Communal Housing Poland 1991

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Communal Housingin Poland:

Management andPrivatization

November 1991

OFFICE OF

HOUSING AND URBAN

PROGRAMS

U S AGENCY FOR INTERNATIONAL DEVELOPMENT

WORKING PAPER

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


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Communal Housing in Poland:

Management and Privatization

November, 1991

Prepared by:

Sally Merrill Stephen Kennedy

Antony Phipps Abt Associates Inc.

Forthe:

Office of Housing and Urban ProgramsU.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 theOffice of Housing or the U.S. Agency for International Development.


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NOTERecommendations, which were included in the original report submitted to USAIDegional Housing and Urban Development Office for Eastern Europe (RHUDO/EE),areurrently under consideration and have, therefore, been removed from this publication.


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TABLE OF CONTENTS (cont.)

Page

7.0 RECOMMENDATONS FOR LONG AND SHORT TERMT1ECHNICAL ASSISTANCE AND TRAINING ................. 68 7.1 Overview of Our Recommendations .................... 68 7.2 Recommendationsfor Technical Assistance ............... 73 7.3 Structure of the Technical Assistanci................... 86

APPENDIX I: Mortgage Financing

BIBLIOGRAPHY


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LIST OF TABLES, EXHIBITS, AND FIGURES

TABLES

2.1 Occupied Housing Stock by Type of Ownership ......... 123.1 Distributionof Housing Units by Form of Ownership

and Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

3.2 Useful Space and Central Heating Among Units Administered by Local State Housing Authorites ........ 21

3.3 Average Size of Newly Constructed (Cooperative) Apartments, by household size...................22

3.4 State Sponsored Housing Construction 1990andFirst Quarter 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.5 Communal Housing in Slupsk - General Characteristics . . .. 255.1 Income and Expenditures - Slupsk District .............. 425.2 Income and Expenditures - Czestachowa District ........ 435.3 Household Tenancy Stats by Income Grcup .............. 455.4 Selected

Economic and Income Data................46 5.5 Rents in Communal Units. ...................... 475.6 Typical Household Income and Estimated Rent and Utility

Burden for Communal Housing ................... ..... 485.7 Estimated Rent and Basic Maintenance Burdens in Communal

Units by Income Decile..........................50

5.8 Affordabilityof Rehabilitationand New Purchase51

.......

5.9 Household Payment Burden under the DIM under AlternativeAssumptions about Growth in Wages .................. 53

FIGURES

6.1 Hypothetical Distributionsof Income and "Quality" in Communal Housing .............................. 58


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1.0 EXECUTIVE SUMMARY

Decentralizationof responsibility and transformationof ownership into private hanids areimportant themes in nearly every sector in Poland. The new responsibilitiesof local government

are nowhere more evident than with regard to the housingmarket. Almostall housing in Polandis organized under four forms of management: communal, cooperative, enterprise, and private.Communal housing consists of the housing that was expropriatedafter World War 11 plus mostof the housing constructed in the immediate post-war period.' Ownership of communalhousing, which aonstitutes substantial share of the urban housing stock, was recentlytransferred to the ocal governments (gminas), which are now responsible for its operation and/ordisposition. 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 fiscalnecessity as well as an important componentof the social process.

The purpose of this report is to evaluate the financial and physical condition of thecommunal housing in the context of the transformation of the housing market from central toprivate cotirol. Based on this evaluation, we then suggest what technical assistance should beprovided to local governments in their efforts to manage and privatize communal housing. Thereport is based on conversations in May, 1991 with officials and researchers in Warsaw andvisits to two

municipalities in western Poland -- Slupsk, which is located on the Baltic to thewest of Gdansk, and Czestachowa, which is located southwest of Warsaw and contains thefamous Shrine of the Black Madonna.

The first five chapters describe the context in which the gminas operate. Chapter 2describes the overall organization of the housing market and the gminas' powers under currentand proposed housing legislation. Chapter 3 describes the current physical condition of thecommunal housing stock and Chapter 4 its financial condition and operation. Chapter 5discusses the affordability

of communal housing at the present time and several options forrehabilitationand purchase. Chapters 6 and 7 then discuss the range of options available to thegminas and the associated technical assistance requirements.

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


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The Condition of the Communal Housing StockCurrent 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 30percent of all urban housing. On the basis of several recent reports, together with insrectionsof sample buildings in Slupsk and Czestachowa, it is apparent that a substantial portion of thecommunal housing stock is physically deficient, overcrowded, and undermaintained.

o The communal housing stock is old: nearly half (49.9 percent) was builtbefore 1945, and 4 out of 5 units were built before 1970; most buildingsare located in the centers of cities and towns.

The shortage of housing is severe. Even by Polish standardsof crowding(less than 10 square meters of useable space per person), at least one outof five families is overcrowd,.; in most households the ratio of personsper 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 mobilityof labor.)

Relative to the hree other forms of tenure (private, cooperative andenterprise housing), communal housing is the least adequate; between oneand three percent of the stock should be demolished; less than half of thecommunal housing units in multifamily buildings contain centralheating and private bathrooms, and very

bothfew units are insulated.Symptomsof extreme deferred maintenaiceare widespread, both outsidecommunal 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 virtualstandstill as the flow of funds to municipal governmentsand housing authoritieshas been cut off.Typically

new (panel) construction costs 2.5-3.0 million zlotys per square meter ($22-27 persquare foot). Adding typical costs for land and infrastructure, together with 7 0 percent interestpayments during cc nstruction, puts new housing out of reach of at least 90 percent of thepopulationof Poland. Substantial rehabilitationmay cost betweenone-third to one-half the costsof new construction; but rehabilitationby itselfdoes not add new units to the siock, and involvesadditionalproblems of relocation.

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The Housing Market and tfle Affordability of Communal HousingPrivatization 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 aspossible.

Ever, in the face of these intentions, however, we conciude that the transfer of thestock 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 communalhousing are in profound disequilibrium. Very little "sorting out" of unitshas been done on the basis of income and preferences, on the one hand,and quality, location, and size, on the other. Getting the mechanisms inorder for building-by-buildingsortingwill take some time, especiallysinceno relocationhousing currently exists and the development of a privaterental market is usually crucial to such sorting.

The existing housing legislation regarding rent, occupancy, and relocationpolicies must be revised. Without major changes in the statutes definingthese policies, privatization of any substantial quantity of communalhousing 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 tofacilitate transfer to private ownership and developmentof a private

rentalmarket. Rents currently cover only a limited portion of operating costsand, of course, provide no reserve for capital repair.

Income and Affordability

Very little information is available or onncome 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 levelsextremely few households could afford a newunit, even a modest one, even if it were financed under a Dual Index

Mortgage (DIM).

Some households could afford modest rehabilitationof a small unit if costs werefinanced under a DIM (dual index mortgage); however, most householdscouldnot afford to rehab a larger unit and/or to undertake more extensiveimprovements.

