Linc-pfr ValueCapture 6.13 #12

8/13/2019 Linc-pfr ValueCapture 6.13 #12

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Implementing Value Capturein Latin America

Policies and Tools for Urban Development

Policy Focus Report Lincoln Institute of Land Policy

M A R T I M O . S M O L K A


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Implementing Value Capture in Latin America:Policies and Tools for Urban DevelopmentMartim O. Smolka

Policy Focus Report Series

The policy focus report series is published by the Lincoln Institute of Land Policy to address

timely public policy issues relating to land use, land markets, and property taxation. Each report

is designed to bridge the gap between theory and practice by combining research findings,

case studies, and contributions from scholars in a variety of academic disciplines, and from

professional practitioners, local officials, and citizens in diverse communities.

About This Report

Value capture policies and tools are undeniably arousing new interest and becoming more

acceptable in Latin America. Initiatives to understand and experiment with the basic economic

principles behind value capture have grown in both number and creativity, and value capture

tools are being used in combination with traditional practices in many cases. The reasons forits growing popularity are manifold: regional economic stabilization and fiscal decentralization;

more progressive strategies for urban planning and management; re-democratization, increased

social awareness, and demands for equitable public policy responses; changing attitudes

toward privatization and public-private partnerships; the influence of multilateral agencies;

and pragmatic considerations to capture land value increments to raise funds for local

community needs.

Based on more than 15 years of education and research programs sponsored by the Lincoln

Institute of Land Policy, this report provides a comprehensive review of the principles of value

capture and its antecedents in Latin America and elsewhere around the world. It describes the

primary tools and instruments used by jurisdictions to mobilize land value increments (unearned

income or plusvalas) for the benefit of the community at large. It concludes with an assessmentof key lessons to be learned from the many examples and case studies presented throughout

the discussion, and offers specific recommendations to help public officials, landowners, and

residents better understand how they could apply value capture in their own communities.

Copyright 2013 by Lincoln Institute of Land Policy

All rights reserved.

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Cambridge, MA 02138-3400 USA

Phone: 617-661-3016 or 800-526-3873

Fax: 617-661-7235 or 800-526-3944

Email: [email protected]

Web: www.lincolninst.edu

ISBN 978-1-55844-284-9

Policy Focus Report/Code PF035

O N T H E C O V E R :

In Curitiba, Brazil, thetaller building on the leftgraphically illustrates thearea above the basic FARof about six stories forwhich building rights werecharged. The taller buildinon the right also paid foradditional building rights,but did not dramatizethat fact in its design. GISLENE PEREIRA


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S M O L K A I M P L E M E N T I N G V A L U E C A P T U R E I N L A T I N A M E R I C A 1

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Contents

2 Executive Summary

4 Chapter 1: Latin American Urbanization and the Case for Value Capture

5 Unearned Income from Publicly Promoted Urbanization

5 Multiplier Effects of Land Use Changes

7 Windfalls from Investments in Urban Infrastructure

8 The Principles of Value Capture

10 The Growing Popularity of Value Capture Policies and Tools

13 Chapter 2: International and Latin American Experiences

13 Historical Precedents

14 Enabling Legislation

18 Applications to Public Lands

20 Selected Value Capture Tools

21 Chapter 3: The Property Tax and Betterment Contributions

21 The Proper ty Tax

23 Betterment Contributions

32 Chapter 4: Exactions and Charges for Building Rights

32 Exactions

35 Charge for Building Rights

37 The Use of OODC in Brazil

42 Transfer of Development Rights

45 Chapter 5: Value Capture Tools for Large Urban Redevelopment Projects

46 Privatizing Public Land for Redevelopment: Puerto Madero, Buenos Aires

47 Public Acquisition of Private Land: Nuevo Usme, Bogot

49 Land Readjustment

53 Auctioning Additional Building Rights: CEPACs in Brazil

58 Chapter 6: Conclusions and Recommendations

59 Key Findings and Lessons

62 Recommendations

64 References

68 Acknowledgments

69 About the Author

69 About the Lincoln Institute of Land Policy


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2 P O L I C Y F O C U S R E P O R T L I N C O L N I N S T I T U T E O F L A N D P O L I C Y

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Executive Summary

by actions other than the landowners,such as public investments in infrastructureor administrative changes in land use normsand regulations. The region has a long his-tory with value capture policies, and manycountries, notably Brazil and Colombia,have passed explicit legislation calling forconsideration of value capture principles.Nevertheless, national legislation has beenfound to be neither necessary nor sufficientto allow some jurisdictions to use thispotentially powerful financing mechanismto implement a variety of tools adaptedto their local needs.

Urbanization in Latin Americais associated with strong pressurefor the supply of serviced land,resulting in significant changes

in land values that are distributed unequallyamong landowners and other stakeholders.Conventional fiscal policies and instrumentslargely neglect how the costs of providingurban infrastructure and services are social-ized, and how their benefits are privatized.

The notion of value capture is to mobi-lize for the benefit of the community at largesome or all of the land value increments(unearned income orplusvalas) generated

Faria Lima Avenue in

So Paulo, Brazil, has

been redeveloped with

funds obtained from

additional building rights

auctioned in the stock

market through special

bonds (CEPACs).

ALV


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This discussion of the concept of valuecapture explains its justification and increasingpopularity, provides a brief review of its ante-

cedents in Latin America and elsewhere aroundthe world, and illustrates its many forms andlongstanding presence in the urban planningagenda. The reasons for its growing popularityare manifold: regional economic stabilizationand fiscal decentralization; more progressivestrategies for urban planning and management;re-democratization, increased social awareness,and demands for equitable public policy responses;changing attitudes toward privatization andpublic-private partnerships; the influence of

multilateral agencies; and pragmatic consider-ations to capture land value increments toraise funds for local community needs. The report examines three categories ofvoluntary and compulsory applications of toolsaffecting existing, new, or changing land usesin single or multiple property developmentprojects: property taxation and bettermentcontributions; exactions and other direct nego-tiations for charges for building rights or forthe transfer of development rights; and large-

scale approaches such as development of publicland through privatization or acquisition, landreadjustment, and public auctions of bondsfor purchasing building rights. Performance indicators of revenues, otherprivate investments generated by value capture,and the effects of higher transaction trans-parency and corruption mitigation in the landmarket vary significantly among comparable juris-dictions applying the same tool. Although inmost places revenues are still low, the applica-tions of betterment contributions in Bogotand CEPACs in So Paulo have generatedrevenues in excess of a billion dollars for thosecities. At the same time, the broader dissemi-nation of these and other instruments is oftenblocked by powerful stakeholders (notablylandowners) and byopinion leaders (includingacademics) from both sides of the ideologicalspectrum due to a lack of understanding of the

theoretical rationale and basic operational issuesinvolved in the implementation of value capturepolicies and tools.

Accordingly, this review of value capturein Latin America recommends steps that canbe taken in three spheres: learning from variedexperiences with the implementation of valuecapture policies and tools; increasing knowledgeabout the complex nature of varied value cap-ture approaches; and promoting greater under-standing among public officials and citizensabout how value capture tools can be usedto benefit their communities.

Learn from Implementation Experiences:

While value capture charges in theory areneutral regarding land use and should fall entirelyon landowners, in practice successful implemen-tation demands management skills to deal withmany complex factors and diverse stakeholders.In addition it requires proper understanding ofland market conditions, comprehensive propertymonitoring systems, a fluid dialogue amongfiscal, planning, and judicial entities, and thepolitical resolve of local government leaders.

Increase Knowledge about Theory and

Practice: Conducting research, documentingand disseminating implementation experiences,and providing evidence about how value cap-ture policies work on the ground are essentialto overcome the disjunction between rhetoricand practice and to change the behavior andattitudes of public officials, landowners, andthe community at large.

Promote Greater Public Understanding

and Participation:Land value incrementsare captured more successfully from landownersand other stakeholders who perceive they arereceiving greater benefits from a public inter-vention than those accruing from businessas usual. Furthermore, value capture tools aremore likely to succeed when used to solve alocally recognized problem.


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C H A P T E R 1

Latin American Urbanizationand the Case for Value Capture

ALV

ARO

URIBE

Urbanization in Latin Americanhas produced a formidable setof urban problems ranging fromvast, often illegally occupied areas

with minimal urban services to rampant dis-regard for building and land use regulationsin wealthier neighborhoods in some cities.This state of affairs cannot be attributedexclusively to broader macroeconomicfactors that contribute to urban poverty,but also to how the provision of urbaninfrastructure and services is financed, howland uses are managed, and how propertyrights are determined.

