Windfall gains often create opportunities for corruption. The big inflow of money increases the opportunities and incentives for kickbacks and bribery as a means to capture new funds. Well-known examples of this phenomenon include disaster relief efforts, resource booms, and humanitarian aid. Yet the concern is not limited to those contexts. Changes in the price and value of land in a given area can also create the opportunity for windfall, and associated corruption risks.
The corruption risks in the land sector and real estate industry have been discussed broadly as pervasive; routine land administration and land grabbing provide ample opportunities for corruption to flourish where land governance is weak. Yet these discussions sometimes overlook another sort of corruptogenic windfall in land markets, one that is often hiding in plain sight: the effects of gentrification of urban centers. Experiences from cities around the world exemplify three common ways in which these windfall gains from gentrification provide opportunity for corruption.
- Rental markets: In cities with “hot” rental markets, the growing value of land (and the units sitting on top of that land) not only drives tenant insecurity and evictions, but also increases incentives to cut corners to take advantage of rising rents, both by quasi-legal means as well as illegal ones, like bribery and kickbacks. Tenants and landlords have asymmetric access to information, and landlords are particularly well-positioned to capture windfall gains from rising market values. Tenants are not only more susceptible to abusive housing practices such as fraudulent eviction, but they also bear the brunt of the corruption that may be used to achieve such ends. In New York, Manhattan District Attorney Cyrus Vance has explicitly noted that “[t]he same surging demand that drives the pace of development inspires the taking of shortcuts and, as we have seen, so often the taking of bribes,” recognizing government integrity as a “potential casualt[y] of the current housing boom.”
- Development and land use planning: As land values rise, developers, and the commercial sector generally, can capitalize on this cycle through new economic development. This makes the development of valuable land competitive and time-sensitive. Zoning and regulation in rapidly growing areas thus involve decisions “where the most money is at stake.” Developers’ need for government services such as building permits and rezoning of land generates opportunities for corruption, which become embedded into land-use regulatory systems. Abuse can occur where government officials exercise their discretionary powers to increase the value of their own properties, or succumb to bribery by investors and developers, who might offer money or personal services. Illustrative examples include Spain, where a housing construction boom bred “unprecedented opportunities for corruption,” and Turkey, where construction spurred by gentrification has been seen as a core unifying factor for corruption.
- Construction permits and safety: As developers face a time crunch, both inspectors and builders have incentives to engage in bribery schemes. Construction firms may feel pressure to cut corners, and inspectors accordingly wield much power, as their sign-offs can “make or break” the success of a given project. Moreover, pressures in rapidly developing areas might spur the enactment of policies counterproductive to addressing the increased risks of corruption. For example, in 2015, the New York City Buildings Department cut down the number of required inspectors in response to surging demand for construction. Additionally, when the “market is hot,” and government agencies like the Buildings Department continue to handle only limited numbers of permits a day, time-pressured developers rely more heavily on ethically questionable expediters to obtain building and construction permits. These middlemen—also used in the zoning context—are hired to navigate and speed the approval process; they may offer legitimate services in dealing with a complicated process, but they have also been identified as a source of corruption in both developed and developing countries.
In addition to general awareness of these sorts of risks, there are a few things that policymakers can do to curb corruption in this context:
- New York City’s recent experiences suggest that in order to combat corruption arising from a hot rental market, anticorruption advocates can look to measures of traditional tenant insecurity to assess corruption risk. Attorneys that traditionally focus on tenant protection, such as Brooklyn Legal Services, look to bribery indictments to examine enforcement of tenant protection laws, or whether the tenants the organization represents were affected by pay-to-play culture. Similarly, prosecutors can use cross-cutting enforcement of tenant protection laws to root out corruption. For instance, anticorruption efforts could either propose or draw from audits of rent-regulated and vacancy statuses of buildings. In cities like New York, developers and landlords seeking to renovate their buildings—especially if rent-regulated— must report vacancy status and implement tenant protection plans. In such cities, owners may lie on their forms in order to avoid implementing tenant protection plans (since a vacant apartment obviates the need for such a plan) or in order to renovate the unit and bring it out of regulation. By requiring applicable departments to cross-check renovation applications with currently-registered statuses, cities could implement small-scale and low-cost measures to prevent false reports from moving forward. Additionally, the measures could put the city on notice of two potential corruption risks: first, an inconsistent vacancy filing might suggest a landlord seeks to begin construction without following tenant protection guidelines and thus cut corners; second, bypassing the rules at one stage might require additional corroboration to maintain that status in the future. Even if no actual further wrongdoing results, the city should identify situations involving off-the-books records or misreporting aimed at bypassing tenant protections and direct anticorruption efforts accordingly.
- In order to reduce the risks of zoning and construction corruption, cities can take a number of both general and targeted steps. For one, they should increase transparency of development and construction permit issuances, for example by charting the process online and establishing formal complaint mechanisms. Another option could be to charge a particular agency with investigatory powers solely over construction and zoning. Additionally, government actors should not treat infractions merely as civil ethics violations where stricter, criminal enforcement is warranted. As for specific measures, cities should resist the instinct to cut down inspections or audits due to the rapid pace of development, instead noting that such pace also increases the need for oversight. Another way to improve the inspections process is to require at least two separate inspectors at sites and to rotate staff among different parts of cities. They should also consider measures to reduce the role of expediters, such as requiring them to be licensed or file with the city. Expediters’ influence can also be limited by policies reducing the number of jobs an expediter can file at one time, and to assign plan approvals (as well as inspections) randomly, in order to reduce the influence of repeat relationships.
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great piece! I have also looked into this issue of urban land and corruption a bit and it struck me how this shapes up to be something like a local real resource curse challenge. See http://ssrn.com/abstract=2689236 for an elaboration of the related risk factors, empirical evidence etc. Direct corruption issues aside I think there is a broader question about who should gain how from the rapid appreciation of urban land value. And getting a handle on the values at stake would be a very good first step into this conversation. But even this basic data is often not available or at least never features prominently in debates about urban development. E..g. what is the total value gain for the stock of property in central Nairobi, downtown Chicago, inner Istanbul? And who has captured what kind of share? Would love to see more research on this. Any pointers (or offers for a joint research project) most welcome. All the best,
Thank you for writing and sharing this article. Corruption in the building and construction industry truly needs to be tackled, reversed, and undone. But first, we need to learn how it’s happening. Your article explains a lot. Very helpful information.
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