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* A subsidy program for low incomehouseholds, whether housing vouchersor part of a general income transfer, is integral to the success ofprivatization. Clarification is required as to whether the its design andfunding are local or national responsibilities.

* Regional differencesin income are likely to cause temporary bursts andshortfalls in demand as privatization and liquidation of numerous state

owned enterprises takes place.

Other Issues in Privatization

Although rich and poor alike live in communal housing, the communalhousing populationappears to be somewhat skewed toward the elderly andpensioners; 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, norwhether the groups will wish to make dramatic changes in their housing.

Another factor is the "psychology" of housing preferences, which appearsto be complicated in Poland, and which may dictate against early sale.The Polish people are said to have strong preferences for housing, buthave also been constiained by the present system from exercising suchpreferences. Furthermore, they have become accustomed to remaining inthe same unit for long periods; sometimes families have stayed forgenerations. In return, cheap housing has been an expected right. In thiscomplex environment, it may be that the jolt brought about by muchhigher rents will take some time to register.

A sizeable group of households, even if they were simply "given" theirunits, could not afford to pay for current levels of maintenance andutilities. Furthermore, since current expendituresgreatly understate whatshould be spent to cover ongoing repairs, and do not begin to correct forthe maintenance backlog, "spending" by tenants at current levels wouldperpetuate the overly rapid decline of the housing stock.

Finally, lack of constrnction and mortgage financingwill severely inhibitexpansion 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 inthe communal stock could be an important source of revenue, but also adds to the managementtask. The evolution of communal housing is, in part, dependent on the development of the

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housingmarket, 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, somesegments are likely to remain as public housing for a considerable time.

* the gmina as PRIVATIZOR/DIVESTORof communal housing.

* the gmina as INVESTORIDEVELOPERof housing; at a minimum thisincludes relocation housing, and possibly new construction andrehabilitation in the near term.

the gmina as PLANNER of the overall functions of municipalmanagement, including zoning, infrastructure, land assembly,environmental

regulation, and so forth, in addition to the administrativefunctions deemed necessary to theorderly development of the housingmarket.

the gmina as FACILITATOR of assistance to other organizations orinstitutions, such as local banks, local private developers, managementandservice companies, and/or local building materials suppliers. Thesefunctions are not the responsibilityof the gmina, but a successful assaulton thesetypes of constraints will materially affect the gmina's success aslandlord and broker.

The Privatizationof Communal Housing

The sale of public housing has not been an unqualified success in any country in the

world, even where a functioninghousing market, adequate credit markets, and housingsubsidy

programs are alreadyin place. Thus, the gmina faces notonly traditional issues of housing

management, but also transition policies and evolution to a newsteady state of public/private

partnership. The basic themes of our discussion of privatization are as follows:

Privatizationof all or most of the communal housing stock, withsubsidiesprovided as necessary through housing vouchers, is a reasonable long-rungoal. The twogninas we visited differed in their perceptionof whetherthe gmina will eventually retain any units, but agreed that most of thecommunal stock could not be privatized in the near future.

The conclusion that the gminas will retain a considerable portion of theexisting communal housing stock in the near futureis supported by ourobservations that the housing market is severely disorganized, with

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considerable uncertainty as to the equilibrium price level, the pricegradient, and implicit subsidies required to support a given standard ofhousing. At the same time, even if the gmina retains a considerableportion of the communal stock in the near term, substantial privatizationcan be enormously useful not only in reducing the gmina's currentoperating

burden but also in stabilizing the housing market as a whole.A gradualist strategy would involve the gmina acting as a redevelopmentauthority, focusing private development in designated areas andundertaking gradual privatization of the communal stock. Privatizationcan be aided by gmina-financed sales using the DM. Such a financingmechanism not only meets the needs of purchasers but also seems wellsuited 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 numberof tenants cannot currentlyaffordmaintenance or rehabilitation.

Thus, the risks involved in rapid privatization are basically two-fold.First, there are financial risks to the gmina in providingadequatesupportfor low income housing. Second are the largely unknown dynamicsinvolved in reaching a market equilibrium. A rapid conversiondemonstration to test dynamic problemscould conceivably be undertakenin a few smaller locations if the central governmentwere to agree to assistin funding an adequate housing voucherprogram 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 newconstruction costs less costs of rehabilitationnecessary to bring units upto chosen standards of habitability (cost less depreciation).

* Complete or initiate those new construction projects already on thedrawing board, to assure the "sunk cost" of these investments is not lostto inflation.

Use joint venture relations with other housing sponsors (for example,cooperatives)to create new units on infill sites to reduce infrastructureandland development costs;

In conjunction with a "rehabilitate-and-sell"strategy, develop new unitson top of existing buildings to control infrastructure, foundation andrelocation costs, while increasing supply.

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short-term technical assistance for the duration of the project. The required number of localadvisors is not clear, but generalizing from Slupsk, Czestachowa, and our recent trainingmissions in other cities, it is felt that most cities and municipalitiescould benefit from long-termassistance. 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 exceedreasonable bounds.

Long-term guidance at the central level is also felt to be important. The functions of acentral advisor(s) would include: assuring consistency and coordination across treatment ofcommon issues, maintainingcommunicationsand policy support with appropriate ministries ofthe central government, managementof multi-localitytraining events, preparation of materialsthat can be used across localities, assistance in

defining and providing short-term technicalassistance from a common pool of experts, ideiitification and arrangement of training courses,and maintaining communications among team members and gmina officials. The reason forsuggesting two rather than one central advisor is that there are essentially two functionsinvolved: (1) management, scheduling, and coordination, aind (2) analysis, data collection, andpolicy development.

Topics in Technical Assistance and TrainingGiven 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 thegmina, we recommend considerable long- and short-term assistance and training. Relevanttopics include:

1) Information Gathering for Communal Housing, such as0 A communal housing inventory;

* A tenant inventory, including careful estimates of householdincome and characteristics;

0 Deferred maintenance, rehabilitation/demolitionestimates; and0 Market information on land values, and on sales of private,

cooperative, and communal housing to date.

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2) Management of Communal Housing, such as* Reorganization/restructuring/privatizationof some or all of themanagement functions of the regional housing authority (GPM)0 Public housing asset management including, maintenance,

rehabilitation, and demolition;0 Occupancy policies; * Rentdeterm-nation/incomeCertification/incomerecertification;and

* Fiscal functions and cost control procedures. 3) Systems Design, MIS, and Planning Methodologies for Managing

Communal Housing, including

Systems design, MIS, newndmethods of planning andmanagement (MIS theas 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.

4) Privatization of the Housing Stock, including0 Valuation procedures;

0 Rehabilitationdecisions: sale with or without rehabilitation;0 Relocation procedures; and0 Facilitation of financing, includinggmina-financed sales.

5 Design/Managementof Housing Subsidy Procedures, including* Local versus central responsibility for design and funding of the

housing subsidy programs in order for the gminas to solve thepuzzle of rent levels, sales price, and affordability.