Rapid urbanization over the last centuryled to the emergence of a vigorous landmarket, and windfalls resulting largely from

public interventions reinforccd strong land-owning interests. When fiscal and humanresources are relatively scarce, the provisionof urban infrastructure and services in thoseareas that can support higher densities createssignificant increases in land value. Theselinkages between services and prices allowample room for practices such as active landspeculation (Jaramillo 1994), clientelism,and other kinds of influence (includingcorruption) between public and privateinterests. This is why land ownership is suchan important issue in the urban land policyagenda, and why the spatial allocation ofpublic investment is so vulnerable to abuseand favoritism by well-positioned stake-holders (Smolka 2011).

High-density

development in

the Barra da

Tijuca area of Rio

de Janeiro was

built in the 1970s

and 1980s as

envisioned in the

master plan of

1969.


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BOX 1.1

Barra da Tijuca, Rio de Janeiro

The Barra da Tijuca area, covering 82 square kilometers (km)

of developable land, provided an opportunity for extension

of the citys high-income South Zone. It constituted 10 percent

of the city of Rio de Janeiro, and half of Baixada de Jacarepagua,

an area of 160 km including a 20 km beachfront and 122.50 km

of developable land.

Expensive public transit lines were announced in 1967 to open

this area for expansion in response to pressure from developers

for more attractive, buildable areas. In 1969 the city hired Lucio

Costa, the urban planner responsible for Brasilias master plan in

the 1950s, and his proposal for this neighborhood was approvedin the same year. Direct access through tunnels and an elevated

expressway built in 1974, together with the master plan, were

associated with an increase in land value of 1,900 percent from

1972 to 1975. In the same period, land prices in most other

high-valued areas of Rio appreciated about 435 percent (Vetter,

Massena, and Rodrgues 1979).

The plans land uses and building standards were implemented

in 1976 (Rezende 1982; 2005). The process was accompanied

by frenetic land acquisitions leading to the control of almost 30

percent of the new developable area by only three landowners.

By 1980 one developer had accumulated more than 6 km2of

land, or about 8 percent of the whole area. Some of these

acquisitions are still under legal investigation.

UNEARNED INCOME FROMPUBL IC LY PROMOTE DURBANIZATION

The expectation that land may be designatedfor future urban uses or redevelopment canproduce significant land price hikes, evenbefore any public investments actually begin.The opening of the Barra da Tijuca neigh-borhood of Rio de Janeiro in the 1970s illus-trates the impact of selective investment onland value increments (box 1.1). Over and above the unearned incomeaccrued to a privileged few, which couldotherwise be used to fund public investments,

unaccounted-for social costs often resultfrom biased public decision making. Thepolitical economy of Latin American urban-ization offers many examples of question-able (inefficient, unequal, unsustainable)public decisions regarding the spatial alloca-tion of investments in urban infrastructureand services and the use of arbitrary landuse norms and regulations. It is not hardto see how the prospect of accruing wind-falls from such public interventions may

induce complicity between landownersand regulators.

For example, no plans have been imple-mented around the petrochemical complexin Itabora, near Rio de Janeiro, to capturepart of the enormous increment in landvalue generated by extensive public invest-ment that could help finance much-neededurban infrastructure (box 1.2). Moreover, aneffective urban planning and financing policyhas not yet been proposed to prevent thegrowth of informal settlements amidst abooming real estate market fueled by highconcentrations of public and private invest-ment (Salandia 2012).MULT IPL IER E FFECTS OFL AN D U S E C H AN G ESThe stakes are high when it comes to theland value increments resulting from public

Proposed Master Plan of Barra da Tijuca by Lucio Costa, 1969

SOURCE:ORIGINALPLAN

FROMTHEMUNICIPALARCHIVEOFRIO

DEJANEIRO


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BOX 1.2

Itabora Petrochemical Complex, Rio de Janeiro

As a consequence of the discovery and exploitation of thepre-salt layer of oil reserves off the coast of Rio de Janeiro,in 2006 Brazilian Petrobras announced the construction of a petro-

chemical complex on the east side of the metropolitan region in

the municipality of Itabora (population of 218,000 in 2010). Work

started in 2008, and in 2009 Petrobras announced the expansion

of the original project doubling the capacity of the refinery that

is to become operational in 2015. The Petrochemical Complex

Rio project (COMPERJ) occupies an area of 5,400 hectares, and

investments of over US$21 billion are expected to generate up

to 150,000 jobs (Petrobras 2013).

The complex, located near the end of Rios new beltway, the Arco

Metropolitano, has so far stimulated 160 new businesses; com-

mercial and office spaces are now sold at US$7,000/m2for a

property gain of 40 percent in 2009 alone. A plot of unserviced

land in a subdivision that previously sold for about US$14/m2has

quadrupled in price to US$55/m2

. At the same time, slums arenow rampant in this otherwise high-end real estate market where,

according to the Regional Council of Realtors of the State of Rio

de Janeiro, properties have appreciated over 70 percent from

2009 to 2012. There is little evidence, however, that Itabora is

developing a financial strategy to capture this increased value

and implement plans for a pleasant, sustainable, and socially

equitable urban environment.

intervention, whether in large complexdevelopments such as Itabora or in smallerareas. The so-called urban multiplierthe

ratio of the per square meter price of land

designated for urban uses to its pre-existingrural (agricultural) use value at the urbanfringeis typically over 4:1.

In Quito, Ecuador, the urban multiplierwas estimated at five times the value of non-urbanized land in the Amagasi Inca neigh-borhood (Barcia and Ortiz 1996). Compar-ing average or median values per squaremeter of property transactions over 10,000m2 with those of plots from 250 to 600 m2for zones in the urban fringe of Rio deJaneiro, a statistically robust multiplier ofsix was found over the period from 1968 to1984 (Smolka 1994). More recently, Vetter,

Massena, and Vetter (2011) used surveydata for Rios West Zone to find a 4.29multiplier. Data collected globally by Angeland Mayo (1996) ratifies this order ofmagnitude for land value increments. The local provision of investments inurban infrastructure and services elicitsthree types of land use change (land useconversion; higher densities, footprints, orother building norms; and zoning regulations)that constitute important sources of windfallsfor well-placed landowners. Allowing forhigher densities (floor area ratios or FARs)or changing zoning from residential to com-mercial uses generates handsome increments,albeit usually lower (in relative terms) com-pared to rural to urban land use conversionswhere the base value is low (table 1.1). Reli-able data on the effects of changing normson land prices are difficult to obtain, andfew studies are available.

Bank transactions on changes in landuse from residential to commercial in Colo-nia San Benito in San Salvador, El Salvador,reviewed by real estate assessor GustavoSagastume, suggested a land value appre-ciation of 108 percent, from US$196 toUS$407/m2in 2004. Similarly, informationdrawn from a developers data bank onproperty transactions in Bogot suggestedchanges ranging from 59 to 151 percent,

TABLE 1.1

Effects of Administrative Land Use Changes on Land Prices

(Stylized Facts)

Type of LandUse Change

Pricebefore Change

(US$/m2)Increment

(%)

Priceafter Change

(US$/m2)

Windfallon 5,000 m2

(US$)

Rural to UrbanConversion

2 400 10 40,000

Building Norms 100 80 180 400,000

ZoningRegulations

200 100 400 1,000,000

Source: Prepared by the author.


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depending on the neighborhood (BorreroOchoa 2007). The same source shows landvalue changes ranging from 80 to 100

percent when converting single-story homesinto residential buildings of five or six stories,and additional increments of 40 percentfor eight-to-twelve-story buildings.

WINDFALLS FROMINVESTMENTS IN URBANINFRASTRUCTUREA comprehensive study conducted in threemajor cities of Brazil (Brasilia, Curitiba,and Recife) revealed significant differences

in land value increments for plots at differ-ent locations and distances from the urbancenter, according to the types of servicesprovided (Serra, Dowall, and da Motta2005). For example, the increased valueper square meter of an inner ring plot fromsupplying water, pavement, or sewerage ismuch higher than that of plots in the outerring. The differences vary with the combi-nation of services available (table 1.2). Inall cells, except for the provision of sewer-

age in the middle and outer rings, the landvalue increment exceeds the cost of provid-ing the service. The exceptions are becausethe lower density in the outer rings allowsindividuals to install alternative seweragefacilities more easily than to access watersupplies or build roads.

