets in bank deposits. It also plans to make a two-year placement. It is clear that this will support the banking system, but will this worsen the financing reforms in housing and communal services?

The money placed by the fund is targeted. According to the law it can only go to subjects of the Federation for large-scale renovation or to remove inhabitants from the emergency fund. But the fund can only grant this money when a region satisfies certain conditions coordinated by the reform of housing and communal services. For example, increase the share of committees of proprietors and private management companies, carry out the cadastral account of land transferred to committees of proprietors, etc. But the fund cannot predict as quickly as it happens. Of 240 billion rubles the fund has distributed only 30 billion. The rest of the money lays idle. Therefore it is good that it can place them, and furthermore that it can for short periods: one month, three months. To place funds for two years is risky. If they are suddenly needed where will they get them from - the same banks, at the same percent?

People want money straight away.

Therefore I also think that indicative planning with parameters of productivity is a very good thing. And the detailed calculation, monitoring and management of risks. It is important both for business, and for public management.

And do municipalities like such strategic figures?

To a lesser degree. It is a rather new system of planning - the budget focuses on results. It is new not only for our country, but also for the whole world - it appeared only about 15-20 years ago. Always start at a national level, and then move lower. Although a system of tracking the parameters of the efficiency of the activity of subjects of the Russian Federation has already been operating for two years. This year it also started to track municipalities. Having studied the results, it is possible to see how the reforms are going, whether the changes have been for the better. But I wouldn’t say that such social and economic monitoring really helps us to live. It is more still the organization of thinking than an administrative process. Previously we had a very detailed, planned Soviet system – an inflexible and not very good instrument. But for the last 15 years in general we have rejected public planning, and administrative chaos has begun. Now we have public planning that is being constantly reborn and that is absolutely right. When you have a large business you need to have a strategic program of activity for the next 20 years, a business plan for the next three years, for the next year. This doesn’t mean that you live in the soviet era. On the contrary, it is a market instrument. In the same way public subjects should plan activities, in coordination with all directions, and therefore planning should be both social and economic, and both territorial, infrastructural, and budgetary.

A business-plan for a municipality sounds good.

It is impossible to identify the activity of a municipality and business completely, of course. Their goals are different.

You have an idealistic approach. The goal for everyone, in general, is the same – to make profit profit. For you, for families...

- That’s because that is how our life has been organized. And it shouldn’t be that way!

In Russia subjective factors still influence the development of any strategy more than objective ones. Is that right?

Yes. But why are we always are limited to only ascertaining the facts? We are now at a certain point – here we have corruption, disinterested officials in solving social and economic problems and, on the contrary, interested in solving personal ones... We don’t live on the Moon, we know all about it. What sense is there to talk about it forever? We don’t want to live like that. We want to live another life where everything is to the contrary. And the problem of our "Institute" is to think up a trajectory on which it will be possible to pass from the first point to the second. It is clear that it will not run on a straight line. But the most important thing is to remember that at any point along the way we may need go a different way or change our route. In making a decision, it is important to compromise to a degree. This also refers to the development of public strategy. At least, that’s how the experts at the Institute of Town Economics.

Do you especially not work in Moscow?

We work very little with Moscow. But we have been here for many years (the fund was created in 1995 - Vedomosti). Moscow is a specific city. Here federal legislation is often not observed at all, and everyone knows about it. The town-planning legislation of Moscow contradicts the town-planning code of the Russian Federation. It is clear that in many cities there are infringements, but in Moscow they are in the policy. And all the time there are odious ideas: for example, continuing to provide benefits from the Moscow budget for the payment of housing and municipal services. Yes, Moscow can allow itself this. But in other regions it is economically inefficient and socially unfair. It turns out, the more square meters you have, the more applications you receive.

Your idea is to create several more centres, which will weaken the position of Moscow?

To weaken the position of Moscow is not easy. Its uniqueness is that it is the capital. You can’t do anything about that. But it is possible to think up economic forces of development of other cities – i.e. create a balance for people. I am sure that the house prices will rise in Moscow. The Moscow housing market is like the antique market. Prices will never fall as it is unique.

Is this rule identical for all capital megacities?

Almost yes. But the status of the capital isn’t the same in all countries. For example, Washington is the capital of the US, but there cities in the US with more expensive housing, for example, Los Angeles and New York. The latter are more important for their financial centers and business centers than the capital center. But in Moscow its role as capital for many more years will be to draw financial and business streams. Redirecting this vector to other cities is an important problem.

The regions are now actively developing. Investments are not only going into Moscow.

I am pleased with the trend for a reduction in the share of housing commissioned in Moscow, the Moscow region, St. Petersburg and the Krasnodar region. Across Russia, as a whole, in the first half of 2008 the volume of housing construction increased only 3 per cent in comparison with the same period last year. And if you exclude these four regions, in all other regions the average growth was 16 per cent. Last year the above four regions all together put into operation the lion's share of housing in the country – 35 per cent, and this year only 27 per cent. What does this mean? That we have started to build in other regions. And people will buy housing there, instead of in the capital. The slogan "Moscow for Muscovites" is from weakness. Moscow resources for the construction of housing are industrial zones. It is necessary to move them. But where? To the Moscow suburbs which do not want them?

What do you think about the idea of uniting us with the Moscow region?

It’s not right and we’ll get nothing from it. It is administrative itch to unite everything. Nothing can be solved by a simple administrative union. It’s another matter that the agglomerative processes need to be managed. But this management should be clever and look for compromises.

Biography

Nadezhda Kosareva was born on September 27th, 1955. In 1979 she graduated from Moscow State University, and in 1984 completed postgraduate study in Economic Science at the All-Union Scientific Research Institute of System Research. In 1985 she worked in the All-Union Scientific Research Institute of System Research and the Institute of Economic Forecasting. She has much experience in the management of large projects and worked for a US agency on international development in the field of housing and municipal complexes and local self-management. In 1995, since the establishment of the Institute of City Economics she has been its president. The fund is a non state and non-commercial organization and assists in solving the social and economic problems of the development of cities and regions.

The Institute of City Economics was created in 1995 in Moscow. It offers solutions in the sphere of municipal development, participates in the legislative process at a federal level, independently assesses the situation and acts as the organizer of public dialogue concerning the development of the country.