WHAT'S NEW ----- 
About The Portal To Russia -----
Email Dr. Palms
THIS DOCUMENT IS IN FOUR PARTS. THIS IS PART III
contract to serve as the program's core contractor and provide the
technical support for its environmental activities in Russia, Kazakstan,
and Ukraine. In April 1994, an initial delivery order was signed to
provide support for activities in Novokuznetsk and the Russian Far East.
Detailed delivery orders were signed for these activities in September
1994. CH2M Hill also serves as the contractor or subcontractor on various
components of the program.
Although the environmental policy and technology project is still ongoing,
USAID officials said its progress so far has been disappointing. Progress
has been slow because CH2M Hill did not fill critical staff positions in
Russia in a timely manner, and it relied on staff located in the United
States to manage the projects. The expanded scope of the Far East
component further contributed to the delay. Further, USAID field staff
lacked authority and information to expedite project implementation. The
projects' expected contributions to systemic reform and long-term benefits
are not likely to be significant.
SECTOR PROBLEM
Severe environmental degradation threatens the physical health and
socioeconomic well-being of people throughout Russia and deters economic
and political restructuring efforts. Environmental problems range from
nuclear safety issues; to pervasive mismanagement of natural resources; to
some of the worst air, water, and land pollution problems in the world.
The breadth and magnitude of the economic, health, and ecological costs
are difficult to quantify, although remediation activities alone are
expected to cost billions.
Environmental problems are exacerbated by many factors, including
inattention to environmental consequences, a lack of economic and
political incentives to use resources efficiently, the inability of
nongovernmental agencies to participate in environmental decision- making,
and the inability of governmental institutions to effectively regulate
state-owned monopolies and curb illegal economic activities.
This information was obtained primarily from USAID's February 1993 Project
Memorandum and the U.S. Government's Environmental Strategy for Russia,
prepared by USAID.
PROJECT OBJECTIVES
Our analysis focused on CH2M Hill's performance as the core contractor and
two projects where it serves as the primary contractor--the Multiple
Pollution Source Management project in Novokuznetsk and the Sustainable
Natural Resources Management and Biodiversity Protection project in the
Russian Far East. Both projects are to run from September 1994 to
September 1997.
The objectives of the $7.4-million core contract are to coordinate all
activities under the core contract, monitor and evaluate the activities
and deliverables, and provide support functions as needed.
The objectives of the Multiple Pollution Source Management project are to
reduce pollution-related health risks and promote environmentally
sustainable economic development; improve public health; reduce pollutant
emissions from industries and cities; assist industries in restructuring
in an environmentally sound and sustainable manner; and strengthen
institutions and train individuals to continue improvements initiated
during the project. The $13.4-million delivery order included $6.3
million for the Novokuznetsk project along with two other projects.
The Sustainable Natural Resources Management project was expanded from a
narrowly focused $3-million, 3-year project focused on fire prevention and
control to a $16.7-million, 5-year project focused on sustainable forest
management and biodiversity protection. This expansion responded to the
Gore-Chernomyrdin Commission's recommendations. Specific project
objectives are to promote sustainable forest management in the
Khabarovskiy and Primorskiy Territories and protect endangered species and
critical habitats in the Khrebet Sikhote-Alin' mountain region. To
address these objectives, the contract specifies 25 tasks for CH2M Hill
and multiple subcontractors. USAID approved a $9.4-million delivery order
for CH2M Hill to implement and coordinate these activities.
The Gore-Chernomyrdin Commission was created in 1993 to overcome trade
barriers in the energy sector, but now includes business development,
space, environment, science and technology, health, and defense
diversification.
PROJECT APPROACH
CH2M Hill worked mainly with local and oblast' government officials to
design and manage the programs. CH2M Hill consultants spent short periods
of time in Russia to design the project proposals and then returned to the
United States to complete the project design. Although USAID and CH2M Hill
established rapport with local and oblast' authorities in the affected
cities, the Ministry of Environmental Protection and Natural Resources was
only involved in the initial selection of project activities and their
locations. Subcontractors, U.S. nongovernmental organizations, and other
federal agencies helped implement parts of the project.
The project approach includes providing technical assistance,
demonstration projects, training seminars, and limited commodities.
Several components in both projects continued efforts initiated by the
U.S. Environmental Protection Agency, World Bank, and the City of
Pittsburgh.
CH2M Hill staff in Washington manage the project, and a regional director
and site managers in Russia handle the day-to-day activities and
coordinate with other implementers. CH2M Hill plans to hire and train
Russian employees who can eventually manage the activities without
assistance from its U.S. office.