6) Constructionand M'citgage Financing,including

Technical assistance and training for local banks; and Consideration of gmina-financed sales.

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7) Private Sector Developers and the Construction and Building MaterialsIndustry

Channelling technical assistanceand training as required;'buildingtechnologyand cost control will have an immediateimpact on localaffordability and the effectivenessof rehabilitationand relocationby the gmina.

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

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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 nowresponsible represents a substantial, but not necessarily majority, share of urban housing.

Section 2.2 discusses the authority granted to gminas under ciinent and proposedlegislation concerning communal housing. Options under the current law are quite limited. Inparticular, it is currently difficult to privatizeeqtire communal buildings,even though individualunits may be sold. The housing bill currently before Parliament will dramatically expand theavailable options. It will (1) allow gminas to divest themselves of responsibilityfor buildingsif more than half the tenants buy their units, (2) allow landlords (including gminas) moreflexibility in setting rents, and (3) allow eviction of tenants for non-payment of rent withoutprovision of comparable units.

Section 2.3 discusses the current housing market. It is difficult for someone accustomedto functioning markets to comprehendjust how disorganized, in an economic sense, the Polishhousing market is and how little information is currently available. To give one strikingexample, while the market shows many signs of a housing shortage, it is not at all clear thatthere is an (unsubsidized)shortage in the economic sense that the equilibrium market price issubstantially above construction costs. This lack of information on the current market isexacerbated by uncertaintyas to general price inflation and future wages and employment.

2.1 Overview of the Housing StockTable 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 privatelyowned units account for 80percent 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.

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TABLE 2.1Occupied Housing Stock by Type of Ownership

(1988 Census)

In Thousands PrivateCooperative Erterprises Commnal Total Sector

Urban 1,670.1 2,586.5 830.2 1,953.0 7,039.8 5,369.7Rural 3,007.5 19.4 525.3 124.7 3,676.9 669.4Total 4 677 6 2,605.9 1,355.5 2,077.7 10,716.8 6,039.1

Some privately owned units are, however, operated as part of the communalhousing stock, eventhough they are recognized as privately owned.

The owners of these non-owneroccupied unitshave, until now, had no rights in connection with the units (not even a special preference inobtaining one of them as a residence), nor any claim on the income from the unit, nor anyresponsibilityfor 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 alsosubject to claims by the former owners. Officials in Czestachowa believe that 20 percent of thecommunallyowned stock may be subject to such claims.

Communalhousing 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 confiscatedat the end ofWorld War II. Another 40 percent were built between 1945 and 1970 (about 20 percent during1945 to 1960 and 20 percent during 1961 1970).o Construction of communal housing

essentially stopped during the 1970's, when new construction was taken over by thecooperatives. However, about 14,000 new communal units (almost 7 percent of the communalstock) have been built in the last three years (1988 to 1990). Communalhousing was

owned andoperated by the central government until 1990, when responsibility for management andownership were transferred to the gminas.

Cooperative housing accounts for 24 percent of all residential units. Almost allcooperative units (99 percent) are in urban areas, where they have the largest share of any ofthe four types (about 37 percent). Cooperatives are building and managementsocieties, usuallyinvolving many buildings and thousands of units. Historically, the construction and operation

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of cooperativeunits were heavily subsidized. In general, however, residentsof cooperativeunitspaid a larger portion of operating costs than residents of communal units, partly because ofhigher resident payments and partly because cooperative units are generally newer and havelower maintenance costs.

The final type of housing -- other social sector housing -- is mostly housing owned andoperated by state-ownedenterprises, in order to provide housing for employees. This housingaccounts for less than 13 percent of all units (12 percent in urban areas and 14 percent in ruralareas).

Sales of State-Owned Housing How many apartments have been sold?' Data on sales is fragmented and often

inconsistent. The Ministry of Constructionclaims that about 60,000apartments have been soldso far (the majority of them in communal stock), which amounts to 18 of total state-ownedstock (communaland enterprise). At the same time, the approximate figure that can be derivedfrom the 1989 household budget survey, where the state-owned category is not identifiedseparately, would be below 10%. The more precise, but older source of data available is the1986 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; consideringthat some householdsshare a dwelling, this may translate into somewhat smaller percentage ofunits sold.

Sales have now come to a virtual standstill; it is not entirely clear why. The best unitshave probably been purchased and households with available savings may have used them.Large multi-familybuildings will be difficult to sell. Furthermore, savings have been erodedby inflation and economic uncertainty is pervasive.

2.2 The Current and Proposed Housing LawCurrent 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

1These data were prepared by Hanna Matris for the World Bank. Unpublished mimeo, 1991.

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gminas are allowed to set rents for commercial space in communal buildings. Landlords(including the gmina) cannot evict residential tenants for any reason unless they provide thetenant with housing comparable to that they already occupy. Tenants can be moved to allowmajor 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 theowner to live elsewhere without losing the unit and to bequeath the unit. It does not affect thecharges paid by the resident to the gmina (except that it frees buyers who live in units with morethan the allowed number of square meters per person from the penalty rents now imposed onthem for this excess space.) Nor does it affect the gmina's responsibilityfor maintenanceof thebuilding.

Sale of the building and land is a separate transaction and can currently be undertakenonly if all of the tenants agree to form a cooperativeto buy the building. This effectively rulesout privatization of most communal buildings, even though some communal units have beensold. Some buildingsoperated and maintained as part of the communal housing stock are in factprivately owned. Given facthe that rents are set by the central government and theimpossibilityof eviction for non-payment of arrears, the gmina cannot persuade these ownersto assume responsibilityfor their property.

Gminas also have considerable flexibility in organizingand funding the maintenanceandoperation of communalunits. In both the towns we visited, the gmina has taken over supervisionof 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-ownedenterprise* make it a company owned by the local government* make it a budget enterprise within the local government

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 andeither sell these or use them to add to the communal housing stock or replace communal unitsremo-ved through demolition or sale

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The,New Housing Bill. The housing bil! now before Parliament considerably expandsthe 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 aunit by unit basis. The draft resticts total annual rents during the firsttwo years after enactment to a maximum of 3 percent of the cost of newconstruction. Whether this ceiling would be applied on a unit by unitbasis or to a gmina's total receipts from communal rents is unclear.

* Second, the bill allows landlords (including gminas) to obtain a courtorder for eviction of tenants due to non-payment of rents, persistenttroublemaking, or vandalism. Landlords are not required to providealternative housing.

Third, the bill provides that when more than 50 percent of the residentsof a building buy their units,

title to the building will automaticallytransfer 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 ownersare 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 theevolution of the rental market and the future success of privatization.

Housing Assistance. A companion measure of great importance is a policy announcedby 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 of10 percent income for single persons or 15 percent of income for families. Familiesare eligibleif per person income is less than the lowest m.onthly pension (580,000 Z per month; $61); singleindividuals 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 householdswere likely to be eligible. This needssubstantiation,and, more importantly, local estimation. We were also told in Czestachowa thatthis program will be administeredand paid for by the gmina. However, the exact responsi

bility for designing, administering, and funding this program still needs clarification.

