Peru
Land value capture in Peru
Several land value capture instruments exist in the country (Table 2.44). Local governments always charge developer obligations for new urban developments that request formal approval. Yet, new formal developments represent only 6% of converted urban land. Local governments rarely adopt charges for development rights, infrastructure levy and land readjustment. The main cities, notably Lima, Arequipa, Trujillo and Cusco, apply them in an exceptional basis. There is no legal framework for strategic land management. The inaccuracy of land registries, low level of technical capacities, reduced political will and insufficient local budget constitute obstacles to the implementation of these instruments.
Enabling framework
Peru is a unitary republic with a two-tier subnational system of government, composed of 24 departments and the Constitutional Province of Callao at the regional level, and 195 provincial municipalities at the upper local level and 1 671 districts municipalities at the lower local level (OECD/UCLG, 2019, p. 507[1]). These two municipal levels are independent, but provincial municipalities have a co-ordination role across district municipalities within the province.
The national and local governments create the legal framework of land value capture. The national government is responsible for land valuation, using a non-market approach. Local public officials have no discretion in the decision of granting planning permits. This means that they cannot negotiate the terms of permits, they can only grant them with basis on zoning parameters.
In 2021, the national government enacted the Sustainable Urban Development Law (Law 31313). This law informs substantial modifications to charges for development rights, developer obligations and land readjustment. However, implementation of the law has not yet started, as the Ministry of Housing must first create its regulation. Only after that, these changes will enter into force.
Developer obligations
Developers are subject to in-kind obligations to obtain approval for new development. The obligations are designed to compensate the impact of new development on public infrastructure and services located within the boundaries of development. Local governments always implement developer obligations and collect the revenues, when there are any to be collected.
The obligation is paid through the in-kind provision of public spaces and public services. After conducting the necessary works, the developer transfers the developed areas to the local authority (Ministerial Resolution 29/2021 of the Housing Ministry). If the development is financed by public sources, developers are exempted to meet this obligation.
If the development is smaller than a specific minimum size, developers can pay the obligation in cash, upon project completion. In this case, the calculation charge follows an established rule, according to the size, type and land value of development (art. 9 of Technical Rule H10 of the Supreme Decree 011/2019).
Since 2021, the concept of developer obligations included the provision of social housing units as a form of compensation (Law 31313/2021). Every development project located within zones of medium or high densification must provide social housing units for at least 10% of the total built area. Local governments can define higher thresholds in their local Urban Development Plans. Once their local plans are updated, local governments will be able to implement this new form of compensation.
The main challenges to implementation are the lack of local administrative capacities and the lack of updated local regulations. The low levels of land formality, with 94% of converted urban land being informal, constitute another obstacle, since the instrument is only used for formal developments.
Charges for development rights
There are three types of charges for development rights in the country: the Floor Bonification for Sustainable Buildings; the Floor Bonification for Inclusionary Zoning; and the Floor Bonification for Public Interest. Local governments rarely adopt charges for development rights and collect the revenues. To do so, they need approval of the provincial government on the land use zoning, which defines the areas where the charges can be applied.
Local ordinances must establish in advance the density baseline for development and the types of compensations admitted. Compensation can be paid in cash or through the in-kind provision of public utilities, social housing or other improvements of public interest. If in cash, the charge is paid upon project completion; if in kind, the improvements must be executed during project development.
Through the Floor Bonification for Sustainable Buildings, developers can obtain the right to build at higher density if they prove that the building meets international standards for energy and water efficiency and has green roofs or green walls. A local ordinance must detail the characteristics of sustainable projects and specify the density increase to be awarded.
Through the Floor Bonification for Inclusionary Zoning, developers who allocate a percentage of social housing units within the project can build at higher density. Currently, the national regulation does not specify the minimum size and cost of units, the percentage of units in relation to the total or the eligibility criteria (Supreme Decree 10/2018). Therefore, provincial municipalities need to regulate these aspects. The authorization granted by provincial governments must contain an expiration date, after which the project cannot be built with the same beneficial parameters (art. 136 of Supreme Decree 22/2016).
