R E P O R T Prepared by A. Larkin, the Chairman of the Chamber of Control and Accounts of the Leningrad Region, for EURORAI Congress (workshop)

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1 R E P O R T Prepared by A. Larkin, the Chairman of the Chamber of Control and Accounts of the Leningrad Region, for EURORAI Congress (workshop) Topic: Justification, effectiveness and legitimacy of the activities of the regional and municipal authorities of the Leningrad Region in approving tariffs and charging in the field of public utilities Distinguished colleagues! I have the honor to represent the regional authority of external financial control of the Russian Federation the Chamber of Control and Accounts of the Leningrad Region. At the beginning of my report, I would like to say a few words about our region.. The Leningrad Region is located in the north-west of the Russian Federation and is bordered by two EU states - Estonia (in the west), and Finland (in the north), and by the subjects of the Russian Federation - Saint Petersburg, the Republic of Karelia, the Vologda Region, the Novgorod Region and the Pskov Region. All the territories around Saint Petersburg making up 86 thousand square kilometers - form the Leningrad region. The region's population is more than 1.75 million people, of whom the majority (approximately 66%) lives in urban areas (towns and urban-type settlements).

2 . 2 Life necessities for the citizens of the Leningrad Region WATER HEAT WATER DISCHARGE The main consumer of all kinds of public utility services is the population of towns, rural settlements and villages of the Leningrad Region. The housing and utility complex is an essential component in the residents life support system in the Leningrad Region. It covers more than 85% of the population of the subject and in this regard, occupies a unique position among the branches of the economy.. Residents dissatisfaction with the quality of public services WATER SUPPLY HEAT SUPPLY GAS SUPPLY WATER DISCHARGE ELECTRICITY SUPPLY In accordance with the results of opinion polls, which were conducted against our order within the process of control measures in the sphere of housing and utilities infrastructure, more than 60% of the residents of the Leningrad Region are dissatisfied with the quality of public utility services, and nearly 70% believe that a further increase

3 in tariffs for housing and communal services will make this payments unsustainable for their family budget. Therefore, the issues of transparency and economic justification of tariffs for public utility services, increase of energy efficiency and modernization of infrastructure, creation of supervisory system over the implementation of investment and production programs of the organizations of the public utility complex are in the focus area of the Region s residents, executive authorities, legislative authorities, and of course in the field of our - the Chamber of Control and Accounts - interest. Maintenance of balance between interests of housing and utility complex organizations and interests of their services consumers 3 TARIFF Tariff is a system of payment rates for various production and non-production services provided to enterprises, organizations, institutions and citizens. The main objective of tariff regulation is the balance between interests of housing and utility complex organizations and interests of their services consumers.

4 4 Tariff formation for public utility services Resolutions of the Government of the Russian Federation The Law of the Russian Federation Ministerial orders TARIFF Procedural guidelines of a federal subject of the Russian Federation Under the current legislation of the Russian Federation the right of tariffs formation in the sphere of public utilities sector belongs to the state and municipal authorities. The Committee on tariffs and pricing policies of the Leningrad Region is the executive authority in the sphere of state regulation of tariffs. It establishes the tariffs for the services of organizations of the public utility complex in accordance with the limit index set by the federal executive authority in the field of tariffs and surcharges regulation for the corresponding subject of the Russian Federation. The tariff for public utility services is calculated in accordance with the federal laws in this area, with the Regulations of the Government of the Russian Federation, ministerial orders and calculation methods. The tariff rates for public utility services must be economically justified.

5 . 5 The procedure of tariff formation Definition of objectives Primary acqusition Calculati on Coordination and approval - list - technical features; - rates of remuneration; - prices of materials and fuel; - tax rates, charge rates, normative standards of overhead expenses etc. Calculati on + taxes etc. - Presentation of the tariff to the regulating authority - adjustment based on the comments and suggestions - approval Formation of tariffs uses regulatory cost method for housing and public utility services such order of price formation, where each cost unit (water, heat, etc.) has a clearly fixed price. Resources expenditure rates are calculated for each type of service (eg, the rate of water consumption). The tariffs are determined with 100% coverage of the planned cost of the services provided. Our conclusion based on the results of inspections - establishment and adjustment of tariffs for public utility services was carried out in accordance with the applicable law. As our experience has shown, the inspections revealed a number of issues that I would like to represent to you. A reorientation of the financial budgetary flows occurred: from direct financing of organizations of housing and public utility complex to indirect financing in the order of intergovernmental fiscal relations via two main directions. The first of them is grants to the budgets of municipal formations in order to exercise the governmental authorities for the provision of social assistance in the sphere of payments for housing and public utility services. The second direction is grants of the regional budget to the budgets of municipal formations in order to recoup shortfall in income of organizations of housing and public utility complex, related to the

