-PA Communal Housing

in Poland: Management and Privatization

P4-QR-15

November 1991

OFFICE OF HOUSING AND URBAN PROGRAMS

U.S. AGENCY FOR INTERNATIONAL DEVELOPMENT

WORKING

PAPER

This working papc represents a Il'1,61,1A iIm n "t OILc Oti ftousifig t ic id Urban Programs. \V.lrkiriv P'apewr, are ditrihjutcd UTIIIItCLI in rdcr 1,.nlur r their tlicIv availability.

Communal Housing
Management and

in Poland:
Privatization

November,

1991

Prepared by:

Sally Merrill Stephen Kennedy Antony Phipps

Abt Associates Inc.
For the:

Office of Housing and Urban Programs U.S. Agency for International Development Washington, D.C. 20523

Abt Associates, Inc. m4800 Montgomery Lane m Bethesda, MD 20814 Contract PDC-1008-I-08-9066-00 m Delivery Order No. 9

The views herein are those of the authors and do not necessarily reflect those of the Office of Housing or the U.S. Agency for International Development.

NOTE Recommendations, which were included in the original report submitted to USAID Regional Housing and Urban Development Office for Eastern Europe (RHUDO/EE), are currently under consideration and have, therefore, been removed from this publication.

TABLE OF CONTENTS

Page 1.0 2.0 EXECUTIVE SUMMARY ........................... THE ECONOMIC AND LEGAL CONTEXT FOR MANAGING PUBLIC HOUSING IN POLAND ...................... 2.1 2.2 2.3 3.0 Overview of the Housing Stock ...... Current and Proposed Law ...... The Housing Market ............................. ................. ................... I 11 13 15 19 ......... ......... 19 26 28 31 34 39 ........ . . . . .. . 39 40 46 49 55 56 60 62 64 ... ... I

THE PUBLIC HOUSING INVENTORY ..................... 3.1 3.2 3.3 3.4 Overview of the Communal Housing Inventory Maintenance of Communal Housing ................... Costs of New Construction and Rehabilitation ..... Addressing Supply Constraints: Managing New Construction and Rehabilitation ....................

4.0 5.0

CURRENT MANAGEMENT OF COMMUNAL HOUSING ...... AFFORDABILITY ................................ 5.1 5.2 ',3 5.4 Overview of Affordability and Income Policy ..... Income . .. . .. . . .. ... .. .. ... Rent and Rent Burden in Communal Housing ............. Affordability of Maintenance Charges, Rehabilitation, and New Purchase .....................

6.0

OPTIONS FOR PUBLIC HOUSING ........................ 6.1 6.2 6.3 6.4 Barriers to Immediate Privatization of Communal Housing ...... ....................... Gradual Privatization ...... ...................... ............... A Rapid Conversion Demonstration ..... Privatization in the Long Run: A Housing Voucher Program ...... ........................

TABLE OF CONTENTS (cont.)

Page 7.0 RECOMMENDATONS FOR LONG AND SHORT TERM T1ECHNICAL ASSISTANCE AND TRAINING ................. 7.1 7.2 7.3 Overview of Our Recommendations .................... Recommendations for Technical Assistance ............... Structure of the Technical Assistanci ...................

68 68 73 86

APPENDIX I: Mortgage Financing BIBLIOGRAPHY

LIST OF TABLES, EXHIBITS, AND FIGURES TABLES 2.1 3.1 3.2 Occupied Housing Stock by Type of Ownership ......... Distribution of Housing Units by Form of Ownership and Location .................................. Useful Space and Central Heating Among Units Administered by Local State Housing Authorites ........ Average Size of Newly Constructed (Cooperative) Apartments, by household size...................22 State Sponsored Housing Construction 1990 and First Quarter 1991 ..............................
Communal Housing in Slupsk - General Characteristics .
.

12

20 21

3.3 3.4
3.5

24
25

..

5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

Income and Expenditures - Slupsk District .............. Income and Expenditures - Czestachowa District ........

42 43 45

Household Tenancy Stats by Income Grcup .............. Selected Economic and Income Data................46 Rents in Communal Units. ......................

47 .....

Typical Household Income and Estimated Rent and Utility Burden for Communal Housing ...................

48

Estimated Rent and Basic Maintenance Burdens in Communal Units by Income Decile.......................... Affordability of Rehabilitation and New Purchase ........ Household Payment Burden under the DIM under Alternative Assumptions about Growth in Wages ..................

50 51

53

FIGURES 6.1 Hypothetical Distributions of Income and "Quality" in Communal Housing ..............................

58

1.0

EXECUTIVE SUMMARY

Decentralization of responsibility and transformation of ownership into private hanids are important themes in nearly every sector in Poland. The new responsibilities of local government are nowhere more evident than with regard to the housing market. Almost all housing in Poland is organized under four forms of management: communal, cooperative, enterprise, and private. Communal housing consists of the housing that was expropriated after World War 11, plus most of the housing constructed in the immediate post-war period.' Ownership of communal housing, which constitutes a substantial share of the urban housing stock, was recently transferred to the ocal governments (gminas), which are now responsible for its operation and/or disposition. Although rents are not adequate to cover costs, no financial assistance is likely to be available from the central government. Thus, privatization may ultimately be a fiscal necessity as well as an important component of the social process. The purpose of this report is to evaluate the financial and physical condition of the communal housing in the context of the transformation of the housing market from central to private cotirol. Based on this evaluation, we then suggest what technical assistance should be provided to local governments in their efforts to manage and privatize communal housing. The report is based on conversations in May, 1991 with officials and researchers in Warsaw and visits to two municipalities in western Poland -- Slupsk, which is located on the Baltic to the west of Gdansk, and Czestachowa, which is located southwest of Warsaw and contains the famous Shrine of the Black Madonna. The first five chapters describe the context in which the gminas operate. Chapter 2 describes the overall organization of the housing market and the gminas' powers under current and proposed housing legislation. Chapter 3 describes the current physical condition of the communal housing stock and Chapter 4 its financial condition and operation. Chapter 5 discusses the affordability of communal housing at the present time and several options for rehabilitation and purchase. Chapters 6 and 7 then discuss the range of options available to the gminas and the associated technical assistance requirements.

'To complicate matters (and confuse numbers) some of the units operated as communal housing are privately owned. This is discussedfurther in Section 2. 1.

The Condition of the Communal Housing Stock Current estimates suggest there are about 11 million dwelling units in Poland of which approximately two million units are located in communal buildings now owned by the gminas. Most of these are located in cities and towns where comunal housing comprises about 30 percent of all urban housing. On the basis of several recent reports, together with insrections of sample buildings in Slupsk and Czestachowa, it is apparent that a substantial portion of the communal housing stock is physically deficient, overcrowded, and undermaintained.
o

The communal housing stock is old: nearly half (49.9 percent) was built before 1945, and 4 out of 5 units were built before 1970; most buildings are located in the centers of cities and towns. The shortage of housing is severe. Even by Polish standards of crowding (less than 10 square meters of useable space per person), at least one out of five families is overcrowd,.; in most households the ratio of persons per room is well above 1.00. Several generatinas often live together, there are no vacancies, and waiting lists can exceed fifteen years. (Indeed, the shortage may have serious impacts on the mobility of labor.) Relative to the hree other forms of tenure (private, cooperative and enterprise housing), communal housing is the least adequate; between one and three percent of the stock should be demolished; less than half of the communal housing units in multifamily buildings contain both central heating and private bathrooms, and very few units are insulated. Symptoms of extreme deferred maintenaice are widespread, both outside communal buiidings, and in the common areas; efforts to renovate or weatherize the stock have been very limited.

The construction of new communal housing units in Poland has slowed to a virtual standstill as the flow of funds to municipal governments and housing authorities has been cut off. Typically new (panel) construction costs 2.5-3.0 million zlotys per square meter ($22-27 per square foot). Adding typical costs for land and infrastructure, together with 7.0 percent interest payments during cc nstruction, puts new housing out of reach of at least 90 percent of the population of Poland. Substantial rehabilitation may cost between one-third to one-half the costs of new construction; but rehabilitation by itself does not add new units to the siock, and involves additional problems of relocation.

The Housing Market and tfle Affordability of Communal Housing Privatization is a major theme across almost all sectors in Poland. The stated goal of many gmina officials is to get a substantial share of housing in private hands as quickly as possible. Ever, in the face of these intentions, however, we conciude that the transfer of the stock will require a long-term effort. The major issues include the following: Housing Market Disequilibrium * Both the housing market as a whole and the universe of communal housing are in profound disequilibrium. Very little "sorting out" of units has been done on the basis of income and preferences, on the one hand, and quality, location, and size, on the other. Getting the mechanisms in order for building-by-building sorting will take some time, especially since no relocation housing currently exists and the development of a private rental market is usually crucial to such sorting. The existing housing legislation regarding rent, occupancy, and relocation policies must be revised. Without major changes in the statutes defining these policies, privatization of any substantial quantity of communal housing will be extremely difficult, if not impossible. Rents in communal housing need to be increased for at least two reasons: to provide revenues adequate for operating and capital funds and to facilitate transfer to private ownership and development of a private rental market. Rents currently cover only a limited portion of operating costs and, of course, provide no reserve for capital repair. Income and Affordability Very little information is available or income on wealth. However, incomes are low -- the median household income is estimated to be about $300 per month -- and efforts under the economic reform plan, by design, will constrain the growth of real wages in the short run. At current income levels extremely few households could afford a new unit, even a modest one, even if it were financed under a Dual Index Mortgage (DIM). Some households could afford modest rehabilitation of a small unit if costs were financed under a DIM (dual index mortgage); however, most households could not afford to rehab a larger unit and/or to undertake more extensive improvements.

A subsidy program for low income households, whether housing vouchers or part of a general income transfer, is integral to the success of privatization. Clarification is required as to whether the its design and funding are local or national responsibilities. Regional differences in income are likely to cause temporary bursts and shortfalls in demand as privatization and liquidation of numerous stateowned enterprises takes place.

Other Issues in Privatization Although rich and poor alike live in communal housing, the communal housing population appears to be somewhat skewed toward the elderly and pensioners; this is likely to increase as some of the stock is, in fact, sold. It is not clear what the course of real income will be for these groups, nor whether the groups will wish to make dramatic changes in their housing. Another factor is the "psychology" of housing preferences, which appears to be complicated in Poland, and which may dictate against early sale. The Polish people are said to have strong preferences for housing, but have also been constiained by the present system from exercising such preferences. Furthermore, they have become accustomed to remaining in the same unit for long periods; sometimes families have stayed for generations. In return, cheap housing has been an expected right. In this complex environment, it may be that the jolt brought about by much higher rents will take some time to register. A sizeable group of households, even if they were simply "given" their units, could not afford to pay for current levels of maintenance and utilities. Furthermore, since current expenditures greatly understate what should be spent to cover ongoing repairs, and do not begin to correct for the maintenance backlog, "spending" by tenants at current levels would perpetuate the overly rapid decline of the housing stock. Finally, lack of constrnction and mortgage financing will severely inhibit expansion of supply and purchase of communal units. New Functions of the Municipalities in the Housing Market No matter what its ultimate plans for privatizing, the gmina must, in the first instance, manage a large stock of communal housing. In some localities, rental of commercial space in the communal stock could be an important source of revenue, but also adds to the management task. The evolution of communal housing is, in part, dependent on the development of the 4

housing market, particularly the private rental market. In some localities, the private sector may develop more slowly than in others. Thus, under the emerging framework of decentralization and privatization, gminas must be prepared to assume the following roles: the gmina as MANAGER, directly or indirectly of communal housing. In the short-run, all of the stock is involved; even in the long-run, some segments are likely to remain as public housing for a considerable time. * * the gmina as PRIVATIZOR/DIVESTOR of communal housing. the gmina as INVESTORIDEVELOPER of housing; at a minimum this includes relocation housing, and possibly new construction and rehabilitation in the near term. the gmina as PLANNER of the overall functions of municipal management, including zoning, infrastructure, land assembly, environmental regulation, and so forth, in addition to the administrative functions deemed necessary to the orderly development of the housing market. the gmina as FACILITATOR of assistance to other organizations or institutions, such as local banks, local private developers, management and service companies, and/or local building materials suppliers. These functions are not the responsibility of the gmina, but a successful assault on these types of constraints will materially affect the gmina's success as landlord and broker. The Privatization of Communal Housing The sale of public housing has not been an unqualified success in any country in the world, even where a functioning housing market, adequate credit markets, and housing subsidy programs are already in place. Thus, the gmina faces not only traditional issues of housing management, but also transition policies and evolution to a new steady state of public/private partnership. The basic themes of our discussion of privatization are as follows: Privatization of all or most of the communal housing stock, with subsidies provided as necessary through housing vouchers, is a reasonable long-run goal. The two gninas we visited differed in their perception of whether the gmina will eventually retain any units, but agreed that most of the communal stock could not be privatized in the near future. The conclusion that the gminas will retain a considerable portion of the existing communal housing stock in the near future is supported by our observations that the housing market is severely disorganized, with

considerable uncertainty as to the equilibrium price level, the price gradient, and implicit subsidies required to support a given standard of housing. At the same time, even if the gmina retains a considerable portion of the communal stock in the near term, substantial privatization can be enormously useful not only in reducing the gmina's current operating burden but also in stabilizing the housing market as a whole. A gradualist strategy would involve the gmina acting as a redevelopment authority, focusing private development in designated areas and undertaking gradual privatization of the communal stock. Privatization can be aided by gmina-financed sales using the DM. Such a financing mechanism not only meets the needs of purchasers but also seems well suited to the gmina's own financial needs. Simply giving the communal housing away is an option that has been raised. This would result in a substantial loss of assets by local government. In addition, however, we conclude that a substantial number of tenants cannot currently afford maintenance or rehabilitation. Thus, the risks involved in rapid privatization are basically two-fold. First, there are financial risks to the gmina in providing adequate support for low income housing. Second are the largely unknown dynamics involved in reaching a market equilibrium. A rapid conversion demonstration to test dynamic problems could conceivably be undertaken in a few smaller locations if the central government were to agree to assist in funding an adequate housing voucher program in those places. Strategies for the Short- and Medium-Term for Gmina As Investor/Developer/Planner Establish the value of the current communal stock on the basis of new construction costs less costs of rehabilitation necessary to bring units up to chosen standards of habitability (cost less depreciation). * Complete or initiate those new construction projects already on the drawing board, to assure the "sunk cost" of these investments is not lost to inflation. Use joint venture relations with other housing sponsors (for example, cooperatives) to create new units on infill sites to reduce infrastructure and land development costs; In conjunction with a "rehabilitate-and-sell" strategy, develop new units on top of existing buildings to control infrastructure, foundation and relocation costs, while increasing supply.

Utilize modem construction management systems and available building technologies to reduce construction costs and shrink the time required for project completion to one year or '.ess.

