Invisible barriers to investment and affordable housing

Since the beginning of the full-scale invasion, the Ukrainian construction market has been operating in extremely difficult conditions: shortages of personnel and construction materials, a growing gap between the market value of real estate and the real purchasing power of people, logistical difficulties and military risks are just a few of the factors that complicate the development of the housing market and drive it into an ever-deepening crisis. At the same time, in addition to the objective reasons caused by the armed aggression against Ukraine, a whole range of purely internal issues remain unresolved, with government agencies, through their actions or inaction, tripping up the construction industry.

Members of the Ukrainian Association of Developers spoke at the IV Ukrainian Construction Congress about poor governance, an approach to decision-making and implementation that does not always comply with the principles of justice and often creates artificial barriers to investment, and offered their vision of solving the problem.

• In English, this is called bad governance, which is straightforward and honest. This is a barrier that discourages investment, destroys trust, and makes construction longer, more complicated, and more expensive. Because without effective, predictable and transparent interaction with the state and the city, there will be no development, and, unfortunately, no housing," explains Yevhen Favorov, Chairman of the Board of the Ukrainian Association of Developers.
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DEVELOPER CASES: HOW GOVERNMENT DECISIONS BLOCK INDUSTRY DEVELOPMENT AND DESTROY INVESTMENTS

Unfortunately, almost every systemic developer in the country has examples of decisions made by the authorities that do not take into account the realities of the market and business needs and, in the end, literally block the development of projects. Rostyslav Melnyk, CEO of RIEL Real Estate Corporation, the most productive member of the Association in Lviv, recalled one of the largest cases of such a misalignment. 

• Since May last year, Lviv has had a system of historical and reference plans in place, where the maximum building height is 20 meters and no higher throughout the city. While there are detailed plans for both 17- and 20-storey buildings, many of them have already received urban planning conditions and restrictions and passed expert examinations. But it is impossible to obtain permits because a new rule has been introduced. And to this day, there is no mechanism or opportunity to make any changes to the approved standards. For a year now, none of the developers has been able to start anything where permits have not been obtained. And for a year now, the whole of Lviv has been standing still," emphasizes the head of RIEL.

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The consequence of such "surprises" is not only a decrease in the number of new buildings, but also large losses that developers incur throughout the project cycle, which ultimately affect the affordability of the price per square meter for the buyer. 

Another example of how the authors of a systemic initiative aimed at positive changes did not take into account its impact on the work of construction workers was given by Andriy Semenov, managing partner of UDP, a member of the Ukrainian Association of Developers, which, among other projects, is working on the revitalization of the former Bolshevik plant in Kyiv. 

• Almost one and a half billion hryvnias were invested three years ago. We were not buying an enterprise, we were buying a land plot where the construction of a new beautiful neighborhood in Kyiv was to begin. But the state's philosophy has changed a bit, and it has decided that there will no longer be such a mechanism as detailed territory plans. When we were planning this project, it could have solved the land issue of changing the intended functional purpose. Someone in the Cabinet of Ministers decided to cancel this mechanism," says Andriy Semenov. "This is probably a good thing, because we need to adopt a new General Plan for Kyiv at some point. But the body that made this decision did not go further. They should have seen what would happen after this decision: what kind of cooperation we would have with local government, what the consequences of this decision would be. In fact, we have been standing for three years. And we will stand, taking into account what is happening with the Kyiv Master Plan, for another five years.
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Such barriers arise not only at the systemic level, but also at the individual level: due to unpredictable changes, it becomes impossible to allocate land for construction in time, obtain urban planning conditions and restrictions, etc. Moreover, no one can guarantee that previously issued documents will not be revoked later. Sometimes a multibillion-dollar investment can be stopped by the decision of one particular official, not even a government agency. Andriy Vavrysh, CEO of SAGA Development, shared this experience.

A project for a residential complex is developed, the entire package of documents is obtained, and the KCSA Land Resources Department determines the intended use of the land. The project is given the green light, construction begins, and work continues for two years. Suddenly, a representative of the department appears and orders a conclusion from a public organization about the alleged misuse of the land. Later, this opinion forms the basis of a prosecutor's lawsuit. A long lawsuit begins, and the developer is attempted to take away the land under the already built houses. A forensic examination by KNIСЕ, an expert organization in criminal cases, confirms the land was used in a completely appropriate manner. However, the litigation has not been resolved to date, further implementation of the project is blocked, and buyers may be left without their expected apartments.

• We come to the Department of Land Resources and say: look, here's your first piece of paper, and this is the KNIJE examination. We see that it's just a crime on your part - this piece of paper you made. We understand that it later caused problems, but it is a crime," says Andriy Vavrysh. "And the amount of damage, we will not even invent anything, we just take from the balance sheet how much we spent on this entire facility - a billion hryvnias in damage from the actions of one particular official."
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THE SYSTEMIC PROBLEM OF "REGULATORY IMITATION" AND ITS CONSEQUENCES

It is the instability of the existing rules of operation and the unpredictable impact of new decisions on ongoing construction that is the biggest pain point for both developers and government officials. According to Natalia Kozlovska, Deputy Minister of Community and Territorial Development, a healthy approach to business and government relations should look quite different.