The investment cost to provide servicesis much lower than the resulting land value

TABLE 1.2

Land Price Increments (US$/m2) Related to Plot Location in Brazilian Municipalities,2001

Increment forAdditional Services

Distance to Central Business District Investment Costof Service Provision

for 1000 mof Usable Area

510 km(inner ring)

1520 km(middle ring)

2530 km(outer ring)

+ Water 11.10 5.10 3.20 1.02

+ Pavement 9.10 4.80 3.40 2.58

+ Sewerage 8.50 1.80 0.30 3.03

Source: Adapted from Serra, Dowall, and da Motta (2005).

increment, supporting Donald Shoups(1994, 236) poignant question: Why is itso difficult to fund public infrastructure that

increases the value of serviced land by morethan the cost of the infrastructure itself?Given Latin Americas chronically insuffi-cient supply of serviced land, high levels ofurban poverty, and the lag between the taxbase and social needs, the land value incre-ment could provide a substantial source offunding to mitigate these chronic problems,rather than provide substantial windfallsto private landowners. For example, in areas predominantly

occupied by the urban poor, such as theWest Zone of Rio de Janeiro, fully servicedland was priced at US$145/m2in 2011compared to formal undeveloped landsold at US$34/m2(Vetter, Massena, andVetter 2011). Similar values have beenfound in the Global Urban Indicatorsdatabase for 13 cities with over 500,000inhabitants in different countries (UN-Habitat 2008).

However, the cost of fully servicing land

intended for low-cost housing developmentsin compliance with urban codes rangesfrom US$10 to US$35/m2, depending ontopographical conditions, quality of the in-frastructure, and scale of the project. Theseprices and costs demonstrate the potentialfor the use of land value increments to fundpublic investments even in the lower endof the land market (Bouillon 2012).


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THE PR INC IPLES OFVALUE C APTUREValue capture refers to the recovery by the

public of the land value increments (unearnedincome orplusvalas) generated by actionsother than the landowners direct investments(figure 1.1). Although all such incrementsare essentially unearned income, value cap-ture policies focus primarily on the incre-ment generated by public investments andadministrative actions, such as grantingpermissions for the development of specificland uses and densities. The objective is todraw on publicly generated land value in-

crements to enable local administrations toimprove the performance of land use man-agement and to fund urban infrastructureand service provision.

The notion is that benefits provided bygovernments to private landowners shouldbe shared fairly among all residents. Further-

more, the principle that no citizen shouldaccumulate wealth that does not result fromhis own efforts, known as unjustified en-richment with no cause (enriquecimiento sinjusta causa), is prevalent in most Latin Ameri-can constitutions (Rabello de Castro 2012).

A typical value capture application wouldhave the government recover only that por-tion of land value increases created by itsdirect interventions. A broader applicationwould have the government recover any

land value increase from actions other thanthose of the landownerfor example, thoseresulting from the direct impact of marketforces associated with a general increase in

FIGURE 1.1

Components of Urban Land Value

Value captured by the former landowner

Former landowners effort Actions of other private agents

Changes in building rights

Public works investments

Landowners effort

Overall land value increments

Land value increments other than the landowners

Land value increments from public actions

Land value increments from public investments

A

a b c d

B C D

Source: Adapted from Fur tado, Biassotto, and Maleronka (2012).


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urban population or from the indirectimpacts on land values from the use of sub-sidies for housing and urbanization services.

In Chile such subsidies resulted in landvalues increasing 316 percent from 1994to 2004, ultimately absorbing 84 percent ofthe increase from the governments adjust-ments in the vouchers to keep up with risinghousing prices (Brain and Sabatini 2006).

Other more geographically limitedexamples may relate to the legitimacy ofwindfalls resulting from proximity to newlydiscovered archeological sites or from dra-matic changes in a neighborhood, such as

new celebrity residents or retailers, thatmake it more fashionable and thus morevaluable for others in the area. In all thesecases the property owners did nothing direct-ly to enhance their land values. Thus, all orpart of the increased value should be sharedwith the public (Brown and Smolka 1997). This report focuses on land value changesresulting from direct government actionsor community efforts. Accordingly, valuecapture is the process by which some of the

land value increments attributed to govern-ment or community effort are mobilized,either through their conversion into publicrevenues as taxes, fees, betterment contribu-tions, and other fiscal means, or through theprovision of on-site land improvements thatbenefit the community. The reference to in-crements in value rather than in land priceindicates that the increment or appreciationis often assessed according to estimated valuesrather than realized market prices. In a fewcases, such as CEPACs in Brazil, the landvalue increment is revealed in market trans-actions through public auctions.

The working definition of value captureencompasses three important components.First, it refers exclusively to increments inthe value of the land. Thus, when assessingproperty appreciation, the productivity gainsor changes in values associated with the

value of the buildings are not to be chargedor captured.

Second, different legal frameworks may

interpret how community effort generatesland value increments in various ways, overand above any explicit public interventionin the form of a financial investment or anadministrative action applied to land uses.Land readjustment schemes, for instance,may be promoted by a nonpublic entitywith the resulting land value incrementshared by the participants according tocriteria established in advance.

Third, the term mobilization of the landvalue incrementis proposed rather than publicappropriation. The latter term refers to theconversion of land value increments result-ing from a community effort into taxes, fees,and the like to be spent on services and pub-lic investments. However, the communityat large can benefit more directly when theprocess is applied to a set of landownerswho are both contributors to and benefi-ciaries of the land value increment, as inthe case of large-scale urban operations.

Although the general rule is that actionsby entities other than the landowner, pri-marily the public sector or broader societalchanges, affect most land value increases,certain actions taken directly by privatedevelopers may enhance the value of theirland. A common yet fallacious allegationof privately generated land value incrementis made when a private agent develops ahigh-end gated community in a low-pricedarea, since this new project will dramaticallyenhance the value of the developed plots.An argument can be made that the capacityto create unanticipated externalities thatcan be internalized in each plot should beappropriated in part by the investor ordeveloper as a legitimate gain, just as cer-tain gains from mergers or other actionsare earned by business investors. However,some of the accrued land value increments


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are not intrinsic to the development itself,but result from conditions already foundin the city.

In the case of two identical gated com-munities, the one located in a city facingstrong competition from similar develop-ments would likely generate much lowerland value increments than the other onelocated where no similar alternatives haveyet been offered. Thus, a significant compo-nent of the willingness to pay for attributesof the gated community (e.g., location,amenities) corresponds to the willingnessto pay for attributes found in other parcels

in the city, just as the value of a single plotis determined according to its differentialattributes compared to other plots. In otherwords, the value of the internalized exter-nalities is affected by the gated communitysoverall value in the city as a whole.

THE GROWING POPULAR ITYOF VALUE CAPTURE POL IC IESAND TOOLSValue capture legislation or applications can

be found in local jurisdictions in most LatinAmerican countries, even when no nationallegislation exists. Several factors account forthis growing popularity of value capture aspart of the urban planners toolbox.

Decentralization

The trend toward fiscal decentralizationa process accompanied by restraints ontraditional revenue transfers together withgreater fiscal autonomy and more respon-sibility for service provisionencouragesmunicipalities to expand their own statutorysources of revenue. Many administrationsare placing higher importance on local salestaxes and other fees, while a few are lookingat means to improve the performance of theproperty tax (De Cesare 2012). Given thewidespread unpopularity of this tax, how-ever, some jurisdictions view value capture

as an attractive alternative. Even smallmunicipalities in the Brazilian state ofParan, which are losing population and

consequently their share of transfers fromthe state or federal level, have resorted tobetterment contributions as a complemen-tary source of revenue (Pereira 2012).

Urban Planning and Management

The shift of emphasis from comprehensiveplanning to city management over the lastfew decades has created an environmentmore receptive to the application of instru-ments based on negotiation and relaxation

of existing norms (Vainer 2000). Local plan-ning officials find greater flexibility in toolsthat tend to be applied on a project or sitebasis as opposed to traditional, citywidefiscal instruments.

This trend has been coupled with thegrowing presence of private investors eagerto promote specific land development proj-ects. While developers would always prefernot to be charged extra fees, they are oftenwilling to surrender a share of the gains

from additional building rights, as in variouslinkage programs and urban operations inBrazil. Some practitioners, especially criticsof comprehensive urban planning, find valuecapture tools useful as a strategy to makelarge-scale urban development more viable,or as a guarantee of the sustainability ofindividual projects. This view has shapedrecent urban development throughout theregion, and in So Paulo in particular.

