“Among the number of legal schemes we also have one where, with the help of what is referred to as “improvement”, the leaseholder can buy the accommodation at the most favourable price. Sometimes it can be even 4-5 times lower than the market price” – says the coordinator of the Public Investigation Center Valerii Bolhan.
Since November VoxUkraine in cooperation with the local media has been holding 12 online-meetings with the communities from different Ukrainian cities concerning important local self-government issues. The ninth meeting – with the Odessa community, supported by the Izbirkom media outlet, on sale and lease of the municipal estate property.
We discussed with the politicians and activists of the city the privatization and leasehold, abuse of rights and necessary actions to be taken to reload these processes.
The participants of the discussion were Oleksii Soboliev, Director of Prozoro.Sales State Enterprise, Valerii Bolhan, coordinator of the Public Investigation Center, Viacheslav Holynskyi, expert of the Civil Society partnership For the Transparant Local Budgets! and Oleh Zviahin, member of the Permanent Committee on Budget and Finance Planning of Odessa City Council. The moderator of discussion was Yuliia Mincheva, leader of VoxUkraine projects.
Please, visit the link to view the discussion record.
In a nutshell. Odessa privatizes less municipal estate property than other big cities and gets less money because of the priority of redemption rights procedure. This right is used to purchase the property through the lease avoiding auction. Privatization was not on the agenda of the City Council, but nearly 1000 of estate property objects are being prepared to be transferred to the private sector by auction this year.
“Everyone knows everything”. The State figured out how to sell, local authorities – not particularly
Government reload in 2018 and change of the State Property Fund management boosted drastically the privatization reform. Privatization and leasehold principles became similar for the state in general as well as for the local authorities, while all the contracts were supposed to be reflected in the Prozzoro. sales system. “Previously some cities loaded these contracts to the web-sites or simply hid them in different departments. Nobody could check them. Now you can” – says Oleksii Soboliev.
He also considers that the local authorities do not use the possibilities of the reform to the full extent. For example, in 2020 the state gained privatization and leasehold income in the amount of nearly 3 billion UAH. Whereas the local authorities received only 1 billion UAH. “It means that the customers are ready to buy, and the state figured out how to sell, while the local authorities – not really.”
Odessa privatizes far less in comparison with other big cities. Thus, last year Lviv gained privatization income in the amount of 140 mln UAH. Kharkiv – 46 mln UAH. Odessa – only 19 mln UAH in 2020.
Why is the budget revenue so low? Oleksii Soboliev states that usually Odessa uses not the auctions to privatize the estate property but the lease with a purchase option. There were 120 of such procedures registered in the Prozorro.sales systems in Odessa last year. For example, there were only 43 capital lease contracts concluded in Kyiv.
What is capital lease “scheme”
There are two ways for the city to transfer the estate property to the private sector. First – place on auction.
An auction should be held with the help of the Prozorro.sales system which cooperates with 40 different marketplaces. The participants come to the auction from 40 different places, and the best bidder gets the lot. Second way – lease with a purchase option. This right can be abused in order to buy an estate property at a lower price.
This is how it works. First the accommodation is let on a lease, the lease holder makes expensive home improvements which are considered to be permanent improvements, then the expert appraisal is conducted and, thus, people privatize the accomodation they leased at the price determined by the real property appraiser.
“This procedure has been preserved in the law with amendments as of August 2020. If the real estate was leased not at auction, it cannot be purchased because the determined price was non-competitive. If the lease was obtained at the auction, it can be purchased at a settled price,” – says Oleksii Soboliev.
He also states that now the local authorities, due to the open data, can evaluate how much extra funds they can obtain, if they place the real estates on transparent auctions without purchase option.
Not only purchase. What about sublease costs?
Valerii Bolhan emphasizes that the Public Investigation Center in Odessa knows about the lease with purchase options and has already published materials on some of the schemes. “You, for sure, cannot find a price per square meter on Derybasivska Str. lower than 1000 USD, whereas there were cases of sale at a price of 250-300 USD. However, the land in the very center of the city, just 300 m from the Mayor’s Office, and the land in Arkadia for building a private house cost one of the known Odessa businessman about 100 USD and 115 USD per square meter respectively.”
In addition to lease with purchase options, there are also a lot of problems connected with the leasehold of the municipal and communal property which is let without any auction at all. That is why often even local counselors do not know that a certain object was let for a lease. For example, fair on Derybasivska Str. was planned to be a temporary event but became a permanent one. “The leaseholders, which at the fair are already considered to be the sub-leaseholders, pay for one pavilion around 30-40 thousand UAH per month, while the city gets 3000 UAH per year.”
Beaches, which assign officially to the municipal budget around 18 mln UAH annually, bring to the leaseholders up to 100 mln UAH.
According to calculations of the Public Investigation Center, the revenue loss of Odessa budget comprises about 50% of its volume annually. Bolhan considers it to be caused, among others, by the diminution of the Communal Property Register and lack of free access to it.
Viacheslav Holynskyi agrees with this statement. According to him, in order to reload privatization and lease processes in Odessa, first of all, it is necessary to make a transparent inventory of the communal property. “Besides, we should definitely privatize and let on lease the communal property only via open bidding.” – he added.
Oleh Zviahin expressed his hope that this year Odessa would privatize more: “This year at the session there were even announced numbers – around 1000 objects which have to be transferred to the private sector by auction. This is a huge sum of money which can be assigned to the city budget. I hope it happens this way.”
Special thanks to the VoxCheck interns Kateryna Sorochynska and Alina Tropynina for their assistance in article drafting.
The event was organized within the Social activity promotion program Join along! sponsored by the US Agency for International Development (USAID) and carried out by Pact in Ukraine. The content of the event is the sole responsibility of Pact and its partners and may not match the opinions of the US Agency for International Development (USAID) or the US government.
The author doesn`t work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations