In Clutches Of Clans. How Construction Mafia Works (In Ukraine)

Source: EPravda

Originally Posted At Economic Pravda on July 24, 2018, author – Olena Medvedieva

The construction market has been captured by a system that lives not by the law, but by its own rules. The system consists of a clan of government officials who want to have their share from each construction site, and a clan of major developers who provide this share, but require their interests to be served.

There is an unfortunate sign in big Ukrainian cities: if a large housing development begins at some place, you are in for activists protesting with banners.

Alas, according to the local market rules, even those developers who are willing to offer a high-quality and inexpensive product to the consumer will be forced by other players to break the law and eventually wind up the price.

The market has been captured by a system that lives not by Ukrainian law, but by its own rules. The system is divided into two clans: a clan of government officials who want to have a share from each construction site, and a clan of major developers who provide this share, but in return want their interests to be served.

The remaining participants in the system – those engaged in drafting and approving projects, law enforcers and activists – are willy-nilly playing to their tune. All of them have their share from the price that buyers pay for each square meter when buying space in new buildings.

The author has examined the situation together with experts taking Kyiv as an example to find out for what exactly and how much they have to pay.

They wipe their feet on general plan

It is necessary to determine the site before beginning any construction.

Any settlement has a General Plan that clearly defines the functional purpose of each meter of land: where to plant potatoes or gardens, and where and what exactly one can build: a private house, high-rise building, road or school. In Kyiv, the abuse begins with violations of the General Plan.

“In Kyiv, there exist two General Plans: the General Plan 2020 and the draft General Plan 2025, which the authorities are struggling to approve,” explains Anatolii Frolov, the city architect, public activist, deputy chairman of the public organization “Kyiv People’s Control Council”.

According to him, the current General Plan there provides for 85 zones for housing construction. It clearly defines the territories and how many thousands of square meters can be erected. With the appearance of each new building, it takes into account the pressure on other infrastructure objects and plans are made how to redistribute it.

The current General Plan was developed in 2002 by the Institute of General Plan. According to the regulations, the developer has to obtain all building permits issued by the Kyiv Council, and make detailed adjustments every five years to all parts of the document on the basis of scientific calculations.

According to experts, within the boundaries of Kyiv, there are no convenient areas left where one can “squeeze in” a large housing complex without violating the order on the functional purpose of the territory. The most common way to bypass this obstacle is development of a Detailed Territory Plan (DTP).

According to the law “On Regulation of Urban Development,” a detailed territory plan is to specify the sections of the General Plan, and changing functional purpose of the territory is forbidden.

However, the Kyiv Council deputies, who dispose of the land on behalf of the community, are changing functional purpose of individual sites during their sessions, thus, constantly violating the law.

The Department of Land Resources of the Kyiv City State Administration and the Department of Urban Development and Architecture willingly accept these orders for implementation.

“The old General Plan has not been implemented for a long time, and the new one is constantly being adjusted on the basis of approved detailed territory plans,” explains the expert of the state administration in the sphere of urban planning, corresponding member of the Ukrainian Academy of Architecture and former deputy Chief architect of Kyiv Viktor Gliba.

According to him, the new General Plan of the capital has not been approved only because it is not clear yet how many DTP submissions the developers will agree with the authorities. “Each detailed territory plan means new land allocations legalized through violations of the General Plan 2020. Who is stupid enough to approve it, when it can bring huge money while pending?” – Gliba says.

Yuri, a lawyer of a large company that deals with housing construction in Kyiv told us anonymously about the amounts of money in question.

“When we had to change the purpose of a homestead farming land into land for construction of an apartment building, we were told the price was $300 thousand.

This issue can be resolved according to the following scheme. A site of interest is found in the private housing sector in Kyiv. Then an application is submitted to the Department of Land Resources of the Kyiv City State Administration for allocation of land to an individual. The application is considered by the Commission on Urban Development, Architecture and Land Use.

Then it goes for consideration to the session of the City Council, and you are given the land. The functional purpose is changed later through the detailed territory plan,” Yuri explains.

The same thing is done by governments of settlements, whose territories are tightly bordered with Kyiv, and, according to the General Plan, are soon to become the outskirts of the capital. In the meantime, local deputies also want to have some profit. An example of such violation was shown by Oleg Khanenko, deputy Director of the state enterprise Ukrainian Scientific, Research and Design Institute of Civil Construction (UkrNDPItsivilbud).

“On the border of Kyiv with the Kyiv-Sviatoshynskyi district there is the village of Novosilky. According to the General Plan of Kyiv, a large traffic junction is to be built there.

We wanted to remove the Southern (Pivdenna) Bus Station and place it there creating a transfer junction at the border of Kyiv city and the region. Moreover, this place is designated for the last metro station Odeska. However, a housing block developer created a detailed plan of the territory taking no care about the whole thing.

The amendments were approved by the Chabany settlement council. Even if its order was approved and there is the signature of the district architect or the head of the Design and Architecture Department of the Kyiv-Sviatoshynskyi Regional State Administration, there are still colleagues in Kyiv and the region who should check with the General Plan. But nobody “saw anything wrong”, and a residential block is already being built there.”

The most expensive question is related to land

According to Yuri, during the whole time of construction of a multi-storey building, the land issue is the most expensive for the majority of developers. One of the schemes to obtain an allotment is to act through cooperatives.
“Previously, it was possible to get a site for free through a housing construction cooperative.” Now the cooperatives have been canceled, but their separate forms can still be registered, such as servicing, consumer and production cooperatives.

The guys who follow this path have friendly relations with the administrations of districts and most often open a servicing cooperative. This scheme is complex, but still works in certain cases. The cost of land solutions for a company like ours depends on everything: whether there is a nearby forest or lake, what kind of transport interchange is in place, the conditions for connecting communications, where the sanitary zone is or who the neighbors are.

If this is in the Shevchenkivskyi district of Kyiv and the conditions allow us to avoid gross violations of norms, then it will cost us over $200 thousand. The cost is about half less in Kyiv-Sviatoshynskyi district.
Distribution strongly depends on who is interested in the site. For example, for KAN Development (its owner Ihor Nikonov used to be the First Deputy of the Head of the Kyiv City State Administration Vitaly Klichko and close to the Petro Poroshenko Block – Auth.), the cost would be much less.

Also preferences are given to Kyivmiskbud, Spetszhytlofond (both enterprises are subordinate to the Kyiv City State Administration – Auth.), Ukrbud (close to the people’s deputy Maksym Mykytas, who is associated with Serhii Berezenko from the Petro Poroshenko Block) and UDP (owned by oligarch, an MP of five convocations Vasyl Khmelnytskyi. – Author).”

The “fight” for profitable sites is so fierce that a newcomer often cannot solve the issue even with the help of money. In such cases, the land can be rented.

If deputies and officials see a good site and can complete documents on it, they do not waste time waiting. They conclude an agreement with a developer company on joint activities and settle the scores with apartments or money. A specific example is a 9-storey building: $50 thousand and the entire first floor,” – says Yurii.

Often the land can be owned by law enforcement agencies. In this way officials pay them for their intentional blindness.

“The prosecutor’s office could break the system, but it has its share in the pie. It is given land for housing construction, but has no money to do the works. So it gives the land to a construction company and signs an agreement according to which the prosecutor’s office is a customer and the developer is an investor. The customer gets 20% of the apartments “, – Frolov explains.

Found a nice land plot? You can take it away

Large residential blocks require large areas. The developers allied to the Kyiv authorities are not bothered by the fact that there are no “fat” pieces of land left in Kyiv where it is possible to build a residential quarter without violating the regulations. The land can be taken away from others.

“Let’s take the “Comfort Town” residential block – a joint creation of Nikonov and former mayor of Kyiv Leonid Chernovetskyi. In order to continue construction and build another quarter they have closed and are liquidating the “Fanplit” plywood factory. They allege it is polluting the area.

However, according to the General Plan, the land is an industrial area where residential construction is forbidden. When they broke the rules and built the first quarter, the factory had been standing there for decades and bringing money into the budget. Now they want to demolish the industrial facilities and erect another residential quarter in their place.

The developers offered money to the plywood factory to leave the territory, but the management resisted, because they were using a nearby railroad to supply logs. This allows them to make their plywood cheaper compared to rivals. And no one would be embarrassed with infringement of sanitary norms in the process of construction,” – says Frolov.
Another example is from the expert opinion of Viktor Gliba of May 8, 2018, which he prepared upon an official request of the Kyiv City Prosecutor’s Office.

We are talking about the construction of the Tekhnopark (a former motorcycle factory) in the Shevchenkivskyi district of the city. The detailed territory plan has been developed in violation of the General Plan: it changes the functional purpose of the territory from industrial to residential.

