Analysis. Public finances. Budget of Kiev Articles.

Open Society Foundation - Initiated Public Discussion of the Kyiv Budget Was Finally Held

Tuesday, 04 November 2014 194
The public discussion of the draft Kyiv city budget for 2015 took place on November 4 for the first time. The debate, however, is not likely to affect the major sources of corruption risks inherent in the revenues structure of the general budget, namely the payments for land and personal income tax.

‘Ukrainska Pravda. Kyiv’ on-line media outlet has published the OSF Director Ivan Sikora’s theses for public discussion of the draft 2015 Kyiv city budget held with the members of the Permanent Committee on the budget in Kyiv City Council on November 4th.

The discussion, however, touched upon 10% of the budget revenue only.

The public was offered to discuss the projected revenue to a special budget fund. This fund comprises about 10% of the total Kyiv budget. For most of its articles the corruption risks are minor. As Kyiv City State Administration (KCSA) put it, due to the procedural obstacles the discussion of the special budget fund revenue only was possible. 

According to the KCSA, the general budget fund may be considered after the receipt of the Ministry of Finance macroeconomic indicators and calculation details (due to the Article 75 of the Budget Code of Ukraine). At the same time, the losses of the general budget fund are obvious. The projected governmental performance is likely to provide the grounds for KCSA officials to argue that [governmental estimates] are too high. Would not it be better to get prepared for the reasoned discussion with the central government together with the public?

In fact, Kyiv city officials have opened for discussion the increase the revenue from the two sources: the advertising and the revenues associated with land sale. At the same time, the major corruption schemes related to the land lease and the land tax, and remained remain out of sight.

The issue of urban planning, which was of strategic importance due to investors attraction and close association with the "old for new" Kyiv General Plan for 2025, had also remained out or public reach. The new General Plan was initiated by [Kyiv ex-Mayor Leonid] Chernovetsky for the legalization of unlawful construction and land acquisition.

"Legalizing" the shadow wages and, consequently, failure to obtain the due revenues from the personal income tax shall not be discussed as well.

The devil is in the details: How to hear the public properly?

In fact, the leadership of KCSA and the Budget Committee of the City Council had supported the public initiative, suggested by the Open Society Foundation, at the alternative assessment of 100 days of Mayor Vitaliy Klytschko on September 30th, 2014.

It should be noted that the previous Kyiv authorities were publicly addressed with such proposal last year. The initiative, however, remained unheard.

At the same time, the "devil is in the details." The city authorities opened for discussion the least problematic areas of the city budget – those covering less than UAH 1 billion. The most problematic lines of income (where the city losses equal to UAH tens of billions, including the land tax – UAH 50 billion loss, and personal income tax – UAH 5 to 10 billion loss), remained out of discussion.

It is "predecessors" fault again, inadequate Ministry of Finance and imperfect Budget Code

KCSA calculation was quite simple. As long as the public discussed the relatively minor risks of corruption on the revenue side of the budget, one can tell the “same old story” on inadequate Ministry of Finance and imperfect Budget Code. The arguments became well-known as often repeated both by the “precursors” and the acting city authorities.

The Argument #1. The projected performance of the land tax revenues was excessive. According to KCSA leadership, including Igor Nikonov [the head of the advisory group to Mayor Klytchko – translators note], the government suggested the overestimated projected performance of the land fee revenues. What about the billions of losses in land fraud, which were recognized both by the current government and the ‘predecessors’?

The Argument #2. The central government literally “robbed” Kyiv budget by removing 50% of personal income tax (PIT) revenues. The government-suggested changes to the Budget Code provide only 25% of total PIT revenues in the budget of Kyiv, offsetting the loss with 10% revenue tax. Such argument, however, has one flaw. The officials usually forget to mention that the large taxpayers pay PIT to the city of Kyiv, yet have the production outside the capital region, in different oblasts and cities of Ukraine. In such case Kyiv receives the PIT funds despite the physical absence of a large part of employees in the city.

In this case stressing capital city patriotism does not contribute to the national interests and the need to balance social and economic development of different regions of Ukraine. Perhaps, it is necessary to the change of the rhetoric on this issue?

- The land use fees

The city officials declare tens of billions of losses from land fraud every year. Still, they seem unable to ensure the planned land fees income of at least UAH 4 billion. At the same time UAH 50 billion of loss is being declared. Significantly, even though Oleksandr Popov [the head of KCSA in 2010-2013 – translator’s note] mentioned UAH 70 billion loss, this has not affected the city budget revenues.

In 2013 this revenue item lacked UAH 1.7 billion. Of these, UAH 1.6 billion were not paid by the legal entities. The loss was due to the absence of lease agreements, under- or non-payment of rent and so on. Out of the estimated 83.6 thousand hectares belonging to Kyiv, the land relations are declared for 18-25% of land.

The income looked no better for the first 9 months of 2014. Out of estimated UAH 4.3 billion from land use fee, only 1.4 billion are currently present in the budget. Land lease budget article is even worse. The city received only UAH 941 million out of the projected 3.6 billion.

The legal entities remain the main nonpayers to the budget. These are mainly developers (there are about 500 long-term construction projects), the owners of various real estate and land plots, who had purchased their property ‘for future use’, yet were neither able to begin the construction, nor willing to return the property back to the community.

In June 2014 the mentioned developers and the owners of commercial real estate have lobbied against the increase of the understated regulatory and monetary valuation of the land. The foreign (not offshore) investors would probably be willing to take over the mentioned land plots, yet no one was there to help them. This sounds like a real Ukrainian story - “like the dog in the manger”.

Perhaps, one should finish ‘the same old story’ of excessive governmental performance indicators? Regulating Kyiv land relations will bring UAH tens of billions of additional revenue from the land fee. However, this question remained out of public discussion. Would it mean diminishing the returns of the land owners represented in KCSA and the City Council?

Continuing manipulations with land and non-transparent schemes in city planning

Shadow land resources and land manipulation possibility have created the basis for corruption. The KCSA Department of Land Resources and the Department of Architecture and City Planning should have dealt with prevention of the mentioned corruption risks.

Every year the first department (dealing with the land resources) fails to fulfill the understated estimates of the target land program – the Program of land use and protection of Kyiv for 2011-2015. Despite the poorly formulated effectiveness and efficiency assessment indicators, this program was supposed to ensure the growth of revenue from land management.

The program was not reviewed, regardless its inefficiency and non-performance. The Department of Land Resources’ officials were not held responsible for the failure to meet the program indicators. Public-generated proposals are ignored every year, and KCSA leaders keep referring to the inflated indicative figures for land revenues. Another public proposal to revise the program still awaits an answer.

The city authorities had failed to publish a report on the lease agreements review with 1342 tenants, whose annual fees were less than the minimum established in the Article 288 of the Tax Code of Ukraine. The decision [for such review] was adopted by previous city council’s convocation. The information on the debtors and the specific actions of the local government to review the contracts has not yet been published on the KCSA webpage despite the public address in July 2014.

The introduction of the new regulatory monetary value of land depends of the outcome of the ‘positional fight’. The ‘golden’ Kyiv land was cheaper than the land in some Ukrainian oblast centers (such as Lviv) before such decision of the Kyiv Council. The additional revenue of UAH 500-700 million to the city budget is at stake.

The Department of the Architecture and City Planning should create the transparent conditions for attracting investors through open and accessible planning documentation. However, this key department not only omitted ‘lustration’, but continued to act in the manner of the ‘predecessors’ while dealing with the public.

As suggested by the recent events, this department violated the procedures and pushed for Kyiv City General Plan 2025 (this hardly could be accomplished legally). The General Plan was initiated by Mayor Chernovetsky for the legalization of unlawful buildings and construction compaction (in reality: constructions in yards, the green zones and stadiums).

Despite the current Mayor Klytschko had publicly opposed the mentioned 2025General Plan, his administration was acting just like the "predecessors" did.

Architecture and City Planning Council of the Ministry of Regional Development, Construction, Housing and Communal Services of Ukraine, in violation of all the possible procedures on informing the public, was assembled on day after the elections (November 27th, 2014 ) for a ‘blessing’ and issuing the recommendations for KCSA to accept the Kyiv City General Plan 2025.

By mere chance the activists had learned about the event from the Facebook page (and not from the appropriate authority website) and visited the meeting. The proponents of the General Plan 2025 clearly lacked the arguments.

- Personal income tax (PIT)

According to various estimates, the city budget loss from the shadow employment was UAH 5-10 billion. UAH 100 million could be obtained solely through the formal employment of nearly 24 thousand employees working in small architectural forms (SAF). The same goes for semi-legal parking lots and other sources of income.

What budget items were offered to discuss publicly?

As mentioned on the KCSA web-page, the expanded meeting of the Standing Committee of Kyiv City Council for Budgetary and Socio-Economic Development with the participation of the Kyiv Mayor Vitali Klytschko titled "The Prospects and Forecasts of the Kyiv-2015 budget” to be held on November 4, 2014.