CONTRACTOR PERFORMANCE
Project progress to date has been mixed. CH2M Hill met the requirements
of its core contract by establishing field offices, monitoring project
implementation, and providing support functions to its field staff. Even
though it has made some progress toward addressing the Novokuznetsk
project objectives, it has been slow to implement the Far East project.
CH2M Hill has missed critical milestones for both projects.
In Novokuznetsk, CH2M Hill established an air pollution database for the
180 heating plants in the city and developed a strategic plan to address
particulate pollution from the heating plants. It also upgraded the
city's air pollution program, trained Russian counterparts in
environmental auditing, and completed environmental audits of two large
steel mills. CH2M Hill is currently assessing local water monitoring
activities and has recommended laboratory improvements to more accurately
measure the quality of drinking water. CH2M Hill is working with the
Novokuznetsk Development Fund and local government officials to develop a
strategic plan. However, CH2M Hill has not provided an acceptable work
plan, which was due on November 30, 1994. The current work is based on
the delivery order specifications.
In the Far East project, CH2M Hill has been even slower getting started
and, according to USAID and Russian officials, had produced almost no
quantifiable results as of February 1995. Several factors have hindered
the project's implementation, including its increased complexity; the size
of the geographic area; and the large numbers of governmental officials,
local interest groups, and subcontractors involved. The project covers 2
large regions and will involve at least 16 implementing organizations,
including 2 U.S. federal agencies, subcontractors, and U.S.
nongovernmental organizations.
Several problems have delayed the effective implementation of both CH2M
Hill projects. One problem was that CH2M Hill experienced problems
filling critical staffing positions in Washington and Moscow and at the
field office level. Although the core contract was awarded in September
1993, the regional director did not arrive in Moscow until February 1994.
Other positions in Moscow funded in September 1994 delivery orders were
still being filled as of January 1995. The contract to implement field
support functions in Novokuznetsk and the Far East was awarded in April
1994, but on-site managers did not arrive until September and October
1994, respectively. The Far East project manager position was authorized
in September 1994, but the manager did not move to Russia until February
1995. CH2M Hill officials had difficulty finding qualified staff who were
willing to relocate to these areas because of the acute environmental
problems and remote locations. USAID and CH2M Hill officials agreed that
the on-site presence is essential for making progress. USAID-Moscow
officials said staffing delays and delays in producing an acceptable work
plan have hurt the credibility of the program in the region.
CH2M Hill also had difficulty developing acceptable work plans that define
how and when the scope of work will be implemented. CH2M Hill was
required to submit the work plans for both the Novokuznetsk and the Far
East projects within 60 days after signing the contract on September 30,
1994. USAID approved the work plan for the Far East project on May 8,
1995, but the work plan for the Novokuznetsk project was still being
revised as of June 1, 1995. According to an USAID official, the work
plans originally submitted were incomplete and lacked specific indicators
or other factors necessary to evaluate the activities.
Additionally, USAID officials said CH2M Hill had done a poor job of
providing them with the appropriate reporting documents for these
activities. USAID expressed concern over CH2M Hill's failure to provide
timely delivery of tracking materials, such as monthly summaries of
financial status by project, monthly presentations of progress on select
tasks, and weekly briefings on overall project progress. According to
USAID officials, CH2M Hill addressed their concerns and has recently
improved its reporting.
RESULTS
As of February 1995, the CH2M Hill projects had contributed little to
systemic reforms, and they will not generally be sustainable without
outside funding support. This limited contribution is due largely to the
vast environmental needs in Russia and the massive amounts of capital
investment needed to modernize or purchase equipment for restructuring
Russia's environmental sector. Also, USAID and CH2M Hill officials said
that Russian monitoring and enforcement procedures will be extremely
difficult to change and are not addressed in these projects. Finally, the
Ministry of Environmental Protection and Natural Resources was not
involved in designing the project, thus reducing the likelihood the
project could be duplicated on a wider scale. USAID officials said the
project will attempt to address systemic reform through efforts to
maintain and restock the forestry base.
Some components of the Novokuznetsk project are likely to address
environmental sector restructuring. CH2M Hill expects to work with
Novokuznetsk's industry, citizens, and local government to develop a
strategic plan and provide recommendations for creating an environmentally
safe city by 2010. However, these recommendations could require large
capital investments. For example, CH2M Hill recently conducted industrial
audits for two steel companies. After spending 6 weeks and using 7 U.S.
advisers and 25 Russian counterparts to conduct the audits, company
officials said the audits did not provide any new information on major
pollution sources. Further, the companies do not have the funding to make
the recommended improvements and will have difficulty obtaining it.
