Considering the amount of land required, the importance of providing mechanisms for efficient land development processes cannot be overemphasized. However, the supply of land in most developing countries is genuinely and artificially limited (Brennan, 1993). The problem of land supply is generally independent of the type of ownership. It is a problem in Delhi and Karachi, where most land is publicly owned, and in Bangkok and Seoul where most land is privately owned.

Figure 7.1. Typical Asian city

In most Asian cities suitable land exists but it is not available for development. These cities often have a densely populated city centre, a mostly residential area surrounding the city core and a number of developed traffic corridors extending into the typically agricultural periphery (figure 7.1). Within the residential areas and between these traffic corridors, there are typically extensive land areas available either for agricultural purposes or lying vacant. An insufficient amount of land is being released for development because of land speculation, government actions (such as for example land banks), shortage of infrastructure provision and a too extensive regulatory framework, which hampers development.

The tools traditionally available to governments in order to regulate the supply of land include rural to urban land-use conversion controls and the provision of infrastructure. The challenge in this process is to supply land, at the right time, in desired locations, and with timely provision of infrastructure (ESCWA, 1993).

The three distinct phases of the urban development process are:

• The extension of the road network and public utility mains in order to connect these lands to the metropolitan networks;
• The servicing and subdivision of landholdings into streets, open spaces and serviced buildings sites by land subdividers and landowners;
• The building development of the sites with houses, factories, shops etc. by building developers and landowners (adopted from Archer, 1984).

There are two major reasons why governments should focus their limited resources on the land development process. First, it is more cost-effective as large amounts of land are being developed. It is obvious that it is very costly to change existing land use with its buildings and infrastructure. Efficient land development and land-use patterns can reduce drastically future public expenses for infrastructure and provision of public services such as schools and public transport. With relatively small expense governments would be able to achieve considerable improvements in the existing situation. Second, there is an enormous shortage of shelter in Asian cities and governments can achieve some of their overall objectives, such as housing opportunities for all citizens, by focusing on land development. As governments rarely have the resources for large public sector development projects, it should invest in the provision of key infrastructure and deregulate unnecessary processes in order to support and stimulate individual and private sector investments. The case for focusing on land development is especially important at urban fringe areas as almost all land conversions take place in this part of Asian cities. Unfortunately, governments often do not concentrate enough of their resources on the urban fringe, sometimes because these are located outide the administrative boundaries, and many deficiencies in current land-use patterns are thus repeated.

An important problem is that the municipal governments often lack up-to-date information on the land markets in their cities. In fact there is a growing recognition that a major reason why municipalities have not coped with urban population growth is because they are "flying blind" - they simply do not know what is going on in their local land markets (UNCHS, 1989). Accurate information of how the land market operates is vital for adopting appropriate strategies to improve the performance of the land market. Land market assessment is a tool developed to assist governments in adopting more appropriate strategies (box 7.1).

7.1.2 Infrastructure and services

In 1982, a Sri Lankan developer was asked what conditions had to exist before he would build low-income housing. The first thing he replied was that he had to know for certain that the Government planned to provide infrastructure and services (Kitay, 1987). Infrastructure provision is consistently slow and lagging behind demand in the rapidly growing Asian cities. In fact, it has been argued that the problem in developing countries is not lack of land, but a lack of serviced land (van Meurs, 1986). A very obvious sign of infrastructure shortcomings in the fields of telecommunications and transport is the fact that the mobile telephone is rapidly becoming a business necessity in Bangkok and Shanghai as telephone systems are deteriorating and traffic is at a standstill. Whereas average inner-city traffic speeds are typically 16 km/h in most large cities in the world during peak hours, lack of investment in roads and traffic management has lead to considerably lower average travel speeds in Asia (Midgley, 1994). For example, inner-city travel speeds at peak traffic hours varies between eight km/h in Seoul and Shanghai, nine km/h in Bangkok and 10 km/h in Manila. Singapore, which has a travel speed of 30 km/h, has managed to avoid traffic congestion through limiting car access to central areas during certain peak hours, making car ownership generally expensive and providing an extensive public transport system (figures from Midgley, 1994).

