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Estonian DwellingOwners' Association andMaintenance Policy: TheConflict of Policy Goalsand IncentivesFrederick Derrick , Charles Scott & EneKolbrePublished online: 02 Jul 2010.

To cite this article: Frederick Derrick , Charles Scott & Ene Kolbre (1999)Estonian Dwelling Owners' Association and Maintenance Policy: The Conflictof Policy Goals and Incentives, Europe-Asia Studies, 51:7, 1285-1294, DOI:10.1080/09668139998543

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EUROPE-ASIA STUDIES, Vol. 51, No. 7, 1999, 1285±1294

Estonian Dwelling Owners’ Associationand Maintenance Policy: The Con¯ ict of

Policy Goals and Incentives

FREDERICK DERRICK, CHARLES SCOTT & ENE KOLBRE

HOUSING PRIVATISATION PLAYS AN IMPORTANT ROLE in the lives of citizens and in the

restructuring of the economies of the former Soviet states. In no other sector does

privatisation have such a direct impact on the lives of so many people. Reform affects

from 67% of Russian Federation and 60% of Estonian housing to 35% in Poland, 23%

in Hungary and 9% in Bulgaria.1

Governments’ goal in housing privatisation was, and

continues to be, to transfer ownership, responsibility and maintenance from the state

and municipal governments to individuals. The effect of unit-by-unit privatisation is

that new owners receive attenuated property rights: they receive the right to dispose

of their property freely but they do not receive control of the management of the

building.2

This is a crucial issue as the majority of Soviet-built housing is in

multi-unit buildings with many common areas (e.g. staircases and roofs) and systems

(e.g. plumbing and heating). This gives rise to the problems of maintenance of these

common areas and of the process for de ® ning responsibilities of the individual owners

for the commons. Dwelling Owners’ Associations (DOAs) responsible for resolving

these issues were not required at the time of privatisation in a number of countries,

including the Russian Federation, Armenia, Estonia, Latvia and Bulgaria.

In Estonia, as well as in the other countries where DOAs were not required, the

initial privatisation process was executed in a manner that may sabotage the

development of the mechanism for renovating and maintaining the commons. This

problem is similar to that faced in health insurance except that most of the `patients’

in this case have pre-existing illnesses. Consequently, health insurance theory and

concepts provide insight into the current maintenance policy. Citizens are persuaded

to privatise, taking on the sick patient, by the low privatised price and the (perceived)

lack of alternative housing. The new owners of the ¯ ats are required to fund building

maintenance through a municipal maintenance ® rm (the building’ s health insurer)

until they form a DOA.3 Unfortunately, the insurance premiums are too low, allowing

the patient’ s (building’ s) health to deteriorate and discouraging the formation of

DOAs: the institution needed to heal the patient.

This insurance approach to viewing housing privatisation is in contrast to the

analytical approach used by Banks, O’ Leary & Rabenhorst.4

They present DOAs in

the context of the legal framework and inter-governmental implementation strategies

concerning development of DOAs, management of privatised housing, and ® nancial

ISSN 0966-8136 print/ISSN 1465-3427 online/99/071285±10 Ó 1999 University of Glasgow

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FREDERICK DERRICK, CHARLES SCOTT & ENE KOLBRE1286

issues related to renovation. The analytical approach is also in contrast to papers, such

as that by Turner & Victorin,5

which provide comparisons of the laws across

countries but do not investigate the implied incentives.6

The next section contains a discussion of the context of Estonian housing privati-

sation. This is followed by a discussion of the maintenance problems inherent in the

method of privatisation used. We then discuss the insurance analogy and consider

how insights from the health insurance literature can assist in understanding the

problems facing Estonia’ s housing privatisation effort. The ® nal section of the article

contains possible policy responses drawn from the earlier analysis.

The housing sector

Prior to privatisation in January 1993 the Estonian state owned 160 000 housing units,

municipalities owned 215 000 units, and the private sector owned 159 000 units, with

foreign states and legal persons owning the remaining 85 000 units.7 Of the total of

33.5 million square metres of housing space, the state owned 8.3 million and the

municipalities 10.3 million square metres. Most state-owned and municipally owned

dwellings were two-room ¯ ats (45%); only 4% of ¯ ats had four or more rooms.

