State and Local Government: How to Improve the Partnership

Martin Lux

Privatization of public housing

The rules and scale of privatization were, however, very different in the individual countries. In Estonia, Romania, and Slovakia, large-scale privatization of former public housing took place mainly because of the application of the tenants' right to buy (in Slovakia only a limited form of this was applied). The central legislation defined the general terms for privatization (right to buy for tenants in public housing, calculation of privatization prices, condominium registration, sometimes-public loan conditions) and municipalities had only limited possibilities to influence the scale or the most fundamental conditions of privatization. In Poland and the Czech Republic the scale and speed of privatization were much more modest. Tenants in public rental housing did not receive the unrestricted right to buy in those countries and municipalities could decide for themselves the scale as well as the terms for privatization (discounts on privatization prices). The central government did not offer any special financial programs to promote privatization (state-qualified loans, interest subsidies, etc.). Bulgaria has a special status in this context, as the privatization of public rental housing was also common practice during the Communist regime. We can thus distinguish three groups among the selected CEE countries: fast privatizers, slow privatizers and the special status of Bulgaria.

• Fast privatizers

In Romania, all tenants who could make the down payment and receive a qualified mortgage loan were eligible to buy the public rental housing they occupied. The qualified loan from the Savings and Deposits Bank, with a 25-year maturity and 4% p.a. interest rate (for married couples under 35 years of age, the maturity was 30 years with a 2% p.a. interest rate) was offered to all households willing to privatize their dwelling. The price was very symbolic; dependent on the date of construction.

All adult persons permanently living and working in Estonia received "privatization vouchers" (according to the length of time they had worked in Estonia since 1945) and the purchase of apartments was realized mostly through such vouchers. All tenants had a right to buy public rental housing, that they occupied, for very low prices (with vouchers). Direct financial costs mainly consisted of only the legal fees for the transaction, not exceeding 1% of the total privatization price. Due to these very soft terms, no particular financial programs had to be introduced to help cope with paying the privatization costs. However, part of the housing stock was restituted into the hands of former owners, which resulted in profound social tensions between those who could benefit from privatization and those who could not, due to the restitution of property. There was also an ethnic dimension to this problem as the restitution concerned mainly Estonians, while Russian immigrants could benefit from the privatization of the more recently constructed dwellings. Municipalities are thus obliged to provide tenants in restituted buildings with flats close to their previous residence and having the same quality standard and size as their former residence. These flats may be privatized under the same preferential conditions originally applicable to tenants in public housing (using privatization vouchers).

The Act on the Privatization of Municipal Flats was one of the first acts of the independent Slovak Republic; in 1995 and 1998 amendments were introduced that strengthened the power of tenants applying to privatize their flats. The first amendment introduced the rule that municipalities were obliged to privatize the flats within two years if at least 50% of the tenant households in a particular rental house request their flats be privatized (limited right to buy). The privatization prices, regulated by the central law, were very low. However, no special financial conditions for households willing to privatize were prepared to further promote the privatization process.

• Slow privatizers

In the Czech Republic and Poland, the right to buy was applied only to tenants in cooperative housing. The Act on Ownership of Apartments and Non-residential Premises (1994) with later amendments, enabled the privatization of public rental stock in the Czech Republic (condominium legislation), but the tenants' right to buy has not been introduced, nor has the regulation of privatization prices been applied. A look at the Polish situation gives us the same picture: dwellings were privatized generally for market prices and various discounts were granted. The extent of the discount as well as the selection of the stock to be privatized remained under the competence of the individual municipalities.

• Bulgaria

Unlike other transitional countries, Bulgaria started its democratic development with a high percentage of home-ownership, consisting of 91% of the total housing stock. The privatization and restitution processes did not cause significant changes in tenure structures. During Communism housing, which was initially built to be State or municipally owned, was later sold to the tenants. Each tenant in municipal or state rental housing had a right to buy the dwelling after occupying it for two years and could benefit from comfortable loans from the State Savings Bank with a 2% p.a. interest rate. Moreover, the construction of public housing was subsidized by the State and the privatization prices were thus widely affordable (only the part of construction costs not covered by the state subsidy determined the privatization price). A new regulation was adopted in 1994, supposedly to prevent further privatization of municipal housing stock and introduce more stringent criteria for their allocation, but this moratorium was cancelled in 1996.