Overview of Recommendations for Technical Assistance Our recommendations for technical assistance rest on important assumptions about the structure and nature of the effort: The primary goals of the assistance are technology transfer and individual and institutional skill building. Methodologies utilized in the United States, whether the), be for public housing management or building and development, cannot be imported wholesale; the techniques must be adapted, or in some cases tailor-made, for Poland. The same cautionary note holds for assumptions about goals: assistance must be sensitive to vastly different histories with regard to concepts such as public responsibility and private ownership rights, tenure security, income distribution, and equity of allocation. The long-term advisors must be skilled, experienced professionals, not generalists. They would be drawn from the fields of housing and urban planning, housing economics, and project development and finance. Solutions to problems will become increasingly local and specific, and, as indicated above, framed in the evolution of the private market in Poland. Local solutions will differ for many reasons, including the skills of gmina management, gmina goals, the rapidity with which a private market evolves, and the development of local banks, developers, cooperatives and builders. Assistance cannot be menu-driven but, rather, must be planned locality by '!ocality. There will undoubtedly be major common elements, however, regarding information gathering and MIS, planning processes, public housing management techniques and developer strategies. The central advisor(s) must coordinate these efforts. The gminas have numerous skilled professionals available to them and thus, the capacity to absorb technical assistance is high. For these reasons, one could argue that only short-term assistance is needed, in specific technical areas. In contrast, however, we argue that long-term, local assistance would be far more beneficial. Ginina officials and the emerging private sector have never had the opportunity to engage in long-term planning based on market precepts. Creating these skills will take some time. Consistency and follow-up, and simply the benefits of "staff extension", will be important.

The organizational framework for technical assistance includes at least one centrally-based long-term advisor, a number of locally-based long-term advisors, and a cadre of experts offering

short-term technical assistance for the duration of the project. The required number of local advisors is not clear, but generalizing from Slupsk, Czestachowa, and our recent training missions in other cities, it is felt that most cities and municipalities could benefit from long-term assistance. A long-term advisor may be able to assist more that one municipality at a time, especially among the smaller localities. Thus, the total number of advisors need not exceed reasonable bounds. Long-term guidance at the central level is also felt to be important. The functions of a central advisor(s) would include: assuring consistency and coordination across treatment of common issues, maintaining communications and policy support with appropriate ministries of the central government, management of multi-locality training events, preparation of materials that can be used across localities, assistance in defining and providing short-term technical assistance from a common pool of experts, ideiitification and arrangement of training courses, and maintaining communications among team members and gmina officials. The reason for suggesting two rather than one central advisor is that there are essentially two functions involved: (1) management, scheduling, and coordination, aind (2) analysis, data collection, and policy development. Topics in Technical Assistance and Training Given the constraints facing development of a housing market in Poland and the fundamental changes in the framework in which many new tasks must be undertaken by the gmina, we recommend considerable long- and short-term assistance and training. Relevant topics include: 1) Information Gathering for Communal Housing, such as 0 A communal housing inventory; * 0 0 A tenant inventory, including careful estimates of household income and characteristics; Deferred maintenance, rehabilitation/demolition estimates; and Market information on land values, and on sales of private, cooperative, and communal housing to date.

2)

Management of Communal Housing, such as * Reorganization/restructuring/privatization of some or all of the management functions of the regional housing authority (GPM)0 Public housing asset management including, maintenance, rehabilitation, and demolition; 0 Occupancy policies; * Rent determ -nation/income Certification/income recertification; and Fiscal functions and cost control procedures. Systems Design, MIS, and Planning Methodologies for Managing Communal Housing, including Systems design, MIS, and new methods of planning and management (MIS was the first priority in both Slupsk and Czestachowa); Computerization of accounting and management functions; Special software designed to assist in the analysis of pricing, rehabilitation, and sale decisions. *

3)

* *

4)

Privatization of the Housing Stock, including 0 Valuation procedures; Rehabilitation decisions: sale with or without rehabilitation; 0 Relocation procedures; and 0 Facilitation of financing, including gmina-financed sales. Design/Management of Housing Subsidy Procedures, including * Local versus central responsibility for design and funding of the housing subsidy programs in order for the gminas to solve the puzzle of rent levels, sales price, and affordability. Construction and M'citgage Financing, including Technical assistance and training for local banks; and Consideration of gmina-financed sales. 0

5)

6)

7)

Private Sector Developers and the Construction and Building Materials Industry Channelling technical assistance and training as required;' building technology and cost control will have an immediate impact on local affordability and the effectiveness of rehabilitation and relocation by the gmina.

There are a number of topics important to the evolution of the housing market which have not been listed above. These include planning for municipal functions overall, the institutional structure of local government, energy management and development, urban environmental safeguards, and so forth. We have assumed that the discussion of technical assistance for these topics is covered in other studies funded by USAID.

10

2.0

THE ECONOMIC AND LEGAL CONTEXT FOR MANAGING PUBLIC HOUSING IN POLAND

This chapter discusses the context within which the gminas manage the stock of communal housing. We start in Section 2.1 with a brief overview of Poland's housing stock. Four types of ownership and management cover almost all Polish housing: communal, cooperative, private and enterprise. Communal housing, for which the gminas are now responsible represents a substantial, but not necessarily majority, share of urban housing. Section 2.2 discusses the authority granted to gminas under ciinent and proposed legislation concerning communal housing. Options under the current law are quite limited. In particular, it is currently difficult to privatize eqtire communal buildings, even though individual units may be sold. The housing bill currently before Parliament will dramatically expand the available options. It will (1) allow gminas to divest themselves of responsibility for buildings if more than half the tenants buy their units, (2) allow landlords (including gminas) more flexibility in setting rents, and (3) allow eviction of tenants for non-payment of rent without provision of comparable units. Section 2.3 discusses the current housing market. It is difficult for someone accustomed to functioning markets to comprehend just how disorganized, in an economic sense, the Polish housing market is and how little information is currently available. To give one striking example, while the market shows many signs of a housing shortage, it is not at all clear that there is an (unsubsidized) shortage in the economic sense that the equilibrium market price is substantially above construction costs. This lack of information on the current market is exacerbated by uncertainty as to general price inflation and future wages and employment. Overview of the Housing Stock Table 2.1 indicates the urban and rural distribution of the four types of housing ownership in Poland. Privately owned units account for about 44 percent of all units; about twothirds of the privately owned units are in rural areas, and privately owned units account for 80 percent of all units in rural areas, as compared with about 24 percent of the units in urban areas. Most of these privately owned units are owner occupied. 2.1

11

TABLE 2.1 Occupied Housing Stock by Type of Ownership (1988 Census)

In Thousands Private Cooperative

Erterprises

Commnal

Total

Sector

Urban

1,670.1

2,586.5

830.2

1,953.0

7,039.8

5,369.7

Rural Total

3,007.5
4.677.6

19.4
2,605.9

525.3
1,355.5

124.7
2,077.7

3,676.9
10,716.8

669.4
6,039.1

Some privately owned units are, however, operated as part of the communal housing stock, even though they are recognized as privately owned. The owners of these non-owner occupied units have, until now, had no rights in connection with the units (not even a special preference in obtaining one of them as a residence), nor any claim on the income from the unit, nor any responsibility for maintenance. Apparently, the owners can now regain control of their units. In addition, the communally owned units that were confiscated after World War H are also subject to claims by the former owners. Officials in Czestachowa believe that 20 percent of the communally owned stock may be subject to such claims. Communal housing accounts for 19 percent of all units. Almost all communal housing (94 percent) is in urban areas, where it accounts for about 28 percent of the residential stock. About half of the communal housing units are pre-war units that were confiscated at the end of World War II. Another 40 percent were built between 1945 and 1970 (about 20 percent during 1945 to 1960 and 20 percent during 1961 to 1970). Construction of communal housing essentially stopped during the 1970's, when new construction was taken over by the cooperatives. However, about 14,000 new communal units (almost 7 percent of the communal stock) have been built in the last three years (1988 to 1990). Communal housing was owned and operated by the central government until 1990, when responsibility for management and ownership were transferred to the gminas. Cooperative housing accounts for 24 percent of all residential units. Almost all cooperative units (99 percent) are in urban areas, where they have the largest share of any of the four types (about 37 percent). Cooperatives are building and management societies, usually involving many buildings and thousands of units. Historically, the construction and operation 12

of cooperative units were heavily subsidized. In general, however, residents of cooperative units paid a larger portion of operating costs than residents of communal units, partly because of higher resident payments and partly because cooperative units are generally newer and have lower maintenance costs. The final type of housing -- other social sector housing -- is mostly housing owned and operated by state-owned enterprises, in order to provide housing for employees. This housing accounts for less than 13 percent of all units (12 percent in urban areas and 14 percent in rural areas). Sales of State-Owned Housing How many apartments have been sold?' Data on sales is fragmented and often inconsistent. The Ministry of Construction claims that about 60,000 apartments have been sold so far (the majority of them in communal stock), which amounts to 18% of total state-owned stock (communal and enterprise). At the same time, the approximate figure that can be derived from the 1989 household budget survey, where the state-owned category is not identified separately, would be below 10%. The more precise, but older source of data available is the 1986 housing survey, which explicitly identifies households in apartments bought from the state. The survey indicates that, until the middle of 1986, tenants who bought communal apartments constituted about three percent of all households residing in communal buildings; considering that some households share a dwelling, this may translate into somewhat smaller percentage of units sold. Sales have now come to a virtual standstill; it is not entirely clear why. The best units have probably been purchased and households with available savings may have used them. Large multi-family buildings will be difficult to sell. Furthermore, savings have been eroded by inflation and economic uncertainty is pervasive. The Current and Proposed Housing Law Current Law. Under current law, there is no rental market (for Polish Nationals). Residential rents, as well as utility charges, are still set by the central government, although the 2.2

1These data were preparedby Hanna Matrisfor the World Bank. Unpublished mimeo, 1991.

13

Landlords (including the gmina) cannot evict residential tenants for any reason unless they provide the tenant with housing comparable to that they already occupy. Tenants can be moved to allow major rehabilitation, but then must be offered the opportunity to return to their original unit. It is possible for people to buy their communal unit. Purchase of a communal unit allows the owner to live elsewhere without losing the unit and to bequeath the unit. It does not affect the charges paid by the resident to the gmina (except that it frees buyers who live in units with more than the allowed number of square meters per person from the penalty rents now imposed on them for this excess space.) Nor does it affect the gmina's responsibility for maintenance of the building. Sale of the building and land is a separate transaction and can currently be undertaken only if all of the tenants agree to form a cooperative to buy the building. This effectively rules out privatization of most communal buildings, even though some communal units have been sold. Some buildings operated and maintained as part of the communal housing stock are in fact privately owned. Given the fact that rents are set by the central government and the impossibility of eviction for non-payment of arrears, the gmina cannot persuade these owners to assume responsibility for their property. Gminas also have considerable flexibility in organizing and funding the maintenance and operation of communal units. In both the towns we visited, the gmina has taken over supervision of the local housing authority that previously operated communal housing. As we understand it, as of January, 1992, the gmina will have to decide whether to: * * * retain the housing authority as a state-owned enterprise make it a company owned by the local government make it a budget enterprise within the local government

gminas are allowed to set rents for commercial space in communal buildings.

and, within any of these options, 0 sell part or all of the service provision to private investors

Finally, gminas are free, within the limits of their resources, to construct new units and either sell these or use them to add to the communal housing stock or replace communal units remo-ved through demolition or sale

14

The, New Housing Bill. The housing bil! now before Parliament considerably expands the gminas' options with respect to communal housing. There are three key provisions o First, landlords (including gminas) would have the right to set rents on a unit by unit basis. The draft resticts total annual rents during the first two years after enactment to a maximum of 3 percent of the cost of new construction. Whether this ceiling would be applied on a unit by unit basis or to a gmina's total receipts from communal rents is unclear. * Second, the bill allows landlords (including gminas) to obtain a court order for eviction of tenants due to non-payment of rents, persistent troublemaking, or vandalism. Landlords are not required to provide alternative housing. Third, the bill provides that when more than 50 percent of the residents of a building buy their units, title to the building will automatically transfer to the owners of the units. The gmina will then be a part owner, reflecting its ownership of units that have not been bought. The owners are then responsible for the operation of the building. As will be discussed in Chapters 6.0 and 7.0, provisions such as these are necessary to the evolution of the rental market and the future success of privatization. Housing Assistance. A companion measure of great importance is a policy announced by the Ministry of Labor and Social Policy in April, providing for assistance to low-income renters. This program will apparently pay for gross rent (including heat and gas) in excess of 10 percent income for single persons or 15 percent of income for families. Families are eligible if per person income is less than the lowest m.onthly pension (580,000 Z per month; $61); single individuals are eligible if their monthly income is less than 1.5 times this (870,000 Z/month; $92). We were told that about 10 percent of households were likely to be eligible. This needs substantiation, and, more importantly, local estimation. We were also told in Czestachowa that this program will be administered and paid for by the gmina. However, the exact responsibility for designing, administering, and funding this program still needs clarification. The Housing Market As has been noted, the Polish housing market is, in an economic sense, very disorganized. We discuss this in terms of three issues: the potential subsidy commitment implicit in new construction of any sort, the absence of location rents and neighborhoods to 2.3

15

guide development decisions, and the problems, posed by macro-economic uncertainty for housing finance. Subsidies and the Housing Shortage. There may not be, on a non-subsidized basis, any housing "shortage" in Poland. This may seem counter intuitive. It can be demonstrated that there are not enough units to meet, the current, admittedly modest, Polish standards. Further, we can observe the usual market signs of a severe shortage -- a total absence of vacant units, endless waiting lists, multiple generations sharing the same unit, and at least anecdotal evidence of sales prices well in excess of construction costs. On the other hand, both the staff of the Ministry of Housing and an academic housing expert asserted to us that Poland could not afford its current housing standards. Further, as discussed in Section 5, there are a number of r'eople who could not afford even the current maintenance costs associated with their units, let alone purchase them. We know that without any government subsidies, the current stock is at least in a non-equilibrium distribution, with possibly substantial numbers of people unable to afford the housing they have, while others are willing to pay far more than the cost of new units. What we do not know is whether the unsubsidized equilibrium price would call for expansion or contraction of the existing stock in addition to its redistribution. Of course, the unsubsidized equilibrium may not be relevant. The Polish government may, as a matter of policy, decide to subsidize housing, either in general or to assure a basic minimum standard of housing. Such a decision does not require publicly owned housing. In principle, for example, publicly owned housing could be sold and consumption subsidized through housing vouchers that low income households could use to help pay for housing in the private market. However, if the equilibrium price of housing, or more exactly, the price-quality gradient, is inknown, then it is difficult to determine the budgetary requirements of such a program and the level of housing that Poland is willing to subsidize. This is not only a problem of not knowing the short run path of housing prices. We cannot determine equilibrium prices either. We could in principle project construction costs and real interest rates to estimate a longrun equilibrium supply, but still would have no information on land costs. Location Rents. During our discussions of the housing market in Poland, estimates of the cost of housing always revolved around the cost of construction. Location was mentioned only in connection with cases where construction would involve costs for additional infrastructure (new roads, sewers, power connections, and the like). In contrast, in the United 16