2.3 The Housing MarketAs 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 commitmentimplicit in new construction of any sort, the absence of location rents and neighborhoods to

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guide development decisions, and the problems, posed by macro-economic uncertainty forhousing finance.

Subsidiesand the Housing Shortage. There may not be, on a non-subsidizedbasis, anyhousing "shortage" in Poland.

This may seem counter intuitive. It can be demonstrated thatthere 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 evidenceof sales prices well in excess of construction costs. On the other hand, both the staff of theMinistryof Housingand an academic housing expert asserted to us that Polandcould not affordits current housing standards. Further, as discussed in Section 5, there are a number of r'eoplewho could not afford even the current maintenance costs

associated with their units, let alonepurchase them. We know that without any government subsidies, the current stock is at leastin a non-equilibriumdistribution, with possibly substantial numbers of people unable to affordthe housing they have, while others are willing to pay far more than the cost of new units. Whatwe do not know is whether the unsubsidized equilibrium price would call for expansion orcontraction of the existing stock in addition to its redistribution.

Of course, the unsubsidized equilibrium may not be relevant. The Polish governmentmay, as a matter of policy, decide to subsidize housing,

either in general or to assure a basicminimum standard of housing. Such a decision does not require publicly owned housing. Inprinciple, for example, publicly owned housing could be sold and consumption subsidizedthrough housing vouchers that low income households could use to help pay for housing in theprivate market. However, if the equilibriumprice of housing, or more exactly, the price-quality gradient, is inknown, then it is difficult to determine the budgetary requirements of such aprogram and the level of housing that Poland is willing to subsidize. This is not only a problemof not knowing the short run path of housing prices. We cannot

determine equilibrium priceseither. We could in principle project constructioncosts and real interest rates to estimate a longrun equilibrium supply, but still would have no information on land costs.

Location Rents. During our discussionsof the housing market in Poland, estimates ofthe cost of housing always revolved around the cost of construction. Location was mentionedonly in connection with cases where construction would involve costs for additionalinfrastructure (new roads, sewers, power connections, and the like). In contrast, in the United

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States we observe enormous variations in housing prices among cities and among neighborhoodswithin the same urban area. Intra-urbanvariations in particular reflect both locationalamenitiessuch as distance from jobs and services and the externalitiesassociated with the sorts of peopleand housing located in a specific place. Absent a market in land, there

is no way to determinelocational 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 communaland cooperative units was often (but not always) fairly random. This does not mean that thereare no neighborhoods in Poland. We were told in Czestachowa, for example, that there aredifferences among neighborhoods. Older areas near the urban center have received littlerehabilitation, so that they tend to be more often occupied by poorer households. However,there have been substantial barriers to economic segregation and the current locationaldistributionof residentsmay be far from an equilibriumone. This situationcreates considerableprice uncertainty, which in turn complicates the privatization task.

Macro-EconomicUncertaintyand Housing Finance. Because housing is a substantialand long-lived capital asset, expansion of the housing stock typically relies on long-termfinancing in capital markets. Such markets are vulnerable to inflation. Fixed rate mortgagesare extraordinarily vulnerable (from a lender's perspective). Variable rate mortgages reduce therisk associated with unanticipated inflation, but, like fixed rate mortgages, have the unfortunatefeature of having a payment stream structured to match short-term rates, so that the erosion inthe real value of the principal is paid off each year. The result is that real payments are veryhigh at the beginning of the mortgage and decline substantially thereafter. This substantiallyreduces the mortgage debt that a family can undertake to pay. The response to this is anindexed mortgage, which inflates payments (and outstandingprincipal) to match inflation. Thisallows for constant real paymentsand a much higher level of affordability. The major drawbackto such mortgages is the possibility that incomes can lag behind inflation so that real wages fall.

This can be addressed by the ingeniousdevice of the dual indexed mortgage, developedby the World Bank. Under a dual-indexedmortgage, the borrower's obligationsaccrue on thebasis of the price index, but actual payments are based on a wage index with the difference madeup by changes in the term of the mortgage. (See Chapter 6.0 and Appendix I for furtherdiscussion of the DIM.) While instruments can be devised to address the financing problems

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created by rapid inflation and uncertain reailwages, both single- and dual-indexedmortgages arenovel to Poland. Introductionwill clearly require considerableassistance.

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3.0 T E PUBLIC HOUSING INVENTORY

On the basis of recent reports together with inspections of sample dwellings in Slupskand Czestachowa, it appears likely that a substantial portion of the communal housing stock isphysically inadequate with respect to modem standards (either

European or United States) ofadequacy and condition. It is also overcrowded, and undermaintained. This chapter examinesbriefly several indicatorsof 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 constructionand rehabilitation. Apart from having to determine the ultimate disposition of this housing, itis clear the gminas must establish first a coherent set of investment priorities based on thecurrent condition of the communal housing stock and on the needs of current occupants.

3.1 Overview of the CommunalHousing Inventory Typically, definitions of housing adequacy include measures of structural soundness,

availability of basic facilities (particularlypiped water, kitchens and baths inside the dwelling).and measures of crowding. Interviews with public officials in Poland reveal that among allhousing units, as many as 300,000 dwellings (about 3 percent) should be demolishedimmediately 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 onthe periphery of the cities, and after 1965 was increasingly constructed with an industrializedbuilding technologybased on factory pre-cast heavy concretepanels erected in place with cranes.Though this housing exhibits a relatively low level of construction quality and negligiblearchitectural merit, it does tend to be physically sound. Clearly, then, the largest portion ofdwellings with inadequate facilities and poor structural conditions tends to be located in thecenters of cities and towns among the older buildings built before the war. Ironically, becauseof its more appealing architecture, it is this same housing which shows the greatest promise forrehabilitationand increased value.

'Interview with Mr. Krzekoto and Mr. Rogalinski, Department of Housing Policy, May 17, 1991.

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

'liYear Dwelling Constructed (in percent)(in 000's) Before 1945 1945-1970 After 1970

All Dwellings 10,716.7 30.5 31 8- Communal

- Cooperative

- Enterprise

-

PrivateUrban Dwellings

2,077.7

2,605.9

1,355.5

4,677.67,039.8

49.4

0.9

28.5

38.927.8

40

22.6

29 5

34.929.6---'4----

11

76.6

47.9

26.2

SCommunal

- Cooperative- Enterprise

1,953.0

2,58C.5830.2 of tshi

49.4

0.92.

40.3

954.

a 1.3

- Private 1,670.1l48.1l2 . 24.3

Source: 1988 Census

Availability of Basic FacilitiesA substantial number of units in the Communal housing stock (perhaps as many as 1/3of all units) lack private bathrooms inside the dwelling. Only in7 percent of dwellings

multifamly buildings feature separate bathrooms and central heating, compared to about 93percent in the cooperative stock.' Most of these are served by a shared WC in commonhallways. 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 urbandwellings (includingcooperatives,enterprise housing, private and communalhousing) 7 percent

l anna Matris, unpublished workingpaper, The WorldBank, June 1990.

