Institutional Contexts and Value Capture Mechanisms

As referred to earlier value capture mechanisms as a type of planning tool are influenced by their institutional context, therefore before considering the role of key actors in the operation of value capture mechanisms it is worthwhile briefly

considering the operation of a range of value capture mechanisms within differing institutional contexts. Considering the international experience is useful in this respect as the operation of planning systems themselves, and in turn of value capture mechanisms, are rooted in the political and administrative culture of a

country and its legal framework as it affects property rights (Norton and Bieri, 2014).

A number of authors (Ingram and Hong, 2012; Crook et al., 2016; Monk and Crook, 2016) have identified several key elements as being particularly relevant to value capture mechanisms, these are property ownership rights, property development rights, the funding of local infrastructure provision linked to the delivery of

development and the conceptualisation of value capture linked to the wider

philosophy of the planning system in that country. The operation of a value capture mechanism is dependent upon the private ownership of land and property and countries which don’t have a market in private property ownership transfer are effectively capturing value by the state ownership of land. In China which has state ownership of land, the state still grants leasehold interests to the private sector to facilitate development, but without an open market trading of legal interests in land the system experiences challenges in establishing market values with which to

assess value capture (Anderson, 2012). In the UK context the nationalisation of land ownership was considered in the 1940s but not implemented, what was introduced was the nationalisation of property development rights via the introduction of the

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planning system requiring planning permissions to develop land as considered in chapter 2.

The second key element therefore is the ownership of the right to develop land, if this is owned by the state, then the granting of planning permission to develop provides an opportunity to secure value capture. This however also depends on the amount of certainty and discretion involved in the operation of the planning system and in the nature of the value capture mechanism, as a fixed or negotiated charge and on its timing within the development process. Monk and Crook (2016) in their

consideration of planning gain in the UK as compared to Germany, Netherlands, USA and Australia point out that the degree of discretion in the UK planning system even if plan-led, provides the opportunity to negotiate planning gain, due to the uncertainty of securing planning permission and the need to take into account other

“material considerations” in determining a planning applications being key to this.

Under the greater certainty provided by the zoning based planning systems of Germany and the Netherlands the requirements in terms of value capture are more defined and fixed, which may be reflected in lower land values as the costs are passed back to the landowner, but don’t provide the opportunity to negotiate extra value as via the planning obligations in the UK. Gielen and Tasan-Kok (2010) argue that the greater uncertainty and discretion, the more value capture that can be generated.

Conversely, in the USA and Australia the ownership of the development rights remain with the landowner never having been nationalised as in the UK. Whilst zoning plans provide some control over land use and development, value capture mechanisms such as impact fees, considered earlier in chapter 2, are more driven by the need to fund local infrastructure to support new development. In the USA the rational nexus principle is a legal requirement to equate charges with spend, yet there is also a move towards a more negotiated approach (Monk and Crook, 2016).

The Australian system has a little more discretion but again has to apply proportionality and the rational nexus principle.

The need to fund infrastructure and to the delivery of development are a key driver for value capture mechanism across many countries, and are illustrated by two different approaches. The value capture mechanisms which levy a charge on new

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development are the main subject of this research but a major alternative is the process of land readjustment. This is where the state seeks to acquire land

ownership to facilitate development, then by providing and funding infrastructure on the state owned land it increases its value, in turn selling the land on to the private sector to develop and capturing the costs by the higher price achieved on the sale.

This is a process that has been very prevalent in France, Germany, and Netherlands but also in India via its Town Planning Schemes (TPS) (Sanyal and Deuskar, 2012).

The land readjustment approach reflects the need to deliver development as well as capture value and is influenced by the legal framework of property ownership. In France, the property inheritance system has often led to much fragmentation of property ownership in urban areas and this needing to be overcome to bring forward development (Booth, 2012).

The land adjustment approach has the advantage of ensuring the supply of land, but requires significant public investment to be committed up front, even if over time the land value increases capture the cost and return this to the public sector.

Accordingly this approach is often supported by important public sector social and economic objectives to justify the upfront resources as has often been the case in Germany and the Netherlands (Monk and Crook, 2016). The land readjustment approach has been much less used in the more market oriented UK context or in the USA and Australia although all have CPO powers with the state to assembly sites.

Recently in France, Germany and the Netherlands there has been a move away from the land readjustment approach, to using CPO powers as part of public private

partnerships more in line with the UK and USA approaches. In some contexts even CPO powers are not needed, a private sector led land readjustment process has been delivered in Hong Kong and Tokyo in Japan linked to the capture of value from new rapid transit systems and development around new stations (Murakami, 2012).

