Last week, the capital received its main financial document, which suffered from the same shortcomings as its predecessors. No fundamental changes were made, despite the willingness of public experts and activists to help the city government uncover billions hidden in the shadows. A positive feature of the budget process was the public discussion of the document, which followed a public appeal by civil activists. However, the resulting document only underwent cosmetic revisions. Thus, the capital's main budget for 2015 failed to demonstrate a commitment to dismantling the corruption schemes that had been in place for years. Billions in Kyiv's budget continue to lurk in the shadows.
Only 17 Kyiv City Council deputies declared their position on the quality of the capital's main financial document and responded to public activists' appeal not to support it. Only seven deputies voted against the 2015 Kyiv budget, and ten abstained (the Svoboda faction voted against it in full, while representatives of Samopomich, Batkivshchyna, Civic Position, Demalyans, and Unity largely abstained). The majority—deputies from the UDAR-Solidarity faction, some radicals, and independents with varying ties to either developers or the "predecessors"—took responsibility for the state of the city budget.
When calculating the budget revenue forecast for 2015, the city government for some reason “forgot” to provide clear information about the land tax base (analysis of various accounting documents gives grounds to assert that from 10,5 thousand to 14 thousand hectares can be considered as land for residential development and, accordingly, taxed at a rate of 0,1% instead of 3-12%).
They likely also failed to take into account the budget losses from maintaining the shadow status of land (the absence of contractual relationships and reduced rental rates of less than 3%), parking lots, and revenues from shared contributions that the city should receive from small architectural forms (MAFs) or temporary structures (TS). The city government also overlooked the in-kind contributions paid by developers and the hundreds of millions of hryvnias they owe the city. The authorities also underestimated revenues from real estate taxes other than land (paid by legal entities—owners of non-residential properties, primarily shopping and entertainment centers and business centers).
Kyiv's New General Plan for 2025, "Stealing" Billions
The city government hasn't abandoned the Kyiv 2025 General Plan "named after Chernovetsky." As is well known, the 2025 General Plan was intended to legalize illegal land acquisitions and construction projects, which were being rubber-stamped en masse under the "cosmic" mayor. Moreover, perhaps sensing the community's mixed reaction and resistance to the new General Plan, "innovative" solutions were proposed, such as zoning plans for "individual parts of Kyiv" or detailed plans tailored to investors. This is a kind of workaround, in case the city government fails to adopt the new Kyiv 2025 General Plan.
For example, if an investor has a problematic land plot due to its intended use and construction restrictions, but is eager to build on it, an "indulgence" is offered. This involves legalizing the city council's unlawful land allocation decision. To achieve this, they offer the opportunity to develop a zoning plan or detailed territorial plan for the plot where they want to build. It doesn't matter that changing the land plot's functional use and urban planning conditions and restrictions may grossly violate Kyiv's current General Plan, the detailed district development plan, or may simply conflict with the interests of local residents. This, of course, is a declaration of the city government's position. With this approach, it will be possible to legally justify the felling of century-old pine trees in a forested area to make way for yet another high-rise, as recently happened at 28 Zhmachenko Street.
As of the end of October last year, of 3094 active land lease agreements covering an area of over 5273 hectares, 1586 agreements totaling 3261 hectares had a rate of less than 3%. This means that over 60% of land leaseholders in Kyiv violate the current Tax Code. Information on land lease revenues as of the end of 2014 suggests that no significant changes have occurred in this area.
The Kyiv 2025 General Plan, lobbied by Viktor Klitschko's team, is also expected to reduce land lease revenues. According to various estimates, the area of residential development will increase by the equivalent of one Kyiv district (from 10,5 to 14 hectares). It doesn't take a mathematician to calculate the losses, given the taxation of residential land at a rate of 0,1% instead of the 3-12% currently applicable to other land categories.
The Kyiv city government continues to attempt to legitimize the loss of billions. And what difference does it make how this is done—through the Kyiv 2025 General Plan "named after Chernovetsky" (which, as a reminder, Viktor Klitschko opposed while in opposition) or by developing zoning plans for "certain parts of Kyiv"?
30 kopecks per month per square meter for high-rise housing in the capital's central district
The city government forecast land rental revenue from legal entities by mechanically increasing the standard land valuation starting in the second half of last year. They plan to collect only slightly over UAH 1,5 billion. It's safe to say that the majority of those who will pay will be those with established legal relationships with the city government. But what about those who don't have contracts, or whose contracts have expired (shadow leases), or those who are unwilling to renegotiate them and pay at least 3% of the standard land valuation (which accounts for over 60% of Kyiv's leased land hectares)? It's unclear what the city government plans to do in this regard.
Developers and land users generally either do not pay rent for land plots at all or pay pennies to the city budget.
A case in point is the dubious land lease agreement of Ukrpromproekt CJSC, located near the Kyiv Zoo in Kyiv's central Shevchenkivskyi District. Excluding the developer's unauthorized seizure of part of the land near the zoo's fence and violations of sanitary and construction regulations, Ukrpromproekt CJSC has, until recently, paid just over 1000 hryvnias to the city budget for almost 0,3 hectares of "golden" land at 32 Shulyavska Street, or 30 kopecks per square meter in Kyiv's central district.
