The Budget Process Hits Homes

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There is a looming crisis in the country's residential services and maintenance sector, and the government knows it. At least Vladimir Yakovlev, who is responsible for the matter as regional development minister, seems to understand. Yakovlev's answer to a deputy's question during government hour in the State Duma on Oct. 11 regarding the sector's needs was as follows:

"We've worked out the level of funding that is needed, but if we were to show it to everyone we would end up with nothing to give," Yakovlev said. "Given the amounts needed and the level of debt that already exists, nobody's going to provide the funding because they won't believe we'll be able to solve the problems no matter what happens. Of the 27,000 municipal administrations in the country, 20,000 are seriously in debt. The hidden underfunding of local budgets, which are responsible by law for residential services and maintenance, presently stands at 300 billion rubles [$42 billion]."

Clearly there is a need for more funding. Can this money be found?

The 11 percent rise in residential -- as opposed to industrial -- prices for natural gas in 2006 will add up to about 30 billion rubles over the year, or one-third of what Gazprom paid for the oil company Sibneft. Why a state-controlled company made such a deal makes no sense. What interest or profit could the state gain? Given that natural gas accounts for 60 percent of the energy cost for generation at monopoly heat and electricity producer Unified Energy Systems, or UES, and that this accounts for much more than 50 percent of residential-services spending, the purchase of Sibneft cost the government the equivalent of three years of increases in residential services charges. So the money is obviously there -- it is just not being used where it is most needed, which is why the situation continues to deteriorate.

And it looks like things will only get worse. According to the federal budget for 2007, the share of total state revenues going to municipal governments will fall. Even worse, debate continues over whether gas prices should be liberalized completely. The fact that the debate at present only concerns industrial consumers, and not residential, is of little comfort. Deregulation of gas prices for industry historically means cross-subsidizing of the residential sector by the industrial sector (this is actually planned for 2007). Ultimately, pressure rises for this compensation to be phased out. With Gazprom's decision to eschew the participation of foreign investors in developing the Shtokman gas field -- at a likely cost of about $20 billion -- it is going to be much more difficult for the company to continue subsidizing residential prices, meaning that pressure to do away with all subsidies will increase.

So either residential services charges will rise or the degradation will accelerate.

Who will come up with the money to cover the increases? As Yakovlev pointed out, the majority of municipal budgets are already running deficits. The UES request for an additional 30 billion rubles could only come at the further expense of municipal governments.

So the only place left to look for the money is the residents themselves. This won't solve the problem either. Teachers' salaries and housing subsidies, for example, come from the same pool of funds. In September, I toured six village schools in the Astrakhan region. When I asked who received housing subsidies, at five of the schools all of the teachers raised their hands. At the sixth, only a few did not receive subsidies.

What this all means is that it might simply be impossible simultaneously to solve the country's two main residential problems: the lack of affordable housing and the need to find investment to upgrade the provision of heat and electricity. There is only so much money to go around and the balance right now is not in the favor of residential services.

Crisis situations often serve as catalysts for making important decisions, even if only for the short term. The State Duma held a plenary session the day after an apartment building in Vyborg collapsed on Oct. 9, killing seven people. There were, understandably, impassioned calls for action, but a mere two hours later the Duma voted down a proposed increase of 100 billion rubles ($3.7 billion) for residential repairs in the 2007 federal budget. This is the same sum that was cut from the residential services portion of the budget in 2006 in conjunction with a new law putting a cap on utilities prices. The latest move would merely have been compensation for revenues lost in 2006. This amount is also, coincidently, the same as the figure for spending from the federal investment fund for 2007. Why shouldn't residential maintenance be a job for the investment fund?

Whatever the case, there is clearly a need to freeze prices for gas and electricity for 2007. Only this will allow municipalities to use what revenues they have to improve living conditions. The money should not go toward paying energy monopolists higher prices.

This will leave these energy providers in the lurch as well. How will they cover their costs?

In the case of Gazprom, the available information suggests that the government has already looked at the company's investment program for 2007, at least giving the impression that it is trying to find a way to improve its finances. Simply put, according to already published figures, all Gazprom has to do is divest itself of non-core activities that incur losses -- and it can afford to freeze prices for two years.

The same kind of "inventory" approach can be taken at UES. For example, there is no reason for UES to be helping finance the completion of construction of the Boguchansk hydroelectric station, a facility that will provide power exclusively for newly built aluminum and timber-processing factories along the lower reaches of the Angar River. It would make more sense to have the owners of the plants in question fund the work and operate the finished station as part of their business. If, on the other hand, UES finishes construction but work is not completed on the aluminum and lumber facilities, there will be considerable generating capacity sitting idle in the middle of nowhere.

Although there might be resistance at UES and Gazprom, the existence of such options means that there is still hope for dealing with the country's residential services and maintenance problems. As it becomes more evident how critical the current situation is, we will have no choice but to deal with it.

Valery Zubov is a State Duma deputy and the former governor of Krasnoyarsk.