Round Table “Housing Subsidies: towards Monetization”

On September 14, 2018 a round table “Housing Subsidies: On the Way to Monetization” was held.

The event was organized by the Agency for Legislative Initiatives, Dzerkalo Tyzhnia  (Mirror Weekly), Internews and USAID Ukraine in order to identify the problems, which the government faces in the first phase of transition to monetization of subsidies, as well as to outline solutions that will enable monetization of subsidies at the consumer level to be implemented quickly and efficiently.

I DISCUSSION PANEL. Service provider level monetization: history, present and challenges

Yuriy Dzhygyr, Deputy Minister of Finance of Ukraine, emphasized the main strategic goal of the transition to monetization, which is energy efficiency – more economical use of energy resources. When applying the monetization tool, it is necessary to take into account the critical objectives to be achieved as a result of its implementation. So, the monetization system should protect vulnerable groups of the population, while it must have built-in tools to achieve fiscal discipline. At the same time, the system should be transparent, user-friendly, and it should be perceived by society as fair.

A two-stage transition to the subsidy monetization model was chosen: the first stage – monetization at the level of service providers. Firstly, direct payments were made with business entities, which facilitated the administration process; and secondly, subsidies cover already consumed resources, which already gives apparent savings in funds; thirdly, automatic financing of subsidies was introduced, which excludes manual interference in calculations with economic entities. These three elements during the 8 months of 2018 have already led to apparent savings in budget funds – 8.2 billion less than in the same period in 2017.

In the second phase, monetization of subsidies at the household level will be introduced.

Oleksiy Habatiuk, Deputy Head of the Energy Efficiency Department of NJSC Naftogaz Ukraine, emphasized that the subsidy monetization phase is an integral part of a large system of subsidies, which, in addition to monetization, involves identifying those to whom the subsidy is allocated, as well as a system for calculating subsidies that depend on technical parameters.

Oleksiy stressed that there is currently no link between the calculation of subsidies and their monetization. Monetization, which came into force on January 1, 2018, had no effect on the amount of resource consumption. Subsidiaries continue to consume substantially more resources than those who consume and pay energy on their own.

“According to the data on Kirovograd oblast, access to which we have, we see that those who live in apartments that have individual heating, and there are quite a lot of such consumers in the region – it is about 40 – 50 thousand apartments, they consume 1.6 times more than those who pay themselves. And those who live in individual homes – consume 2 times more gas. And this is very critical for us.”

Every saved cubic meter of gas to the population is profitable, because NJSC “Naftogaz” buys gas on the market more expensive than it sells to the population. Gas of own extraction is not enough. Therefore, NJSC “Naftogaz” is interested in the population to consume economically, in particular, the subsidiaries, because the budget pays for them, which is formed from our taxes. Therefore, for us, this is a double benefit: less tax is spent, as well as less losses from gas supply at a low price.

Also, Oleksiy noted that according to the observations of NJSC Naftogaz Ukraine, since January 1, 2018, the situation has little changed: financing of expenditures from the state budget for subsidies continues, as before, with delays. You cannot say that only resources consumed by the population are financed, since there is no access to information on personalized consumption of resources by the population. And this is a significant corruption risk, since private gas companies supply gas to the population, which can manipulate the price of gas and thus receive grey funds that will fuel corruption in the country.

Valeriy Lyulin, Director of the Calculation Department, Kyivvodokanal, spoke about the difficulties Kyivvodokanal encountered during the implementation of the reform. First of all, due to software reassignment, there were no subsidies for consumers for several months, all calculations were subsequently redeemed.

Among possible risks Valeriy highlighted the danger of using money that would be received on personal accounts of consumers, for other needs. It is therefore important to synchronize the exchange of information about consumer indebtedness in order to prevent a situation where consumers accumulate payment arrears for certain services.

Valeriy noted that it is important to introduce mechanisms that would stimulate the saving of resources, in particular, encourage consumers to install meters. In Kiev, still 25% of apartments are not equipped with water meters. Yes, you can apply a subsidy for consumers who have already installed meters to encourage others to install and save resources.

Vitaliy Muzychenko, Director of State Social Assistance Department of the Ministry of Social Policy of Ukraine, noted that the system of subsidies in Ukraine has been in operation since 1995 and, during all the years of existence, it was the subject of discussion on its compliance with the requirements of the time. The system of subsidies became especially relevant after 2014, when the incomes of the population decreased significantly, and prices and tariffs greatly increased. It was the system of housing subsidies that made it possible to cope with this situation.

In 2014, the approach to the mechanism for assigning and accrual of subsidies was changed. These observations suggest that the established social norms are approaching the actual volumes of natural gas consumption. Also, on the basis of a thorough analysis, a conditional portrait of the recipient of housing subsidies was drawn up, as well as factors that allowed households to obtain fraudulent subsidies for which they were not entitled. Since May, more rigorous approaches to the allocation of subsidies have been introduced that aim at increasing the targeting of this type of social assistance. This creates the basis for the successful introduction of housing subsidies monetization.