Lack of adequate infrastructure and services does not only hamper business and industrial development, but also affects the life of the people. Insufficient water supply and sanitation causes ill-health and diseases such as dysentery, cholera and hepatitis. In Indonesia, 24 per cent of the urban households had access to water in the house or from a standpost, while 24 per cent had sewer connection or another sanitation system (WHO, 1987). In the Philippines, 49 per cent had access to water and 83 per cent access to a sanitation system (WHO, 1987).

It is possible to distinguish between four different types of infrastructure investment:

• Additional infrastructure made necessary because of urban growth, formation of new household or changed household structures;
• Investments to improve the quality of services. These may for example be to remove traffic bottlenecks or improve the telecommunications network;
• Investment to repair and maintain infrastructure;
• Other reasons for investment. This may include the provision of services for economically weaker income groups.

There are various alternatives regarding the responsibility for the provision of the services. The services can be provided by: (1) the public sector; (2) the public and the private sector in parallel; (3) the private and public sector in partnership; (4) the private sector under public supervision through franchised monopolies or regulated competition; and (5) the private sector (including self-help) without public intervention (Davey, 1993). The responsibility within the public sector may be at the national, regional or municipal level. A large number of variations of organizational setup can be found, not only between countries, but among cities in the same country. Decentralization has been promoted in this paper and by governments in most countries during recent years, but whether the overall quality of urban services would improve by decentralization is not at all clear (UNCHS, 1992). However, since it has been shown that the private sector and community organizations have a competitive advantage over the public sector in the delivery of services, they should be considered as viable alternatives to reduce costs and implementation time. By September 1992, Orangi Pilot Project in Karachi had provided underground sewerage connections to 75 per cent of the lanes of the largest squatter area in the city at a cost which was considerably less than half of the regular public provision (ESCAP, 1993b).

Earlier estimates of the costs to provide sufficient housing and infrastructure to meet the needs of rapid urbanization in the region were startling. However, recent calculations suggest that the required investment costs are more manageable and that they yield a higher return than was earlier assumed (ESCAP, 1994). Investment needs vary from country to country, but almost all countries can reduce the costs to a large extent by lowering their infrastructure standards. Given the chronic lack of funds of most governments, it is imperative that new methods to design and fund investments are found. Gakenheimer and Brando (1987) describe how several mutually independent domestic actors, intentionally or unintentionally, end up sustaining high and unrealistic standards for urban infrastructure which use very limited national resources poorly.

It is imperative for the economic growth and the human living environment of cities in the region that a transport-efficient land-use pattern is created in which well-mixed downtown centres are linked with several outlying, compact centres of activity by an extensive public transport system. It is necessary to encourage urban development that is dense enough to promote alternatives to the use of private cars (Lowe, 1991). Dense urban structures which mixes housing with job opportunities conserves energy and protect water resources as well.

It should also be pointed out that infrastructure investment may have positive effects on the entire economy. In developed countries, infrastructure investments have traditionally been used as a method to provide economic impetus during depressions. In developing countries, appropriate investments are required as the very base for economic development. However, to reduce costs and generate employment, lower standards and labour-intensive construction technology should be applied. Little research has been carried out on the multiplier effect of infrastructure investments, but a study of squatter areas in six cities in Africa and South America found that while the type of improvement households choose to make was determined by income, the rate of building investments roughly doubles with access to infrastructure and, in particular, access to water and sewerage connections (Strassmann, 1984).

7.2 Public land development

It is important that the roles of the private and public sector are clearly defined from the outset in the land development process and that a conducive environment for shelter provision exists. A USAID review of various countries which received development assistance from the United States of America revealed that the public sector rarely contributed more than 10 per cent of the annual shelter production in those countries (Kitay, 1987). In Surabaya, Indonesia, the informal sector provides more than 90 per cent of the annual housing construction (Municipal Government of Surabaya, 1993). Housing development in Surabaya mostly takes place in the urban outskirts in new so-called kampungs.

Most developing countries have set up parastatal organizations for land development. Typically they have been given three objectives (Dowall and Clarke, 1991): (1) provide land for housing projects which are affordable to low- and medium-income households; (2) ensure that land value increases associated with public infrastructure provision are not appropriated by private developers; and (3) that important but risky projects avoided by the private sector are undertaken. Generally, these public land development agencies have evolved into very large and inefficient organizations incapable of reaching a scale of production which would justify their size (van Meurs, 1986). An example is the world's largest public land development agency, Perumnas in Indonesia, with an annual average production during the 1980s of 17,000 units. This is equivalent to 4.25 housing units per employee which should be compared with 30 to 60 in the private sector (Dowall, 1989). It has been indicated that the staff of most public land development agencies lack the necessary skills to manage the complex and risky process of land development. Successful developers are highly entrepreneurial, pragmatic and staffed by highly-skilled people willing to take risks (Dowall, 1989).

