The Concept of Reforming of Housing and Utilities Sector

This post discusses the terrible state of affairs in Housing and Public Utilities in Ukraine and argues that the cause of systemic distortions and pervasive corruption in these areas is lack of unambiguous and secure property rights, absence of transparent and efficient decision-making mechanisms for governing common property, and extremely weak enforcement. The foundation for improvement must be the overhaul of the “rules of the game” in the entire sector: we need an institutional reform that will clarify and formalize the relationships between owners, co-owners, operating agencies, local governments, service providers and other stakeholders.

The situation in Housing and Public Utilities is chaotic because it is frequently impossible to establish who owns a property or its share. The problem is particularly severe for common property. As long as the uncertainty about the property rights persists, lack of investment in maintaining and developing property, conflicts about usage rights, and corruption will be “business by necessity“.

For an illustration, consider an apartment building. There are owners of the apartments but their ownership, usage, and other rights over the rest of the building, its infrastructure, and the land on which the building is located are not formalized or even defined.  The local governments throughout Ukraine have exploited this confusion to declare the buildings a “communal property”, that is, the property that belongs to them. This violates the rulings of the Constitutional Court of Ukraine on 02.03.2004 and 09.11.2011, as well as Article 382, Section 2 of the Civil Code of Ukraine. According to the Court and to the Civil Code, the buildings and infrastructure are common property of all owners of the apartments.

The attempt of the municipal governments to unlawfully grab property rights creates disputes whose resolution is uncertain because of corruption and incompetence in judiciary. This uncertainty destroys incentives for the parties, the local municipalities and the owners of the apartments, to invest into the building, infrastructure, and land because it is unclear if they will be able to benefit from these investments.

Furthermore, conflicting provisions in the Civil Code of Ukraine create notions of “double” and “triple” ownership of the same object. For example, according to Section 1 of Article 384 of the Civil Code of Ukraine, a building, which was built or purchased by cooperative (a legal entity representing a union of individuals), is owned by the cooperative. According to Section 3 of the same article, if a member of the cooperative buys the apartment from the cooperative, she becomes the owner of the apartment. Now the twist – Section 2 of Article 382 states that the building and its infrastructure (with the exception of the apartments and offices) belongs to the owners of the apartments (and offices). Thus, the building and its infrastructure, its hallways, garages, elevators, pipes, heaters, etc belongs (1) exclusively to the legal entity cooperative and (2) exclusively to the owners of the apartments and offices. The standard resolution for this problem is introducing a working concept of “collective private property,” or co-ownership, which is standard in the civil law of many countries but absent in the Ukrainian law.

Yet, another problem in Housing and Public Utilities is that many real estate developers have registered their buildings as integral property complexes securing their rights over the buildings and the infrastructure. After the apartments in the buildings are sold to the public, the developers have kept their property rights over the building, automatically generating another dispute over the property rights over the building with the owners of the apartments.

To manage collective private property (privately owned apartments and jointly owned building), the Ukrainian law allows for creating of special legal entity (condominiums, apartment associations, cooperatives, etc.). However, despite many discussions and recent legislative initiations, this entity is not mandatory. If such a management entity is not created, Articles 358 and 369 of the Civil Code require unanimity for any decision, providing for vast opportunities of hold up and resulting in stalemates and little effective management. As a result, almost all organizations providing municipal services to the building (garbage disposal, water, sewage, etc.) do so without contract and legally binding obligations. This is another source of confusion about the rights and obligations, further generating economic inefficiencies and disputes.

These conflicts in allocation of the property rights and contractual obligations make investment in housing, both private and state, meaningless. It is then non-surprising that substantive amounts of government funds appropriated for investment in housing are diverted.

This is evidenced by the numerous criminal cases, in which the typical plot is as follows:

(1) the state allocates budget funds to repair a building;

(2) a company connected to or owned by a bureaucrat in a local government or municipality wins the contract from the state to implement these repairs;

(3) almost no work is completed;

(4) this is despite existence of the documents confirming that satisfactory repairs have been made. These documents are either forged or signed by heads of Housing and Utilities Firms/Companies, or even heads of condominiums or cooperatives, which are may be corrupt, or reasonably believe that it is better to obtain a fraction of the allocated funding and services than nothing.

Efficient management of housing requires creation of transparent and efficient institutions that represent the owners of the apartments and can enter in enforceable contractual interactions with other legal entities. Legitimacy of the decisions by these institutions must be ensured and must have legal protection. Nevertheless, the political and even physical risks of advocating this position are high due to resistance from vested interests. (The author of this article has death threats in the past.)

The existing institutions for representation of the owners of the apartments have dubious legal standing. The membership in these institutions is not mandatory and the institutions do not have their own property and assets. This creates opportunities for conflicts and hold up by non-member owners of the apartments. The limited liability of these institutions makes ineffective their interaction with the local governments and utility providers since the latter have no guarantee that their services will be paid for. These institutions are incapable of meaningfully managing and developing property, including, among other things, investing into energy saving technologies and infrastructure – the important ingredients for the energy security in Ukraine.

The responsibility for formalization of property rights and creating legal instruments for resolution of the existing situation belongs to the Ministry of Justice. The responsibility of Housing is on the Ministry of Regional Development. The latter cannot resolve the problem in Housing without cooperation with the former, but the former has no incentives to resolve the issues that are mainly concern the other Ministry.

Thus, a successful reform in Housing and Public Utilities require formalization and clarification of the property rights, creating of formal, transparent, and efficient decision-making bodies governing collective property, resolution of the hold-up by the owners of the real estate the local governments, and the utility provides, and judicial enforcement of contractual obligations. Implementation of this reform requires cooperation of multiple ministries, with the Ministry of Justice taking the lead.