States we observe enormous variations in housing prices among cities and among neighborhoods within the same urban area. Intra-urban variations in particular reflect both locational amenities such as distance from jobs and services and the externalities associated with the sorts of people and housing located in a specific place. Absent a market in land, there is no way to determine locational premiums in Poland. In addition, it appears that the absence of a housing market may have undermined the organization of neighborhoods. In particular, as described to us, assignment to both communal and cooperative units was often (but not always) fairly random. This does not mean that there are no neighborhoods in Poland. We were told in Czestachowa, for example, that there are differences among neighborhoods. Older areas near the urban center have received little rehabilitation, so that they tend to be more often occupied by poorer households. However, there have been substantial barriers to economic segregation and the current locational distribution of residents may be far from an equilibrium one. This situation creates considerable price uncertainty, which in turn complicates the privatization task. Macro-Economic Uncertainty and Housing Finance. Because housing is a substantial and long-lived capital asset, expansion of the housing stock typically relies on long-term financing in capital markets. Such markets are vulnerable to inflation. Fixed rate mortgages are extraordinarily vulnerable (from a lender's perspective). Variable rate mortgages reduce the risk associated with unanticipated inflation, but, like fixed rate mortgages, have the unfortunate feature of having a payment stream structured to match short-term rates, so that the erosion in the real value of the principal is paid off each year. The result is that real payments are very high at the beginning of the mortgage and decline substantially thereafter. This substantially reduces the mortgage debt that a family can undertake to pay. The response to this is an indexed mortgage, which inflates payments (and outstanding principal) to match inflation. This allows for constant real payments and a much higher level of affordability. The major drawback to such mortgages is the possibility that incomes can lag behind inflation so that real wages fall. This can be addressed by the ingenious device of the dual indexed mortgage, developed by the World Bank. Under a dual-indexed mortgage, the borrower's obligations accrue on the basis of the price index, but actual payments are based on a wage index with the difference made up by changes in the term of the mortgage. (See Chapter 6.0 and Appendix I for further discussion of the DIM.) While instruments can be devised to address the financing problems 17

created by rapid inflation and uncertain reail wages, both singleand dual-indexed mortgages are novel to Poland. Introduction will clearly require considerable assistance.

18

3.0

TE PUBLIC HOUSING INVENTORY

On the basis of recent reports together with inspections of sample dwellings in Slupsk and Czestachowa, it appears likely that a substantial portion of the communal housing stock is physically inadequate with respect to modem standards (either European or United States) of adequacy and condition. It is also overcrowded, and undermaintained. This chapter examines briefly several indicators of the physical condition of these units and their need for maintenance. It goes on to identify some approaches to measuring the need for, and cost of, new construction and rehabilitation. Apart from having to determine the ultimate disposition of this housing, it is clear the gminas must establish first a coherent set of investment priorities based on the current condition of the communal housing stock and on the needs of current occupants. 3.1 Overview of the Communal Housing Inventory Typically, definitions of housing adequacy include

measures of structural soundness, availability of basic facilities (particularly piped water, kitchens and baths inside the dwelling). and measures of crowding. Interviews with public officials in Poland reveal that among all housing units, as many as 300,000 dwellings (about 3 percent) should be demolished immediately for reasons of imminent structural failure or other hazards to health and safety.' In part, of this problem is due to the age of the stock. According to the 1988 census, nearly half (49.9 percent) of the communal housing stock was built before 1945. Another 39 percent was constructed between 1945 and 1970. (See Table 3.1). A large share of the communal housing built after the Second World War was built on the periphery of the cities, and after 1965 was increasingly constructed with an industrialized building technology based on factory pre-cast heavy concrete panels erected in place with cranes. Though this housing exhibits a relatively low level of construction quality and negligible architectural merit, it does tend to be physically sound. Clearly, then, the largest portion of dwellings with inadequate facilities and poor structural conditions tends to be located in the centers of cities and towns among the older buildings built before the war. Ironically, because of its more appealing architecture, it is this same housing which shows the greatest promise for rehabilitation and increased value.
'Interview with Mr. Krzekoto and Mr. Rogalinski, Department of Housing Policy, May 17, 1991.

19

TABLE 3.1 Distribution of Housing Units by Form of Ownership and Location

'liYear (in 000's) All Dwellings 10,716.7 Before 1945

Dwelling Constructed (in percent) 1945-1970 31 8 After 1970

30.5

- Communal
-

2,077.7 2,605.9
1,355.5

49.4 0.9
28.5

Cooperative

40 22.6
29.5

11 76.6
47.9
26.2

- Enterprise

Urban Dwellings

Private

7,039.8

4,677.6

27.8

38.9

29.6---'4-----

34.9

SCommunal - Cooperative Enterprise

- Private
Source:

1,953.0 2,58C.5
830.2
1,670.1l48.1l2

49.4 of tshi
2.

40.3
954.
.

1.3

0.9

24.3

1988 Census

Availability of Basic Facilities A substantial number of units in the Communal housing stock (perhaps as many as 1/3 of all units) lack private bathrooms inside the dwelling. Only 47 percent of dwellings in multifamly buildings feature separate bathrooms and central heating, compared to about 93 percent in the cooperative stock.' Most of these are served by a shared WC in common

hallways. Only 41 percent of the total units are served with complete plumbing facilities (water, sewer, and gas) inside the apartment.' A recent report from the Institute of Organization, Management and Economics of the Building Industry in Warsaw indicates that for all urban dwellings (including cooperatives, enterprise housing, private and communal housing) 7 percent

lHanna Matris, unpublished working paper, The World Bank, June 1990. IH. Kulesza, p. 20.

20

lack water supply, 17 percent lack toilet facilities, 21 percent have no bathroom, and 30 percent are not connected to a central heating system.' Comparable statistics for the communal housing stock alone were not available, although local authorities are beginning to compile statistics on the communal inventory in their jurisdictions. However, for most indicators of dwelling unit conditions, cort,.unal housing tends to be the least adequate relative to the three other forms of tenure. For this reason, the numbers above would appear to provide a lower-bound estimate of the overall condition of the communal housing stock nationwide. In the case of heating, for instance, it is estimated that only 43 percent of communal housing units are connected to a central heating facility; with the balance relying on coal-fired stoves in each of the main rooms of the dwelling.5 (See Table 3.2).

TABLE 3.2 Useful Space and Central Heating Among Units Administered by Local State Housing Authorities (GPM)

1988 Total Units in 000's (urban) Useful Space in 000's meters Average Useful Space (meters) Percentage with Central Heating Average Number of Rooms/Unit Source: Hanna Matris. 2,037.5 92,977.4 45.6 42.8 2.72

1989 2,042.5 93,515.2 45.8 43.3 2.73

The absence of central heating, in many cases, is due primarily to the lack of district hot water distribution lines in the streets of the older parts of towns where a large portion of the communal housing stock is located. (It should be noted that very few buildings of any kind contain their own separate heating facilities).
4Irena Herbst, Housing Finance International, August 1990. p. 42. -'Hanna Matris, Table 2: Housing Stock in Administration of Local State Authorities, December 31, 1989, also, H. Kulesza, interview May 13, 1991.

21

By contrast, most communal housing built after 1970 on the edge of the towns tends to have smaller room sizes than, their pre-war counterparts, but also to contain kitchens and bathrooms with hot and cold water, and to be heated with hot water radiators connected to central heating plants. While these units are more likely to meet current norms of adequacy, they are very wasteful of energy, having neither insulation nor a means of regulating heat usage within the unit. Overcrowding In Poland definitions of overcrowding, of course, differ greatly from those in the United States. The current standard of adequacy is about 10 square meters of usable space -- including kitchen and bath -- per individual (106 square feet). The average communal housing unit in the towns contains 45.8 square meters (484 square feet), and serves 2.53 people in 2.73 rooms (including kitchen). While design standards regarding useful space for families of different sizes for new housing have increased by 15 percent over the last 12 years, the proportion of. households who are technically defined as overcrowded has not diminished. Table 3-3 provides an estimate of average unit size for cooperative housing. 3.3 Average Size of Newly ConstructedTABLE (Cooperative) Apartments, by household size 1978
sq. meters sq. meters
per person 1 25.6 25.6 34.3

Persons

1987
sq. meters sq. meters
per person 34.3

2
3 4

33.8
46.4 57.7

16.9
15.5 14.4

36.2
50.2 61.8

18.1
16.7 15.4

5 6

66.5 74.4

13.3 12.4

72.5 85.7

14.5 14.3

Source: H. Kulesza, Systems for Meeting Housing Needs in Poland, Table 1I, p. 49; 1990.

22

For all dwelling units, roughly one out of every five households is overcrowded. It is estimated this number is considerably higher for those living in communal housing. The average number of fiats produced overall has fallen to about 285 units per 1,000 population, far lower than the neighboring countries of Hungary and Czechoslovakia, and far less than necessary to meet increasing demand. Among communal housing units there is a zero vacancy rate. The most obvious factors contributing to this housing shortage include: * an inefficient building delivery system supported by central government subsidies and relying on the vertically integrated kombinats (state-owned building companies) who have been unable to deliver a sufficient number of low cost units designed to serve the poorest families; continual shortages of building materials and capital necessary to meet the housing needs of a growing population; and huge discrepancies between rent payments and actual operating costs, which until 1990 were subsidized by the central government.

* *

The rate of new apartment constr'uction has slowed appreciably, as the costs of building materials, and to a lesser extent, labor have increas .d, and the supply of state funds for new construction has been shut off. See Table 3.4. By the first quanr.. r of 1991, housing starts in the state sector (communal, cooperative and enterprise) had shrunk to 10,000 from 20,000 units in the first quarter of 1990. As the number of units in the pipeline continues to shrink (10 percent last year), the waiting lists for new cooperative housing units grows longer, and in many places has reached 15-20 years. In the 10 year period from 1978 to 1988 public sector housing construction has declined 40 percent. One source indicated that in 1990 only 2,924 communal housing units had been completed'. For these reasons, the number of units containing two, and even three, families continues to grow.

Mr. Kre-ekoto and Mr. Rogalinski, Department of Housing Policy, Ministry of Planning and Construction, Interview, May 20, 1991.

23

TABLE 3.4 State Sponsored Housing Construction 1990 and First Quarter 1991

Completed Units State-Funded TOTAL UNITS 1990 total 1 quarter if quarter

121 quarter [V quarter

In Construction
Private Statefunded starts 72.8 20.0 15.4
18.7 18.7

total* 86.8 16.1 18.5

20.6 31.6

coops 67.2 12.8 14.9

If.8 22721.0

134.2 23.2 28.4

30.0 52.6

Total in Process End of Period 175.6 182.1 177.9

173.1 175.6

47.4 7.1 9.9

94

I quarter Jan-Apriiil,

23.7
32.1

18.0-5.--57-10.-167.
245 21.2 7.6 NA 6 .

State: cooperative, communal, enterprises Source: Hanna Matris, unpublished paper, The World Bank, 1991

to confirm the general picture outlined above with respect to conditions of the communal housing stock. Local officials assisted us in visiting units in good, mid-range, and poor cordition. Those units characterized as being in the best condition were the ones most recently constructed (1987-1989), and were located on the periphery of the city in five-story apartment blocks, generally as part of a large-scale, mid- to high-rise cooperative housing development. The buildings were constructed using the heavy pre-fabricated concrete slab system. The units visited in each town were very similar, and consisted of one bedroom (11.25 square meters), a small living room (13.5 square meters), a kitchen (6 square meters), Pnd a small bathroom (3.5 square meters). Both flats had double-glazed (but not thermopane) windows, and no insulation in the walls, floors or ceilings. The unit in Czestachowa totalled 48 square meters and was occupied by a widow, her two unemployed sons, and the new wife of one of the sons. 24

Inspection of Units in Slupsk and Czestachowa The team's visits to Slupsk and Czestachowa tend

The unit in Slupsk had about 50 square meters and was occupied by a single widow. She was happy to pay the additional rent "penalty" for "overconsuming" space. TABLE 3.5 Communal Housing in Supsk - General Characteristics
Average Size (sq. meters) 24 24 62 65 99
54

Category Buildings built after 1961 Buildings built 1950-1960 Buildings built before 1950 Houses built w/ brick wood before 1940 Temporary Housing Total Source: Discussions with officials in Slupsk.

Buildings 59 14 81 1,272 28
1,454

Units 2,880 620 650 7,817 107

12,074

In both towns, examples of the "mid-range" of housing conditions among the communal housing stock consisted of two- and three-story buildings constructed before World War H of brick (and/or hrick rubble surfaced with plaster or stucco) and located near the center of town. In a number of cases, ne v double pane windows had been installed for energy conservation, but there was no exterior wall or ceiling insulation. While most units were serviced with water and electricity, approximately 10 percent of the communal housing stock in Czestachowa lacked water or a toilet in the unit. Only half had at least one full, private bath; the other half shared a WC in the hallway. Interestingly, almost all the typical "mid-range" units in Slupsk were heated with coalfired room heaters. In Czestachowa, on the other hand, it was indicated that only 70 out of 670 communal buildings were heated by coal alone. Frequently, hot water heating was electric, although one unit in Slupsk had its own gas-fired hot water heating and domestic hot water system. Roof structures were usually wood with surface materials varying from corrugated metal, to tar paper, to asbestos shingles. Typically, these mid-range units were larger than their post-war counterparts. A twobedroom unit with a living room averages about 80 to 100 square meters and the occupants 25

were substantially lower. The typical 52 square mete,, flat would thus rent for about $7.30 (not including utilities), irrespective of operating costs, which might be four or more times that amount.7 The "worst" communal housing units in Supsk and Czestachowa were indeed dilapidated. In Sipsk, out of a total of 1,452 buildings now under their ownership, the gmina has identified nine properties comprising about 116 flats that needed to be torn down immediately due to their hazardous condition. In one case, an entire building built in 1908 was sinking due to inadequate foundations on filled land near the river. In another case, settling problems were confounded by ground water absorption into the first floor units, creating a serious moisture problem and health hazard for a family of seven that had been living in the unit for 12 years (in 45 square meters of space). In Czestachowa, similar conditions prevailed among the "worst" dwelling units. Though comprehensive statistics were not available, it was estimated that as many as 34 buildings (about 340 dwelling units) out of the total of 670 buildings (about 5 percent) need to be torn down. Although few in number, there are several families, who due to the severe shortage of housing, are forced to live in partially abandoned, rat-infested buildings, or in burned out apartments for which no money has been available to make repairs. Due to the lack of alternative housing, there are essentially no effective or enforceable sanctions for building code violations, either for public or private owners of property. Fines of 300,000 zlotys per month are either not levied or, if levied, are ignored. Under current law no evictions for building violations or nonpayment of rent are possible without replacement housing (which is not available). Maintenance of Communal Housing It was clear from our visits that there is considerable variation in the amount of information compiled and available to the gminas regarding the present condition of the communal housing stock. In Slupsk, for example, data describing the inventory of units was fairly comprehensive and included information about building age, type of construction, 3.2

the same -- 1,320 zlotys per square meter (1.3 cents per square foot) -- although the operating costs for the new units

would be less likely to be overcrowded. For these, as well as for the new units, the monthly rents were

'Conversions utilize Z9500 (Zlotys) = $1.00 unless noted otherwise.

