PRESS RELEASE: Kyiv budget lacks billions of hryvniasin 2015 due to corruption

The experts of the Open Society Foundation and the Reanimation Package ofReforms initiative believe that the Kyiv budget lacks several billions of hryvni as due to ignoring the corruption schemes. Kyiv city authorities are not ready todismantle the corrupt practices in land relations, urban planning and operation of utility services providers. Instead, the ordinary residents of Kyiv and the national government are foreseen as main budget income sources. This strategy appears to be a substitute of Klitschko’s promised ‘devastating attack on corruption’. Land developers and tenants, managers of utility providing enterprises, the owners of the most ‘shadow’ Small Architectural Forms (SAF) will continue to work by the old rules and receive billions of the shadow income.

Lesya Shevchenko, the senior expert of the Reanimation Package of Reforms - Kyiv stressed that Klitschko’s team does not fulfill the campaign promises of ‘the devastating attack on corruption’. Moreover, his team membersignore the proposals received from the civil society. The Kyiv City State Administration (KCSA) draft decision of the Kiev city council "On Kyiv city budget for 2015” did not take into account the suggestions by the experts of the Open Society Foundation and Reanimation Package of Reforms initiative. These have been provided to the Mayor Klitschko several times. Ignoring these proposals costs billions of hryvnias.

The Director of the Open Society Foundation Ivan Sikora noted that "the Kyiv budget for 2015 is ideologically similar to the budgets of political predecessors. Thus, we call upon the members of the City Council not not support the draft budget until KCSA revises such income lines as lease of land and tax for non-residential property for legal entities, mutual contributions of land developers and the owners of SAF, and the revenues of utility services providers”. Ivan Sikora believes that "increase in revenues is possible by de-shadowing the budget, reducing corruption, proper performance by relevant KCSA departments, refraining from Kyiv 2025 General Plan and detailed territory plans for landplots". According to Sikora, land developers and tenants, the owners of entertainment and business centers, the shadow owners of most SAF and temporary structures will become the primary beneficiaries of the draft budget suggested by KCSA. At the same time the ordinary Kyiv items will lose due to lower quality andincreased value of public services (public transportation, utility services, etc.) and deterioration of living conditions (destruction of green areas), as foreseen in 2025 General Plan and developers’ detailed plans of the territories.

Ivan also elaborated on the cost of corruption risks in the budget and showed where to find the extra billions by preventing land fraud. Earlier, Volodymyr Klitschko estimated these losses at UAH 50 billion. The following budget items were suggested for filling the budget:

• tax on real property other than land, paid by legal entities - the owners of residential real estate. In particular, this concerns shopping-and-entertainment and business centers. The authorities plan to collect only UAH 23 million (by 64 kopiykas per square meter per month). At the same time, there are about 3 million square meters of commercial real estatein Kyiv. These could provide a minimum income of UAH 720 million per year (given the rent rate of UAH 20 per square meter per month).
• land lease payments by legal entities (the estimated amount is just over UAH 1.5 billion). At the same time as of December 1, 2014 more than UAH 1.1 billionwas collected. The introduction of the new regulatory monetary value of land had to give UAH 500 -700 million per year. In other words, the target revenue had to reach UAH 1.7-1.9 billion even without de-shadowing the land market. Over 60% of Kyiv land is leased out. The legal entities, however, pay less than 3%, which is a violation of the Tax Code of Ukraine. Hundreds of millions more by-pass the city budget through shadow lease without contracts;
• land tax for legal entities (only UAH 770 million of income is estimated. At the same time introduction of the new regulatory monetary value of land is expected);
• parking fee (an income of UAH 30 million is estimated. The maximum revenue, however, is more than UAH 360 million. The vast majority of parking spaces remains unaccounted and illegal);
• the revenues of utility services providers (only UAH 40 million is estimated. The audit of these enterprises, however, identified the corruption risks in the form of direct losses in the amount of UAH 84.2 million). Interestingly enough, the share of Social Security beneficiaries is 63% in land transport, and 34% in the subway;
• share participation in infrastructure development of the settlement (only UAH 170 million is estimated. At the same time many developers pay non-cash in violation of applicable law);
• the sale of land (UAH 380 million is estimated). Hardly any self-respecting investor will invest in land, given the existence of ‘manual’ planning documentation;
• equity funds of the owners of commercial temporary structures (TS-SAF) (only UAH 59 million is estimated). At the same time, the majority of these temporary structures operate ‘in shadow’. The political predecessors managed to collect more income than collected last year. As of December 1, 2014 only UAH 16.7 million was collected, while UAH 70 million was estimated and UAH 100 million was promised.

Victor Gleba, the urban development expert, stressed the signs of fraud associated with land management of residential and public construction in various documents (Kyiv General Plan 2025, Kyiv Development Strategy 2025 and the Program foruse and preservation of land), which compose the basis for taxation. According to the expert, the difference in land records varies from 10.5 to 14 thousand hectares. Given the taxation rate for residential land is 0.1% instead of 3.12% for other types of land, it directly affects the reduction of budget revenues from the taxation of land. Moreover, the Program of socio-economic development of Kyiv secured continued funding for the development of the Kyiv General Plan 2025 ‘named after Leonid Chernovetsky’. The mentioned document legalizes the unlawful land acquisition and development by increasing the density of constructionin green zones, and construction in the buffer zone of the historical part of Kyiv. According to experts’ estimation, the 2025 General Plan will reduce the revenue from taxation of land through a significant increase of the areas for residential and public buildings. Gleba also drew attention to the ‘innovative’ way to legalize the unlawful construction and land acquisition through developing zoning plans of individual parts of Kyiv instead of detailed plans of the territories for different city districts.

The draft 2015 budget for Kyiv ignores significant corruption risks. Thus the reforms promised by the current city authoritie sand Mayor Klitschko are nothing but the imitation. Experts urged the city authorities and members of the City Council not to support the draft budget. The corruption schemes have to be eliminated. Thiswill allow de-shadowing billions of hryvnias.

For further information please contact: (050) 382 4661, osf55@ukr.net.

More on Kyiv city budget and corruption in the capital of Ukraine:

• The Public Address to Mayor Klitschko

The Attack on Corruption in Kyiv: Promises and Reality (Artcle post in Dzerkalo Tyghnya, №47  December, 12 2014)

Where to Get the Money for Kyiv budget? (Artcle post in Ukrainska Pravda, January, 14 2015)

The Real Fight on Corruption in Kyiv Should Begin with Illegal Construction ( Comment, NO CORRAPTION web-site, January, 17 2015)