Redemocratization and

Increasing Social Awareness

Redemocratization in many Latin Ameri-can countries has raised the level of popularparticipation, increased the politicization ofsocial inequalities (the so-called social debtaccumulated from the former authoritarianand dictatorial regimes), and challengedgovernments to address the roots of these


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inequities. Social demands in turn put pres-sure on local officials for increased publicspending. Many value capture initiativesare associated with, and motivated by, themobilization of new and more flexible

funds to finance special social programs.In the land policy realm, value capture

has been associated with many constitutionaland legislative reforms that redefine prop-erty rights, obligations (often embodying thesocial function of property and the right tohousing, or more generally the right to thecity), and the ability of public administra-tions to redistribute the benefits and costsof urbanization. These ideas contradictthe pervasive and traditional mode of state

intervention in Latin America, typified bythe phrase socialization of costs andprivatization of benefits.

Neoliberal Agendas and Privatization

The notion that the beneficiaries of a pub-licly provided benefit (potential free riders)should compensate society is easily acceptedby proponents of mainstream economics

as adhering to marginal principles of priceefficiency. The dissemination and influenceof the so-called neoliberal agenda hasparadoxically helped reduce ideologicalresistance to value capture.

Tolerance of free riders is certainly nota neo-liberal idea. In 1974 a mayor of theProvidence Commune ratified by GeneralAugusto Pinochets dictatorship in Chile(the epitome of laissez-faire practices inLatin America) argued publicly that valuecapture was indispensable to urban plan-ning proposals. In this high-income area,a charge was proposed on landownersbenefiting from the construction of a newavenue (named 11 of September, honoringthe date of the military coup). The proposalwas later blocked by the finance minister,but the construction of a subway line underthe avenue had required some expropria-tions that were compensated well belowthe appreciation values anticipated by thelandowners, thus indirectly benefiting thecommunity in any case (Cceres andSabatini 2002).

MINISTRYO

FTHECITIES,BRASILIA

Many citizensparticipated in Brazils

third Conference of

the Cities in 2007.


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Privatization, in turn, has set the stagefor the development of more flexiblepublic interventions, public-private part-

nerships, and direct negotiations over landuses and regulations. Significant examplesare the release of public land into the pri-vate land market and better coordinationbetween real estate and public sectorinterests to promote new areas for urbandevelopment.

Influence of Multilateral Agencies

Value capture ideas have been promoted bymultilateral agencies stressing user fees and

cost recovery of public investments as goodpractices. For example, explicit concernswith value capture can be found in theVancouver Declaration (UN-Habitat 1976),which includes Recommendation D3.b:

The unearned increment resulting from the

rise in land values resulting from change in

use of land, from public investment or decision,

or due to general growth of the community

must be subject to appropriate recapture by

public bodies (the community), unless thesituation calls for other additional measures

such as new patterns of ownership, the

general acquisition of land by public bodies.

More recentlyUN-Habitat has organizedconferences to understand how value cap-ture is practiced in different regions andhas made more use of value capture tools(Sietchiping 2011). The World Bank alsohas commissioned papers on alternative

tools for financing infrastructure (Blackburnand Dowall 1991) and on ways to unlockland values to finance urban infrastructure

(Peterson 2009). The Inter-AmericanDevelopment Bank organized a seminarin January 2013 to identify what is beingdone in Latin America and the need forfurther research on ways it could adoptvalue capture tools in their funding prac-tices in the region.

Pragmatic Considerations

With the macroeconomic stabilization ofmost economies in the region, the dramatic

reduction of chronic inflation gave trans-parency to windfalls otherwise disguised asnonoperational real estate gains. In highlyinflationary regimes land value incrementsare often embedded in mark-ups reflectingexpectations of price increases. Opportun-ism is another motivation behind someattempts by public officials to implementvalue capture policies, since the value thatis captured can be directed to funds or proj-ects not covered by regular taxes and other

own revenues, thus leveraging the local au-thoritys discretionary expenditure capacity.

Value capture often emerges as a prag-matic substitute for the poor performancerecord of property tax collections and otherinstruments. This option is especially attrac-tive when, due to active political opposition,a local administration finds it cannot increaseits own fiscal revenues, let alone carry outinvestment plans for social programs.


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C H A P T E R 2

International and Latin AmericanExperiences

Value capture policies and toolsare by no means limited to LatinAmerica. A long trajectory ofinternational experiences has dem-

onstrated that defraying at least part of thecost of urbanization by using the land valueincrement created in the process is feasibleand practical (Hagman and Misczynski 1978;Smolka and Furtado 2001; Vejarano 2007;Peterson 2009; Muoz Gielen 2010; Alterman

2012; Ingram and Hong 2012; Walters 2012;Furtado and Acosta 2013).

H IS TO R IC AL PR EC ED EN TSThe use of valorization to construct newroads and maintain aqueducts has beendocumented as early as the Roman Empire,

but it probably existed before then since it isbased on the understanding that if you getbenefits, you should pay for them (Villamil2000). Arguments calling for fees to be im-posed on landowners benefiting from sometype of public investment (roads, bridges,and the like) can be found in Portugal andSpain in the 1500s, and their applicationin Latin America has been traced back to1607 in Mexico (Reyes 1980).

England used valorization around theyear 1650 to build canals along the Leaand Thames Rivers, and in 1801 the Houseof Lords authorized a betterment levy forurban development purposes. France beganto use valorization in 1672 to build parks,roads, and bridges, and a special type of

The Bridge of the

Commons was built

in 1809 in Bogot,

Colombia, using a

form of betterment

contribution.

KAMILOKARDONA/WIKIMEDIACOMMONS


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valorization was also used after World War Ito reconstruct the country. In Italy it wasused as early as the seventeenth century to

enlarge parks and to make improvements inthe city of Florence (Reyes 1980).

Elsewhere around the world, Japan reliedextensively on land readjustment instrumentsto promote urbanization following WorldWar II, and these tools are also applied inSouth Korea and Finland (Hong and Need-ham 2007). Taiwan has had an explicit taxon land value increments since the timesof Dr. Sun Yat-Sen, the founding father ofChinas republic, inspired by his Equalization

of Land Rights principles. Leasing systemson public lands capture value through regu-lar contract adjustments in Hong Kong andstill play an important role in various citiesin the Netherlands, especially Rotterdam.

Gains associated with rights provided inpartial or comprehensive plans have beenused to fund new urbanized areas in manyEuropean countries, such as Englands rightto tax the increase in value caused by therezoning of land and Frances Plafond Lgalde Densit,whereby charges were levied forbuilding rights over and above a certainbaseline. In Spain, municipalities capturepart of the value increase in urban exten-sion areas by requiring landowners to cedebetween 5 and 15 percent of the servicedbuilding plots to the municipality. In addi-tion, landowners must provide the landneeded for infrastructure, pay the relatedcosts for service provision, and pay theoverhead costs and a profit margin(Muoz Gielen 2010).

Since the 1970s, about 25 percent ofjurisdictions in the United States haveimposed impact fees on developers to fundthe provisions of infrastructure improvementspaid for by the community (Lawhon 2003).In Florida, for example, over US$2 billionwas collected in fiscal years 20052006,with the fees accounting for more than

5 percent of the revenues in 48 counties.In the states large counties with over onemillion inhabitants, such as Orange County,

these fees accounted for 28 percent oflocal revenues (Burge 2010). Notwithstanding growing concerns withlack of access to serviced land by the urbanpoor, the underlying principle of payingfor urbanization costs using the associatedland value increment has not been widelyadopted in most parts of the third world.Strong market-based countries like theUnited States and Canada have actuallybeen more active in recovering the unearned

income resulting from land rents than coun-tries south of the U.S. border, although ina less explicit form (Smolka and Amborski2007).

ENABL IN G LEG IS LAT IONThe most comprehensive and systematicexamples of value capture legislation inLatin America are found in Colombias Law388 of 1997 (Ley 388 de 1997) and BrazilsStatute of the City of 2001 (Estatuto da Cidade).

Although both resulted from a long periodof trial and error with other legislation, theydiffer significantly. The Colombian processhas been markedly top down, whereas inBrazil social mobilization associated withthe urban reform movement played a sig-nificant role in the post-redemocratizationreform of the Constitution in 1988 andother initiatives.

Colombias Law 388, in Article 73,introduces the notion that public actionsthat improve urban land uses, includingthe associated air space, give the public theright to participate in the resulting landvalue increments (plusvalas). The laws Article74 specifies the sources of these benefits asthe conversion of rural land to urban uses,changes in zoning and density, and the rateof land occupation. Article 79 states thatlocal or district councils may share from


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30 to 50 percent of theplusvalas. The lawincludes other provisions relating to valuecapture, such as permitting the public auctionof idle land to be used for social housingafter proper notification of the owners; theright of the public to have the first option tobuy the land; the public acquisition of landat prices listed before the announcementof the project; and the enabling of landreadjustment in partial plans.

