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Following the meeting, Dmitry Medvedev issued a list of instructions on further development and monitoring over housing and utilities sector financing. The Government, regional governors and law enforcement agencies are instructed to conduct nation-wide inspections of performance by organisations rendering services in housing and public utility sector. The progress in inspections is to be reported to the President on a monthly basis.

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President of Russia Dmitry Medvedev: Mr Chuychenko, I have received two reports from you. The first concerns how effectively money allocated for modernising the housing and utilities sector has been spent, and the second examines how money allocated for the Sochi Olympics is being spent. Both are quite harsh in their assessment. Run through them again in more detail and I will then make some conclusions. Please, go ahead.

Presidential Aide and Head of the Presidential Control Directorate Konstantin Chuychenko: Mr President, regarding our checks of the housing and utilities sector, we revealed many suspicious-looking financial operations. These operations were carried out by organisations providing housing and utilities services to the public. Instead of putting funds into modernising the sector, these organisations were transferring them to what bear all the signs of fly-by-night companies, or quite simply siphoning these funds abroad. This money would then return in considerably lower amounts in the form of loans. 

Dmitry Medvedev: Who has been doing this? Which organisations?

Konstantin Chuychenko: These are various organisations working at the municipal level.

Dmitry Medvedev: Who chooses them?

Konstantin Chuychenko: The municipalities choose them.

Dmitry Medvedev: Are there tenders, or do the municipal authorities choose them themselves?

Konstantin Chuychenko: Tenders are held. In the Central Federal District, for example, we calculated that the total money channelled abroad over the two years of 2009 and 2010 came to around 25 billion rubles [some 900 million dollars].

“Regarding the housing and utilities sector: if checks reveal the existence of fly-by-night firms or cases of money being channelled abroad without proper justification, on the basis of fraudulent documents, or via whatever fraudulent schemes, the region’s governor should raise the question of dismissing the head of the municipality.”

Dmitry Medvedev: In other words, in all of the regions in the Central Federal District these organisations, fly-by-night, and not so fly-by-night, have been shifting money out of the country?

Konstantin Chuychenko: It is not the organisations themselves that are fly-by-night, but they are transferring the funds to fly-by-night companies, which in turn wire the money onwards out of the country.

Dmitry Medvedev: These 25 billion rubles, what percentage do they represent of the total funds allocated for housing and utilities in the Central Federal District? 

Konstantin Chuychenko: Total funds for the country as a whole come to 230 billion rubles, and I think the Central Federal District accounts for…

Dmitry Medvedev: We’re talking about at least 15 percent then, given that this is the Central Federal District in question. These sums come to about the same as what is actually spent.

Konstantin Chuychenko: This is the figure for two years, a bit more in the Central Federal District’s case. 

Dmitry Medvedev: But it’s a huge amount of money no matter how you look at it: 25 billion!

Konstantin Chuychenko: It is indeed a huge sum. This is why we proposed that you sign an instruction on having the Prosecutor General’s Office, Interior Ministry, Investigative Committee, and the Federal Service for Fiscal Monitoring carry out a total check of all regions of the country. All of the necessary procedural decisions should be made following these checks because the housing and utilities sector concerns the interests of all of our citizens. Really, when it comes down to it, these organisations providing housing and utilities sector services are stealing from the pockets of practically every single person residing within the respective area. 

Dmitry Medvedev: You are absolutely right. This is our money that instead of being spent on repairs in the housing and utilities sector is being sent to the accounts of organisations that then appropriate these funds for themselves. This is theft. It is theft of taxpayers’ money. 

But I think that as well as giving the relevant instructions to the law enforcement agencies, we must make sure the regional governors and Presidential Plenipotentiary Envoys [to the Federal Districts] are involved too, because the law enforcement agencies will not be able to organise all of this work on their own. Let’s add an instruction to the presidential envoys, who should take part in this too, together with the regional governors, all the more so as it is not only the municipal authorities themselves who answer for the state of affairs in the municipalities, but also the regional governors.

Konstantin Chuychenko: Yes, you are absolutely right. The second part of our check in fact identified the systemic factors affecting the amount of investment going into the housing and utilities sector, and thus the prices set in the sector. Here too we have identified problems that I would say are systemic in nature.

First of all, the rates set in the sector are based on higher figures for the degree of wear of engineering networks and equipment. This means that the organisations providing services in the housing and utilities sector can put more money into whatever it is they are responsible for, but in reality there is often no objective need for this, and what we see in actual fact is that, although rather large sums of money are invested, the percentage of wear in the systems does not get any lower.

“This is our money that instead of being spent on repairs in the housing and utilities sector is being sent to the accounts of organisations that then appropriate these funds for themselves. This is theft. It is theft of taxpayers’ money.”

Dmitry Medvedev: Yes, this is what people often say. They say that housing and utilities sector bills keep going up, but all the old equipment remain untouched, nothing gets replaced, and the amount of wear does not decrease.

Konstantin Chuychenko: Yes, another problem is that the housing and utilities sector bases its rates on outdated consumption standards, using them to calculate the investment required and the infrastructure maintenance costs. The water consumption rate, for example, reaches as much as 400 litres per person per day, and the water loss allowance in the water supply network is 35 to 40 litres, while in Denmark, Poland, and Germany, say, the daily water consumption is only 130 litres per person, and water loss in the network is 6.8 litres.

