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A quarterly magazine of the IMF September 2001, Volume 38, Number 3 The Odessa Initiative A Model for Institutional Reform in Eastern Europe Caroline Mascarell An initiative that involved local residents in reforming Odessa's housing and water sectors demonstrates how popular participation can contribute to the success of development projects. Known as the "Pearl of the Black Sea," the 200-year-old city of Odessa, with its ethnically diverse population of more than one million, wide range of industries, naval base, fishing fleets, and large port, is Ukraine's most important city for external trade. But living standards plummeted after the onset of transition and, by the mid-1990s, Odessa was in the midst of a severe social crisis. The city lacked basic affordable housing and its water supply was contaminated. The Odessa Participatory Initiative was conceived in 1995 to enhance the effectiveness of two World Bank-supported operations: (1) developing a housing market that met the needs of Odessa's residents while encouraging home ownership and responsibility for maintaining the housing stock, and (2) transferring water and wastewater management to the local government and recovering costs from consumers to achieve a cost-effective, sustainable use of water. The approach was to develop institutions at the local level to support market reforms in the housing and water sectors. The Initiative was unique in a region in which citizens have little opportunity to tell their governments what services they need or how well these services are being delivered. In fact, one of the major problems threatening the sustainability of development efforts in the countries of the former Soviet Union has been the lack of public voice in decision making. Approach and methodology The objective of the Odessa Initiative was to provide a framework that would allow the local government and World Bank staff working on the two projects to obtain information from Odessa's residents on their needs and priorities and to encourage the residents to become active stakeholders in the reform of municipal services. Odessa was a particularly promising site for a participatory initiative because of its strong local institutions—a reform-minded city council, grassroots associations representing a wide range of interests, a growing community of nongovernmental organizations (NGOs), and major media outlets. Activities during 1995-96, funded by an interim grant of $150,000 from a Japanese grant facility, were devoted primarily to assessing demand for, and delivery of, housing and municipal water services, and to carrying out a public awareness campaign. Qualitative and quantitative surveys were conducted, primarily by local staff and consultants. The latter included specialists in social surveys from the Department of Sociology and the PULS Research Institute (local survey research institute) of the University of Odessa and from the Department of Housing and Communal Services in the Odessa City Council; specialists in condominium formation from the Housing and Municipal Reform Support Center (a local NGO); and communications specialists from several media and press organizations active in Odessa. The research was supported by Odessa's mayor, whose special advisor on social issues eventually became the local project coordinator. The latter's strong advocacy was critical in overcoming the skepticism of some city officials about the participatory approach. Also critical was the mayor's creation of a steering committee that monitored the research to ensure that it was relevant to the concerns of city officials and residents. The steering committee included the principal stakeholders in the housing and water sectors, representatives of target groups, faculty members of the Department of Sociology at the University of Odessa, agents of the NGO community, and media representatives. The Odessa Initiative became effective in February 1997, with a grant of $200,000 from the World Bank Institutional Development Fund (IDF). Management of the grant was the responsibility of local staff in the project coordinating unit, whose work, like that of the technical consultants and the steering committee, was critical in eliciting the active participation of stakeholders. During later phases of the project, the unit redefined itself as an independent NGO with a legal mandate to serve the poor, but it remained involved in implementing the Initiative. The Initiative was carried out by a multidisciplinary team consisting of the staff of the project coordinating unit, the Odessa City Council, local stakeholders, and foreign specialists. The work proceeded in five stages between February 1997 and April 1999: (1) An operational framework comprising an institutional structure, mechanisms, and procedures was established to facilitate interaction between the Ukrainian government (recipient of the grant), the Odessa City Council (beneficiary agency of the grant), the project coordinating unit (the implementing agency), and key stakeholders. The framework clarified the role of each participant. (2) A year of technical, diagnostic, and survey work was carried out to refine the results of the research of the previous two years. (3) A housing and a water sector survey were designed and implemented. The former focused on soliciting residents' preferences with respect to building maintenance, insulation, retrofits, and energy efficiency; the latter focused on obtaining information on water consumption patterns and usage habits, conservation, metering, billing and collection, water tariffs, willingness to pay, minimum needs of low-income households, and consumer satisfaction. (4) Two nationally televised workshops enabled the principal stakeholders in the housing and water sectors to exchange information and views, disseminate the preliminary findings from the water and housing beneficiary assessments, and discuss prospects for improvement. (5) Training and consultation programs on new forms of apartment-building management and maintenance were designed and implemented. Leading television and radio agencies covered activities carried out under the Initiative as well as meetings of the steering committee, the City Council, and regional officials at which the Initiative was discussed. The Housing and Municipal Reform Support Center developed manuals on topics ranging from the basics of housing management to detailed guidelines on homeowners' associations, alternate versions of housing management, and condominium formation. The manuals were widely distributed in Odessa, as well as to housing departments in 40 other cities in Ukraine. The organizational framework (see figure below) was developed to support the Odessa City Council in its new role as key agent for the delivery of municipal services. It consists of distinct but interrelated structures. At the core is the Institutional Support Structure (the Ministry of Finance, the Odessa City Council, the project coordinating unit, grassroots associations, and the citizens of Odessa). Alongside the core structure are the institutions and partners responsible for technical and institutional assessments, capacity building, public information campaigns, and client surveys.

