Turning cities’ focus back to land-based finance

Last month, the South African Independent Electoral Commission announced in frustration that it needs USD 22.9 million to collect addresses ahead of a court-mandated deadline, a problem compounded by the fact that most townships don’t have well-marked street names.

Elsewhere, this problem is even worse. For instance, successive generations of leaders have tried — and failed — to name the streets in Mauritania’s capital, Nouakchott. Once a small village, Nouakchott’s population has boomed to nearly a million over the past half-century. But even today, many of the capital’s streets still lack formal names.

Related problems go well beyond postal delivery and pedestrian directions. Street names and addresses are a vital first step for municipal governments to create accurate land registries and to be able to collect property taxes, thereby paying for basic city services. So why do so many cities struggle to put names on roads?

“If I arrive in a shiny vehicle and hand you a number for your house, your response will be: ‘Are you going to evict me? Will you charge me for services I’m not receiving?’” explained Jean du Plessis, a researcher with the Global Land Tool Network, a consortium of land rights experts based at UN-Habitat. “You need to involve the population in the process.”

That’s one of the key takeaways from “Leveraging Land: Land-Based Finance for Local Governments”, a new publication aimed at practitioners. It offers in-depth explanations of instruments that local governments can use to raise municipal funds equitably through land valuation, as well as real-world case studies to back them up.

Since the beginning of this year, the 77 organizations that work under the umbrella of the Global Land Tool Network have been teaching from this reader at global workshops from Montréal to Nairobi, and at weeklong national trainings in Egypt and the Philippines. The experts behind the 241-page work hope to restart an international conversation about how to employ land-based finance instruments successfully in an era of rapid urbanization and amid the growth of intermediate cities lacking administrative capacity.

Traditional tool

Land-based taxes have existed since humans began practicing agriculture and setting aside a crop yield. Celebrated classical economist Adam Smith promoted land-value taxes in his seminal 1776 work, “The Wealth of Nations”. As cities grew in the 19th and 20th centuries, such taxes collected at the national and local level became standard practice in developed economies and led to other ways to raise revenue, such as a city government selling surplus land to private real estate interests.

“Land-based finance has been used effectively but to a limited extent by many towns and cities. The question is, why is it not being used more broadly?”

Jean du Plessis
Researcher, Global Land Tool Network

In the new reader, the authors home in on seven key instruments for financing urban services:

• Recurring taxes on land and buildings
• Betterment charges and special assessments
• Developer exactions
• Land-value increment taxes
• Sale of development rights
• Land leases and sale of public lands
• Transfer taxes and stamp duties

The authors recognize that their topic of interest is nothing new but also that it serves a renewed need.

“We developed these instruments to demonstrate the potential of land-based finance, to be used in new ways,” du Plessis said. “Land-based finance has been used effectively but to a limited extent by many towns and cities. The question is, why is it not being used more broadly?”

The use of this tool has been overwhelmingly concentrated in valuable areas — affluent neighbourhoods and attractive downtowns, in cities with strong property registries. As a result, the poor have often been left out of a system that can produce significant benefits in the provision of basic urban services such as water, sewer, sanitation and paved roads.

“We feel that segments of populations in cities are missed due to lack of services or lack of recognized land rights,” du Plessis said. “The more people are provided with security of tenure, the more they can become part of an inclusive urban development process. Our land-based finance approach is therefore based on the inclusive concept of a continuum of land rights.”

Pre-conditions and models

So what does it take to start demanding that real estate developers also pay to improve sidewalks, streets and parks near their new high-rises, or to structure an auction of public lands to the highest bidder?

According to the reader, there are four pre-conditions: an understanding of local property rights and attitudes, a fiscal cadaster to link properties to taxpayers, sensitivity to the maturity of local real estate markets, and administrative capacity within local government.

Not all of those pre-conditions are easily addressed. “Administrative capacity can be changed if you make the necessary investments,” argues Brigham Young University Professor Lawrence Walters, a land policy expert involved in the new reader. “And land registration systems and the judicial system can be changed much more readily than the culture can.”

That is to say, if there is a culture of corruption and tax evasion in a society that views land as a commodity or communal good, land-based finance instruments face an uphill battle.

There are bright spots, however, and the study offers over 20 case studies from a mix of cities and countries on five continents. From selling development rights in São Paulo to land leases in Hong Kong, the reader offers a wide range of experiences. While some are quite specific — Singapore’s stamp duties, for instance, are tied to the particularities of the city-state’s top-down economic planning — the authors believe there are some universal lessons.

In Cuenca, Ecuador, for example, a medium-sized city has managed to collect as much per capita through a special assessment as much larger cities such as Quito and Guayaquil. Ecuador’s special assessment taxes, known as the Contribución Especial de Mejoras (CEM), have had remarkable success in Cuenca, where neighbourhoods petition city government for road improvements with the expectation that they will pay for them through a CEM.

The result? Some 270 km have been paved in Cuenca, and 1,800 construction contracts, worth USD 106 million, have been executed. Further, only 3 percent of taxpayers are reportedly late making their CEM payments.

Cuenca’s experience is instructive globally “because it shows that you can get people on the ground involved,” Walters said. “We’re trying to put together a discussion of all the major tools in use somewhere, so that they can be adapted to their local context.”

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Photo source:  Bertrand Duperrin  via Flickr/Creative Commons (CC By-NC-ND 2.0). Photo: ©Bertrand Duperrin