# **Box 4.4.  Armenia’s vicious circle**

As a result of the local policy environment in Armenia, housing maintenance providers and residential customers are caught in a vicious circle. Low tariffs, poor payment enforcement and public subsidies mean apartment owners do not pay the full costs of their housing. As a result, apartment owners who establish a homeowners association (HOA)<sup>*</sup> to manage their building will pay more, which creates a strong disincentive to HOAs. At the same time, without HOAs, it is hard to enforce payments for maintenance since individual customers cannot be “disconnected” for non-payment. This situation has resulted in a cycle of mounting subsidies, arrears and deferred maintenance.

Although the central government has reduced its involvement in housing, the public sector’s role remains high because local governments continue to own and maintain the common areas in multi-story apartment buildings. There are two possible explanations for why local governments participate so actively in this sector. First, provision of shelter and vital communal services are seen to be part of the social contract with the population. Second, local government involvement provides opportunities to build political support, for example, by fixing a building that is falling down.

Maintenance fees set by local governments range from 50 to as much as 95 percent below the estimated costs, as shown in the table below. Low collection rates further compound the problem of low maintenance fees. At the beginning of 2003, only one-quarter of households paid their maintenance fees. As a result, substantial arrears owed to the municipal maintenance have accumulated. In Yerevan, arrears to maintenance providers were the equivalent of 1-3 years of total monthly billings.

As a result, virtually no capital repairs have been undertaken in recent years and even routine maintenance is rare. Interviews with representatives from local governments and Municipal Maintenance Companies found that most efforts are directed at emergency repairs performed on an as-needed basis. This work is financed by pooling the scarce fees from all buildings to cover the costs of repairs in a few buildings, which results in large cross-building subsidies that serve as a type of insurance for emergency repairs. Five years ago, the National Housing Policy Study estimated that the amount required to repair only the roofs and common hallways in multi-apartment buildings would be more than US$ 160 million, or nearly 10 percent of GDP for that year.

As the below table shows, capital repairs have dropped by a factor of ten from 1.3 percent of the housing stock in 1994 to 0.1 percent in 2000. Although world experience varies substantially from country to country, in the Netherlands it is assessed that capital repairs should average 1-2 percent per year.

## **Capital Repairs of Housing (as percent of total housing space)**

||**1994**|**1995**|**1996**|**1997**|**1998**|**1999**|**2000**|
|---|---|---|---|---|---|---|---|
|Percent of all housing<br>space undergoing capital<br>repairs|1.3%|1.01%|0.05%|0.16%|0.03%|0.08%|0.11%|

_Table Source:_ National Statistical Service of the Republic of Armenia Source: Vecvagare, L. and E. Hamilton. 2003. “Multi-apartment housing in Armenia—an Issues Note.” ECSIE, the World Bank (mimeo).

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