Chapter 6

Between Command and Market
Economies: The Changing Roles of
Public and Private Housing Sectors
in Transitional Economies

Geoffrey Payne and Richard Grover

INTRODUCTION: THE CONTRASTING POLITICAL
ECONOMIES OF URBAN DEVELOPMENT

There are comparatively few societies in the world in which urban development is wholly a private-sector activity, determined by landowners and developers pursuing their own self-interests. Even in those societies in which the private sector is dominant and capitalist activity is the norm, the state tends to intervene in urban development. The justification for this is that urban development generates externalities, which impact upon third parties not involved in the development process. Where these bring costs to third parties, the state often seeks to mitigate these – for example, through urban planning processes by denying development consent or by imposing conditions. If there are beneficial externalities from a development, the state may seek to promote it. For example, subsidies may be provided to encourage private owners to participate in desired development. Powers of compulsory purchase can be used to assemble sites or partnerships entered into with private developers and financiers. Through its control of externalities, the state in capitalist societies can be regarded as providing a regulated environment in which markets can function efficiently, so that private urban development can take place without undue adverse consequences.

By contrast, for a significant number of countries during much of the post-war period, the underlying philosophy has not been one of the state providing a regulatory environment in which private urban development can flourish. Rather, the view has been taken that urban development ought to be a state monopoly. In the socialist countries, there was ideological opposition to the private ownership of land and private ownership of the means of production used in the construction industry. This inevitably resulted in urban development being a state activity, as there was no private legitimate sector access to the resources this needed. The state was pre-eminent in determining the spatial and social allocation of resources in accordance with official policies, standards and objectives.

It is this latter model of economic development that provides the starting point for this chapter. The chapter examines both the failure of the command economy model to satisfy supply-led housing provision, and how the legacy and consequences of this model have impacted upon the newly imposed market-driven provision in the so-called transitional economies since the collapse of communist regimes a decade or so ago. Recognizing, equally, the limitations of an unregulated market enablement model as the means of satisfactorily fulfilling housing needs (its crude and rapid imposition has been particularly problematic), the chapter considers emerging and experimental practices involving partnership approaches between public and private sectors. The chapter argues that these less ideologically extreme approaches offer a potentially more valuable way of providing housing for the mass of the urban poor in fast-growing cities.

STATE CONTROL OVER URBAN DEVELOPMENT

In the Union of Soviet Socialist Republics (USSR), for example, there was no legal market in land or housing. Land had been nationalized by the Bolsheviks in 1917. After the civil war, the Civil Code of 1921 drew a distinction between socialistic and personal property. Socialistic property was not capable of being privately owned. Land and most buildings, other than country houses and flats in residential cooperatives, came into the category of socialistic property and therefore could not be privately owned. It was not permitted for personal property, including real estate, to be used for commercial profit. Thus, only the state was permitted to carry out urban development. State enterprises and organizations were the main source of capital investment in housing, and state banks provided credits. Housing development was determined by the needs of industrial development. Major industrial projects also included finance for the housing of their workers and for social infrastructure, such as education and healthcare. Housing and urban development were subordinate to industrial development and were intended to help achieve industrial development goals. Allocation of housing was primarily through queuing rather than in response to effective demand, with the determination of allocation in the hands of municipalities or enterprises (Grover et al, 2001).

The concentration of power and resources in a few hands reinforced a supply-driven approach in which housing needs were assessed in terms of housing deficits, using arbitrarily defined criteria, such as the minimum acceptable floor area per person. Within the central planning paradigm, forms of provision gradually became driven by political or technical considerations, rather than based on expressed social needs or resources. Centrally determined standards and regulations were often imposed on areas for which they were inappropriate, sometimes with disastrous consequences. For example, design standards for the USSR were controlled by Soviet agencies based in Moscow and failed to take into account local seismic conditions. Consequently, a high proportion of the casualties in the 1988 earthquake in Armenia were caused by the structural failure of state-built apartments (Anlian and Vanian, 1997, p15).

The concept of value for money was largely absent. Since the principal underlying central planning approaches was to counter the ethos of market forces, the emphasis on costs became increasingly marginal to the extent that, in the socialist countries, it was almost impossible to assess the costs of any housing supply component using conventional pricing mechanisms. Patterns of urban development were often different from those that result from the impact of market forces. For example, in Moscow and St. Petersburg during the early 1990s, a disproportionate share of the land in prime central locations was allocated to low-intensity industrial use. There was a positive gradient between population density and distance from the city centre instead of the negative one found in market-oriented cities. The density of development was lower towards the city centre, but more intensive on the urban periphery, than in market-oriented cities (Bertaud and Renaud, 1997).