7.3 Public/private cooperation

In countries, such as China, India and Pakistan, the public sector has an extensive role not only in implementing plans and regulations but also in land development. India can serve as an example of a country which is attempting to reduce the role of the public sector and encourage links with the private sector. Many cities in India have large land banks (Acharya, 1989) and there is an extensive regulatory framework which includes laws, such as the Urban Land Ceiling Act, in order to restrict the amount of land which can be privately owned. Whereas India experienced rapid economic growth during the 1980s, government policies have been criticized for their inadequate response to development pressures and for their poor implementation which has worsened the situation (Garg, 1992). In 1992, the country embarked on a process of liberalizing its economy. An integral part of this process was the reduction of national government funds (Billand, 1993). It has been proposed that an alternative source of funding would be the mobilization of private sector capital and managerial skills by states and municipalities. The 1990 Draft Housing Policy of the Government of India describes the proposed roles as follows (Baker, 1991):

"What they (the people) cannot do is obtain land, assemble it in large sizes and arrange basic infrastructure of water supply, sanitation, roads, lighting etc. Government should not therefore try to build houses itself: its crucial role is to create an environment which enables the full potential and resources of the people to be fully utilized and constraints to housing to be removed."

However, while agreeing with increased private developer participation in the delivery of serviced land in principle, the process of reaching consensus on concrete actions was slow (Baker, 1991). The National Housing Policy of India was finally approved in 1994.

Governments need to intervene in the land market in order to fulfil some specified social objectives. But rigid implementation of regulations and control of land development tend to create a shortage of land, increased land prices and higher costs for infrastructure provision and building (compare with Billand, 1990). The private and public sector both have their respective strengths and weaknesses. In order to accelerate land development it is recommended that each sector is made responsible for the issues for which it has a comparative advantage. The private sector would be the main implementor, that is to say responsible for capital resource generation and the management of the implementation. The public authorities would be the facilitator and "protector" of some overall social objectives (e.g. equality among its citizenry). Table 7.2 shows guidelines for increased public-private cooperation developed at a seminar held at Udaipur, India, in 1991, which indicates the possible tasks of the facilitator and implementor respectively.

Table 7.2. Guidelines to increase cooperation between local government and private developers

Source: Billand (1993)

An example of public/private cooperation with an extensive and comprehensive scope is the Guided Land Development Programme (GLD) in Jakarta. GLD will attempt to guide the urban fringe development by providing serviced land which should be affordable to medium- and low-income earners (box 7.2).

7.4 Delays and public development procedures

In developing countries it often takes a very long time to get all the required permits and approvals from the public sector and they are often associated with a complicated procedure. Complicated procedures and delays have, among others, the following two negative impacts: (1) the land market responds more slowly to changing housing demands of the population; and (2) land values are artificially increased since, as the demand for developed land is very high in the rapidly growing Asian cities, the market is prepared to pay a significantly bigger "bonus" than in industrialized countries for land for which all the necessary permits and approvals have been acquired.

In Lima, Peru, for example, subdivision approval takes an average of 28 months and building approval takes 12 more months (Farvaque and McAuslan, 1991). Although recently made more efficient, in Malaysia, the administrative process of receiving, examining, and deciding on applications for conversion and subdivision could take anything from two to seven years (Farvaque and McAuslan, 1991). However, in South-East Asia, subdivision procedures for land were simplified and physical standards relaxed during the 1980s (Kidokoro, 1992). The Philippines have even introduced an one-stop shop system whereby building and subdivision permits are issued at the same time. This has substantially simplified the development control system (Kidokoro, 1992).