This leads on to the final key element the conceptualisation of value capture within the wider context of the philosophy of the countries planning system. In the case of the USA, Australia and the UK the planning system is currently oriented to supporting growth and the market and less so towards the securing of state determined

economic and social objectives more characteristics of the planning systems in Germany, Netherlands and France. But this is also changing as the latter three countries also seem to be moving more towards market based mechanisms such as

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the TLE local infrastructure tax in France to fund infrastructure (Booth, 2012).

Historically France has never been influenced by the notion of the undeserving landowner benefiting from the uplift in land value as in the UK in the past, but today both see value capture as driven by a need to fund infrastructure to support growth with parallels between the CIL and the TLE and the IDP (UK) and the PAE

development program in France (Booth, 2012).

Today, few countries pursue value capture as an explicit tax on land or development value, rather it is presented as the recovery of costs of infrastructure provision or the costs to mitigate the impact of the new development. In less developed economies there is also much interest in value capture mechanisms, especially as many of these countries have rapidly growing populations and economies requiring infrastructure to support that growth. In his recent review of value capture in Latin America, Smolka (2013) explains that the notion of the unearned income accruing to undeserving landowners is still relevant in developing economies in contrast to the more developed economies of Western Europe, USA and Australia. The importance of social justice issues are also relevant, in relation to the provision and funding of public services and in relation to the occupation and ownership of land. This is beyond the scope of this research but it is important to remember, that as various countries such as Brazil and Columbia implement value capture mechanisms and other countries such as Argentina consider legislation in this respect (Smolka, 2013) in the face of powerful influences, that the whole policy is socially constructed.

What is apparent is that the implementation of various types of value capture

mechanisms are very much influenced by the intuitional context as set out above and that this changes over time and by location. This shows how these policies are socially constructed and that there are not right answers that emerge from a technical analysis. The socially constructed nature of the policy also requires research

approaches able to uncover those policy processes, something which will be discussed in chapter 4. It also demonstrates that the role of key actors and how value capture mechanisms share value are important and this is now considered further.

72 3.5.4 Landowner’s behaviour

Whilst important actors in the property development process, relatively little research has been undertaken into the behaviours of Landowners, with economics traditionally assuming that supply is a function of demand. In addition the difficulty of securing information on patterns of ownership, has meant that the main actors studied in the development process have been planners and developers rather than landowners (Goodchild and Munton, 1985). The main reasons for landowners ownership is either for use or investment purposes, rarely for control. Three separate behaviours were identified, the timing of the owner’s decision to sell land for development is related to the owners financial strategy, the nature of the owners contribution to the development process is reflected in the owners operational strategy and the owners management decisions as they effect development (Goodchild and Munton, 1985).

In addition a distinction was made between the non-professional landowner who believes the policy context is against him due to his imperfect knowledge, the more experienced landowner tend to think of the policy context as more flexible.

(Goodchild and Munton, 1985).

Lack of knowledge and understanding can also influence the landowner’s willingness to sell, firstly, the pattern of land values, the effect of planning on that pattern and the uncertainty over planning permissions. Secondly, the rise in land values over time due to economic growth and urban expansion, but expectations are not always realistic in the short term and finally landowners have a price below they will not sell.

(Goodchild and Munton, 1985).

A major impact of the planning system on the behaviour of landowners is the time taken to prepare Statutory Plans with the uncertainty this creates. The number of unanticipated developments that proceed not identified in the Development Plan, or often the Plans contain unrealistic or vague policies and these also increases the scope for negotiations (Goodchild and Munton, 1985).

In specifically considering the impact of tax on landowners the conclusion was that it was significant in the short term and often led to a wait and see outcome. This is supported by the response to landowners to national betterment taxation discussed in the last chapter. In relation to Planning Obligations and CIL the research predates these policies. The assumption from economic theory is that the contribution or

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charge should reduce land values, but it depends on the timing of the land purchase agreement. In relation to Planning Obligations they are often negotiated much later than the land purchase price, so this assumption is not always correct. As with CIL as well the assumption about a reduction in land values only occurs if the cost of the contribution or charge is known in advance of the land price negotiation and that there is certainty of its continuation into the future, generally an uncertain

assumption.

Whilst useful background it is important to consider this research in terms of the policy context at the time and whilst some of the conclusions probably still hold true some matters may not. In any event an appreciation of the motivations and decision making of landowners is important within the CIL policy making process for the assessment of the threshold land value, i.e. the price a landlord will be willing to sell land.