Brazils 2001 statute incorporates manyprinciples relevant to value capture thatwere established previously in Article 182of the 1988 Constitution. They includethe social function of property as reflectedin the application of progressive propertytaxation on vacant land; the separation ofbuilding rights from land ownership rights;new tools like the Consortia for UrbanOperations that allow special treatment forrecognized stakeholders (owners, residents,users, and private investors) to redeveloplarge areas; the right of first option tomunicipal governments to acquire land; andthe use of transfer of development rights.

In regard to administrative actions,such as charges on development rights, theColombian law has had more influence onsubsequent legislation in other countries ofthe region than the Brazilian statute, whichcontemplates a broader scope and calls forcapturing up to 100 percent of the land val-ue increment. This difference is likely due tothe language and imprint of Spanish legisla-tion in Colombia, whereas Brazil was moreinfluenced by the French precedent.

Several other countries have passednational legislation enhancing the powerof governments to mobilize land value in-crements. Uruguays 2008 Law (OrdenamientoTerritorial y Desarrollo Sostenible)establishesthe principle of equitable distributionamong public and private actors of chargesand benefits from the urbanization process,including the capture of values generatedin land use planning and development. ItsArticle 46 contains an explicit value captureprovision authorizing municipalities to sharein the higher land value increments result-ing from their interventions.

Varied types ofbuildings illustrate

changing land uses

over time in Rambla

Mahatma Gandhi,

Montevideo,

Uruguay.

MARTIMO.SMOLKA


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The instrument, referred to as a returnon valorization, is set at a minimum of15 percent of the increment resulting frompublic actions. This charge on the full addi-tional property value represents an ingeniousway to bypass the difficulties of calculatingthe land value appreciation resulting frompublic actions since the 15 percent figureis an estimate of the average share of landvalue in the final price of the property.

The municipality of Montevideo hasbeen applying an instrument referred to ascompensatory price since 2001, thus evenbefore the national act was passed. It charges10 percent on the value of the entire prop-erty or up to 10 percent when developmentsare in strategic areas or are part of specialplans. In 2011 the city collected only US$3.8million from this source, about 2.5 percentof its total investment budget of aboutUS$150 million. However, some new devel-opments, such as FORUM in the Puertodel Buceo area and a new shopping center(Shopping Nuevo Centro), are expectedto generate about US$5 million each.

The smaller municipality of Maldonadoin the state of Punta de Este, Uruguay, bycontrast, has collected US$4.5 million, ormore than 11 percent of its US$40 millionworth of investments (Mendive 2013).

Ecuadors 2010 COOTAD (CdigoOrgnico de Organizacin Territorial, Autonoma

y Descentralizacin) established a 10 percenttax on land value increments when propertiesare transferred, a deduction ofplusvalasinexpropriations for social housing and regu-larization projects, and an explicit recogni-tion of illicit enrichment with no just cause.

Argentina has had an ongoing congres-sional debate over national legislation,but Buenos Aires and other municipalities,including Crdoba, Moreno, Morn, Rosario,San Fernando, Trenque Lauquen, andVenado Tuerto, already have concrete anddistinct value capture experiences. Ordinance3808 of 2011 in Tranque Lauquen, one ofthe 135 small municipalities in the provinceof Buenos Aires, calls for 12 percent of theplots in new subdivisions at the urban fringeto be transferred to the government for

Citizens support a

congressional debate

over the promulga-

tion of new land

development laws

for the Province

of Buenos Aires,

Argentina.

EDUARDO

REESE


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social housing. These areas are over andabove the regular obligatory cessions ofland for preservation, streets, public facilities,

and the like. The fee transfer has been ap-plied to many requests for rezoning (affectingFAR increases from .8 to 1.2 and minimumlot size reductions from 600 to 300 m2) gen-erating for the municipality a sizeable num-ber of plots to be used for social programs.

A progressive Law on Fair Access toHabitat for the Province of Buenos Aires,approved in late 2012, required the contri-bution of at least 10 percent of the landvalue increment generated by large urban

developments occupying more than 5,000m2; a 50 percent increase in the propertytax on vacant land; a special contributionon plots benefiting from zoning changes;and opportunities to readjust public landfor social housing programs.

In general, across all countries in theregion and at different times, national orlocal legislation can be found to includeprovisions for some form of value capture.A 1940 decree in Honduras, for example,

allowed for property owners to pay a thirdof the cost of paving projects on streets thatbordered their properties. In 1976, anotherdecree explicitly authorized the CentralDistrict (Tegucigalpa) to collect bettermentcontributions. This provision was extendedin 1984 to the municipality of San PedroSula, and in 1987 to all municipalities(Kehew 2002). Costa Ricas Urban PlanningLaw No. 4240 of 1969 allowed for better-ment contributions, and it was later broad-ened in the reform of 1972. NicaraguasMunicipal Arbitration Plan of 1988 alsoanticipated use of a betterment contribution.

In the emblematic case of Guatemala,Article 132 in the 1956 Constitution estab-lished that property owners who benefitedfromplusvalasas a result of public workswere obligated to contribute an amountin proportion to their benefits. This stipu-

lation was to be regulated by the Law onthe Plusvalas Tax and Improvements Fees,which also had language regarding the

social character of the benefits accruing toproperty owners. As with similar initiativesin the region, the project was blocked bystrong opposition from landowners andothers who characterized it as socialist.

Venezuela, in its 1999 reform of theBolivarian Constitution, included the pos-sibility for municipalities to charge specialcontributions for land value increments re-sulting from changes in land use or density.The municipality of Baruta included in its

zoning ordinances for the development ofLa Naya-Las Manitas and UrbanizacinLas Mercedes a charge of 5 percent ofplusvalas;between 2002 and 2010, US$9.4million was collected from properties inthat area (Monserrat Guzman 2010).

Other countries have had varyingdegrees of success in fully establishingand enforcing their value capture legisla-tion. In Mexico, Article 115 of the 1982reform of the constitution allows munici-

palities to collect additional fees (as definedby the states) on certain actions associatedwith land development (e.g., subdivisionsor consolidations), and on improvementsthat change the value of properties. Fiscallegislation in seven states refers to this toolas a tax onplusvalas,although in essenceit is a betterment contribution that hasnot been fully implemented countrywide(Perl Cohen and Zamorano Ruiz 2001). Local officials often allege their hands aretied and they avoid taking action, even whenthey actually are permitted to apply manyvalue capture instruments. This situationresonates throughout the region where prin-ciples (sometimes in explicit value captureparlance) established administratively or bylaw are essentially ignored in practice, or atbest are implemented partially or selectivelyin a few jurisdictions.


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APPL ICAT IONSTO PU B L IC L AN D SThe disparity between principle and practice

is illustrated by the challenges surroundingthe acquisition, retention, and dispositionof public lands. Each step in the process isheavily regulated, often with an explicit valuecapture rationale, in virtually all jurisdictionsin the region, though only a few places have aspecific policy tool in place. Public authoritiesacquire land relying on eminent domain,expropriations, direct purchases, or anothermeans. Each approach has some concern re-garding the just price, usually as prescribed

by law but often equated to the currentcommercial price (Rabello de Castro 2006).

Public Acquisition of Land

The recently enacted Decree 9050 ofJune 15, 2012 in Venezuela seeks to deter-mine the just price of properties in casesof emergency expropriations for housingand settlements. Article 2 establishes thatthe just price is to be based on the valueof the propertys most recent acquisition.

If that occurred within the same year, thebase value would be the previous registeredtransaction. Article 3 states that the valuewould be updated according to the averageprice indexes and nominal interest ratesdefined by the central bank. Most impor-tant, it adds that in no case may the cal-culation of the just price consider anyinfluence or impact generated by plannedpublic or private investments in the imme-diate area, nor the expected returns derivedfrom uses established by urban land usenorms and regulations. It also establishesthat the just price cannot consider thecurrent market value.

Colombia is one of the few countrieswhere an explicit tool has been designedto address the calculation of public landacquisition prices: the Project Announce-ment (Anuncio del Proyecto) included in Law

388 of 1997. Under this powerful provisionthe commercial value (for compensatorypurposes) cannot include the increment

attributed to the planned project itself. Inpractice this condition freezes the acquisitionland price to its level prior to the announce-ment of the project, and therefore is anexpedient instrument to capture the landvalue increment that otherwise would accrueto the landowner, or to reduce the land costthat the local administration would pay forits own urban development projects.