7.5 Land speculation

7.5.1 Overview

In most Asian cities, the price of land has increased substantially faster than the consumer price index, making land inaccessible for low-income groups. In some cities the increase has been higher because of special circumstances, such as a shortage of land not subject to flooding (Dhaka), purchases by nationals returning from work in the Middle East (Dhaka and Karachi) as well as the existence of a large green belt (Seoul) (Brennan, 1994). Other special circumstances in Seoul included excessive land and building regulations causing high land development costs leading to a rise in land values from 1974 to 1989 of 1400 per cent. For residential land, price increases were even steeper, on average 24.2 per cent per annum, which would equal a rise of 25.7 times during the same time period (Figure 7.2) (Kim, 1991).

The major reasons behind the land value increases in Asia are high and relatively reliable returns on land investments and a shortage of investment alternatives such as stocks, bonds and saving deposits. In comparison, in so-called developed countries, land and buildings are in general considered as providing a reliable but lower return in the long term than capital market investments. However, most developing countries lack a capital market that provides a reliable and easy return on other investment alternatives. Interest rates on bank deposits are typically substantially lower than inflation rates. Furthermore, banks are willing to provide loans at relatively good terms for land purchase, since land is considered a reliable collateral. In this way, the financial institutions, ironically, tend to encourage land price increases indirectly. Another reason for land value increases may be that the anticipation of high yield itself attracts higher prices, so that high land values are self-fulfilling at least in the short term.

Figure 7.2. Land prices in the Republic of Korea

Source: Kim (1991)

The expected continued high population growth rate in Asian cities is another factor contributing to continued high demand for land in cities and land speculation. Governments have taken various steps with the purpose of reducing the attractiveness of land for capital storage and accumulation, and thereby increase the supply of land. Land speculation is very difficult to tackle, especially as government officials themselves are often involved in land speculation (Rivkin, 1983).

Most of the methods implemented to reduce speculation have not been successful as indicated by the continued fast rate of land value increases. The methods include limitations on land ownership, capital gains taxes, legalizing land tenure (thereby increasing the availability of land), excess land holding tax and increased property taxes on vacant land.

7.5.2 Methods to reduce land speculation

A commonly used method is the capital gains tax. It is very effective in developed countries but faces several problems in developing countries. The concept is basically that the net gain from land will be taxed when the land is sold. The net gain is defined as the selling price minus the buying price and incurred expenses such as development charges. When setting the capital gains tax rate, it is important not to set it too high as this may encourage illegal subdivisions and sales. Reasons for shortcomings in developing countries often include an inefficient and not up-to-date land registration system and low interest in tax collection among municipalities, as yields typically belong to the national government (ESCAP, 1985).

Various types of limitations on land ownerships have been tried in many countries. Karachi has introduced a limit to the number of plots which an individual can possess. However, this law has been avoided by use of family proxies (Brennan, 1993).

The Indian Urban Land Ceiling and Regulation Act of 1976 intended to reduce land speculation and distribute land to the poor in urban areas by imposing a ceiling on the amount of land which could be owned by an individual. Excess land was to be sold to the Government. Compensation was considerably lower than market values. By 1987, the Government had only taken physical possession of 3,852 hectares out of an estimated total amount of 166,000 hectares (ESCAP, 1993). The Land Ceiling Regulation has in effect reduced the supply of land drastically, thereby increasing land values of other land, primarily small parcels and land located outside the municipal limits (ESCAP, 1993). However, one source indicates that "most of the large landowners were able to obtain exemptions, and those, that did not, have gone to court seeking just compensation" (Billand, 1990).

Land supply can also be increased by legalizing land tenure thereby reducing land values and making land less attractive for capital accumulation. Access to land tenure is a major incentive for low-income groups to invest in housing and infrastructure. Many countries have attempted this method with Karachi taking the biggest step in regularizing all squatter areas (Katchi abadis) located on provincial or local council land and built on before 31 March 1985. A charge was levied on squatters receiving 99-year-long leases and they could not be transferred within five years. Karachi has faced problems to recover development costs and, in a pilot project, only 10 residents came forward to obtain the title (Brennan, 1993). In general, squatters were satisfied with the current situation and would apply for the title only if they intended to sell the plot after five years (Brennan, 1993).

In some instances, granting land tenure has caused an "upward filtration" where middle-income groups have "bought out" lower-income groups (Doebele, 1987). Furthermore, many officials and people in several countries feel that legalizing squatting is equivalent to legalizing a criminal act.

