Why land-based financing?
Land based financing can constitute an important source of revenue for land actors. Nevertheless, one of the core challenges is raising the revenue necessary to provide key public services and improvements in infrastructure and services. The challenge is particularly acute in developing countries where issues of land governance and inadequate and affordable land tools impinge on tapping onto land as a means for achieving pro-poor, gendered sensitive and sustainable outcomes.
As cities grow, the pressure to improve services and provide essential infrastructure can be immense. Because land cannot be moved, it can be a unique foundation for local revenue. But it also presents important challenges for local officials. In many developing countries, revenue systems are largely centralized, with most of the revenue flowing to the national government. Local authorities do not always control sufficient revenue sources, so cannot effectively respond to unique local needs. Therefore, local officials may not be accountable to local residents.
One on-going dilemma is the extent to which poor households should be included in the revenue system There is a tendency on the part of some governments to simply exclude the households which are seen as administratively difficult to identify and from which the revenue yield is expected to be low. Such policies may undermine grassroots community engagement and allow local authorities to focus attention and resources outside areas of critical need.
How does GLTN approach land-based financing?
GLTN's efforts to improve local land-based revenues and to finance land-related services include conferences, the publication of various guides, and support for various activities that impact land-related revenues. The Network has expanded its approach to land-based financing to cover not only land valuation, but also land and property taxation and other means of generating revenue through land and on improvements over land. In doing so, the Network keeps the poor, gender and other vulnerable groups in land-based financing tool development process.
Improving the living standards in any community is most efficiently achieved through cooperative effort. Whether it is infrastructure improvements or enhanced local services, it is often more cost effective for communities to act through their government than to act as individuals. In many instances, it may not even be possible for individuals to accomplish what can be achieved through collective action. Such collective action requires resources, and the purpose of this guide is to help government and community leaders understand the potential of land and immovable improvements as a foundation for mobilizing such resources.
Land-based financing for whom?
Local and national governments have several reasons to consider land. One of the rationales for the land-based financing is that the base is immovable. In comparison, a tax on income requires that income be defined and reported, and the failure to fully report income often contributes to the expansion of an "informal" economy. Tax income heavily at the local level and high income households are likely to relocate to nearby communities or other countries with lower taxes. Because land is immovable and highly visible, it is in principle fairly easy to discover changes in land use, new buildings, building expansions or new subdivisions of land. Discovering the actual income of a household can be extremely difficult.
People who live and work in a community obtain benefits from that community such as the use of public roads and other public services. If a tax qualifies as a "benefit tax" the taxes paid by a household are roughly proportional to the benefits that household receives from the community. If the land-based financing system is well designed (mainly with the poor in mind), those who receive greater benefit from the community will pay more in taxes. Often tax receipts can be used as first evidence of securing land rights and can well fit into the continuum of land rights. When a community invests in public infrastructure such as road improvements, improved water systems, better sewage treatment facilities or the like, the community or neighborhood becomes more attractive and desirable. People are willing to pay more to live in that community, and consequently land becomes more valuable. Sometimes the increase in value is the result of land use decisions taken by the local government, such as granting development rights on land that was previously farm land. Sometimes the value increase is simply the result of population growth. The point is that this increased value is not the result of any investment made by the land owners or occupants, but is a direct result of public.
In the development, dissemination and implementation of any tool, the capacity of organizations and individuals to understand, support and make use of the tool must be enhanced. From this perspective, capacity development related to the tools for land-based revenue systems should focus on:
- "Upstream policy change agents"- those policymakers and opinion leaders who must understand, adopt and support any changes in the legal, administrative or fiscal arrangements of a city or nation. This capacity development will likely require the development of short, readily accessible guides outlining alternatives and recommending actions
- Practitioners- those agencies and other practitioners charged with actually implementing legal, administrative or policy changes require sufficient training and technical support to assure quality implementation of the initiatives. Some of the techniques implied by the above discussion are quite technical and will require the development of specialized training materials and guides.
- Training, peer to peer exchange, institutional review, workshops, study visits, etc.- Networks to facilitate the dissemination of knowledge and shared experience, as well as evaluation and identification of best practices, should be developed and supported.
What is the Network doing on land-based financing?
In an effort to support efforts to mobilize local land-based revenues and finance land-related services, GLTN has undertaken a variety of initiatives including conferences, the publication of various guides and support for various activities related to the land-related revenues.
The proceedings of one such conference (UN-Habitat Regional Conference, 2009) documents several conclusions related to land-based financing. All participants agreed that urban development should be financed, at least in part, through capturing the increases in land value resulting from public investment or broad urban trends. There was also substantial agreement on some essential aspects of how such a system should be implemented, including the need for strong political support, and adaptation of;
- tools and policies to local conditions,
- land valuation methods to local administrative capacity, and
- the inclusion of informal settlements in any land value capture system.
