Land Tax an effective source for urban development

Flawed Land Laws impact public land revenue

SGI

In a country like Vietnam which is a government subsidized economy that is gradually switching to a market based economy, public land revenue has enormous impact that is capable of facilitating significant increase in investment capital for development purposes.

The equitization of Vietnamese Film Studios is a controversial example because of cheap gold-land prices and brand value.

The equitization of Vietnamese Film Studios is a controversial example because of cheap gold-land prices and brand value.

However, risk of corrupt practices is high with land taxes now so low and the value of public land suffering serious losses in many ways.

Flawed Land Laws

There has been a real concern about corruption risks resulting from the situation that the State hands over or leases out strips of public land directly to private investors in accordance with legal regulations and decisions on land use rights and land rentals. The fact that the State hands over and leases parts of public land to users and lessees has been a common practice since the Land Law came into existence. In fact, the land use duties and land rentals are estimated to be just 30% of the market price, indicating a substantial loss to national revenue.

The Land Law introduced in 2013 included a regulation on holding auctions to find the highest possible bidder for tracts of land for land use rights. However, such auctions have not been held often enough, even in cities where land prices are prohibitively high. On the other hand, there are only general regulations for land auctions, and no specific regulations for special cases in which competent agencies must choose appropriate investors with robust investment projects.

Additionally, the Bidding Law in 2013 has a regulation for bidding for projects that use land, and has clear Government guidelines on private investment projects. In principle, bidding is applicable only to public investment projects, and auctions for land prices are meant for private investment projects. These regulations cause legislative discrepancies between Land Law of 2013 and the decree with guidelines on implementation of Bidding Law of 2013.

It is therefore proposed that the 2013 Land Law be amended in a way that it includes regulations on land price bidding applicable to investment projects, and bidding for projects that use land for public investment projects, including investments in the form of Public-Private-Partnership (PPP). The government must introduce a particular decree on the land price bidding process that includes the selection of appropriate investors and bidding for land use projects which are required to use the land for higher benefits.

Taking advantage of equitization and BT

Equitization of state-owned enterprises (SOE) with land use rights has not obtained the real value of land. In fact, many private companies try to seek controlling shares for the purpose of taking over the ownership of the land that the equitized company is using, even in the case where such land becomes the company property, and even in situations where the land is leased and the rental is paid every year.

Several companies got tracts of land handed over to them by the State a few decades ago, but so far they have not fulfilled any financial duties on land use. Since 1996, the Government introduced eight decrees on equitization of SOEs, but the problem of determination of land value in such equitization has not been satisfactorily met. The Land Law only requires that determination of land value in equitization must undergo a process of setting appropriate price for specific cases. Lots of equitized companies have vanished before they could be listed in the securities trading floor, and the tracts of land have been used for development of houses for sale.

Now, offering tracts of land for infrastructure in return through build-transfer (BT) construction projects is a big concern in society. Wrongdoings have been found in all of the BT projects which have been inspected or audited. The loss of the value of public land exchanged for infrastructure is that the completed infrastructure is not properly priced, and neither is the exchanged land.

The exchange value depends totally on the estimate of BT projects, which are used as the basis for signing of BT contracts between the concerned government agencies and private investors. This lack of transparency affords high risk of corruption. The 2013 Land Law has only one regulation on land handed over to PPP projects, including BT projects, but it only mentions the handover of land, and does not include any concern about land value.

The amendment to the 2013 Land Law needs to include a specific regulation on the range applicable to BT projects, with a provision on conditions for application; scale of application; contents of BT contracts; process of assessment and pricing of the infrastructure; requirement for pricing different tracts of land in different areas; and the cost of fixed property when a piece of land is exchanged for infrastructure project.

Revenue from increased land value

Since the 2013 Land Law, there has been a regulation on collection of revenue from the increased value of the land thanks to the infrastructure developed with investment from the state budget, but it has just been a policy and not a single guideline has been introduced. As a matter of fact, Da Nang has done a great job in restructuring the central city with the very resources of its land after re-planning. Da Nang simply revoked the existing legalities on land on either side of the widened street or new street and offered that land at auctions, thereby raising funds for construction of streets and urban development.

Ho Chi Minh City applies another approach that revokes legalities on land along new streets and arranges for relocation of local residents living along such streets to new locations, which helps to considerably reduce the expense of compensation, financial support and resettlement. Hanoi, however, has not taken any such measures, and the extremely high cost of infrastructure development has resulted in the most expensive streets on the planet, and the extremely narrow and ugly houses along the streets.

The amendment to the 2013 Land Law must focus on development of infrastructure and planning of land adjacent to such infrastructure, making it possible for the authorities to obtain the increased value of the land after the development of an infrastructure and use the revenue to pay for further development works. Such an approach could prevent haphazard urban landscaping and the construction of narrow tube houses.

Reallocating premises on public land

This is a major policy in cities when authorities want to move some congested non-business government offices and polluting factories to suburban areas, and rearrange head offices of government agencies. However, the implementation of such policies has not been transparent as far as the value of land is concerned. For instance, the transfer of land use rights of public land has not been conducted at auctions or through bidding for projects that use land. The 2013 Land Law also does not include any regulation on determination of land value when it comes to reallocating premises that use public land in cities.

There has been breach of legal regulations at government agencies that use part of their duty-free premises for leasing or other wrong purposes. This lack of transparency clearly leads to corrupt practices. The amendment to the 2013 Land Law should introduce an appropriate statute on reallocating of public premises that help create extra strips of land. For example, there should be a specific criterion for activities such as moving congested non-business government offices and polluting factories to suburban areas.

Translated by Nguyễn Gia

Prof. Dr. Đặng Hùng Võ

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