According to the documents of Prof-InvestGroup Ltd., they plan to cut trees in this area and “plant” a giant complex of 270 thousand square meters for 6,700 inhabitants.

According to the expert’s conclusions, the deputies of the Kyiv City Council of the previous convocation voted for the development of this detailed territory plan stipulating allotment of 48 hectares in their resolution in spite of the fact that the project is designated for 91.94 hectares, which means that the missing area will be taken away from the city. At the same time, no agency reacted to the violations, except for the Prosecutor’s Office of Kyiv.

The infrastructure is not ready to accommodate so many people. The project provides for construction of a school for 360 students on a site, which is allocated for a sanitary protection zone by the General Plan 2020. However, there have been no decisions regarding construction of a polyclinic, a hospital and expansion of the district’s roads.

According to the detailed territory plan, the industrial territories of enterprises are planned to be moved to the Korchuvate micro-district – an industrial zone in the Holosiivskyi district of Kyiv. However, the General Plan of Kyiv already provides for filling Korchuvate with residential complexes. Then where will the enterprises be moved? A question without answer.

“The urban planning conditions should be issued by the City Planning and Architecture Department of the Kyiv City State Administration on the basis of the indicators of the approved detailed territory plan. These indicators should be decisive when issuing documents for land use and construction.

This Department is the customer of the detailed territory plan and it also lobbies the interests of developers using the signature of the city’s chief architect to approve documents thus violating the regulatory requirements for voting by the profile commission and Kyiv council session,” says Gliba.

According to him, in half of all the developed detailed territory plans, the department has its “interest”, the developer “is not qualified”, and the deputies “are blind”.

A beautiful house on paper

As far as construction of the “box” goes on, other schemes and players enter the game.

“As a rule, not a single object in Kyiv has a complete set of licensing documents at the start of construction,” says Maryna Lytvynchuk, a norm-projector of the government-public organization Together Against Corruption.

According to her, most often, an architect designs an object that passes the expertise after the construction has started or even after its completion.

“In general, the architect carries out author’s supervision of the project, which means control over the compliance of construction and installation works with the project documents. At the same time, the architect is to resolve all deviations from the building norms. If they do not resolve that or refuse to do it, they risks to remain without new orders,” says Lytvynchuk.

Usually it takes a team of architects to work on a multi-storey building project. On average, their work costs UAH 25 per square meter.

“If you break the rules, the price of the question goes up to $50. The developer has to pay for its greed. By forgetting about playgrounds, saving on parking lots and green areas it turns everything into extra living space. If there is no parking area, you have to pay to the architect and he will draw it in the project,” – Yuri admits.

The same prices, he says, apply to “resolve the issue” with firefighters: “If you have a detour around the house – it’s good, if you do not, then it means that you have to ‘resolve it’. After ‘adapting’ the project to standards, the architect submits it for expertise. The expert who conducts it does not visit the site, after all, it makes sense, as there is no house yet.

If there is something in the project that does not correspond to the state building regulations, then the expertise returns it for revision, and the architect adds the missing details or eliminates the redundancies by means of concluding agreements. As a result, on paper, the house can comply with all norms, but in fact – contain many violations.

What is the price of inspector’s blindness?

Control over the conformity of construction to all documents and norms is exercised by the State Architectural and Construction Inspectorate (GASI). However, its representatives are know how to avoid uncomfortable questions. The author of the article had an opportunity to see it with her own eyes during the round table conducted by the Together Against Corruption initiative.

Experts discussed an outrageous violation of town-planning standards and asked the director of the Department of Regulatory and Legal Support of the State Architectural and Construction Inspectorate, Sergey Shevchenko, who is responsible for compliance of urban planning documentation with the legislation. He answered this question in the following way.

“The urban planning documentation is not under control of either us or any other agency. We are checking a decision made by the city planning and architecture agency: the construction passport, the town-planning conditions and restrictions, the passport of the binding to the terrain. The process of development of the General Plan, detailed territory plan and other documentation is under anyone’s control.

The resolution is made by deputies of local government body to which the territory belongs. Our inspector does not check compliance of the project with the design data. None of the central authorities is responsible for approving this.

However the big questions are caused by discrepancies in terminology in the legislation, according to which each architect or another expert sees possibilities of approval at their own discretion. As long as there is no order in the terminology – there will be no order in general.”