According to one steel mill executive, the environmental audit allowed the
mill to fulfill a condition for a World Bank loan. The Novokuznetsk
project places a considerable emphasis on the contractor delivering
studies and does not establish any indicators to measure progress in
reducing actual pollution.
Some components of the Far East project are designed to address the
region's need to maintain and restock its important forestry base. Efforts
are planned to (1) strengthen polices and develop an adequate
environmental regulatory structure, (2) create economic and political
incentives to use resources efficiently, (3) increase the participation of
nongovernmental agencies in environmental decision-making, (4) promote
U.S.-Russian partnerships, (5) promote the export of timber products made
by Russian workers, and (6) conserve biodiversity.
USAID MANAGEMENT
USAID's decision to use a core contract and delivery orders has caused
delays and excessive paperwork reviews for both CH2M Hill and USAID staff.
Under this system, USAID must prepare delivery orders and CH2M Hill must
submit detailed work plans for each project component within 60 days. The
decision to expand the Far East program has also delayed project design
and implementation. The expansion covers a larger geographic region and
greatly increased the scope of work, including the number of activities
and subcontractors involved.
The division of responsibility between USAID-Washington and USAID-Moscow
has affected the agency's ability to manage the project. USAID-Washington
maintains overall management authority, but has given USAID-Moscow
increased monitoring and program responsibility. However, USAID-Moscow
officials said they still had minimal authority to manage the project or
make changes. USAID-Washington must approve all program decisions,
including minor ones, such as country clearances for visitors and all
purchases exceeding $500. In April 1995, USAID-Moscow submitted an
initial request, which remained under review as of June 1, 1995, for
delegation of authority to the field.
USAID has had difficulty monitoring the projects. USAID staff said they
have not regularly visited the project sites because of the difficulty of
traveling to the sites and the lack of adequate staff. The USAID-Moscow
project officer keeps apprised of the project activities primarily by
talking to project staff over the telephone or in informal meetings and by
reviewing reports by the contractor or visiting teams.
DISTRICT HEATING--RCG-HAGGLER BAILLY
The district heating project is one component of USAID's Energy Efficiency
and Market Reform Project for the NIS. The project began in January 1992
and is considered the first economic development effort undertaken by the
United States in the region. With $5.3 million in funding, the project
was designed to improve district heating systems in six countries:
Armenia, Belarus, Kazakstan, Kyrgyzstan, Russia, and Ukraine.
Although the contractor, RCG-Haggler Bailly (RCG-HB), met most of its
objectives, we found no indication that the project was having a
significant impact on the sector. Most of the Russian work was
concentrated in two Russian cities, Yekaterinburg and Kostroma, and the
project was not completed in Yekaterinburg. Because USAID did not
adequately monitor the project, it was unaware of (1) problems that
prevented the completion of the project and (2) any long-term benefits, if
any, to the beneficiaries. An evaluation conducted by a consultant did
not identify obvious problems, and USAID did not address the
recommendations in this evaluation.
RCG-Haggler Bailly, one of three contractors implementing the district
heating project in the NIS, is an international management consulting firm
that specializes in energy and the environment.
SECTOR PROBLEM
Fuel and energy are an important part of Russia's economy. The subsidies
provided by the former Soviet government to Russian energy consumers, both
residential and industrial, created artificially low prices and promoted
the inefficient use of highly polluting energy. Since the dissolution of
the Soviet Union, Russia has implemented several policies, including
increasing or freeing coal, oil, and gas prices, to reform its energy
sector. Although still below world market levels, the cost of domestic
oil and oil products in Russia doubled in 1993 and 1994. Such increases
in energy prices have a significant influence on inflation and social
conditions. As energy prices increase, consumers must find ways to use
energy more efficiently.
The information in this section was obtained primarily from papers
presented at the International Energy Agency's October 1994 Symposium on
Russia's Energy Strategy and the Agency's report, Russian Energy Prices,
Taxes, and Costs, 1993.
PROJECT OBJECTIVES
In February 1992, RCGHB was awarded a contract for $550,000 to complete
the project in Russia. The project was amended in August 1992, increasing
the total cost to $1.3 million. The project had five objectives: (1)
foster improved management of energy use in heating plants by identifying
and implementing cost-effective "low cost-no cost" energy efficiency
improvements; (2) transfer energy auditing and management techniques,
including financial and economic analysis techniques; (3) provide
equipment support to implement low-cost options, improve monitoring and
energy management, and identify additional energy efficiency
opportunities; (4) support the World Bank's efforts to reform Russia's
energy pricing policies; and (5) promote the emergence of an energy
efficiency industry in Russia.