IH. Kulesza, p. 20.

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lack water supply, 17 percent lack toilet facilities, 21 percent have no bathroom, and 30 percentare not connected to a central heating system.'

Comparable statistics for the communalhousing stock alone were not available, althoughlocal authorities are beginning to compile statistics on the communalinventory in theirjurisdictions. However, for most indicators of dwellingunit conditions, cort,.unal housing tends

to be the least adequate relative to the three other forms of tenure. For this reason, the numbersabove would appear to provide a lower-boundestimate of the overall condition of the communalhousing stock nationwide. In the case of heating, for instance, it is estimated that only 43percent of communal housing units are connected to a central heating facility; with the balancerelying on coal-fired stoves in each of the main rooms of the dwelling.5 (See Table 3.2).

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

1988 1989

Total Units in 000's (urban) 2,037.5 2,042.5Useful Space in 000's meters 92,977.4 93,515.2 Average Useful Space (meters) 45.6 45.8Percentage with Central Heating 42.8 43.3 Average Number of Rooms/Unit 2.72 2.73

Source: Hanna Matris.

The absence of central heating, in many cases, is due primarily to the lack of districthot water distribution lines in the streets of the older parts of towns

where a large portion of thecommunal housing stock is located. (It should be noted that very few buildings of any kindcontain their own separate heating facilities).

4Irena Herbst, Housing Finance International, August 1990. p. 42.-'Hanna Matris, Table 2: Housing Stock in Administrationof Local State Authorities, December 31, 1989, also,H Kulesza, interview May 13, 1991.

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By contrast, most communal housing built after 1970 on the edge of the towns tends tohave smaller room sizes than, their pre-war counterparts, but also to contain kitchens andbathrooms with hot and cold water, and to be heated with hot water radiators connected tocentral 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 usagewithin the unit.

OvercrowdingIn Poland definitionsof overcrowding,of course, differ greatly from those in the United

States. The current standard of adequacy is about 10 square meters of usable space -- includingkitchen and bath -- per individual (106 square feet). The average communal housing unit in thetowns contains 45.8 square meters (484 square feet), and serves 2.53 people in 2.73 rooms(includingkitchen). While design standards regarding useful space for familiesof different sizesfor new housing have increased by 15 percent over the last 12 years, the proportion of.householdswho are technicallydefined as overcrowded has not diminished. Table 3-3 providesan estimate of average unit size for cooperative housing.

TABLE 3.3Average Size of Newly Constructed (Cooperative)Apartments, by household size

Persons sq. meters1978

sq. metersper person

sq. meters

1987

sq. metersper person

1 25.6 25.6 34.3 34.32 33.8 16.9 36.2 18.13 46.4 15.5 50.2 16.74

57.7 14.4 61.8 15.45 66.5 13.3 72.5 14.56 74.4 12.4 85.7 14.3

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

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For all dwelling units, roughly one out of every five households is overcrowded. It isestimatedthis number is considerablyhigher for those living in communal housing. The averagenumber of fiats produced overall has fallen to about 285 units per 1,000 population, far lowerthan the neighboring countries of Hungary and Czechoslovakia, and far less

than necessary tomeet increasing demand. Among communal housing units there is a zero vacancy rate. Themost obvious factors contributing to this housing shortage include:

* an inefficient building delivery system supported by central governmentsubsidies and relying on the vertically integrated kombinats (state-ownedbuilding companies) who have been unable to deliver a sufficient number oflow cost units designed to serve the poorest families;

* continual shortages of building materials and capital necessary to meet thehousing needs of a growing population; and

* huge discrepancies between rent payments and actual operating costs, which until1990 were subsidized by the central government.

The rate of new apartment constr'uctionhas slowed appreciably, as the costs of buildingmaterials, 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, cooperativeand enterprise) had shrunk to 10,000 from 20,000 units in the first quarter of 1990. As thenumber of units in the pipeline continues to shrink (10 percent last year), the waiting lists fornew cooperative housing units grows longer, and in many places has reached 15-20 years. Inthe 10 year period from 1978 to 1988 public sector housingconstructionhas declined40 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 togrow.

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

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TABLE 3.4State Sponsored Housing Construction 1990 and First Quarter 1991

Completed UnitsIn Construction

State-FundedTotal inTOTAL

UNITS total* coopsPrivate State-

fundedProcessEnd of

1990 total

1 quarter

if quarter121 quarter

134.2

23.2

28.430.0

86.8

16.1

18.5

20.6

67.2

12.8

14.9If.8

47.4

7.1

9.994

starts

72.8

20.0

15.418.7

Period

175.6

182.1

177.9173.1

[V quarter 52.6 31.6 22721.018.7 175.6

I quarter 23.7 18.0-5.--57-10.-167.

Jan-Apriiil, 32.1 245 21.2 7.6 NA 6 .

State: cooperative, communal, enterprises

Source: Hanna Matris, unpublishedpaper, The World Bank, 1991

Inspection of Units in Slupsk and CzestachowaThe team's visits to Slupsk and Czestachowatend to confirm the general pictureoutlinedabove 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 recentlyconstructed (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 cooperativehousing development.The buildings were constructed using

the heavy pre-fabricatedconcrete slab system. The unitsvisited 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 noinsulation in the walls, floors or ceilings. The unit in Czestachowa totalled 48 square metersand was occupied by a widow, her two unemployedsons, and the new wife of one of the sons.

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--

would be less likely to be overcrowded. For these, as well as for the new units, the monthlyrents were the same 1,320 zlotys per square meter (1.3 cents per square foot) -- although theoperating costs for the new units were substantially lower. The typical 52 square mete,, flatould thus rent for about $7.30 (not including utilities), irrespectiveof operating costs, whichmight be

four or more times that amount.7 The "worst" communal housing units in Supsk and Czestachowa were indeeddilapidated. In Sipsk, out of a total of 1,452 buildings now under their ownership, the gminahas identified nine properties comprising about 116 flats that needed to be tornimmediatelydue to their hazardouscondition.down

In one case, an entire building built in 1908 wassinking due to inadequate foundations on filled land near the river. In another case, settlingproblems were confounded by ground water absorption into the first floor units, creating aserious moistureproblem and health hazard for a family of seventhat had been living in the unitfor 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 34buildings (about 340 dwelling units) out of the total of 670 buildings (about 5 percent) need tobe torn down. Although few in number, there severalre families, who due to the severeshortage of housing, are forced to live in partially abandoned, rat-infested buildings, or inurned out apartments for which no money has been available to make repairs.Due to the lackof alternative housing, there are essentially no effective or enforceable sanctions for buildingcode violations, either for public or private owners of property. Fines of 300,000 zlotys permonth are either not levied or, if levied, are ignored. Under current law no evictions foruilding violations or nonpayment of rent are possible without replacement housing (which is

not available).