Housing in the former communist countries is characterised by relatively good space

standards, but low quality, and in a poor environment.8 Most of the ¯ ats (60%) were

built during the period 1946±80.

The public living stock has minimal comfort: hot and cold running water (approx-

imately 66%), ® xed bath or shower (78%) and central heating (77%). Approximately

half of privatised dwellings have two rooms and a kitchen and were built more than

25 years ago.9 Thus they are old ¯ ats, not of high quality and in need of renovation

and regular repair.10 Kaganova notes that utilitiesÐ electricity, heat, water and

gasÐ are provided by monopol istic enterprises under policies set by the former

socialist regime, and show no signs of reform. Utilities are usually provided using

centralised stations and inef® cient networks.11

The services are supplied to buildings

and individual ¯ ats without metering and, in the case of heat, often without control

of consumption in the individual ¯ at. Thus the housing stock needs renovation to

improve its condition and reorganisation of its management to conform to private

ownership.

Neither the number of units nor the quality has drastically changed with privatisa-

tion; only the ownership has changed. In January 1997 there were 622 000 dwelling

units, compared with 618 000 four years earlier. The total area shrank slightly to 33.1

million square metres. The state and municipalities owned 118 000 (19%) units,

compared with the 375 000 (61%) prior to privatisation. Under the Soviet system,

citizens had the right to occupy their ¯ ats but no right to transfer them. Estonian

housing privatisation has con ® rmed the right to occupy, with current occupants

having the right of ® rst refusal, and established the right to sell the privatised unit.

However, privatisation only partially transferred the responsibilities of ownership,

as most housing units are in large multi-unit buildings. Each ¯ at is privatised

separately. The effect of this unit-by-unit privatisation is that new owners receive the

right to maintain and dispose of their ¯ at freely but they do not receive control of

the management of the building or ownership of the land. Management remains

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ESTONIAN DWELLING OWNERS 1287

with the state-run or municipality-run maintenance ® rm until an association of

owners, DOA, is formed.12

The DOAs `offer a tremendous opportunity for improving tenants’ control over

maintenance and improving its quality ¼ the rewards of implementing reform are

large: maintenance fees that may well be less than half of the stated [given the level

of maintenance provided], a much higher level of services provided to the tenants, and

improved living environment for the population’ .13

Thus, DOAs could control how

money is spent; keep money from their own house in their own house, control costs,

and improve the condition of the building and grounds.14

And a DOA is needed to

ensure performance of the necessary maintenance.

According to the Estonian Privatisation Act,15 any residential building with ® ve or

more owners shall establish a community of owners, a DOA, for `joint possession and

usage’ . By this statement, large numbers of new owners are required by law to

assume management responsibility, but there is no reference to their ® nancial, legal

and technical ability to do so. When the law was enacted, there were limited choices

in contracting for management and maintenance servicesÐ and limited ® nancial

resources to make repairs necessitated by years of deferred maintenance. This

management responsibility is a daunting task as housing may be the most complex

economic good to manage properly. Housing has spatial speci® city (with the in¯ uence

of neighbourhood, ecological, sociological and infrastructure qualities), durability

(measured in decades), heterogeneity (in terms of design, age and utilities) and

extensive regulation by government.16

In addition, housing was heavily subsidised

under the Soviet system. With budgets based upon a housing cost signi® cantly below

market price, privatising will require signi ® cant increases in the private resources

devoted to housing.17

DOAs are needed for the transfer of management and maintenance to be complete.

But this also transfers the responsibility for the increased costs related to the common

areas and systems. Thus, it is not surprising that there is limited progress in DOA

formation.