Experiments conducted in Russia show that the average person living permanently in one apartment uses daily around 100 litres of water, or 150 litres including water loss. This is a factor affecting the prices set. It makes for higher costs, because excessive production capacity is to be maintained in order to guarantee the supply of 400 litres per capita. 

In our view, what we lack at the moment are systemic mechanisms that would monitor the way the organisations carry out production and investment programmes. In other words, our consumers have no way of knowing how the money collected from them in payment for these various services is being spent. The second part of the instruction deals with this issue and all of the problems that I have told you about.

Dmitry Medvedev: Regarding the housing and utilities sector and municipal authorities’ responsibility, the list of instructions should include provisions that if checks reveal the existence of fly-by-night firms or cases of money being channelled abroad without proper justification, on the basis of fraudulent documents, or via whatever fraudulent schemes, the region’s governor should raise the question of dismissing the head of the municipality in question. Add this to the list of instructions. 

Konstantin Chuychenko: Yes.

Dmitry Medvedev: Good. Now, what about the Olympics?

Konstantin Chuychenko: Acting on the instruction you gave at the start of this year, we looked at how prices are set for the construction materials used to build facilities for the Olympics. Overall, the Government has done a lot to optimise the Olympics’ costs. Some project decisions have been optimised and the costs of a number of sites have come down. Furthermore, design capacity of a number of sites has been brought into line with the real demands. Transport infrastructure has also been modernised to some extent in terms of optimising costs.

But we did reveal a rather unpleasant problem concerning prices for sand and gravel and such like.

Dmitry Medvedev: Which materials precisely?

Konstantin Chuychenko: A sand-gravel mix. The price for this product has gone up from 360 rubles to 800 rubles per ton, and this is quite simply absurd, especially when the average price for this particular product around Russia is 250 to 400 rubles.

Dmitry Medvedev: Where are they getting this sand from? Are they importing it from China or something?

Konstantin Chuychenko: From various places. They bring it in by rail too.

Dmitry Medvedev: In other words, they bring it in from neighbouring regions, the areas close to Sochi?

Konstantin Chuychenko: Yes, from close areas. We should note, however, that there are quarries in Krasnodar Territory that are not being used to the full extent possible, and this sand and gravel is often being brought in by ship or rail, which of course adds dramatically to the cost.

Dmitry Medvedev: Who is responsible for this?

Konstantin Chuychenko: The Regional Development Ministry.

We have written up a draft presidential instruction that would make it possible to calculate and set justified costs for these construction materials and take disciplinary action against those who let the prices rise so unjustifiably, and thus remove them from taking part in building the Olympic facilities.

“I want you to continue monitoring spending on the Olympics, the APEC summit preparations, and other major events. The tight supervision has made it possible to minimize any deliberately fraudulent economic schemes here. But that does not exclude them altogether.”

Dmitry Medvedev: We can only take disciplinary action against directly subordinate people, that is, people working for the Government and its subordinate agencies.

But there is obviously a whole chain of people there making these decisions. We have an organisation responsible for this matter.

Konstantin Chuychenko: Yes, these prices were decided by – I will give the organisation’s precise name – the working group on price setting in cost estimates for the Olympic facilities, and this was the price recommended.

Dmitry Medvedev: 678 rubles without VAT, 800 rubles with VAT. But what is the real price?

Konstantin Chuychenko: I can say, for example, that this sand-gravel mix is being shipped in too for the construction of sites for the APEC summit [in Vladivostok in 2012], and the price there is not more than 400 rubles per ton, although the supply conditions there are more complicated, in my view. 

Dmitry Medvedev: Yes, we’re talking about the Far East there, it’s a different price bracket. Practically everything is more expensive there.

Konstantin Chuychenko: But as I said, at the start of 2010 the price was 360 rubles. In any case, this was the recommended starting price, and many contract estimates were made on the basis of this price.

Dmitry Medvedev: You know, I think that aside the instructions for Prime Minister Putin, we should get the Prosecutor General, [Yury] Chaika involved too. Have him look into it too. If there are disciplinary breaches involved this is one thing, but if there is criminal activity, this is another matter. Have them look into it. If there is cause to press criminal charges the necessary decisions will have to be made. All of this is to be looked into and sorted out.

As for the Olympics, I want you to continue monitoring spending on the Olympics, the APEC summit preparations, and other major events, because we are giving this a lot of attention. I think things are in order on the whole, and the tight supervision has made it possible to minimize any deliberately fraudulent economic schemes here. But that does not exclude them altogether, as we see with these gravel prices and some other cases. There thus should be an ongoing effort to bring such cases to light and make them public. If there are objective reasons for the situation, let the parties concerned give their explanations, and if not, this is reason to take action accordingly. Keep watch on this, because the Olympics are being held on public money to a large extent, and our people have the right to know how this money is being spent.

Konstantin Chuychenko: We will do this on a systematic basis.

Dmitry Medvedev: That’s agreed then. Make the additions to the instructions. Thank you.

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