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Subsidies: turnaround toward effectiveness

14 July 2020

Instead of spending a fortune on subsidies, the country needs to devise a strategy of overcoming energy poverty, and fast

Subsidies: turnaround toward effectiveness

34% of households in Ukraine receive assistance to pay utility bills. It means that approximately one-third of families are unable to pay for the most necessary services – heating, water, gas and power supply – themselves. However, experts believe that the existing subsidization system is incapable of taking them out of energy poverty.

What experience of others proves

Ukraine is not the only country in the world where citizens receive monetary assistance to pay for housing maintenance and utility services. A system of housing subsidies exists in Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Greece, Italy, Poland, Portugal, Romania, Slovakia, Spain, Sweden, United Kingdom and other countries. Subsidization models vary, but at the same time, they have common foundations: thanks to personification, assistance is provided only to those who really need it.

In Germany and France, for example, people with low income (mostly families with many children and pensioners) may receive subsidies from the government to pay housing rent, because for many residents of these countries, having an own housing is too expensive. Moreover, France has introduced in 2018 the so-called “energy check” to pay utility bills and/or for energy efficiency measures. It is issued to households whose income is below a certain predefined level. In 2018, the amount of this check for 4 million beneficiaries (7% of the population) was 157 euros on average. In Lithuania, assistance is provided to pay heating and hot water bills. In Estonia, vulnerable consumers receive poverty benefits tied to utility bills. In 2018, assistance was provided only to persons whose income left after paying all utility bills and purchasing essential goods was less than 90 euros. In Poland, housing subsidies exist in the form of “Housing Application”, but only a few percent of citizens could be eligible for it. Usually, these are single persons and families whose monthly income is lower than the minimum salary in the country and whose housing is small (not exceeding 35 m2 for one person, 40 m2 for two, 45 m2 for three, and so on). On top of that, especially vulnerable categories of consumers may additionally receive an “electricity allowance”, which in 2018 ranged between 11 and 18 zloty per month depending on the number of family members. For comparison: the average amount of monthly electricity bill was 30-80 zloty.

“In Great Britain, one of the most popular subsidization models envisages the payment of 800 pounds to a subsidy recipient for the heating season,” Sviatoslav Pavliuk, Executive Director of the Association of Energy Efficient Cities of Ukraine, says. “And how he spends this money – buys a sausage or pays for energy – is his business.” But to be sure, the recipient of this money will be interested in consuming less energy to buy himself, figuratively speaking, a sausage.

Therefore, a subsidization system is used even in many developed Western countries, but only an insignificant portion of the population (mostly a few percent) receives this assistance from the government, and often for a certain limited period only, for example, for a year. The reason is to stimulate a person to improve their living conditions by finding a new, higher-paid job and by saving energy.

Subsidies in Ukraine

In our country, assistance with paying housing maintenance and utility bills is provided to one-third of households: 3.2 million families receive a subsidy and 1.8 million get benefits. This year, UAH 39.33 billion in our taxes will be spent from the state budget on this support. This data was made public by Natalia Khotsianivska, Deputy Minister for Development of Communities and Territories.

According to data by the State Statistics Committee, the number of households in Ukraine receiving subsidies has been gradually declining from 2010 to 2014. But in 2015, the number of subsidies issued to households has tripled comparing to the previous year and continued to grow until 2018.

In some periods, the subsidization mechanism covered more than half of all households! But today, comparing to the previous years, the number of families who were paid subsidies and the sums spent from the budget on this support began to decline.

Thus, almost 25% of households received subsidies in 2018, and the amount of government assistance to them was UAH 71 billion, or close to 2% of GDP. Last year, this amount should have been UAH 55 billion, but it was cut to UAH 47 billion. Yet, it does not mean that the number of people unable to pay housing maintenance and utility bills and thus needing government support became smaller. In fact, the subsidization system in our country is designed in a way that it fails to notice many nuances and can simply dump a person that needs help. On the other hand, it can provide material support to quite affluent people.

