Analysis of Affordability of Cost Recovery: Communal and Network Energy Services. September 30, By Clare T. Romanik The Urban Institute

Analysis of Affordability of Cost Recovery: Communal and Network Energy Services September 0, 1998 By Clare T. Romanik The Urban Institute under contract to The World Bank

EXECUTIVE SUMMARY The following analysis compares the housing-utility burden of Russian households under the current (1996) subsidized rate scheme with the burden they would experience under a rate scheme that would cover the full cost of providing the same services. Special attention is given to the relative impact of the new scheme on households in different expenditure categories and on households living in urban and rural areas. In this analysis, households are grouped into quintiles based on total expenditures, which serve as a proxy for income. The analysis uses a sample of households that is 68 percent urban, 6 percent PGT (poselok gorodskogo typa), and 26 percent rural (using GOSKOMSTAT settlement type definitions). Rural households comprise a disproportionate share ( percent) of the households in the lowest quintile. In addition, households in the lowest quintile are much more likely to be one-to-two member households, to be composed of pensioners without working age adults, and to occupy more space per capita than households in the higher expenditure quintiles. By Western standards, housing and utility charges in Russia are very low households in the highest expenditure quintile on average spend more money on alcohol and tobacco than on all housing-related costs. The mean combined housing-utility charge for the sample is 97 thousand rubles (19 US dollars at an exchange rate of 5000 rubles to $1); at full-cost recovery levels, the mean charge is 285 thousand rubles ($57). Standard units in the sample (with district heat and hot water, gas stove, central water and sewerage and telephone connections), were on average 9 square meters one square meter larger than the overall sample mean; their higher mean charge of 71 thousand rubles ($7) reflects greater amenities. The analysis defines the housing-utility cost burden to be housing and utility charges as a share of total expenditures, and then uses this measure to illustrate how burdens increase with the introduction of full-cost recovery measures. A household paying out 20 to 29 percent of its expenditures on housing and utility services has a moderate burden; one paying 0 percent or more has a high burden. With full-cost recovery tariffs and no income growth, nearly all (97 percent) of the households in the lowest expenditure quintile have moderate or high burdens while only a few (8 percent) of the households in the highest expenditure quintile fall into this category. The share of the overall population with moderate or high burdens increases from 12 to 5 percent when tariffs increase to full-cost recovery levels. We can put the latter figures into perspective by comparing them with figures for the United States: according to the American Housing Survey for the United States in 1995, 5 percent of U.S. households had moderate or high burdens. However, the figures for Russia are not directly comparable because they overstate the housing-utility burden. The Russian sample comprises owners occupying their own unit and public renters paying below-market rent, and the market value of their housing is not counted as income. To assist households facing a moderate or high housing-utility burden, municipalities will have to set aside funds for housing allowances, distributed on a means-tested basis. i

Despite the higher costs associated with operating a housing allowance program, raising tariffs to full-cost recovery levels will help municipalities balance their budgets. At 1996 tariffs, a municipality must provide an average annual effective subsidy of 2.6 million rubles ($51) per household because of low tariffs, housing benefits and housing allowances, and non-collection (arrears). If tariffs increase to full-cost recovery levels with zero income growth and the same levels of energy consumption, a municipality will still have to provide an average annual subsidy of 1.1 million rubles ($225) per household because of increased participation in the housing allowance program and continuing non-collection. However, this means that a municipality will be subsidizing only one-third of housing-utility costs (referred to as the subsidy burden of the municipality), as opposed to subsidizing threequarters of the costs under the current rate scheme. For a municipality with 50,000 households, the savings from lower subsidies annually amounts to 72.2 billion rubles ($1. million). Sensitivity analysis was performed to see how assumptions about income growth and energy conservation affect the housing-utility burdens faced by households and municipal subsidies. With percent annual growth in real income from 1996 to 200, the share of households with moderate or high burdens drops from 5 to percent and the municipality s subsidy burden drops from to 28 percent. Assuming a modest decline in energy demand due to low-cost investments in energy conservation measures causes the share of households with moderate or high burdens to fall from 5 to 9 percent and the municipality s subsidy burden to decrease from to 0 percent of costs. Access to utility services is weakly correlated with expenditures, but strongly correlated with settlement type. Services like district heat, centrally-supplied hot water, and sewerage are available to most urban households; few rural households have this access to these services. The majority of rural households have to use coal for heating, bottled gas and coal for hot water, and bottled gas for cooking. At current tariffs, coal is the most expensive form of heating; however, cost recovery levels of coal are currently twice those for district heat and gas boiler heating on average. Reliance on fuels that already have higher cost recovery levels, helps explain why rural households experience smaller payment increases under a full-cost recovery scenario both in terms of absolute and percentage increases. If rates are brought up to full-cost recovery levels, the average total housing-utility charge for rural households increases from 95 to 21 thousand rubles; the average total charge for urban households increases from 100 to 16 thousand rubles. Compared to households in the highest quintile, households in the lowest quintile experience similar smaller increases in total charges when housing-utility charges are brought up to full-cost recovery levels. The average charge for households in the lowest quintile increases from 69 to 195 thousand rubles; the average charge for households in the highest quintile increases from 128 to 97 thousand rubles. Households in higher quintiles will tend to have a greater increase because they typically occupy larger units and have more family members (both factors affecting housing and utility charges). ii