Other methods to reduce land speculation include excess land holding tax and increased property taxes on vacant land. A justification for higher property taxation on vacant land is to encourage capital investments on land as it is often not being utilized to its full potential.

7.6 Funding public infrastructure investments

As mentioned in section 6.1, equity and distribution of wealth were the main reasons why landowners should return the government costs for providing infrastructure and services (betterment) as well as any windfall profit resulting from the public investment. In addition, the public sector also intervenes in the market indirectly through the collection of capital gains and other taxes.

Figure 7.3 shows the changes in land values during the land development process. As the city grows, the value of nearby rural land starts to increase, often several years in advance, in anticipation of changed land use and higher capital values. The time when this increase will begin and the rate of increase, depend on the level of anticipated increased value (expected return of investment) and the risk involved. In theory this anticipatory increase would not occur if there was a capital gains tax or a windfall profit tax which would cover the total increase in capital values in land in connection with land development. The major justification to exact windfall gains is that they are not created by the labour or capital investment of the landowners but by the investment of the public authority.

Figure 7.3. Changes in capital values of land with changes in land use (click to view)

Source: Adapted from Dunkerley (1983)

Betterment taxes are charges imposed on landowners specifically to recover the costs for infrastructure development. A major problem in many developing countries is the failure to collect betterment, let alone the windfall gains (the anticipatory increases). This failure causes shortages in financial resources and contributes to a considerable lag in infrastructure provision. In fact, it is very likely that the anticipatory increase in land value will be higher in countries where the government is known to fail to collect the costs to the public for infrastructure provision as the landowners will attempt to collect a value equivalent or higher than the expenditure made by the public authority.

Research shows that the revenue potential from land value increment taxes and betterment levies are greatest when the tax is clearly linked to a specific expenditure (Shoup, 1983). Regarding the payment of betterment taxes, some landowners may be unwilling to pay for what they consider unnecessary infrastructure improvements (such as paved roads). As betterment taxes can be substantial, it can also lead to financial problems for landowners and sometimes force them to sell the land. A number of solutions exist to improve the cash-flow problems of landowners: First, the authority could provide loans with market interest rates although this may create extensive paperwork. Second, the payment could be postponed until the land is sold deducting the betterment as a lump-sum from the selling price. A general problem with these methods is that cash-strapped Asian authorities may have to wait for a considerable time before their investment is refunded.

Another method to cover the costs for infrastructure provision is a valorization charge. This method raises a substantial share of Colombia's municipal revenues. It is a complex system whereby the costs for infrastructure provision are shared by the beneficiaries on the basis of expected increases in the property values (Devas, 1983).

7.7 Case-studies

7.7.1 Availability and provision of services

Table 7.3 shows the availability of infrastructure and services in five case-studies. As it is difficult to compare the figures mainly because of the different city sizes, the discussion will be based on a set of indicators which were developed for comparison purposes (table 7.4).

Table 7.3. Availability of infrastructure and services⁷

	Bandung	Dhaka	Kandy	Makati	Penang
Road type (kilometres) Primary roads Secondary roads Access roads	96.3 617.1 (65.3)	436.4 1207.4 323.7	5.2 56.2 90.6	18.6 7.2 141.2	572.26 - -
Street lights (kilometres)	183.6	1753.5	565	(167.0)	-
Vehicles (number of)	783,175	61,016	-	41,459	N.A.
Water (serviced households) Individual piped water Stand pipes Water tanks Other	(120,000) 30,000 5,400 -	441,015 36,751 36,751 220,509	14,834 7,850 - -	6,917 - - 6,1424	(107,926) (9) - -
Sewage (serviced households) Sewerage system Septic tank Others	21,800 4,166 (273,341)	147,005 220,502 330,7602	- 20,944 2,3272	(6,000) (80310) (3,000)	(84,000) (8,000) (9,000)
Electricity (serviced households)	(540,360)	661,523	20,700	- 5	(120,000)
Garbage collection1	(379,100)	(624,772)	- 3	(85,000)	(100,000)

Sources: Bandung: Planning Board, Bandung Municipality (1993); Dhaka: Water and sewage: Huq, M.F. (1987), Rahaman and Jahan (1989), Dhaka City Corporation (year missing), All other information: Dhaka City Corporation (1991); Kandy: Source missing (1990); Makati: Metro Manila Authority (1983) and National Statistics Office (1990); Penang: Municipal Council of Penang Island (1994).