PROJECT APPROACH
RCG-HB and USAID worked with representatives from the Russian Ministry of
Fuel and Power, the Commission for Humanitarian and Technical Assistance
of the Russian Federation, nongovernmental organizations concerned with
energy efficiency and conservation, municipal governments, and industrial
enterprises.
The two primary Russian cities selected for the project were Yekaterinburg
and Kostroma. In these cities, extensive energy audits were conducted of
the district heating facilities, and three sites (i.e., hospitals,
apartment buildings, and heating plants) in each city were selected as
demonstration sites for U.S. energy efficiency equipment, including flow
meters, temperature sensors, and thermostatic control valves. The value
of the equipment supplied to the demonstration sites was approximately
$172,000. The project sites were intended to demonstrate the savings in
using no-cost or low-cost technologies and also serve to promote
American-made equipment.
In addition, RCG-HB conducted energy audit training seminars and provided
energy audit equipment to technicians in Yekaterinburg, Kostroma, Irkutsk,
Moscow, Murmansk, and St. Petersburg. To complete its work, RCGHB
contacted more than 250 U.S. equipment manufacturers to determine their
interest in conducting business in Russia. The 12 companies that
responded participated (at their own expense) in "wrap-up" seminars in
four Russian cities when the project ended. The information obtained at
these seminars was published in a lessons learned document.
CONTRACTOR PERFORMANCE
RCG-HB completed most of the objectives stipulated in its contract. The
products delivered to complete the objectives included energy audits in
two cities, energy audit training and distribution of energy audit
equipment, a study of natural gas pricing in Russia, and an energy
efficiency industry development effort. It also produced a video about
the project that was shown on Russian television.
RCG-HB was also required to identify, purchase, and install low-cost
energy efficiency equipment manufactured by U.S. companies. RCG-HB
purchased this equipment; however, due to problems with local conditions,
some of the equipment was not installed in Yekaterinburg. An RCG-HB
official said that in June 1993, a Russian subcontractor assured RCG-HB
that it would install the equipment in Yekaterinburg by the end of 1993.
We visited three sites in Yekaterinburg in February 1995 and found all the
equipment at one site was still in shipping containers. Russian officials
said the equipment at the other two sites only began operating in
September 1994 and January 1995, respectively. According to an RCG-HB
official, the company had not paid the subcontractor and would not pay
until the installation was completed. However, USAID had already paid for
the equipment, valued at $8,000.
Officials in Yekaterinburg stated that the equipment had not been
installed in 1993 for two reasons. First, in two cases, the sites (a
hospital and an apartment building) were under construction and the
construction plans had to be altered to accommodate the equipment. Second,
at the other installation site (a district heating facility), the
equipment had not been installed, and most likely will not be installed,
because the proper Russian authorities had not certified it. Officials in
Yekaterinburg stated that it would be illegal to install and operate the
equipment before it was certified. They explained that although the
equipment can be used for demonstration purposes at consumer locations
(e.g., apartment buildings), a public utility cannot use the equipment and
the information (e.g., energy consumption data) it produces as a basis for
charging customers.
Similar equipment was installed in Kostroma, according to USAID and RCGHB
officials, even though it had not been certified. USAID officials told us
that city officials were willing to install the equipment because they
realized the potential benefits.
RESULTS
We found no indication that the project had contributed to systemic reform
in the area of energy efficiency. Most of the work was concentrated in
two cities, and the project was not completed in either city. In
addition, USAID did not adequately monitor the project and could not be
certain of any long-term benefits.
USAID MANAGEMENT
USAID used an independent consultant, Management Systems International, to
evaluate the NIS district heating project, including RCG-HB's work in
Russia. The evaluation, published in July 1993, reported no serious
problems and declared the project a success. Specifically, the study
indicated that total equipment costs for the four cities in Russia
amounted to $418,000 and would produce an annual savings of $1.4 million.
It also noted that the equipment would reduce pollution. Furthermore, as
a result of the energy efficiency industry development effort, 12 U.S.
companies had sent representatives to the various countries to participate
in seminars held at the end of the project.
We found that the consultant's evaluation was deficient. The evaluation
did not mention the equipment installation problems in Yekaterinburg or
the need to have foreign equipment certified by the Russian government.