Maintenance

From the time of privatisation, the new owners are required to pay an annual

maintenance fee of 2.5% of the 1 January 1993 assessed value of their ¯ ats for

renovation and maintenance of the common areas to the maintenance ® rm that has

been maintaining their property previously. This percentage presumes a 40-year

replacement cycle with no provision for repairing current problems. Capital improve-

ment cycles for the construction elements in the typical building are shorter than the

40-year cycle implied by the 2.5% fee. For instance, roofs should be repaired every

15 years; stairs, every 30 years; paint, every 10 years; plumbing pipes, every 15 years;

exterior lighting, every 10 years; and internal and electric wiring, every 20 years. In

1993 the fee was estimated to be only half of that needed to perform the necessary

renovation. To maintain the housing stock in its current state, repairs of 11.4 billion

EEK18 should have been made in 1994. During recent years construction and repair

costs have risen quite rapidly. For example, in 1995 the total construction price index

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FREDERICK DERRICK, CHARLES SCOTT & ENE KOLBRE1288

was 146.7 and the ¯ at building index was 164.4 (1994 5 100). The estimated current

backlog of repairs has increased to 18 billion EEK.19

The funding method creates an additional problem since the magnitude of the

maintenance fee is a function of the assessed value. Privatisation assessments are

based on an underestimate of the value and include some adjustment for condition.

Buildings in a poor state of repair are assessed at a lower value, thus reducing the

amount of the maintenance fee. Under this method funding for all buildings is

insuf® cient and buildings in need of the most renovation will have the least funds

available.

In the long run, owners and DOAs will need to take responsibility for the

maintenance of the common areas and to take loans to ® nance the necessary

renovations. There are limited mortgage funds available with very high interest rates.

Average loan terms are of no more than 5 years and 15% interest. These loans are

not affordable for most of the new owners.20

This lack of ® nancing is a broader

problem in itself.

By the conditions of the initial privatisation, until a DOA is formed, the state or

municipal maintenance ® rms were placed in charge of housing maintenance. These

state and municipal maintenance ® rms have largely been privatised by now. This

process was carried out after housing privatisation and was accomplished quickly

thanks to strong support from local governments, as they wished to divest themselves

of the maintenance challenges and responsibilities. Despite this interest in escaping

the maintenance responsibility, municipalities have been forced to continue to bear it

owing to the slowness of DOA formation. Additional maintenance ® rms have entered

the market but can only win business as DOAs are formed since individuals cannot

change the maintenance ® rm chosen.

Policy implications: the insurance analogy

Insurance theory can provide insights into the implications of the current DOA and

maintenance policies. This is a unique use of insurance theory as it is normally

applied in situations of rare occurrence and high costs. In the case of housing

privatisation, the costs will be high in almost all buildings. However, there is a

probability aspect in terms of whether, and when, maintenance must (or will) be

completed.

The annual maintenance fee of 2.5% can be viewed as a `community rating’ as the

fee has been based on an assessment of the average status of the buildings. The

community rating is analogous to setting a health insurance premium for all individ-

uals in a community based on the average per capita medical costs in the community.

Use of the same rate per building ignores the differences in the health status of the

buildings due to the age of the physical plant, the size and type of buildings, and their

speci® c features. The implication is that some buildings will be paying fees substan-

tially lower and some (potentially) higher than necessary to rehabilitate the common

areas of the building.

The setting of the fee by community rating may be attributed to actuarial

dif ® culties in acquiring information similar to the dif® culty of developing suf ® cient

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ESTONIAN DWELLING OWNERS 1289

information for a health insurance company to rate a new group by experience.

Alternatively, the use of the community-rated maintenance fee may be due to the

political reality that the citizens lack suf ® cient ® nancial resources to pay the

experience-rated fee.21

At times, the use of community rating is justi® ed on the basis of equity. Thus, one

might argue that the community-rated maintenance fee was set by the government as

a means of income redistribution to `correct’ for differences in housing quality.

However, housing quality was taken into account in the pricing of the housing units.

In addition, the maintenance funds are by law to be kept separate by building,

precluding income redistribution, and there is a separate housing assistance pro-

gramme to help those in ® nancial dif ® culties. Thus, income redistribution is not the

intent.

The maintenance fee is structured as a separate contingency fund for each building.

The accrual of funds over time for a building is crucial, given the limited Estonian

® nance markets and the dif® culty in obtaining loans. In practice, accumulation of

funds has not been occurring. Instead, funds have been combined across buildings and

spent annually. This practice is analogous to a (term) insurance fund in that money

accumulated through annual premiums, and the associated investment return, are used

to pay current claims. The combining of funds is similar to the structure of the United

States’ social security programme in that current collections are applied towards

current expenditures. This policy presumes that funding will be suf® cient to address

today’ s pressing needs and that suf® cient funds will continue to ¯ ow into the coffers

in the future. Funds have been spent according to an appraisal where buildings are

classi® ed as (1) unable to be saved; (2) in poor shape but recoverable if immediate

action is taken; and (3) recoverable at a later date. This appraisal process is referred

to as the `triage method’ and is similar to the system used by health professionals at

a disaster or battle ® eld since the Korean War to produce the greatest bene® ts to

casualties. Full treatment is given to those who may survive and not to those who

have no chance of survival or to those who will survive without it.

