'Cities Can Make Money Themselves'

Land development in Russian cities has become more difficult in the crisis, primarily due to difficulties with financing, both public and through investment. Many of the problems could be solved by competent regulation, said Ilya Ponomarev, managing director the Federal Center for Project Finance (part of Vnesheconombank). One of the goals of this organization is to provide expert advice and methodological assistance to regional and local authorities in identifying effective concepts of land development and methods of extrabudgetary investment.

The Federal Center for Project Finance

Ilya Ponomarev

Problems with the lack of money for land development have traditionally been solved by authorities at all levels in Russia in a proven way: saddling developers with obligations to create communal, social and transport infrastructure. However, such an approach during a crisis could lose many developers who already have problems with money. And it's hard to impose those obligations. The state itself has declared war on administrative barriers in construction. But how else to deal with the deficit of financing for land development?

I have to say that I have a fair amount of skepticism for the idea of reducing administrative barriers as a value in itself. I always use the example of Switzerland. Formally, you only have to go through a small number of procedures and approvals to build something. But it is necessary to obtain the consent of the canton, which can say no, say, just because it doesn't trust the identity of the investor. And that's not a barrier, it's an unscalable wall. The investor cannot initiate a change in the functional purpose of land by building on it. Only a member of the local parliament or municipal assembly can. A project must have indisputable social significance to reach the level of a political decision. Getting permits for such a conversion could take several years. But that is not considered an administrative barrier in any world rankings.

In Russian practice, numerous administrative barriers were the result of a quasi-system of urban planning that formed in the absence of meaningful land development plans, land use and development rules, city zoning or adequate cadastral valuation of land plots and real estate. The authorities today do not have effective tools to ensure equal conditions for the development of sites with varying degrees of investor attractiveness. Let's say, for example, everyone knows that conditional developer Ivanov, who is going to build a facility in the city center based on existing infrastructure, will make 50 rubles, and conditional Petrov, building in an open field on the city's outskirts will make 3 kopecks. That's because Petrov will put in heating and electrical facilities, a kindergarten and a store at his own expense. But officials have interests of their own. They need to develop urban spaces at the lowest possible cost to the budget. And then they include informal administrative levers that turn into the notorious bureaucratic barriers and burdens on construction. And I'm not even taking the criminal component into account. Let's assume that all business expenses are used exclusively for the benefit of the city.

Administrative restrictions in urban development should not exist at the level of fiscal rules and licensing procedures or local requirements, but as a discrete and easily understandable system of legal relations between participants in urban development processes. At the level of legislation, there must be a clear divide, with everything up to the urban development plan subject to public regulation, and everything after that purely professional activity (planning, support for land development projects, calculations, design and the expertise to meet all kinds of regulations and requirements). The project initiator is handed a document with the procedure already approved and all that's left to do is enact it. Except when the investor wants to change these procedures — make the building higher, denser, etc. The he has to hustle.

Under the former planning system, it was stipulated how much space, what year, what size will be built, and what infrastructure capacity and financial resources it requires. It's not like that now. From one extreme Ч total state regulation of the economy Ч we have swung to the other Ч the abolition of any meaningful planning at the macrolevel. But the idea that what is good for business is good for the economy does not always and everywhere hold true. Especially now, during the crisis and acute shortage of budget funds at all levels, and with heavy social commitment. Perhaps the main risk for any major project now is the lack of clear understanding of what the authorities might do. A detailed, publicly accessible development plan is much more valuable to business than a full spectrum of options. With markets shrinking, a confident turtle looks much better than a speculative overperforming hare.

Managers at various levels, from local to federal, should do a thorough analysis and economic modeling of spatial land development. We have to restore vertically integrated design, from the master plan and land planning projects through regulations for the design of specific objects.

Only in the past few years have concepts of integrated development become a priority in Russia. Ideally, a comprehensive approach based on principles of spatial development and economic modeling should be applied at the level of districts, cities, regions Ч and the whole country.

Currently, master plans and spatial planning are in place almost everywhere, but the quality of the documentation in the majority of cases does not hold up to scrutiny. The bases for decision-making are not overseen, and planning is carried out from the particular to the general. For example, if we analyze documents approved in different regions, the total estimated population of Russia in 15-20 years will exceed 200 million people. This is an increase of 30 percent. But, in fact, we now have less than 0.2 percent growth per year. Often growth is planned in economically depressed regions losing population.

In Moscow, there is still no approved master plan.

Yes, and that is because government agencies are taking a maximally responsible attitude toward developing land planning documents, these documents are regarded as real land development management mechanisms, rather than the formal pictures for archiving. That is why the work is long, difficult and expensive. But a ruble spent in the planning stage will save hundreds of thousands in the implementation stage. And what Moscow plans should be an example of administrative documents with the maximum level of substantiation and efficiency.

If we consider the development of a city, Moscow, for example, as a real estate development mega-project, how cost-effective is it?

The city can be regarded as a macrocorporation, and among the main criteria for its success are increasing capitalization and stable earnings. All participants in the project must be rewarded in some form. In the case of a city those are its inhabitants, who receive a higher level of quality of urban environment. In Moscow, there is expensive land and well-developed infrastructure. However, in my opinion, even the capital uses its advantages inefficiently.

In what sense?

Commercial projects often meet with success when the infrastructure is developed at municipal expense, creating more business opportunities. Usually the entrepreneur contributes nothing. That person owned the property and, without doing a thing, suddenly he becomes many times richer. Where does this chance happiness come from? From all the surrounding activities, not his talent or hard work. Why shouldn't the owner of the real estate contribute in the form of tax or some other official form of replenishment of the local treasury Ч within a clear and transparent system and not by making unofficial arrangements with officials.

I have to say that the topic of the socialization of profit from property complexes is timely worldwide. In Australia, for example, the idea of the expropriating the share that a business receives through land development in which it did not take part is regularly discussed.

How does it look in practice?

In some European countries, there is a tax not only on property, but also on the growth of its value. If you own a site that has risen in value as a result of an action of the municipality, it is taken into account for taxation purposes. In Spain, the local Plusvalia tax is charged on the sale of real estate. In Israel, the tax rate was at one time 50 percent of the increase in market value. In Italy, it reaches 30 percent.

I would like to remind you that property makes up about 60 percent of global assets. In Russia, this figure is not even 30 percent, which demonstrates the enormous potential for economic growth with proper administration. Urban areas can make money for their budgets themselves through their own development.