Ladies and Gentlemen,

Solving the housing requirements of South Eastern Europe is one of the issues critical to the social and economic future of the region. Currently it is an issue at a turning point. This conference has been called to ensure that housing policy makes the transition from a reactive effort, dependent on outsiders, to a more self-sustaining process fueled by market forces. Such a move to a sound, long-term solution is the normal evolution we expect to see on a broad array of issues in South Eastern Europe supported by the Pact.

You may recall that the Stability Pact for South-Eastern Europe was established by the Heads of State and Governments meeting in July 1999 in Sarajevo. While the decision was in reaction to the Kosovo crisis, the regional effort was designed to help end the years of conflict resulting from the break up of the former Yugoslavia and the difficult transition from communism. Led by Special Coordinator Erhard Busek, the Pact aims at helping solidify peace and stability throughout the region, by addressing mainly issues of regional importance in the areas of democracy, human rights, economic reconstruction, development and cooperation, the fight against organized crime and other justice and home affairs reforms. Benefiting eight countries, the Stability Pact's transatlantic effort supports and complements the EU's Stabilisation and Association process for the five Western Balkans countries, the accession process for Bulgaria and Romania and the process of Cooperation and Partnership for Moldova.

Importance of Housing Policy Reform
Before, we attempt to formulate general recommendations for the contents of an action plan, let me outline three premises:

First, there is a general re-discovery of the crucial contribution that housing policy reform can make to accelerate economic and social progress, particularly in emerging economies. This requires that national policies be formulated and a sound legal framework established for the emergence of an efficient housing market and the development of housing finance instruments;

Second, the transition to a market based economy raises special challenges for housing policy reform. Privatisation of a large part of the housing stock over the first decade of transition was done in a way that has left serious problems of maintenance unanswered. A more secure legal framework and social housing policies are also needed;

Third, the countries of South Eastern Europe that went through a war during the last decade have a legacy of destroyed homes and other specific housing problems related to refugees and returnees. Market based solutions for this problem will still need to be complemented by government intervention.

A new paradigm to address housing policy reform: the Mystery of Capital

The development expert Hernando de Soto has concisely explained the problem faced by households in developing countries as they attempt to reach living standards enjoyed by their neighbors in OECD. He points out that:

"For poor countries to develop, the poor and lower middle classes must be allowed to use their assets in the same way that wealthier citizens do. The political challenge is to bring those assets from an 'extra-legal' status into a more inclusive legal property system. There they can become more productive and generate capital for their owners, growth for the nation, and markets for industry.
With sound property law, people could suddenly go beyond looking at their assets as they are (houses used for shelter) to thinking about what they could be (security for credit to start or expand a business).
It is property law that provides the titles and records that identify and locate people, businesses, and organizations; underlies all the contractual mechanisms that allow economic agents to exchange goods and services in the expanded market; facilitates the procedures that allow citizens to transform their assets into leverageable capital through credit and investment; provides the means to enforce rules and contracts; and allows for good governance within the rule of law." (Hernando de Soto, 2000)

Housing policy making vs. production

The World Bank's policy paper on housing (WB; 1993) advised Governments 'to abandon their role as producers of housing and adopt an enabling role of managing the housing sector as a whole'. The Bank pointed out that 'this fundamental shift is necessary if housing problems are to be addressed on a scale commensurate with their magnitude.

Different conceptual frameworks were described by Tosics/Hegedues (Tosics, 2001) of which we will surely hear more during this conference. They go from a) the increase of institutional efficiency, to b) avoid social collapse, or to c) avoid the deterioration of the housing stock.

Housing as Economic Engine:

Sound housing sector policy can have a very significant economic impact. Housing investment typically accounts for 2-8% of GNP (Gross national product) and housing services for an additional 5-10% of GNP (WB, 1993).

Policies affecting the demand for real estate and housing as an asset, i.e.:

security of tenure for housing real estate; and

the ability to use it as an asset in securing long-term financing

heavily influence cost, availability, quality, and production of informal housing, which accommodates most of the urban population in many developing countries ( In the capitals of SEE 20% of population live in illegally constructed units [Tosics, 2001]).

Housing policy focused on a limited engagement of government in the direct production of low-cost housing is missing the opportunity to have a major impact. It could be guiding the performance of the housing sector as a whole, including, that of both the formal and the informal private sector, with a stronger emphasis on its overall role in national economic development (WB, 1993).

Changing the Concept of Housing

The region needs to thoroughly overhaul its concept of housing. The literature on economic transition highlights the differences between housing systems under central planning, where government control and public ownership dominate, and under market-based economies (Renaud, 1991).