6 establishment of the limiting indices of changes in payments for housing and public utility services by the Federal Tariff Service. In this case, the regional budget compensates for the difference between the tariffs set by regional resource-suppliers, and the cost rate of public utility services for residents, calculated in terms of these limitations. According to the Housing Code of the Russian Federation the charge for public utility services is calculated based on the volume of consumed public utility services, measured with the help of metering devices, and in their absence - on the basis of consumption standards for public utility services, approved by the state authorities of the federal subject of the Russian Federation in the manner prescribed by the Government of the Russian Federation. Sources of payments for housing and public utility services 6 Payments from residents Grants to the budgets of municipal formations in order to exercise the governmental authorities for the provision of social assistance in the sphere of payments for housing and public utility services Grants of the regional budget to the budgets of municipal formations in order to recoup shortfall in income of housing and public utilities and organizations, related to the establishment of the limiting indices of changes in payments for housing and public utility services by the Federal Tariff Service (if housing and public utility has shortfall in income) Payment for public utility services Payment sources for the rendered public utility services: - payment of the residents; - grants to the budgets of municipal formations in order to exercise the governmental authorities for the provision of social assistance in the sphere of payments for housing and public utility services; - grants of the regional budget to the budgets of municipal formations in order to recoup shortfall in income of organizations of

7 housing and public utility complex, related to the establishment of the limiting indices of changes in payments for housing and public utility services by the Federal Tariff Service. 1.5 billion rubles will be allocated in 2013 by the regional budget in order to compensate for shortfall in income. Measures of social assistance to citizens in the sphere of payments for housing and public utility services 7 The introduction of new housing legislation to the Russian Federation and approved federal legal regulations for its development in 2004 granted the citizens living in apartment buildings the right to receive grants for payment of housing and public utility services. Such grants can be provided to the citizens in case the expenses of the family on payments for housing and public utility services exceed the amount of the maximum allowable share of expenses for their payments in total family income. In the Leningrad Region a standard was adopted that defined the value of this share - 22%. Thus, if a family living in an apartment building in the Leningrad Region, spends more than 22% of its total income on payments for housing and public utility services, such family is entitled to get a compensation in the amount exceeding 22%, but within the social norm of living space and standards of public utility services consumption.

8 I would like to mention, that a number of municipal formations of the Leningrad Region have lowered this share in total income to 18%, 15% or even 10%, based on the capabilities of municipal budgets. Today, in the Leningrad Region more than 400 thousand of citizens annually exercise their right to receive such government support.. 8 Social assistance to the residents of the Leningrad Region in the sphere of payments for housing and public utility services Funds recouped to the citizens , ,9 thousands тыс. чел. of people ,4 426,3 млн. mln. rub. руб ,2 3376, The Regional budget expenditures connected with compensation payments increase from year to year. At an average, more than 3 billion rubles are spent for this purpose yearly.

9 Sufficiency of budgetary financing and 100% payments for housing and public utility services by residents allows providing a positive financial result. Budgetary financing 100% payment by residents While assessing the economic impact of subsidization we have reached the following conclusions. Sufficiency of budgetary financing and transition to 100% payment by the residents for housing and public utility services enables the organizations of the public utility complex to provide positive financial results. Reorganization of housing and utilities infrastructure TARGET Ensuring standard quality of housing and public utility services, ensuring standard reliability of communal infrastructure systems, improvement of energy efficiency of infrastructure and housing, optimization of public services costs and housing maintenance costs.

10 The tariffs were established, there are the sources the reason why the ultimate goals of reform of housing and public utilities were not achieved provision of the standard quality of housing and public utility services and standard reliability of public utility infrastructure systems, increase of energy efficiency of the infrastructure and optimization of production costs for public utility resources and operational costs for housing space. During the expert analytical measures the following was identified: 2 Wear of the main funds of housing and utility complex - Boiler equipment - >60% - Water supply networks 70% - Sewer pipe networks 65% - Heat supply networks 65% - Treatment facilities 73% Firs of all wear of the main funds of housing and utility complex: - boiler equipment -60%; - water supply networks 70%; - sewer pipe networks 65% - heat supply networks 65%; - wear of treatment facilities -73%. In separate municipal formations this wear is 90% or even more.

11 3 Loss of utility resources - Water supply - 14% - Heating supply 16% Losses of public utility resources, related to the physical state of the engineering infrastructure of housing and utility complex make up: - for water supply 14%; - for heat supply -16% These figures significantly exceed the standards to be considered for approval of tariffs for public utility services. In tertiary industries someone must pay for these losses. And organizations of public utility complex look for the ways to make these losses paid. The source as shown above is the population and, if possible, the budget.

12 4 Reorganization of the municipal government - Authorization in the sphere of housing and utility complex activity maintenance - Financial insecurity of municipal formations delegated authorities It should be noted that the development and the current condition of utility complex in the Leningrad Region were significantly influenced in by the reform of municipal government. The Federal Law "On General Principles of Municipal Government in the Russian Federation" came into effect in In the course of the reform the objects of public utility infrastructure were transferred to the level of urban and rural settlements have been. As a result of the reform of municipal government, 192 new municipal formations were created in the Leningrad Region. The authorities for virtually all the issues in the sphere of housing and utility complex activity were delegated to the level of newly formed municipal formations - urban and rural settlements. The Chamber of Control and Accounts of the Leningrad Region has repeatedly drawn attention in its findings on the financial insecurity of the authorities of these municipal formations.

