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Land adjustment Land value capture
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Land adjustment Land value capture

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  • TP schemes are a form of land readjustment, a process not unique to India. Variants of it have been used extensively in Germany, Japan, Korea, Taiwan, Australia, and elsewhere. (Washington DC). (read slides) The TP scheme version of land readjustment has a long history in Ahmedabad dating back to the early 20 th century – most of the city has been built this way, and there have been around 200 such schemes. It has been used particularly extensively in the last decade or so, following some legislative changes.
  • (read slides) On the right are some photographs from landowner meetings, which as you can see are as orderly and efficient as India as a whole is. The landowners sell their parcels on the market, and usually receive a high price from real estate developers. In theory, they pay half of the increase in value of their land to the government as a betterment charge (which I will explain in more detail shortly), while the remaining increase is theirs to keep. The government benefits because it avoids taking land compulsorily and all the delays and difficulties that that involves, and can pay for the infrastructure through land value capture. According to the proponents of TP schemes, both landowners and the government benefit, making it a 'win-win' proposition. The pace of expansion using TP schemes has increased since the turn of the century. Between 2000 and 2009, AMC and AUDA developed over 77 sq. miles (200 sq. km.) of land using TP schemes, as opposed to only half that area in the preceding 25 years (Annez, Bertaud et al. 2010). As of late 2009, around 100 schemes under AMC and another 100 under AUDA had been prepared or were underway, with another 200 envisioned under the 2002 development plan (Ballaney 2009). Between 2005 and 2010, AUDA also built over 11,000 units of low-income housing using land obtained through TP schemes
  • Here is an example of a real town planning scheme in Ahmedabad, showing the process of plot reconstitution.
  • (read slides) In theory, the betterment charge owed by the landowner to the government is half the difference between the original land value and the final value. The idea is that the landowner has benefited through the government’s actions, and so owes the government something – the fact that it is 50% is arbitrary.
  • So here is a simple example that can illustrate the financial side of TPS, including how the betterment charge is calculated. Let us imagine that a farmer owns a parcel of land within a proposed TPS with an area of 1000 sq. m., which is valued at 200 rupees per sq. m.
  • As part of the TPS, (read)
  • Farmer A’s original parcel: 1000 m 2 @ Rs.200/m 2 = Rs.200,000 Govt. takes 40% from all parcels, i.e. Farmer A loses 400m 2 For this, govt. owes Farmer A Rs. 80,000 (=400m 2 X Rs.200/m 2 ) as compensation Farmer A’s remaining land is worth Rs.120,000 (=600m 2 X Rs.200/m 2 ) The govt. estimates the final price after TPS to be Rs.500/m 2 Farmer A’s remaining 600m 2 is now worth Rs.300,000 (=600m 2 X Rs.500/m 2 ) Increase in land value = Rs.300,000 – Rs.120,000 = Rs.180,000 Betterment charge = 50% of increase in LV = Rs.90,000 Total owed by Farmer A to govt. = Betterment charge - compensation = Rs.10,000 Farmer A’s net gain is Rs.90,000 A hypothetical example may be useful here in order to illustrate this somewhat complicated process. (The values used in this example are comparable to actual observed values). Let us imagine that a farmer, Mr. X, owns a plot of agricultural land of 1,000 square meters on the periphery of Ahmedabad. His plot falls within the boundaries of a new TP scheme being prepared by AMC. AMC assesses the value of this plot to be `200 per sq. m., i.e. `200,000 in total. While preparing the TP scheme, AMC decides that 40% of land will be taken from each plot, which means that it takes 400 sq. m. of land from Mr. X, which is worth `80,000 in compensation. So AMC now owes Mr. X `80,000. 600 sq. m. of land, worth `120,000, remains with Mr. X. AMC estimates that once the improvements have been made, the value of the land in Mr. X's reshaped final plot will increase from `200 to `500 per sq. m., i.e. the total value of his land will increase from `120,000 to `300,000. The improvements have thus caused the value of his remaining land to go up by `180,000. In order to share this benefit with the government, he now owes 50% of this, `90,000, to AMC as a betterment charge, which goes towards AMC's project costs. Since AMC already owed him `80,000 for the land it originally took, his net payment to AMC is `10,000. The other 50% of the estimated increase in his land value, `90,000, is his to keep. If all estimations used above are accurate, in total Mr. X is `90,000 better off than he was before.
  • That was how it’s supposed to work. The way it works in reality is different. Original and final land values are supposed to be based on recent land sales. However, sale prices are not a reliable guide to actual market value, as they are routinely underreported, sometimes by up to 60% (the remainder is paid in cash), to avoid stamp duties and taxes. Instead the government bases original values on a standard “reckoner”, or guidelines to estimate land value, which do not really reflect market values. It calculates final values in reverse, based on how much they want to recover through betterment charges. That is – they decide how much they need the betterment charge to be, and work backwards, fixing final land values so that they yield this result. While it may seem like the government is taking unfair advantage somehow, in fact the final values on paper are much lower than market values, which means that the betterment charges recovered are also very low. The government does not really exercise its ability to take back half the real increase in land value, treating the betterment charge as a nominal fee. e.g. instead of Rs.500/m 2 as used to calculate the betterment charge, the actual sale price may be Rs.20,000 – 60,000 per sq. m. So betterment charges here are an ineffective means of land value capture for the government. This leads to two questions. Why does the government not calculate betterment charges more realistically, and recover more money? The explanation one hears is that this would be politically unpopular. TP schemes are accepted now because landowners don’t have to give up too much. The government seems to not think it worthwhile to upset this understanding. The other question is, since the amounts are so small, why bother with betterment charges at all? The answer to this that is sometimes given is that varying the nominal charge it from one landowner to another based on parcel characteristics creates the perception of fairness.