Municipal enterprise of the Kyiv City State Administration "Zhilinveststroy-UKB", headed by a deputy of the Kyiv City Council Vyacheslav Nepop, where the general contractor, ST INSTROY, is constructing a 25-story "candle" on a plot of land without any documentation. The land lease has already expired, and construction is proceeding without any contractual relationship. This means that funds for land lease are not being transferred to the capital's budget. How many such plots are there? There are hundreds of similar situations in Kyiv, and not only in the Shevchenkivskyi district.
In Kyiv's Pecherskyi district alone, public experts and activists have identified approximately 70 construction sites on the sites of parks, squares, hospitals, sports and playgrounds, industrial facilities, and urban improvement lands, totaling approximately 94,98 hectares. Their base value is UAH 2 billion (UAH 2170 per square meter). The usable development area of these sites is approximately 3,7 million square meters, and the construction cost is preliminarily estimated at nearly $7 billion.
By leasing land from just part of Kyiv's Pechersky district at commercial rates (100 UAH/month per square meter), the city could have received 1 billion UAH per year. Currently, only 10% of these plots are privately owned, while the rest are leased at standard monetary valuations with decreasing coefficients. It appears that Kyiv City State Administration leaders "don't know" or don't want to know the addresses of the plots where billions could be found for the city budget, while deputies, for some reason, are not actively pursuing sources of revenue.
Tax holidays for developers, landowners, and tenants with projects valued at UAH 250–350 million
The assessed value of land subject to tax in Kyiv has remained unchanged for seven years and is currently lower than in Lviv. Although the City Council finally approved a new standard monetary value this summer, this "gift" worth an additional UAH 500-700 million to the city budget likely didn't please developers and the actual owners of various land plots. In December, they successfully lobbied for a six-month "tax holiday," which will cost the capital's budget UAH 250-350 million.
Will owners of shopping, entertainment, and business centers pay 64 kopecks per month per square meter of commercial real estate?
Kyiv has approximately 3 million square meters of commercial real estate, which could generate approximately 72 million UAH per square meter annually at a rate of 24 UAH. Is this a lot or a little, and should non-residential commercial real estate be taxed at all? This question requires a balanced approach. Specifically, it's necessary to find out how much commercial real estate owners are paying for the land on which their properties are built. However, this has so far been impossible, with authorities citing confidentiality. On the other hand, the demand for commercial real estate should be considered. In the first half of last year, maximum rental rates in business and shopping and entertainment centers ranged from 500 to 900 UAH per square meter at an exchange rate of 12 UAH to the dollar. Are retail spaces in the Dream Town, Gulliver, and Ocean Plaza shopping centers empty? Therefore, it would be interesting to know how much the city receives from such non-residential real estate. The government plans to collect only 23 million hryvnias (an average of 64 kopecks per month per square meter) from legal entities that own non-residential real estate. But is this adequate for the size of the taxable area? Again, this is a question of how the tax base is taken into account.
Why is the government so reluctant to finally disclose how much tenant-occupied shopping, entertainment, and business centers pay for the land they're built on? After that, a more substantive discussion could be held about the tax rates the City Council should set per square meter of commercial real estate.
Developers are in no hurry to pay for properties
The situation with developers' debts is no better. Back in September 2014, the city government announced that it had referred to court cases against 132 debtors for shared-equity payments, owing 736 million hryvnias. As of the end of 2014, the revenue from this item had reached 164,6 million hryvnias. The city government hasn't addressed the debts. Perhaps it doesn't expect them to be paid?
The widespread practice of in-kind payments (work, goods, and services to the city, which are counted as equity contributions) is likely hindering the increase in developer revenues. As with debts, nothing is known about a reduction in the proportion of in-kind payments of equity contributions by developers. The current forecast for revenue from developers' equity contributions—170 million hryvnias, with debts of 736 million—raises logical questions.
Small architectural forms may finally pay, but almost 50-60 million hryvnias will remain in the shadows.
The shadow leasing of small architectural forms is a long-standing problem in Kyiv. Klitschko isn't alone in promising to bring order to this sector. This is similar to the promises to "build a metro to Troyeshchyna." In January 2015, the city government reported the dismantling of 1680 illegally placed temporary structures in 2014. What has been done with the other thousands of temporary structures? At the same time, we can also see evidence of shadow payments by kiosk owners. Specifically, revenue from shared participation in the project amounted to UAH 34,1 million, against a target of UAH 70 million and promises to collect UAH 100 million.
In other words, Klitschko's team failed to achieve fundamental changes in restoring order and de-shadowing payments. Proposals to increase revenue from shared participation (contributions) of owners of temporary retail buildings (TS-MAFs) from UAH 59 million (the first version of the budget) to UAH 75 million were partially taken into account. Given the number of TSFs, which ranges from 15 to 24, revenue could be almost double that. This means that approximately UAH 50-60 million could continue to remain "under the table."
Thus, there are certainly opportunities to increase revenues to the capital's budget. But attracting them requires the hitherto lacking political will and genuine steps to combat corruption.
The material was prepared based on research by the Vidkrite Suspilstvo Foundation www.osf.org.ua
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