Land Corruption Schemes Are Costing the State and Communities. This May Soon Change.

Land is one of the key resources of the state and communities. It forms the foundation for the economic and financial sustainability and development of territories, and also enables the creation of infrastructure to strengthen community capacity.

At the same time, this sphere has long retained legal constructs that allow access to land plots for next to nothing and without competitive procedures, serving the interests of individual businesses. The result is significant economic losses for the state and territorial communities, the elimination of competition, and the distortion of the very logic of transparent management of public assets.

One problem concerns the non-competitive acquisition of state and communal land in cases where real estate objects are located on it. Legislation stipulates that, as a general rule, such land should be transferred through land auctions, but it contains an exception for owners of buildings and structures.

In the absence of additional safeguards, this exception allows the transfer of plots whose area is disproportionately large compared to the size of the real estate object.

There are a number of court examples. For an object with an area of 12.9 sq. m, a plot of 0.53 hectares was transferred; for an object of 52.2 sq. m — 0.62 hectares; for an object of 26.1 sq. m — 1.25 hectares. A telling and even absurd example is a case where, for objects with a total area of 13.7 sq. m, a plot of 44.5 hectares was transferred — that is, 3,248 times larger than the area of the object itself. Most such cases are observed in Kyiv.

One of the most well-known examples is the case linked to Denys Komarnytskyi. According to NABU and SAPO, within a corruption scheme, participants in the organization illegally seized land plots worth UAH 11.6 million, in particular through the privatization of small real estate objects.

Such cases became possible due to a combination of several gaps. First, there is no legally established procedure for verifying the grounds for acquiring ownership rights to a real estate object. Second, the law contains no clear limits on the area of land that can be transferred for servicing a building or structure.

Under this model, even a small or dubious object could become a formal basis for obtaining a substantial land plot without an auction. These features of legal regulation created the basis for the so-called "toilet schemes" as one of the most well-known mechanisms of non-competitive access to land.

This scheme was built by persons close to officials who gain access to land through influence over local council decisions. This is a kind of "state capture," as OECD anti-corruption units might describe it.

However, even greater economic consequences are linked to the use of investment agreements in the development of state lands.

Legislation stipulates that the transfer of state and communal land for development should be carried out on a competitive basis through land auctions, except in cases specifically defined by law (for example, providing a land plot within the framework of public-private partnership).

However, there is a gap in legal regulation that allows construction projects to be carried out on such lands without the developer first acquiring rights to the plot. This means that state or communal enterprises, institutions, or organizations that hold land under permanent use rights enter into investment agreements with private developers, who then gain the ability to use the land for residential or commercial development without an auction and without going through the procedures stipulated by land legislation.

The risk is that investment agreements leave the parties significant freedom in determining the terms of cooperation. In most cases, the developer is selected non-competitively. The investor determines the goals, scope, and direction of investment themselves.

Investment agreements are not approved by the government (unlike joint activity agreements) or by authorized management bodies, and the distribution of space in constructed buildings becomes unfair to the state or community. Below are data from court cases (state/community-to-developer ratio): 5% vs. 95%, 8% vs. 92%, 8.4% vs. 91.6%, 10% vs. 90%, 170 sq. m vs. 2,972 sq. m.

At the same time, state/communal enterprises formally remain the land users and do not receive compensation for land tax expenses for the period when the plot was actually used by the developer.

The most illustrative example in this context is the case of the State Enterprise "Pushcha-Vodytsia." According to a report by the Accounting Chamber on an audit of the effectiveness of the State Property Fund's exercise of powers to manage the property of state enterprises, institutions, and organizations with financial consequences for the state budget, nine plots with a total area of over 308 hectares in Kyiv were transferred for residential development without competitive procedures during 2006-2015.

Large residential complexes have been built or are being built on these lands, including "Varshavskyi," "Varshavskyi Plus," "Varshavskyi-2," and "Krister Grad." According to audit calculations, the estimated market value of the land transferred for development may exceed UAH 40 billion. At the same time, the state enterprise's share under most agreements amounted to only 4-5% of the residential complex area.

The audit found that in 2020-2021 the enterprise paid over UAH 29 million in land tax for plots used within such projects. Nearly another UAH 5 million was lost due to delays in changing the designated purpose of the land. In addition, in 2019 the enterprise's rights to 32 plots with a total area of over 426 hectares were revoked, with an estimated value that could have exceeded UAH 8.4 billion.

Similar approaches were recorded at other institutions as well. According to the State Audit Service, the National Academy of Sciences of Ukraine had for many years entered into investment agreements with developers, transferring land plots intended for the development of science for residential construction. 44 investment agreements were concluded, 20 of them in 2020-2023. Private investors were given over 130 hectares of land. Most of these agreements concerned 116 hectares in Kyiv.

The State Audit Service reports that at the end of 2023, the National Academy of Sciences' assets included 458 land plots with a residual value of UAH 73.2 billion. In other words, there is still a great deal of this resource, and its use should be regulated.

Another example concerns a "construction project" involving officials of the Ministry for Communities and Territories Development. According to NABU and SAPO, a plot and the objects located on it were valued at almost five times below market value, which could have caused the state to lose out on real estate worth more than UAH 1 billion. The cost per square meter of apartments that featured in the case as illegal benefit was UAH 1,000-8,000 per sq. m, while the minimum market value was around UAH 30,000 per sq. m.

All these examples demonstrate numerous problems for the state, communities, and honest investors. Current regulation has long failed to ensure the proper use of state- and communally-owned land, creates conditions for abuse, and forms a system of risks that discourages investors from putting money into construction, even of socially important facilities.

As a result, access to public land is often gained by those who do not go through auctions, do not acquire rights to a plot in the manner prescribed by the Land Code, and do not operate within a transparent partnership model with the state or community.

Such loopholes create, at a minimum, chaotic development of territories, and at worst, conditions for acquiring land into private ownership for next to nothing — resulting in losses for communities and the state, and reduced interest from foreign partners.

Draft Laws No. 14038 and No. 14039 have been registered in parliament, aimed at closing these legal gaps. The latter proposes establishing that, after state registration of ownership rights to a real estate object, the owner may receive without an auction only the area of land that is maximally necessary for servicing the relevant building or structure, according to a methodology set by the Cabinet of Ministers.

If a person seeks a larger plot, they must acquire it through an auction. The draft law also provides for verification of documents confirming ownership of the object and inspection of that object. If signs of document falsification are detected, the authority will apply to court and suspend consideration of the application.

Draft Law No. 14038 proposes to regulate the implementation of residential investment projects on state and communal lands. The approach is that a developer either acquires rights to the plot in accordance with legal requirements and implements the project on general terms, or, if such rights are not obtained, the project must be carried out through a public-private partnership mechanism.

For the economy and public finances, this issue is much broader than individual land cases involving top officials. It is about whether the state and communities are able to obtain proper value from the use of their most valuable asset and attract domestic and foreign partners to invest in the country, or whether land will continue to be a resource that, in many cases, is removed from transparent and competitive circulation due to flaws in the law.

Especially during wartime, society needs to see how the reforms being proposed to reduce corruption schemes work and how this strengthens the economy.