More spending instead of saving

The foregoing means that this system, which was launched in Ukraine back in 1995, remained inefficient up until the last year. And not just inefficient: it was extremely burdensome for the budget, nontransparent and had low targeting. Subsidies were intended to help people cope with the introduction of market prices for energy and, consequently, with the rise of tariffs. But the moneys were paid not to consumers, as it should have been according to the Law on Housing Maintenance and Utility Services, but to the companies providing these services, allegedly to protect them against nonpayment of bills. Under these conditions, nobody was interested in saving energy.

“To be sure, subsidies for housing maintenance and utility services affect energy efficiency. But everything depends on what to subsidize and how. One can subsidize, for example, gas, heating or electricity, or can issue targeted subsidies,” energy expert Mykhailo Pavlychenko says. In his opinion, the rise of energy and heating prices must be accompanied by an adequate support of the poorest categories of population – the ones who cannot pay for themselves. But for that, targeted subsidies are necessary.

For a long time, the impact of subsidies on energy efficiency has been adverse. Instead of spending less energy, people who received subsidies were, on the contrary, increasing the spending to receive even more subsidies. Naftogaz’s Energy Efficiency Department analyzed the energy spending by Kirovohradgaz’s consumers living in the same apartment buildings. The analysis has revealed that the ones who received subsidies consumed 1.6 times more gas on individual heating that unsubsidized consumers. Also, subsidy recipients who could adjust temperature in their apartments would set it at 24-26 degrees and open the vent pane when it was becoming too hot. At the same time, temperature in the apartments of their neighbors who did not receive a subsidy did not exceed 20 degrees.

It proves inefficiency of the existing subsidization system in our country. Positive shifts in this area became visible after 2018, when Ukraine began to implement monetization of subsidies. Beginning from the spring of 2019, this assistance started to be paid in cash. Effective 1 January 2020, Ukrainians became eligible to switch to receiving cash payments of housing and utility subsidies at any time. Monetization stimulated them to save water, heat, gas and electricity, because by doing so, they could spend the saved subsidy on some personal needs.

“Presently, subsidy recipients are the least interested in thermal modernization of their homes. The problem is solved by monetization of subsidies,” Mykhailo Pavlychenko says.

A kick-butt to monetization

“In the past, one could say that the subsidization system which existed in our country before the advent of monetization of subsidies was the killer of energy efficiency,” Tetiana Boiko, coordinator of housing and utility programs at OPORA Civil Network, says. “The recipients of this assistance weren’t interested in any way in implementing energy efficiency measures. It is not a secret that the main argument for people is wallet. One could talk a lot about consciousness, but without economic interest consciousness declines manifold.” The situation has changed only when monetization of subsidies was introduced, the expert says. Ukrainians began to receive hard cash (according to normative rates), actually paying bills based on meter readings, so now, the more they save the more money they have left in hand. “People saw for themselves the benefits from investing this money in energy efficiency, thus being able to save even more,” Tetiana Boiko adds.

“Monetization of subsidies is one of the measures that could prompt subsidy recipients to invest in energy efficiency,” energy expert Mykhailo Pavlychenko emphasizes. “As for other people, they simply have to realize their benefits. For the money invested in thermal modernization is the money that will return to you even with the current energy prices.”

To be sure, the greatest possible support for energy efficiency measures and programs by the government would have been very expedient today, but despite this year’s cuts in the funding of subsidies and benefits by almost 16 billion hryvnias comparing to the previous year, the expenditures on energy conservation and energy efficiency (including funding of the Energy Efficiency Fund) remained at the previous “unserious” level of UAH 2 billion. Unfortunately, therefore, mass modernization of the housing stock, 80% of which is obsolete, won’t happen.

Square meters and poverty

Surely, the number of subsidy and benefit recipients must be reduced, because inspections prove that assistance is often provided to those who should not be eligible for it. For example, according to data by the Ministry of Social Policy, 1 million affluent persons or persons with shadow income received utility subsidies during the heating season in 2017. In particular, 23.4 thousand households in houses with the space of over 200 sq.m and 28.5 thousand households in apartments with the space of over 120 sq.m took advantage of the government assistance back then. In 2019, the Finance Ministry ran a check on 24.5 million recipients of subsidies and social benefits. 14.7 thousand cases of paying subsidies to ineligible recipients in the amount of UAH 27.4 million, which had to be refunded to the budget, were confirmed for October of last year alone.