3.2 Maintenanceof Communal HousingIt was clear from our visits that there is considerable variation in the amount ofnformation compiled and available to the gminas regarding the present condition of thecommunal housing stock. In Slupsk, for example, data describing the inventory of units wasfairly comprehensive and included information about building age, type of construction,

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

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condition, and numberand compositionof households. In Czestachowa, on the other hand, datadescribing characteristics of the housing stock were less complete. In neither town werestatistics on historical maintenance costs available. Nor were there accurate data availabledescribing levels of need for maintenance and repairs across different

types of housing. (Asnoted in Chapter 7.0, in both towns the absence of a computerizeddatabase prevents a coherentand flexible analysis of housing needs and resources.)

The visits to housing units in Shupsk and Czestachowa revealed a serious lack ofmaintenance 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 incommon areas was clearly a major problem. In the older buildings, absence of lighting incommon 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 lackof funds to provide regular maintenanceservices to the communal housing stock. Until recently,it was possiblefor residents of communalhousing in Czestachowa to secure materials from GPM(the central housing authority) and to perform maintenance themselves. However, thesematerials are no longer available.

Under the prior system the GPM in Slupsk had a Z20 billion zloty maintenance budgetfor 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 tomaintain the housing in good condition -- about Z70,000 per square meter. This means thatrents fall short by a factor of four or five in addressing the maintenance needs of communalhousing.

Furthermore, these figures in no way address the tremendous "overhang" of deferredmaintenance that would need to be eliminated to bring units up to a more habitable conditionaccording to modern standards. In Shipsk municipal officials estimated that Z200 billion ($20million US) would be required for eliminating deferred maintenance and bringing units up tostandard. Assuming this estimate applied only to the 9,200 apartment built before 1961, thisimplies a need of about $2,175 per apartment, or $3.78 per square foot. In Czestachowa, thefull scope of the problem has not been estimated by the municipal government. However, basedon cursory inspections, it would not seem unreasonable to posit a similar level of deferredmaintenanceproblems. Clearly, in most towns the lack of regular maintenanceservices severely

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underminesthe value of communalhousing units while sharply increasing the costs of repair inthe future. If changes in rent continue to lag behind inflation, very soon not even emergencymaintenance services can be afforded by the gminas.

3.3 Cost of New Construction and Rehabilitation. Due in part to rapid inflation and extremely high interest rates, very little housing iscurrently under construction in Poland. Building costs for traditional apartment buildingconstructionhave been quoted in the Z3 million per square meter range (about$28.40per squarefoot), althoughprices (per square meter) tend to vary geographicallyfrom western Poland (Z2.5million) to central Poland (Z3.0 million) to eastern Poland (Z3.5 million). Few people willhazard a guess as to what kinds of savings might accrue to the introductionof more modem

technologiesand more aggressive construction managementpractices. One private contractorin Czestachowa indicated that, using his own crews and subcontractors, he is biddingjobs atabout the same amount on a per-square-meter basis (Z2.5 million) as traditional kombinatbuilders. However, he believes he can cuL construction time for a 150 unit apartment buildingfrom 24 months to 18 months. With inflation running at, say, 50 percent per year, real costswould thereby be reduced by about 13 percent (not including the savings of interest payments

on a construction loan). In anothercase in Szczecin, a local architect/builderdeveloped zero-lotline, one- and two-story, single family housing that can be constructed in the range of Z1.8-2.0million per square meter (about $18 per square foot). The savings resulting from introducingsuch 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 canbe found to complete three buildings already started, and to begin two others now planned (fora total of 137 units). One building will be traditional block and plaster, and is projected to costabout Z2.4 million per square meter. Two others already underway were originally estimatedat Z2.1 million per square meter. Now, cost to complete may be as high as Z3 million permeter, not including interest during the construction period. Until these projects are complete,the gmina has little flexibilityto decide how to allocate scarce housing resources, or how to meetrelocation needs if rehabilitation projects are to be undertaken.

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In Czestachowa the municipalgovernment is taking an aggressive posture in proposingto develop 16 units of new housing in town house format, and selling that at the highest possibleprice (perhaps Z5 or 6 million per square meter), and to reinvest that money into 75 lower costunits which would be available at a lower rent. Such leverage will only

work if building costsare 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 slow, toooo wet (not amenable to cold weatherconstruction), too heavy and therefore too expensive to use in today's high interest rateenvironment. If a typical 100 unit four-story project takes two years to build at Z2.5 millionper 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

squaremeter 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 Bankwould require a monthly household income of Z3.5 million -- well above the present medianincome in Poland (see Chapter 5.0).

A second major problem is the extremely high cost of new infrastructure (districtheating, water, electricity, gas, telephone). For new projects, it has been estimated thatinfrastructure alone might add to200 Z400 thousand per square meter to the cost ofconstruction. 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 toundertake 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 theolder housing now under their control. Rehabilitationcan offset the negative consequences ofdeferred maintenance, and reduce maintenance and operating expenses. Renabilitationprioritieswould normally be aimed at upgrading the condition of the worst units (e.g. those seriouslythreatening the health, safety or welfare of the occupants). Particularlyamong older buildingswith architectural merit in the centers of towns, rehabilitation can restore value and attract

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private investment, and thus enhance the tax base of the community. Sale of some of therehabilitated units could add much needed capital into local government treasuries.

In Siupsk, there is a definite commitmentto restore much of the older housing in thecenter of town and to make these areas more attractive. Maintaining the medievalcharacter andcharm of this older stock reflects a central priority of the gmina. In Czestachowa there areseveral projects underway to totally renovate a number of buildings at an estimated cost of ZImillion per square meter -- less than half the cost of new construction. This entails structuralrenovation, introduction of a complete bath and kitchen in each apartment, double glazedwindows, 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 rehabilitatethe most attractive buildingsare undermined by

the lack of relocation housing. There are few places to move the families whose apartmentswould 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 relocationresources are formally identified.

Overall, there is a dire need for new housing which is projected to cost about Z2.5-3.0million per square meter (excluding interest costs during construction),or Z135-165million per

54 square meter apartment. Rehabilitationmay cost one third to one half of that, but does notcreated new units, unless through conversion. Taking care of the backlog of deferredmaintenance may require as much as Z21 million per E.partment, while ongoingmaintenance/managementitself costs roughly Z70,000 per apartmentper month, not includingutilities. As elsewhere, there are no easy solutionsto the problems of providingdecent housingat a price people (and governments) can afford.

Valuing the ComnxnunaiHousing InventoryThe new housing law requires that in disposing of residential buildings through sale tothird parties, the gminas must take into account the building'spresent value, which is defined

as its replacementcost less its depreciation. "Replacementvalue" is not too difficult to estimate,but "depreciation" is, since there are no hard and fast rules about useful life. One way toapproach this problem is simply to define depreciation as that amount of money that is required

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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 beworth 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 thecentral heating plant, needs a newroof 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 rehabilitationof Z960 million (Z1,68' millionless Z720 million), or Z1.6 million zlotys per square meter. While the "comparable sales" and

"discountedcash flow" methods of valuation may eventually be usefulin Poland, when there isa 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 constitutesa "well defined standard of habitability". A usefulplace to begin, however, might be the current standards for cooperativehousing regarding space

and basic facilities.