Instead, the evaluation stated that "by April 1993, all of the equipment
was installed and operating." In addition, USAID did not specifically
direct Management Systems International to assess the products RCGB was
required to produce, such as the natural gas pricing study for Russia or
the lessons learned from the energy efficiency industry development
effort. The evaluation did not discuss the quality of either of these
products. USAID officials stated that the natural gas pricing study had
been completed in a collaborative effort with the World Bank, which used
it in its work pertaining to loans made to Russia's natural gas sector.
However, the consultant's report contradicted USAID's statement by noting
that the World Bank did not make a serious attempt to involve RCG-HB in
its work in Russia.
Finally, the evaluation did not discuss the training seminars conducted by
RCG-HB in Irkutsk, Moscow, Murmansk, and St. Petersburg, or the energy
audit kit instrumentation supplied to technicians in these cities. The
continued use of these deliverables is an important factor to consider
when evaluating the success and sustained benefits of this project.
USAID officials were not aware of the problems we identified in
Yekaterinburg nor the shortcomings of the evaluation. They stated that in
June 1993, an official from USAID-Washington visited all the NIS sites
except Yekaterinburg. They stated that equipment had been installed at
the sites visited. A local national employee from the USAID mission in
Moscow also visited Yekaterinburg in June 1993 but did not report any
problems at that site. USAID officials discovered the problems we found
when they accompanied us to Yekaterinburg. USAID said it would take
corrective action.
Also, USAID has no mechanism to monitor various outcomes of the project,
including (1) the success of U.S. industry in entering the NIS market,
(2) policy reforms written into law, and (3) the rate of adoption of new
technologies. Although USAID said that the installed equipment would
produce annual savings at project sites, it did not record these savings
during the 1993 or 1994 heating seasons. Furthermore, USAID had not
determined the savings generated by either the energy audit kits provided
to technicians in six cities or the energy audits conducted in
Yekaterinburg or Kostroma.
USAID paid $18,385 for this evaluation.
HEALTH CARE TRAINING--PARTNERS FOR INTERNATIONAL EDUCATION AND
TRAINING
USAID initiated the NIS Exchange and Training program in the spring of
1993 to train NIS leaders about free-market economies and democratic
governance. USAID hoped that training the participants in the United
States would provide them with the technical skills and attitudes required
to create similar policies, programs, and institutions in their own
nations. We reviewed the health care training provided to Russians in
late 1993.
Our analysis indicated that the health care training had little likelihood
of contributing to systemic reform and that USAID now considers the
training to be irrelevant after Russia changed its direction for health
care reform. The training's primary objective--to facilitate Russia's
transformation to a democratic free-market system--was unrealistic for a
2-week training course. USAID did not follow up with participants to
determine the training's impact on systemic reforms. Although USAID
officials said that most participants have been involved in follow-on
projects, only 25 percent are slated for follow-on activities planned in
1995 and 1996.
SECTOR PROBLEMS
According to USAID, Russia's health care industry has a number of
problems. These problems include the virtual collapse of the
pharmaceutical and medical supply industry, poor quality of care due to
training and technical gaps, serious funding shortfalls, and a centralized
system devoid of incentives for efficiency and cost control. Although
Russian policies have produced an educated workforce with more doctors per
capita than the United States, the workforce lacks many of the basic
skills and institutions necessary to function in a democratic, free-market
context.
PROJECT OBJECTIVES
USAID contracted in June 1993 with its worldwide training support
contractor, Partners for International Education and Training (PIET), to
conduct training in the United States for 200 NIS leaders and
professionals at a cost of $2.6 million. The training objectives were
to
facilitate the region's rapid and sustainable transformation from
authoritarian, centrally controlled regimes to pluralistic, democratic
countries with free-market economies;
provide participants with new skills and knowledge to contribute to
economic and social development;
promote the value of democratic decision-making;
provide an understanding of U.S. programs; and
lead to long-term relationships with U.S. institutions.
USAID also hoped that participants would share their new skills and
perceptions with their counterparts.
PROJECT APPROACH
Under the PIET contract, USAID missions identified the training topics and
selected the participants. USAID-Moscow selected the participants based
on their positions in oblast' health care systems and their planned
inclusion in follow-on projects. According to USAID, participants went to
the United States before participating in follow-on projects so they would
be more receptive to reforms. The training project encouraged missions to
link training, if appropriate, to ongoing or planned developmental
assistance by USAID and others.
After course topics and participants were selected, PIET was expected to
arrange training courses in the United States and provide administrative
and logistical support for international travel, living expenses, medical
insurance, tuition, books, and other needs. PIET was also expected to (1)
ensure that training programs at U.S. training institutions were
functioning properly, (2) monitor the participants' progress, (3) provide
USAID status reports, and (4) evaluate each training program.