¹ Estimate of the number of households which are serviced by garbage collector trucks or other means at least every second day and within a distance of 30 meters from the house.
² Surface, pit and bucket latrines.
³ 80 metric tons/day.
⁴ Deep wells.
⁵ Number of meters installed was 828,165.
⁶ Both primary and secondary roads.
⁷ Please note that figures based on estimates are indicated with brackets.

Table 7.4 is mostly based on average household sizes which has gradually been accepted as a better indicator than population as income and expenditures are typically shared within households in developing countries. Although a commercial centre of Metropolitan Manila, it was found that Makati had actually the fewest roads per household. Kandy indicated that its road system was more than 40 years old and not constructed to carry the heavy loads of modern trucks and the general increase of motorized vehicles. Furthermore, Kandy also intended to provide pavements to improve pedestrian safety. The amount of vehicles per household varied significantly between the case-studies and a misinterpretation of the question is likely to be the cause. In Bandung only about 43.5 per cent of the households had access to water from pipes, water tanks or wells, while the figures in the other case-studies were about 80 per cent. Sanitation and garbage collection were a smaller problem with figures higher than 83 per cent of households.

Table 7.4. Indicators for infrastructure and services provision³.

	Bandung	Dhaka	Kandy	Makati	Penang
Average household size	5.76	4.95	4.64	5.07	4.96
Road metres per household	(2.18)	2.68	5.43	1.87	5.47
Vehicles per household	2.19	0.08	-	0.46	-
Vehicles per road kilometre	(1005)	31	-	248	-
Households with access to piped water, well or water tanks (%)	(43.5)	70.0	81.0	77.3	(103.2)
Households with access to sewerage system or septic tank (%)	7.3	50.0	74.8	(96.6)	(88.0)
Households with access to sewerage system, septic tank, latrine or other (%)	(83.9)	95.0	83.1	(100.0)	(96.5)
Households with electricity (%)	(151.4)2	90.0	74.0	-	(114.7)
Households with access to near and frequent garbage collection (%)1	(106.2)	(85.0)	-	(92.0)	(95.6)

Sources: Bandung: Planning Board, Bandung Municipality (1993); Dhaka: Water and sewage: Huq, M.F. (1987), Rahaman and Jahan (1989), Dhaka City Corporation (year missing), All other information: Dhaka City Corporation (1991); Kandy: Source missing (1990); Makati: Metro Manila Authority (1983) and National Statistics Office (1990); Penang: Municipal Council of Penang Island (1994).

¹ Households are defined as those serviced by garbage collector trucks or other means at least every second day and within a distance of 30 meters from the house.
² Figure may refer to installed meters.
³ Please note that figures based on estimates are indicated with brackets.

There was no information which indicated a trend to differentiate in the provision of infrastructure and services depending on type of land use. However, it appeared that a differentiation of rates according to land use was widely practised. Dhaka indicated that the rates for provision of water and sewage were higher for the industrial and commercial sector. Kandy had also differentiated rates on water according to land use and garbage was collected 2-3 times a day in commercial and industrial areas but only once in 2-3 days from residential areas. In Makati, provision of infrastructure and service did not differ depending on type of land use.

7.7.2 Land development

All six case-studies were involved in land development to some extent, especially land for low-income housing which typically included the provision of infrastructure and services. Programmes to provide housing opportunities for low-income groups, such as example settlements upgrading and sites- and services schemes, will be discussed in chapter 10.

Among the land development activities undertaken, Dhaka had a project for the allotment of some plots to mostly middle-income groups. In Hué, the provincial government used expropriation as a means of enlarging the built-up area of the city while Hué municipality widened roads, and provided water, drainage and electricity, and also developed business and other services. In Makati, the municipality acted as the provider of most infrastructure and services particularly for housing, educational and recreational areas. The Municipal Council of Penang Island was involved in the development of public markets, community halls, hawkers/stalls complexes, public housing and shops for rental, multi-storey car-park buildings and an indoor stadium.