3.4 Addressing Supply Constraints:Managing New Constructionand 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-privateentities preparedto 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 governmentswill be called upon to sponsor housingdevelopmentprograms in one

form or anoth,r. It is clearly desirable that gminas privatize as muchof the communal housingstock as possible. Over the near term, however, the initiative for creating new or renovated

housing will rest with themunicipal governments.This scenario requires that local agencies with the resources of land and infrastructure

be able to act as (co)investorsof 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 equilibriumthrough filteringand migration, and for a rehabilitationstrategy

to get off the ground. Given the costs outlined above, municipalitiesmust also be ableto speed

up the developmentprocess; this could be assisted by:

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* expeditingpermits 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/constructionprocess as

efficientlyas possible, and using fast-tracked, modem construction systems without relying on foreigntechnology.

With respect to implementing rehabilitations strategies, one intermediate solutionbetween new construction and rehabilitation would involve adding one or two stories on topof existing two- or three-storybuildings to create new units. The advantagesof this strategy areclear:

* No new connections to, or installation of, new infrastructure are requiredunless those utilities in the street are inadequate to start with);" No new foundationswould be required (preliminaryarchitectural studies showost foundationsand bearing walls are structurally sound enough to carry twomore floors);

" There would be substantial cost savings in the creationof these atticunits, sincehey 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)ould be in place before winter. Work could be completed in six months orless; and

Renovation of the first through third floors could be completed after the atticnits were created, thereby requiring no outside relocation.

The clearadvantage of this approach lies in the fact that the gminas would be taking fulladvantage of the infrastructure already in place, rather than having to expend major funds toinstall new infrastructure to "greenfield" projects (the traditional approach during the last 30years). This assumes, of course, that there is already adequate capacity in the infrastructurealready in place. Construction costs per square meter might be half that of new construction.

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SummaryThere 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 areconfronted with a broad range of deficiencies, overcrowding, and deferred maintenance forwhich the projected costs to correct are overwhelming and certainly not within their currentbudgets. 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 thedrawing board, to assure that the "sunk cost" of these investments is not lostto inflation, but is redirected to creating a little slack in the very tight supplypicture.

" Aquisition of one or more small computers to build accurate databasesdescribing the presentphysical and financial conditionof the communalhousinginventory, and the characteristics and needs of its occupants.

" Identification of potential relocation housing resources (particularly underutilized nonresidentialspaces that could be converted to temporary residentialuse), so that when rehabilitation projects or unit sales create the need to findalternative housing, that housing will be there.

" Provision of training in modem construction organization and managementsystems to speed up the construction process and control

costs. Supli,,rt forsmall construction enterprises by making bidding opportunities available andoffering low rental rates on under utilized construction equipment that nowbelongs 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 electricor gas hot water heaters, etc. which will permit more efficient heating andmore appropriate user charges.

" Planning for infill, site intensification, roof-top and general rehabilitationstrategies in the center of town to revitalize these neighborhoods, createopportunities to privatize the stock, and establish a private market.

Recommended training and technical assistance programs designed to support theseefforts are discussed in Chapter Seven.

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4.0 CURRENT MANAGEMENT OF COMMUNAL HOUSINGIn both Slupsk and Czestachowa, the gmina has taken over supervision of the localhousing authority (GPM) responsible for the operationof the gmina's communalhousing. Thislocal authority still operates as an independent

organizationwith its own board of directors andstaff. 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 independentprivate 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 themeantime, thegmina 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 theincentives and options provided by cirrent law. In Slupsk, the focus has been on controllingoperatingcosts and increasingcommercial revenues to eliminate operating deficits. Indeed, asdiscussed below, the potential seems high for offsetting losses on the residential units withsurpluses from rental

of space to commercial ventures. It is not clear, however, whether thesituation in Slupsk is unique, since 9 percent of its communalver space is devoted tc commercial operations.

Czestachowahas focused less on operations, perhaps because it has been interested in theprofits available from development. Housing efforts in Czestachowa now underway includeconstruction of three new buildings. One of the buildings, with 75 units, is intended as lowincome housing and will be added to the communal stock. The other two buildings have eightunits each and are being builtto a higher standard. The gmina intends to sell these to privatebuyers and use the profits to help pay for the low income units.' More important, althoughCzestachowaattracts some 5 millionvisitors a year becauseof the Shrine of the Black Madonna,

7The Gmina expects to construct the 16 higher quality units for roughly Z260 million each. Gmina officialseport current market prices o r such units of Z650 million. if the 16 units were in fact to be sold o r this amount,he total profits of Z6,240 million would finance roughly 2,600 square meters of low income construction.

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it has few hotels or other tourist facilities. Accordingly, a major priority for the gmina isdevelopment of hotels, shops, restaurants, and so forth.

Expenditures and Revenues for CommunalProperty in SlupskSlupsk has made major progress in understanding and reforming communal housingoperations. The discussion that follows reflects almost entirely the situation in Slupsk. Whiletentative reorganizationplans in Czestachowa are similar in outline to those in Slupsk, Slupsk

had gone further in both implementationand detailed planning.'It is generally known that residential rents in communal housing do not begin to coverthe cost of even routine operationsand maintenance. This was confirmed in both Czestachowa

and Slupsk. It appears, however, that in Slupsk commercial rentsmay yield enough profits toallow communal housing to break even in terms of current operations.

Monthly expenditures for current operations for residential housing in Slupsk wereZ2,299 per sq. meter during the first quarter of 1991, as shown below:

TABLE 4.1Monthly Expenditures for Operation of Communal Housing in Slupsk

Expenditure CategoryMonthly Cost Per Square Meter

Housekeeper salaries (including taxes)(Zlotys)

316

SewageJanitorial and routine maintenance1.4

Water and pipe15

Local office administration36(and maintenance services and supplies)36

CentralAdministration 149

TZ2,299

Source: Based on conversationswith Slupsk Officials.

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

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Residential rents, on the other fiand, averaged Z916.6 per sq. meter in April, 1991,or about 40percent of operatingcosts.

The monthly operating costs for commercial space were estimated at half theresidentialcost, or roughly Z1,150 per sq. meter. Gminas are free to set rents for commercial

space in communalbuildings, and commercial rents in Slupsk averaged Z29,647per sq. meter.The result is that the operation can in principle break even and fundven a very modestreduction in the backlogof previouslydeferred maintenance. Slupskofficials indicated that theywould like to spend about Z666.7 per month for reduction of the backlog.