CONTRACTOR PERFORMANCE
PIET subcontracted with Management Sciences for Health to provide the
training in the United States; 42 Russians were trained in health finance
and 20 were trained in pharmaceutical management. USAID subsequently
contracted with the Academy for Educational Development to make training
arrangements.
PIET met its contractual requirements by providing training,
transportation, and logistics, according to USAID officials. The
participants we spoke with in Russia praised PIET's support and assistance
as well as the quality of the training they received in the United States.
Our review of sample course assessments showed that other participants
generally gave high marks to the training. For example, in the evaluation
conducted by the USAID mission, most participants were satisfied with the
course and believed it was applicable to their work conditions.
PIET also met its monitoring and reporting requirements. PIET maintained
contact with the training institutions, called a random sample of
participants once a week, contacted the trainers on an as needed basis,
and helped participants with general adjustment problems. PIET also
provided all the required reports, including regular status reports and
course assessments. USAID-Washington officials were satisfied with the
quality of PIET's support and monitoring during the training.
RESULTS
USAID was unable to provide any evidence that the training will help
Russia's democratic or economic transformation. Although the training may
have met some secondary goals, without follow-on activities, fulfilling
these objectives will not likely result in systemic reform.
USAID-Washington officials agreed that the training could not meet all of
the contract's objectives. They said that a 2-week training course could
only "facilitate" reaching these objectives but not actually attain them.
Further, they provided the training quickly as a political imperative to
respond to the opening in the NIS, and they recognized training alone has
limited usefulness.
USAID was unable to substantiate that any of the 62 participants
contributed to any reforms, partly because the participants lacked the
authority, expertise, or resources to influence reforms. However, the
participants who had taken PIET health-related courses said the training
helped them understand U.S. programs and they had shared their training
with others.
USAID officials in Moscow and Washington said that training alone would
not influence systemic change and that subsequent training was better
integrated into follow-on activities. They said that the main purpose of
the PIET training was to make participants receptive to follow-on reform
projects, which USAID thought would occur. However, USAID later dropped
plans for follow-on activities in Central Russia because the oblasts were
not reform-minded and the contractor reported that only 25 percent of the
Siberian participants would participate in follow-on activities.
The Russians did not see health reform as a priority when the early
training took place, and Russia has only recently begun to consider the
direction of reforms, according to USAID-Washington officials. Further,
this early training is now irrelevant because it was based on Russian
policy directions that were later discarded as unworkable.
USAID MANAGEMENT
The mission was forced to move much more quickly than it desired because
it was under extreme congressional pressure to quickly establish the
training program, according to USAID officials. As a result, the health
care training was initiated before it could be integrated into follow-on
projects more likely to facilitate systemic change. Further, because the
Russians were unclear about what reforms they wanted, the mission had
trouble targeting the training. The Russian officials began exploring
reform options with the mission in December 1994.
USAID-Moscow officials assessed the training after participants returned
to Moscow; however, they have had no contact with the participants since
then. They did not know which participants, if any, would be involved in
any of the follow-on activities planned in Siberia.
COMMERCIAL REAL ESTATE--INTERNATIONAL BUSINESS & TECHNICAL CONSULTANTS,
INC.
The International Business & Technical Consultants, Inc. (IBTCI) project
did not achieve its goal to increase the availability of commercial real
estate to small enterprises, although it did provide potentially useful
technical assistance in three cities. The project did not contribute to
systemic reform and was not sustainable. IBTCI did not replicate the
pilot project--a project objective--in part because the roll-out cities
were poorly chosen. IBTCI was responsible for choosing appropriate
cities, but its short-term consultants lacked sufficient knowledge of
Russia and local conditions to determine what cities would have
cooperative officials and could benefit from the project.
SECTOR PROBLEM
Much of Russia's commercial real estate is still owned by the government.
Rather than divesting its ownership rights, the central government has
decentralized those rights to local governments, both regional and
municipal. Although this practice is quite common among other countries
in transition, Russia is different because local governments (1) have a
virtual monopoly on commercial real estate and (2) have not moved toward
commercial real estate leasing using market mechanisms. Highly
inefficient users occupy valuable commercial space, contributing very
little to local budgets, while private sector development is blocked by
the unavailability of property.
Harding, April L., Commercial Real Estate Market Development, The World
Bank, Discussion Paper Number 109 (May 10, 1995).