26

condition, and number and composition of households. In Czestachowa, on the other hand, data describing characteristics of the housing stock were less complete. In neither town were statistics on historical maintenance costs available. Nor were there accurate data available describing levels of need for maintenance and repairs across different types of housing. (As noted in Chapter 7.0, in both towns the absence of a computerized database prevents a coherent and flexible analysis of housing needs and resources.) The visits to housing units in Shupsk and Czestachowa revealed a serious lack of maintenance in the common areas of the older buildings, both inside and outside the dwellings. While most households maintained their units in decent condition, deferred maintenance in common areas was clearly a major problem. In the older buildings, absence of lighting in common areas, peeling paint, fallen plaster, broken windows, loose or missing stair treads. exposed wiring, and the like were common symptoms of the general state of disrepair and lack of funds to provide regular maintenance services to the communal housing stock. Until recently, it was possible for residents of communal housing in Czestachowa to secure materials from GPM (the central housing authority) and to perform maintenance themselves. However, these materials are no longer available. Under the prior system the GPM in Slupsk had a Z20 billion zloty maintenance budget for 12,078 units (about $2,000,000), which is about Z30,000 per square meter per year (about $0.30 per square foot). Today, the gmina is estimating it will require twice that figure to maintain the housing in good condition -- about Z70,000 per square meter. This means that rents fall short by a factor of four or five in addressing the maintenance needs of communal housing. Furthermore, these figures in no way address the tremendous "overhang" of deferred maintenance that would need to be eliminated to bring units up to a more habitable condition according to modern standards. In Shipsk municipal officials estimated that Z200 billion ($20 million US) would be required for eliminating deferred maintenance and bringing units up to standard. Assuming this estimate applied only to the 9,200 apartment built before 1961, this implies a need of about $2,175 per apartment, or $3.78 per square foot. In Czestachowa, the full scope of the problem has not been estimated by the municipal government. However, based on cursory inspections, it would not seem unreasonable to posit a similar level of deferred maintenance problems. Clearly, in most towns the lack of regular maintenance services severely 27

undermines the value of communal housing units while sharply increasing the costs of repair in the future. If changes in rent continue to lag behind inflation, very soon not even emergency maintenance services can be afforded by the gminas. Cost of New Construction and Rehabilitation. Due in part to rapid inflation and extremely high interest rates, very little housing is currently under construction in Poland. Building costs for traditional apartment building construction have been quoted in the Z3 million per square meter range (about $28.40 per square foot), although prices (per square meter) tend to vary geographically from western Poland (Z2.5 million) to central Poland (Z3.0 million) to eastern Poland (Z3.5 million). Few people will hazard a guess as to what kinds of savings might accrue to the introduction of more modem technologies and more aggressive construction management practices. One private contractor in Czestachowa indicated that, using his own crews and subcontractors, he is bidding jobs at about the same amount on a per-square-meter basis (Z2.5 million) as traditional kombinat builders. However, he believes he can cuL construction time for a 150 unit apartment building from 24 months to 18 months. With inflation running at, say, 50 percent per year, real costs would thereby be reduced by about 13 percent (not including the savings of interest payments on a construction loan). In another case in Szczecin, a local architect/builder developed zero-lotline, one- and two-story, single family housing that can be constructed in the range of Z1.8-2.0 million per square meter (about $18 per square foot). The savings resulting from introducing such a system would be substantial, particularly if the units could be built in half the time required for heavy panel systems. fn Slupsk, public sector housing construction is at a standstill until adequate fur.d6 can be found to complete three buildings already started, and to begin two others now planned (for a total of 137 units). One building will be traditional block and plaster, and is projected to cost about Z2.4 million per square meter. Two others already underway were originally estimated at Z2.1 million per square meter. Now, cost to complete may be as high as Z3 million per meter, not including interest during the construction period. Until these projects are complete, the gmina has little flexibility to decide how to allocate scarce housing resources, or how to meet relocation needs if rehabilitation projects are to be undertaken. 3.3

28

In Czestachowa the municipal government is taking an aggressive posture in proposing to develop 16 units of new housing in town house format, and selling that at the highest possible price (perhaps Z5 or 6 million per square meter), and to reinvest that money into 75 lower cost units which would be available at a lower rent. Such leverage will only work if building costs are kept under control, and if the gminas are permitted to set their own rents at "market" levels. The main point is that traditional building systems used by the kombinats in Poland, based on heavy concrete panels, are too slow, too wet (not amenable to cold weather construction), too heavy and therefore too expensive to use in today's high interest rate environment. If a typical 100 unit four-story project takes two years to build at Z2.5 million per square meter, the interest cost on a 50 percent construction loan will add about 38 percent, bringing the total cost to about Z3.44 million per square meter. This means that a 50 square meter apartment would cost about Z172 million. Even with a 30 percent down payment, monthly installments under a dual index mortgage such as that proposed by The World Bank would require a monthly household income of Z3.5 million -- well above the present median income in Poland (see Chapter 5.0). A second major problem is the extremely high cost of new infrastructure (district heating, water, electricity, gas, telephone). For new projects, it has been estimated that infrastructure alone might add Z200 to Z400 thousand per square meter to the cost of construction. Without a separate source of funds to cover these costs, few if any municipalities can afford to build out on the periphery of the community. Thus, one way for the gmina to undertake affordable new construction would involve building "site intensification" or infill projects, where land and infrastructure are already available, and where the project can be constructed in one year or less. Rehabilitation There is clearly a need for the gminas to invest in the repair and preservation of the older housing now under their control. Rehabilitation can offset the negative consequences of deferred maintenance, and reduce maintenance and operating expenses. Renabilitation priorities would normally be aimed at upgrading the condition of the worst units (e.g. those seriously threatening the health, safety or welfare of the occupants). Particularly among older buildings with architectural merit in the centers of towns, rehabilitation can restore value and attract 29

private investment, and thus enhance the tax base of the community. Sale of some of the rehabilitated units could add much needed capital into local government treasuries. In Siupsk, there is a definite commitment to restore much of the older housing in the center of town and to make these areas more attractive. Maintaining the medieval character and charm of this older stock reflects a central priority of the gmina. In Czestachowa there are several projects underway to totally renovate a number of buildings at an estimated cost of ZI million per square meter -- less than half the cost of new construction. This entails structural renovation, introduction of a complete bath and kitchen in each apartment, double glazed windows, and new roof, but retaining the coal-fired room heaters. It was explained that there are no hot water lines to this part of town, so central heating is not possible. In both towns, programs to rehabilitate the most attractive buildings are undermined by the lack of relocation housing. There are few places to move the families whose apartments would be renovated. In Czestachowa, the city does own a 32-unit temporary housing facility. While this building is now fully occupied, it provides the city with a partial answer to the. relocation problem. Clearly, rehabilitation programs cannot go forward until such relocation resources are formally identified. Overall, there is a dire need for new housing which is projected to cost about Z2.5-3.0 million per square meter (excluding interest costs during construction), or Z135-165 million per 54 square meter apartment. Rehabilitation may cost one third to one half of that, but does not created new units, unless through conversion. Taking care of the backlog of deferred maintenance may require as much as Z21 million per E.partment, while ongoing maintenance/management itself costs roughly Z70,000 per apartment per month, not including utilities. As elsewhere, there are no easy solutions to the problems of providing decent housing at a price people (and governments) can afford. Valuing the Comnxnunai Housing Inventory The new housing law requires that in disposing

of residential buildings through sale to third parties, the gminas must take into account the building's present value, which is defined as its replacement cost less its depreciation. "Replacement value" is not too difficult to estimate, but "depreciation" is, since there are no hard and fast rules about useful life. One way to approach this problem is simply to define depreciation as that amount of money that is required 30

to bring a building to a common, well-defined standard of habitability. For example. an older building in the center of Shipsk might have, say, 10 apartments with 600 square meters of useful space. At today's construction cost of Z2.8 million per square meter, the building might be worth Zl,680 million new. Assume for a moment, however, that the building lacks bathrooms in every apartment, needs rewiring and upgraded electrical facilities, has no connection to the central heating plant, needs a new roof and new double pane windows. For illustration, the total cost of these repairs might be Z720 million (Z1.2 million per square meter). This would leave a current residual value of the building before rehabilitation of Z960 million (Z1,68' million less Z720 million), or Z1.6 million zlotys per square meter. While the "comparable sales" and "discounted cash flow" methods of valuation may eventually be useful in Poland, when there is a basis of transaction histories on which to establish a market value, the question of valuing the stock is perhaps most ieadily addressed by using the replacement cost approach suggested above. The hard part is agreeing on what constitutes a "well defined standard of habitability". A useful place to begin, however, might be the current standards for cooperative housing regarding space and basic facilities. 3.4 Addressing Supply Constraints: Managing New Construction and Rehabilitation Based upon the team's visit to Slupsk and Czestachowa, and from conversations with officials in Warsaw, it was apparent that there are few private or quasi-private entities prepared to organize and implement housing development programs throughout Poland. At the present time, there are no housing developers, except for the local cooperatives, who already have housing projects under way. Until a private sector development capacity is created, it is likely that municipal governments will be called upon to sponsor housing development programs in one form or anoth,r. It is clearly desirable that gminas privatize as much of the communal housing stock as possible. Over the near term, however, the initiative for creating new or renovated housing will rest with the municipal governments. This scenario requires that local agencies with the resources of land and infrastructure be able to act as (co)investors of housing projects, and perhaps even as full developers. In a situation of zero vacancies, creating new units provides the only way for the private housing market to adjust to equilibrium through filtering and migration, and for a rehabilitation strategy to get off the ground. Given the costs outlined above, municipalities must also be able to speed up the development process; this could be assisted by: 31

* * "

expediting permits and approvals, taking on or designing smaller projects on infill sites,

phasing projects to be completed within one year, " managing and controlling the design/development/construction

process as efficiently as possible, and using fast-tracked, modem construction systems without relying on foreign technology.

With respect to implementing rehabilitations strategies, one intermediate solution between new construction and rehabilitation would involve adding one or two stories on top of existing two- or three-story buildings to create new units. The advantages of this strategy are clear: * No new connections to, or installation of, new infrastructure are required (unless those utilities in the street are inadequate to start with);

" No new foundations would be required (preliminary architectural studies show most foundations and bearing walls are structurally sound enough to carry two more floors); " There would be substantial cost savings in the creation of these attic units, since they could be constructed for between Zl and ZI.5 million per quare meter (roughly $12 to $17 per square foot); There would be substantial time savings if the exteriors (roof, windows, walls) could be in place before winter. Work could be completed in six months or less; and Renovation of the first through third floors could be completed after the attic units were created, thereby requiring no outside relocation. The clear advantage of this approach lies in the fact that the gminas would be taking full advantage of the infrastructure already in place, rather than having to expend major funds to install new infrastructure to "greenfield" projects (the traditional approach during the last 30 years). This assumes, of course, that there is already adequate capacity in the infrastructure already in place. Construction costs per square meter might be half that of new construction.

32

Summary There is little hope that gminas throughout Poland can meet all the diverse housing needs of the current residents of communal housing over the near term. Clearly, they are confronted with a broad range of deficiencies, overcrowding, and deferred maintenance for which the projected costs to correct are overwhelming and certainly not within their current budgets. In the absence of resources sufficient to address each of these problems directly, several strategies would appear to be worth pursuing: * Completion or initiation of those new construction projects already on the drawing board, to assure that the "sunk cost" of these investments is not lost to inflation, but is redirected to creating a little slack in the very tight supply picture. Aquisition of one or more small computers to build accurate databases describing the present physical and financial condition of the communal housing inventory, and the characteristics and needs of its occupants.

"

" Identification of potential relocation housing resources (particularly under utilized nonresidential spaces that could be converted to temporary residential use), so that when rehabilitation projects or unit sales create the need to find alternative housing, that housing will be there. " Provision of training in modem construction organization and management systems to speed up the construction process and control costs. Supli,,rt for small construction enterprises by making bidding opportunities available and offering low rental rates on under utilized construction equipment that now belongs to the regional housing authority of the voivodship (GPM). Determination of intermediate solutions for the central heating problem, including central gas or coal furnaces in rehabilitated buildings, in-unit electric or gas hot water heaters, etc. which will permit more efficient heating and more appropriate user charges.

"

" Planning for infill, site intensification, roof-top and general rehabilitation strategies in the center of town to revitalize these neighborhoods, create opportunities to privatize the stock, and establish a private market. Recommended training and technical assistance programs designed to support these efforts are discussed in Chapter Seven.

33

CURRENT MANAGEMENT OF COMMUNAL HOUSING In both Slupsk and Czestachowa, the gmina has taken over supervision of the local housing authority (GPM) responsible for the operation of the gmina's communal housing. This local authority still operates as an independent organization with its own board of directors and staff. By the end of the year, the gmina must decide whether to: " retain the housing authority as a state-owned enterprise, * transform it into an independent private company owned by the gmina, or * make it a budget enterprise within the gmina. In addition, the gmina may sell all or part of the operations to private service providers. In the meantime, the gmina appears to have some, but far from complete, control over its operations. (For example, officials in Slupsk pointed out that they do not yet have control over the wages and salaries paid by the local housing authority.) The two gminas we visited have responded quite reasonably, though differently, to the incentives and options provided by cirrent law. In Slupsk, the focus has been on controlling operating costs and increasing commercial revenues to eliminate operating deficits. Indeed, as discussed below, the potential seems high for offsetting losses on the residential units with surpluses from rental of space to commercial ventures. It is not clear, however, whether the situation in Slupsk is unique, since over 9 percent of its communal space is devoted tc commercial operations. Czestachowa has focused less on operations, perhaps because it has been interested in the profits available from development. Housing efforts in Czestachowa now underway include construction of three new buildings. One of the buildings, with 75 units, is intended as low income housing and will be added to the communal stock. The other two buildings have eight units each and are being built to a higher standard. The gmina intends to sell these to private buyers and use the profits to help pay for the low income units.' More important, although Czestachowa attracts some 5 million visitors a year because of the Shrine of the Black Madonna,
'7The Gmina expects to construct the 16 higher quality units for roughly Z260 million each. Gmina officials report current market pricesfor such units ofZ650 million. if the 16 units were in fact to be soldfor this amount, the total profits of Z6,240 million would finance roughly 2,600 square meters of low income construction.

