Number 71 /August 2004 Community Driven Development Approaches in Housing Sector Projects in Transition Economies This note is part of a series that considers the linkages between of Community Driven Development (CDD) and urban operations. The objective of this note is to identify the role of CDD in the housing sector in transition economies, to highlight the varied CDD approaches that have been used thus far in World Bank projects, and to develop recommendations for emerging issues. We would welcome your feedback on this note. Box 1: What is CDD? Background Poor people are often viewed as the target of poverty reduction efforts. CDD approaches, by contrast, treat poor A majority of the housing stock in transition people and their institutions as initiators, as collaborators economies consists of multi-apartment buildings and as resources on which to build. CDD is broadly defined (Table 1) where most of the residential units have as giving control of decisions and resources to community groups. CDD frameworks link participation, community been privatized. This has resulted in a major management of resources, good governance and change in the ownership structure of these multi- decentralization (World Bank, 2003). With a view to apartment buildings, wherein apartment units are generate sustainable and wide-ranging impacts, CDD owned by individual households, while common operations and regional strategies have increasingly embraced two important pillars of sustainability and scale: areas (such as staircases, roofs, basements, linking communities to private sector and local internal infrastructure, land, etc) are owned either governments. by local governments or collectively by all apartment owners. Table 1 ­ Basic characteristics of housing stock in However, despite privatization and the selected transition economies * development of relevant legal frameworks, little has changed in the way buildings are managed Estimated share of the Estimated and maintained. Private activity is low, housing total housing stock share of communities of apartment owners are weak, and multi- only a fraction of buildings are managed by apartment Country Privately Multi- housing homeowners associations (HOAs) ­ formal owned apartment with community organizations established by (1999 ­ housingb HOAs apartment owners for the management of their 2002)a building.i Thus, local governments continue to Armenia 96% 52% 41%d service the majority of the housing stock at highly Belarus 68% 96% N/A subsidized maintenance fees. Estonia 93% 69% 50% e Kazakhstan 97% 46% N/A Due to insufficient funds and inefficient Latvia 75% 72% < 10% e management, maintenance of buildings is Lithuania 97% 85% N/A Moldova 91% N/A 30% in negligible and performed in an ad-hoc manner in Chisinau e Russia 59% 75 ­ 80%c <5% f response to emergencies. As a result, buildings imposed by the legal framework in many continue to deteriorate and a major share of transition economies increases these costs. Little household assets is being eroded. In addition, delegation of decision making from apartment household access and affordability of basic owners to the building's manager, high utilities such as heating, gas and water is also requirements for quorum (up to 50 percent), high impaired, particularly in countries such as rates of required approval (50 ­ 100 percent of all Moldova, Armenia, Georgia and Azerbaijan. For apartment owners) are among such restrictive example, in Armenia only 12 percent of rules. In addition, bylaws often undermine the households that have connection to the district government's own attempts to encourage heating and 17 percent of those that have community development by imposing rigid connection to gas actually receive the services.ii guidelines and establishing unrealistic deadlines. Key obstacles to community development As a result, there is not much room for the community to choose the way their HOA is The World Bank has carried out a number of operated. studies in Armenia, Moldova and Russiaiii that provide information on the current status of International organizations and bilateral donors community development and, more importantly, have provided extensive technical assistance for identify key obstacles and impediments in raising awareness and building capacity of promoting the active involvement of apartment housing communities and HOAs in Lithuania and owners in housing management and maintenance. Armenia. Experience in these countries While situations vary from country to country, as demonstrated that awareness and capacity well as from location to location within a country, building are important drivers of housing the following were identified as key areas of community and HOA development. However, it concern: also demonstrated that it is not enough. While 41 percent of the housing stock in Armenia has (i) Heterogeneity of household interests in a HOAs, only half of them are considered active. single building resulting in high Results of Lithuania Energy Efficiency / Housing transaction costs; Pilot Project indicated that very few new HOAs (ii) Inefficiency of the legal and regulatory were established during the project framework and its ineffective implementation. Further studies in Armenia, implementation/enforcement; Moldova and Russia identified that an enabling (iii) Inadequate awareness and capacity of policy environment is just as important, and is a communities in terms of understanding precondition for active private initiative and their roles and responsibilities in community development. managing multi-apartment buildings, costs and benefits of different activities These studies found that central and local and investments; governments have retained an important role in (iv) Restrictive local policy environment that the provision of housing and communal services. hinders community development and The