Thirty percent of households in the sample reported that they had arrears in housing or utility bills. Since the incidence of arrears varies little by income, it indicates a serious problem of enforcement as opposed to a problem of households not having the ability to pay. Although the incidence of arrears does not vary much by settlement type, it can vary a lot for individual oblasts, krais, and cities. For example, default rates range from 8 percent in Moscow City to 71 percent in Kurgan, indicating real differences in the efforts or ability to control this problem. The average cumulative household arrearage (among those households in arrears) also varies by individual oblasts, krais, and cities, ranging from 15 to 50 thousand rubles ($-90). Cumulative arrears are particularly high in PGT (about 00 thousand rubles per household on average), and are lowest in rural areas (about 186 thousand rubles per household on average). iii

DESCRIPTION OF THE SAMPLE This analysis uses data from Round 7 of the RLMS (Russian Longitudinal Monitoring Survey), which was conducted in the last quarter of 1996. 1 The original Round 7 sample had 562 household records. After cleaning the data for this analysis, 2990 records remained. The original RLMS sample was designed to be representative of the population of the Russian Federation. The resulting sample after cleaning should also be representative of this population, except for the exclusion of households renting their units at market value. 2 Using GOSKOMSTAT settlement type definitions, the resulting sample is 68% urban, 6% PGT (poselok gorodskogo typa), and 26% rural. The reader should carefully interpret statistics presented for PGT because of the relatively small number of cases in the PGT category. Household size does not vary by settlement type, having a median value of three persons for all settlement types. This is not a poverty study. Specialists in poverty studies measure current consumption because they are trying to assess the household s welfare. Knowing that income will vary over a lifetime, the household saves. When current resources fall, the household may rely on savings to continue its habitual level of consumption. This is known as consumption smoothing. A poverty study would not consider money invested or put in savings because the household is, in effect, setting aside the money for future consumption. 1 In Round 7 of the RLMS, 77 percent of the interviews were held in October, 2 percent in November, and less than one percent in December 1996. See Poverty in Russia: Public Policy and Private Responses, (ed. Jeni Klugman), Washington, DC, The World Bank for a detailed description of the RLMS. 2 Annex 1 includes a detailed description of the process of cleaning the data and imputing unit characteristics. Cases were removed if they did not have pertinent information on expenditures, utility connections, or unit type, and this information could not be imputed. Also, all households renting on the secondary market (as opposed to renting from municipalities and enterprises) were excluded. Households that split were not included, because it could not be determined whether the new households resided in separate units or in the same housing unit. 1

This study measures income (including from past savings) because it is the current resources of the household that determine its ability to pay for housing and utility services. Household expenditures are used as a proxy for household income because of the problem of underreported income in surveys. For the sample as a whole, the average reported total expenditures is 50 percent more than the average reported total income. The variance between reported expenditures and income grows with wealth: average reported total expenditures for the highest expenditure quintile is twice the reported income; in the lowest expenditure quintile there is little difference between the reported figures. Questions on both income and expenditures were quite thorough in the RLMS. This together with the anonymity of the survey may have encouraged some households to reveal more income than they would to the government. The mean monthly income reported in the RLMS (1,192 thousand rubles) is percent higher than the official mean monthly income (892 thousand rubles) for September 1997, nearly a year later. In addition to reported expenditures, total household expenditures include an imputed value for food produced and either consumed or given away by the household (imputed by the Carolina Population Center of the University of North Carolina, responsible for designing the RLMS) as well as an imputed value for housing and utility charges (imputed as part of this report). Households reported what they had paid in the past 0 days for housing and communal services; however, in this time they might have paid none of what they owed for that month, some of what they owed, exactly what they owed, or what they owed for that month plus past arrears. Thirty percent of the households reported that they were in arrears. In addition to arrears, many households were eligible for housing benefits because they were veterans, disabled or had an occupation designated as special. Other households were also participants in the new housing allowances program which targets subsidies to low-income households whose housing-utility burden is more than a certain percent of total income. Finally, some households might be paying up past arrears or building a stock of coal or firewood for the whole winter. Thus the reported value often does not correspond to the family s usual housing-related liabilities. Table 1 compares imputed monthly housing and utility charges with those reported in the RLMS. 5 Since most households spend a relatively small share of their budget on For a discussion of problems encountered in measuring income with households surveys in Russia, see Poverty in Russia: Public Policy and Private Responses. One serious problem with measuring income in Russia is the common delay of salary payments. Although the RLMS was quite thorough in its questions, it is very difficult to obtain the monetary value of many in-kind benefits that employees receive. For example, respondents were asked if they had received goods and services from their place of work. However, it is unlikely that respondents would cite benefits such as free lunches, subsidized food in schools and kindergartens managed by enterprises, and subsidized vacations. 5 The reported charges had three components: (1) a question on all charges for housing and communal services; (2) a question on purchases of coal, firewood, peat, kerosene; and () a question on purchases of bottled gas. The households were to report expenditures within the past 0 days. However, the 2