A variety of monitoring and controlling mechanisms was used for land development. Bandung issued building permit licences and industrial location permits, and a Land Control Committee existed for determining the concurrence of land use to actual schemes and development plans. In Dhaka, land development was controlled by the Capital Development Authority and Urban Development Directorate of the national Government. However, Dhaka city corporation monitored whether private land development was carried out in accordance to the legal provisions. In Makati, private developers had to secure municipal approval that the development conformed with allowed land use and, furthermore, projects were inspected before the occupancy permits were approved. Penang's innovative honour system required that all professional consultants were required to honour their professional work ethics to ensure that land was developed in accordance with the approved plan.

Among the case-studies, only Penang indicated some type of time limitation for the implementation of projects. Developers were required to commence work on the site within one year of the approved building plan. However, Penang did not have a time limitation for the implementation of approved plans.

There were several methods whereby governments influenced the areas which should be developed for commerce and industry. The most widely used method was through the provision of infrastructure and services.

Bandung directed industrial development through the industrial location permit. Dhaka had set up a Co-ordination Committee chaired by the Mayor of Dhaka for commercial and industrial development. The Co-ordination Committee held a meeting every three months with the various actors (government, semi-government and autonomous governments as well as NGOs) involved in urban development and utility services. In Makati, provision of services was never used as a tool to control land development. Instead, the municipality controlled development through strict implementation of zoning ordinances. In Penang, the state authority promoted and controlled commerce and industry through the availability of suitable sites and provision of services. Within already developed areas, it was common to rezone land.

7.7.3 Land markets, land development procedures and delays

A detailed discussion on how the land markets operates in the case-studies would require a very thorough on-site examination. Some information has already been mentioned in previous sections. A somewhat crude market indicator is the land development multiplier. The land development multiplier (the price of developed land divided by the price of raw land) shows the premium for providing infrastructure and converting raw land to residential land. It is an indication of the extent to which windfall profits exist in the development process and of the availability of infrastructure as well as the complexity of the development process. A high multiplier value indicates a shortage of developed land for housing.

Three case-studies provided median prices for developed as well as raw land. The land development multiplier for the case-studies are shown in figure 7.4. The information from Bandung and Dhaka corresponds to the preliminary findings of the UNCHS/World Bank Housing Indicators Program, which showed that the indicator generally declines with economic development. However, Makati contradicts this conclusion. Although information on the GNP per capita for the case-studies was not available, it was probable that Makati, together with Bandung, had the highest per capita income of the three case-studies which replied to the question and should therefore not have such a high land development indicator.

Figure 7.4. Land development multiplier

* Source: UNCHS/World Bank (1992)

The questionnaire included a question on the expenses incurred by the developer from the time the land was purchased until the building permit had been issued and the approximate amount of time for the entire process. The replies to this question were often very long and detailed. Typically, many different permits were required and many government agencies were involved. A land registration fee and some type of building permit existed in all countries. It was also common to exact a fee in connection with the planning process. However, as may be expected, the set-up varied considerably between the case-studies.

In Bandung, the required time period depended on the time it took to make notarial documents and to process the ownership change and building permit. The land registration fee was set by the Ministry of Home Affairs.

In Dhaka, there was a 12 per cent stamp duty and six per cent registration fee which belonged to the national Government. The registration fee included a municipal transfer tax of one per cent. There was differentiation depending on the transfer value but a flat rate was applied. Such a high overall land registration cost (18 per cent of transfer value) disencourages land registration and is counter-productive as it promotes illegal transfers. There was no specific planning permission fee. The subdivision fee was about US$0.8 (31 taka) per subdivision whereas the building permit fee varied depending on floor space. The building permit fee was US$8 for 200-300 square metres and the maximum fee was US$2,564 (100,000 taka). The time which the process could take varied substantially but it could take "extremely" long if land ownership was litigated.

In Hué, the provincial government decided on the land registration fee. There was also a planning permission fee which varied depending on how complex the development was. After the fee for the building permit had been paid, it took 30 to 45 days to receive the permit. In Kandy, it took 1-2 months from the time the land was purchased until the building permit was issued. This time was required for processing the application, registration, certificate of conformity and parking fees (fees in-lieu of providing parking space).