For example, the city of Bogot managedto acquire 62 hectares of land for the Nuevo

Usme project in 2000 at about US$8.5/m2and in 2010 about 80 hectares at US$3.5/m2on average, when the typical commercialvalue of similar land sold by pirate subdi-viders was rarely below US$20/m2(Pinilla2013). One of the largest landowners in theproject area stated in his appeal against theadministrative expropriation that his landwas worth US$50/m2. In fact, the land wasacquired at below US$2.50/m2in 2000.

Land Banking

It is generally understood that the stockof public land should be used diligentlyand strategically according to socioeconomicand urban development priorities. Landbanking is one way to acquire large tracts tobe held for relatively long periods of time tobetter control the use of the land, to preventspeculation, and through their ultimate saleor lease to capture for the community anyincrease in land value resulting from publicor market actions. Public officials frustratedwith land market regulations are oftenseduced by this idea, but its effective imple-mentation in Latin America has been limitedfor several reasons: lack of resources; highershort-term priorities for scarce public funds;thorny legal procedures for acquiring land;the local influence of strong private land-owning interests; the disruptive impacts


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of high inflation on land prices; and poormanagement practices.

Again, although it is an almost univer-sally approved urban policy, only a fewLatin American countries have applied landbanking effectively. Mexico has used thisapproach most systematically through itsReservas Territorialesprogram (Brito 1998).In perhaps the most interesting application,the municipality of Aguascalientes man-aged a successful program to prevent theestablishment of informal settlements dur-ing the 1980s and 1990s. The administra-tion acquired land through expropriationand other negotiations to provide an alter-native to informal occupations while atthe same time imposing sanctions on sub-divisions offered by pirate developers(Jimnez Huerta 2013). The program wasdiscontinued, however, when an opposingpolitical party took over the administration.

In general, land banking has a convolut-ed history in Latin America, since publiclyowned assets are easily disposed of by theclientelistic practices of politicians, givenaway for questionable projects, or invadedby low-income families who find it easier

(and more secure) to occupy public thanprivate lands.

Land Leasing

A significant amount of public land is dis-posed under leasing concessions to privateusers who pay a fee for the right to occupy

the land for a given time period, often inperpetuity. This type of lease is widely usedin the region, especially in coastal areas.Residents in the Copacabana beach neigh-borhood in Rio de Janeiro, for instance,technically do not own their properties, justthe right to use and transfer them. Fees forthe right of use tend to be set at symboliclevels and collection is often ignored.However, when land is transferred, a fee(referred to as a laudemio) is charged up to5 percent of the transacted value.

As in the case of land banking, there islittle experience with land leasing as a valuecapture tool to promote urban developmentin the region. A notable case is the autono-mous fiscal and administrative district ofthe historic center of Havana, Cuba, whichis under the control of the Office of theHistorian. Through an operative corporation,

Many sections of

Brazils coastal land,

as in Copacabana

Beach in Rio deJaneiro, are publicly

owned and leased

to private users.

CLAUDIO

ACIOLY


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Cia Habaguanex, the office restores buildingsto rent, lease, or sell, and also sells specialservices. A revolving fund, created by the

lease payments, tax revenues, and interna-tional donations for historic preservation,supplements the 5 percent tax collected onrevenues from businesses operating in reha-bilitated buildings in the district.

On a somewhat smaller scale the munici-pality of San Fernando near Buenos Airescreated a joint public-private entity that isowned 51 percent by the municipality and49 percent by CACEL (the ArgentineanChamber of Light Boat Manufacturers).

Through a 20-year lease, it administers theconcession of a commercial marine park onpublic riverfront land covering about 5 km2.Besides participating in the companys prof-its, the municipality receives CACELs an-nual lease payment and other regular localtaxes and fees that generated about US$4million in revenues over the last six years.Half of these funds have been used tofinance social housing units and the upgrad-ing of low-income neighborhoods and the

other half to invest in park improvementsand public access along the river bank.

SELECTED VALUE CAPTURE TOOLSOver and above the rather eratic applica-tion of otherwise ubiquitous institutionalprovisions affecting public land manage-ment, jurisdictions in most countries havedevised tools to capture some land valueincrement resulting from a public interven-tion. The variety of issues addressed undermany institutional circumstances oftenresults in a local interpretation being givento the tools, which makes an objectiveassessment of their use very difficult.

This report focuses on selected toolsthat meet the following criteria: innovativeand original; most relevant to the urbanproblem being addressed; representative

of multiple jurisdictions; consistent in theapplication of core principles over time; andeffective in terms of the level of impact.

Although value capture instruments areconventionally categorized as taxes, contribu-tions, fees, exactions, and regulatory charges(Smolka and Amborski 2007), here they areorganized within three groups: taxes and fees, including betterment

contributions; exactions and other regulatory charges

for building rights; and a variety of tools used in large urban

development projects.

The distinctions are not exclusive, however,because the same tool may embody subtle-ties that defy classification. The ColombianParticipacin in Plusvalas, for example, cansupport betterment contributions to recoverthe cost of public works investments orexactions to capture the increased value re-sulting from a change in zoning regulations.Moreover, in Colombia this instrument isconsidered a tribute or fee, but in Brazil a

similar instrument that charges for addi-tional building rights (Outorga Onerosa doDireito de Construir, OODC) is not. UnderBrazilian law building rights are not con-sideredan inherent component of the realestate property right but rather a way ofusing the property bestowed by the public(Rabello de Castro 2012). Similarly, in most uses of exactions wherethe generating factor is flexibility in landuse norms, the compensation is often madethrough public works to support the permit-ted new uses. Although the revenues collect-ed by all of these kinds of tools are includedin the overall municipal budget, typicallymanaged by the local treasury secretary, insome cases the value capture proceeds takethe form of in-kind compensation.


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C H A P T E R 3

The Property Tax andBetterment Contributions

Property taxes, contributions, andfees are typically levied on existingland values or on increments tothose values due to changed condi-

tions or land uses. Revenues tend to be usedto defray investment or maintenance costsfor public works, transportation, and otherinfrastructure.

THE P ROPERTY TAX

Any tax on land value, typically levied onlyon private property, is a form of value capturein so far as much of the land value resultsfrom accumulated public actions and invest-ments. It follows that the property tax cap-tures some value since the tax rate appliesto both buildings and land. This point hasled some to wrongly claim the imposition ofdouble taxation when a charge on building

rights is added to the regular property tax.The Brazilian Supreme Court has ruledthat the charge on additional building rights(OODC) is not a tax but rather a chargeimposed on the use of additional buildingrights that are not part of the owners assetsbut a public good that belongs to the cityas a whole (Rabello de Castro 2012, 18).

Some observers consider value capturea replacement for land value taxation at the

margin. But because property taxes are notusually associated with any particular publicintervention, others question whether theyshould be recognized as an instrument ofvalue capture. In making their decision on where toreside, individuals often consider the bundleof services offered by a jurisdiction in returnfor a particular property tax payment.The

Avenue Boyacava

in Bogot, Colombia,

is a north-south

route passing through

residential and commer-

cial areas. This public

work collected about

US$320 million in

betterment contributions.

BORRERO

OCHOAYASOCIADOSLTDA.,BOGOT


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The property tax is, economically speaking,

a combination of one of the worst taxes

the part that is assessed on real estate

improvements . . . and one of the best taxes

the tax on land or site value.

William Vickrey (1999), Nobel Prize in Economics, 1996

celebrated Tiebout hypothesis suggests thatthe property tax can be seen as a user chargebecause taxpayers can choose which juris-

diction offers the highest level of benefits inexchange for a particular tax rate (Fischel2005). This hypothesis of voting with yourfeet is weaker in Latin America than in theUnited States because fiscal autonomy andthe share of property taxes in local revenuesare minimal.

burden falls entirely on landowners, it doesnot distort economic decisions in regard toland use, and it does not generate the excess

burden (deadweight loss) common to mosttaxes (Oates and Schwab 2009). At thesame time, it has a bearing on value capturebecause public expenditures for infrastruc-ture and service improvements, norms andregulations affecting land uses, and otherlocational attributes (externalities in general)are all fully capitalized in land values (asopposed to buildings that tend to be valuedon their intrinsic attributes).