housing and utility charges, the imputation process does not greatly affect total expenditures. Annex 2 provides more information on the imputation process and a comparison of total expenditures based on the imputed and reported charges. Table 1 Comparison of Reported and Imputed Monthly Housing and Utility Charges, per Household (1996 Thousand Rubles) Methods for Estimating Housing and Utility Charges Minimum Value Median Value Mean Value Maximum Value Reported total rent and utility expenditures 0.0 7.5 71.1 1,170.0 Reported total rent and utility expenditures with 0 values excluded Imputed total rent and utility expenditures 0.8 75.0 97.8 1,170.0 15.1 88.2 97.2 77.9 Table 2 shows that the mean monthly total expenditure level of the sample is 1,797 thousand rubles (1996 rubles). At an exchange rate of 5000 rubles to one US dollar this is $59. The median for the sample 1,152 thousand rubles, or $20. The mean expenditure level for rural households is below the sample average because they are overrepresented in the lowest quintile and underrepresented in the highest quintile. Although rural households make up 26 percent of the sample, they represent percent of the households in the lowest expenditure quintile and only 17 percent of the households in the highest expenditure quintile. The opposite is true of urban households which are overrepresented in the highest quintile and underrepresented in the lowest quintile. The expenditure disparity among all households is high: the mean expenditure level of the lowest quintile (1 thousand rubles) is only 7 percent of the mean expenditure level of the highest quintile (,912 thousand rubles). Table 2 Total Monthly Household Expenditures By Settlement Type (1996 Thousand Rubles) latter two categories are generally lumpy purchases (purchased less frequently than on a monthly basis) so some households would report an amount much larger than that needed for one month, while others would report zero spending. These values were adjusted to a third of the reported amount to compensate.

All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 All Households mean median 1,796.6 1,152. 1,98.5 1,227.1 1,605.1 1,090.7 1,7.8 97.1 By Expenditure Quintile (mean) Lowest 2 Highest 1.0 727.2 1,161.9 1,851.2,912.0 5. 725.9 1,167. 1,870.2 5,01.7 6.2 77.6 1,180. 1,82.6,28.6 21.8 728.0 1,12.5 1,809.2,57.9 Households in different expenditure quintiles tend to have different demographic characteristics. (See Table.) About 28 percent of all households in the sample could be called pensioner households. A pensioner household is defined here as a household with no working age adults (in a few cases, these households might include children under 18 years of age). Pensioner households make up 59 percent of the households in the lowest quintile and only 7 percent of the households in the highest quintile. Another difference concerns household size. Households in the lowest quintile on average have fewer than two household members, while the higher quintiles on average have more than three household members. This is to be expected, since a household s income and expenditures should increase as it includes more working age adults. Table Pensioner Households and Average Household Size by Expenditure Quintile Pensioner Households as a Percentage of all Households Average Household Size All Households 28 2.8 By Expenditure Quintile Lowest 2 Highest 59 2 25 17 7 1.9 2.5 2.9..5 Although households in the higher quintiles tend to have larger apartments, they tend to have less space per capita than households in the lower quintiles. (See Table.) The latter is true even for households that occupy only part of an apartment or house (the living space of these households, however, varies little by expenditure quintile). 6 Table 6 The 10 percent of dwellings that were part of a house or apartment were much smaller on average

largely explains this counterintuitive result. Households in the lowest quintile tend to have fewer members and are more likely to be pensioners. Pensioners may reside in a unit that used to be occupied by themselves and their children who have since then moved into their own unit. This finding is counter to the approach of a poverty study which would rate these pensioners as not poor because their per capita consumption of housing, at least, is relatively high. From the perspective of housing reform, however, this finding is important because pensioners with relatively large apartments and relatively low income are facing a very real problem with respect to space-based fees that should be understood by policy makers. Table Total Space and Space Per Capita by Expenditure Quintile and by Type of Space (Square Meters) Separate Apartment or House (Total Space) N = 2696 Part of Apartment or House (Living Space Occupied by Household) N = 29 Total Per Capita Total Per Capita All Households 50 22 2 1 By Expenditure Quintile Lowest 2 Highest 8 51 5 55 29 2 21 19 18 26 2 5 16 15 12 1 11 Table 5 describes the sample in terms of ownership and housing type. The sample contains 62 percent privatized, private, or cooperative housing units and 8 percent publicly-owned units. A large share (71 percent) of the units in the rural areas are private single-family houses. In urban areas, the housing units are overwhelmingly (88 percent) apartments, but are almost equally split between private (52 percent) and publicly-owned (8 percent) dwellings. Table 5 Distribution of Ownership and Unit Type of Housing Units, By Settlement Type All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Privatized, Private or 61.8 52. 68.6 8. (2 square meters) than separate houses and apartments (50 square meters). 5

Table 5 Distribution of Ownership and Unit Type of Housing Units, By Settlement Type Cooperative Apartments Single Family Houses All Households N = 2990.0 28.8 Urban N = 202 1.1 11. PGT N = 188 26.1 2.6 Rural N = 778 1.6 70.8 Publicly-Owned 8.2 7.6 1. 15.6 Apartments Single Family Houses 6. 1.9 7.1 0.5 29. 2.1 10.2 5. UTILITY SERVICES AND CHARGES This analysis focuses on the utility component of housing-related costs. Table 6 shows that utility connections vary heavily by settlement type: for example, only 10 percent of rural households enjoy utility-supplied hot water, while 75 percent of urban households have this service. Central (district) heating is supplied to most (89 percent) urban households, but only to 21 percent of rural households. Because of these differences in utility connections, households from different settlement types are likely to be affected differently by a rise in utility tariffs. Table 6 Percent of Households with Utility Connections By Settlement Type Utility Service All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Central Heating 70 89 66 21 Network Gas 6 7 92 27 Hot Water 57 75 52 10 Central Water 76 90 81 9 Sewerage 66 87 7 17 Telephone 51 5 2 Table 7 shows that, in most cases, households in the highest quintile are more likely to have a utility connection than households in the lowest quintile. However, the relationship between wealth and utility connections is not as strong as the relationship between settlement type and utility connections. Network gas is the one utility service that does not appear to be related to income. This is because many households in the higher 6

