Tripping investors up. Why construction permits still “impossible” for real estate developers

24-04-2019

One of the world’s most popular tools for analyzing the economy is the construction of new housing. In the United States, there is even a special index recording the number of permits for new construction granted by the Government for 50 consecutive years. In February 2019, they granted 1.3 million of such permits.

We cannot even dream about this. And not only because Ukraine is much smaller. The problem is different. It is the state’s ability to start such a construction. Our statistics on granting construction permits showing that each other investor who is a real estate developer has their request denied just confirms this fact.

For example, in the last few months of last year, 554 document packages were submitted to the State Architectural and Construction Inspection as the agency dealing with permitting procedures for the beginning of construction. However, only 51% (that is 282 projects) obtained permits. For some reason, 72 applications were withdrawn by applicants themselves, and 200 documents were refused.

Residential construction projects obtained the largest number of refusals (75 refusals). Permits for construction of 52 fuel filling stations and gas filling stations were also refused. Another 40 permits were not granted for industrial and commercial construction projects. Kyiv and Lviv regions are the leading regions according to the refusal statistics (58 and 23 respectively). They are closely followed by Kyiv with 20 refused applications.

And we have these statistics despite the simplification of a number of procedures related to construction works, including granting permits. That is, in most cases, an honest investor cannot obtain a permit without going through all “circles of bureaucratic hell” despite the nominal simplification of procedures. But as a rule, “trouble-shooters and related persons” get permits very quickly. That’s why it’s difficult to build a facility for IKEA in Ukraine, but you can build a “monster on the Podil” with no hassles.

A paperwork system or opportunities to manipulate the process

The procedure for granting construction permits is in fact not easy for all parties, but it is the most difficult for investors. Its cost, duration and simplicity affects any serious investment project. It is necessary to build or reconstruct for any facility. Investor expenses can reach 10-15% of the total construction project cost before construction works, and this is only official expenses, which increase multi-fold when dealing with Ukrainian licensing realities due to non-official (in other words, corrupt) “incentives and thanks”.

Additionally, when waiting for obtaining a permit, investors should pay employees and spend their money on filing documents exclusively in Kyiv, because large projects usually imply the construction of high consequence class facilities (CC3), construction permits for which are granted only by the State Architectural and Construction Inspection (DABI) in the capital.

But, it’s not even clear that an investor will receive a permit even having a package of necessary documents. In our country, the procedure for obtaining permits is carried out in such a way that in most cases, there is a subjective factor to grant or refuse involving “manual” influence on decision making.

We analyzed the refusal statistics in obtaining construction permits, in particular, to build high consequence class facilities, and found a number of patterns and, in fact, sad statistics.

In general, all refusals received a total of 1,780 comments, almost half of which (880) were for documents to obtain a residential construction permit. 92.5% of applications received a conclusion on a lack of project documentation, and 65% – on non-compliance with the DSTU “Basic requirements for design and working documents”.

The most numerous comments also include the conclusion on a lack of output data (37.5%), improperly issued or no expert opinion (28.5%), applications that do not meet the required format (24%), etc. Also, 1 residential complex project received comments about the non-compliance of a helicopter landing site on the roof with the requirements.

In addition to statistical observations, our expert analysis of refusals to grant construction permits included practical communication with investors. Sometimes, formal comments such as “design documents do not meet the requirements” are based on the banal absence of the facility address in the project name (although the address is specified separately in the next line of the same document).

But, the cherry on the cake was the fact that all investors, whether they are from any region or from another country, should personally submit documents to the DABI, that is to go to Kyiv. Therefore, any clarifications and updates mean significant time and financial costs.

A special attention should be paid to the comments on project documents. In fact, in accordance with the procedure, all packages of documentation are examined and received some conclusions before being submitted. Conclusions on the project compliance are provided by an expert organization accredited by the state (or rather, by the Ministry of Regional Development). That is, the ministry as a representative of state interests confirms the qualification of this organization and authorizes it to provide expert conclusions.

The cost of such expertise is high. Therefore, most investors who are real estate developers hope that this expertise is a certain guarantee of obtaining a positive expert opinion. However, 1,780 comments and 36% of refusals show a different picture. They show the ineffectiveness of the procedure, under which investors do not have any guarantee on the quality of project documents despite the paid expertise. And this is just one example.

We live in the 21st century. What do we need to change the situation?

Business owners are increasingly rejecting business trips and travels. Video and Skype conferences are a new practice no more. Electronic document circulation not only saves hundreds of hectares of forests and reduces the amount of garbage. It saves time and money. And the circulation of open data increases the effectiveness of control over the activities of state bodies. And electronic administrative services remove the element of direct interaction between a business and an official, significantly reducing corruption risks.

It is a pity that this is not available for granting permits procedures yet. But a highly publicized “Transparent DABI” does not have the necessary functionality being just a fake. We had a chance to learn this through our own experience of working with investors.

That is why BRDO experts together with the Ministry of Regional Development developed a concept of a unified information system in construction activities providing for the creation of an information complex that will unite many unrelated stages and procedures within a single information environment. The relevant working group is already working at the Ministry of Regional Development. The experts finish the development of amendments to the draft law on the introduction of a Register of construction documents, electronic personal accounts of back and front offices, a portal for obtaining open information about the construction industry in general and its licensing system in particular. It is the first time when we got a chance to create a system in construction that will become a real tool for effective interaction.

For example, it is planned to implement the interaction between the expert organization and construction owners within a single information space. And then the expertise process has all the chances to become not a formal line in a cost sheet, but a real tool to prepare for construction works. And this is just the beginning.

I hope that the introduction of such a system will allow to avoid tripping investors up, and we will be able to engage in competition in terms of the number of construction permits granted. Even not with American ratings, but with our previous statistics.

Olena Shuliak, the BRDO Board Member and Construction Sector Head

Source: Livy Bereg

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