The mixing of funds, annual expenditure of funds and the triage method for

deciding which buildings are to be rehabilitated leads to the potential for moral

hazard. Moral hazard is the disincentive for individuals to take actions that would

reduce the amount of the claim received.22

Alternatively, moral hazard can be viewed

as an incentive for individuals to take actions that would increase the amount of the

claim received. In housing, moral hazard would be the failure to take steps that would

lead to lower renovation or maintenance costs in the future.

If maintenance funds from a speci® c building do not accrue to that building, it is

to the bene® t of the residents to move their building to the front of the maintenance

queue by not maintaining the building themselvesÐ or even intentionally damaging it.

In buildings that are unable to be saved, it is bene ® cial for residents to act in ways

that increase the rate of deterioration. This would more rapidly move residents either

to a new building or to ¯ ats in a better quality existing building.23

The decline in the

condition of the building will be most visible in the common areas. Individuals will

maintain their ¯ ats to the extent that this affects their own quality of life and the value

of the sellable asset. However, this tragedy of the commons applies to the shared

space. Without DOAs to establish ownership rights over the common areas, the

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FREDERICK DERRICK, CHARLES SCOTT & ENE KOLBRE1290

government retains implicit ownership of the common areas and explicit ownership

of the land. Individuals have only limited return on resources applied to the common

areas since costs are fully borne by the individual while bene® ts are shared by all.

This gives rise to the free rider problem where owners who do not pay will still

bene® t from the expenditure.

Residents living in buildings that are in `moderate’ shape have a similar incentive

to defer maintenance activities and/or increase the rate of deterioration. Such activities

would be perceived as moving the building to the front of the renovation queue. This

would result in renovation of the building using not only the maintenance funds that

the residents have contributed but also funds from other buildings. Such cost-shifting

activity results in increasing the wealth of the residents of the renovated building at

the expense of others. Residents in the `better’ buildings that face deferred mainte-

nance until some time in the future will recognise the wealth transfer as their

maintenance fees are spent on other buildings. This provides an incentive, even in the

better buildings, to defer maintenance and increase the rate of depreciation, thus

raising the building’ s priority for renovation.

The irony in this approach is that residents of each building have the incentive to

delay maintenance activities and to increase the rate of depreciation. The overall

response is a fallacy of composition in that attempts to move every building to the

front of the rehabilitation queue lead to an increased rate of depreciation for the

building stock as a whole, further straining the available resources.

For the owners in the better buildings and for the owners in renovated buildings,

an alternative response to the pooling of fees and the resulting wealth transfer is to

remove the building from the maintenance pool. These owners have the incentive to

organise a DOA to take charge of their own maintenance and to consider contracting

for maintenance with another ® rm. By doing so, they can keep funds collected for the

maintenance of their own building. In addition, the DOA is more likely to negotiate

a lower experience-rated maintenance fee, based on the maintenance needs of the

particular building. Indeed, one might expect that the maintenance companies would

actively market themselves to these DOAs as building-speci® c funds will be available

and it will be easier for the maintenance ® rms to estimate costs. The removal of the

® ttest buildings from the community housing pool corresponds to the health insurance

concept of `cream skimming’ Ð only the ® ttest are taken. It also leads to the adverse

selection bias in the current maintenance poolsÐ hence the government’ s interest in

privatising the maintenance companies rather than retaining the responsibility for the

increasingly run-down buildings.