An explanation that recipients of housing subsidies consume more resources than those who do not receive them is that their income does not allow them to implement energy-saving measures at their own expense. It is necessary to think about the mechanism of support for such groups of citizens, in particular, it can be done through the system of providing “warm loans”.

Svyatoslav Pavlyuk, Independent Expert on Energy Saving, said that if while subsidizing we aim to stimulate energy efficiency, then we must first look at what subsidies are being given. Currently, subsidies are allocated for 8 services: gas, heating, hot and cold water supply, drainage, electricity, garbage, housing maintenance. Among these services only gas, heat and electricity are directly related to energy efficiency. Household expenditures for the maintenance of adjoining areas, garbage disposal, drainage and even water supply are not so significant for the family budget, and the costs of administration of subsidies for these services are significant. Therefore, it is worth subsidizing only the payment of services that are most sensitive to the family budget – gas, heat and electricity.

II DISCUSSION PANEL. Monetization of subsidies at the consumer level

Vitaliy Muzychenko, Director of State Social AssistanceDepartment of the Ministry of Social Policy of Ukraine, stressed that the conditions for the appointment of housing subsidies have now changed, the system becomes more targeted and provides more rigorous verification of potential recipients of subsidies, as well as social standards were adjusted. All these steps provide an opportunity to talk about the successful introduction of housing subsidies monetization at the level of service users.

Subsequent revisions require mechanisms to control the use of subsidized funds to consumers. Today it impossible to simultaneously introduce monetization of subsidies among all households that need it; a phased system of introduction of this mechanism should be introduced.

Yuriy Dzhygyr, Deputy Minister of Finance of Ukraine, noted that the second stage of monetization assumes that funds will be transferred to personal accounts of recipients of subsidies from which they will pay for utilities.

A key condition for the introduction of the second stage is filling the register of households, which need of assistance, as well as the possibility of a complete check of the property status of recipients of subsidies.

Also, Yuriy stressed that the set of measures that accompany the monetization of subsidies at the level of consumers, give an opportunity to hope for significant savings.

Svyatoslav Pavlyuk, Independent Expert on Energy Saving, stressed that speaking about energy saving, it is worth remembering that people do not save energy, they save money. Monetization makes the consumer to change his behavior and stimulates to energy saving. You need to tell people about medium-term plans of the state, so that people can have a strategy of their behavior. The mechanism of control and deprivation of subsidies for non-payment of accounts must be introduced.

According to Svyatoslav, the state should allow households to use subsidized money to upgrade their housing for the sake of better energy saving. Here the problem of the elderly people appears, who are not able to upgrade their housing on their own. It is also necessary to inform consumers that the subsidies will not be issued forever, and the amount of payments will be reduced. Therefore, it is critically important to invest in upgrading housing.

In addition, the problem of renting apartments with subsidies needs to be solved. And also the question of gas rate formation.

Olga Pishchulina, Expert on social support of the population of the Razumkov Center, drew attention to the fact that in Western countries, subsidies are received from 2 to 5% of citizens. In Ukraine today almost 50% of the population are considered disadvantaged ones.

“The number of recipients of subsidies, which is now in Ukraine, is not a problem, not a catastrophe, it’s a verdict,” stressed Olga.

Today, subsidies are not available to everybody who really needs it.Also, the subsidy system does not stimulate energy saving. Such a system is beneficial both for service providers and for consumers. Through the recipients of subsidies, the state finances monopolists of energy supply companies.

Olga pointed out that the new rules on provision subsidies have the element for assessing the property status of applicants for subsidies, which would allow more accurately identify the recipients of subsidies. However, creep-holes for wealthy applicants are still there.

The method of monetization of subsidies is not definitely positive, not all elements of the mechanism are well thought out. There is also a problem of liquidity of the treasury.

Oleksiy Khabatyuk, Deputy Head of Energy Efficiency Department of NJSC Naftogaz Ukraine, stressed that 100% of energy consumers receive subsidies, simply through various subsidy mechanisms. In the electricity market it is cross-subsidies, in the gas market it is the difference of the purchase and sale price of gas.

“Energy subsidy – the case when the selling price to the end user does not correspond to the market price”

Today, there is a problem of guaranteeing the payment of debts by subsidiaries, since the system does not stimulate paying for services at all. Misuse of subsidized money should lead to severe punishment. The planning horizon must be clearly defined so that citizens can plan their own energy costs in advance. In addition, qualitative verification of the subsidiaries should be carried out. The reform should be aimed at ensuring that the subsidiary is no different from ordinary consumers.

Gallery of the event:

Photos by Oleksandr Kovalenko