How to improve funding of infrastructure development in Kyiv? (press release)
The current infrastructure development contribution scheme used in Kyiv contains numerous omissions and inaccuracies that can lead to corruption and possible manipulation with contribution payments. Contribution rates enhance administration expenses for businesses and create barriers for investment in construction. This negatively affects Ukraine’s position in international rankings such as the World Bank’s “Doing Business” index[1].
Within research on “Determining the optimum municipal infrastructure development contribution scheme“ experts of the Centre for Economic Strategy determine ways to improve the procedure of calculation and payment of this contribution. First of all, it is recommended to facilitate process of payment and approaches to determination of the size of contributions. At the same time, the size of the contribution should be reduced and real estate tax should be increased, thus providing stable revenues directed towards infrastructure development.
In Ukraine, developer should conclude contract with local government in order to pay infrastructure development contribution. This process is complicated and non-transparent – thus creates possibilities for abuse. On the one hand, local government impose a duty on businesses, and on the other hand, the authorities overcomplicate fulfilment of this duty. This situation is detrimental to Kyiv’s budget, which does not receive enough money, moreover it harms economic activity and investment attractiveness. According to the “Dealing with Construction Permits” World Bank Doing Business indicator, Ukraine ranks an extremely lowly 140th place among 189 countries in this regard.
International experience shows that the majority of developed countries simplify administrative procedures and decrease the cost of public services in order to stimulate economic activity. In Central and Eastern Europe, the average cost of all construction-licensing procedures is 0.225% of construction costs. In European Union countries there is no additional fee for builders, except those directly linked to the cost of permits and network connections. At the same time, the cost of administration licensing procedures in Ukraine is 15.2% of the estimated cost of construction budget. That is the eleventh highest figure in the world.
In order to improve the financing mechanism for infrastructure, reduce administrative costs for businesses and support economic activity in the construction market, it is recommended to:
- Adopt a new infrastructure development contributions scheme in Kyiv. This must comply with the Law of Ukraine “On regulation of urban development” and should close any possibilities for delinquency in payment of contributions;
- Simplify the calculation method of contribution to a formula based on only two criteria – object area and contribution rate;
- Reduce the size of contributions to the cost of network connections to the city’s infrastructure;
- Adopt an exhaustive list of required documents which should be given for conclusion of a treaty for participation in infrastructure development;
- Allow to send all necessary documents for conclusion of a treaty by post or in web form;
- Provide comprehensive information about contribution payment scheme on the Kyiv City State Administration website;
- Increase real estate tax for private individuals and legal bodies to meet the needs of development financing and renewal of city infrastructure.
“Real estate taxes are the most common way in the world to finance spending on infrastructure. In our opinion, this approach is fair, as city infrastructure development is financed by direct users of this infrastructure. Secondly, it helps to reduce construction costs and, as a result, brings down real estate prices for consumers. Thirdly it energises the construction and reconstruction market, as the price of market entry (i.e. administration of permits) falls”, commented Oleksandr Kashko, economist of the Centre for Economic Strategy.
[1] Even though research informs about general field condition countrywide, estimations made by zoning regulation, which acts in capital cities. As a result, we can interpret data for Ukraine in this report as data for Kyiv.
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