The same principles that solidly ground

land value taxation in economic theoryapply in principle to value capture, sincepublic benefits are ultimately capitalized asland value increments. Observed land pricescan be perceived as either the accumulationof all land value increments over time or thepresent (or discounted) value of a stream ofland-based services expected to be obtainedin the future.

In its more radical version that advocatesfull confiscation of all rents related to public

actions, the land value tax would ultimatelyeliminate the need for any additional valuecapture tool (George 1992). It should beclear that a full tax on such land rents wouldresult in its market value dropping dramati-cally as the present value of the expectedflow of future rents net of taxes would alsobe small. The landowner nevertheless wouldstill be taxed periodically for an amountcorresponding to the total rental valueof his land.

A system in which the property tax fallsentirely on the land value has few precedents.The most significant experience can be foundin Baja California in Mexico, especiallyin Mexicali (Perl Cohen and Zamorano1999). In a recent study, Lpez Padilla andGmez Rocha (2013) found that the shift toa land value tax base in Mexicali improvedtax collections by about 400 percent over

It has some bearing, though, on the de-bates surrounding certain wealthy neighbor-hoods seeking more legal autonomy, such asthe arguments raised by residents of Barra

da Tijuca in Rio de Janeiro in the 1990s,or as a criteria to redistribute a centrallycollected property tax among municipalitiesin a fragmented context such as the metro-politan area of Santiago, Chile. In bothsituations residents claimed that their taxshare was higher than the services they re-ceived. On the other hand, Bogots voluntary10 percent supplemental tax payment allowstaxpayers to choose how their additionalcontributions should be spent from among10 publicly provided city services, thusoffering an opportunity for local taxes tobe treated as direct user payments (Pinillaand Florin 2011).

Land Value Taxation

The land value tax presents, in theory, manydesirable features compared to the conven-tional land-plus-building property tax. Its


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the last 20 years. By 2005 Mexicali out-performed comparable municipalities withconventional tax bases, or at least matched

well-known high performers such as themuch richer (in per capita income) cityof Hermosillo. In addition, there are indi-cations that Mexicali expanded at a higherdensity, as would be expected from theory.

In spite of these desirable features, taxauthorities in Latin America tend to favorthe conventional property tax on land andbuildings due to the ease of observing andrecording market transactions, as opposedto the more roundabout land value assess-

ment methods for built-up areas. They havealso been reluctant to implement land valuetaxation in part because it could be regres-sive for the large numbers of low-incomefamilies for whom the land represents ahigher share of their property value thantheir precarious housing structures(De Cesare et al. 2003).

Temporary Property Tax Rate

Increase

Value capture may also be associated witha temporary rate increase in property taxes,as when an additional charge is applied forfinancing large-scale urban infrastructurethat benefits all residents directly or indi-rectly in proportion to their property values.

For example, to pay for a new 40 km sub-way line in Buenos Aires that would doublethe existing capacity, Law 23.514 of 1987created a special fund with a 5 percent addi-tion to property taxes from all city residents,plus another 2.4 percent surcharge for thoseresidents within 400 meters of the stations(Cuenya et al. 2003). In 2012 revenuesaccruing to this fund amounted to aboutUS$750 million. However, other revenuesources from expressway tolls, bettermentcontributions, and automobile licenses gen-erated four times that amount. In general,the property tax in Buenos Aires accounts

for only about 8 percent of total city revenues,second to the gross local income tax, andit is charged at rates that increase progres-

sively according to bands of assessedproperty values.

BETTERMENT CONTR IBUT IONSA betterment contribution (known as aspecial assessment in the United States) is acharge or fee imposed on owners of selectedproperties to defray the cost of a publicimprovement or service from which theyspecifically benefit (Borrero Ochoa 2011;Borrero Ochoa et al. 2011). It is not only

the oldest but likely the most consistentlyused value capture instrument, with casessince the early nineteenth century in coun-tries such as Argentina, Brazil, and Colombia.

In Bogot, the Bridge of the Commonswas built in 1809 using a form of bettermentcontribution, although the first specificnational legislation was not approved until1887. It was established to distribute thecosts of dike projects to those benefitingfrom their construction. Subsequent legis-

lation in 1921 authorized the use of assess-ments in rural areas for flood and drainageprojects. By 1936, Law 195 allowed citieshard-pressed to find infrastructure financ-ing mechanisms to use special assessmentfinancing to supplement existing resources(Walker 2000, 114).

In Brazil, such a levy was introducedconstitutionally in 1934, but it had appearedin a 1921 decree of the then Federal District(Rio de Janeiro) as a real estate valorizationcontribution. In 1909, So Paulo establisheda law that the city council would only ap-prove new streets proposed by private inter-ests if they would cover half of the pavementcosts, and in the 1920s a pavement fee wasintroduced (Sandroni 2001). Almost all Latin American countries nowhave national laws that permit some versionof a valorization fee or charge to enable the


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public sector to capture the increments ofland value directly associated with publicinvestments (Manon and Macon 1977). Even

in El Salvador, where full property taxeshave not yet been introduced, the constitutionallows for the collection of special contribu-tions (Lungo and Oporto 1998). In Chile,where value capture issues are still viewedskeptically, contributions for road pavementprograms have been promoted since 1927and have been defined under law since1953 (Cceres and Sabatini 2002).

Significant Variations in Performance

In spite of the betterment levys apparentuniversality, it still plays a negligible role inmost jurisdictions finances, as it typicallyaccounts for much less than 1 percent ofown local revenues. In Mexico, for example,it represents no more than .42 percent ofmunicipal revenues (Prez Torres and AcostaPea 2012); in Brazil in 2011 it represented

.25 percent of all fiscal revenues and6.8 percent of all property-related tributes(Afonso et al. 2010); and in Rosario, Argen-

tina, it accounted for .30 percent of ownrevenues (Alvarez 2009).

Some notable municipal outliers are inColombia, where in 1968, at the height ofits use, the betterment contribution wasresponsible for 45 percent of all local publicexpenditures in Medelln; in the early 1980s,30 percent of Calis expenditures; and in1993, 24 percent of Bogots local revenues(Furtado 2000; Jaramillo 1998). After peri-ods of neglect in Bogot its use resurged in

recent years, with about US$1 billion worthof public works being funded by the instru-ment (table 3.1). A lesser known outlier is the municipalityof Cuenca, Ecuador, which over the last 10years issued 1,800 contracts for public worksprojects and collected almost US$200 percapita, much higher than Bogots US$150in the same period. Cuencas US$25 percapita fees collected in the single year of2010 (totaling US$12.4 million) also far

surpassed those of Bogot in any singleyear. Cuenca also excelled in terms of per-formance, with 90 percent of householdsmaking their contributions in less than fouryears, 95 percent of the projects collecting60 percent in betterment contributions, andonly 3 percent of contributors found to benoncompliant.

Collection of betterment contributionsis not consistent among countries, or withincountries among their jurisdictions or acrosstime. For example, in Mexico, only fourstatesCoahuila, Estado de Mxico, Sonora,and Zacatecasaccount for 86 percentof total national revenues from bettermentcontributions (Prez Torres and AcostaPea 2012). In Ecuador, 74 percent of allbetterment contributions are collected inits three largest cities (Cuenca, Quito, andGuayaquil), although they account for only

TABLE 3.1

Charges Collected from Public Works Programs Funded

by Betterment Contributions in Bogot, 19932013Programs Year of Approval Date of Charge US$ (TRM)

Basic Valorizationacross the City

1993 1993 106,160,600

Subtotal 106,160,600

Forming theCity Program(Formar Ciudad)

1995 19961998 351,928,000

2001 2002 55,931,000

Subtotal 407,859,000

Agreement 180of 2005 (modifiedby Agreement

398 of 2009)

2005 Phase I- 2007 and 2010 319,311,000

Phase II- 2012 326,108,000

Phase III- 2014 321,685,000

Phase IV- 2016 105,000,000

Subtotal 1,072,000,000

Agreement451 of 2010(Master Plan,Zone North)

Ring Road #1 Charges in 2012 220,000,000

Note: TRM represents the conversion rate from Pesos to US$ (millions) at the respective marketvalue in each year during this time period.

Source: Borrero Ochoa et al. (2011).


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30 percent of the population (Rodrguezand Aulestia 2013).

Pereira (2012) shows for Brazil that

although the betterment contribution inthe 20002010 decade overall was no morethan 1 percent of total tributes on properties,the share in Maranho, one of the pooreststates, was over 10 percent. The municipalityof Bacabal in this state has per capitaGDP of only $1,300, but collected overUS$32 per capitaabout half of the high-est per capita contribution in any city inthe country.

