The present

According to figures from the Ministry of Natural Resources of the Russian Federation, the services of centralized water supply are available to 30% of all population centres in the Russian Federation, with the services of centralized sewerage available to a mere 5.5%, including in towns to 99% and 97% of the population respectively, in settlements 93% and 74%, in rural areas no more than 29% and 4%.

The country has a total of 8801 water-supply systems, with centralized water supply used by 106.5 mln people resident in 1092 towns and 1872 urban-type settlements. The total length of the water mains in Russia's population centres is 463.0 thou. km, including 200.9 thou. km in towns (43%). The capacity of water-supply systems is estimated at 90.0 mln cbm/day, with towns accounting for about 71.0 mln cbm/day (79%).

To date, the condition of Russia's utilities, and in particular of the water and sewage utilities, is considered critical. According to figures from the Federal Agency for Construction, Housing and Utilities, as of the beginning of 2005, the degree of wear and tear on public utility infrastructure facilities in certain municipal entities is as high as 70-80%, with the degree of wear and tear increasing by 2-3% annually.

In the sector of water and sewage utilities the wear and tear on property, plant and equipment ranges from 50 to 70%. Specifically, the wear and tear of water mains is 65.3%, of sewerage networks 62.5%, of water- supply pumping stations 65.1%, of sewerage pumping stations 57.1%, of water purification facilities 53.9%, of sewage treatment facilities 56.2%.

Such situation is the result of inadequate management system, dominance of political expediency over economic considerations in the area of tariff regulation, unsatisfactory financial situation, high costs, lack of economic incentives to cut the costs related to the provision of public services, underdevelopment of competitive environment resulting in poor performance of businesses, massive losses of power, water and other resources.

At the beginning of economic reforms it was believed that a transition to unsubsidized operation of utilities would be completed within a sufficiently short period of time; the socioeconomic situation, however, made it impossible to complete the transition, and by the beginning of 2001, the public paid about 60% of the cost of utility services, which actually meant, with exemptions and allowances factored in, about 40%.

The continuing budget allocations for housing and public utilities, in turn, led to a dramatic increase in the wear and tear of the capital assets at the local level due to a shortage of funds. The situation deteriorated particularly sharply in the territories that received financial assistance.

In 2000 the shortfall in funding for the housing and utility sector was more than 20% of the amount of the funds needed. The problem is aggravated by the enormous amount of arrears in housing and utilities, due first of all to the failure by treasuries at all levels to honour their commitments. The arrears triggered off a chain reaction of payment defaults which has extended to cover virtually all sectors of the economy.

The situation being what it is, the housing and utility sector is on the way to become a threat to the social and economic growth of the nation.

The technical condition of public utility infrastructure in Russia is characterized, in addition to a high level of wear and tear, by a high accident rate, low efficiency of capacity utilization and high losses of energy products. Scheduled preventive maintenance has given place to emergency-response and accident-recovery work, the cost of which is 2-3 times higher. This has aggravated the problem of supply of the Russian population with drinking water, the shortage of capacities for water conditioning and purification and wastewater treatment.

One of the causes of the present situation is that the municipal utilities have little or no economic incentives to streamline the cost structure and cut down on inefficient use of materiel. This results in the consumption of electric power for the production and marketing of 1 cubic metre of water being 30% higher than the European average, the number of personnel per 1000 residents serviced 1.5-2 times higher than at similar European businesses, the consumption of water per resident in 1.5-2 times higher than in West-European countries.

Review of the majority of investment projects proposed by municipal authorities to develop the public service systems shows that they are mostly designed to extend the capacities, with far fewer measures contemplated for the reduction of costs, losses and leakage.

Failure to provide budgetary allocations and lack of effective and transparent procedures for setting and changing tariffs make the housing and public utilities sector unattractive for private investment. On the other hand, a majority of public utility infrastructure modernization projects are potentially commercially attractive. Reforming the sector and putting in place conditions for inflow of private investment may fuel a dramatic change in the technological and financial situation in the sector.