PROJECT OBJECTIVES
USAID and GKI recognized this problem and signed a task order with IBTCI
to develop a solution. The $2-million task order for the rapid diagnosis
pilot project and roll-out project was part of IBTCI's $13.3-million
omnibus contract. The initial deadline of May 1994 was extended to
December 1994, but without any increase in the cost or level of effort
required. The general purpose of the task order was to significantly
increase the availability of commercial property in Russian cities.
The specific goals of the task order were to examine the causes of limited
access to retail space, implement a pilot project in a selected city, and
then replicate the pilot project in other oblasts. IBTCI was to (1)
deliver a report on the root causes of and solutions to the problem of
commercial property access for one city; (2) design an implementation plan
to address these issues, including procedural, legal, administrative,
financial, policy, and other measures; (3) replicate the pilot project in
at least five other oblasts; and (4) produce and nationally distribute
publicity and instructional materials for local state property committees,
local authorities, and entrepreneurs on how to increase the availability
of retail property.
PROJECT APPROACH
IBTCI used a subcontractor, Boston Consulting Group (BCG), to perform the
rapid diagnosis phase and conduct the pilot project in the City of Perm'.
The goals of the pilot project were to (1) design and test a method for
increasing the amount of commercial real estate available to small and
start-up businesses and (2) identify any constraints or impediments that
might exist. The pilot was intended to serve as a model for instituting
the program in five other Russian cities. IBTCI instituted the roll-out
in Irkutsk, Tver', Novgorod, Yekaterinburg, and Vladivostok.
Because it had previously worked in Perm', BCG used staff who already had
a relationship with municipal officials when it began the diagnosis and
pilot phases of the project. In contrast, IBTCI relied on consultants who
made short visits to the other cities to research, plan, and implement the
roll-out.
During the rapid diagnosis phase in Perm', BCG identified three feasible
ways of improving access to commercial space: convert residential
premises to commercial use, develop a secondary real estate market, and
optimize the leasing process. BCG, IBTCI, USAID, and GKI selected the
leasing optimization method because they thought some concrete results
were possible during the study period, even though it was predicted that
this alternative would have limited support and low potential impact.
Lease optimization means, among other things, (1) moving toward
market-determined rents, (2) removing bureaucratic discretion in space
allocation, and (3) creating incentives to sublease unused space.
Perm', with a population of 1.5 million, was selected for the pilot
because of its intermediate size and presumed representative nature of
municipalities within the Russian Federation.
CONTRACTOR PERFORMANCE
BCG conducted the rapid diagnosis and pilot phase of the project from
November 1993 to March 1994 in Perm'. BCG devised a two-track auction
system for making municipality-controlled real estate available to private
businesses. The first track was an auction for the right to lease
specific commercial real estate properties (i.e., a one-time premium).
The second track was an auction for the rental rate at which a property
would be leased. The purpose of this system was to introduce market
mechanisms into the allocation and pricing of commercial real estate.
Under this system, bidding for the right to lease and the rent to be paid
replaced government bureaucrats with market mechanisms.
The results of the first auction, which occurred on March 1, 1994, were
not promising. In the first track auction, three properties were
available. The right to lease them was sold for each property. In the
second track auction, 15 properties, all basements, were available. Bids
were made on only 3 of the 15, and each received only one bid. The rental
rate for the three properties did not exceed the rent that started the
bidding.
The results of a second round of auctions, which occurred in May 1994,
were also disappointing. In the first track auction, 10 properties were
available, but the right to lease was sold for only 4 properties, although
several parties bid on them. In the second track auction, three
properties were available, but only one received a bid, and that was the
starting bid. These results were not perceived to have significantly
increased the amount of commercial real estate available in Perm'.
IBTCI started work on the roll-out in mid-February, before the Perm' pilot
was completed or its results evaluated. IBTCI soon found that none of the
five cities chosen for the roll-out had conditions that approximated, let
alone duplicated, those in Perm'. The roll-out cities seem to have been
chosen more for their geographic and population distributions than for any
existing economic, political, and regulatory conditions that might make
the Perm' model replicable. Because of these differences, IBTCI had to
deviate from the Perm' model and basically develop five new pilot
projects; nonetheless, it still experienced problems.
Irkutsk officials were not cooperative with IBTCI and declared the
information needed to assess the commercial real estate situation a state
secret. Local officials were not ready to participate in the project.
In Tver', an auction system had been functioning between June 1992 and
December 1993. The original investment tender process used in the auction
was challenged in court and hopelessly compromised. IBTCI introduced a new
tender process in Tver', but the new system's effectiveness has not yet
been demonstrated.