Survey findings The preliminary survey on residents' willingness to pay for water and the housing beneficiary assessment, which were carried out in 1996, identified the most critical problems in these sectors, helped to open a dialogue among the key players, and provided the basis for developing market mechanisms in these two sectors. The survey also provided information that went into the design of the activities carried out after the Initiative became effective in 1997. The water sector. In 1995, when the Initiative was designed, the operations of municipal water enterprises (vodokanals) were still well below international standards because of inefficient organization and management, poor planning, limited financial capacity, and high industrial tariffs. Moreover, the vodokanals suffered from poor maintenance and investments and low-quality equipment, materials, and construction. As a result, water and wastewater services were deteriorating. The challenge was to develop efficiently managed, fully self-reliant enterprises capable of providing reliable services at affordable prices. The quantitative and qualitative water survey assessed the willingness of Odessa residents to pay higher tariffs for better services and identified the types of assistance needed by poorer residents. The survey covered 738 households and was carried out by a team from CVM Inc., an international consulting firm, together with the PULS Research Institute. The findings were striking: (1) 87 percent of households were willing to pay much more for improved water supply services; (2) only 8 percent of the households surveyed had continuously running water; (3) the tariff collection rate was extremely low; (4) subsidy and discount programs were not reaching most poor households; and (5) both high- and low-income residents strongly supported subsidized water services for low-income households. Moreover, 61 percent of households surveyed confirmed that service levels had deteriorated, and nearly 72 percent felt that tap water was unsafe for drinking. In addition, roughly two-thirds did not know how much they paid for water and sewerage because these payments were part of their total monthly utility bills. The survey findings revealed a wide variation in the demand for water and opened up the opportunity to use a pricing mechanism for managing demand through a differential tariff structure requiring water metering to improve cost recovery and service quality. Higher-income households would be charged a low tariff for a specified base volume of water, paying progressively higher tariffs for specific blocks of water beyond the base volume, according to their ability to pay. The poor would pay the same low tariff for the first block of water—the so-called lifeline supply (25-50 liters a day). The housing sector. In the mid-1990s, Odessa's housing stock was deteriorating, rents were increasing rapidly, and the city lacked the resources for maintenance and repairs. Of the buildings constructed before 1976, more than half were officially classified as ramshackle or in a state of emergency, and many constructed in the 1920s and 1930s had crumbling facades and balconies that posed a threat to pedestrians. Two ZHEKs (primary providers of maintenance and repairs for residential and commercial properties) with inadequate budgets and poorly paid—or unpaid—employees were responsible for servicing approximately 3,000 municipal units in Odessa. Residents complained of extortion, irresponsibility, deficient work, and a lack of parts and materials when they requested repairs. Although privatized apartments represented more than half the housing stock, instruments such as condominium associations, where a group of owners has collective responsibility for building management and maintenance, were unknown. The Odessa City Council's goals included increasing private ownership of housing, developing the municipality's role in facilitating the evolution of housing markets, transferring management and maintenance to residents through homeowners' associations, and creating mechanisms that would enhance people's capacity to manage local affairs and interact more effectively with local authorities. The housing beneficiary assessment consisted of a survey of 404 randomly selected households carried out by PULS with the assistance of the World Bank and a foreign consultant. It also included 24 focus groups and interviews. It found that nearly 40 percent of the population lived in ramshackle or emergency buildings, 80 percent in buildings that needed capital repairs. Although Odessa's private housing industry was expanding, with the emergence of new housing construction companies, the assessment indicated that there were a number of constraints on private ownership. One such constraint, the poor condition of the housing stock, could be overcome by the formation of private ZHEKs to carry out maintenance and repairs. The lack of housing finance—especially long-term financing—was another serious constraint. The assessment highlighted the difficulties faced by low-income groups. Although Odessa's housing program included a subsidy intended to keep the expenditure of low-income families on housing to less than 15 percent of their monthly income, one-third of eligible residents did