• When a customer, having a land plot, having clear rules at the level of urban planning documentation, plans its investment activities, it expects that it has obligations for the land plot it has acquired in such a volume, the average landing per facility is such and such, and it needs to calculate an implementation plan. And, accordingly, he understands how he is going to pay off this project. He invests in land, project development. And at the stage when he does not yet have a permit, he has a new introduction that completely changes the concept. "My question is, what's next?" the deputy minister emphasizes. "How does he need to build the financial component of the project? Because it is different for him. Accordingly, when he acquired the land or received certain obligations on it, he expected a completely different approach.

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Andriy Vavrysh believes that such situations arise primarily due to the lack of coordination and inconsistency in the actions of various authorities. When some officials give the go-ahead for a project to start, and further barriers and investment risks are generated by others who have not been involved in the process before. In his opinion, the Ministry of Regional Development, which is trying to implement rules that oblige all parties to take them into account, is, unfortunately, rather an exception.

• "When we talk about regulatory imitation, we need to understand that when the Ministry of Regional Development develops rules, the Ministry of Agriculture looks the other way, which also coordinates relations in land relations to some extent. "The Ministry of Culture pays even less attention to this, as it does whatever it wants, without regard to anyone else," explains the head of SAGA Development. "But by and large, we are all suffering from the same story, which is called 'uncoordinated government officials.

Andriy Semenov emphasizes that any investor expects only one thing from the state: transparent and consistent rules. The documents issued by the state must be "reinforced concrete". Without this, it is impossible to plan either actions or project indicators. 

• Business schools teach us how to deal with risks, with black swans. There is a methodology for this: avoiding risk, accepting risk, forming a reserve, this science exists. But there is no science yet on how to dodge a black goose coming from your home country. Therefore, unfortunately, we either record losses or pin our hopes on advanced government officials who can do something," says UDP's managing partner.
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HOW TO SOLVE THE PROBLEM: PRIORITY STEPS

Natalia Kozlovska reminds that the Ministry of Regional Development is currently actively continuing to work on eliminating most of the risk points at the initial stages of construction. This is done by improving and expanding digital tools, such as the EDESSB electronic portal and the state urban planning cadastre.

• When it comes to checking the land use, size of the land plot, ownership, compliance with urban planning documentation, our task is to minimize what may be subject to further appeal. That is, to minimize what could be the subject of such an appeal at the entrance. And we are trying to do this by introducing digital tools, i.e. not paper documents. And these checks are carried out automatically. In this context, we are trying to minimize such cases as much as possible," says the official.

At the same time, developers note that new tools alone will not be enough. Legislative changes are needed. Andriy Vavrysh emphasizes that today in Ukraine the so-called "reverse law enforcement" is widely used, when decisions are heavily dependent on the interpretation of existing rules and regulations by a particular person. This problem also needs to be resolved quickly.

• This is not an accident or a tradition, it is the absence of a legal norm. That is why the things we are talking about now need to be supplemented and the legislation improved. Where the principle of legal certainty is maintained, if the permit is obtained in a proper manner in accordance with the procedure, it will be a means of protection. That is, it will have legal immunity. And, for example, such a form of immunity could be that the permit cannot be canceled. Except in cases of direct fraud or forgery of documents. In all other cases, it cannot be canceled. Mechanisms should be introduced to implement this legal certainty in practice," suggests Andriy Vavrysh.

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A separate issue is the need to regulate the responsibility of all parties for the decisions made. After all, if the actions or inaction of an official or body lead to very specific results in the form of billions of dollars in losses, then it is he or she who should be responsible for these consequences. Conversely, there should be mirror liability of all construction market players, not limited to developers. 

• When we see gross violations of the approved project documentation, who makes the decision at this stage? The designer who handed over the project documentation developed in violation to the customer. The expert organization, which, I do not exclude, illegally provided an expert opinion," Natalia Kozlovska reflects, "This is the responsibility of each entity at each stage. Both developers and builders, as well as government officials who in one way or another cancel certain decisions that affect investment activity. Perhaps this should be not only administrative or criminal liability, but perhaps it should also be financial. 

Obviously, the entire complex of existing problems can only be solved by building a constructive systemic dialogue between industry representatives, state and local authorities, lawmakers and civil society. As long as the authorities consider the problems they have created to be solely business problems, the housing crisis in the country will continue to deepen, the economy will lose money and jobs, the country will be closed to large investments, and Ukrainian families will remain without comfortable and affordable housing.

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