quintiles have units equipped with electric stoves and thus have no need for gas connections. The weak correlation between income and access to utilities results from the past practice of administrative allocation of housing and the persistence of underdeveloped housing markets. Table 7 Percent of Households with Utility Connections, By Settlement Type and Expenditure Quintile Utility Service and Expenditure Quintile All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Central Heating Lowest 2 Highest 61 69 67 70 81 82 90 87 90 9 5 62 56 7 89 2 19 18 21 27 Network Gas Lowest 2 Highest 62 6 66 6 60 76 77 76 76 6 92 92 95 9 86 29 22 1 2 0 Hot Water Lowest 2 Highest 5 55 59 72 65 7 70 79 8 1 1 6 65 6 8 7 11 8 20 Central Water Lowest 2 Highest 6 76 77 77 87 80 91 91 92 95 62 77 9 81 92 6 6 1 51 Sewerage Lowest 2 Highest 56 65 65 68 77 79 89 85 88 92 1 8 51 58 61 19 1 15 18 19 Telephone Connection Lowest 2 2 9 50 9 6 19 26 2 7

Table 7 Percent of Households with Utility Connections, By Settlement Type and Expenditure Quintile Utility Service and Expenditure Quintile Highest All Households N = 2990 6 58 Urban N = 202 52 6 PGT N = 188 71 56 Rural N = 778 25 To highlight the potential impact of reforms, it is useful to compare how much households relying on a particular fuel were expected to pay based on 1996 charges, with how much they would be paying if they were charged at full-cost recovery levels. 7 (See Table 8.) The utility charges in Table 8 are broken down by fuel type to show how households are obtaining heating, cooking, and hot water services. The lowest cost recovery levels, and thus the greatest jump in charges, are for gas space heat and services typically supplied by the municipality: district heating, hot water connections, central water, and sewerage. Under the 1996 rate scheme, the combined average charges for district heat and hot water are the same as the combined average charges for heat and hot water fueled by network gas 6 thousand rubles, or 9 US dollars. When rates are raised to cover the full cost of providing these services, however, the combined average district heat and hot water charges become greater 159 thousand rubles ($2), as opposed to 1 thousand rubles ($29). Households without network gas and district heat must use coal, bottled gas or some other means for obtaining heat and hot water. 8 Households using coal for heating and bottled gas for hot water begin by paying the most at 69 thousand rubles ($1), but end up paying the least at full-cost recovery levels, roughly 107 thousand rubles ($22). No matter which fuel type, heating charges are a household s largest payment both under 1996 charges and at full-cost recovery levels. 9 7 As with estimating the current housing and utility costs, the estimates for full cost recovery depended on the type of service, fuel and unit type. Data on cost recovery levels for communal services were taken from Form 22 of the Department of Housing and Communal Services. Cost recovery levels for gas and coal were calculated using 1996 prices and unsubsidized prices. Full information is provided in Annex. 8 The RLMS did not explicitly ask households what fuel they used for heating; however, it did ask households if they had a connection to the district heating network or the natural gas network. It also asked if the household had purchase firewood, coal, peat, or kerosene (and in a separate question, bottled gas) within the past 0 days. Combining this information, we categorized households accordingly using coal-heating as a catch-all for households without district heat or network gas. 9 Annex has more information on the breakdown of the housing-utility bill by type of unit and ownership of unit. Again, regardless of the breakdown, heating charges represent the largest share of a household s housing-utility bill. 8

Table 8 Imputed Monthly Utility Charges by Fuel and Utility Connection (1996 Rubles) Utility Connection and Fuel Type 1996 Charges Mean Value of Imputed Charge (1996 Rubles) At Full Cost Recovery Levels Ratio of Average 1996 Charge to Average Full Cost Recovery Charge (%) Percent of Households With Connection Heat Central (District) Heating Gas Boiler Heating Coal Heating 27,1.9 1,826.0 60,51. 91,782.2 11,501.6 96,6.9 0 2 6 69.8 8.6 21.6 Cooking Network Gas Bottled Gas Electric Stove,155. 7,766. 10,008. 7,507.8 9,708.0 22,88.7 2 80 5 60.8 21.5 17.7 Hot Water Hot Water Connection Gas Boiler (Network Gas) Gas Boiler (Bottled Gas) Coal or Other 18,751.9,55.8 8,00.9 (accounted for in heat) 66,911.6 12,086. 10,501.1 (accounted for in heat) 28 8 80 -- 56.6 19.1 20.2.1 Central Water/Sewerage Central Water & Sewerage Only Central Water Only Sewerage Neither 1,519.6 7,521.5 2,891. 0.0 6,627.1 2,262.6 1,068.6 0.0 29 2 22 -- 65.6 10.5 0.7 2.2 Telephone With Connection No Connection 15,752.1 0.0 26,25.5 0.0 60 --. 55.7 Electricity (Except for Cooking) 1,5.7,209. 100.0 In 1996, property taxes and payments for capital repair were practically non-existent. (See Table 9.) Tenants of publicly-owned apartments made one kvarplata payment which included a nominal rent component. Since 1997, many jurisdictions have instituted separate capital repair and rent payments, in addition to a maintenance fee. Here, we assume that rent for tenants of publicly-owned apartments will be equal to the property tax instituted for owners. 10 Thus, future rent and property tax are presented as one category 10 This assumption reflects the principles of the current housing policy by the Government of Russia. 9