TABLE 4.2COST AND REVENUES IN COMMUNALHOUSING IN SLUPSK*

TYPE OF RENTAL Monthly Cost MonthlyRevenue NetSPACE Area in(000s) Per Square Total Per Square Total Total

Meter (000,000s) Meter (000,000s) (000,000)Residential Operations 645.3 2,299 1,483.5 916.6 591.5 Commercial Operations 59.3 1,150 68.2 29,647 1,758.1 1,689.9

Gross Operating Profit 797.9

Accrued Maintenance perMonth not included in current operating costs

Net Operating Profit 131.2*Monthl costs rd revenues based on January through April 1991

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

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that almost all residential tenants in arrears really cannot afford to pay. In Czcstachowa thebelief is the reverse, that about two-thirdscould afford to pay. Both have a fairly standard setof procedures for collecting back rents including letters, public notices, and rent collectors.

Commercialarrears in Slupsk appear to reflect non-paymentof past increases whiletheywere being appealed to the gmina. Commercialtenants can be evicted at will with three months

notices. If commercial or residential tenants do not pay their rents, the gmina can get a courtorder that allows them to seize the tenants' property in lieu of the required rent, but the processis felt to be cumbersome and expensive (at least as applied to commercial tenants).Furtiermore, commercial space includes rental to public institutions, such as libraries, wherethreats of seizure and eviction are not effective.

Reorganization cf Housing Management in SlupskIn 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 firstquarter of 1991 appears to have been running at an annual rate of Z18.6 billion, or about 70percent of the Z26 billion originally budgeted by the housing authority. This at least partlyreflects reductions in staff (mostly administrative)from 405 persons on January 1, 1990 to 369as of March 31, 1991.

TABLE 4.3Changes in Housing Authority Staff in Slupsk

Staff Category January 1, 1990 March 31, 1991 Change

White Collar 154 133 -21

Housekeepers 97 94 -3

Maintenance 7770 -7

Services 10 8 -2

Drivers 23 21 -2

Mechanics 5 5 0

Other 39 38 -1

TOTAL 405 369 -36

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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 ofauthorityoperations. The gmina plans to decentralizeoperations into four operatingunits. Eachunit will be responsible for rent collections and operations in the buildings in its area, and willbe expected to be self-supporting. (Given the importance of profits from commercialspace, thegmina is attemptingto allocate buildings across districts so that commercial revenuesare roughlythe same in each district). They are consideringencouraging the 80 or so workers in the centralrepair unit to form their own company, which would then compete with other firms for repaircontracts.

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5.0 AFFORDABILITY

5.1 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 inturn affects decisions with regard to type and intensity of rehabilitation, building-by-buildingsales strategies, and long-term versus shorter-term horizons in planning sales.

As might be expected, however, our understanding of income levels and the incomedistribution is inadequate to the task. Income policies under the current economic reformprogram constrained the growth of state sector incomes in the short run. Additionaluncertaintieswill occur in the medium term as public firms are privatized or liquidatedand thelocus of

employment shifts increasingly to the private sector.Our current understandingof income and rent can be summarized as follows:

Income and Rent

Income is low in Poland; it is comparable to that in lesser developedcountries in the World Bank's classification of lower-middle incomecountries;

Rent burden for communal housing residents is moderate for all but thelowest income groups; however, rent burden is not as low as in therecent past and is currently rising as charges for both rents and utilitiesare 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 forthe housing they want. On the other hand, rent burdens can probably beincreased for inany segments of the population; these households will beable to pay as rents in communal housing rise toward more appropriatelevels.

Macro-economic Policies

The affordability situation may get worse before it gets better. Polandwill probably get poorer in the short- to medium term: a plan for wagesto increase more slowly than prices is built into the reform plan as anintegral part of the fight against inflation. Thus, real income will fall bydesign;

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* Compounding this is the expectation that unemployment, alreadyincreasing at a rapid rate, will grow worse during the process ofprivatizingstate-ownedindustries. Regional unemploymentmay be severein some cases;

Income and Tenancy Status

* As has been discussed, householdsare not sorted out in the market in theways we understand. Ownership actually falls with income, sincedwellings in rural areas were generally not expropriated.

* Nearly the same proportion of the two highest income brackets live incommunal housing as of the two lowest income brackets. We alsounderstand that a very broad mix of professions and social classes arelikely to live in the same building, which may complicate the reshufflingproblem;

Affordabilityof 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 utilitiesFurthermore, since current expenditures greatly understate what shouldbe spent to cover ongoing repairs, and do not begin to correct for themaintenance backlog, "spending" by tenants at current levels wouldperpetuate t. : overly rapid depreciation;

Most households could afford minimal rehabilitation to a small unit ifcosts were financed under a DIM; many could not afford to rehab alarger unit and/or to undertake more extensive improvements (many ofwhich are building-widesystemic problems involving plumbing, heating,roofing, and so forth);

* Extremely few householdscan afford a new unit, even a modest one, andeven if financed under a DIM.

5.2 Income

Accurate information on household income is currently not available in Poland. Themost 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 includeso-called "second economy" income, which is thought to be substantial for many households.

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Our discussion of affordability will utilize three estimates of household income:

* income (and expenditures)obtained in a survey conducted by the districtof 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 forMarch 1990, and updated to March 1991 using the increase in the wageindex.

Tables 5.1 and 5.2 show the results of the incomeand expendituresurveys in Slupsk andCzestachowa.' Incomes are presented for four categories of households: workers (presumablyin state-owned enterprisesand in the private sector); farmers; worker-farmers;and retired anddisabled persons (presumably receiving pensions). Average monthly family incomes foremployed 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 thefour groups, expendituresexceed income. (Municipalofficials noted that the shortfall was beingfinanced out of past saving.) In any event, despite their limitations, the surveys offer insightinto typical family budgets, including payments for rent and utilities.

The survey estimates of income are quite consistentwith those derived from the nationalincome 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 twofigures; the World Bank currently uses a median of $300 per month. Average income in thelowest 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 adjustmentof 15 percent to

'These data were speciallyprepared for our team in response to our questions about income, rent, and familybudgets.

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TABLE 5.1 Income and Expenditures

Slupsk District1st Quarter 1991 (Zlotys)

Households Average AveragestutrofEpmeprHuehl

VJof households insurvey)

Monthly

Income ofHouseholds

(Zlotys/

monthly

Expenses c,!Households Foo Al

o o

S r c u e o

Clth n

z

Ret

e osh l

C a/ etngCoH H ge eO h rdollars) &

Tobacco&

FootwearElectricity and

Health

Workers (employees ofcompanies)(57)

Farmers

(1100.0%

Work#rs-Farmers

1,901,397($200)

2,212791

3,318,101

2,271,464

100.0%

2276,775

($3)($76)

3,586,051($4)(z39)

1,1 17,613

49.2 %

554,9(P_

24.4%

869,323

65389

2.9%

60,858

2.7%

141.253

210,694

9.3 %

149,761

6.6%

476,911

195,057

8.6%

719,883

31.6%

366,247

100,813

4.4 %

60,050

($6)2.6%

1050

Communal Housing Poland 1991

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