4.0

34

Accordingly, a major priority for the gmina is development of hotels, shops, restaurants, and so forth. Expenditures and Revenues for Communal Property in Slupsk Slupsk has made major progress in understanding and reforming communal housing operations. The discussion that follows reflects almost entirely the situation in Slupsk. While tentative reorganization plans in Czestachowa are similar in outline to those in Slupsk, Slupsk had gone further in both implementation and detailed planning.' It is generally known that residential rents in communal housing do not begin to cover the cost of even routine operations and maintenance. This was confirmed in both Czestachowa and Slupsk. It appears, however, that in Slupsk commercial rents may yield enough profits to allow communal housing to break even in terms of current operations. Monthly expenditures for current operations for residential housing in Slupsk were Z2,299 per sq. meter during the first quarter of 1991, as shown below: TABLE 4.1 Monthly Expenditures for Operation of Communal Housing in Slupsk
Expenditure Category Monthly Cost Per Square Meter (Zlotys) 316

it has few hotels or other tourist facilities.

Housekeeper salaries (including taxes) Sewage

Janitorial and routine maintenance1.4 Water and pipe15

Local office administration36 Central Administration

(and maintenance services and supplies)36

149 TZ2,299 Source: Based on conversations with Slupsk Officials.

'Czestachowa was not unaware that it was behind in this area. Indeed, the gmina official in charge of communal housing in Czestachowa had taken his job only one month before our visit, following thefailure of his predecessor to make progress in reforming GPM operations.

35

Residential rents, on the other fiand, averaged Z916.6 per sq. meter inApril, 1991, or about 40 percent of operating costs. The monthly operating costs for commercial space were estimated at half the residential cost, or roughly Z1,150 per sq. meter. Gminas are free to set rents for commercial space incommunal buildings, and commercial rents in Slupsk averaged Z29,647 per sq. meter. The result is that the operation can in principle break even and even fund a very modest reduction in the backlog of previously deferred maintenance. Slupsk officials indicated that they would like to spend about Z666.7 per month for reduction of the backlog. 4.2 COST AND REVENUES IN TABLE COMMUNAL HOUSING IN SLUPSK*
TYPE OF RENTAL SPACE Area in (000s) 645.3 59.3 Monthly Cost Per Square
Meter

Monthly Revenue Per Square

Meter

Net Total
(000,000)

Total
(000,000s)

Total
(000,000s)

Residential Operations Commercial Operations

2,299 1,150

1,483.5 68.2

916.6 29,647

591.5 1,758.1

<892.0> 1,689.9

Gross Operating Profit Accrued Maintenance per Month not included in current operating costs Net Operating Profit
*Monthl costs ard revenues based on January through April 1991

797.9 <666.7> 131.2

There is, however, an important caveat to these calculations. It is not completely clear that the commercial rents set in Slupsk are sustainable (rather then exploiting a temporary monopoly position) or that they will all be paid. In Slupsk, arrears in rents totalled about 1.5 months rent for commercial tenants and 1.3 months rent for residential tenants. Residential rent and utility arrears in Czestachowa appeared to be about half of a month's rent. Slupsk believes

36

that almost all residential tenants in arrears really cannot afford to pay. In Czcstachowa the belief is the reverse, that about two-thirds could afford to pay. Both have a fairly standard set of procedures for collecting back rents including letters, public notices, and rent collectors. Commercial arrears in Slupsk appear to reflect non-payment of past increases while they were being appealed to the gmina. Commercial tenants can be evicted at will with three months notices. If commercial or residential tenants do not pay their rents, the gmina can get a court order that allows them to seize the tenants' property in lieu of the required rent, but the process is felt to be cumbersome and expensive (at least as applied to commercial tenants). Furtiermore, commercial space includes rental to public institutions, such as libraries, where threats of seizure and eviction are not effective. Reorganization cf Housing Management in Slupsk In Slupsk, the gmina has used its budgetary authority to force the local housing authority to reduce speiiding. Actual spending for operations (not counting capital costs) in the first quarter of 1991 appears to have been running at an annual rate of Z18.6 billion, or about 70 percent of the Z26 billion originally budgeted by the housing authority. This at least partly reflects reductions in staff (mostly administrative) from 405 persons on January 1, 1990 to 369 as of March 31, 1991. TABLE 4.3 Changes in Housing Authority Staff in Slupsk

Staff Category White Collar Housekeepers Maintenance Services Drivers Mechanics Other

January 1, 1990 154 97 77 10 23 5 39

March 31, 1991 133 94 70 8 21 5 38

Change -21 -3 -7 -2 -2 0 -1

TOTAL

405

369

-36

37

Slupsk intends to make the housing authority into a budget enterprise within the gmina. This option may in fact have been chosen to provide the government with direct control of authority operations. The gmina plans to decentralize operations into four operating units. Each unit will be responsible for rent collections and operations in the buildings in its area, and will be expected to be self-supporting. (Given the importance of profits from commercial space, the gmina is attempting to allocate buildings across districts so that commercial revenues are roughly the same in each district). They are considering encouraging the 80 or so workers in the central repair unit to form their own company, which would then compete with other firms for repair contracts.

38

5.0 5.1

AFFORDABILITY Overview of Affordability and Income Policy

Affordability is clearly one of the most important parameters underlying our ability to estimate what portion of the communal housing stock might be sold and at what price. This in turn affects decisions with regard to type and intensity of rehabilitation, building-by-building sales strategies, and long-term versus shorter-term horizons in planning sales. As might be expected, however, our understanding of income levels and the income distribution is inadequate to the task. Income policies under the current economic reform program constrained the growth of state sector incomes in the short run. Additional uncertainties will occur in the medium term as public firms are privatized or liquidated and the locus of employment shifts increasingly to the private sector. Our current understanding of income and rent can be summarized as follows: Income and Rent Income is low in Poland; it is comparable to that in lesser developed countries in the World Bank's classification of lower-middle income countries; Rent burden for communal housing residents is moderate for all but the lowest income groups; however, rent burden is not as low as in the recent past and is currently rising as charges for both rents and utilities are being increased; Preferences for housing in Poland are said to be strong. On one hand, because income is so low, this means that many Poles cannot now pay for the housing they want. On the other hand, rent burdens can probably be increased for inany segments of the population; these households will be able to pay as rents in communal housing rise toward more appropriate levels. Macro-economic Policies The affordability situation may get worse before it gets better. Poland will probably get poorer in the short- to medium term: a plan for wages to increase more slowly than prices is built into the reform plan as an integral part of the fight against inflation. Thus, real income will fall by design;

39

Compounding this is the expectation that unemployment, already increasing at a rapid rate, will grow worse during the process of privatizing state-owned industries. Regional unemployment may be severe in some cases;

Income and Tenancy Status * As has been discussed, households are not sorted out in the market in the ways we understand. Ownership actually falls with income, since dwellings in rural areas were generally not expropriated. Nearly the same proportion of the two highest income brackets live in communal housing as of the two lowest income brackets. We also understand that a very broad mix of professions and social classes are likely to live in the same building, which may complicate the reshuffling problem;

Affordability of Maintenance Charges, Rehabilitation, and New Construction * A sizeable group of households, if they were simply given their units, could not afford to pay for current levels of maintenance and utilities Furthermore, since current expenditures greatly understate what should be spent to cover ongoing repairs, and do not begin to correct for the maintenance backlog, "spending" by tenants at current levels would perpetuate t. : overly rapid depreciation; Most households could afford minimal rehabilitation to a small unit if costs were financed under a DIM; many could not afford to rehab a larger unit and/or to undertake more extensive improvements (many of which are building-wide systemic problems involving plumbing, heating, roofing, and so forth); Extremely few households can afford a new unit, even a modest one, and even if financed under a DIM.

5.2

Income

Accurate information on household income is currently not available in Poland. The most frequently cited statistic is the average monthly wage in the six basic (state-controlied) sectors of the economy, which was about $177 per month in February, 199i (see Table 5.4). This statistic can'not readily be translated into household income, nor of course does it include so-called "second economy" income, which is thought to be substantial for many households.

40

Our discussion of affordability will utilize three estimates of household income: * income (and expenditures) obtained in a survey conducted by the district of Slupsk in the first quarter of 1991; income from a similar survey conducted by the district of Czestachowa, also in.the first quarter of 1991; and income estimates (by decile) calculated from macro-economic data for March 1990, and updated to March 1991 using the increase in the wage index. Tables 5.1 and 5.2 show the results of the income and expenditure surveys in Slupsk and Czestachowa.' Incomes are presented for four categories of households: workers (presumably in state-owned enterprises and in the private sector); farmers; worker-farmers; and retired and disabled persons (presumably receiving pensions). Average monthly family incomes for employed households range from $200 to $350; those for pensioners are less than $200. Socalled worker-farmers and farmers (who are likely to be at least partially in the private sector) appear to be the most prosperous. It is not known whether these surveys attempted to estimate second-economy incomes. Also, sample sizes are quite small, especially for several groups in Slupsk, and in three of the four groups, expenditures exceed income. (Municipal officials noted that the shortfall was being financed out of past saving.) In any event, despite their limitations, the surveys offer insight into typical family budgets, including payments for rent and utilities. The survey estimates of income are quite consistent with those derived from the national income accounts data (see Table 5.7). Average income in the fifth decile is estimated to be $292; and average income in the sixth decile is $339. Median income lies between these two figures; the World Bank currently uses a median of $300 per month. Average income in the lowest decile is estimated to be $82 per month, while average income in the highest group is estimated to be over $1000. These estimates include an upward adjustment of 15 percent to

'These data were specially prepared for our team in response to our questions about income, rent, andfamily budgets.

41

TABLE 5.1 Income and Expenditures Slupsk District 1st Quarter 1991 (Zlotys)
Households VJof households in survey) Average Monthly Income of Households (Zlotys/ dollars) AveragestutrofEpmeprHuehl monthly Expenses c,! Households Foo Al o o & Tobacco 2,271,464 100.0% 2,212791 (1100.0% Work#rs-Farmers ------.Retired and Disabled 1,743,003 {16) $184)53,63 3,318,101 3,586,051 ($4)(z39) 100.0% 1,583,073 ($8)($16) 100.0% 2276,775 ($3)($76) 1,1 17,613 49.2 % 554,9(P_ 24.4% 869,323 24.3 % 692,072 43.7 % 65389 2.9% 60,858 2.7% 141.253 3.9% 50,577 3.2 Srcueo Clth n & Footwear 210,694 9.3 % 149,761 6.6% 476,911 13.3 % 89,1!13 5.% 195,057 8.6% 719,883 31.6% 366,247 10.2 % 148,277 4% z Ret e oshl etng H ge eO and Health 9526are,3 95,210 4.2 % 4.0 2.2% 1041 2.8 %

CoH a/ C

h r

Electricity

Workers (employees of companies) (57) Farmers

1,901,397 ($200)

100,813 4.4 % 60,050 ($6) 2.6% 1050 ($20) 5.3 % 173,249 ) ($18) 109%3.%

48611) 21.4 % 8,1 29.9% 14136 40.2 % 37$ i .%

53,603------8

42

TABLE 5.2 Income and Expenditures Czestachowa District 1st Quarter 1991 (Zlotys)
Households V of households in survey)

Average Monthly Income of Households (Zlotys/ dollars) 2.742.648 ($289) 3,200,556 ($337) 3,188,978 ($336) 1,510.790 ($159)

Average Monthly Expenses of Households Food

______

Structure of Expenses per Household

Alcohol & Tobacco 79,014 3.0% 55,555 1.8% 92,577 3.5% 43,698 3.2%

Clothing & Footwear 203.257 11.2% 206,259 6 7% 202,911 7.6% 131,580 9.5%

Rent Payment

CoaliHeating Electricity

Hygiene and Health Care

Others

Workers (employees of companies)($28) 34 Farmers 32 Workers-Farmers 35 Retired and Disabled 17

2,612,109 100.0% 3,091,850 100.0% 2,654,063 100.0% 1,380,920 100.0%

1,097.809 42.0% 659,777 2.13% 777,333 28.2% 668,569 48.4%

264,381 10.1% 233.037 ($25) 75% 371,177 ($39) 14.0% 119,096 ($21) 8.6%

111,843 $12) 4.3% 82.222 ($9) 2.7% 135,911 ($14) 5.1% 122,956 ($13) 8.9%

96,824 3.7% 83.481 2.7% 85,266 3.2% 56,677 4.1%

668,981 25.7% 177.518 57.3% 1,108,888 38.4% 238,344 17.3%

Source: Slupsk and Czestachowa Officials; Based on Surv zy conducted in the Ist quarter of 1991. Conversion to dollars at 9500 = $1.00.

43

reflect second economy income; this is probably an under-adjustment, but no solid evidence is available as to what the adjustment should be.' Whatever the correct figure for household income, these estimates confirm the fact that income is quite low. The World Bank groups Poland with lower middle income countries worldwide. In 1988, Poland's per capita GDP was similar to that of Mexico, Mauritius, and Malaysia, and less than one-tenth that in the United States. Poland is also poorer than some of its neighbors; 1988 per capita GDP in Hungary and Yugoslavia were 32 percent and 35 percent higher, respectively, than in Poland. However, Prland's income distribution is more equitable than that for most developed and developing countries: that is, the lowest 20 percent of households have a relatively higher share of income and the highest 20 percent a relatively lower share of income than in many other countries. No data are available describing income for tenants in communal housing. Apparently, however, there is a broad mix of income groups in all types of housing (see Table 5.3). Almost as many people from the top two income brackets live in communal housing (32 %) as from the lowest two income groups (35%). Also, given the history of housing and income policies in Poland, one does not see the usual positive correlations between income and the probability of owning a single family house. Households in the upper income groups are no more likely to be owners than those in the lowest groups. Furthermore, a somewhat greater proportion of the lower income groups own private single family dwellings, which are likely to be in rural areas. Income Policy Under Structural Adjustment As mentioned above, the Balcerowitz Plan for structural adjustment dictates that increases in official sector wages be less than price increases; wages are expected to rise at a rate between 60 and 80 percent of inflation. Remuneration in some other sectors is apparently controlled through tax policy; if wages are increased for gmina staff, for example, by more than a designated amount, the gmina must pay a tax greater than the wage increase. In any event, private sector wages were reported to be four times higher than public sector wages.

'The income data were prepared by Hanna Matris and are presented in an unpublished World Bank. A 15 percent adjustmentfactorfor memo prepared for the second economy income was added to the study, the data were adjusted upward data. For use in this by 6 7 percent to reflect the increase in the wage index between March 1990 and February 1991. Conversion to dollars was done at the exci-ange rate of Z9500 per dollar.

