Harnessing the growth of Land and Property values for Urban Infrastructure and services
ODELEYE AYODEJI PAUL
A term paper on Planning Practices in Europe (BENVGEPA), The Bartlett School of Planning, University College London
Submitted 18 January 2013
Introduction
Urban growth is the reflectionof the state of an economyat both national and regional levels. Urbanisation and globalisation have led to increased demand for additional infrastructure and municipal facilities/services. This is essential to forestall congestion and subsequent inefficiencies that might arise. It is therefore pertinent for city administrators or government to secure additional revenues to meet these urban growth needs. The importance of this is informed by the slow growth of revenues while expenditure continues to increase rapidly. Land has however been seen as a safe hedge against inflation. This could be illustrated by the property sector’s ability to quickly recover from the 2008 global melt down. Land and properties in cities like New York, London and Beijing have experienced continuous growth in their values. This essay therefore examines how various methods have been adopted to harness the growth in land and property values for urban infrastructure and services.
Urban infrastructure and services
Defining urban infrastructure and services as well as measuring their condition is a very technical challenge (Petersen, 1988). This is due to the broad and dynamic nature of these phenomena. However, a look at a nation’s income account with respect to spending on fixed capital investment would present a simple explanation. Urban infrastructure and services include as shown in figure 1, the provision of roads, rails, public transport, water, sewerage and drainage, communication network, energy (electricity, fuel), jails or correctional facilities, schools, security or defence (Alm, 2011; Cao and Zhao, 2011; Oates, 1972, 1993, 1999). This list is not exhaustive as urban infrastructure and services are provided based on the needs of a nation (an example is the present need for facilities against terrorism in countries like USA, UK, and Spain). These amenities are called public goods because they are utilised by more than one consumer at the same time, without diminishing the utility derived by any other consumer regardless of who supplied it (Needham, 2006; Adams et al). Several literatures have discussed the meansof providing these basic facilities and services which are crucial to the survival of urban dwellers as well as national development (Matthew 1967; Neutze, 1997). The sector or authority (public or private sector, and central government or local authority) that provides them is determined by the fiscal policy, economic and planning system of an area (D’Arcy and Keogh, 2002; Cao and Zhao, 2011).
Figure 1: illustrating the capital and current expenditure of Local Authorities in United Kingdom for 2011 - 2012.
Source: Fiscal policies and Cities. Besussi E. (2012)
General concept of taxation
The fiscal policy employed in a country determines the structure by which funds are derived for infrastructure and service provision. Taxation is one of these instruments employed by city administrators or government to amass revenue for collective spending on infrastructural and service provision (Bird, 1992). Taxes are levied on income, property or land, as well as excise duty. There are other alternatives like printing of money, direct provision, borrowing from public and charging of fees on public goods to secure funds (Besussi, 2012; Devereux, 1995; Olken and Singal, 2009; Fritscher et al 2010). The objectives of these tax policies however, go beyond the provision of infrastructure and services. They entail among other things, stimulation of economic growth, redistribution of resources and wealth for efficient and equitable use, stabilization of economy (due to the elastic nature of tax to changes in income level), re-pricing of resources (Bird, 1970). While aiming at its goal, taxes are believed to be constituted on principles such as equity, simplicity, economy of collection and administration, neutrality, revenue stability and revenue adequacy (Feldstein, 1975; Snodgrass, 1974; Oates, 1972; Stanlake, 1989). Tax base as relates to income, expenditure or wealth and tax rates are premised on these principles. A vital decision on the incidence of tax becomes imperative and this determines the security of the tax,as the chances of tax evasion are minimized (Netzer, 1973)
Figure 2: showing the revenue sources of 3 countries Italy, Netherlands and United Kingdom.
property accounts for 100% in the United Kingdom.
Source: Fiscal policies and Cities. Besussi E. (2012)
Property taxation
The most important ingredient for property taxation is the value concept of land and property. This refers to the various notions attached to land or property value in the market (Millington, 1982). Consequently, decisions on its purchase, sale and taxation are based on value principle. It has been argued that local property taxes (which currently accounts for major source of revenue for governments in advanced countries like the United Kingdom – see figure 2) are levied ad valorem (meaning - according to value), with net annual value, capital value, market value or site-value being the basis of assessment (Zang et al., 2003; Gao, 2005; Harvey, 2000; Oni, 2011). In United Kingdom for example, land tax is levied on the market value of property as supplied by the routine valuation exercise(Lichfield and Connellan, 1997). The fact that taxes are levied on value makes it possible for government revenues to grow with local economy as property values reflect the state of the economy. This is because land and property values are determined and influenced by physical, economic, political, social, as well as institutional factors (Richmond, 1975; Johnson, Davis and Shapiro, 2003; Millington, 1982). Furthermore, land value increases based on the efforts and expenditures of the community as a whole. For instance, the provision of infrastructure such as roads, energy and water services will increase the values of land which lie adjacent to such services(Lichfield and Connellan, 1997). Likewise, land and property ownership, use and development play a key role in determining land values. In practice, property appraisers concern themselves with giving an opinion on the net annual value, capital value, market value or site value of a land or property. These opinions are based on the value of land or property while in use or in exchange.
Value capture for urban infrastructure and services
In order toappropriate the value of property for urban infrastructure and services, the below-mentioned are suggested.