Central planning does not have a track record of successfully producing urban development that meets the needs of its citizens. Rather, its legacy has been one of large-scale projects that have gone wrong or been abandoned incomplete, such as Ceausescu's attempt to remodel Bucharest, and cities that have unattractive environments, with poorly constructed and maintained high-rise housing, lacking in services and located away from urban facilities. This is scarcely surprising in view of the priority given to industrial development, compared with meeting the aspirations of households, and the internal inefficiencies of the system.

A number of developing countries adopted a socialist development model, based upon the experiences of the USSR. Courses on central planning for officials from developing countries, as well as aid and soft loans from the Soviet Union and its allies, helped to spread ideas about state control over urban development. This included central planning of the economy, unbalanced growth models that supported the development of key industries at the expense of agriculture and household consumption, and state ownership of land. In half of the sub-Saharan countries reviewed by Mabogunje (1990), the state had nationalized all land, thereby increasing its monopolistic control over development.

In some other countries, notably in South America, what was effectively a state monopoly over development came about as a result of political and bureaucratic forces rather than for ideological reasons. Development was controlled through a web of bureaucratic and legalistic means. While these may originally have had the objective of controlling the adverse externalities from urban development, they came to have the effect of making legal development prohibitively expensive and almost impossible to obtain (de Soto, 1989, 2000). The process of gaining legal consents for development had the potential to enrich through corruption those with the ability to control the supply of these consents. In addition, the elite were able to enhance their political controls by offering development consents that would otherwise have been impossible or prohibitively expensive to obtain. While there may have been little ideological support for socialist-style state control over urban development, politicians and bureaucrats had an incentive to maintain and enhance state control in order to satisfy their own interests.

For those educated in the belief that the main role of planning was to meet the needs of all citizens, or at least all of those unable to satisfy their needs and aspirations within commercially driven markets, housing was predominantly a welfare activity. The state's assumption of authority can be argued to have undermined the willingness of otherwise capable groups to organize housing for themselves. In countries such as Tanzania during the 1970s and early 1980s, many households able to afford their own housing were inclined to sit back and wait for a free or subsidized unit from the state, increasing their dependency, and even leading to greater demands. Payments for housing could be very low. For example, in Russia in 1993, expenditure on housing and communal services amounted to only 0.7 per cent of household expenditure (Goskomstat, 1999). Under these circumstances, there was little incentive for the population to assume responsibility for the provision of their own housing. It is of note that by 1998, six years after the policy of privatization commenced, less than half of the housing stock in Russia had been privatized.

Even in mixed and market-based economies, housing policy has commonly been based upon a welfare approach. For example, South Africa's attempt to improve the living conditions of the black majority resulted in the goal being adopted of constructing 1 million dwellings within five years of the African National Congress (ANC) assuming power. This placed a considerable burden on public finances. Dewar (1999) estimated that if 90 per cent of households qualify for the full grants available to low-income households and the remaining 10 per cent qualify for part subsidies, the total annual cost to the state would be about UK£300 million. On top of this has to be added the inflationary impact of stimulating the demand for land and building materials over a short period and the increasing dependency of households. Moreover, the pressure to increase supply led to a standardization of housing provision in suburban locations, which created alienating environments and has separated housing from social and economic activities. Low densities and peripheral locations of new developments make public transport uneconomic, imposing potentially further costs in the form of transport subsidies.

THE RETREAT FROM WELFARE

The idea that urban development should be a state monopoly has broken down over the past decade as a result of a number of forces. The ‘new world order’, which succeeded the break-up of the USSR, resulted in the abandonment of its brand of socialism, except in a handful of countries such as Cuba and North Korea. Market-led solutions have been promoted by donor agencies, such as the World Bank, United States Agency for International Development (USAID), and the European Union (EU) and its member states. Access to grants and soft loans has been conditional on adopting such solutions. The realization of prizes, such as membership of the EU or the World Trade Organization (WTO), has also depended upon the adoption of market-friendly policies. Aid and loans from bodies such as the World Bank and the International Monetary Fund (IMF) have been conditional on reducing market distortions by cutting subsidies and targeting them more effectively.