While leaving the maintenance pool is advantageous for these particular owners, it

further exacerbates the funding dif® culties faced by the remaining owners and the

government. Those buildings remaining with the municipal maintenance ® rm, whose

owners helped ® nance the other buildings’ renovations, will then have access to a

diminishing pool of funds for their own renovations. In time, the government, and in

turn the owners, will face either a steady deterioration of the housing stock under

contract with the (formerly) municipal maintenance ® rms and/or the need for a higher

maintenance fee. A steady deterioration of housing stock would further delay the

transfer of responsibility for the common areas of the building from the government

to the residents. Residents would face increasing ® nancial incentives not to take on

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ESTONIAN DWELLING OWNERS 1291

managerial and ® nancial responsibility for a `sick’ building. This steady deterioration

will further reduce the quality of life for occupants.

An apparent strategy for combating this decline is to raise the maintenance fee

rates. By increasing the maintenance fee, there will be an incentive for those in

buildings better than the median level either to allow further deterioration or to opt

out of the government maintenance programme by forming DOAs. Regardless of the

choice made by individual buildings, the maintenance fee needed for the median

building in the maintenance programme will continue to rise. This result is similar to

results of adverse selection as owners in the `sickest’ buildings will choose the

community-rated maintenance fee and stay in the insured pool, while less expensive

`healthy’ buildings opt out of the pool by forming DOAs. Adverse selection results

from asymmetric information in which individuals (owners in Estonia) purchase

insurance (maintenance) at rates below the actuarially fair premium, including

administrative costs (maintenance fee).

In the health insurance literature this continual increasing of rates as the healthy opt

out of community ratings is referred to as the `death spiral’ of rates. Each subsequent

increase in rates results in driving more individual buildings from the pool as

buildings previously worse than the median building now ® nd themselves better than

the new median building. Thus, the continual increase of the community rates leads

to the buildings that remain being in progressively worse shape without a funding

source for suf® cient maintenance coverage.

In addition, the combining of funds in conjunction with the triage of building

maintenance will lead to a delay in the formation of DOAs. The appearance to

residents of individual buildings is that the government will eventually take responsi-

bility for upgrading the buildings’ common space. This is partially balanced in the

better buildings by the realisation that the residents’ wealth is being transferred to the

rehabilitated building by the combining of funds. Thus, the timing of the development

of DOAs in the better building is an empirical question. However, residents in the

other two categories of buildings have the incentive to delay forming DOAs in hopes

of salvation through the government or the pooled funds.

Policy responses

Despite the adoption of the Flat Associations Act in 1995, the development of DOAs

and the shift of maintenance responsibilities from the state and municipalities made

little progress until spring 1997. The Union of Flat Associations was formed to inform

and educate potential and existing DOAs, real estate agencies and other establish-

ments and has shown initiative in this ® eld. By 1 January 1998 there were 2648

DOAs, a 28% increase over the previous year but still a long way from what is

needed. The slowness is due to the dif® culty in setting up dwelling owners’

associations for most owners and the lack of enforcement of the requirement that they

should be formed. Owners are deterred from forming DOAs by the costs and

responsibilities that they will assume. They also recognise the dif ® culty of determin-

ing the responsibility for infrastructure.24

With all of the dif® culties in organising and running DOAs, local governments

must go beyond mandating formation to becoming a positive force in the transition.

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FREDERICK DERRICK, CHARLES SCOTT & ENE KOLBRE1292

They need to facilitate the movement of residents to decrease the internal ® nancial

and ethnic diversity of the various houses. One strategy municipal governments are

pursuing is devoting funds to low-cost housing to allow the poor to move to more

affordable accommodation. Another strategy would be to minimise the transaction

costs for buying and selling ¯ ats, at least in the short term. This could include

repealing the capital gains tax, or at least allowing the ® rst post-privatisation sale to

be tax-free. In addition, the paper-work and procedure for transfer of ownership of

¯ ats should be streamlined. Local governments must also assist the various groups in

their efforts to de® ne goals, to organise and to obtain ® nancing. With assistance in the

formation of dwelling owners’ associations, the distributed market created by privati-

sation can operate ef® ciently, and the deferred maintenance issues will be addressed.

If DOAs are to be formed the government must get out of the maintenance

structure rapidly so that residents take responsibility for their own building. A ® rst

step in this direction would be to enforce the existing law that funds not be

combined.25 A second step would be to mandate that residential buildings with ® ve

or more owners must form DOAs and to specify the timing. The current law says that

they shall establish them but leaves the timing, responsibility for forming and

mandatory aspect of DOA formation vague. Evidence from other former Soviet states

indicates that requiring DOAs has led to a much more rapid understanding, appreci-

ation and acceptance of responsibility for the commons. Estonia needs to follow their

successful example by passing and enforcing the necessary legislation.