here. Also, the average future maintenance fee was calculated for all apartment units, without regard to tenure. Table 9 Imputed Monthly Housing Charges by Ownership and Unit Type (1996 Rubles) a Mean Value of Imputed Charge (1996 Rubles) Ownership - Unit Type Category 1996 Charges At Full Cost Recovery Levels Percent of Households in Each Category Maintenance Publicly-Owned Apartment (APT) Privatized or Cooperative APT Single Family Housing (SFH) (included in kvarplata) 15,60.9 0 5,16.1 5,16.1 0 6..0 0.6 Kvarplata Publicly-Owned APT Publicly-Owned SFH Private Housing 18,08.2,52.9 0 0 0 0 6. 1.9 61.7 Property Tax or Rent SFH without network gas or without district heat APT without network gas or without district heat Housing with network gas and district heat Housing with network gas and district heat in a large city 0 0 0 0 5,07. 7,80.5 9,65.7 11,26.0 27.9 18.2 0.7 1.2 Capital Repair SFH without network gas or without district heat APT without network gas or without district heat Housing with network gas and district heat Housing with network gas and district heat in a large city 0 0 0 0 6,595. 12,155.9 15,5.9 18,281.6 27.9 18.2 0.7 1.2 Notes: a In the future, the kvarplata paid by renters of state-owned units will be divided into a rent payment and a maintenance payment. The rent payment should be comparable to the property tax charged to owners of privatized units. Maintenance payments should be the same regardless of ownership of the unit. Having both network gas and central heating connections is used as a proxy for housing with modern amenities. Since rural households often do not have access to district heat, network gas, and centrally-supplied hot water, they more heavily rely on coal for heating, bottled gas for cooking, and bottled gas or coal for hot water. The high costs of coal heating relative to 10

district heating (at 1996 rates) help drive up the housing and utility charges of rural households. 11 It is not surprising then, that rural households are expected to pay almost as much as urban households for housing and utility services (see Table 10). It is important to note that while expected to pay nearly as much as urban households, rural households generally do not have access to many important services, such as centrally-supplied hot water and sewerage. Table 10 Imputed Monthly Utility Charges and their Distribution by Settlement Type: At 1996 Rates (Mean Value in 1996 Thousand Rubles or Percent Distribution) All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Housing or Utility Service Charge Share (%) Charge Share (%) Charge Share (%) Charge Share (%) Heat Cooking Hot Water Water/ Sewerage Telephone Electricity Rent /Maintenance 5.6 5. 1.2 9.7 7.0 1. 11.9 7 6 1 9 7 17 11 29.9 5.0 15. 11.8 8.2 1.1 15. 1 5 1 11 8 16 1 28. 2.8 10. 8.7 6.7 16.2 8.9 6 11 9 8 2 9 52. 6.9 8..5.8 15.0.8 5 8 9 19 Total 97.2 100 99.5 100 82.1 100 9.6 100 A rural household s relatively high housing and utility costs at the 1996 rates, even in the absence of many services, partly reflects the relatively high cost recovery levels of the main fuels on which they rely: coal and bottled gas. This means that when charges are brought up to full-cost recovery levels the average rural household is now in a better situation than its urban counterpart. Table 11 shows that the mean housing-utility charge of rural households (215 thousand rubles) at full cost recovery rates is only about two-thirds that of urban households (16 thousand rubles). 11 Other explanations for why heating is such a large share of a rural household s housing costs include: (1) Many rural households do not have access to and thus, do not pay for sewerage or even central water; (2) There are more houses than apartments in rural areas which means no maintenance costs as well as more total space to heat; () Under the calculation method used here, the costs of providing hot water with coal was included in heating charges. (Eleven percent of the rural households were assumed to be using coal for heating water. See Annex 5 for a complete breakdown of utility services by fuel and settlement type.) 11

Table 11 Imputed Monthly Utility Charges and their Distribution by Settlement Type: At Full Cost Recovery (Mean Value in 1996 Thousand Rubles or Percent Distribution) a All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Housing or Utility Service Charge Share (%) Charge Share (%) Charge Share (%) Charge Share (%) Heat Cooking Hot Water Water/ Sewerage Telephone Electricity Maintenance Rent / Property Tax Capital Repair 96.2 10.6 2..1 11.6.2 6.8 8.2 12.8 7 12 10 1 11 5 9.9 10.6 5.2 0.9 1.7 2.8 1.2 7.8 9.0 1 15 12 12 5 1 79.7 8.1 1.6 27.1 11.1.0 1.2 26.0 8.5 6 12 10 5 16 6 9 106.2 11.2 16.6 1.5 6..0 8.8 10.9 6.2 51 6 7 5 18 Total 28.9 100 16.1 100 29. 100 21.7 100 Notes: a The average unit in the sample has 8 square meters, 2.8 occupants, and an average cost per square meter of 6,190 rubles. In the entire sample, 70% has central heat, 61% gas stove, 57% hot water connection, 66% both central water and sewerage and % telephone. Standard units in the sample, having all of the abovementioned amenities, make up 2% of the sample. On average, they have 9 square meters, 2.8 occupants and an average cost per square meter of 7,807 rubles. The mean charge for standard units in the sample is 71,226 rubles, which is 0 percent more than the mean charge of the average unit in the sample. ARREARS Before considering raising tariffs, it is also important to analyze why there are arrears in housing and utility bills. From Table 12, it appears that poor enforcement is a major cause of high arrears. Thirty percent of households reported that they had arrears in housing or utility bills. 12 The incidence of arrears among households in the highest expenditure quintile, who clearly have the means to pay, is only slightly lower (27 percent) than that of all households. The region with the lowest rate of reported arrears is Moscow City with 8 percent. The city of Kurgan has the highest rate of reported arrears at an astounding 71 percent. The fact that in Kurgan the cost of housing and utility services is high in relation to income level may help explain the city s high arrears rate. 12 The terminology in the RLMS was, Do you have unpaid housing bills? which was preceded by the question, Have you paid for housing and communal services in the past 0 days? A third question asked 12