In the leading communist regime, the USSR, during 1989–1990, Mikhail Gorbachev brought about the separation of government from the Communist Party, a process that led to the formal break-up of the USSR in 1991 and the ending of the Communist Party's role in government. A market economy, with privatization of state enterprises and assets, replaced the central planning system. The former Soviet satellite and client states and the non-Russian parts of the USSR were left to pursue their own policies without the constraint of the preceding doctrine. Housing in Russia was transferred to the private sector by means of free and voluntary transfers from the state or municipalities to occupiers with residence permits renting under social contracts. Elsewhere in Central and Eastern Europe, restitution has also played an important role in the creation of private land and housing markets. This has enabled former owners, or their heirs, to recover property that had been expropriated under Communist governments. Privatization and restitution have contributed to the growth of owner occupation. In Russia, 46 per cent of the housing stock was privatized between 1992 and 1998, principally between 1992 and 1994. In some other parts of Central and Eastern Europe, the extent of privatization has been less dramatic because of the existence of large cooperative housing sectors during the Communist period than in the USSR. However, countries such as Bulgaria, Estonia, Hungary, Romania and Slovenia now have owner occupation levels in excess of 80 per cent (Yasui, 2000).

With the abandonment of the socialist development model by the successor states of the USSR, those developing countries, for which the USSR had been a mentor, also changed their approach to urban development. Moreover, writers such as de Soto (2000) provided intellectual support for donor agency preferences for market solutions by arguing that state controls and a state monopoly over urban development prevent capital from being mobilized in support of economic development. Funding to support a capitalist approach to urban development was available at a time when there was none to support the socialist model. For example, in Armenia, the 1988 earthquake was followed by credit from the World Bank of US$28 million for reconstruction work (Anlian and Vanian, 1997). This evolved into a regulation requiring all state construction, no matter what the cost, to be subject to competitive bids. It also introduced the principle of cost recovery, with well-targeted subsidies in the form of housing allowances for those able to satisfy eligibility criteria.

Once private ownership of real-estate assets is permitted, private sale and rental markets for housing can develop. Private construction and development industries can come into being. Private banking systems can become the means of raising urban development finance. The state thus ceases to have a monopoly over urban development as it no longer exercises detailed control over land, the construction industry or the banking system. It may still have regulatory functions in order to ensure the control of adverse externalities and it can promote development that is socially beneficial. The role of the state can be one of partnership with the private sector; but the state does not have exclusive development rights.

In reality, the development of private real estate markets has not been smooth. Housing production, particularly of social housing for low-income and other needy groups, has declined as the role of the state has diminished. In Armenia, state supply of housing virtually dried up after the break-up of the USSR in 1991, except for a small amount of reconstruction work related to the earthquake of 1988. Over 50,000 prefabricated apartment units remain unfinished (Anlian and Vanian, 1997). In Russia, the floor space of new housing constructed in 1998 was 74 per cent of that constructed in 1992 and the number of apartments was 56 per cent (Goskomstat, 1999). The state was responsible for only 12 per cent of the construction that it undertook in 1992. The number of families re-housed due to overcrowding was only 36 per cent of the 1992 level. In Romania, in 1992, 50 per cent of the dwellings completed were financed from public funds. In 1998 this had fallen to 10 per cent so that the number of dwellings completed with public funds was only 26 per cent of what it had been in 1992 (National Commission for Statistics, 1998).

By contrast, housing production for those with effective demand has increased. In Russia, the proportion of new housing commissioned by households increased from 12 per cent of the total in 1992 to 39 per cent in 1998, while that commissioned by state bodies fell from 70 per cent to 11 per cent. The average size of dwelling increased from 60.8 to 79.1 square metres (Goskomstat, 1999). In Romania, in 1991, 75 per cent of new dwellings were in apartment blocks of three or more storeys and 17 per cent were single-family houses. In 1998, the proportions were 17 and 58 per cent, respectively, and the average dwelling constructed increased from 34 to 47 square metres (Romania, 2000).

