Monetization of subsidies: political bribe or reform?

 

At the beginning of 2019, the Government decided to introduce a cash form of monetization of privileges on the eve of the elections. This innovation caused sharp controversy. Some experts believe that the introduction of cash monetization just before the election has signs of political bribery. The other part believes that this political decision has more advantages than disadvantages, even without taking into account the political component on the eve of the election.

In Ukraine, citizens have the right to receive a subsidy – a targeted state aid for housing and communal services (housing and communal services). The size of the subsidy depends on the income and the amount of the payment for the housing and communal services. Until recently, citizens received it in the form of a discount in payment for the housing and communal services. Such a “cashless” system had many disadvantages. Some of them had rather technical nuances for consumers, such as the lack of clear deadlines for the payment of subsidies with service providers. Others were associated with opaque and corrupt schemes in subsidizing, since the “no-money system” was rather confusing, privileges were calculated on the basis of certain social norms that were higher than actual consumption of services and lacked targeting.

 As a result, the system did not contribute to the growth of a sophisticated attitude towards consumed resources. The biggest disadvantage was the fact that the system violated the right of citizens to choose state aid and distort competition in the housing and communal sector.

The mentioned disadvantages solve the so-called monetary monetization of privileges. Its essence lies in the fact that citizens receive a subsidy in cash, which covers part of the bill in the payment. The principle of the subsidy’s assessment as a whole remains unchanged – the amount of the subsidy depends on the income received and the amount in payment for the housing and communal services. The monetary form of the subsidy at an appropriate level of implementation increases the targeting of its provision and fills the system of settlements for housing stock in “live” money. This in turn increases the ability to control the use of subsidies, increases the transparency of the settlement system in the housing and utilities sector, enabling service providers and electricity to receive timely payments for subsidies.

And most importantly, monetization contributes to the population’s saving in the use of electricity and motivates them on the rational use of state aid. Having received “live money”, the citizen will be able to save on the consumption of utilities, and save money, use for the purchase of other goods and services. Or take up energy efficiency of their  homes. Of course, there is a risk that citizens will be able to “eat” monetary aid without paying for housing and thereby increasing their debts. However, there is a mechanism for preventing such behavior – if a citizen does not pay for HCS consumed during a certain period, he or she automatically loses the right to receive a subsidy.

The path to monetization

The preliminary system of housing assistance, which, in addition to formal care for low-income citizens, was actually aimed at supporting enterprises in order to protect them from possible non-payment, was burdensome for the budget, had low targeting and high opacity. The economic situation has changed, and the defects of the old system have actualized the issue of more efficient use of taxpayers’ funds. Housing subsidies, which actually had the form of a price discount, were replaced by aid in the form of live money.

Only at the end of 2018 the Government was offered a monetized form of subsidies. The very transition to a monetized form of subsidies should take place in three stages.

1st stage. From March 1, 2019, monetized grants should start receiving those families who would seek help for the first time.

2nd stage. From May 1, 2019, monetization will affect those who receive a subsidy for many years in both periods – both in the heating season and in non-heating. This approach is associated with the specifics of the housing and communal services cycle. The recalculation of the subsidy amount is provided twice a year: in May – in the summer, in October – in the heating period. Therefore, those who receive a subsidy now and on their own income fall into the program of “summer subsidies”, from May could monetize the payment.

3rd stage. From October 1, 2019, the remaining subsidies will be transferred to the new scheme of subsidies payments. That is, those who receive a subsidy only during the heating season.

Consequently, the apartment building co-owner association (so called OSBB) took a critical position on this approach. The introduction of special accounts and their automatic administration of accounts with Oschadbank substantially complicates their work. In case of a significant number of subsidies among members of OSBBs, cooperation with Oschadbank for the transfer of a subsidy will be able to bury its management (OSBBs) under the tone of contracts, so that the chance to receive funds from Oschadbank in accordance with the prescribed calculation scheme would be extremely low. After the President’s meeting with the participation of OSBB representatives, the Government decided to start cash monetization as early as March 2019. As a result, both cash and cashless monetization mechanisms will work in parallel.

“Underwater stones” of cash monetization

As a result of the political decision made by the President on the cash form of monetization, sharp discussions have arisen. Among the discussed issues, it is worth to highlight the following:

  • Is it desirable to start cash monetization before the end of the heating season?
  • Is there enough money in the state budget? Cash monetization will require UAH 6 billion monthly for subsidies.
  • Will the grant of cash subsidies continue after the end of the election? There is a risk that, after the election, the cash subsidy payment process will be rolled over and the state will return to the “quasi-cash” form using special accounts.
  • Will there be any temptation for subsidies to “eat” the state aid received instead of paying bills?
  • Will the significant inflow of cash cause inflation processes?
  • Will the targeting principle of state aid be respected and will the verification of subsidies will be completed?

In addition, the program still has a number of negative features that still need to be upgraded.

First, the criteria for providing housing subsidies work worse than in other social programs of the country. The program has low targeting, which means that the poor people who are able to pay for housing and communal services receive more benefits from the program than those who are in need of it more. In particular, according to the absolute criterion, the targeting of the subsidy program in 2017 was 38.3%, despite being too low in the international comparison and even compared with other social programs existing in Ukraine. If housing subsidies were received only by the poor, the share of income support recipients would be much higher than 10.1%.

Second, the program covers less than half of the needy population. So, despite a significant increase in the coverage of the poor (4 times – from 2.9% in 2014, to 11.9% in 2015), in 2016 only 39.9% of the population with lower incomes earned subsidies. The level of coverage of the poor (according to the absolute criterion) by the program of housing subsidies in 2017 amounted to 46.8%.

 The need for further upgrading of the program becomes especially relevant given its high cost. As the tariff increases started in 2015, the amount of funding and coverage of the housing subsidy program increased tenfold. The program of housing subsidies covered almost half of the population and for the year it was almost the largest program of social security of the consolidated budget, second only to transfers to the Pension Fund. In 2016 and 2018, about one third of the expenditures on social protection of the consolidated budget were allocated to housing subsidies, in 2017 – just under half. The enterprises of housing and communal services for 2015-2018 years were reimbursed UAH 166.6 billion, which is comparable to the size of the country’s defense budget for 2017-2018 (UAH 178.5 billion) and is one and a half times larger than the size of the new program of the IMF. The amount of subsidies planned in the budget for 2019 is UAH 55.1 billion.

The given discussion questions are really topical, but they can have a technical solution with proper preparation of the mechanism for the implementation of the reform of monetization.

Potential solution to problems is to combine the program of housing subsidies with the other most effective program of assistance to the poor. This approach to providing assistance has at least three benefits.

First, it allows to save on scales while administering and making payments.

Second, this approach can increase the coverage of vulnerable populations and provide high targeting rates.

Third, this approach also allows for more meaningful volumes of assistance to the needy.