The conference report also points out the need for testing and demonstrating the effectiveness of available tools in a variety of small-scale political and economic environments. Countries should also be encouraged to improve their data collection, analysis and documentation on land and property taxation. Such data and evidence derived from current land and property tax systems remain insufficient. As a result, decision-makers often lack the information that would improve the quality of their decisions.
GLTN and UN-Habitat have partnered in the production of two notable publications on land value capture and land and property taxes more broadly. The first was the land value capture scoping study (November, 2010) which makes several important points, including the need for a political champion, a good property tax law and decentralized authority to implement the system.
The second work put forward by UN-Habitat and GLTN is the land and property tax guide called for at the Warsaw conference (Link to Land and Property Tax: A Policy Guide, 2011). This Guide elaborates on several of the themes that emerged in the Warsaw conference. In particular, the Guide notes that in designing a land-based revenue system, decision-makers should carefully consider four aspects of the local environment:
- How land and property rights are defined in the community
- How such rights are publicly recorded, or at least recognized, and defended
- The maturity of local land and property markets
- The administrative capacity of those public agencies charged with implementing the system
Further, GLTN has documented the case of the Urban Land Registry (RFU) in Benin, which offers a useful example of how practical solutions to some of the land-based revenue issues can be addressed.
|RFU, an example of land-based financing tool:
The Benin Urban Land Registry (RFU) is a land information system which aims to improve substantially the management capacity of local authorities to respond effectively to urbanization. The period 1991-2002 was marked by a low yield of local taxes. At the same time, the administrative districts faced significant needs for infrastructure, public facilities and urban services in addition to the issue of tenure insecurity. It became necessary to design and develop tools for acquiring a reliable information system with the aim to substantially improve local resources. Launched in 1992 in Parakou, the RFU has now been implemented in the three largest cities - Cotonou, Porto-Novo and Parakou - in addition to many smaller towns.
On the land administration front, land administration organizations tend to transition over time from a system mainly financed through governmental grants to more direct funding through fees paid by service users. There are several reasons for this development. One is that it means that those who actually are using the services, the land users, pay for the services and not the broader public. The organization will become less dependent on political decisions. The motivation of staff to accept changes and deliver more efficient services will increase when they realize that their income and employment is depending on the quality of the services they deliver to customers.
The GLTN is currently working on the costing and financing land administration services in developing countries. This tool will allow the land administration organizations, to be more independent of political decision, more demand-driven from the market, create possibilities for more transparent costing of the various services and improve access to services for the poor and contribute to regularization of informal settlements.
What land tools are available to support land-based financing?
Conceptualizing the problems related to land-based revenue systems as interacting continua yields a number of productive considerations regarding both existing and potential tools. Two currently available GLTN tools are should be noted and a third is under development.
The Social Tenure Domain Model (STDM). (Visit link here) The focus of STDM is on building a multi-purpose cadastre that models the relations between people and land, independent from the level of formalization and/or legality of those relationships. The development of STDM is a search for an approach that can be used as a basis for the development of a land administration system that can support all forms of land rights, social tenure relations and overlapping claims to land (e.g. in post conflict areas). Such cadastres can also support land-based revenue systems. Manatron, a U.S. subsidiary of Thomson Reuters, is piloting the use of the STDM model for use in managing land records and potential land-based revenue systems. The STDM has been successfully piloted and used in Uganda (Read more...)
Participatory enumeration. This tool is also focused on collecting information that can inform a fiscal cadastre or valuation roll. It should be noted that there exists some potential for tension between using the results of a participatory enumeration process for building a fiscal cadastre and other purposes for that same information. If households perceive that participation will result in a tax obligation, they may be hesitant to participate. This concern does not preclude the use of the tool in a fiscal capacity, but does suggest that attention be paid to the incentives that participants face.
Tool in development. GLTN is developing a tool for valuing unrecorded land interests in informal settlements. That there is need for such a tool is illustrated by the Kenyan example described in the box below.
Assigning obligations. There are a range of possible tools that can be applied to assessing land values and collecting contributions to land and municipal services. These do not have to be the normal fees and property taxes and can be related to the rights/tenure continuum. Examples of such alternative tenure arrangements include a) community land trusts, b) community savings and development funds and c) the option for non-monetary contributions.
Both the community land trust and the community development fund have similarities in that they contemplate a community rather than an individual basis for the assessment and collection of taxes. The community land trust has a community structure for the management of land that has existed for some time and has found new popularity in the developed world, though its popularity in developing countries is not as strong. The point for this discussion is that assigning the tax or fee to a community rather than an individual or household is both feasible and attractive in some settings. This model can be used in addressing the issues of communally held traditional or family land in the south. The community saving and development fund can be used by groups that hold collective title as a means of financing infrastructure or land services but can also be used by collections of individuals with informal or quasi-market title where there are functional and strong communities or neighbourhood coherence and loyalties. The family or group can be collectively responsible for dealing with the state in providing and financing the land services.
