How the state can stop losing billions to land schemes

Corruption mechanisms designed to receive state- or municipally owned land for residential development are a kind of art. They typically exploit loopholes in the law to privatize land without competition and pay far below market value. 

If the NABU and the SAPO had not uncovered an unlawful scheme to transfer land in Kyiv for residential construction, the state could have missed out on roughly UAH 1 billion worth of housing area. The case is often referred to as the Ministry for Development of Communities and Territories corruption case because, according to investigators, it allegedly involved ex-minister Oleksii Chernyshov. This is a clear example of an “investment scheme,” in which an investor, often selected without a competitive process, receives land from the state or a municipality for development outside an auction, in exchange for a share of apartments in the future building. 

Another common scheme is the “toilet scheme.” Under this model, a small structure is erected on a plot intended for development, often illegally. Current legislation allows owners of structures to buy or lease the land underneath them without competitive bidding. In the absence of mandatory checks on whether such structures were built legally and without limits on the size of plots that can be acquired this way, the state and municipalities again lose substantial budget revenues. A recent example is a Kyiv scheme uncovered by the NABU and the SAPO during Clean City Operation. According to the investigation, it involved the theft of land in Kyiv worth more than UAH 19.5 million, with another nearly UAH 84 million at risk had the scheme not been exposed.

Although these mechanisms have been known for years, legislative initiatives intended to stop them repeatedly stalled in parliament due to a lack of necessary support. In September last year, Members of Parliament registered two new draft laws aimed at eliminating the “investment” and “toilet” schemes. Let’s take a closer look at whether they can deliver if they are ultimately passed.

Public-private partnerships vs. “investment agreement” schemes

To build on state or municipally owned land, a developer first has to obtain that land—either as ownership or a right of use. This can be done only through competitive auctions on Prozorro.Sale.

In housing construction, however, there has been an alternative route: an investment agreement. Land legislation allows state and municipal enterprises, institutions, and organizations to build housing on land that they hold under permanent use rights, while bringing in private investors. Under such agreements, the investor does not pay for the land but commits to transferring a share of the housing built on the plot to the state or community.

This arrangement has a long list of corruption risks:

• the investor does not have to be selected through a competitive process;
• even if a selection process is held, there is no requirement to publish documents or even the agreement itself;
• the agreement may be concluded without approval from a higher authorized body;
• most importantly, the law does not define what share of the completed housing the state or municipality must receive, nor does it set out a clear method for calculating that share;
•  amendments, including reallocating shares, can be made during project implementation.

This loophole was used, for example, in the so-called “apartment case” of the ex-MP Maksym Mykytas. The case concerns an investment agreement under which the National Guard of Ukraine was to receive apartments in a building constructed on its land in Kyiv’s Pecherskyi district. Additional agreements were later signed, under which the National Guard would receive apartments on the outskirts of the city instead. According to investigators, the value of that housing was UAH 81 million lower than the original offer.

Draft Law No. 14038 is intended to counter this scheme. It proposes treating and implementing investment projects as public-private partnerships (PPPs). 

This approach could eliminate most of the risks associated with investment agreements. At a minimum, PPP rules require investors to be selected through competitions. Overall, the preparation process would be more transparent and subject to greater oversight, as it would involve more stages of project development and approvals. 

However, the current version of the draft law still leaves two long-standing issues unresolved: it preserves the ability to amend agreements under the old rules, and it does not regulate the share of housing that must pass to the state or municipality (the owner of the land). These points can—and should—be improved between the first and second readings.

Methodology, verification, and competition vs. “toilet schemes”

The “toilet scheme” exploits a loophole that allows an owner of real estate located on state or municipally owned land to buy or lease that land without competitive bidding. Current legislation does not limit the size of the plot that may be acquired in this way. In other words, the owner of a small structure, say, a public restroom, may claim a plot tens or even hundreds of times larger than the structure itself. At the same time, the legal grounds for acquiring ownership of such a structure are often not thoroughly verified. This creates fertile ground for abuse—from unauthorized construction to fictitious registration of a “property” for one purpose only: to anchor a land claim to it. 

Draft Law No. 14039 proposes a way to address this scheme:

1. The Cabinet of Ministers would approve a special methodology to determine the maximum size of a land plot necessary to maintain a particular real estate. If the plot size requested by the structure’s owner falls within that limit, the owner could buy or lease it directly.
2. If the land plot exceeds the established maximum, it would be divided: the owner would receive only the portion genuinely needed to maintain the facility. Any land above the threshold could be acquired only through a land auction. The structure’s owner would still have a preemptive right to purchase at auction, meaning that if someone bids a higher price, the owner may match that price and buy the plot, even if the owner’s own bid was lower.
3. A separate safeguard is verification of the applicant’s ownership rights to the structure. Land-managing authorities would be required not only to review documents, but also to physically inspect the facility. If there are signs of fictitious property registration or other violations, the authorities would be required to go to court to protect the interests of the state or the community. However, the draft law currently introduces this obligation only for cases where land is transferred without an auction. 

Again, passing this draft law would be a major step toward combating “toilet schemes.” Ideally, it should be refined between the first and second readings to eliminate inconsistencies and ensure transparency in the process of verifying ownership rights to the structure. It would also be advisable to require verification before an auction as well. Preemptive purchase rights should not be granted to those who built something illegally.

These changes should be passed as soon as possible

At this point, there are two strong legislative initiatives that could close loopholes through which the state and municipalities lose billions of hryvnias to land schemes. Neither is perfect. But both can be improved between the first and second readings. They also complement each other, so the best outcome would be to pass both draft laws. And the sooner they are adopted, the sooner we can stop losing money as well as state and municipal land, to these schemes.

This material is funded by the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.