The incidence of arrears is lowest in rural areas, although still high at around 25 percent of the households in each expenditure category. It may be difficult, however, to define arrears in rural areas. Although 25 percent of rural households reported that they housing bills that they had not paid, 51 percent of rural households reported they had not paid a regular housing and communal services bill in the prior thirty days. Even when the purchase of coal, peat, kerosene, firewood, or bottled gas is taken into account, 2 percent of the rural households reported no housing related expenditures in the previous thirty days. Rural households may not report housing-related expenditures if they receive the goods and services through a barter arrangement between their employer and the utility company. For example, an agricultural employee may receive very little cash, but their employer might arrange for their utility payments to be paid through a barter arrangement with the utility service provider. Table 12 Monthly Incidence of Arrears and Cumulative Arrearage in Housing and Utility Bills (Percent of Households in Each Expenditure Quintile, 1996 Thousand Rubles) All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Incidence for All Households 0 1 2 25 Incidence by Expenditure Quintile Lowest 2 Highest 2 1 29 27 5 2 0 26 9 56 2 2 25 26 20 25 26 28 Average cumulative arrearage (among households in arrears) 250.2 27.6 9.9 185.7 It is important to know not only the incidence of arrears, but the amount of arrears. If a household reported that it had unpaid housing or utility bills, the RLMS asked how much the family owed. The mean cumulative arrearage of households is 250 thousand rubles, while the median is 128 thousand rubles. The mean cumulative arrearage in PGT is particularly high, at close to 00 thousand rubles. As with the incidence of arrears, cumulative arrearage varies widely for different oblasts, krais, and cities. The place with the lowest average arrearage, 15 thousand rubles, is the settlement of Betlutsa in respondents how much they owed. Judging from the rather high amounts reported in response to the third question, it is most likely that households interpreted this as cumulative arrears. 1

Kalushskaya oblast. In contrast, the city Surgut in Khanty Mansiiskiy AO, Tiumenskaya oblast, and the settlement Zalokokuazhe in Kabardino-Balkariia have the highest cumulative arrearage, averaging nearly 50 thousand rubles for the households reporting to be in arrears. The latter also had the second highest incidence of arrears at 59 percent. The areas with the highest average cumulative arrearage are not the poorest. The average total expenditures for Kabardino-Balkariia (2,50 rubles) is well above the sample mean, and the average for Khanty Mansiiskiy (6,82 rubles) is the highest in the sample. In both of these locations the cost of housing and utility services in relation to income level is lower than it is in Betlutsa, which has the lowest cumulative arrears in the sample. ANALYSIS OF HOUSING-UTILITY BURDEN In most countries, food and housing dominate a household s expenditures. In Russia, food is clearly a household s most significant expenditure; housing-related costs do not represent a significant expenditure, except for households in the lowest quintile. Table 1 shows that for households in each of the three highest expenditure quintiles, the average housing- utility burden (combined housing and utility charges as share of total expenditures) is less than 10 percent. Households in the second lowest expenditure quintile on average have a housing-utility burden of 12 percent, while the lowest quintile has an average housing-utility burden of 25 percent. 1 Having to spend little on housing, the wealthier households devote a small portion of their income to investment and a large portion to other items, including the purchase of durables. Note that when a household devotes income to investment and purchase of durables, they are not fully consuming their income today, but are setting aside income for future consumption. For the poorer households, investment is practically non-existent. This may reflect in part different demographic characteristics of the quintiles. Younger wealthier families are establishing their households and saving for retirement. Pensioners may have less need for durables or savings. However, it also signifies a continuing trend of income disparity. 1 Note that the imputed housing and utility charges and the resulting housing-utility burdens do not reflect the fact that many households pay little or none of the prescribed charge because they are recipients of housing benefits or housing allowances or they simply do not pay and are in arrears. Thus, actual housingutility burdens will be considerably lower and even zero for many households. By calculating what the housing-utility burden would be without these programs and arrears, we can compare the relative change in housing-utility burden as a result of policy changes. Later on, we will take into account these programs as well as arrears in determining the impact of these policy changes on municipal budgets. 1

The very low share of expenditures spent on housing by wealthier households reflects the low dispersion of housing and utility charges even as income disparity has grown immensely. Under market pricing, it is normal for wealthier households to have lower housing-utility burdens than poorer households; however, the particularly low burdens of Russian households in the highest expenditure quintile is an artifact of universallysubsidized rent and utility services. Table 1 Average Share of Monthly Household Budget By Category and Expenditure Quintile (Mean Percent Value) Expenditure Quintile All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Food a All Quintiles Lowest 2 Highest 60.0 61. 67.2 65.8 60.5 5.1 59.0 6.0 66. 65.5 59.8 2.8 59. 6.8 67.7 65.7 50.7 5.8 62.8 57.9 68.9 66.7 6.0 55.1 Housing & Utility Charges b All Quintiles Lowest 2 Highest 10.8 2.8 11.8 8. 6.0. 10.1 2.2 11.8 8.2 6.0. 9.6 22.2 8.7 7.8 5.0.2 1.2 28. 12.8 8.6 6.0.2 Alcohol and Tobacco c All Quintiles Lowest 2 Highest.5 2.8.6.7.6.7.7.1.9.8.7.9 2.8 1.7 2.2 2.6..5.0 2.2.2.5. 2.8 Investment d All Quintiles Lowest 2 Highest 2.9 0.9 1. 1.8.0 6.7.2 0.8 1.5 2.1.0 6.7 2.8 0.9 2.0 1.5 0.8 8.9 2. 0.9 1.1 1.1. 5.8 Other Items e All Quintiles 22.7 2.1 25. 18.6 15

