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Value Capture in Sao Paulo, Brazil

“Value Capture in Sao Paulo, Brazil – new forms of urban governance and lessons for South African cities” by Professor Paulo Sandroni and Moegsien Hendricks

As cities grow in size and building density, the demand for additional construction sites combined with the limited amount of physical well-land available for development often results in land price increases. High land prices, coupled with the availability of land suitable for inclusive development presents one of the biggest challenges facing governments in developing cities as they attempt to address the ever growing challenges of rapid urbanisation, increased ‘slum’ formation, growing inequality and poverty.

Section 26 of the Constitution of South Africa provides that everyone has a right of access to adequate housing and obliges the State to take reasonable measures, within its available resources to make sure that this right is realised progressively. The lack of available resources whether it be in the form of land, finance or capacity are often reasons put forward by government as obstacles  to delivery, particularly delivery of affordable housing on well-located land. One of the lessons from the City of Sao Paulo is that there are ways for municipal governments to realise increased revenue from developments in ways that are not disadvantageous to developments / developers and the land and property market in general.

Where to begin?

One of the foremost urban development challenges for officials and politicians is the provision of new infrastructure as well as alleviating the pressure on existing infrastructure through upgrading. How is the investment in infrastructure financed? How are the benefits and costs from land improvements distributed? In most cities, the cost of public infrastructure and services (e.g. streets, sewers, water) is paid for with public funds, yet the resulting improvements or added value to the land is usually enjoyed by private land owners, entirely free of charge.

The notion that private owners should not be the only beneficiaries of such improvements was gradually introduced in Brazil during the 1970s, and this principle was incorporated in articles 182 and 183 of the 1988 Federal Constitution. These articles were subsequently regulated by Federal Laws in 2001, also known as the Urban Development Act or City Statute. This meant that the federal law ratified the principle of the social function of urban land ownership and the separation of the right to own land from the right to build – a conceptual shift that provided the context for all subsequent land regulations and value capture instruments. Based on the Urban Development Act, the City of Sao Paulo approved its Strategic Master Plan in 2002 and a number of land use legislation which allowed for the introduction of the mechanism of Charges for Additional Building Rights (Outoga Onerosa do Direito de Construir – OODC) which established minimum, basic and maximum floor area ratios and limited the supply of buildable area. These tools, utilized together, enabled the municipality to improve land management efficiency, promote socially desirable outcomes and increased revenues.

The charge for building rights in Sao Paulo does not seem to have affected the profitability for developers. On the contrary, increasing the floor areas ratio in some areas of the city contributed to enhancing the developers’ rates of return. Unlike property tax revenues that recur annually, revenues from the sale of building rights will fade in time as the additional building potential is exhausted. However, future changes in the master plan may provide greater building potential for these areas.

Another instrument that was effectively used in the 2002 Master Plan for Sao Paulo is the Special Zones of Social Interests (ZEIS). The purpose of these  ZEIS were to discourage land speculation; recognition of the rights of residents over the land they occupy; implementation of land regularisation programmes; recognition of the need to improve quality of life through upgrading; and recognition of the need to generate income for residents.

The application of the principle of the social function of property, embedded in the 2002 Strategic master Plan for Sao Paulo, enabled the enactment of municipal legislation that clearly separates the right of ownership from the right to build. As a result, the traditional notion of all-encompassing property rights is no longer sustained, and land ownership cannot override the public interest or take precedence over the social function of property. Consequently, existing building rights can be reduced without landowners being entitled to monetary compensation simply because their hopes have been dashed.

The use of innovative property taxation and land value mechanisms to finance affordable housing, serviced land and infrastructure to enable access for the urban poor is practiced in many developed and developing countries with great effect. In South Africa however, these tools are under-developed and insufficiently mainstreamed. The limited reach of land management policy and regulatory systems, and an unregulated land and property market contribute to growing inequality, poverty, marginalization, and spatial segregation. Land value tax and other land value capture mechanisms as a source of additional revenue for local municipalities are absent from urban development policy.

Moreover, South Africa has a tax system that encourages land speculation and contributes to urban sprawl, resulting in the unsustainable and inefficient functioning of our cities. Many commentators on land and property taxation are of the opinion that the scrapping of the tax on land only in favour of a tax on both land and buildings was short-sighted, given that there are many advantages of taxing only land. Advantages include, intensifying land use; recouping the value of public investment in local amenities to the government; discouraging vacant possession for speculative purposes; inhibiting urban sprawl by bringing unused land into the market; encouraging equal access by bringing the price of land to more affordable levels; and dampening price escalation.

Some Important Lessons for South Africa

Interventions in land management and valuation, is an urban governance issue as much as it is a planning issue. Plans and interventions must consider the implications for the land and property market vis-à-vis the needs of society at large. It is important that urban planners and development practitioners, and especially those in the employ of government, have a firm understanding of urban land economics and the workings of the land and property markets. The importance of up-skilling and education of officials, politicians, NGOs and communities is clear. On the one hand, it is about the role of civil society and their levels of know-how to lobby government for an appropriate intervention or tax, and to assert their right to the city. On the other, it is about the commitment of officials and involving them in the discourse. Ultimately, it is about bringing the discourse to civil society and government to intensify debate around the ‘democratisation’ of the economy.

Further, the innovative use of zoning regulations as in the case of the ZEIS can protect the poor from gentrification and exclusion from the City due to high price of land and property. This therefore requires greater alignment between zoning regulations and spatial and human settlement imperatives and objectives. The land use management officials dealing with rezonings, granting more building floor area and bulk, approving building plans and sub-divisions and so forth are equally responsible for achieving integrated human settlements and the spatial restructuring of our cities.

Innovative approaches to managing and taxing land requires political will and is best driven by champions within the legislature and the administration. It requires partnerships between government, the private sector and civil society..

DAG believes we need new instruments to address old problems.  Future research should, therefore, be aimed at appropriate and contextually relevant land taxation and value capture mechanisms, drawing on lessons learnt from their implementation internationally. Unless we apply the right instruments to tax land appropriately within the right administrative systems to channel the captured land value for pro-poor development,, we will not solve the many challenges of urbanisation such as housing and service delivery.

The majority of the population rely heavily on government to deliver affordable housing and services. DAG’s motivation for the introduction of innovative fiscal and regulatory mechanisms is to enhance the financial capacity of municipalities to meet this need as well as to optimise the use of land to achieve more inclusive cities.

MEC Bonginkosi Madikizela has expressed commitment to meaningful public participation in the management of urban land.  He believes this will “let us overcome the complex cultural, legislative and structural challenges in our way”.  For public participation to enable his vision of settlements that “offer our citizens access to jobs, to transport, to hospitals, to recreation and to schools” it will be essential for government to address the limitations posed by a lack of resources such as well-located land and finance.  DAG believes a system of value capture will go a far way in meeting these needs.

 

This article captures some of the salient points of a presentation delivered at a recent DAG seminar by Professor Paulo Sandroni (formerly from the City of Sao Paulo) as well as quotations from the opening speech by the Western Cape Minister for Human Settlements, Bonginkosi Madikizela.

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