It has beenstated that the economic system in a nation which produces the fiscal policy determineshow its tax system will run and this has a direct impact onproperty value and the availability of resources for urban infrastructure and services. Hence, in a capitalist nation wheremarket is allowed to determine the distribution of wealth and resources, market actors will only invest on infrastructure and services that will return optimum profits. This then leaves a gap in the provision of needed public goods. Also, a welfare economy devolves the provision of these facilities on government. By this, administrative cost is increased. Thus, it will reduce capital expenditure so as to make available funds for current expenditure thereby limiting infrastructure and service provision. Invariably, in order to succeed in making the best of property value growth for the provision of basic infrastructure and services, government should be seen to be playing a managerial role in urban areas by allowing market forces to operate and intervenewhen market failure is imminent (Tiesdell & Allmendinger, 2005). This has been the case in China since its 1978 economic reform which is reported to have brought about a transitional economy, characterized by the coexistence of planned and market economies (Bian and Logan, 1996; Nee, 1989; Logan, 2008).
Similarly, changes in land ownership or tenural system would go a long wayin driving value of property for urban infrastructure and services. Examples are: the United Kingdom moved from feudal land ownership to freehold and leasehold interests (RTPI, 1985; Home, 2009); China moved from strict state land ownership to land leasing (Logan, 2008). These two nations have since increased the chances of transactions and investmentsincluding exchange or development on land. Prior to that, conversion of land to cash remained a difficult task as a result of variety of factors which include complexity of ownership. With these changes, it became easier to levy tax on profits gained (economic rent) and other values captured for owning, developing or selling land. With animproved land ownership system, tax incidence could be focused on the owner instead of users of land. This will guarantee the collection of funds as tax evasion becomes somewhat difficult (Netzer, 1973). An additional means of capitalising on a proper or confirmed tenure is by merging all levies, rates and taxes in property to one. A case in point is Lagos State of Nigeria where the Land Use Charge Law was promulgated to replace tenement rate, property tax and other
Land-based taxes (Land Use Charge Law, 2001). This merger will have a compounding effect as the tax base is mainly on the capital value of land. A single bulky fund has since been discovered to be far better than piece-meal rates which are, as a matter of fact, difficult to administer. Some other states in Nigeria have started to follow-suite.
Also, in China, the main source of fiscal revenues was reported to have been converted from budgetary allocation and local earmarked taxes to land transfer fees. This was made possible by the decentralisation of fiscal power. This gives room for local authorities to effectively meet local needs as well as create big development corporations. According to Cao and Zhao (2011), before 1978, China’s infrastructure funding was typically characterized as centrally planned; that the whole fiscal system was characterized by the centralized revenue collection and fiscal transfers. They went further to state that all taxes and profits were collected by local governments, remitted to the central government and then transferred back to the provinces and municipalities according to their expenditure needs approved by the central power. This step gave birth to China’s Urban Development and Investment Company (UDIC) which has played crucial roles in the provision of infrastructure and services since its establishment. This reinforces a strong case for fiscal federalism which is the devolution of powers and responsibilities for decision-making including legislative powersin a central authority coupled with an increased financial and fiscal autonomy at the sub-central levels of government (Bird, 1999).
Related to fiscal decentralisation is the call for governments at all levels to relinquish its managerial position and become entrepreneurial in nature. This means that they should be involved in the operation of the market. That is, charge users for the infrastructure that they provide. A good example of this entrepreneurial act is the public-private-partnership. This was practised in Nigeria for the construction of a 70km highway from Lekki to Epe in Lagos State. On completion, a toll was charged on road users (Lekki Concession Company, 2013). Other advantages to government relate to the ownership rights on land or properties that enable government to receive annual rents and subsequently trade for capital returns subsequently.
Levies can be placed on anyone who is ready to be liable for any form of developments which will yield a return or an enjoyable value in the future. This levy will be paid after development permission has been granted. The rationale behind this is to secure a contribution for community on the benefits that the development is deriving or will derive from the increase in an area’s land value, resulting from such development or other available developments (Lichfield and Connellan, 2000). This levy is called community infrastructure levy in the United Kingdom. Akin to this is the agreement between a developer and local authority to contribute to infrastructural development a specified sum in accordance with Section 106 of the Planning obligation Act. Under this section, the use to which the funds contributed will be put can be stated.
Consideration should be given to the conversion of some brownfields or Greenfield, or creation of development zones so as to take advantage of improved property value. For instance, Wang et al (2011) argued that in China, city government captured a substantial rent and gained a windfall from farmland conversion. This was not only because the conversion costs (land compensation plus resettlement subsidy) are lower than the land use right conveyance fee that city governments can receive, but as a result of the fact that more taxable properties can be created in association with farmland conversion and development.
Conclusion
Urban financing is currently a topical issue among city administrators owing to the dwindling revenue accruing on urban facilities. This has impeded the adequate provision of infrastructure and urban services especially at the local level. For good understanding, an attempt was made at defining urban infrastructure and services. Their broad and dynamic features make it difficult for an express definition as the needs and challenges faced by countries differ. However, they should be considered the major items on which urban funds are expended and a look at government institution’s accounts will reveal this. The provider, depending on the economic or market system, could be the public or private. But the general agreement is that these amenities are very crucial for the survival of urban dwellers and general economic development.
Property taxation should be a crucial means to be employed to secure funds for infrastructure and service provision. This is because it is based on the value (ad valorem) of assets levied, usuallyon current market value. For anyone to harness the growth in property value, a good understanding of the value concept of property is required. Depending on the outcome expected, the capital value, market value or site value of land and property are key concepts to be understood.
For infrastructural and service provision to be made possible through a proper assessment and use of the growth in property value, a combination of capital or market and welfare or planned system will go a long way in driving property value to boost urban infrastructure and services. Likewise, a systematic property or land ownership system will aid the liquidity of land or property which will afford the opportunity to levy a charge or tax on the income generated or transferred. Also, it is important to decentralise fiscal power through fiscal federalism. Tied to this is the need for government to start being more entrepreneurial than managerial. Development levy and contributions to the community through corporate social responsibility functions would also be a welcome development.
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