By contrast, So Jose dos Pinhais, in thestate of Paran (the sixth richest in Brazil),with a per capita GDP of about $13,000,collected no more than US$12 in bettermentcontributions per capita. The same studyindicates that for the state of Paran munic-ipal GDP is negatively related to the relativeimportance of this fee. For the country as awhole, per capita contributions were aboutUS$1.50. Overall in only 667 of the 5,505

Brazilian municipalities did the bettermentcontribution represent more than 10 percentof all tributes on properties.

Whereas municipal size is an importantfactor, larger population is associated withhigher collections in absolute terms, butlower population is associated with highercollections relative to other local taxespossibly because the poorest and smallestmunicipalities collect little from the servicesales tax. The share of contributions is 3percent of total revenue in municipalitieswith fewer than 10,000 inhabitants, and theshare declines as population increases. Overthe 20002010 decade, no city in Brazil col-lected as much as Bogot or Cuenca (figure3.1). In other words, there is an enormousvariance in the use of the instrument amongand within countries, and no robust relationbetween its performance and a particularcitys size or wealth, suggesting that politicsmay be playing an important role in explain-ing the observed differences.

Parque de la Madre in

Cuenca, Ecuador, was

funded by about US$5

million in bettermentcontributions.

DIEGO

ERBA


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. . . . . . . . . . . . . . . . . .

FIGURE 3.1

Total Revenues from Betterment Contributions in Brazilian Municipalities, 20002010

Notes: 2,890 Brazilian municipalities (52.5 percent of all municipalities) collected some revenue from betterment contributions.The revenues were converted annually to US$. The abbreviations in the map refer to state names.

Source: Pereira (2012).

No revenueUS$06,700

US$6,70170,127US$70,12815,276,430

Considerations in the Application

of Betterment Contributions

Although the logic of paying a bettermentfee for an investment whose benefits willexceed the fee is straightforward, the appli-cation of such an instrument can be quitecomplicated. This may explain its poor overallperformance as a revenue source and whythe most successful cases seem to rely onrather arbitrary technical shortcuts to keep

it manageable. In practice the estimation

of the charge and its distribution among thebeneficiaries of a project depends on severalimportant considerations.

The total cost of the project or

investment to be recovered

In most places these are the direct costs,but in others some additional charges areimposed, such as in Colombias Law 25


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. . . . . . . . . . . . . . . .

of 1959 that authorizes adding up to30 percent to account for items such asthe costs of feasibility studies, interest, and

administration associated with the publicworks (Garca Rojas 2012). In addition todirect costs, the law also includes an allow-ance for future cost contingencies. Theamount to be recovered varies according tothe jurisdiction and type of project. Author-ities often consider the payment capacityof contributors in the affected area whendetermining the total amount to be charged.

Most existing legislation limits theamount to be recovered to the lowest value

of either the project cost or the land valueincrement. That is, if the project generatesa larger increment than its cost, the latterprevails, whereas if the estimated incrementis lower, then only this amount is to berecovered. Some legislation, such as theBrazilian Law of 1967 (no longer in effect),allowed recovery of the full value increment

independently of the project cost. Others,like the Colombian Law 9 of 1989, aremore similar to a full-fledged cost-recovery

scheme since the charges are collectedindependently of the benefit.

The practical relevance of these distinc-tions emerges when distributing the chargesamong individual properties in the impactedarea. In effect, technical imperfections inproperly estimating how each property inthe defined impacted area will benefit oftenleads to situations where the charge may behigher than the net benefit for some prop-erties while others receive a lower share of

the cost than of the accrued benefit.

The overall land value increment,

valorization, or benefits resulting from

the investment

In principle any public investment shouldgenerate some social improvement, yet notall benefits are necessarily reflected in land

Water is trucked into

an informal settlement

in Guayaquil, Ecuador.

MARTIMO.SMOLKA


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TABLE 3.2

Studies of Bogots TransMilenio Bus Rapid Transit (BRT) System and Property Values

Study Method or Measurement Result

Rodrguez andTarga (2004)

Rents on 494 multifamily residential properties in a 1.5 kmarea of influence surrounding two TransMilenio corridors.

A premium of 6.8 to 9.3 percent was found for every5 minutes of walking time closer to a BRT station.

Muoz-Raskin(2006)

Values of 130,692 new multifamily properties provided bythe Bogot Department of Housing and Control from 2001to 2004.

Properties within the immediate proximity of feeder lines(05 minute walk) were valued higher than those requiringa 510 minute walk. High-value properties were valued evenhigher if they were close to a feeder line, but the effect wasthe opposite for trunk lines.

Mendieta-Lpezand Perdomo-Calvo (2007)

Assessed property values from cadastral data in 2007 for1,547 properties within 1 km of TransMilenio.

Property prices increased between 12 and 38 percent,depending on the distance to the BRT at 5-minute incrementsin walking time to a station.

Perdomo-Calvoet al. (2007)

Analysis of 304 residential properties and 40 commercialproperties to compare asking prices in two zones, one withand one without BRT access.

Mixed results, with most comparisons yielding statisticallyinsignificant results. In only one case at standard levels ofconfidence, a premium of 22 percent for residential propertieswith BRT access was found.

Rodrguez andMojica (2008)

Single-family properties at 1 km from the system networkand local changes in land value from 2001 to 2006.

Premium between 15 and 20 percent, before inauguration;no evidence of increments along the corridor that had nostation but is now serviced by an extension.

Source: Adapted from Rodrguez and Mojica (2008).

value increases. For example, in a small citywith a precarious water distribution system,an area serviced with piped water has a

land value premium that corresponds toareas that must pay higher costs for waterprovided by trucks. Once water is universal-ized the land price differentials disappearand, at the same time, no additional landvalues are added to the land price in theoriginally unserviced areas. That is, in spiteof its great social benefit for the community,the piped water investment may yield anoverall net reduction of land values.

This suggests that citywide investments

may not be good candidates for bettermentfees. For example, public investments thoughtof as general interest projects may not bedesired by neighboring property owners. Astudy of So Paulos Ring Road shows thatthe land value increments vary significantly,and negative values may occur betweenentry and exit points where the expresswaymay generate noise and pollution but noclear accessibility benefits (Maciel 2009).Table 3.2 presents varying estimates of the

impacts of Bogots Transmilenio bus rapidtransit system, obtained from various studiesthat followed distinct methodologies, illus-

trating the difficulty of assessing these landvalue increments.

Definition of the impacted area and

identification of all benefited properties

This can be a complex problem since thesize of the impacted area (or area of influ-ence) depends on the relevant thresholdestablished for the impact on individualproperties and lower thresholds producelarger aggregate impacts. This interdepen-

dency is further aggravated if the impactof the project varies among propertiesaccording to distance or even over time.When assessing the impacts of bus rapidtransit, for example, the properties closestto the stations and the line may actuallybe valued lower than those in more inter-mediate locations that still enjoy the conve-nience of access yet experience less noiseand pollution. As distance increasesfrom the stations, the impact progressively


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recedes to zero. The rate of perceiveddecline in benefit with distance may not

be constant (Rodrguez and Targa 2004;Flores 2011).

Again in practice the problem is resolvedby the application of known, fixed factorsdrawn from past comparable project contexts,as for example the long-standing practicefor street paving projects of simply identify-ing the beneficiaries as those propertieswithin 500 meters of the project, or forsubway expansions, properties within a600 meter impact radius around a station.

The criteria to distribute the charge

among beneficiaries

In principle charges should not be equal forotherwise similar properties with differentdegrees of access to public works benefits,such as their relative physical location. Ad-ditional adjustments can be made accordingto the size, frontage, or position of the prop-

erty, for example by applying a factor to ac-commodate corner properties compared to

those within a block or with other uniqueattributes. Two primary methods are used to distrib-ute the charge among the individual bene-fitted properties: the method of factors andthe method of double valuation. The firstdescribes the individual physical plot with aseries of known or predetermined attributesto calculate a score for each plot. Theseattributes may include the distance to thepublic works, built-up area, density, numberof retail stores, quality of the building, andthe use of the property (industrial, commer-cial, residential, or charitable). In Colombiathe strata of the neighborhood is scored ac-cording to its access to urban infrastructureand services as well as socioeconomic attri-butes of the occupants. All such scores areused to determine the charges (BorreroOchoa 2011).

A road interchange at

Street 100 and Avenue

15 in a high-income areaof Bogot was funded

Linc-pfr ValueCapture 6.13 #12

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