Key message 3 – The city authority has the right to capture land value appreciation created by urbanisation.
Urban land value capture offers an ethical and efficient source of revenue for cities to fund themselves. Increased land values in a city are not generated primarily by the actions of the landowner, but by increased demand for land that comes from population growth and rising incomes, as well as nearby public investments. In Accra, for example, properties serviced with tarred roads and concrete drains are 1.8 times more valuable that those without (Awuah et al., 2013). Harnessing the value of land enables a virtuous cycle where appreciating urban land and property values finance the public investments which make the city more productive.
There are two key mechanisms for land-value capture: the taxation of private ownership, and public ownership of land.
Taxation of private ownership
Annual taxation of urban land values has long been proposed by economists as an efficient and fair form of revenue generation. Taxing land is efficient because the supply of land is fixed, so taxation does not reduce the amount produced. It is fair because the rising value of land is primarily created by public investment and population growth, rather than the private actions of the owner.
Although only taxing land is the most efficient option, often governments tax the value of properties built on land as well. This is administratively easier and allows policymakers to progressively tax individuals with higher value property at a higher rate. In Lagos, successive land and property tax reforms have increased state revenues from taxes five-fold to over $1 billion in 2011 (Paice, 2015). Strong resistance to these taxes from property owners has been overcome in part by combining taxation with visible improvements in local infrastructure.
One-time fees offer an additional source of underutilised land value capture for many developing cities. These are levied based on increases in land values that result from the granting of planning permissions or nearby public investments. In Bogota, up to half of the city’s arterial road network has been funded by ‘betterment’ levies charged to land owners on the basis of rising land values (Uribe, 2009). Similarly, development fees can be levied on property developers in exchange for public infrastructure investments to be made or planning permissions to be granted. This pre-agreement is likely to make them politically easier to collect. In Latin America, simply converting a piece of land from being officially ‘rural’ to ‘urban’ increases its value five-fold (Smolka, 2013) – cities can negotiate fees for such conversions to enable a win-win for the city and the landowner.
Public ownership of land
Governments can also capture increases in the value of urban land by owning land in the city themselves. In Hong Kong, where almost all land is government-owned and leased to private holders, charging lease fee payments and land rents (as well as property taxes) has enabled the government to recoup 80% of annual infrastructure investments through land-related revenues (Hong, 1996).
However, for government land ownership to work well, transparent institutions are needed to manage land lease allocation. Without these, the result can be inefficient allocation of land based on political patronage (Moyo et al., 2015). Furthermore, in contexts where land is not currently owned by the government, it can be highly politically challenging for the government to establish ownership.
Where governments do need to acquire land, this is best facilitated through land markets. However, voluntary transactions are not always able to provide governments with the particular land needed for vital infrastructure projects such as roads and railways. In many cities, the announcement of an infrastructure project actually fuels investors to speculatively invest in the land the government is about to acquire, driving up land prices to unaffordable levels. Governments have to pay for the increased land value that their own planned investments create. Payment to landowners at the market value of their land and property before redevelopment projects are announced prevents this. It also enables adequate compensation to be paid to those tenants and businesses displaced by acquisition who are not landowners.
Singapore adopted an even more uncompromising attitude to landowner compensation in the 1970s to facilitate large-scale urban transformation with limited public funding. By fixing future compensation payments at the value of land in 1973, Prime Minister Lee Kuan Yew paved the way for extensive land acquisition, and enabled the government to capture massive land value appreciation as the city developed.
“I saw no reason why private landowners should profit from an increase in land value brought about by economic development and the infrastructure paid for with public funds.” -Singapore Prime Minister Lee Kuan Yew, 2000
Where compulsory land acquisition is too politically or financially costly, land readjustment can provide a more attractive way to increase efficiency of land use and transfer some ownership of land to governments. Under readjustment schemes, governments pool together privately-held land plots and create a new land use plan for the whole area. These plans include new infrastructure provided by the government, which increases the value of each surrounding plot. Because land values rise due to better planning and infrastructure provision, private landowners are willing to give up some of their land to the government. Land value capture happens through the exchange of land itself. Governments are able to acquire selected, strategic land parcels which can either be used for the planned infrastructure investments, or leased or sold to recover the costs of delivering infrastructure. In South Korea, landowners agreed to release up to half of their land under land readjustment schemes in the 1940s. These enabled public investments in infrastructure and public spaces to be largely self- financing (Lozano-Gracia et al., 2013).
Such schemes require effective institutional structures. Angola offers a striking example of two diverging experiences with land readjustment based on different institutional structures. In one successful scheme, the local government that implemented the project directly received the land payments required to finance this. However, in a second scheme, the municipal authority was not able to collect land payments itself. The latter scheme was therefore underfunded, and ultimately led to corruption as wealthy landowners gained control over the replotting process, and used it simply to increase their landholdings.