In Armenia, the 1988 earthquake proved to be the catalyst to stimulate reforms in housing, as the World Bank imposed conditions on its credits in the form of policy changes. Although most land in rural areas had been privatized on independence in 1991, land and maintenance in urban areas remain largely under direct or indirect state control. This has several important implications. The market value of buildings is so low that it is impossible to use them as collateral for loans to effect improvements, or even to prevent further deterioration. In some cases, particularly the older high-rise apartment blocks, it is estimated that the cost of raising their structural ability to withstand earthquakes to current standards would cost more than US$1 million per building. In market terms, many of the blocks currently have a negative value. As land and housing markets emerge, it is the blocks in advantageous locations, particularly in central areas, which attract the limited private-sector capital investment. While the land remains under state control, it is difficult for residents and developers to realize that its commercial potential and investment is inhibited. Even if the land under the buildings is privatized and the titles in both united, opportunities to generate economic benefits to cover the costs of building maintenance and environmental improvements will be frustrated unless regulations restricting land use and administrative procedures for processing development proposals are changed. If control over maintenance remains directly or indirectly with state agencies, the prospects for preventing further deterioration will be limited. There is evidence of inefficiency, as well as politicization, resulting in resources being diverted to limited group interests. Attempts at privatization of these in 1991 largely failed, though some maintenance agencies operate as cooperatives. However, there is a long way to go before groups of residents are able to secure building work on competitive tenders, even where they are able to afford it.

In housing, as in other aspects of living standards, there is evidence that the transition from centrally planned to capitalist society has increased inequalities (Ellerman, 2000). Those with effective demand have benefited from transition, while those dependent upon state aid have experienced a shrinking of the welfare safety net. New luxury suburban developments have been constructed, while the construction of social housing has plummeted. The introduction of market forces may have reinforced previous inequalities. As Anlian and Vanian note (1997), a family who, by chance or good fortune, or by virtue of status in the Communist Party or an official body, lived in a highly desirable location or a well-appointed apartment, has been able to assume ownership of a valuable asset. As a result, some of the non-cash benefits enjoyed by the nomenklatura may have become capitalized into asset prices. Other households, by contrast, may have acquired assets with considerable liabilities resulting from poor design, construction or maintenance.

Policy changes have been accepted with varying degrees of enthusiasm. The old guard of professionals have often found it difficult to adapt to the new situation or accept new approaches. They may obstruct innovative policies, sometimes because of vested interest, as well as on grounds of principled objection, or fail to change their attitudes sufficiently to implement them successfully. Authoritarian practices and attitudes continue even when undertaking participatory projects. Younger, highly qualified, officials may be unable to translate new ideas obtained from international exposure into local practice. They may not understand the extent to which these depend upon changes elsewhere in the economy in order to be successful, or may be insufficiently pragmatic to be able to adapt what they have learned to local conditions. In some transition countries, this has created a bipolar approach, in which some sections of the professional cadres and political elites remain wedded to the previous development paradigms, while others are pushing hard to build constituencies of support to introduce new approaches. Competition may occur between different agencies tasked with creating different elements of new approaches, with each jealously guarding its area of influence and access to its data. Such internal conflicts run the risk of rendering public bodies even less effective and discrediting new approaches before they have had the chance to prove themselves.

PRAGMATIC ALTERNATIVES

While both central planning and neo-liberal paradigms of planning and housing have been highly influential, both have also generated outcomes very different from those intended or envisaged by their proponents. Officially sanctioned forms of land development and shelter provision have generally failed to deliver their expected benefits. Unrealistically high standards, restrictive planning regulations, and cumbersome and costly administrative procedures inhibit the ability of public- or private-sector suppliers to address either the scale or nature of demand. Antipathy between public- and private-sector interests constrain opportunities for innovation and raised the cost of entry to legal shelter. Increasing emphasis upon the role of the private sector to meet economic policy objectives under globalization pressures has recently generated considerable interest in various forms of public–private partnerships (Payne, 2000). This partly reflects an increasing awareness that neither the state, nor unrestrained market forces, are able to meet the basic needs of the majority of people. This raises the question of the appropriateness of either paradigm in addressing the needs of diverse social and economic realities in both transitional and developing market-based countries. Yet, examples exist in which innovative approaches, based on local traditions and practices, have proved effective in meeting needs. One way of addressing these issues and building confidence, as well as developing new constituencies of support for new approaches, is through the dissemination of such successful approaches and their application in pilot projects elsewhere.

A continuum of new approaches exists between those that are close to a free market in urban and housing development, in which the public sector's role is one of being a facilitator, and those in which the public sector is strongly proactive in urban development. Between these two is a range of intermediate positions, in which the public sector performs a variety of different roles. As argued above, urban development results in externalities, both beneficial and harmful. Their existence means that there is a continuing role in urban development for collective bodies to promote beneficial externalities and to limit the harmful ones. It is generally neither possible nor desirable for urban development to be undertaken exclusively by private individuals or companies. They are not in the position to provide infrastructure and other public goods, and cannot compel other owners to promote the common good.