Demand-side subsidies (housing allowances)

Demand-side subsidies (housing allowances) were introduced in Poland, the Czech Republic, Slovakia and Estonia (now part of the subsistence benefit). In Bulgaria, only a special type of energy/social allowance has been implemented. A common feature of the housing allowance in all the countries mentioned is its marginal significance; a housing allowance serves as support for the lowest income families, rather than an effective demand-side housing policy instrument (part of basic social assistance policy). This can be documented by looking at the percentage of the total number of households in each country from households that received benefits; in no country except Estonia does this percentage exceed 8%. The main goal of housing allowances is not to stimulate demand for housing, but to maintain the current housing standard for households in need. We can cautiously state that there is no significant relationship between housing allowances and the supply side of the housing market in these transitional countries. The income support provided through the benefits is not sufficient to stimulate the demand for new housing and provoke an appropriate response with respect to the supply.

Housing allowance programs in the Czech Republic, Slovakia, Estonia and Poland are targeted at low-income and handicapped households. The many restrictive conditions that apply (income ceilings) demonstrate this. Two types of income ceilings can be distinguished: implicit and explicit. Implicit income ceilings arise from the formula used for calculating the housing allowance, whereas explicit income ceilings are strictly set in the Act. The explicit income ceilings could be considered as a discouragement. A significant change can happen when an applicant's income exceeds the ceiling because, in such a case, the applicant is not eligible for any benefit (however, this is not the case neither for the Czech nor for the Polish systems). The income ceiling (with no regard as to explicit or implicit) negatively affects the household members' work incentives and leads to a poverty trap. This concerns mainly the Estonian system where one unit income growth is connected with one unit allowance decrease.

With the exception of Poland and Estonia, explicit housing expenditure normatives are also applied in housing allowance models (normative housing expenditures). In Estonia, housing expenditures are not set as one-figure normatives but are limited by ceilings (maximum values); these limits are not set centrally but by the municipalities. Poland is the only country where real housing expenditures are included in the calculation with only indirectly set ceilings (comparable costs in municipal housing)^[1]. The normatives in the Czech Republic and Slovakia reflect only the composition of the household and not the local or regional particularities (regional rent differentiation). Moreover, normatives in those countries are set at too low a level, reflecting the situation in the "privileged" rent regulated sector. From that point of view, the Polish model of housing allowances is the only model that is close to the standards of continental EU housing allowance systems.

Though in all the above-mentioned countries no tenure is explicitly excluded from the right to apply for a housing allowance (housing allowances help both tenants and housing owners) another common feature of these systems is that households living in market rental housing are at a disadvantage. Generally, the income of these households is relatively high and they are thus ineligible for the allowance (if an income ceiling is used), although their housing expenditures burden can be significantly higher than that of households paying regulated rent prices. Moreover, the calculation of the allowance is limited by housing expenditure normatives (with the exception of Poland and partially Estonia) that are significantly lower than housing expenditures of those living in the free market rental sector.

Another problem of the analyzed housing allowance models concerns the determination of so called normative rate of burden. The normative rate of burden is defined as the normative share of household income that a household must spend on housing (always based on a formula involving a coefficient). By other words, it sets the minimum financial participation of a household on its housing expenditures not directly (in absolute values) but indirectly in a form of a percentage of the total household income. In the Czech and Estonian models the normative rate of burden varies according to the size and composition of the household (due to their connection to the concept of a subsistence level). In the Polish model the coefficient varies according to income level. In all analyzed CEE models, the normative rate of burden does not increase with the level of housing expenditures (assuming constant income). However, in the standard continental models used in most of the EU countries, the normative rate of burden usually increases with the level of housing expenditures. For example, moving to better located or equipped housing would be connected with a rise in the normative rate of burden; the household covers the higher costs with a higher share of its income, compared to before the move. This is the common failure of all the analyzed CEE housing allowance models.

The danger of creating a poverty trap situation can also be evaluated (in EU countries this is discussed mainly in connection with the housing allowance in the United Kingdom). This could be measured by the so-called "rate of degression", showing the amount of decrease in housing allowance when the income of a household increases by one currency unit. In most of the analyzed countries, degression rate is relatively sustainable (about 30%) and only the Estonian model with 100% degression rate forms an exception (one unit of additional income is connected with one unit of decrease in housing allowance). The Estonian allowance leads to a substantial decrease in work incentives and a poverty trap situation.

With the exception of Poland, housing allowances are paid from the state budget. In Poland gminas (municipalities) are mainly responsible for covering housing allowance expenses, but they obtain a grant from the state budget, calculated according to two possible relatively complex formulas (on the average, they receive a subsidy equal to 50% of the total payment duty).............