Deputy Khinstein: We will not allow the building of schools and hospitals with investors’ money

Deputy Khinstein: We will not allow the building of schools and hospitals with investors’ money
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Deputy Alexander Khinshtein told about when the second block of amendments to 214-FL will be adopted and what they will be like.

As we have already reported, The RF State Duma Committee on financial market have adopted a draft bill on the second amendment block to FL № 214 on co-funded construction (the first block was adopted last autumn) and will recommend that deputies adopt it after the first reading. Thus the months-long epic of the amendments to FL № 214 is heading into the home stretch.

Deputy Alexander Khinshtein was present at the meeting, and we asked him to tell us which amendments are likely to be written into the draft and when it is to be finally adopted by the Lower Chamber.


— How do you assess the bill draft, on the whole?

— In my opinion, it does not have any revolutionary innovations. Nevertheless, the majority of the novelties proposed are useful and I acknowledge them. It refers to checks and additional requirements, and the compulsory integrated electronic registering of all construction objects (we have spoken of this for a long time), and a number of other items.


— Are there any items that you question, or do not agree with?

— Yes, they are three, and my colleagues agreed with me while discussing them.

The first item is the restriction on developers attracting people’s finance. I agree with the idea that a developer taking money from people must have enough in the till. And it is wrong when a small company with an equity capital of 10,000 rubles attracts a billion. The requirements must be adequate.

The bill draft presumes an alternative. Either a developer is to have their own resources equal to 5% of the construction volume, calculated according to Rosstat’s (Russian Federal State Statistics Service) prices. I support this norm. Or – and here I cannot agree with the bill – if it is a group of companies, it must have 1 bln rubles or more of its own finance.

The thing is that neither developer will show proof of such finances, as they do not in fact have it. So I think this regulation will result in market monopolization and the extinction of small regional companies building one or two houses. So I cannot support this proposal.

One more issue I cannot agree with is expanding the list of targets that people's money may be directed at. For now, the list has been established by law and is exhaustive. A developer may not direct money from co-investors anywhere but towards the construction of the object and the necessary infrastructure included with the object (for example, a boiler facility or heat substation). The draft bill suggests expanding the list and give a developer the right to invest the money in the construction of social and cultural objects – schools, polyclinics, nursery schools, etc. – on the condition that the objects constructed will be assigned municipal ownership.

I do not agree with such an approach, as I do not understand why a co-investor should pay for government authorities. It will result in the increase of the cost of 1 m2, as these additional expenditures will surely be paid by co-investors.

Besides this, it will offer the opportunity to regional local authorities to make developers build such objects. Today it is done by default, outside any legal framework, and a developer has a formal right to refuse. But when the law is adopted he won’t have this right.

We understand the difficult conditions of the budget, and that the state lacks finance for the fulfillment of social commitments, but citizens pay taxes – why should they pay for the construction of schools and nursery schools? It does not fit into any partnership (as the state is trying to present it), and I can hardly imagine a situation whereby citizens will invest in the construction of schools or polyclinics and then get their expenditure refunded. Moreover, the law suggests that the municipal authorities will own the object. If it is owned by the local administration, how can investments be repaid?


— But developers suggest introducing this norm because infrastructure and social object construction is formally an inappropriate use of funds which different sanctions are meant for. In particular, the President of “MORTON” GC, Alexander Ruchiev, has spoken about this more than once. “According to the currently active regulations of 214-FL, the construction of social infrastructure objects, roads, and engineering communications is considered an appropriate use of co-investors’ money”, he reminds us, and continues:

— That is, if we consider 214-FL formally and follow its logics to enhance a developer’s responsibility for inappropriate use of money, these issues become impossible. But we know that it is impossible to get a permit for construction in, say, the Moscow region without it.

— At the sitting of the committee on financial markets, I made clear my apprehensions on the expansion of the list of expenditures. And all deputies present at the sitting agreed with me that it was really wrong, but the regions were lobbying for the regulation, so that they could make developers do this with lawful justification.

And the third norm which I am against is connected with actionable accounts. I’m not against actionable accounts but I think that they will work in only exclusive cases. The thing is that actionable accounts may be set up only if a developer has a credit line for the project, and for now they have very few such credit lines, and mainly they are large developers. It is rather hard to obtain project financing from a bank, so the accounts will work only in exclusive cases.

But the danger is that introducing actionable accounts may result in the banks ceasing the financing of construction, having in mind only a mechanism with actionable accounts. And this will lead to an increase in the price of 1 m2.


— Everybody, even officials, acknowledges this...

— When we had a meeting of the working group headed by the deputy minister of constructionNatalia Antipina, bank representatives (including Sberbank, VTB, and Gazprombank) spoke about this problem. And they agreed that implementing the scheme with actionable accounts will lead to the cost of a square meter growing by 40%, because the bank will have to deposit the money, and then the bank will direct it as credit. The service of two and a half year’s credit: 40%.


— Say something about the first block of amendments in 214-FL, now adopted, concerning insurance. Developers say that it all looks great on paper, but in reality there is no alternative to escrow accounts. Without creating a national re-insurance cover company and expanding insurers, it does not work. Do you agree that there are no alternatives, as the Ministry of Construction is joyfully reporting?

— No, I do not agree. There are alternatives, but they are just not widespread. There are problems with reinsurance cover and I share the developers’ view. It has been said more than once that a national re-insurer is needed on the market.

As far as insurers are concerned, the adopted tightened measures are necessary if insurance is a reality, not a sham.


— Does that mean that it is time to clean the market while the crisis is ongoing?

— Exactly.


— Alright. And how can the draft under discussion, and recommended for the first reading, be changed?

— I think we shall revise it and include a number of necessary innovations.


— For example?

— For example, cancel the restrictions on small business checks, as many developers work now as individual entrepreneurs attracting citizens’ finance. And here we are to define priorities: which is more important – to defend the rights and interests of citizens, or those of businesses? I think the rights and interests of citizens are more important.

Or take the unified data in the USRLE — Unified State Register of Legal Entities. There is no legal requirement to have a unified register of co-investors’ agreements, but we think it is necessary. Rosreestr is ready to support our proposal.

An important thing, already mentioned, is the inappropriate use of funds. For now, we have no idea how to solve the problem.


— But there is a governmental drive to develop and introduce a law establishing legal responsibility for the inappropriate use of co-investors’ funds…

— Yes, there is. It is very difficult to measure… still, we-are trying to solve the problem.


— When will the first reading take place?

— In February.


— And the second?

— I do not think it will be soon. I suppose it will take about two months. The work is to be completed in spring.


— And the last question. If all the proposed amendments are included in the final text of 214-FL, how will it influence the market?

— Ideally, it will result in many unscrupulous developers leaving the market. And this is good, of course.


— And what about prices?

— If we manage to introduce the norms I was speaking about, there won’t be any price rise.