The differences go to the basic concepts of goods and services. Under communism housing was considered a 'distribution good' to be uniformly allocated to every member of society according to needs. Under a market economy, housing is a 'private good' , which households acquire according to income. Providing the same amount of housing services to everybody is not considered an appropriate social goal.

The problem of inadequate housing in South Eastern Europe stems largely from the legacy of communism and the consequent absence or limited existence of private housing. The system of "tenancy rights" in the context of a centrally planned economy prevailed until the end of the cold war. The transition to a market economy started with an outdated housing system difficult to administer and manage both for lack of funding and an appropriate policy framework. The initial privatisation efforts turned dilapidated housing assets into the hands of households who -- most of the time -- lacked the financial means to maintain them. Even when they did have the means, they often lacked the incentive to do so in the absence of a sufficiently secure legal framework. They simply could not be sure of recouping an investment. The formulation of new more sustainable social housing policies is an urgent necessity.

Instruments for an Enabling Housing Policy

Experts (WB, 1993) point out that governments have seven major enabling instruments at their disposal: three addressing demand, three addressing the supply side constraint and one improving housing sector management. On the demand side they are:

i. Developing property rights: This requires that rights to own and freely exchange housing be established by law and enforced. The government must administer programmes of land and house registration and regularise insecure tenure (especially in ethnically divided societies and having refugees and returnees problems in mind)
ii. Developing mortgage finance: This requires creating healthy and competitive mortgage lending institutions, and fostering innovative arrangements for providing greater access of the poor to housing finance; and
iii. Rationalising subsidies : Any remaining subsidy programmes must be appropriate and affordable in scale, well targeted, measurable and transparent. Great care must be taken to avoid distorting housing markets .

The three supply-side instruments are:

i. Providing infrastructure for residential land development: agencies responsible for the provision of residential infrastructure (roads, drainage, water, sewerage, and electricity) need to focus on servicing existing and underdeveloped urban land for efficient residential development;
ii. Regulating land and housing development: a cost-benefit analysis should be applied to the regulations that influence the urban land and housing markets, especially land use and building permits. Regulations should be amended or removed when they unnecessarily hinder housing supply
iii. Organising the building industry: Policies should create greater competition in the building industry, removing constraints to the development and use of local building materials, and reducing trade barriers that apply to housing inputs.

These instruments are best supported and guided by developing the institutional framework for managing the housing sector. This includes:

strengthening institutions which can oversee and manage the performance of the sector as a whole;

bringing together all the major public agencies, private sector, and representatives of nongovernmental organizations (NGOs) and community-based organisations; and

ensuring that policies and programs benefit the poor and elicit their participation.

These seven enabling instruments are applicable in all SEE countries. The priorities for the use of these instruments, however, vary across countries. In low-income countries, the priorities are to develop market-oriented systems of property rights, to help the housing supply by increasing infrastructure investment, and to increase building industry competition. In highly indebted middle-income countries, the priorities involve fiscal and financial policy reform. In particular, housing finance institutions should be improved and budgetary transfers to the housing sector reduced while infrastructure investment is expanded to the extent possible. In formerly centrally planned countries as we have in SEE, reform priorities are the establishment of property rights, the development of housing finance, as well as land and building regulations allowing the development of land, materials production and distribution and the residential construction industry, while reducing subsidies. In other middle-income countries, priorities are regulatory reform in land use and building, facilitating transition to a more responsive system of housing supply, and development of mortgage finance.

Priorities for Housing Policy Reform

Clearly, the following priority areas require national action, international cooperation and harmonisation of housing policy and housing finance:
1. Legal and regulatory changes are needed in:

Housing management and land administration: transparent delivery of construction permits as well as clearly defined security of tenure are essential for a functioning housing sector.

Urban planning: zoning and public access help secure property values whether for public or private housing, at all levels.

Comprehensive spatial planning: trans-boundary and cross-sectoral co-operation is needed, particularly along the future new borders of the European Union;

2. Fiscal regimes must be reviewed, including income tax deductibility of some expenditures, as well as subsidies affecting housing and construction and charges for public utilities.
3. Social policies must also be reviewed, particularly as concerning social housing delivery mechanisms and eligibility conditions for socially weaker or vulnerable groups.
4. The development of housing finance instruments is crucial; mortgage loans require both a functioning banking system and a secure system of mortgage registration and enforcement. Governments can help spur mortgage finance through various support mechanisms, including:

A system of municipal guarantees for low-income mortgages; the guarantees could be pooled at the national level by a national housing guarantee institution;

Alternatively, a mortgage loans refinancing facility (possibly in the central bank, or as a freestanding institution); or

A savings for housing loans scheme, in which participants would receive a small capital subsidy matching their savings deposits

5. Institutional development and capacity building is required in the areas mentioned above.
6. Benchmarks have to be developed to monitor progress in policy reform and in achieving policy objectives.