Moreover, should individual owners selfishly pursue their own interests, this can result in worse outcomes than if cooperation takes place (Rothenberg, 1969). For example, maintaining one's own property to a good standard produces beneficial externalities for neighbouring properties, whose value is enhanced as a result. If all owners did this, the value of the neighbourhood as a whole is likely to be enhanced. But how can ‘free riders’ – who decide that it is in their interest to benefit from externalities generated by others, while contributing nothing to their neighbours – be impeded? They fail to maintain their properties, thus saving themselves any costs, while deriving benefit from the expenditure of others. Faced with this, their neighbours will realize that the rational course of action is to cease expenditure on maintenance since the worst outcome is to spend money and generate externalities for others, but get nothing back in return. In this way, an area can enter a cycle of neglect and blight as each owner individually pursues his own self-interest, even though cooperation and agreement to enhance the neighbourhood would be in everyone's interest. Urban development usually is a collective good with individual benefits. Being a collective good, urban development is likely to involve a collective body with the ability to generate cooperation between individual landowners. The differences along the continuum depend upon the extent to which the state or the municipality is the collective body or whether some private club is able to fulfil this role.

Ankara and Moscow represent the extremes of the continuum. In Ankara, the public sector has performed the role of facilitating urban development that has been promoted by communities. Local communities are the lead collective body and lobby for, and influence, the use of state powers in support of urban development. In Moscow, where there has been no recent history of non-state collectives, the city government has been proactive in urban development, including intermediating between the capital market and individual households. A powerful interventionist mayor has exploited the creditworthiness of the city to continue public housing redevelopment programmes and other urban development projects at a time when these have declined in other parts of Russia. In contrast to either end of the continuum, public–private partnerships are seen by many as a way out of the impasse between public- or private-sector urban development and a way of constituting a political third way, in which the relative strengths of both sectors complement each other. Among the examples of urban and housing development that embody a partnership approach, land readjustment and pooling, guided land development, participatory development projects, and requests for proposals have been most widely adopted.

The development of Ankara provides an interesting example of how the state can facilitate urban development without carrying it out itself. When Ankara was established as the national capital in 1923, it had a population of about 20,000. By 1969, this had increased to 1.2 million. Currently, the population is just over 3 million, a rate of growth as rapid as that of almost any major city. During this period of growth, local government resources were restricted to a levy on car parks, cinema tickets and other marginal sources, as well as grants from central government, which did not always materialize. This left no resources for direct intervention or subsidies. Master plans were routinely prepared, only to gather dust due to lack of resources to implement them. Yet, during the 1960s and 1970s, when immigration into the city was at its peak, it was possible for migrants to find a place to live and work within months, if not weeks. Housing supply kept pace with demand throughout this period. Housing standards within low-income settlements could be argued to be higher than in the increasingly densely developed middle-class neighbourhoods. How was this achievement possible?

Under the Ottoman Land Law of 1858, unused or unclaimed land could be occupied and developed by anyone needing it. Practices known as imece (self-help) and salma (a local tax) evolved to enable isolated Anatolian villages to obtain essential infrastructure and social facilities. When villagers migrated to the city, they claimed and developed land and housing according to these traditional practices, often oblivious to the fact that they were acting in contravention of urban planning procedures. They settled in areas where they could find relatives or friends from their village and collaborated to build houses and obtain infrastructure. Since the municipality lacked funds to intervene directly, it evolved a form of ad hoc planning by which new settlements (gecekondus) were incorporated within the administrative boundaries of the city and received representation on the municipal council (Payne, 1982).

Each ward (mahalle) lobbied for its priorities; for new settlements, this invariably involved demands for access roads and bus services. On receiving a request, the city sent a planner and surveyor to plot the best route. Rather than impose this on the community, the proposal was sent to the community for approval or modification. If there was no agreement, the road would not be approved and the planners and surveyors would move on to other areas. Objections tended to come from those residents whose houses lay in the path of the proposed road. The local community had to overcome the objections by offering alternative plots and to help in relocation in order to satisfy the wider community interest. Even when agreement was reached, the lack of funds meant that implementation could often only proceed if the residents contributed to the construction process by clearing routes and digging trenches.