state continues to provide large subsidies to crowds out private initiative; buildings and building maintenance and utility (v) Lack of access to financing. companies in the form of cash transfers, setting tariffs below cost recovery levels and weak One of the consequences of the way housing was payment enforcement. Often local governments allocated under the soviet regime is that any also continue to own the common areas in multi- single multi-apartment building is inhabited both apartment buildings even if apartments are by the rich and the poor. This heterogeneity of privatized. These policies have resulted in income results in very different consumption extensive free-riding and low collection rates. priorities and financial capacities among the Thus, there are no incentives for housing residents. Thus, the transaction costs in communities to undertake the responsibility for organizing and operating an HOA are very high, their buildings. Quite to the contrary, government particularly in countries with high poverty rates. policies result in penalties to active communities Inefficient and costly decision-making rules as they lose access to a large share of subsidies. 2 Thus, service providers and apartment owners are from the experience of these countries and to caught in a vicious circle or low level apply it to other transition economies. equilibriumiv: subsidies and weak payment enforcement provide no incentives for apartment CDD approaches in housing projects owners to form HOAs and undertake building Many international organizations, including the management; without HOAs it is difficult for the World Bank, USAID, CIDA, DFID, GEF and government to reduce subsidies and for service others, have implemented numerous housing providers to enforce payments.v projects in many transition economies. Most of This situation also has negative impacts on the these projects have predominantly focused on two utilities sector, as resources such as heating and aspect of CDD ­ enabling environment and water continue to be wasted, residential collection community controlvi. Less attention, however, rates remain low and service quality continuously has been paid to working with local governments deteriorates. Lack of enforcement of residential in developing an enabling policy environment, payments played a significant role in causing the which plays just as important a role in successful recent distress in the power sector in Armenia as community development. utilities (water, sewage and heating) accumulated This note reviews nine housing sector projects in large debts reaching 10 percent of GDP in 2002. six transition economies (see Table 2 below). The studies also demonstrated that development CDD related activities in Latvia, Lithuania and of housing communities requires active work in Armenia include both technical assistance and three areas ­ establishment of an efficient legal financial instruments for financing investments in framework, capacity building of communities and common areas in multi-apartment buildings (sub- HOAs, and development of policies that support projects). In countries with more advanced rather than discourage community activities. financial sectors such as Latvia, guarantees for Several countries such as Estonia, Slovakia and loans to HOAs to be financed by local financial Kazakhstan and in some cases even individual institutions have been determined to be most cities such as Ungeni in Moldova appear to have appropriate. In countries with less developed overcome these obstacles as a majority of housing financial sectors such as Armenia and Lithuania is managed by housing communities. However, in 1995, long term credit lines to be on-lent to very little is known about how the transition took HOAs for undertaking such investments have place and what the crucial steps were in this been found to be more suitable. process. More research is needed in order to learn Due to the low level of community activity in Table 2 ­ Reviewed Housing Sector Projects * - UI ­ under implementation, UP­ under preparation Country Name of the project Type Status* Armenia Community Based Urban Water Supply Management JSDF grant UI Project Municipal Development Project, HOA component Loan UI Urban Heating Project Loan UP Latvia Housing Project Learning and Innovation Loan Loan UI Japanese Grant for the Preparation of the Housing PHRD grant UI Project Lithuania Energy Efficiency / Housing Pilot Project Loan Closed in 2001 Russia Housing and Communal Services Project Loan UP Tajikistan Community Based Water Management Project JSDF grant UI Uzbekistan Proposed Community Based Urban Water Supply JSDF grant UP Project 3 these countries, the active involvement of project in Russia is still at the early stages of community groups in project design and preparation. preparation requires extensive resources. Therefore, their involvement in project Most of the above technical assistance programs preparation so far has been limited to have been financed by different international consultations through interviews, surveys and organizations and donors such as the Danish and focus groups. However, implementation of Dutch Governments (in Lithuania), GEF, OECD individual sub-projects is solely demand driven. and USAID (in Armenia), and the Government of Decisions on the type and design of individual Japan (JSDF grants in Armenia, Uzbekistan and sub-projects and their financing are made by Tajikistan and PHRD grant in Latvia). communities. Communities are also solely responsible for the implementation and Concluding remarks and emerging issues supervision of sub-projects during both the construction and maintenance phases. The above review of studies and projects highlights the importance of integrating CDD In order to strengthen communities and build their approaches in the housing sector in transition capacity in