Table 1 Average Share of Monthly Household Budget By Category and Expenditure Quintile (Mean Percent Value) Expenditure Quintile Lowest 2 Highest All Households N = 2990 10.2 16.0 20. 26.0 1.1 Urban N = 202 9.9 16.5 20. 26.5.1 PGT N = 188 11. 19. 22.5 9.2 8.5 Rural N = 778 10.6 1.0 20.1 22.2.1 Notes: a Food includes food produced and either consumed or given away by the family. b Housing and utility charges were imputed based on local tariffs, norms and household and dwelling characteristics. The imputation includes the purchase of coal or bottled gas. c Alcohol and tobacco expenditures are probably underestimated because of the difficulty of separating them from food purchases. d Investment expenditures include cash savings, deposits, investments in securities, and loans to others. e Other items include, among others, the purchase of durables in the last three months, adjusted to obtain a monthly figure. By including per capita expenditures, Table 1 shows that the major difference in the housing-utility charges of households in the lowest and highest expenditure quintiles is a result of household size. In other words, unlike in market economies, in Russia there is no correlation between income and housing-related expenditures. In fact, households in the lowest quintile on average spend slightly more per capita than their counterparts in the highest quintile. (This can be explained by the fact that they occupy more space per capita, shown in Table.) Without having to spend more on housing and utility services on a per capita basis, households in the highest quintile in total still manage to spend more than 7 times the amount spent by households in the lowest quintile on a per capita basis. To illustrate just how little households in the highest quintile are spending on housing and utility charges, compare the average amount they spend on housing, 128 thousand rubles, with the average amount they spend on alcohol and tobacco, 159 thousand rubles. The average amount households in the highest quintile spend on non-food items (the categories alcohol and tobacco and other items from Table 1) is 20 times the average amount they spend on housing and utility charges. Table 1 Average Monthly Household Expenditures by Category and Expenditure Quintile (Mean Value in 1996 Thousand Rubles) All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Expenditure Quintile Per Capita Expenditures Household Expenditures Household Expenditures 16

Table 1 Average Monthly Household Expenditures by Category and Expenditure Quintile (Mean Value in 1996 Thousand Rubles) All Households N = 2990 Urban N = 202 PGT N = 188 Rural N = 778 Expenditure Quintile Per Capita Expenditures Household Expenditures Household Expenditures Highest 859. 2,65. 2,55.8 1,60. 1,821. At 1996 tariffs and expenditure levels, housing-utility burdens are not very high for most households. The mean housing-utility burden for households in the sample is 10.8 percent and the median value is 7.5 percent. Rural households have slightly lower total charges than urban households (See Table 10), but their mean housing-utility burden is higher, 1.2 percent compared to 10.1 percent, because of their lower incomes. Nearly 6 percent of the sample has very low housing-utility burdens (defined as less than 10 percent of their household budgets). Five percent has high housing-utility burdens (defined as greater than or equal to 0 percent of their household budgets) and another 7 percent has moderate housing-utility burdens of 20 to 29 percent of their budgets. By administratively allocating housing and charging low fees for rent and utility services, the government historically has allowed low-income households to occupy relatively large units. As shown in Table above, low-income households often have more space per capita than wealthier households. Since it is the space variable that determines a household s largest utility payment heating this partially explains the relatively high housing-utility burden faced by low-income households. (See Table 15.) Low rent and utility charges do not provide an impetus for a household to find a smaller unit if it becomes smaller (e.g., children moving out). Table 15 October 1996 Housing-Utility Burden Housing-Utility Burden as Percent of Total Expenditures Very Low 0-9% Low 10-1% Low to Moderate 15-19% Moderate 20-29% High 0+% Total All Households 6.6 16.8 7.7 6.5 5. 100.0 Expenditure Quintile Lowest 10.9 20.1 18. 2.2 26. 100.0 2 1.0 5.6 15.9 6.9 0.7 100.0 7.1 21.9.8 1.2 -- 100.0 18