  • Here is an illustration of the differences between final land values on paper and on the market. The draft scheme as sanctioned in 2006 (left) shows low estimated final plot values.
  • (read slides) [[[[[ The sale of land obtained through TP schemes has become an important source of income for AUDA. Between 2001-02 and 2004-05, AUDA's total capital budget increased sevenfold, from `32 crore to `227 crore4 (US$ 7 million to US$ 50 million). On average, between 2003-04 and 2008-09, 29% of AUDA's revenue came from the sale of land. In April 2006, AUDA auctioned 20 plots for `172 crore (US$ 38 million), to large real estate firms. In that year, 65% of AUDA's revenue came from land sales. The proceeds from land sales have been used by AUDA to finance large infrastructure projects, mostly road development, water supply, sanitation, drainage, etc (Mahadevia 2009; Sridhar and Reddy 2009). A recent development plan states that from 24 schemes, AUDA has created a land bank worth `500 crores, i.e. over US$ 100 million (AUDA/ AMC City Development Plan 2006-2012).]]]]]]
  • Here is an illustration of the lengths of time taken to implement TP schemes. This is an area in northern Ahmedabad as seen before a TPS.
  • This shows the TPS prepared in 2004.
  • And this shows it in 2010, with hardly any infrastructure built. It is the same in more recent satellite images. This is not an unusual situation.
  • Transcript

    • 1.   Satyam Sing h MBA-IFM 5 0 0 0 21 421
    • 2.  Metropolitan population of over 6 million  Seventh largest metropolitan area in India  Area: 464 km2  (179 sq mi)  Situated in prosperous western state of Gujarat  Founded in 1411 as a walled city  Became a center of textile manufacturing in the 19th century  Grew rapidly in the 20th century mostly using Town Planning Schemes (land readjustment)
    • 3.  A form of land readjustment  A means of expanding urban infrastructure without compulsory land acquisition  Promoted as equitable, participatory and cost-effective  Originally introduced by British Colonial Government in 1915. Legislation updated in 1954, 1976 and 1999.
    • 4.  Areas designated for urban expansion in the city’s development plan  Divided into TP schemes of ~100-250 hectares (250-500 acres), covering ~100-200 parcels  Government pools the land, uses 30-40% for roads, open space, other public purposes, including 5-10% for sale.  The remaining 60-70% is returned to original owners, whose land value has increased  Urban land use is now allowed on these parcels  Landowner consultation at various stages, regarding their individual parcels
    • 5.  Land Value Capture in TPS occurs through two means: o Betterment charges o Sale of appropriated land  Purpose of betterment charge: to divide the increase in land value evenly between the landowner and the government Betterment Charge = Final LV – Original LV 2  Offset by compensation to landowner for appropriated land, based on original land value
    • 6.  Farmer A’s original parcel: 1000 m2 @ Rs.200/m2 = Rs.200,000 Rs.200,000
    • 7.  Govt. takes 40% from all parcels, i.e. Farmer A loses 400m2  For this, govt. owes Farmer A Rs. 80,000 (=400m2 X Rs.200/m2 ) as compensation  Farmer A’s remaining land is worth Rs.120,000 (=600m2 X Rs.200/m2 ) 60% 40% Rs.120,000 Government Landowner Rs. 80,000
    • 8.  The govt. estimates the final price after TPS to be Rs.500/m2  Farmer A’s remaining 600m2 is now worth Rs.300,000 (=600m2 X Rs.500/m2 )  Increase in land value of final parcel = Rs.300,000 – Rs.120,000 = Rs.180,000  Betterment charge = 50% of increase in LV = Rs.90,000  Farmer A’s net gain is the remaining Rs.90,000. Rs.300,000 (from Rs. 120,000) Rs. 90,000 Government Landowner + Rs. 180,000
    • 9.  Original and final land values are supposed to be based on recent sales  Sale prices are underreported by as much as 60%  Government instead bases original values on a standard “reckoner”  Final values calculated “in reverse”  Final values on paper are much lower than in reality  Betterment charges are therefore an ineffective means of land value capture  However, creates the “perception of fairness”
    • 10.  While not emphasized in the rhetoric, land sales are a much bigger source of land value capture from TP schemes  5-10% of land is “banked” by the govt. for later sale  Land sales have been lucrative for the govt. o Govt. claims to have collected land worth $100 million from 24 TPS o e.g. April 2006: 20 parcels sold for $35 million (including one for Rs.61,000/m2 i.e. $1200/m2 ) to large real estate firms
    • 11.  It is hard to attribute the land value increase directly to infrastructure  Simply allowing urban use on this land may account for much of the land value increase  Land value increases partly due to passage of time in a rapidly urbanizing context. It is often a very slow process: final approvals from state governments make take 10+ years (in one case, 26 years). Implementation may have barely begun after a decade.
    • 12. Source: Google Earth November 2003
    • 13. September 2004
    • 14. Source: Google Earth January 2010
    • 15.  The implementation of TPS in Ahmedabad has not been perfect, but these flaws do not reflect on the concept of land readjustment or land value capture itself, but on broader institutional constraints faced in Indian cities.  In Ahmedabad – TPS is an improvement over land acquisition other cities  May be streamlined by doing away with compensation and betterment charges, as most benefit comes for land sales by both original landowners and government.  Land value capture relies on reliable and transparent land valuation