The Novgorod officials opposed conducting right-to-lease auctions because
they feared losing future revenue and the city had experienced poor
results from a similar auction in November 1993. IBTCI focused on
establishing a market for municipal, oblast', and private commercial space
by creating a real estate listing center, developing a secondary market,
and encouraging officials to allow increased and legalized subletting.
The listing center's effectiveness has not yet been demonstrated.
In Yekaterinburg, an effective auction system has been in place since
1992. City officials were not interested in IBTCI's original task of
increasing the use of commercial leases. Instead, they wanted assistance
in how to use retail and commercial space efficiently and increase the
city's revenues from property leases. Although IBTCI submitted some
analyses and recommendations addressing their concerns, city officials
told us that IBTCI came to town on different occasions, spent little time
there, did not speak to the appropriate local officials, and presented an
academic report that was of little use to them.
Vladivostok city officials were interested in privatizing commercial real
estate, but were unable to devise a method that would use mortgages to
provide substantial revenue for the city. IBTCI devised a mortgage
instrument that allowed the city to continue receiving income by holding
the mortgages and allowed small business owners to bid for a property and
provide as little as 5 percent of the final cost as a down payment. The
city auctioned one property in August 1994 for under $7,000, but local
officials doubted they would use an auction again because the city did not
not have any more excess property.
By the time IBTCI had completed its work in the five cities, none of
the cities had participated in any activities that remotely resembled
the Perm' model. As a result, the objective of replicating the pilot
project in other cities was not achieved.
There were various reasons for IBTCI's inability to replicate the Perm'
model. First, tensions between IBTCI and BCG caused some problems. BCG
performed both the rapid diagnosis and the pilot phases, but IBTCI
determined that BCG's approach was not adequate. Russian officials
monitoring the project were aware of tensions between IBTCI and BCG early
in the project, but IBTCI was obligated to fulfill the contract and
replicate the model. The tensions between IBTCI and BCG resulted in
little continuity of personnel from the pilot to the roll-out phases.
Second, a provision of Russia's 1994 State Privatization Program Act and
its implementing regulations caused problems in the Perm' pilot. The
provision gave lessees who obtained their leases competitively (i.e., at
an auction) the right to buy the property at the end of the leases. The
implementing regulation set an extremely low selling price for such
privatized properties. IBTCI said that the act's provision and the
implementing regulation stopped the Perm' model because city officials did
not want to lose revenue from leases and did not want to be forced to sell
leased property for extremely low prices. Even though reports identified
the problem as early as January 1994, USAID, GKI, and the Russian
Privatization Center took no effective action to address the issue.
Third, although officials at the federal level agreed earlier that the
project should be done and that the Perm' model was viable, local
officials in the roll-out cities did not agree with the Perm' model or its
usefulness in their cities.
Fourth, although the consultants used by IBTCI for this project had some
experience in Russia and some spoke Russian, Russian authorities
questioned the level of some IBTCI consultants' professional experience.
In addition, the consultants did not have enough knowledge of the Russian
localities and local politics to choose roll-out cities well. IBTCI staff
did not reside in the cities during the roll-out. Instead, they would fly
in, do a few days work, then leave. Thus, they were unable to identify
what cities would be the best candidates for replicating the Perm' model.
Even BCG had problems carrying out a successful pilot, despite its
knowledge of and relationships in Perm'.
Novgorod and Tver' were included because they are relatively small cities,
under 250,000 in population. Irkutsk and Vladivostok represented
medium-sized cities, with populations between 250,000 and 750,000.
Yekaterinburg was to represent large cities, population over 750,000, and
be a match for Perm'.
RESULTS
The project was not sustainable and did not contribute to systemic reform.
Although IBTCI's final report provided solutions to specific problems, the
project did not implement the pilot or develop a method that could be
replicated in other cities. USAID officials and the Russians who were in
charge of disseminating the report did not know whether or where the IBTCI
"solutions" had been applied in any but the six cities. City officials we
interviewed in Yekaterinburg and Vladivostok were not using the concepts
of the project.
GKI and the Russian Privatization Center had originally proposed the
project, which suppported a federal initiative. However, an existing GKI
act and its implementing regulation potentially forced local governments
to sell leased property at low prices to anyone who bought the lease at an
auction. This regulation contributed to the poor results of the project.
USAID MANAGEMENT
USAID managed this project from Washington with limited help from
Go to TOP of this page
RETURN to Palms' Lobby
RETURN TO HOME PAGE