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 2006.

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Inefficient, outdated infrastructure that is burning up taxpayer money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

Delegatespowers to

Centralizedfunding

Centralized funding

ВЛАДА = ГРОМАДАДЕРЖАВА

Government = CPU + State

– Homeowner

Completed changes in form of ownershipand system of government

RSS•Утримання•Ремонт

•ПОЛІТИЧНИЙ НАГЛЯД ЗА МЕШКАНЦЯМИ

Apartment owners set up Owner Associations

RSSRenamed 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 • privateProfessional

managers hire service providers

Apartment owners set up

Owner Associations,

hire managers

Economic Reform Program for Ukraine for 2010-2014 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“The current system of managing the utilization of residences… is outdated and inefficient.”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

ModernizationModernization

How to pay for modernization?

What does the RSS cost Ukraine?

State Budget

How to pay for modernization?

National Program to Reform and Developthe RSS for 2009-2014

UAH 23.325 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 2010-2014

How much will actually be disbursed?

State Targeted Program to ModernizeCentral Heating System for 2010-2014

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

Ukraine Russia Poland

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