The continuing increase in community rates in conjunction with insurance compe-

tition led to the development of experience rating in the health insurance industry.

Experience rating bases the insurance premium on the individual’ s experience or

history instead of the average or community experience. It appears that a similar

response of developing the maintenance fee rates on the basis of the statusÐ the

`experience’ Ð of of each building will be necessary if the housing stock depletion and

deterioration is to be stopped.26

As the original assignment of ¯ ats to households was

not by household choice and since the ¯ at price at privatisation did not fully

incorporate the quality of the building, equity issues may require the government to

consider subsidising the necessary repairs in some cases.27 In addition, the govern-

ment should consider getting involved in the mortgage market, possibly with funds

from the World Bank or the International Monetary Fund.

Without using combined funds and given the limited ® nancing available, it is

doubtful whether residents of most buildings will have suf ® cient funds to address

signi ® cant renovation needs. Thus, a necessary fourth step is an adjustment of the

legal structure of DOAs such that they have the legal right to contract loans as

opposed to the current requirement whereby each household in the building has to

apply and be approved. Prior to DOA formation the land cannot be privatised and the

¯ ats are considered `movable property’ . This means that they cannot be used as

collateral for loans. Once the DOA is formed and privatises the land, this impediment

to ® nancing is removed. DOAs, once formed, also need to be able to contract on the

basis of their legal right to collect funds from residents.

Finally, the Flat Associations Act should specify obligations and rights in the cases

when some ¯ at owners do not join the associations and in the cases where the state

and municipal governments retain ownership of some dwelling units. Owners often

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ESTONIAN DWELLING OWNERS 1293

refuse or are ® nancially unable to make payments for the maintenance of the house

and do not ful® l the statutory obligations of the members of the association. The

obligations and liability for maintenance of the individual’ s portion of the common

property of such ¯ at owners have to be speci® ed.

These policy issues, which arose as housing privatisation in the former Soviet

countries transferred the rights and responsibilities from government to citizens, are

not unique to Estonia. Because Soviet housing consisted predominantly of multi-unit

buildings, dwelling owners’ associations are needed. Citizens and legislators need to

recognise their importance in terms of owner satisfaction and of maintaining the

housing stock. With the generally poor state of the housing stock, these DOAs must

be mandated or they will not be formed and the quality of housing will continue to

deteriorate. Even if formation is mandated some additional resources will be needed

from the government to address equity and the limited availability of ® nancing. This

is true in Estonia, as well as in countries such as the Czech Republic and Hungary

where DOAs were put in place at the time of privatisation. Otherwise, insurance

theory tells us that a death spiral of rates will develop over time and/or the housing

stock will deteriorate at an accelerating rate.

Loyola College

Tallinn Technical University

1Raymond Struyk, `The Long Road to the Market’ , in Raymond Struyk (ed.), Economic

Restructuring of the Former Soviet Bloc: The Case of Housing (Washington DC, The Urban InstitutePress, 1996). Lisa Lee, Katya Petrova, Marina Shapiro & Raymond Struyk, `Housing Maintenanceand Management in Russia During the Reforms’ , Washington DC, The Urban Institute, November1996, report that 67% of housing was state and municipal stock in the Russian Federation with upto 90% in the larger cites.

2Struyk, `The Long Road ¼ ’ .

3DOAs in intent are comparable with condominium associations in the United States. However,

they do not have the legal status to enter into contracts. The owner of a privatised housing unit in amulti-unit building carries rights and responsibilities comparable with those of a purchaser of acondominium.

4Christopher Banks, Sheila O’ Leary & Carol Rabenhorst, `Privatized Housing and the Devel-

opment of Condominiums in Central and Eastern Europe: The Cases of Poland, Hungary, Slovakia,and Romania’ , Review of Urban & Regional Development Studies, 3, 1996, pp. 137±155.