13 5 The indebtedness of housing and public utilities ies for the supplied gas and electricity makes up rub. The indebtedness of the organizations of housing and utility complex providing public utility services in front of enterprisesmonopolists supplying gas and electricity used in manufacturing now stands at 1.0 billion rubles in the Leningrad Region. This indebtedness is not reduced. This sum includes the situations when cooperation with the public prosecution office and investigation committee in one municipal formation an urban-type settlement, were revealed the facts of non-payment by a municipal enterprise for delivered services - water supply, amounting to about 60 million. However, the population regularly paid for these services.

14 6 Every year the Federal executive agency establishes the surcharges to tariffs on public services for the federal subjects of the Russian Federation in accordance with the limiting index Since July 1, 2013 the volume of charges for public utility services increased on 12% The basis of governmental regulation is the establishment by the authorized federal and regional executive authorities of the limiting indices of tariffs growth. The rates of regulated tariffs are approved for a calendar year in compliance with the average values of these indices. So, as for January 1, 2013 the tariffs for public utility services for the population of the Leningrad Region remained at the level of December Since July 1, 2013 the increase was less than 12%, not more than 6% on an annualized basis. In terms of tariff restriction, according to our data, the investment component in their structure is reduced, first of all. Saving this practice for a long period of time eliminates the perspective of renewal of capital funds of the branch, attraction of private sector for the implementation of large-scale projects that could dramatically upgrade the infrastructure of housing and utility complex in the nearest future and this reduce the losses to the level of technologically acceptable ones.

15 7 The level of housing and utility payments collectability from residents % ,3 95,2 93, Very important component of relations between services providers (organizations of housing and public utility complex) and consumers (population) is the collectability of payments for housing and public utility services. On the basis of the actual level of collectability, current indebtedness of the residents of the Leningrad region before operating companies and, respectively, before organizations delivering public utility services, is 1.3 billion rubles. And this is one of the sources of funds renovation.

16 8 Municipal government Normative standard for disposal and treatment of solid domestic waste1 Tariff on disposal and treatment of solid domestic waste The average tariff for residents for household waste disposal is calculated on the basis of living space occupied by a citizen, and is about 2 rubles per 1m² per month. The difference in the tariffs in various municipal formations reaches more than 60 times, ranging from 11 kopecks per 1m² to 7 rubles per 1m². MISSING - Separate collection of waste - Solid domestic waste processing > 2,0 2,0 mln. mln. sq. sq. m 863 mln. mln. rub. rub.

17 If converted to one resident of the Leningrad Region, the average payment for waste disposal will be about 450 rubles per year. Such an insignificant amount of the charge is related to the lack of waste recycling plant on the territory of the Leningrad Region. Currently, almost all solid domestic waste in the Leningrad Region is exposed to dumping or disposal by way of landfill - solid waste collecting is performed without preliminary sorting and transported to the landfill. Annual volume of solid domestic waste generated in the Leningrad region is about 3 million m³. 9 Investment agreement the Lenigrad Region Return 12 years 6 years Gazprom OJSC 18 mlrd. rub. 86 boiler-houses 729 km of networks 6 municipal districts Realistic assessment of the situation in the sphere of housing and utility complex, active work with attraction of major investors into this sector of the economy allowed the Government of the Leningrad region to enter into investment agreement with "Gazprom" OJSC in the amount of 18 billion rubles in August "Gazprom" OJSC is obliged to build 86 modern boiler houses and 729 km of networks during 6 years on the territory of six municipal districts of the Leningrad region. The Leningrad region, through the grants to municipal districts, is obliged to settle accounts connected with these investments during 12 years.

18 The implementation of such investment activities will reduce at a later stage the rate of tariffs growth, and possibly save the rates for subsequent periods of regulation, without their increase, and solve the problem of providing qualitative public utility services. 10 Freezing of natural monopolies tariffs for 2014 Inflation minus 30% One of the most significant changes awaiting public utilities and consumers is connected with the beginning of the Program approved by the President on the State Council in July According to the program, in 2014 the tariffs for public utility services will be established for several years, and they can be indexed only at the level of inflation for the previous year. It is planned that the tariffs will be approved for five years. In addition it should be noted that at the present time the Russian Government announced the measure freezing the tariffs of natural monopolies in This is the case of "Gazprom" OJSC, power producers and "Russian Railways" RJSC. The tariffs for the population will increase based on the formula "inflation minus 30%".

19 11 State Budget Chamber of Control and Accounts of the Leningrad Region Complex of housing and public utilities In conclusion, I would like to note that in the course of carrying out by the Chamber of Control and Accounts of the Leningrad Region of control measures on the use of budgetary funds by enterprises of utility complex and participating in audits in conjunction with the Prosecutor's Office there is still very, very much work in this industry. And we too still have a lot of work to do here. Thank you for your attention.

20 Thank you for your attention! 12