The purpose of the meeting is an open discussion of estimated figures for the city budget revenues for 2015. The meeting will bring together the experts, the NGO representatives, the heads of the departments of the Kyiv City State Administration, and the members of the City Council.

However, as already noted, the offer was not to discuss the entire Kyiv budget, but only its special fund (UAH 2.4 billion), representing approximately 10% of the municipal budget.

Discussion agenda included the revenue forecast for the following budget items:

1) The sale of land

The KCSA had offered to discuss the revenues from the sale of land. This source covers a tiny fraction compared to the land tax and land lease income (estimated earnings for 2015 equal UAH 380 million; UAH 159 million received as of October 1st, 2014).

In 2014, according to Mayor Klytschko, UAH 500 million income was expected, despite the relevant performance land management target program mentioned UAH 760 million in 2014 and 770 million in 2015.

Thus, there is a double difference between the KCSA forecast and the current performance of the program. The difference was, of course, downward, despite the program was formed on the basis of the understated estimates.

2) The tax on real property, other than land

Despite the city Kyiv gets the new square footage [translator’s note – residential property] every year, the city officials estimated an income of UAH 7.3 million for 2015. The methodology for such estimates remains unclear. As of October 1, 2014, UAH 7,8 million was earned on this article.

Possible increase in revenues for this tax relates to the inventory of tax privileges for hostels that rent out their premises to the entrepreneurs. The transition to a tax [calculation based] not on square meters, but the appraised value of the property would be another revenue source. Ultimately, this will significantly reduce the cost of square meter of real estate and make the housing more affordable.

3) The income from share participation in the infrastructure development of the settlement

The forecast of UAH 170 million look significantly understated. The actual revenue for 2013 was UAH 251 million; as of October 1, 2014, UAH 121 million was received. The information regarding the 132 budget debtors with the total debt of nearly UAH 736 million was not yet published. What was the reason at least part of the funds of UAH 763 million was not included in the revenue forecast?

Interestingly enough, the forecast contains no estimates of the income of share contributions from the owners of temporary structures (small architectural forms). Significantly, as October 1, 2014, the city budget received only UAH 6.8 million on this article, despite the income for the same period last year was more than UAH 44 million!

Thus, there is the question on the effectiveness of the new city government. If the mentioned funds failed to be reflected in the budget, these got in the ‘shade’. Will the officials continue to pay the lip service for the fight against corruption?

Certainly, the city government should more actively work with the Prosecutors office; the latter can be very slow and selective while dealing with the shady debtors. Given the fact that much of Kyiv scandalous development projects (e.g. a fountain on the Lvivska square turned into a shopping center) were connected with very influential officials of the new government, one can predict the launch of the next ‘soap opera’ endless series. Unless an effective lustration takes place.

A shift from the common practice of inclusion of the estimated value of goods and services, made by investors for needs of the city, into payment of the shared participation would be another important source of the increased revenues.

Often times, such estimation methodology is used for diminishing the payments to be paid by investors. Open and transparent reporting of the City Council about the ‘lucky-shareholders’, who contributed to the city with the ‘in kind’ contributions, should be subject for disclosure.

4) The funds from the sale of real estate located within the municipal property

The forecast of UAH 100 million in revenue was significantly understated. As of October 1, 2014 the city budget received more than UAH 77 million. The disclosure of the audit of communal enterprises and their use of the real estate should serve as a significant increase in revenues.

It is important to estimate the necessary area for the communal enterprises, the space leased or subject for sublet, the comparison of the amount of cash received and the cost of similar property on the market.

5) The single tax

The estimated UAH 1.3 billion revenue was significantly understated. As of October 1st, 2014 the city budget received more than UAH 1 billion in revenue with respect to nearly UAH 1.1 billion estimated. The effective and transparent SME support program would give a powerful impetus and significantly increase in revenues. The proposals from the NGO experts had been provided to KCSA last fall and they remained relevant.

Redecorating instead of capital repairs?

The other revenue items of the special budget fund deserve a close attention too. However, the major discussion should focus on the revenue items with the largest reserves and corruption risks. These include land, urban development and informal employment. Discussing the less important revenue articles will keep Kyiv residents disappointed. Instead of the capital repairs the community will get minor redecorations.

Kyiv authorities will eventually find it increasingly difficult to tell the same old story about the ‘precursors’ and the bad government. Of course, it is easier to find the outside culprits rather than start to fight the corruption at home. However, the fight against corruption was a major promise of Vitaliy Klytschko in mayor elections capmaign.

One should take a responsible approach to discuss the city budget and focus on corruption causing the greatest losses to Kyiv budget. The public experts are ready for topical discussion. Are the local authorities ready? The question remains open.

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