MRT boosts land values—so why not create triple win? - Bambang Susantono
Op-Ed / Opinion | 26 March 2019
On any given working day, whether you are driving around Manila, Jakarta, or Bangkok, the experience tends to be the same—long spells crawling in slow-moving or almost stationary traffic. The personal time and wider economic wastage from these lost hours stuck in traffic has been quantified by various researchers.
One of the main reasons is that transportation infrastructure has simply not kept pace with the relatively rapid city growth. In the last 40 years, road networks have traditionally been at the core of modern public infrastructure investment. It was automobile mobility and not peoples' accessibility that was the center of urban transportation policy.
In its landmark report titled Meeting Asia's Infrastructure Needs in 2017, the Asian Development Bank (ADB) highlighted the need for US$1.7 trillion annually to pay for developing Asia's infrastructure from 2016 to 2030. There is a large difference between this target and current levels of spending. And the biggest infrastructure finance gap is in transportation, where $600 billion is needed annually across developing Asia. Further, almost 80 percent of transportation infrastructure financing in developing Asia comes from the public sector, which has many other priority spending needs.
Other funding sources are clearly needed to bridge the infrastructure gap. One innovative option is land value capture (LVC). Through this, improved accessibility as a result of infrastructure, such as subway or light rail lines, leads to rises in land values. The concept of LVC is that those who benefit from transit's added value should contribute to the cost of high-quality transit development.
A new ADB report, Sustaining Transit Investment in Asia's Cities, highlights the potential for LVC in the context of Bangkok, Jakarta and Manila. The report systematically reviews 61 MRT systems in advanced and developing economies and provides case studies of changes in land prices around MRT stations in Bangkok, Jakarta and Manila. It shows significant price premiums for properties near a mass transit station; the closer you get to a station, the more expensive land becomes—particularly for commercial properties. For example, in Manila, land value uplift in the catchment area of MRT-3 metro stations amounts to an estimated $3.5 billion—five times the building cost of MRT-3.
When the public sector properly secures the windfalls from increased revenues resulting from its own infrastructure investments, the burden on traditional sources of tax is reduced. Recycling LVC revenues back into mass rapid transit allows cities to continually expand their transportation networks, rather than worrying about how each new addition will be funded.
But what is in it for the private developers and landholders? The answer is they benefit from participation in LVC because they gain more in value added to their property from improved accessibility than the contribution asked of them.
Despite the potential for LVC in rapidly growing and urbanizing Asia, many cities still lack the conditions required for successful LVC implementation. As the new report points out, LVC can be achieved in several ways—strengthening the legal, regulatory and institutional frameworks; learning from successful models elsewhere; and developing institutional capacity.
Successful developed cities such as Tokyo, Osaka, Nagoya, Singapore, Hong Kong and Seoul have all previously made the transition from developing city status into the top league of economic performance, all with a strong focus on MRT investment that rested on value-capture concepts.
The report recommends five mechanisms to pursue LVC, each intended to be complementary and mutually supportive.
First, the mainstream tax system—this is one of the most important points. Improving land valuations to increase property-related tax revenues close to transit stations is core to sustaining investment and growth in MRT.
Second, special fees and levies—these target specifically defined beneficiaries, for example, those benefiting from a major transit upgrade. It can also take the shape of charging connection fees to property owners for physically integrating their property to a transit station.
Third, auction of development rights—this involves putting a development opportunity associated with a new transit facility or line up for sale, via open auction.
Fourth, an urban renewal agency with value-capture capabilities—a comprehensive authority would work to generate new property value, with access enhancements and delivery of needed transit infrastructure to generate value capture.
Fifth, rail agency as developer—this involves a transit operator developing and trading property associated with stations and their precincts on a commercial basis. Some of the profit from these activities would be channeled to transit infrastructure. This model is widely used in East Asian cities, including Japan and Singapore.
Adopting LVC in cities like Jakarta, Bangkok and Manila creates a triple win. The first win is that it helps finance metro systems and thus improves overall urban mobility. The second win is that if used properly, LVC reduces the subsidy levels required in running metro systems, since the money from LVC can also go toward operating costs. For the third win, the money generated from LVC creates the fiscal space to use government finance productively for other sectors -- such as health, education and slum improvement.
Taking action on this issue will not only pave the way for viable MRT systems but spur a new period of sustained growth, improved living conditions, and—of course—fewer clogged roads.