In Makati, the developer incurred a documentary stamp fee equivalent to five per cent of the fair market value as well as a land transfer tax which was 0,5 per cent of whichever was highest, the transfer value or the fair market value assessed by the Municipal Assessor. Typically, it took only one day to process payment of tax on transfer of real property. Many fees and permits were related to the construction of the building and the final cost varied substantially. Some of the components included building permit fee, zoning and land use verification fee, sanitary/plumbing permit fee, and occupancy permit fee. Typical costs were US$0.38 (10 pesos) per square metre for residential and social/educational buildings, and US$0.88 (23 pesos) per square metre for commercial buildings. The processing of a building permit usually took at least seven days.

In Penang, the costs for the developer were stamp duty, registration fee, plan submission fee, subdivision fee, individual title fee and conversion fee (if agricultural land).

7.7.4 Methods to reduce land speculation

An overview of the various taxes to reduce land speculation in the case-studies is provided in table 7.5. Four out of five municipalities indicated that land speculation was a main reason for land being vacant. However, in general there were few regulations which attempted to encourage capital investments on land instead of using land for capital storage and accumulation, and the available tools typically suffered from poor performance record. Almost all case-studies levied a capital gains tax and most applied a property tax on vacant land. However, if property tax was levied on vacant land, it was not higher than for other land use. Not one case-study applied limitations on land ownership or excess land holding tax. Only Makati indicated that there was a legal provision for the imposition of a betterment tax in order to collect revenues for public investments. However, it had not been implemented yet and the collection rate would not be more than 60 per cent of the actual cost. Furthermore, the Philippines was the only country where a special tax on vacant land existed and attempts were also being made to collect windfalls profits (unearned increments) to the public sector through a specific tax for this purpose. Typically the case-studies appeared to have poor implementation records regarding taxes to reduce land speculation.

Table 7.5. Overview of regulations to reduce land speculation¹

¹ Please note that blank boxes indicate that information on unavailability is not clear. It is most likely that this would imply that the method is not being implemented.

In Bandung, it is difficult to control land speculation as about 50 per cent of land ownership is unregistered. Bandung also considered absentee land ownership a problem. The Land Control Committee was doing comprehensive research and surveys on the legal status, land use and conditions of the land and buildings. There was property taxation on vacant land and a capital gains tax. The capital gains tax had been introduced in 1994 and the tax rate was three per cent of the gross transfer value.

Dhaka had a regulation limiting ownership of rural land to eight hectares of land for each family and suggestions for a regulation on a ceiling on urban land ownership were discussed. The capital gains tax was applicable for capital assets (e.g. land) owned for more than two years. For land owned 2-10 years, the rate was the lowest of either 20 per cent of the capital gains or a tax level which depended on the income level of the individual. For land owned for more than 10 years, the rate was either 15 per cent of the capital gains or a tax level which depended on the income of the individual. Tax was not levied on income below US$320 (40,000 taka). Income exceeding this level was assessed at a progressive scale up to the maximum tax level, which was 30 per cent. It appeared that it was fairly easy to evade taxation on capital gains and Dhaka acknowledged that the tax suffered from poor implementation record.

The Philippines had recently introduced a new Local Government Code which provided municipalities and cities with an option to introduce an additional vacant land tax. The tax rate could not exceed five per cent. Makati was not using this tax. The capital gains tax in Makati is five per cent of gross transfer value or fair market value, whichever is higher. The capital gains tax was levied regardless of whether the property was sold at a loss. The municipality may in the future impose a so-called special levy (betterment levy) on land which benefitted from public works projects or improvements. The rate would be 60 per cent of the actual costs of the project or improvement including costs for land and property acquisition. The special levy had rarely been used due to the shortage of skilled personnel, absence of clear regulations, problems of defining the assessment zone (the area benefitting from the investment), and the issue of defining criteria for cost allocation among taxpayers.

In the Philippines, a windfall profit tax had been proposed and about to be presented to the parliament. The definition of windfall profit (unearned increment) was the accretion of capital values of property that are not foreseen or in any degree due to the efforts made, intelligence or capital invested by the owner. The intention was to curb land speculation, reap some of the profits of the current investment boom in the Philippines and induce investors to improve land as capital investments were to be deductible. The tax would be especially high for short-term land ownership.

In Penang, there was a limitation on foreign land ownership and imposition of real property gains tax on land transactions. Furthermore, property tax was levied on vacant land at the same level as other land which was six per cent on its annual value in urban areas and 1.7 per cent in rural areas.

Go to Chapter 8: Land registration and information systems