44

TABLE 5.3 Household Tenancy Status by Income Group* 1986 (Percent in Income Bracket)
Owners Private single Family Cooperative Communal Owners, Total Renters Communal Cooperative Sharing with Relatives Renters, Total TOTAL 35% 15% 5% 55% 100% 33% 21% 3% 52% 100% 32% 21% 2% 55% 100% Two Lower Brackets 42% 2% 1% 45% Middle Brackets 38% 3% I% 42% Two Upper Brackets 38% 5% 2% 45%

Data prepared by Hanna Matris, based on a 1986 study by Polish Officials. Unpublished memo, May, 1991.

Table 5.4 provides an overview of economic and income data through February 1991, derived from statistics prepared by the National Bank of Poland. National income is falling while unemployment, which was low prior to the reform program, is rising rapidly. Poland experienced hyper-inflation, over 1000 percent a year, during 1990. The rate has now been greatly reduced, although it is still very high (80 percent for the period shown in Table 5.4). During this same period, wages increased by only 67 percent; note, however, that during the period of hyper-inflation, official wages rose relatively little.

45

TABLE 5.4 Selected Economic and Income Data

Dec. Jan. 1990 eb. 1990 J 1991 Feb. 1991 %Change Feb 90Feb 91 103.4 67.7 73.6 6,705 9.6 1989 Production & Services Income, (Constant Prices: same month previous year = 100) Construction & Assembly Income, (Constant Prices: same previous year = 100) month Index of consumer retail prices: (same month of previous year = 100) Average employment in 6 basic sectors (th.. ousands of people) Unemployment (thousands of people) Average monthly wages in six basic sectors of economy (thousands of Zlotys) Weighted mean interest rate on deposits

69.5 75.5 1!07.6 6,636 55.8

69.7 81.2 1283.1 6,562 152.2

97.1 95.1 194.9 6,403 1,196-

96.4 70.6 180.0 6,348 1,259

-3.6% -29.4% 80.0% -3.0% 886.0%

613 N.A.

624 30.5

1009 17.3

1516 56.1

1680 73.3

67.0% 324%

Source: Derived from National Bank of Poland; Monthly Information Bulletin, March 1991.

Unemployment isexpected to continue to r se, possibly dramatically. Also, the early 1991 unemployment level of over I million is predicted by the World Bank to be 2 million by the end of the 1991. A massive displacement of labor is expected in the transition to a market economy which will produce incredible pressure on housing in some regions. In any event, if real wages do indeed continue to fall, the affordability calculations will be even more dismal than those
presented below. 5.3 Rent and Rent Burden in Communal Housing Under the state-controlled system, both wages

and rents have been kept low; in other words, housing services have been transferred partially in kind. Prior to recent increases in rent and utility charges, rent burdens were extremely low, reportedly between I and 3 percent. However, increases during 1990 and further increases proposed for July, 1991 have raised average rent burden considerably.

46

Table 5.5 shows rent and utility charges in effect for communal housing and Table 5.6 provides an estimate of rent burden. Based on the income figures obtained for Slupsk and Czestachowa, rent burden in communal housing would be in a range of 8 to 13 percent of income for the various groups; the July changes will increase this range to between II and 19 percent.' Finally, based on the income estimates derived from the national income accounts, the median income household would pay about 11 percent of income for rent and utilities in communal housing according to the July increases (see Table 5.7) The higher income groups pay only 5 percent or less of income for rent and utilities. The poorest households may have to pay 39 percent (see column 3 of Table 5.7). Based on the expenditures distribution from the household surveys, paying rent at this level of burden would probably not leave enough income left over for food and necessities. This calculation, although hypothetical, may help explain the dramatic increase in rent delinquencies reported by both municipalities.

TABLE 5.5 Rents in Comnmunal Units* (Standard Unit; 60m2 , 4 Persons) Zlotys (dollars)

Current Law Rent Central Heat Hot Water Cold Water Z 1320 per sq. meter Z1120 per sq. meter Z7400 per person 2390 (for 7 cubic 5
meters) per person Total Z

Proposed Changes for 7/1/91 cu7 22 i sq. meter 1oc 32,o000 ($12) 106c,200 ($10) 46,800 ($4)
66920 ($6) 351,920

79,200($8) 67,200 ($7) 29,600 ($3) .2390

66,920($7) 142,920

1770 per sq. meter Z 1,700 per person (for 7 sq.

meters) per person

Total ($)

$25.57

$V2.00

at 9,500 Zlotys per dollar (in effect under 5/19/91); for the proposed change, the rate is 11,000, now in effect.

Calculated for a unit of 60 sq. meters with 4 persons, using 7 cubic meters of cold water. Dollar calculations for current rent were made

tIt is interesting to compare thesefigures with the rent and utility burdens reported in the household surveys in Slupsk and Czestachowa ( refer to tables 5. 1 and 5. 2). The surveyed households do not necessarily live in communal housing. Reported burdens for rent end utilities rangefrom"10 to 20 percent (except for an unusually high figureforfarmers in Slupsk, who are more likely to be owners).

47

TABLE 5.6 Typical Household Income and Estimated Rent and Utility Burden for Communal Housing Slupsk & Czestachowa Districts*
Reported Household Monthly Income Slupsk District Payment Burden for Rent and Utilities
Slups

Czestachowa District

current
rent

proposed
rent .19

Ieth
current
rent

Czetocow

proposed
rent .13

Workers Farmers

Z1,901,397

$200 Z2.212,791 $233 Z3,318,i101

$349

Z2,742,648

.13

$289 Z3,200,556 $337 Z3,188,978

$336

.09 .08 .08 .11

.11 .08 .10

.16 .11 .12

.11 .11

IWorkers/
Farmers

Retired &
Disabled

Z1,743,003
$184

Z1,510,490
$159

.15

Rent figures include heat, water and electricity. Zlotys were converted to dollars at Z9,500 = $1.00. These figures pertain to the districts for Slupsk and Czestochowa, and were developed for our team by personnel in each gmina from the first quarter 1991 household survey. Eighty-four households were interviewed inSlupsk and 163 in Czestachowa. Average household sizes obtained in Slupsk were used to calculate the per person charges for.hot and cold water.

Standard units of 60 sq. meters were used for all groups.

Further increases in rent must be coordinated with increases in income, including transfers through the "social safety net," apparently now being designed by the Ministry of Labor and Social Policy. As described in Section 2.0, the provisions of the housing subsidy program asdescribed to us by officials in Czestachowa are tha., familie3 are eligible if income per person is less than about $61, and individuals if income is less than about $92. Based on the survey data obtained in Slupsk and Czestachowa (and using the household sizes for Slupsk), income per person ranges from $50 per month to $112, depending on the category of household. It would appear that a substantial proportion of workers in Slupsk and of pensioners in both municipalities would be eligible. This represents a tremendous drain on gmina resources if, indeed, the grninas are responsible for the program. As noted, it must be made clearer whether responsibility

48

for designing, funding, and administering the income subsidy program lies at the local or national level. Its design is integral to the privatization strategy. Affordability of Maintenance Charges, Rehabilitation, and New Purchase Five types of affordability assessments have been made, each based on a possible course of action by the gmina with regard to privatizing the communal housing stock: 1) Gminas give the units away, at no cost to the tenant. The tenant would no longer pay rent, but would pay for utilities and pay the same amount the gmina is now paying for routine maintenance (until such time as a new ownership entity sets its own charges); 2) Gminas contract out to the private sector to undertake modest rehabilitation of a small unit (50 m2). The builder charges a 25 percent markup for overhead and profit. The unit. is purchased at this cost by the tenant, financed through a DIM. The gmina does not charge for the value of the unrehabilitated unit. 3) Gminas undertake the same actions as for case two, but add a 25 percent charge for the costs of gmina administration and relocation for the period of the rehabilitation; 4) Gminas undertake the same actions as for case 3 but the calculations are made for a unit of 100 m2; 5) Gminas and/or private contractors build new units of modest size and quality and offer them for sale. Again, tenants purchase the unit financed with a DIM. The first case is illustrated in Table 5.7, in columns two and four (in column two utilities charges were based on costs in May 1991; in column four, utility costs reflect changes proposed for July 1991). The maintenance costs are derived from actual costs for maintenance of communal housing in Slupsk. Two conclusions can be drawn. First, households in at least the bottom two income deciles could not afford to pay for these maintenance charges. Second, the figures for maintenance are far too low to support the unit at a reasonable level of quality for the long term. The maintenance figures are actual expenditures in Slupsk, which is far less than what the municipal officials think should be spent. Furthermore, as discussed in section 3.0, there is an immense backlog of capital repairs which is not considered in this calculation. Thus, at reasonable levels of charges for maintenance and upkeep, a much greater proportion of the 5.4

49

Estimated Rent and Basic Maintenance TABLE 5.7 Burdens in Communal Units by Income Decile
Average Monthly Income Decile ($) Rent and Utilities Burden Under Current Law (I) $82 .31 . 13 -1--6-4 Basic Maintenance Charges and Utilities Burden Under Current Law (2) .47 .220 3 5 6 7 8490 9 101,094 586 4238 209 292 339 396 .12 I11 .09 .08 .06 .05 .04 .02 .08 .07 .03.0.4 .

Rent and Utilities Burden Under Proposed Changes (3) 92

Maintenance Charges and Utilities Burden Under Proposed Change (4) .5 0

.3 .16 .13 1.0.2 --"-----

.3 .1 1.4

--'----

.0

10 0 .05 0 .07

Utilities include central heat, hot water, and cold water, but not electricity. Maintenance costs are derived from figures obtained in Slupsk. Note that this is what is actually spent, not what should be spent. * Column (1) is based on current rent and utilities charges as defined in Table 5.4 * Column (2) is based on basic maintenance charges and utilities (but not rent) " Column (3) is based on proposed rent and utility charges as defined in Table 5.4 * Column (4) is based on basic maintenance charges and proposed utilities charges. Income Calculation: Income by deciles calculated by Hanna Martis contained in an unpublished menio done for the World Bank. the bank data for March 1990. Data A 15% adjustment for second economy were then adjusted upward by 67% income was added to to reflect the increase in the wage index between March 1990 and February during the May trip). The Zloty figures were then calculated in dollars 1991 (the latest available using the then official exchange of Z9500 per S.

50

--Average Monthly Income by Decile (dollars) MaxinitunLoan Under DIM Rules

TABLE 5.8 Affordability of Rehabilitation and New Purchase Funds Available with 30% Downpayment Ratio of Funds Available to Cost of Rehabilitation or New Unit Rehab Cost $6,575
5

---

Rehab Cost 0m' + Gmina Charges $7,900

Rehab Cost

"Market" Cost fol. 1OOm 2 New Unit $35,506 .10 .20 .25 .29 .35 .41 4 .57 .71

loom, + Gmina Charges

$15,800 2 .22 .44 .5 .65 .79 .92 1.07 1.27 O.K.

1 Is:--.4

$82 164

$2,460 4,920 6,270 7,140 8,760 01014,519 l1.880

$3,514 7,029 8,957 10,200 12,514

.53 .94 1.55 1.07 0.K. 0. K. OK. 0.87

.44 .89 1.13 1.29 O.K. 0. K. 0.K. O.K. O.K. O.K.

3 4 5 6 7

209 238 292 3 396

8 9 10 I) 2)

470 586 1,094

14,000 17,580 32,820

20,143 25,114 46,886

O.K. O.K. O.K.

O.K. .32 Cost of rehab of 50 sq. meter unit at ZI million per sq. meter + 25% builder overhead + profit. Cost of what of 50 sq. meter unit at Zi million per sq. meter + 25% No gmina charges builder overhead + profit + 25% ma,kup for gmina administration + relocation charges. 3) Same assumptions as (2) for a 100 sq. meter unit. 4) Cost of construction of new 100 sq. meter unit. Costs may differ by region or for better quality features. Calculation: Underlying income data by Deciles calculated by Hanna Matris contained in an unpublished memo done for the adjustment for second economy World Bank. A 15% income was added to the bank data for March 1990. Data were then increase in the wage index between adju.sted upward by 67% to reflect March 1990 and February 1991 the (the latest available during the calculated in dollars using the May trip). The Zloty figures were then official exchange of Z9500 fhbn per $. Costs were ca!culated as follows: Z2.5 million per sq. meter years interest on the outstanding construction loans at 70 percent, plus once for a final cost of Z3.38 million per sq. meter.

51

income distribution could not afford to pay. This example also assumes that these are the per unit charges for the entire building, so that costs of reshuffling should also be considered. The remaining cases are presented in Table 5.8. For each decile of the income distribution, calculations for maximum loans have been made according to the current rules for the DIM: loans equal to 35 times monthly income. With the requirement that the household have a 30 percent down payment in cash, the "total" funds available to typical households are determined. Note that the DIM may be offered by the gmina or a local bank. The funds available ar, then compared wiih the three, rehabilitation/sale options described above and with the purchas,. ci a new unit. Costs of modest rehab are assumed to be ZI million per sq. meter; costs of new construction are assumed to be Z3.38 million per sq. meter. The entries in the right-hand columns are the ratios of the total funds available to that household (through the down payment and the DLI loan) and the cost of the rehabilitation or new purchase option. If the ratio is greater than 1.0, it is assumed that the household can "afford" the purchase. For example, the cost of modest rehab of a 50 sq. meter unit is $6575. All households except the two poorest categories can (in theory) obtain sufficient funds to pay the rehabilitation costs for a unit rehabilitated at this modest level. The unit is assumed to be "sold" by the gmina without charge for the administrative costs incurred, nor for the underlying value of the non-rehabilitated unit. This is a somewhat modified version of "giving the unit away." The next example is the cost of purchasing a communal unit when the gmina has included costs for the relocation and aJministrative duties incurred in having the unit rehabilitated, as well as the rehab costs themselves (again, the gmina is not charging for the basic unit). This brings the total cost to $7900. A reasonable number of households might be able to afford this option (at least households at or above the fourth decile. The third example is based on costs for rehabilitating a larger unit (100m2 rather than 50m2). Alternatively, the funds might be spent for features in addition to the modest rehabilitation assumed in the first two cases. Thus, at a cost of about $15,800, only households in the top three income groups could "afford" to finance the rehabilitation (that is, to be eligible for a DIM and provide a 30 percent downpayment). Finally, only households in the highest income decile can afford to purchase a new unit, which is estinated to cost about $35,500.

52

In summary, recall that very little is really known about the true income distribution or about assets and savings. It is possible that a fair number of households have substantial savings and/or second-economy income. Nevertheless, it is clear that effective demand for new housing will probably not be robust for some time. Mortgage Financing using the DIM. Previous sections of this report have commented on the utilization of DIM financing in a context such as the current one in Poland. The DIM is inde;,d an ingenious approach for "jump starting" a system of housing finance in difficult circumstances. The affordability calculations presented above in Table 5.8 pertain only to eligibility for the DIM based on, the 35 times monthly income rule. They do not "predict" what haippens during the life of the loan and whether the repayments are still affordable. A simple example looking at future affordability in given in Table 5.9.

