Public Value Capture: An Opportunity to Improve the Economic Situation of African Municipalities

Table of Contents:

Introduction

“There is nothing more important to the progress of our economies and societies than good regulations. By good regulation is meant the sort that serves to enhance the wellbeing of the community at large” (OECD 2015).

Public administration shapes economic prosperity, social cohesion, and sustainable growth. It molds the environment for creation of public value (European Commission 2016).

The shortage of financial resources is a global problem. Coming out of the economic and financial crisis, countries as well as municipalities have decreasing means to fulfill all their public commitments. This chapter provides options to solve this highly topical problem. An effective tax system is one of the key policies in this connection. Modernizing governance is a way to relieve economic and budgetary pressures, to design and deliver needed structural reforms, to remove existing barriers, and to foster innovation. Public value capture is essential to improve the refinancing of public infrastructure to keep the necessary budget for important duties such as education and health care. For this reason, it is one of the key factors of responsible land management and smart tools are needed for a successful implementation.

In Latin America, many value capture initiatives are also motivated by the mobilization of new and more flexible funds to finance special social programs. In the land policy realm, value capture has been associated with many constitutional and legislative reforms that redefine property rights, obligations (often embodying the social function of property), and the ability of public administrations to redistribute the benefits and costs of urbanization. These ideas contradict the pervasive and traditional mode of state intervention in Latin America, typified by the phrase “socialization of costs and privatization of benefits” (Smolka 2013).

Public value capture still attracts little interest on the African continent. However, it constitutes a type of financing with strong potential in cities with solid and regular space growth (ULCG Africa 2012).

The role of data is highly important for effective and reliable policies, as data provides a solid evidence base to draw upon for successful policy design. This implies gathering and interpreting data from an array of sources and viewpoints, and challenging preconceived ideas and current practices in the search for more effective policy solutions. Therefore, innovative financing is of growing importance and much can be learned from approaches in different countries. However, a “one-size-fits-all” approach should be avoided. The optimal tool box has to be adapted individually to country-specific circumstances.

Theoretical Framework

Increasing property values have deep social, economic, and distributive-justice implications (Alterman 2012). Historically, this has raised fundamental questions. Is the economic value increase a private property or a social good? Do governments have the right to reap some (or all) of the increments in value? Are property owners responsible for the externalities of the development of their land and should they thus internalize the costs of mitigating the impact? Still, the issue has been hotly debated in relation to the concept of public value capture, which can be seen “as a method or a strategy to capture value increase to use it for specific purposes” (de Wolff 2007).

The ethical basis to address the distributive-justice problem of dividing value increase between private property owners and the governments is the concept of unearned increment. A general definition of this concept can be formulated as an increase in the value of property through no work or expenditure by the property owner (Morales Schechinger 2007).

What then constitutes work or expenditure by the property owner? Obviously, land values are determined by a number of factors, that is, as a result of both public and private investments and actions. In order to “sort things out,” Hong and Brubaker (2010) divided the roots of increasing values into five main categories:

  • (1) the original productivity of the land, the value of current land-use
  • (2) changes in land-use regulations, extension of property rights
  • (3) public investments in infrastructure and social services
  • (4) private investments that increase land value
  • (5) population growth and economic development

In this chapter, we share the view of Ingram and Hong (2012) that a conceptual delineation of these five elements of land value and their ownership can facilitate the discussion of who should capture what. If we apply the five elements to a property development situation, we can construct Figure 20.1.

In the “predevelopment phase,” property value is based on the current land-use, that is, farm, forest, or derelict urban land.

The “development phase” contains three principal measures and activities that influence property value.

  • • A change of land-use normally requires some form of permission from authorities, that is, extension of the property rights. This regulatory system differs between countries, but often it is based on land-use plan(s) and subsequent permits.
  • • Individual properties must be supplemented with public infrastructure. We can then make a distinction between “internal infrastructure” servicing only the development area (roads, water, and sewage, etc.) and “external infrastructure” for larger areas (main roads and parks, schools, etc.).
  • • For individual properties, it is the owners’ responsibility to construct buildings and facilities with their own investments.

The value increase due to a specific government decision such as specific types of land-use regulatory decisions or the execution of public infrastructure can be also classified as betterment. This is a term used especially in Great Britain and its former colonies. Betterment can be further divided in the subtypes “development-right based betterment” and “infrastructure-based betterment.” Infrastructure-based betterment levies are, historically, the earliest form of betterment capture (Alterman 2012).

Value steps of property development

FIGURE 20.1 Value steps of property development.

When the property is completed, the “postdevelopment phase” begins. Value increase in this phase is determined by, for example, population growth, migration, and the increase of societal productivity.

In real life, these activities do not necessarily follow this order, as they might overlap or even precede each other in different sequences. For example, agricultural land already rezoned for housing (property owner’s rights are already extended) might remain undeveloped for years and its economic value might increase further due to general economic factors while the owner is still farming it, perhaps waiting for larger value increases. Or land already built might profit from the construction of public infrastructure by the municipality and/or from general economic factors before the owner decides to sell his property.

 
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