The Stability Pacts contribution:

Two Initiatives of the Stability Pact tackle "Housing" as a key component of social stability. The Social Cohesion Initiative (ISC) is focusing, amongst other things, on the development of Housing Policy through the Council of Europe Housing Policy Network and the activities of the Council of Europe Development Bank, which has pledged € 167.8 million to the housing sector. The Regional Return Initiative (RRI) identified the lack of housing as one of the major economic impediments to the return and the local integration of displaced persons. In the context of social stability as well as migratory movements, now being addressed by the Migration, Asylum, Refugees Regional Initiative (MARRI), the issue of adequate and affordable housing is one of the essential "push and pull" factors besides employment and access to social and educational services.

The shortage of public housing and more generally the development of social housing policies are among the new challenges facing South-Eastern Europe as it grapples with poverty reduction. Access to affordable housing is essential if labor is to be able to move to new jobs and social exclusion is to be reduced.

In mid-2001, the Stability Pact Return Initiative commissioned a Housing Programme Development Study. The objective was to provide an overview of the situation in Croatia, Bosnia-Herzegovina (BiH) and the then Federal Republic of Yugoslavia (FRY). The study characterised the housing situation of refugees in these three countries as follows:

About a million dwellings were destroyed or badly damaged and 3.5 million homeless refugees created during the wars in the 1990s. IDPs and returnees were in need of reconstructed or additional housing. Today almost 1 million remain in that situation.

Housing construction plummeted during the war years and has not regained more than about one-third of the pre-war production levels.

Little attention has been paid to maintenance, particularly of the public housing stock, even though it has now been largely privatised.

There has been a steady decline in household sizes and continuing urbanisation during 1991-2001.

The combination of the wars and the demise of the socialist mode of housing production has created a situation in which even a well functioning housing market would only be able to cater to part of the needs, as purely market-based solutions are bound to be unaffordable to some 25-30% of the population.

Overall, the restructuring of the economy and the resultant geographical changes in employment opportunities are further changing population and settlement patterns. The solution is not so much reconstruction as the development of an adequate housing policy framework.

Indeed, in each of the countries covered by the Return Initiative Study, there is a clear rationale for a significant programme of new housing development, rehabilitation of existing units and measures enhancing the functioning of the housing market. Clearly there is a need for the development of a long-term national housing and spatial development policy and strategy, including the mechanisms for the provision of housing related land development and infrastructure. Similar requirements exist in the other transition countries of South Eastern Europe.

The challenge is to develop such a policy in a socio-economic environment with limited economic growth, limited capacity to borrow, limited financial sector development, high unemployment and an on-going privatisation process. On the other hand, housing production can function as an economic engine, given the relatively high multiplier impact of investment in housing on income and employment generation, particularly through its backward linkages to the construction materials industry. Humanitarian funds are no longer a reliable answer.

Ladies and gentlemen, considering the scope of the remaining problem at the national or regional level, the Stability Pact has made housing policy reform a key topic under both the ISC and MARRI. The Pact has promoted the issue and lobbied for reform, pointing out that the lack of housing, particularly for the more vulnerable social groups, is one of the greatest dangers and challenges to the stability in the region. If not addressed soon - and you know better than I how long it takes to implement a coherent policy - the lack of access to housing, combined with unemployment and the inadequacy of social infrastructure or lack of access to it- will be- and are already- major push factors for outward migration.

Finally, let me refer to the solid support being provided in refugee-impacted countries -- support which we now intend to expand to Albania and possibly Macedonia. Policy development and technical capacity are crucial. MARRI will continue to direct technical assistance to the concerned ministries and taskforces, develop and promote technical assistance projects as well as attract potential donors, banks, organisations and investors. This approach is already moving ahead in Serbia, where we have been able, with our national and international partners, to develop an inter-ministerial taskforce and housing secretariat, focused on policy and programme development, based on a sound national strategy. Their work has led the Council of Europe Development Bank to consider a loan for the Republic of Serbia of some € 20 million, while the Italian government would provide some € 15 million for social housing. Important Serbian municipalities are negotiating with major building companies to start direct investment programmes. Such commercial programmes involve far higher volumes. A major capacity building project for the whole sector is expected to be financed and supported by the Scandinavian governments.

MARRI is proceeding with a similar proposal in Bosnia. Despite all its difficulties and delays due to the recent elections, MARRI expects to have structures in place very soon. The UNDP and the EC are proceeding with central government and municipal capacity building programmes in this sector. A central housing fund, called initially the 'Return Fund' is under discussion.