not apply for the subsidy because they found the process too complicated. The poor need more information on how to apply for the subsidy, and procedures need to be simplified. Results Because of their involvement in the Odessa Initiative, the local government and communities were able to learn about the fundamentals of participation, service delivery, accountability, and project management and were better equipped to handle their transition to a market economy. The Initiative had a catalytic effect in other areas as well. Institutional development. The Initiative fostered the creation of the Department of Social Help in the Municipal Center for Social Assistance to provide housing assistance to vulnerable citizens. The NGO that grew out of the project coordinating unit focuses on participatory social development. Capacity building. The Initiative funded on-the-job training for professional staff and students in the Department of Sociology of the State University of Odessa, who helped design and carry out the social assessments; courses in condominium formation for more than 3,500 participants, including government officials responsible for housing, housing specialists, construction firms, residents, and cooperative representatives; and the development and distribution of a manual on condominium formation. Privatization. The activities of the Housing and Municipal Reform Support Center led to the formation of 17 new homeowners' associations and the subsequent privatization of condominiums administered by these associations (with more than 50 now in the process of being registered), and the formation of 6 new private ZHEKs that must engage in competitive bidding for maintenance contracts. Promotion of partnerships. The Initiative was instrumental in forming three important partnerships: the City Council's Department of Housing and Communal Services and the Housing and Municipal Reform Support Center joined together to disseminate information to tenants on the maintenance and management of multifamily buildings; Odessa University, the Department of Housing and Municipal Services, and the Support Center provided training in the business aspects of housing and communal services; and the Support Center and the Association of Ukrainian Cities, a Kiev-based NGO with a similar mandate for all of Ukraine, joined together to provide training, based on the Odessa experience, for 450 municipal officials in nine cities. In the process, all of these partnering institutions have enhanced their capacity for decision making and managing local affairs more effectively. The Odessa Participatory Initiative also gave rise to several independent local initiatives: a housing consultation program by the Support Center, which, in its first year of operation, advised nearly 800 residents on converting their buildings to condominium associations; a television program created by the City Council that gives residents the opportunity to call in with housing-related questions; and economic analysis by the Odessa University of Economy, which clearly demonstrated that housing management is far more economically efficient when carried out by homeowners' associations than by the municipality. At another level, the Initiative encouraged and inspired a number of grassroots associations, both new and old, although they did not participate in project activities. The project coordinating unit provided consultative services to nascent local associations and citizen groups on preparing project proposals and seeking funds from private donors and NGOs. In essence, the Initiative supported a mutually reinforcing learning-and-doing process among the key stakeholders. Development impact Follow-up beneficiary assessments on housing carried out in 1998 and 1999 showed that, as a result of this Initiative, Odessa residents were playing a more proactive role in the maintenance and upkeep of their buildings and had a more positive view of homeowners' associations. A market mentality was beginning to emerge, as reflected in residents' new interest in the value of their real estate. Odessa's residents are better informed about their rights as owners and the various options available to them for managing their condominiums, while public authorities have come to understand the importance of providing efficient, high-quality services and of including the community in key decisions about services. This development, together with the emergence of democratization and decentralization, could serve as a model for developing partnerships in the rest of Eastern Europe. Perhaps the most important lesson of this Initiative is that participatory development is a gradual, time-consuming process but that its benefits more than outweigh its costs. As beneficiaries develop a sense of responsibility for their housing and the services provided by their municipalities and the willingness to pay for basic infrastructure, the sustainability of reforms is enhanced. As demonstrated by the Odessa Initiative, even a modest project can have a strong, long-lasting, and far-reaching impact. Caroline Mascarell, an Institutional Development Specialist in the Human Development Unit of the World Bank's Europe and Central Asia Regional Office, was the task manager of the Odessa Participatory Initiative.