TABLE 5.9 Household Payment Burden under the DIM under alternative Assumptions about Growth in Wages
Year Average Monthly Income Annual Increase in Wages Annu I Increase in Interest Average Monthly Payment During the Actual Payment Burden Household Income Increases at at .75 1.25

Year

assumed wage increase

(1)

assumed wage increase (2)

.25

assumed wage increase (3)

.25

Year 1

$300

59%

66%

$75

.25

Year 2 Year 3 Year 4 Year 5

*

519 898 1,311 1,809

59 40 35 30

66 47 42 37

130 224 328 452

.25 .25 .25 .25

(.33) (.43) (.57) (.76)

(.20) (.15) (.12) (.10)

Compounded Quarterly

53

The starting point is current median income ($300 per month). On average, annual incomes are expected to increase by a given percentage; the increases used in Table 5.9 are drawn from assumptions used by the World Bank.' Monthly payments are then assumed to be 25 percent of this increased income. If the individual household's income increases at exactly the rate assumed for the economy on average, its payments remain at 25 percent of its income. If, however, this households's income increases at a rate only 75 percent as fast as the average, its payment burden quickly increases, reaching 43 percent of income after only three years. This case clearly leads to default. Conversely, of course, if the household's actual income increases at a rate higher than the assumed average, the payment burden steadily falls, and the household may be in a position to prepay. Thus, whether the DIM is financed by a bank or by the gmina, local economic circumstances will have an important bearing on affordability over the long-term.

'See Elaine Weis, The Development of Housing Financein Poland.: Technical Assistance to the Polish Housing Finance Project, Abt Associates, July 1991.

54

6.0

OPTIONS FOR PUBLIC HOUSING

This section discusses a basic range of policy strategies for gminas in dealing with communal housing. The implications of this strategy for technical assistance are discussed in Chapter 7. The basic themes of this chapter are as follows: 1) A reasonable long run goal is privatization of all or most of the communal housing stock with subsidies provided as necessary through housing vouchers. The two gminas we visited both saw substantial privatization as a goal, but differed in their perception of whether the gmina will eventually retain any units. However, both agreed that most of the communal stock could not be privatized ia the near future. The conclusion that the gminas will retain a considerable portion of the existing communal housing stock in the near future is supported by our observations that the housing market is disorganized, with considerable uncertainty as to the equilibrium price level, the price gradient, and implicit subsidies required to support a given standard of housing. At the same time, even if the ginina retains a considerable portion of the communal stock in the near term, privatization can be enormously useful not only in reducing the gmina's current operating burden but also in stabilizing the housing market as a whole. 3) A gradualist strategy would involve the gmina acting as a redevelopment authority, focusing private development in designated areas and undertaking gradual privatization of the communal stock. Privatization can be aided by gmina-financed sales using the dualindexed mortgage concept developed by the World Bank. Such a financing mechanism not only meets the needs of purchasers but also seems well suited to the gmina's own financial needs. The gmina can supplement its own privafization sales by acting as a redevelopment authority to facilitate use of financing provided through the World Bank for further construction and rehabilitation. The gmina's operation of the remaining communal stock should be organized so as to facilitate gradual conversion to complete privatization. 4) The risks involved in rapid privatization are basically two-fold. First, there are financial risks to the gmina in providing adequate support for low income households. Second are the largely unknown dynamics involved in reaching a market equilibrium. A rapid conversion 55

2)

demonstration to test dynamic problems could conceivably be undertaken in a few smaller locations if the central government were to agree to be responsible for funding an adequate housing voucher program in those places. The rest of this chapter is organized as follow. Section 6.1 discusses the barriers to immediate privatization of the communal stock in the near term, whether through sale to residents, donation, or auction. Section 6.2 discusses pricing and financing policies to accelerate gradual privatization in the near term. Section 6.3 discusses a rapid privatization demonstration. Section 6.4 discusses the goal of privatization and the use of housing vouchers to provide subsidies to households in the private market. Barriers to Immediate Privatization of Communal Housing We have argued that the gminas are likely to continue to own and operate much of the communal housing stock in the near future. Consider, for example, three vehicles for immediately privatiing the public stock -- sale to residents, donation to residents, and a general auction or lottery. It appears that the first option will only privatize some of the stock; that the mechanics of the option are difficult, and may expose both the gmina and the households financially and might actually impede organization of the housing market; while the third imposes excessive information costs, and thus also faces difficult mechanics. Sale to Residents. Even in circumstances of effective new housing legislation, a broad array of factors dictate against quick, easy, or complete sale. The stated goal of officials in Czestochowa, for example, is to get all possible land and property in private hands. Even in the face of these intentions, however, these same officials concluded that they could sell at most about fifteen to twenty percent of the buildings or units in any initial effort. As has been discussed in previous chapters, the major issues include the following: * the relatvely low level of income, and the efforts under the reform plan to constrain the growth of real wages in the short run, make even communal housing unaffordable to some; regional differences in income are likely to cause temporary bursts and shortfalls in demand as privatization and liquidation of numerous stateowned enterprises takes place; 6.1

56

although rich and poor alike live in communal housing, the communal housing population appears to be somewhat skewed toward the elderly and pensioners; this is likely to increase as some of the stock is, in fact, sold; it is not clear what the course of real income will be for these groups, nor whether they wish to make dramatic changes; very little" sorting out" of units has been done on the basis of income and preferences, on one hand, and quality, location, and size, on the other. Getting the mechanisms in order for building-by-building sorting will take some time, especially since no relocation housing currently exists and the development of a private rental market is usually crucial to such sorting; for lack of a better expression, the "psychology" of housing preferences appears to be complicated in Poland, which may dictate against early sale. As has been mentioned, Polish people are said to have high preferences for housing, but have also been constrained by the present system from exercising such preferences. Furthermore, they to remaining in the same unit for long periods, have become accustomed sometimes even families over generations. In return, cheap housing has been an expected right. In this complex environment, it may be that the jolt brought about by much higher rents will take somL time to register; lack of construction and mortgage financing will severely inhibit expansion of supply and purchase of communal units that have been substantially rehabilitated (we have assumed that such units are eligible under the World Bank program);

Figure 6.1 attempts to capture some elements of the demand factors that will inhibit sale of the communal stock. The vertical axis portrays the income distribution an6 the. horizontal axis portrays housing "quality", in this case a mix of size, condition, location, and the aesthetics of the architecture and building materials. Numerous other factors ar absent from the figure. for example, the joint distributions of income and the many household characteristics that determine preferences. In any event, only households located in the top right hand corner are likely to be high probability candidates for purchase. Some "creaming" of the communal stock has already taken place, just as it has for cooperative units. While no one knows the actual availability of liquid household assets, many of those with ready cash may already have purchased. Without mortgage credit, however, the majority of households will be unable to purchase even at moderate prices.

57

FIGURE Hypothetical Distributions of 6.1 Income and "Quality" i Communal Housing What Are the Choices for Tenants and Municipalities?
Household Income High Income

Moderate Income

less likely to buy this unit M: not saleable with rehab? T: ? less likely to buy M: ? retain and rehab

T:

T:

may buy with/or

Low Income

without rehab M: more likely to sell with/with rehab T: ?? less likely/able to buy M: try to shift to would-be purchasers cannot afford unit; most need housing subsidy M: retain and perhaps rehab Moderate Quality T:

T: M:

most need housing subsidy retain and rehab

most likely to buy as is M: most likely to sell at fair price T: some may try to buy; need credit M: try to shift units to would-be purchasers cannot afford unit; most need housing subsidy M: try to shfit units to would-be purchasers High Quality Unit Quality T:

T:

Low Quality

M = Municipality T = Tenant

"Quality refers to some bundle of attributes including size, condition, aethetics of architecture and building materials, location, and so forth.

Equally to the point, the apparent lack of correlation betwee housing attributes and income and preferences, especially as very different households live within the same building, introduces a great deal of ,igidity into the current situation. Gmina officials note that their administrative and cost burden is only reduced if they sell an entire building. It is also probable that the outcome is more stable if like-minded households form the new cooperative or condominium association. Thus, while the lower income groups simply cannot afford to rehab

58

and purchase their units, households in the top left corner of the figure may be less likely to prefer the building in which they currently reside. Donatita to Residents. One obvious way to expand sales to residents is to charge a zero price (i.e. give the stock away). Such donations may be objected to on the grounds of loss of asset value to the locality. Such donations may also be objected to on the grounds of equity: people may receive units of markedly different values, and people not in communal units receive nothing. Such equity concerns may be overrated. There are likely to be substantial inequities in any transition, if only because it preserves pre-existing inequities. In any case, there already have been extraordinary windfalls for peopie who recently bought cooperative or communal housing. Even so, equity issues are often politically potent and cannot be ignored. Apart from equity issues, however, the mechinics involved in such a transfer seem quite difficult. Supposedly, each former communal building would now be free to set its own policy as to maintenance and rehabilitation. Since some communal tenants cannot afford even basic maintenance, the gmina would, we suppose, continue to offer subsidies to low income households. These subsidies would probably not be sufficient to ailow low income households to pay for housing in buildings whose tenants voted for substantial rehabilitation and high maintenance. Buildings would foreclose on residents who could not afford the building's majority-determined maintenance or rehabilitation expenditures, selling their units and giving the tenants the proceeds. Gradually, the market would sort itself out. The first problem with the mechanics of this scenario would seem to be the lack of available units to receive families displaced in the process. Second, such transfers could conceivably retard the organization of the market. Given a historic lack of residential mobility, it may be difficult for either better or worse off tenants to organize the swaps of units needed to create buildings with like-minded residents. Further, as long as the expected rate of inflation is high, it may be difficult in any case to persuade people to sell a real asset. Finally, it is important to remember that the decision to dispose of communal units is now a local one. If it appears that reform of operations plus some flexibility in setting rents may allow gminas to break even on communal housing operations, in the absence of operating deficits, it may be quite difficult to persuade gminas to give away an asset that they could sell.

59

Auction
The problem of market organization can be highlighted by considering another simple mechanism for transfer of communal housing. Say that one were to offer an auction in which what was sold off was the order in which individuals would get to chose from among all existing units. Put aside the problems involved in the design of auctions and simply consider the problem faced by the person who wins the first choice. If this position was obtained by auction, we can assume that the person is well off. He/she would no doubt like to live in a nice neighborhood. What constitutes a desirable neighborhood is partly a matter of things the person can know, such as elevation and view or access to existing jobs and services. But it also involves who else will live in the neighborhood and how they will maintain their buildings. Access may change if commercial locations are allowed to respond to residential locations. Ultimately, there may be a tradeoff between access and land prices. Likewise, in selecting a building, our auction winner will want to know both current condition and rehabilitation potential and most important what the other owners in the building will want to do in terms of rehabilitation and the level of maintenance. The point is, of course, that the information needs are enormous. Organization of housing market requires developers with the ability to set a quality strategy for a number of buildings. Thus, as discussed in Chapter 7.0, a first step is development of data bases by the localities. 6.2 Privatization with DIM Financing Under a gradual privatization scenario,

the gmina would continue to operate a substantial portion of the private stock in the near term. Rents would be increased to "market" levels, offset by corresponding housing voucher subsidies to low income residents of communal housing. Initially, these subsidies would not be portable to non-communal units. At the same time, the gmina would act as a redevelopment authority, designating areas for private development or rehabilitation and, if possible, helping to organize financing for these. Even if it is difficult to envision rapid privatization of the entire communal stock, it is certainly reasonable to consider immediate sale of a substantial portion. Such sales are most useful if they involve at least half of the residents of a building, so that control of and responsibility for the building is transferred from the gmina to the tenants. This suggests that gminas will need to target buildings -- if necessary increasing rents (with or without 60

rehabilitation) to the point that purchase or moves to other buildings are desirable to tenants. As an adjunct to higher rents, gminas could also help to promote the sale of units by providing seller financing for their purchase. Dual indexed mortgages seem to be appropriate instruments from the perspective of both the gminas and the residents. Some residents may be willing and able to purchase communal units for cash. Others might be able to do so with financing. As has been pointed out, however, fixed or variable rate mortgages are not appropriate financing vehicles during the periods of high inflation. Either sort of mortgage in effect sets a nominal payment based on anticipated inflation. For simplicity, consider a fixed rate mortgage with constant nominal payments. Because payments are fixed in nominal terms, the real payment stream declines over time; real payments are high at the beginning of the kT-.rtgage and low later on. The problem from the borrower's standpoint is that the real payment stream does not match either the flow of consumption from the unit or the borrower's expected income stream. The obvious solution is to hold the real payment constant, setting the initial payment based on amortization at the real rate of interest, adjusted for risk, and then indexing the payment amount by the overall price index. This ,ssentially creates a mortgage that in real terms matches the returns and risks associated with a fixed nominal payment in the absence of inflation. Accordingly, the lender's risk is increased (relative to a fixed nominal payment with a known rate of inflation), because the lender can no longer count on inflation to offset declines in the relative price of housing (or overly optimistic valuations of either the specific property or the borrower's income). Such single indexed mortgages are, of course, subject to increased default risk if real incomes fall. This is, of course, particularly likely in the short run if the government attempts to reduce the rate of inflation. Over long periods, on the other hand, falling real wages are relatively rare. This situation has led to the dual index mortgage (DIM). Under this device. the borrowers' liability is calculated under a single indexed mortgage, but the borrowers' payment is indexed to the overall wage index. The difference between payment and liabilities is capitalized and adjusted by either extending or reducing the term of the payments. The DIM does not, of course, protect the individual borrower against his or her individual variations in income. Just as the single index protects against changes in the general price level, the DIM

61

protects against changes in the general real wage (but not changes in the general probability of being employed). From a gmina's standpoint, the indexing of accrued payments against the general price level has much to recommend it. Gminas have a backlog of capital needs and should therefore be able to absorb and. usefully apply a certain number of cash payments. As seems possible, however, the sale of a very substantial portion of the communal stock could outrun a gmina's immediate capital development capacity. In this case, an indexed payment offers a store of real value, protected against inflation, on which the gmina can draw in future years. The gmina could finance up to 100 percent of the sale price. The gmina might want to retain title until payments are complete in order to avoid problems with registration of deeds and foreclosure of delinquent borrowers. A Rapid Conversion Demonstration The problems with rapid transfer of communal housing to private ownership, discussed in Section 6.1, were essentially of two types. One set of issues revolved around the fact that the current market is disorganized. Housing prices may be veiy erratic in the short-term and equilibrium will require a considerable reshuffling of current residents. The other set of issues revolved around support for low income housing. As long as the gmina owns the communal stock, it does not have to adjust spending to track market prices. Equally important, it can continue to allow short falls in support to manifest themselves through deferred maintenance and overcrowding. While these decisions can be made by adjusting funding levels of housing vouchers as well, they are much more explicit when they take the form of reduced payments. We know little about the dynamics of markets in disequilibrium. It may be useful to consider a demonstration effort in a few smaller gminas, to test the effects of rapid conversion. Such a demonstration would appear to require funding by the gmina and/or the natioP.Al government (o provide adequate housing voucher support. To give an e).ample, a demonstration gmina might simply turn over title to the existing residents of communal housing. (Some provision might need to be made for buildings that include important commercial space.) Each building would then be responsible for determining, arranging, and paying for its own maintenance and rehabilitation. Owners could sell or rent their units. Residents who wanted a higher or lower level of maintenance/rehabilitation than 62 6.3

their building's majority, or who wanted to move for other reasons, would be free to try to sell their unit and rent or buy another. How rapidly residents and buildings could successfully sort themselves out cannot be known; that would be determined by the demonstration. The demonstration gmina could certainly assist the process by acting as a redevelopment authority and perhaps by helping to arrange for and encourage financing using World Bank loans or even perhaps by issuing indexed bonds, whose proceeds would be used for financing. Some number of families would not be able to afford maintenance costs. Others might be able to afford basic maintenance, but might not be able to afford the level of rehabilitation or maintenance selected by a majority of their building's residents. They will have the value of their ownership of their unit, but once this is exhausted, they may be unable to find affordable housing. Thus, a key aspect of a rapid conversion demonstration would appear to be assistance to the gmina from the national government for funding a housing voucher assistance program if the gmina cannot obtain all of these funds for the demonstration. The simplest program might be to subsidize individuals based on:

S =

R* - by

where
S = subsidy

R*= a rent level b = some fraction y = income.