In Montenegro, we have assisted the municipality of Podgorica to devise a legalisation project for illegal settlers. The project has a large infrastructure development component as well as a construction and improvement of housing component, which will require a large extent of self-assistance. The Podgorica project and a first large Austrian financed commercial housing investment project in Sarajevo, are designed to promote "learning by doing" and to demonstrate that new ways in the approach to housing financing are possible.
A regional property data exchange system, now started by a Stability Pact project team with the agreement of the concerned governments, will make it easier to verify the property and pension situation of "our clients" in their country of origin and could easily become a useful tool in the financial sector.

Cross-border Data Exchange

With regards to cross-border data exchange, a project to increase co-operation in the areas of social and pension benefits is being implemented by the Council of Europe, under the auspices of the Initiative for Social Protection. The Project, jointly financed by the CoE and the Italian Government, aims at establishing a platform to allow increased mobility and has the following main components:

Comparative study on social protection needs and systems and available financial resources;

Creation of a regional network of social security experts (to promote bilateral and multi-lateral agreements);

Technical seminars to explain the mechanics of co-ordination;

Training sessions for officials responsible for co-ordination.

The EC, under a complementary approach, recently pledged 2 Million EURO to establish a regional co-ordination centre on social policy.

Next Steps

This high level conference on housing policy reforms in South-Eastern Europe, under the auspices of the Stability Pact, should initiate a process of policy dialogue among countries and stakeholders on the potential of the housing sector for economic growth, social development and poverty reduction. In a manner similar to the other initiatives launched by the Stability Pact in areas such as trade, energy, the Information Society and the investment climate, we suggest that the Ministers present here commit themselves to concrete steps, to be achieved by a specific date, which could include:

The formulation of national housing policies and action plans;

the development of new public and private housing finance instruments (as well as the exploration of the full potential of public/private partnership in this sector);

the strengthening of the existing network of experts to ensure regional co-operation; and

the holding of periodic ministerial meetings to review progress against benchmarks and continue to share experience and expertise.

If, through the launching of this process of regional co-operation in housing policy reform, we can improve over the coming years the actual situation of million of citizens of the countries of South Eastern Europe, this conference will have achieved its objective.

Thank you

Bibliography and selected background reading:

Bluhme, N.C. (2002); Technical Assistance for Capacity Building within the Housing Policy Task Force of the Republic of Serbia; Glostrup / Denmark; Carl Bro; Project Document (December 2002)
Buckley, Robert M., F. Mini (2000); From Commissars to Mayors - Cities in the Transition Economies; Washington, D.C.; The World Bank
CEB/CoE (2002); Meeting Report; South East Europe Strategic Review on Social Cohesion; Strasbourg; Council of Europe; SEER/Housing (2001) 6; (2nd meeting, Zagreb, 4-5 December 2001)
CEB/CoE (); Towards A Housing Strategy for South Eastern Europe; Strasbourg; the Council of Europe Development Bank and the Council of Europe
De Soto, H. (2000); The Mystery of Capital: Why Capitalism triumphs in the West and fails everywhere else; New York; Basic Books and London: Bantam Press/Random House; Lima; Instituto Libertad y Democracia (ILD)
Forced Migration review (2000); Going home: land & property issues; Oxford; Refugee Studies Centre (April 2000)
Hegedues, J. (2002); "Financing of Housing in South East Europe"; Strasbourg; Council of Europe; SEER/Housing (2002) 1
Hentschel, J., R. Seshagiri (2000); The City Poverty Assessment: a Primer; Washington, D.C.; The World Bank (World Bank Technical Paper No. 490)
Kopstein, K., P. Epstein; et al. (2001); Housing Needs Assessment: The Economic and Community Revitalization Activity Croatia; Washington, D.C.; The Urban Institute for USAID
Kreimer A., J. Eriksson, et al. (1998); The World Bank's Experience with Post-Conflict Reconstruction; Washington, D.C.; The World Bank
Leckie, S. (2000); Legal resources for housing rights - International and national standards; Geneva; Centre on Housing Rights and Evictions (COHRE); sources 4 June 2000
National Center for Regional Development and Housing Policy (1999); Draft National Housing Strategy 1999-2009; Sofia; October 1999
Phuong, C. (2000); At the heart of the return process: solving property issues in Bosnia and Herzegovina; in Forced Migration review number 7 (April 2000)
Renaud, B. (1991); Housing reform in socialist economies; Washington, D.C.; The World Bank; World Bank Discussion Papers 125
The World Bank (2000); Entering the 21st Century; World Development Report 1999/2000; The International Bank for Reconstruction and Development / The World Bank; Oxford University Press
The World Bank (1993); Housing: enabling markets to work; Washington, D.C.; The World Bank; A World Bank Policy Paper
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The World Bank (1996); Technical Annex Bosnia and Herzegovina Emergency Housing Repair Project; Report No. T-6937-BIH (July 8, 1996)
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