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A genie called 'LVC'.

IMAGINE this. Just a fifth of the increase in land values spurred by the MRT-3 is already equivalent to the total construction cost of the mass transit system, according to the Asian Development Bank (ADB).

The Manila-based multilateral development bank said this only indicates the potential of using Land Value Capture (LVC) in financing infrastructure projects and programs, including those needed to improve mass transit systems.

LVC is a 'public infrastructure funding instrument' anchored on higher property values. LVC revenues can be reinvested into mass rapid transit to allow cities to expand their transport networks, among other projects.

Given such awesome potential, the question then is, why hasn't this LVC concept been used for planning the financing of big-ticket projects, such as those on which the Duterte administration pins its high-growth projections?

In fact, there has been much discussion about that, it turns out, but experts agree legislation is needed. Members of the incoming 18th Congress, please take note.

Government efforts

The National Economic and Development Authority (Neda) said all publicly funded projects can be used to capture LVCs. Neda Assistant Secretary for Investment Programming Roderick M. Planta told the BusinessMirror that this is now being discussed at the Infrastructure Committee (Infracom).

Planta said, however, that this requires legislation since it is a form of taxation. Currently, the Infracom is in the process of studying the country's options when it comes to LVCs, particularly on how other countries are implementing it.

He added that since the LVCs is about public infrastructure financing, the government's actions may need to involve the Economic Development Cluster, specifically the Department of Finance.

'Technically, all government projects that are able to raise land values can be used for LVCs. [However,] we still need to study what other jurisdictions are doing,' Planta said.

According to the ADB report, 'Just one-fifth of the incremental land value increase due to MRT-3 would have been enough to pay for the $655 million total cost of MRT-3, while still leaving a very substantial windfall for private property owners. This implies substantial scope for generating 'win-win' situations via LVC: more infrastructure funding means more mass rapid transit gets built, and more quickly; this generates more windfalls for property owners and improves productivity and welfare for all residents.'

Data showed that residential land values in areas farther from the MRT posted a growth of over 100 percent while land values in nearer residential areas grew over 200 percent.

In farther areas, data showed, land values increased to P7,584 or $172 per square meter (sqm) from P2,789, or $107 per sqm; in nearby areas, it surged to P16,036 or $364 per sqm from P4,972 or $190 per sqm.

The ADB said this translates to a difference of about P6,268 or $154 per sqm, while estimated differences are even larger for commercial parcels, at P22,140 or $545 per sqm.

However, taking into consideration other factors that affect land values such as distance to other rail lines, distance to central business districts (CBDs), population density, and per capita income, among others, the ADB said the MRT-3's impact on land values reached P3,743 ($92) per sqm for residential parcels and P13,968 ($344) per sqm for commercial parcels.

The ADB said that based on more conservative estimates, the aggregate impact on land values within 1 km of MRT-3 stations was close to P180 billion or $3.4 billion at current exchange rates. This is roughly five times the $655-million construction cost of the MRT-3.

'Triple win'

ADB Vice President for Knowledge Management and Sustainable Development Bambang Susantono said in an Asian Development blog that such impressive figures indicate why adopting LVC in cities like Metro Manila can 'create a triple win.'

'The first win is that it helps finance metro systems and thus improve 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,' Susantono said.

'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,' he added.

Based on the ADB report, there are six ways cities can pursue LVC. These are through the mainstream tax system; special fees and levies; auction of development rights; urban renewal agency with value capture capabilities; rail agency as developer; and a combination of these mechanisms.

However, the Philippines encounters a number of challenges in these mechanisms. In terms of the mainstream tax system, LVC revenues are based on 'outdated assessments, inadequate systems for accurate property valuation.'

Further, while local governments collect property taxes, the national government is the one financing big-ticket infrastructure projects such as those identified under the Build, Build, Build.

In terms of using special fees and levies, the ADB said local government units lack awareness regarding these special levy mechanisms that are already included in the law.

The ADB also decried a lack of incentive to tap into LVCs. It said LGUs find it 'technically and politically easier to rely on national government to provide infrastructure funds.'

The report stated that with regard to auction of development rights, the Philippines continues to struggle with the lack of competition when it comes to the property and infrastructure development market.

It added that the government lacks the know-how in assessing benefits to the private sector, making negotiations and/or bid parameters/mechanisms challenging.

With regard to urban renewal agencies with value capture capabilities, the Philippines could not maximize LVC as there is no agency tasked to push coherent urban transport plans and coordinates with all cities, the ADB said.

Technically, the Metropolitan Manila Development Authority (MMDA) has the mandate when it comes to urban and transport planning and coordination, but its current focus is on traffic management.

The Manila-based multilateral body also said that in terms of tapping a rail agency as developer, entities such as the Philippine National Railway (PNR) lack the capacity and incentive to adopt a longer-term and 'entrepreneurial, revenue-maximizing perspective.'

In terms of cross-cutting across mechanisms, the ADB said the evaluation and selection of infrastructure projects are viewed from an individual rather than a master-plan perspective.

'Basic policy reform actions should be proactively considered for Bangkok, Jakarta, Manila, and beyond: to spur a new period of sustained growth in transit investment, with a conscious focus on integrated urban planning, high-quality transit networks, and encouraging non-car, nonmotorized and pedestrian movement for dense yet highly accessible city areas,' the report stated.

The ADB said Metro Manila's population is at 12.88 million with a population density of 20,785 people per kilometer. In terms of mass rapid transit network, there are 61 stations and 78.4 kilometers of track.

Metro Manila's main thoroughfare is the circumferential Epifanio de los Santos Avenue (Edsa), which can carry 6,000 vehicles per hour in each direction. However, it currently carries 7,500 in each direction, or 25 percent above its carrying capacity.

Despite the congestion, mass rapid transit systems have not been able to keep up. The ADB said the combined daily ridership on the three mass rapid transit lines and the commuter line is about 1.24 million, which accounts for less than a tenth of the 13.4 million motorized trips a day that Metro Manila's citizens make.

Private transport accounts for 91 percent of trips in the metropolis-29 percent by own vehicle and 62 percent by paratransit such as jeepney, bus and public utility vehicle-but on increasingly congested roads.
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Publication:Business Mirror (Makati City, Philippines)
Geographic Code:9PHIL
Date:Jun 2, 2019
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