The Law on Verification and Monitoring of Government Payments passed last year is intended to combat these misappropriations and reduce the total number of subsidy, benefit and pension recipients. In addition, a draft law amending the Law on Court Charge, which should simplify collection of wrongfully received subsidies, benefits and pensions, was recently registered in the Verkhovna Rada.

“In many European countries, a general approach is as follows: a person having any immovable property cannot be considered a poor person,” Tetiana Boiko says. “In our country, the problem is much broader, because the income people have is not enough for them to be able to pay utility bills. Therefore, we cannot fully copy the international experience in this regard.” Theoretically, the expert says, if you have a property and cannot maintain it, you cannot own that property. This is a general approach in Europe, but it is not suitable for us. “I believe that we will come to it one day, but at present, it would probably be wrong to bend everyone across the knee, because a certain system of relationships has already taken shape in our country, and it cannot be changed at a stroke,” Tetiana Boiko adds.

“One has to understand that the subsidies which the government pays to people, for example, to make gas, electricity, etc. cheaper, do not come out of thin air but are paid from our taxes,” Mykhailo Pavlychenko says. “In other words, the government took this money from us first, and gave some of it away afterwards. But the important thing is whom this money is being paid to. Let’s assume that the heating subsidy is, say, 10 hryvnias per sq.m. If some person has a 20-sq.m apartment in a council building, they will get 200 hryvnias (10 UAH × 20 m²). But another person having a 100-sq.m dwelling will get 2,000 hryvnias.” Therefore, our interlocutor concludes, subsidies are being paid mostly to the more affluent part of the population. Such a disbursement of money is unfair.

Sviatoslav Pavliuk agrees with that: “A person having a 90-sq.m apartment on Khreschatyk can hardly be called poor. Nevertheless, that person will apply for a subsidy as well. Therefore, poverty standards must be revised.”

And undoubtedly, the social security system must be improved, Tetiana Boiko believes, to safeguard it against abuse, because there are instances when people own enough immovable property to sell and maintain more than one apartment. But at the same time, these people do not have official income, and therefore, continue to receive subsidies and be a burden to their compatriots who are paying for that with their taxes. In other words, the government must continuously work on improving this system and making it fairer. “At the same time, the situation we presently have (after introduction of monetization) is already a much bigger step forward comparing to what we had three or four years ago,” our interlocutor says.

The number of subsidy recipients in Ukraine must be reduced by transparent accounting of consumers, target payments and verification…

Prospects of subsidies

Experts believe that the number of subsidy recipients in Ukraine must be reduced by transparent accounting of consumers, target payments and verification. To that end, we need a register of subsidy recipients containing all the necessary data (income, number of family members, housing conditions, availability of meters, energy consumption, implemented energy saving measures, etc.).

The number of persons receiving government assistance to pay housing maintenance and utility bills could also be reduced by improving wellbeing of citizens. “We have to understand that the level of income in our country also depends, on average, on the general state of our economy,” Mykhailo Pavlychenko says. “Therefore, economic development of our country will ensure that people won’t need subsidies. And vice versa: economic decline will result in a situation when more and more people will feel the need in this kind of support.”

But in this regard, the prospects presenting themselves in our country are not very rosy. “The majority of subsidy recipients are pensioners whose pensions depend on payments made by the working population,” Sviatoslav Pavliuk says. “But able-bodied persons are migrating abroad en masse, and therefore, they do not pay taxes in Ukraine. And the situation with funding the Pension Fund is only becoming worse. Therefore, we have no reasons to expect the raise of pensions if we’ll keep losing the able-bodied population, the expert adds. And it means that the percentage of persons needing subsidies in Ukraine will remain high. By the way, it has obviously increased at present because of coronavirus and the quarantine, because a lot of people lost the job and a part of the population saw their income dwindle.

“We have to keep individual, targeted subsidies simultaneously with their monetization and introduction of market energy prices,” Mykhailo Pavlychenko believes. In his opinion, market prices stimulate people to consume less heat, gas and so on. The government provides substantial support to implementation of thermal modernization projects. Presently, compensation amounts up to 70% of the project implementation costs. “Such an unprecedented level of support makes thermal modernization self-recouping, and after returning the expenses it produces clean savings. In addition, a comprehensive thermal modernization stops destruction of the building’s walls, improves its technical condition and increases the value of housing, not to mention the comfort of living. And on the national scale, it reduces our energy dependence,” our interlocutor adds. But to be sure, a large-scale thermal modernization would need a much greater financial support than what was allocated from the budget this year.