I wonder whether the “discrepancy in terminology” accounts for the fact that a certain part of the of inspectors’ authorities is regulated not only by the provision, but also by the Law “On the Regulation of Urban Development”? Thus, Article 41 states that chief inspectors of construction oversight not only verify legality of decisions in the field of urban development adopted by supervised objects.

They are also required to demand that construction control agencies conduct inspections in case of signs of violation of the requirements of legislation in the field of urban development, construction norms, standards and regulations.
In case of failure to comply with the law, inspectors have the right to suspend the decisions of officials and bring them to responsibility. The State Architectural and Construction Inspectorate often initiates lawsuits against developers to prohibit illegal construction, but these cases are most often won by the latter.

Prices for expert services are also well-known. “The State Architectural and Construction Inspectorate takes UAH 48 per square meter of an object regardless whether the project is properly designed or not. If there are no violations, and you don’t want to pay them, it will be necessary to bother with documents for several years even for a small object,” Khanenko says. The representative of the developer Yuri says that the fee of the State Architectural and Construction Inspectorate starts with $ 14.

“The fee depends not only on the amount of violations, but also on the functional purpose of the object and its size. The larger the area, the lower the price per square meter.” One of the projects cost $ 1 million. The State Architectural and Construction Inspectorate issued the permits, although there were a lot of violations,” Gliba explains.

“Grabbing assets” with a legal scheme

In Ukraine, there also happen court rulings on demolition of high-rise buildings due to absence of permits. One of the latest pieces of news – the Kyiv Economic Court ordered developers to demolish the multi-apartment house of the “Perspektyva” residential complex in Desnianskyi district of Kyiv as it has been built there instead of the planned school.

However, nobody has ever heard about implementation of those rulings. “The court decisions must be enforced by the executive service, but it rarely finishes the job to say the least. The justification is simple: “Who is to pay for the demolishing works?” – says head of the Illegal Building Committee Andrii Bobrovskyi.

According to him, the ‘box’ usually stands there for a while, and later the house is completed. This means that the developer has brought the money in and has been given the necessary permits. If the developer has already been brought to bankruptcy and frozen the construction, then it is possible to legalize an “asset squeeze” according to a lawful scheme.

The city is looking for an investor to complete the building and remove the risks of ordinary people who have invested money in construction and are facing the prospects of being left without money and apartments. If there are enough unsold apartments left, there is an obvious profit for an investor.

If most of the apartments have already been assigned to investors, then they will settle the scores with the investor-developer by allocating it a plot of land in another place. As a rule, such contracts go to the ‘friendly’ companies, most often – “Ukrbud” and “Spetszhytlofond”, which are in communal ownership.

“That is why not a single illegal building has been demolished,” Bobrovskyi says.

Give alms to activists for their banners

There is another resource that the “clans” have turned into their weapons – the activists and protesters. Nowadays, not only deceived investors or residents of the micro-district are coming to construction sites with their banners. There are groups that earn good money doing this.

“When such ‘activists’ come to a construction site, they either immediately say that they need a certain amount of money, or they first arrange problems, and then call a price that can be very high,” Gliba notes.

For example, he says, the developer of “Yaroslaviv Hrad” (Yaroslav Hail) had to pay $500 thousand to the outraged groups, so that they agree to a consensus by signing a memorandum with the Kyiv City State Administration.
It stipulated that the construction would be only two floors lower than planned.

The construction in this historic part of the city on the site of the Sinnyi market prohibits erection of buildings above nine floors, while the height of individual sections of the complex was planned at up to 22 floors.

According to Gliba, groups of activists are often at the disposal of political forces. He also told how developers use the help of activists to oust rivals.

“If two construction sites of different developers are located close to each other, they will compete in order to quickly sell apartments.” Then one of them hires activists against the rival. They stand with their banners, making noise and stating that the construction is illegal. The developer behind the protests is quickly selling the apartments, while the other one is not able to do that. People see that there is something shady going on.
If there is a real war, when one developer has a square meter for UAH 15 thousand, and the other – for UAH 35 thousand, the latter would not spare money and calls for inspectors.

While court hearings are going on, the developer suffers huge losses, because in most cases the equipment is rented. One crane costs about UAH 200 thousand per month. Disassembling, removing and transporting it also costs a lot. The rest of the equipment is also rented with fines for delays. When construction works are frozen, the developer is brought to bankruptcy, and in the meantime the customer behind the ‘activities’ successfully sells its square meters,” he explains.