WASHINGTON, February 26, 2008 – Russian consumers in at least 10 cities will benefit from a pilot program to improve housing and communal services due to a partnership between the Russian Federation and the World Bank, which today approved a US$200 million loan for a Housing and Communal Services (HCS) Project in Russia.

The project will test a competitive grant mechanism to cities that increase market mechanisms in housing and communal services (heating, power, water, sewage and sanitation) and also strengthen social protection of vulnerable consumer groups. Lessons from the project would be studied and adapted by the Russian Government for use in federally-funded infrastructure projects, including the housing and communal service reform program, which is one of the four country’s socio-economic priorities. 

The Housing and Communal Services Project will help the Government scale up the quality of housing and communal services in part based on the Bank’s global knowledge and experience in designing and implementing similar projects around the world.

Investment needs in the Russian housing and communal service sector are substantial, both to rehabilitation of deteriorating stock and to increase access to services.  The sector is also inefficient.  Providers of communal services in a number of regions run at a loss due to inadequate tariffs and managerial shortcomings. The heat efficiency rate of some service providers is as low as 30 percent due to the deterioration of assets.

The Russian Government has enacted a wide array of legal and regulatory reforms to improve the situation in the sector.  It has also allocated over $10 billion to related housing and infrastructure investments.  Together with the World Bank, it aims to test a more comprehensive reform strategy that would focus on implementation at the local level.

“By bringing global knowledge to local reform efforts, the World Bank is essentially supporting innovation,” said Klaus Rohland, Director and Resident Representative of the World Bank in the Russian Federation.  “The monitoring and evaluation framework will help the Government determine what approaches are most successful for scaling up in federal and regional programs.”

The competition to participate in the pilot program will be open to cities ranging in population from 90,000-600,000 people and that meet minimum criteria of financial performance by the municipal administration and communal service providers. Participating cities need to implement a reform program successfully before gaining access to grants for investments.  The loan, which represents and compliments only a small share of the larger Government program, will initially finance technical support and advise for the design and implementation of reforms, including improvements in the financial viability of communal service providers, strengthened social protection of consumers, and creating market competition in housing management and maintenance.  After delivering results on reforms, cities will receive grants for modernizing and rehabilitating existing infrastructure. The two step process is important since the political willingness and capacity of local authorities is essential to reforms in this sector.  Knowledge-sharing among cities to share experience will also be a key feature of the project.
 
The loan will also finance technical support to design capital investment programs for measurable improvements in reducing operating losses, pipe breaks, water leakage, or energy inefficiency, while increasing the share of private investment in the sector and private management of facilities.  The monitoring and evaluation framework will enable the Government to assess the value of public investments through a physical audit (to confirm that rehabilitated stock is performing as expected) and a consumer satisfaction survey.  The project will help increase public acceptance of reforms by providing tangible benefits through infrastructure investments. 

The five-year project will be financed by a variable spread loan denominated in US dollars with a repayment period of 15 years, including a 5 year grace period.