The scope of the Floor Bonification for Public Interest is broader than that of the other charges for development rights. Projects that create additional public spaces, infrastructure for sustainable mobility, care facilities or that promote other social interests, as established in local metropolitan or urban development plans, can obtain permission to build at higher density. Since the Law 31313 dates from July of 2021, local governments still have to create local ordinances to render the tool operational.
The main challenge to implementation is the absence of local regulations, which is not helped by the fact that there are no national guidelines to support municipalities in this task. Additional challenges are the low quality of land registries, the risks associated with land markets and the lack of administrative capacities.
Infrastructure levy
Local governments may charge a contribution from owners whose land is adjacent or near public improvements such as roads, parking space, public spaces and other public utilities. The contribution levies the land value increment generated by the new project. Municipalities cannot recover the land value increases when the national government funds a public improvement, in which case the levy is not collected (Article 64 of Presidential Decree 776/1993). Even though the current legislation dates back from 1981, municipalities rarely implement this instrument and collect the revenues.
Municipalities have the autonomy to create, change and extinct contributions (art. 60 of Presidential Decree 776/1993). They must enact local norms to collect and administer the levy. Moreover, prior to the start of every public work, they must communicate to landowners what is the estimated amount of charge.
Benefitted landowners are identified according to distance to improvement. However, the selection criteria may vary depending on the type of project. Some property owners may be exempt from payment, typically due to their low-income status.
The charge is calculated according to distance to improvement, size and position of the land, estimated land value gains and capacity to pay of landowners. Municipalities typically carry out a socioeconomic study to define owners’ capacity to pay. In the end, each landowner will have to pay a different amount.
The collected funds are earmarked for the purpose of financing the specific public work. The total amount collected can never surpass the total project cost, otherwise it would constitute a confiscatory collection.
The main obstacle to implementation is the lack of political will to implement the levy, due to resistance by property owners. They frequently appeal against the charge, which renders the process lengthier and more difficult. Most local governments lack sufficient administrative capacity to design and implement the tool. Land registries are inaccurate, which renders the calculation of the land value increment difficult.
Land readjustment
Land readjustment is an instrument designed for the purpose of urban expansion. Private landowners can file an application to conduct a land readjustment project in rustic land plots, that is, non-urbanized land located in newly converted urban land (art. 60 of the Supreme Decree 029/2019). The current legislation was enacted in in 2011 and has been little used since then. Public entities do not get involved.
Rustic plots, due to their original shapes and dimensions, would otherwise hamper the allocation of public spaces and public equipment. By readjusting and servicing these plots, urban expansion is carried out in a more integrated and effective way, in the benefit of private landowners and of the wider municipality.
All property owners willing to conduct land readjustment must agree to join their undeveloped lands. If they agree, a new legal entity is formed to manage the project. This private entity is responsible for filing the application and executing the project, which includes readjustment of plots and distribution of charges and benefits. Landowners often opt not to participate, and the necessary consensus is almost never reached.
A share between 13% and 24% of the area is reserved for public improvements, such as public roads, public utilities, schools, parks and green space – from which landowners will benefit. After readjustment, landowners receive a plot with a value proportional to their original holdings. No cash substitutions are allowed.
In 2021, the national government enacted a new framework of land readjustment, which is yet to be implemented (Law 31313/2021). Besides urban expansion, land readjustment will be used for urban development and renewal. Instead of 100% of consent, owners whose properties represent 60% of the total area will have to agree with the project for it to happen. Public authorities will be able to initiate land readjustment projects, too, which means that expropriations could be carried out if needed. The goal is to broaden the scope and frequency of land readjustment.
The main obstacles to implementation are resistance from landowners and the low quality of land registry systems.
References
[7] Municipality of the Metropolitan District of Quito (2020), www7.quito.gob.ec - / mdmq_ordenanzas / Administration 2019-2023 / Commissions of the Metropolitan Council / Land Use / 2020 / 2020-08-17 / 4. Economic reactivation ordinance /, http://www7.quito.gob.ec/mdmq_ordenanzas/Administraci%C3%B3n%202019-2023/Comisiones%20del%20Concejo%20Metropolitano/Uso%20de%20Suelo/2020/2020-08-17/4.%20Ordenanza%20reactivaci%C3%B3n%20econ%C3%B3mica/ (accessed on 23 August 2021).
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.