Where there is no strong community coherence or collective action individuals can contribute to the cost of services to their spatial unit or community by providing labour. The self-help or sweat equity model has been utilized in squatter upgrade programs in Jamaica and Trinidad and Tobago. This method of contribution in labor can be combined with collective mechanisms. It has however proved to be problematic in areas of high unemployment where available time is devoted to livelihood issues.
Self-assessment. Self-assessment has proven to be an effective means of assessing land and property values in established land markets. Combined with the lessons learnt from participatory evaluations tools being used by the GLTN partners it may prove to be useful both for the poor and informal land holder in the south. In Latin America and the Caribbean it has been seen that even among these communities there are those who are able and willing to pay taxes as it helps establish their claim to the spatial units they occupy informally of illegally.
What still needs to be done?
Looking to the future, GLTN should consider investing in further tool development in several areas related to land-based revenue.
The financing of land administration tool is under development and will include suggestions for development of more self-financing mechanisms to strengthen management. One objective of this tool is to help local authorities become more independent of higher levels of government within a goal and result-based management system. The proposed financial systems will be activity-based and allow the management to keep track of the costs related to different services and thus also develop a more efficient service delivery. The land administration financing tool is intended to be piloted in cooperation with one interested land administration organization.
What land tools are needed?
Self-assessment tool. Self-assessment has been shown to be effective in a number of settings. However, a "how to" guide would be a valuable addition to the GLTN resource library and would facilitate knowledge transfer from those areas which have successfully employed self-assessment to those considering using the approach.
A method for assessing the appropriate financial obligation of citizens. The concept of land value capture assumes that public actions result in private gains in property value, and that the public should reasonably be able to share in those gains as a way to finance public investments. The public finance literature also uses the term "benefit tax" in discussing land-based taxes and fees. To describe a tax as a benefit tax is to say that taxpayers pay amounts that are approximately proportional to the benefits they receive from government. Land and property owners receive benefits such as roads, police protection and fire protection from local governments and generally do not pay direct fees for these basic services. If a land-based tax or fee is charged to each household in amounts which are roughly proportional to the value of the benefits received by that household, then that tax or fee can be said to be a benefit tax and is considered the "tax price" for those public services. Thus, both of these concepts (value capture and benefits received) can be used to justify a given household's billed financial obligation.
This proposed tool would provide policymakers with the means to evaluate alternative financing plans by presenting a conceptual framework for understanding how the final bill is determined and as well as information on both components. It also provides a means to explain to taxpayers why the tax or fee represents good value to the public. If it can be argued that the base bill is driven by the cost of valued services delivered to the land occupant and by the public cost of improving private land value, then the likelihood of public acceptance of the financing plan is greatly enhanced.
The valuation tools necessary to evaluate the impact of public projects on private land values are well known and documented. The tools necessary to assess the cost of providing general services to land and property will need to be developed. But the development and integration of the two elements will be worth the effort. Policymakers will better understand how the services and investments they make affect land and therefore citizens. And citizens will see much more clearly the connection between what they pay and the value they receive from public services.
Mobilizing non-financial resources tool. Without doubt, not all land occupants in a city will be able to easily pay their tax bill. Cities may choose to adjust the bill due based on ability to pay. But such adjustments require additional administrative infrastructure (and costs) for such added tasks as the processing of claims for partial or full exemptions. Rather than simply granting such adjustments, it would be possible, particularly in informal settlements and other more established communities, to allow land occupants to pay all or part of their tax bill in-kind through some type of community service. How such a program might work, including the potential involvement of community-based groups or communal owners, should be explored further and guidelines developed. But the potential for mobilizing human resources through this type of community engagement holds sufficient promise that it merits further consideration, especially if the added resources can be engaged within their own neighbourhoods.
Here are selected Questions for land-based financing tool developers
- Where has and based financing been implemented?
- How difficult is it to assess land values?
- How would you implement land-based financing in a small community with limited resources and what are the barriers?
- Is it fair to tax existing landowners who have not been taxed in the past?
- Is it fair to tax the poor?
- What if there is no valuation profession in place in the country?
Land-based Financing: Related Publications
- Improving Slum Conditions through Innovative Financing (Eng - 2008))
- Innovative land and Property Taxation (Eng - 2011)
- Land and Property Tax: A Policy Guide (Eng - 2011)
- Improving Slum Conditions through Innovative Financing (Eng - 2008)
- Mobilisation des ressources financieres locales: Documentation des registres fonciers urbains des communes du Benin (Fr - 2012)
- Guide du maitre d'ouvrage: Les registres fonciers urbains (Fr - 2012)