As the commercial value of even illegally occupied or subdivided land increased during the late 1970s and the 1980s, many residents sold their plots and houses to informal developers, who built apartment blocks for sale to middle-income households. The gecekondus were increasingly replaced by apartmentkondus, increasing land densities and values to the point where what were initially low-income households have often become more affluent than salaried professionals. Housing development and urban land development have become a means of economic expansion for the large proportion of settlers who came to the city as poor migrants. The process has enabled the supply of housing to match demand throughout a period of rapid growth and resource scarcity. Similar informal land development and housing processes operated in many other countries, such as Egypt (see Davidson, 1984, and Chapter 3 in this volume). Their increasing commercialization during the 1980s has made access to such benefits for later generations of low-income households harder to obtain (Payne, 1989).

Throughout this process, local communities learned how to provide their own houses and develop their own settlements. Public goods, which all need but no individual can provide, were not delivered by the state but by communities. This is not unusual or unique. In other societies, different interest groups have formed clubs to provide public goods as diverse as lighthouses and lifeboats. The gecekondus of Ankara show that this approach can also be used in urban development to secure the infrastructure that enables communities to develop and individual landowners to exploit their property.

In contrast to Ankara, Moscow shows how a powerful city government can intervene to secure urban development at a time when the state has come under pressure and has been largely obliged to withdraw from urban development (Grover et al, 2001). Although Moscow was founded over 850 years ago, the modern city is largely a product of the Soviet era. The population grew from 1.8 million in 1917 to 9 million in 1989. The growth was mainly accommodated in successive waves of blocks of high-rise flats. The quality of the blocks of flats varied considerably between different periods in terms of the materials used, construction methods and space standards. Those constructed during the late 1950s and 1960s were built to lower space and construction standards than those of earlier and more recent periods. They have often not been adequately maintained and are coming to the end of their planned lives. The problem faced by the city is how to replace these blocks with housing that meets modern space and construction standards. The issue is how to replace large numbers of dwellings simultaneously, rather than how to upgrade individual units. There is also the question of how to accommodate continuing migration from the less prosperous parts of the Russian Federation and former USSR.

Although privatization has existed since 1992, the take-up rate has been relatively low, with just under half the dwellings in Moscow being privatized. While brick-built dwellings from the Stalin or Gorbachev eras are likely to be attractive to purchasers, the dilapidated concrete blocks, with their small flats, from the Khruschev period are not. Privatization has changed the pattern of ownership by breaking the state's monopoly of housing provision. The institutional framework within which efficient private housing markets can flourish, though, has been slow to develop. A mortgage market has not emerged that would enable purchases to be funded from commercial sources. Proposed mortgage schemes by commercial banks were abandoned following the financial crisis of 1998. The number of mortgages granted has been small and confined to high-income groups. For example, the Russian Federation Savings Bank (SBERBANK) granted just 500 mortgages in 2000.

There is a limited amount that owners of flats can do to improve their dwellings. Many aspects of flats are collective goods, including the structure, common areas and building services. Groups of owners have to come together to improve their environment by refurbishing or replacing obsolete blocks. The 1996 Law on Associations of Homeowners gave apartment owners the choice as to whether to manage the properties themselves or to leave this to the municipal authorities. Condominiums and associations of homeowners can be created and registered. Associations can set budgets, maintain common areas, undertake capital repairs, and collect charges and fees. Thus, a legal framework is in place by which groups of owners could manage and develop the collectively owned elements of their dwellings. However, by May 2000, there were just 395 registered bodies covering just 1 per cent of eligible blocks. This compares with the 11,200 associations, which existed in 1927 before private residential tenures and cooperatives were abolished. The reasons for this probably include the complex procedures needed to set up homeowners’ associations. If the municipality maintains a property, it assumes the risks of poor construction and past maintenance history. There may also be fears that subsidies from the municipality to homeowners, associations will be halted in the future, to which the irregular payments of subsidies to homeowners’ associations lends credence.