Table 15 October 1996 Housing-Utility Burden Very Low 0-9% Housing-Utility Burden as Percent of Total Expenditures Low 10-1% Low to Moderate 15-19% Moderate 20-29% High 0+% Total 9.0 5.5 0.5 -- -- 100.0 Highest 99.2 0.8 -- -- -- 100.0 Settlement Type Urban 65.2 17. 7.6 6.0.8 100.0 PGT 71. 17.6 2.7.. 100.0 Rural 57.7 15.0 9. 8.1 9.9 100.0 If we hold total expenditures at the same level and allow housing-related costs to rise to their full-cost recovery levels, the mean housing-utility burden of the sample rises to 1.1 percent, with a median value of 21.9 percent. The median housing-utility burden in the United States for 1995 was also 22 percent. 1 The distributions of housing-utility burden at full-cost recovery (Table 16) differ dramatically from those computed using 1996 tariffs (Table 15). Now only 16 percent of the households has a very low burden. Over half of the sample (5 percent) has moderate or high housing-utility burdens. As expected, the incidence of moderate or high housing-utility burdens varies heavily by income. Almost all (97 percent) of the households in the lowest expenditure quintile fall in this category, but less than 10 percent of the households in the highest quintile do. Burden also varies by settlement type. The percent of urban households with moderate or high housing-utility burdens increases by more than 5 times from 10 percent to 57 percent. The percent of rural households with moderate or high housing-utility burdens increases less than times: from 18 percent to 50 percent. This reflects the relatively high current costs that rural households incur. Table 16 Housing-Utility Burden at Full Cost Recovery Housing-Utility Burden, as Percent of 1996 Total Expenditures 1 The source for the US figures is the American Housing Survey for the United States in 1995, issued April 1997, by the U.S. Department of Commerce and the U.S. Department of Housing and Urban Development. 19

Very Low 0-9% Low 10-1% Low to Moderate 15-19% Moderate 20-29% High 0+% Total All Households 16. 15.1 1. 19.6.6 100.0 Expenditure Quintile Lowest 0 0.8 1.8 10.2 87.1 100.0 2 0.8.7 1.0 29. 52.2 100.0.5 17.9 2.1 0. 2.2 100.0 20.9 27. 21.6 21.7 8.5 100.0 Highest 55.5 2.9 12.0 6.5 1.0 100.0 Settlement Type Urban 15.1 1.2 1. 19. 7.2 100.0 PGT 15. 17.6 17.0 2.9 26.1 100.0 Rural 19.9 17.0 1.6 19. 0.1 100.0 Table 17 summarizes how the distribution of households across housing-utility burden categories changes as tariffs increase and compares this with the distribution of housingutility burden in the United States in 1995. The share of households with a very low housing burden starts out at 6 percent at 1996 rates. It decreases to 26 percent at a 75 percent cost recovery level, and further decreases to 16 percent at full-cost recovery. The share of households with a high burden begins at a small 5 percent at 1996 rates, and increases to 22 percent at the 75 percent cost recovery level, and to 5 percent at full-cost recovery. 15 The U.S. distribution is closest to the Russian distribution at full-cost recovery levels in both 5 percent of households has moderate or high housing-utility burdens. Table 17 Comparison of Housing-Utility Burden Levels at 1996 Charges, 75% Cost Recovery and Full Cost Recovery in Russia, with 1995 Housing-Utility Burden Levels in the United States Housing-Utility Burden, as Percent of 1996 Total Expenditures Very Low 0-9% Low 10-1% Low to Moderate 15-19% Moderat e 20-29% High 0+% Total 15 Note that unit size varies little with burden levels. At 1996 charges, the mean total space occupied by households with the lowest burden is 9 square meters and the space occupied by those with the highest burden is 5 square meters; at full-cost recovery, households with the lowest burden occupied 6 square meters on average and those with the highest burden occupied 8 square meters. 20

Table 17 Comparison of Housing-Utility Burden Levels at 1996 Charges, 75% Cost Recovery and Full Cost Recovery in Russia, with 1995 Housing-Utility Burden Levels in the United States Housing-Utility Burden, as Percent of 1996 Total Expenditures 1996 Charges (% Full Cost Recovery) Very Low 0-9% Low 10-1% Low to Moderate 15-19% Moderat e 20-29% High 0+% Total 6.6 16.8 7.7 6.5 5. 100.0 75% Full Cost Recovery 26. 19. 1.7 18.1 22. 100.0 Full Cost Recovery 16. 15.1 1. 19.6.6 100.0 United States 1.7 15.2 15.9 2.2 1.1 100.0 Source for U.S. figures: American Housing Survey for the United States in 1995, issued April 1997 by the U.S. Department of Commerce and the U.S. Department of Housing and Urban Development. Note that the distribution excludes 2 percent of the sample which reported zero or negative income as well as percent of the sample which reported no cash rent. Including these would add to the very low and high categories. Housing-utility burden is calculated as monthly housing costs (rent, mortgages, utilities, etc.) as percent of current income. Although housing-utility burdens experience great shifts with the imposition of greater cost recovery, in absolute monetary terms, the increases in charges appear to be less dramatic. Table 18 compares the 1996 imputed charges and corresponding burden levels with the charges and burden levels at 75 percent cost recovery and at full-cost recovery levels. The mean imputed 1996 housing-utility charge for the sample is 97 thousand rubles ($19). At 75 percent cost recovery, the mean charge increases to 21 thousand rubles ($) and at full cost recovery, the mean charge is 285 thousand rubles ($57). 16 With such a low initial level of charges, it is not surprising to see the average housing-utility burden double under 75 percent cost recovery and triple under full cost recovery. It is also important to remember that these burden measures assume that real incomes do not grow and that no one implements technological or institutional energy conservation measures. In the following sections on sensitivity analysis, we will see that these factors greatly affect burden levels. Table 18 Comparison of Average Monthly Housing-Utility Charges (1996 Thousand Rubles) and Average Burden Levels (Percent) Under the 1996 Rate Scheme, 75 Percent Cost Recovery and Full Cost Recovery, by Expenditure Quintile and by Settlement Type 16 Note that for 2 percent of the sample occupying standard units (i.e, receiving the following services: district heat and hot water, gas stove, central water and sewerage and telephone) the mean charge is higher at 71 thousand rubles, or $7. The average size of these units was 9 square meters. 21