5Bengt Turner & Anders Victorin, `Housing Policy Reforms in Eastern Europe: The Case of

Estonia’ , in Struyk (ed.), Economic Restructuring of the Former Soviet Bloc: The Case of Housing.6

Additional insight into how the process and speci® c features of the situation can affect thesuccess and timing of privatisation can be drawn from comparison of the three Baltic countries.Lithuania had largely completed and Latvia was just beginning housing privatisation in spring 1995.Comparison of the Baltic countries’ approaches to restitution, privatisation and rent issues may befound in Turner & Victorin, `Housing Policy Reforms ¼ ’ .

7The Estonian privatisation process and legal references are discussed in Charles E. Scott,

Frederick W. Derrick & Ene Kolbre, `The Challenges of the Commons’ , Loyola College WorkingPaper, 1998. Many of the privately held units had previously been restituted and suffer from problemssimilar to those of privatised ¯ ats.

8Turner & Victorin, `Housing Policy Reforms ¼ ’ .

9Estonian State Statistical Board, 1997.

10An overview of dwellings built after 1991 shows that the structure of dwelling completions

is changing. During 1992±94 the housing that was completed was largely ® ve to nine storey buildingsstarted during the Soviet time. In recent years completed housing has been mainly one-family housesbuilt by private persons.

11Olga Z Kaganova, `Development of the Market for New Housing in Seven Cities of the

Russian Federation in 1993’ , Washington DC, The Urban Institute, March 1995.12

Struyk, `The Long Road ¼ ’ .

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13Lee, Petrova, Shapiro & Struyk, `Housing Maintenance ¼ ’ .

14Andres Jaadla, Director, Estonian Association of Home Owners’ Associations, personal

conversation, Tallinn, 9 June, 1997.15

Law on Privatisation of Housing Space, Riigiteataga, 1993, 23, 411 and Regulations for thePrivatisation of Housing Space, Riigiteataga, 1993, 46, 641.

16Bertrand Renaud, `Housing Reform in Socialist Economies’ , World Bank Discussion Paper

125 (Washington DC, The World Bank, 1991).17

For further discussion of the problems of DOA formation see Scott, Derrick & Kolbre, `TheChallenges ¼ ’ .

18The Estonian Kroon (EEK, for Eesti Kroon) is convertible, by law, at a rate of 8 to 1 for the

German mark.19

A 1998 inquiry concerning the maintenance and management costs, conducted by the Ministryof Economic Affairs housing department, revealed great regional variations. The majority of ruralmunicipalities were making efforts to organise housing maintenance, but no resources were beingcollected from the inhabitants for major repairs. There were also rural municipalities which organisednothing else but transport of waste. In many administrative units the maintenance and repairexpenditures were very low. In fact, all non-maintained houses are decaying.

20Without ® nancing, the equity value of the housing cannot be used to carry out renovations.

This precludes one means of stopping the deterioration. Thus, ® nancing is a major issue in itself.21

Privatising at prices well below market values can adjust for the poor condition of thebuildings and the limited ® nancial resources of the new owners only if there is a ® nancial market toallow them to borrow against the equity to carry out the necessary repairs. Without the ® nancialmarket owners will under-fund renovation from necessity.

22Sherman Folland, Allen C. Goodman & Miron Stano, The Economics of Health and Health

Care (Upper Saddle River, New Jersey, Prentice-Hall, 1997).23

This presumes that there is available housing for relocation from these buildings. At presentthis is a problem and may delay this intentional deterioration. Buildings beyond repair at the time ofprivatisation were not privatised, and the residents were given priority in available ¯ ats not otherwiseprivatised

24Lee, Petrova, Shapiro & Struyk, `Housing Maintenance ¼ ’ . Additional problems in forming

DOAs are the diversity of income within buildings, leading to divergent ® nancial capabilities andhousing quality expectations; the ethnic diversity within buildings, leading to diverse priorities andculture; and the paranoia about giving up their freedom, so recently won, by subjecting themselvesto the DOA.

25Now that municipal companies are privatised and the maintenance service is offered by

several enterprises, the cost account is held separately for each building. It is no longer legal to usecommon funds and transfer costs.

26There are currently efforts to implement experience rating. Residents in OÃismaÈ e have had their

maintenance fee reduced owing to the newness of the buildings in this suburb.27

Banks, O’ Leary & Rabenhorst, `Privatised Housing ¼ ’ .

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