Until private collective bodies develop, the only effective collective body is the municipality. The property owned by the city and the relative buoyancy of its budget revenues mean that it is creditworthy even if its citizens individually find difficulty in raising finance. It is therefore in a position to intermediate between the international capital markets and the residents of the city. This has enabled the city to develop a building savings scheme with guaranteed credits, grants and access to mortgages for those in the municipal housing queue. In 2000, 16 blocks comprising 183,000 square metres were constructed under this scheme. It is also tackling the problem of obsolete apartment blocks at the end of their planned life by a mass housing programme known as the Wave. Blocks of 1950s and 1960s housing are demolished in sequence. By utilizing the areas between blocks, their replacements can be larger and incorporate higher space standards per person. In 2000, 0.5 million square metres of blocks were demolished and replaced by 1.7 million square metres. By contrast, in the Russian Federation as a whole, the role of the state housing development has declined so that, in 1998, it was responsible for only 12 per cent of the level of housing construction that it undertook in 1992. The volume of floor space as a whole, including that by the private sector, constructed in 1998 was 74 per cent of the 1992 level (Goskomstat, 1999).

The land pooling/readjustment (LP/R) approach has been adopted in many parts of Asia, including Nepal, Japan, Korea and Thailand, and in Australia. It is designed to facilitate the consolidation of small land parcels under different owners for planned development. The essence of the approach is that, in peri-urban areas under pressure for urban development, the urban development authority may designate an area as suitable for an LP/R project. If a predetermined proportion of the affected landowners accept the proposal, a development plan is then prepared. Under land pooling, the landowners surrender their title deeds to the development agency once the scheme is approved and receive a receipt, which indicates the value of their parcel as a proportion of the total site area. Once the site has been developed, the development agency disposes of sufficient serviced plots to recover the costs of developing and servicing the area and returns the balance to the original owners in proportion to the value of their contribution. In land readjustment schemes, the same approach is followed, except that the original landowners retain their title deeds until the site is developed and then exchange them for titles relating to their new plots.

The major advantage of LP/R for government agencies is that they do not have to undergo the time-consuming, expensive and often contentious process of land acquisition. Landowners become stakeholders in the development of their land and receive a better return than they could expect through piecemeal development. At the same time, households are able to acquire residential plots in developments, which provide best value for money. Since landowners receive smaller areas of land after development than they possessed before, the major attraction for them is that the value of their newly serviced plots is worth significantly more than their original holdings. This makes it difficult to meet the needs of low- income households other than through a trickle-down effect, but improves the efficiency of urban land development. Land consolidation and site assembly takes place without the need for compulsory purchase. This makes the approach suited to countries where the legal and valuation framework for compensation based on post-development market values is poorly developed. By providing landowners with an equity stake in the development, it avoids the up-front costs of compensation where site assembly takes place through compulsory purchase. The process of designation of areas overcomes the problem of lack of cooperation between landowners, which lies at the heart of the ‘prisoners’ dilemma’ problem.

Another approach, which embodies a pragmatic approach to development, is that of guided land development. This has been applied particularly widely in Nepal and Pakistan. It consists of planning a development in collaboration with private developers and allowing the residents to design and manage the construction of their own dwellings. In this way, the land available is put to the most efficient use as the residents have control over the design and cost of their dwellings. The state's objective of developing sustainable and affordable urban development for all income groups can be met. The Kudi ki Basti project in Hyderabad, Pakistan, is a good example of this approach (Ahmed, 2000), and, subsequently, has been adopted in other parts of the country with funding from the World Bank. In Nepal, the authorities even employed informal land developers in the guided land development scheme because of their considerable experience in knowing and meeting the needs of lower-income groups.

Requests for proposals (RFPs) have much to commend them, especially in situations where local authorities have limited awareness of the potential costs and benefits of a particular development, or what options might be most appropriate for a particular site. They have been widely used in the transition countries of Eastern Europe and are currently being adopted in Lesotho. They are also used in countries such as the UK for town centre redevelopment and for the development of problematic sites. Under this approach, the local authority identifies a site that is suitable for development and prepares a brief. The brief stipulates the mandatory components that a development must fulfil, as well as a series of desirable optional features. Proposals for development based on the brief are invited from the private sector, landowners, non-governmental organizations (NGOs) or any combination of actors. The tender that meets all of the mandatory elements and offers the greatest value in additional features, which can include features proposed by the developer, wins the contract to develop the site.

The main advantage of this approach for developers is that they know at the outset what conditions are required in order to obtain planning permission. They can then decide how many additional features they are able to provide in order to secure the tender, while making a reasonable profit. It also reduces uncertainty and costs since, once the proposals are submitted and compared, the successful bid can start quickly. The costs are principally those of preparing unsuccessful tenders. For development agencies, sites can be developed in conformity with social, economic and environmental policy objectives, without the need to acquire land or commit scarce public resources. For households, it provides a responsive form of development because developers cannot sell units that cost more than people are able and willing to pay.