R* could be set at the larger of some basic maintenance cost or say the 40th percentile of current monthly costs for moderate income households (as determined by quarterly surveys). Some adjustment would need to be made for assets. Alternatives might include collating income from assets or, in the case of equity in the unit, transferring some ownership interest to the program, with sale when the recipient's equity is largely exhausted.

63

Privatization in the Long Run: A Housing Voucher Program to Support Low Income Housing The alternative to direct provision of low income housing by the municipality is payment in cash or housing vouchers to support low income renters and/or owners in obtaining housing in the private market. The U.S. experience suggests that housLng voucher assistance programs are preferable to direct provision of low income housing in terms of flexibility, recipient choice, and costs. There are, however, some important issues in the design of such programs. Design of a Housing Voucher Program: Housing Standards Existing housing programs in the United States require that tenants occupy housing that passes certain minimum requirements and has at least the number of bedrooms deemed adequate for the household's size and composition. Such requirements seem to have been imposed for any or all of four reasons: 0 To avoid the emb'arrassment of subsidizing families in palpably deficient or overcrowjed tnits. To protect families against unsafe conditions. Because the prograni is intended to subsidize housing and standards are necessary to ensure that recipients improve their housing. In order to promote a general increase in demand and thus raise the overall quality of the housing stock.

6.4

a *

The experience in the U.S. suggests that program housing requirements are not really as effective in meeting these goals as one would expect and impose unexpectedly large burdens on potential recipients. In particular, the experience of U.S. programs has been that the imposition of housing requirements effectively excludes a large number of eligible households from receiving assistance. Furthermore, the families excluded are most likely to be those in housing classified as inadequate by the program standards. Whatever the standard imposed, some eligible families will normally meet them even without assistance. In the Demand Experiment, it was estimated that 80 percent of such families succeeded in becoming recipients once they had applied for the

64

program. In contrast, only 20 percent of other applicants succeeded in becoming recipients. They were indeed induced to meet the program requirements and thus improve their housing in ways that they would not have otherwise. But the cost was the denial of benefits to an additional 60 percent of their number. Obviously, the less stringent the program standards, the more likely recipients are to comply with them in any case, and the less likely they are to be excluded. At the same time, the more likely recipients are to comply with the standards in any case, the less reason there is to impose them. To the extent that a transfer whose receipt is conditioned on living in acceptable housing, denies aid to a substantial proportion of the population in need, one must carefully examine the grounds on which aid is denied. The lesson seems to be that housing standards need to be designed to reflect the information available in the market to program enrollees searching for housing, or to be phased-in in a way that allows the market to adjust the available information. Some ability to refuse to assist families to live in dangerous or severely sub-standard conditions may be desirable. Translating such discretion into detailed rules is difficult to accomplish without inadvertently and unnecessarily restricting access to housing. Other Issues in the Design of a Housing Voucher Program The other issr . in the design of a housing voucher program revolve around determination of benefits. These include, specification of the benefit formula, adjustment of benefits to take account of variations in the cost of housing, coordination with other benefit programs, and collection and verification of recipient income. The starting place is the benefit formula. The formula in use in the U.S. for many years, called the Certificate Program Formula, was:' TC = 0.30Yn PC = R -0.30Yn, R < FMR where

'This presentationignores certaindetailshaving to do with minimum tenant contributions and coordinationwith certain AFDCprograms that include explicit provisionsfor recipient rent.

65

TC = tenant contribution Y= tenant net income PC = prograt:i contribution R = gross rent In effect, the rent is divided between the tenant (who pays 30 percent of net income) and the program (which makes up the difference). This formula is very much like that of the proposed Polish program, with one important difference. In order to limit program payment, programs using this formula in the U.S. must limit the unit rent. Presumably, as rents in Poland are decontrolled, a similar limit would be required there. The limit used in the U.S. is a Fair Market Rent (FMR) schedule of rents by number of bedrooms, established by HUD for each of approximately 840 Metropolitan and Primary Metropolitan Statistical areas, plus 2,450 n : i; ,:'ropolitan counties, based on data from the decennial census, the biannual American Housing Survey, and the Consumer Price Index. An alternative formula, called The Housing Voucher Formula, was recently adopted for part of the Section 8 Program. This formula fixes the program contribution and removes the ceiling on rents. Under this formula: PC = PS - 0.30Yn TC = R -PC where PS = The payment standard (a schedule of rents by bedroom size) The Payment Standa-d is based on the FMRs used to determine rent limits in the Certificate Program. Payments under the Housing Voucher Formula are not tied to actual rent and hence are less closely targeted to individual variations in housing costs. On the other hand, the tie between rents and payments in the Certificate Program, like all efforts to ameliorate the vicissitudes of life, also reduces individual incentives to limit rents paid. The Certificate program offsets this by placing as ceiling on allowed rents and requiring PHA review of the reasonableness of the rents charged for recipient units. The combination of a ceiling on rents and PHA review of rents is as, or more, effective than the incentives provided by the Housing

66

Voucher Program in promoting effective shopping, but only at the price of reduced recipient choice. Either of these formulas requires some system to estimate local housing costs, which may vary considerably in Poland, as in the U.S., once rents are no longer controlled. In addition, both require information on family income, which may be difficult to determine and even more difficuit to verify in Poland. The Polish system of taxation has apparently been largely based on taxe paid by employers (i.e., collected by state-owned enterprises). There is no ongoing system of income reporting. Further, there are assertions of substantial numbers of workers with second or even third jobs. If uncertainty as to costs and income is substantial enough, it might be useful to consider payments based on rent, for example,

PC

RO) R O -R(R/R 0

R<R R>R

where R0 = basic rent

R, = ceiling rent

R = actual rent Under this sort of formula every person is guaranteed free housing to a certain level (Ro). For rents greater than RO, the subsidy declines until persons renting above a certain level (R,), receive no subsidy. Such formulas may be very poor at targeting assistance to low income recipients (though separate determination of income eligibility could still be attempted) and clearly distort prices and choices over their range. Further, some consideration of local housing costs would be desirable in determining Ro and R,. Their usefulness would depend in part on how sensitive individual demand is to price and income and how difficult it is to determine incomes and housing costs with any precision.

67

Appendix I Mortgage Financing This appendix briefly reviews several aspects of mortgage financing with special reference to the dual-indexed mortgage developed by the World Bank, which we suggest could also be used by Gminas to finance the sale of some communal housing units (Chapter 6). We review in turn the basic problem of matching streams of revenue and debt service in the presence of inflation, addressed' by the use of indexed mortgages; the problem of default risk, addressed in part by dual-indexed mortgages; and the problem of term risk. Matching Revenue and Debt Service Residential and commercial buildings are extremely durable capital and standardly require substantial financing. In principle, the value of a building is based on the present discounted value of the stream of real income generated by the building and that is:

P o = (.er-y (e) dt

' VL) + (e

where

V, = The present value r = The real discount rate (adjusted for risk) y(t) = The real net income stream VL = Residual value at eventual demolition L = Lifetime of the building The actual stream of nominal net income will, of course, be the inflated stream of real

returns:

N(t) = eP' y(t)

where

p = The rate of inflation

Now consider the financing appropriate for such a property. First imagine a simple fixed rate mortoage with a constant stream of nominal payments. The monthly payment is set by:
T

e' e-P' M

or

M = (r.p) [l-e(P)T ]l D

where

D = The initial debt r = The re rate of interest (adjusted for risk) p = The anticipated rate of inflation M = The fixed annual payment T = The term of the mortgage

Consider, for convenience, a world in which there is no depreciation so that the real net income stream. y, is fixed Real income = y Real debt service

(r ) ID [I -e _,.pr rj

Real debt service declines, while real income is constant (alternatively, nominal income rises, while nominal debt service is coisant). To give a simple example, say that the building yields a constant stream of real income over its entire lifetime, at the end of which it evaporates with no residual value. Say further, that the owner borrows a fraction, f, of the value with a fixed nominal payment. In this case the cash flow generated by the building is:

et

(f

(I + .) r,(,r rr

pr -1 )1

Jp

If the risk of inflation is zero, the owner has a positive cash flow equal to the unfianced share of the net income: C (P= 0 )= (1-)y As shown in Table 1, even modest rates of inflation can materially changt. 'he cash flow generated by the building. If we assume a real interest rate of 5 percent, an (instantaneous) inflation race of five percent and that the owner borrows 80 percent of the value of the building for 30 years, the initial debt service is about 31 percent more than income; there is a positive cash flow after about 5.4 years; and if the owner wanted to have an initial positive cash flow, he could borrow up to 61 percent of the building's value. With an (instantaneous) inflation rate of 10 percent, the initial debt service at the end of the year is almost 1.9 times net income, with a positive cash flow occurring during the seventh year, and a maximum borrowing for initial break even year of 42 percent of value. With an instantaneous inflation rate of 60 percent (an annual rate of over 82 percent) the initial debt service is over 8 times net income, break even occurs in the fourth year, and the maximum borrowing for an initial positive cash flow is less than 10 percent of value.

Table 1 Cash Flow for Building With 30-Year Life and 30-Year Fixed Nominal Payment Mortgage

Instantaneous

Annual Rateof Inflation

Real Rate of Interest 5.0% 5.0% 5.0% 5.0%

Rate of Inflation 0 5.0% 10.0% 60.0% 0 5.1% 10.5% 82.2%

With Mortgage Equal to 80 Percent of Value Initial Cash as Flow as a Percent of Break Even Income Year 20.0% -30.8% -88.5% -807.9% 0 5.37 yrs. 6.34 yrs. 3.48 yrs.

Maximum Borrowing for Positive Initial Cash Flowl Flow

100.0,% 61.2% 42.4% 9.9%

(Note that adjustable rate mortgages do not change this calculation appreciably; they only rpduce uncertainty by recalculating the payment based on the short-term rate of inflation.) This obviously suggests a debt instrument whose payment stream is more closely matched to the revenue stream. The standard indexed mortgage is defined by:
IM
-e e

Mo =Wr [I-e "T"-D

where IM, = The nominal payment under the indexed mortgage M = The initial payment level

M,

In words, M, is the annual payment based on the real interest rate under zero inflation. The actual payment at any time, t, is simply M, increased by the rise in the price index since the mortgage was begun. Such an instrument should not be thought of as capitalizing nominal payments (though it could be formally written in this way). Rather, it is a new instrument that maintains a constant real stream of payments rather than a constant nominal stream. Accordingly, it allows the borrower to finance a larger portion of development by matching expected revenue and payment streams.

Default Risk There is, of course, always some risk of default. However, with fixed nominal payments, and inflation, a borrower who can pay in early years is very unlikely to default in later years (unless the bor-ower borrows against the emerging equity). Thus it becomes relatively easy to assess default risk, since this is more closely based on current revenues and costs rather than projections of future revenues. With an indexed mortgage, projection of future revenues or, in the case of a residential mortgage, future borrower income, becomes more critical. Inflation no longer covers overly optimistic projections of revenue or income. This increased risk of default at the individual level cannot be avoided: it is the price of undoing the effects of inflation and is no different from the risks faced when there is no inflation. There is, however, one special risk associated with such indexing. Priced to not all move in lock-step, and some may be behind others. In particular, for residential mortgages, an overall decline in real wages (such as is likely to occur in the early stages of efforts to reduce the rate of inflation) may lead to hicreased risk of default as borrowers try to cope with nominal mortgage payments that rise faster than nominal wages. This risk is dealt with by the device of the dual-indexed mortgage, developed by the World Bank. The idea of the dual indexed mortgage is straightforward. Accrued payment obligations are calculated as with a standard indexed mortgage. Actual payments are indexed to the average nominal wage. The difference between actual and accrued payments is reflected in a shortening or lengthening of the term of the mortgage. As long as real wages rise on average over the term of the mortgage, it will eventually be paid off. Such a mortgage does not, of course, guard against individual variations in income, nor will it protect borrowers reliant on other income sources (e.g., pensions) unless these are tied to the real wage index. It appears, however, to offer a very important ability to accommodate short term fiuctuations in aggregate real income. Term Risk The mortgage system developed in the U.S. after World War I was based on financial intermediation by banks and savings and loans, which accepted short-term deposits and used them to finance long-term fixed rate mortgage debt. For obvious reasons, such a system cannot withstand substantial increases in nominal interest rates; higher interest rates reduce the value of the loans held by the bank or savings institution, without reducing its liabilities to creditors. This in itself is not a problem unless depositors attempt to withdraw their funds. However, to prevent withdrawals, the institutions must pay the higher nominal rate, while collecting the lower rate o iginally fixed for its mortgages. The response has been two-fold. On the one hand institutions have issued variable rate mortgages, where payments adjust to meet changes in shortterm nominal rates. On the other hand, fixed rate mortgages are commonly sold in the secondary market, instead of being retained as assets against short-term liabilities (deposits). An indexed mortgage with prc-erty specified pre-payment conditions (i.e., inflation of the outstanding principal) should not ( reate term risk. The nominal value of the mortgage adjusts to meet inflation. It does, howe~ler, shift the negative cash flow discussed earlier from the borrower to the lending institution. In the absence of a secondary market, this can create some obvious problems.

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