Insights on ‘Build, Build, Build’: harnessing land value capture

By Cesar Purisima and Raya Buensuceso
THE PHILIPPINES’ landmark “Build, Build, Build” infrastructure agenda is critical to unlocking the remaining constraints to Philippine growth. As the government works to turn bold ambition into tangible results, it is imperative to consider fairer, and largely untapped, funding alternatives.
Wider use of land value capture (LVC), which draws on the increase in the value of land adjacent to new infrastructure developments, merits a place high on the list of revenue sources the government should explore as a supplement to taxes and user fees.
At present, the government relies primarily on taxes and fees to support infrastructure projects. Indeed, an important feature of the recently passed Tax Reform for Acceleration and Inclusion Act is that 70% of the additional revenue it generates will help pay for the P8-trillion “Build, Build, Build” program. Proceeds from the act will be added to the P1.097 trillion — about a third of the 2018 budget — previously allocated by Congress.
The common criticism against taxation as a funding source is that members of the public do not benefit equally from infrastructure projects. User fees may seem fairer, but they rarely produce enough revenue to cover operations and maintenance costs, let alone finance construction or debt obligations. And it goes without saying that fare increases are always a hard sell with the public.
Land value capture is attractive because of its fundamental fairness: LVC taps into the newly created wealth of higher property values rather than add to the financial burdens of taxpayers and users. The property-value windfall, created at government expense, should not go just to landowners. The government — and the people it represents — has a right to capture a portion of it to help pay for the construction, operation, and maintenance of public projects.
LVC, which has been used successfully in cities such as Hong Kong and Singapore, ensures that those who benefit the most from higher property values help pay the costs of development. Based on this single premise, it can be implemented in a variety of ways. Hong Kong’s Rail+Property gives the railway operator exclusive development rights for land surrounding its lines. Profit from developing, selling, and leasing the land helps pay the cost of rail projects. Singapore’s development charge system levies fees on new projects that are expected to increase the value of the underlying land.
The Philippines has had its own experience with LVC. Similar to the Hong Kong model, the cost of building, operating and maintaining the new Metro Rail Transit System Line 7 will be partially funded with tax and development proceeds from a mixed-used development around the station in Bulacan, north of Metro Manila. Two decades ago, the government raised more than P15 billion for infrastructure investments in Subic and Clark by selling a stake in former military base Fort Bonifacio.
Notwithstanding these examples of success, LVC is underused, implemented largely on an ad hoc basis. Given the Philippines’ own experience with LVC and its success in many cities worldwide, the government could consider using LVC more. There’s no better time than now, as we embark on the largest infrastructure campaign in our country’s recent history.
 
Cesar Purisima is an Asia Fellow at the Milken Institute, a nonprofit, nonpartisan think tank. He previously served as the Philippines Secretary of Finance and Secretary of Trade and Industry. Raya Buensuceso is the Princeton in Asia Fellow at the Milken Institute Asia Center.