Simultaneously with the government’s contemplations of the ways to reduce the number of subsidy recipients (by creating conditions for people to earn enough money, to make sure that subsidies are paid to those who really needs them and who have low income), successful examples of energy efficiency must be promoted, Tetiana Boiko believes. “I think that by working with subsidy recipients the right way, they could be convinced that energy efficiency will help them cut their utility bills and over time, they will no longer need these subsidies at all,” the expert says. But in order to set this process in motion and make it irreversible, large systemic efforts on part of city councils and associations of apartment building co-owners are necessary, she added.

Hidden subsidies

Besides subsidies for housing maintenance and utility bills, there is another form of government support for payment of these bills: benefits. They are provided to certain categories of population on an individual basis as a discount on payments for the actually consumed volume of utility services, but not exceeding the applicable consumption norms (if metering devices are available), or for the volume of services calculated on the basis of consumption norms (if metering devices are unavailable). Experts believe that benefits must also be monetized and that the list of benefit recipients must be revised and shortened.

On top of that, Ukraine had – at least, until recently – a policy of hidden subsidization via low gas prices for households, which differed from market prices by several factors. According to Reform of Subsidies and the Gas Market in Ukraine study by DіXі Group, this policy “cemented the problems of critical dependence on energy imports, high energy intensity of industrial production, and extremely low energy performance of the housing stock.”

“Nevertheless, during the last year I could not call the gas price under the mechanism of placing special obligations (PSO) a benefit, because there were even months when the market price for this resource was lower than the PSO price,” Tetiana Boiko says. That’s why experts believe that today is a very good time to abolish hidden subsidies by opening a competitive gas market for households and fully switching to market relationships. But to make that happen, consumers must be equipped with individual gas meters. Gas supplied to consumers without a meter today could become a subject of speculative transactions: it could be purchased allegedly for household needs and then sold to industrial consumers at a higher price. Gas supply using a double subsidization scheme results in a situation when more affluent consumers use much more energy. Speculations can also be possible because not all consumers have individual gas meters. At the same time, according to regulatory documents, benefits and subsidies issued to consumers who will not install gas meters by 2021 will be canceled.

“I am for market relationships in the areas of gas and electricity supply and, in the future, possibly heat supply as well. I believe that the market model as an instrument can produce the biggest effect, particularly for consumers, because service providers will be competing for customers and offer them the best price-to-quality ratio,” Tetiana Boiko adds. “Today, when European and Ukrainian traders and our gas storage reservoirs have so much gas, offers to Ukrainians could be very attractive.” And to be sure, market prices will force consumers to save gas.

Speaking about the electricity market, the expert adds, the situation there is somewhat more complicated because of the cross-subsidization, when tariffs are artificially kept at the same level and somebody continuously subsidizes households. In her opinion, we need to drop populism in the electricity market as soon as possible and abolish cross-subsidization, for only in that case will we get a truly fair price. “Obviously, it will be higher than the one we have today,” Tetiana Boiko believes. “However, the market will adjust itself and stimulate inefficient players to modernize themselves, invent better services and apply better technologies – not prompted by a stick, i.e., not via government regulation, but in a natural market way.” And the first necessary step to be taken in the expert’s opinion is to abolish the discounted price for those consuming less than 90 kWh of electricity per month, because this price does not cover even the electricity transmission costs. At the same time, our interlocutor believes that it won’t have significant bearing upon the amount of utility bills but will result in electricity savings.

The experts interviewed by Ukrainian Energy believe that the existing subsidization system (when payments are made at nonmarket prices and without a clear individual metering of consumed resources) results in inefficient energy consumption. In their opinion, the government must improve this system to make sure that it encourages people who save energy and to reallocate the freed funds on energy efficiency programs. Our interlocutors believe that these changes can improve the quality of people’s lives and boost development of the national economy in general.

Svitlana Oliinyk, writing for Ukrainian Energy

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