making efficient and educated economies . CDD provides an opportunity for decisions and implement sub-projects, extensive communities to come together for an easily technical assistance programs have formed an identifiable and common immediate interest ­ integral part of the projects in Armenia, Latvia management of the building's common areas. . and Lithuania. While in Latvia, technical However, the involvement of individual assistance work was directed towards improving community members and homeowners the legal framework for HOA activities, the main associations in the management of common areas focus in Armenia and Lithuania has been on and shared utilities of their buildings, has by and raising public awareness, setting up HOAs and large been low. building their capacity. This has involved A typical World Bank project in the housing establishment of advisory centers and financing experts in organizing communities, legal issues, sector in transition economies consists of engineering and development of investment technical assistance and/or financial instruments involving two aspects of CDD ­ fostering an projects. enabling legal environment and building In parallel, extensive nationwide public capacities of communities to make decisions, information campaigns have been designed to design and implement individual sub-projects. raise public awareness about the new rights and However, there have not been many initiatives responsibilities associated with the apartment that are aimed at working with local governments ownership in multi-apartment buildings and the on the development of enabling policy benefits of collective activities. Particular environment and the establishment of the process emphasis is being paid to energy efficiency of consultations and feedback between policy measures as they have the greatest potential for makers, service providers and communities. savings and enhance household living conditions. This review suggests that an efficient legal Experience in countries such as Baltic States and framework, increasing awareness level of Poland have demonstrated that savings from communities and an enabling policy environment energy efficiency measures can be 20 ­ 80 percent. all play an important role in development of active housing communities. Identification of CDD activities in Tajikistan and Uzbekistan country specific issues is also crucial in designing augment water projects in the respective appropriate CDD approaches in housing projects. countries, and mostly cover technical assistance In most projects, the entry point for CDD has along the lines of that in Lithuania and Armenia. often been the project implementation stage rather Some of these technical assistance projects also than the project preparation stage. In order to involve grants to HOAs and/or low income enhance the application of CDD approaches in the households for purchase of water meters. The earlier stages of the project life cycle, additional 4 time and financial resources are needed so that communities can be mobilized and involved in the ivLampietti, Kolb, Gulyani and Avenesyan; 2001; design and decision making of the overall project Utility Pricing and the Poor. Lessons from Armenia; framework and components. World Bank Technical Paper No. 497; World Bank, Washington D.C. While management of multi-apartment buildings v For more discussion see Hamilton and Vecvagare; is among the most important issues in the housing 2003; Problem of Multi-family Housing in Armenia; sector in transition economies, there are other World Bank. issues that may require community participation viCommunity Control - Community groups make such as access to housing and choice of tenure decisions on planning, implementation, O&M AND (ownership / rental), housing assistance to socially directly manage investment funds; and Community vulnerable groups etc. It is important to consider groups make decisions on planning, implementation, ways in which CDD can support these other O&M, BUT do not directly manage investment funds; emerging needs in the housing sector in transition Enabling environment - Policy and institutional reforms oriented toward increased control of decisions economies. and resources by community groups; Local Governments - Democratically elected local governments make decisions on planning, implementation, O&M in partnership with different community groups. This note was prepared by Laura Vecvagare. You can contact the author via email at: lvecvagare@worldbank.org. Additional copies can also be requested via e-mail: socialdev@worldbank.org * Source: a ­ SIMA, ­ Statistical bureaus and b interviews with country officials; ­ "Urban Housing c and Land Market Reforms in Transition Countries: Neither Marx Nor Market" by Buckley, Ellis and Hamilton (2001); ­ "Condominium Development in d Armenia. An Introduction" by Desilets and Vanoyan (2001); ­ Association of HOAs; f ­ "Housing and e Communal Services in Russia: competing the Transition to a Market Economy" by Ellis (2002). i In most countries HOAs can be formed as common agreements or authorization of a manager signed by a majority of the apartment owners in a building, or a legal entity, i.e. co-operative, limited company or joint stock company. The most common forms are co- operatives, common agreements and authorization of a manager. ii National Statistical Service of the Republic of Armenia (2000 official data) and Integrated Survey of Living Standards in Armenia (2001). iiiArmenia ­ `Condominium Development in Armenia. An Introduction.' by Desilets and Vanoyan (2001), `The Problem of Multi-apartment Housing in Armenia' by Hamilton and Vecvagare (2003), Moldova ­ `Strengthening Community Based Organizations in the Housing Sector' by Oikos (2003), Russia - `Housing and Communal Services in Russia: Completing the Transition to a Market Economy' by Ellis (2002). 5