In order to make RFPs work, development agencies must develop the capacity to assess the degree of leverage which they can exert over potential developers. By being too demanding, they will discourage potential developers from bidding. By not being demanding enough, they will lose the potential public benefits, which could have been extracted. Given that every site has unique opportunities and constraints, getting the balance right requires experience, which can only be gained from practice, while being soundly grounded in an understanding of valuation theory. RFPs have proved highly effective in stimulating the development of a local private sector where none existed before. They can also be effective in improving governance since proposals can be evaluated openly – for example, in meetings at which representatives of key stakeholders are present.

Even in Cuba, one of the last remaining communist states, the authorities are considering new approaches. Increased emphasis on tourism as a source of hard currency has led to massive tourist developments. These have generated inward migration to nearby towns by people seeking employment. The need to stimulate planned housing supply under conditions of extreme resource scarcity has encouraged the government to explore alternative approaches, which place greater emphasis upon community participation in the preparation and development of residential areas. A pilot project has recently been proposed in Matanzas, near the tourist resort of Varadero, to encourage demand-led housing and urban development in the expectation that this can be adapted and replicated in other areas. Such locally based projects can provide a practical basis for repositioning the public sector within emerging land and housing markets. Of course, there is no guarantee that such linkages will occur, and there are numerous examples of pilot projects that have remained just that. However, by emphasizing the development of new relationships between all key stakeholders, confidence can be built in new ways of working, which can encourage responsive, pluralistic market systems.

In all of these approaches, the state plays a key role in setting the regulatory framework. A major consideration in the application of any partnership approach is the relevance of the regulatory framework of planning and building regulations, standards and administrative procedures required by the public sector in approving a development. In this respect, a key consideration is the minimum requirements to which developments by, or for, poor households need to conform. Where requirements cannot be met, either because of costs or bureaucratic delay, households are forced into unauthorized types of housing. Establishing the terms and conditions, which determine access to the bottom rung of the legal housing ladder, is therefore a critical role for government action. For example, it is not much help requiring that roofs are designed for snow loads in countries where it never snows, or that roads are designed for heavy vehicular traffic where car ownership is virtually unknown. Yet, many countries retain regulations, standards and procedures that have been inherited or imported from the West and do not reflect local conditions.

By imposing inappropriate frameworks, governments force households unable to conform into various unauthorized solutions, which could be prevented by the existence of a more appropriate regime. For example, by restricting the incremental development approach adopted throughout urban Egypt and imposing immediate conformity with official building regulations, the Ismailia demonstration projects were unable to serve the needs of low-income households as effectively as intended. Research is currently being conducted by Geoffrey Payne and Associates for the UK Department for International Development (DFID) into the ways in which regulatory frameworks can be made more responsive to local realities. The research, undertaken by teams in India, Lesotho, South Africa, Tanzania and Turkey, involves carrying out regulatory audits to assess which elements are the greatest constraints on affordable legal shelter.

CONCLUSIONS

Governments throughout the world have been struggling to develop responses to macro-economic change that take full account of their social, cultural, economic and political realities. Within housing and urban development, such transformation has involved a move away from relying upon either the state or market to meet diverse needs, towards the evolution of more pragmatic, participatory approaches. Public-sector staff are having to learn the need to understand how land and housing markets work in order to use their limited powers more effectively in regulating and guiding them. Private-sector developers and investors have had to accept their social responsibilities towards less affluent groups and society, as a whole, if only to protect their commercial interests. The poor majority has demonstrated an ability to develop a wide range of rational and creative responses to the problems facing it. The way in which cities develop in the future will depend to a large degree upon the extent to which these challenges can be seen by politicians, professionals and other stakeholders as opportunities rather than threats to traditional approaches to urban development.

The priority in many countries is to reassess options for addressing the needs of the poor within increasingly market-driven economies. This requires a reappraisal of the role of housing from a welfare burden on economic development to a more positive recognition of its role in stimulating capital formation through domestic savings and investment. Such recognition is not, of course, new. Turner (1976) advocated such an approach a quarter of a century ago. However, it remains valid in terms of current practice within many countries. This begs the question of why it has taken so long for those in positions of authority to accept this characteristic of housing. More pertinently, it raises the question as to why those of us advocating the economically productive role of housing have failed to persuade those in positions of authority of the merits of the case.

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