Improved accessibility and increased commercial traffic are amongst the benefits of a public transport system and, as a result, the value of adjacent properties increases. For the government, adopting a Land Value Capture (LVC) framework for recovering the value added generated by proposed infrastructure will be essential for financing the said projects.
In President Rodrigo Duterte’s Build, Build, Build Campaign, rail developments are the focus of the infrastructure projects. The majority of the Department of Transportation’s (DoTr) proposed budget is allotted for the rehabilitation of existing railways and the construction of new ones. Monies collected from LVC measures will provide a means to offset the cost of expensive infrastructure projects. But what is an LVC?
LVC is a financing tool for public infrastructure projects, which will recover the value increase of adjacent lands, as a result of the public investment. Revenue is earned from the beneficiaries of the value increase through taxation.[i]
The simplest LVC measure is the collection of real property taxes through Local Government Units (LGUs). The higher value of land is “captured” or recovered through the recurring collection of these taxes based on its land zone. Another measure is through a sale of building development rights. Private investors purchase these rights to construct a building beyond the land’s use plan or density limit.[ii]
LVC measures also take form in partnership arrangements between the local government and the private sector through the construction of the Transit-Oriented Developments (TODs). TODs are commonly defined as tax-incentivized, high-density, mixed-use developments within an 800-meter walking distance of a transit station. The commercial traffic associated with TODs attracts private investors as this presents investment opportunity.
The revenues from LVC primarily provide recoupment of some if not all of the public infrastructure expenditure. LVC measures vary in terms of investor type and financing duration, some more applicable than others. For the costly campaign to enhance the county’s transport services, the use of LVC is also a means to fund the maintenance of the rail systems.
People’s willingness to pay a premium to own the benefits of living by or working close to a good public transport system, often yields to the location’s higher valuation of real property relative to others. According to the study carried out by the Asian Development Bank (ADB) in 2018, the completion of the Metro Rail Transit 3 (MRT-3) in 1995 resulted in an increase of PHP3,700-6,300 per square meter and PHP14,000-22,100 per square meter in residential and commercial land values, respectively, within one kilometer of the train stations.
Based on ADB’s estimates, the total increase in public investment in MRT-3 is close to PHP180 billion — about five times its construction cost of about PHP34.7 billion.[iii] This shows that the government, private sector, and general public stand to benefit in the application of LVC. The government will have more funding to build infrastructure projects, the private sector will have more income potential, and the general public will improve their standard of living.
LVC measures have also been used to drive urban development in underutilized government property. In 1995, the Bases Conversion Development Authority (BCDA) sold 150 hectares of undeveloped land in Fort Bonifacio to private developers for PhP30.4 billion. The sale led its development as a premiere business district in Metro Manila. Subsequently, part of the proceeds was used to fund infrastructure projects in Subic and Clark in 1998. [iv]
In enhancing the country’s transport network, LVC becomes an integral part not only for its funding, but also for its long-term sustainability of infrastructure. The National Economic and Development Authority plans to utilize different LVC funding tools and has assigned the Infrastructure Committee (InfraCom) to further study and examine how it is being implemented in other countries. The application of LVC would require legislation as it would be a form of tax and would involve the participation of the Department of Finance (DOF), according to Mr. Planta, NEDA Assistant Secretary for Investment Programming.[v]
Through innovative financing methods, LVC methods can be adjusted to be more progressive, generating funds by applying LVC measures against more productive economic activities around infrastructure projects. In other words, LVC should be focused on capturing earning potential from nearby productive private land as opposed to imposing blanket fiscal measures on all activities, some of which may be essential but vulnerable.
The Philippine Railway projects
Written by: Fred Mejia and Hanah De Vera
Aviso Valuation and Advisory Corp. is a real estate consultancy firm that offers valuation and business advisory services compliant to international standards such as the International Valuation Standards (IVS) and International Financial Reporting Standards (IFRS). To assure that we only produce high-quality deliverables, as needed, we do tasks beyond the usual appraisal process like verifying pertinent property documents (i.e. land titles, tax declarations, etc.) with the appropriate government agencies for due diligence purposes prior the acquisition of the properties.
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REFERENCES
[i] The Audiopedia (Producer). (2016, December 10). What is VALUE CAPTURE? What does VALUE CAPTURE mean? VALUE CAPTURE meaning & explanation [Video file].
[ii] Buensuceso, H., & Purisima, C. (2018, July 27). Funding Transport Infrastructure Development in the Philippines: A Roadmap Toward Land Value Capture.
[iii] Abiad, A., Farrin, K., & Hale, C. (2019, April). Sustaining Transit Investment in Asia’s Cities: A Beneficiary-Funding and Land Value Capture Perspective.
[iv] Peterson, G. E. (2008, October 15). Unlocking Land Values to Finance Urban Infrastructure.
[v] Ordinario, C. (2019, June 2). A genie called ‘LVC’.
