Ecuador
Land value capture in Ecuador
The infrastructure levy is the only systematically used land value capture instrument in Ecuador (Table 2.15). It has a longstanding tradition and works well. The capital city, Quito, and two other major cities, Cuenca and Guayaquil, concentrate the most relevant experience. The 2016 Organic Law of Spatial Planning, Land Use and Management (LOOTUGS) provides a national legal framework for urban planning and land management that includes land value capture concepts and instruments that were new to the majority of local governments. However, implementation of the LOOTUGS has been slow. Only Quito and Cuenca have started to institutionalise and implement land value capture instruments beyond the infrastructure levy. The main obstacles are the lack of political will to charge landowners and developers, as well as smaller local governments’ lack of administrative capacity. Less than 20 large or intermediate cities may have sufficient urban planning and land management capacity to use land value capture instruments beyond the infrastructure levy. Most other cities are small and do not have the technical, political and financial capacity to exercise their urban planning and management competencies.
Enabling framework
Ecuador is a unitary state with a four-tiered government system: the national level and Decentralised Autonomous Governments at the provincial, municipal and parochial levels. There are 24 provinces, 221 municipalities and 1,500 parishes (OECD/UCLG, 2019[1]). Municipalities are the planning authorities and decide on land use and management. Local officials have high discretion when issuing planning permits. Municipalities are also responsible for property valuation. Property value is appraised using a market-based approach, by comparing with the price of recently sold properties with similar characteristics in a specific area.
According to Article 31 of the Constitution, property has a social and environmental function. Articles 3, 5 and 7 of the Organic Law of Spatial Planning, Land Use and Management (LOOTUGS) define land value capture as the equitable distribution of the benefits of public actions, decisions on the territory and urban development in general. Society has the right to participate in these benefits. The national and local government levels create the legal framework for land value capture.
Infrastructure levy
Landowners pay a levy (contribuciones especiales por mejoras) for infrastructure built by the government and from which they specifically benefit, for example public roads, public transport, public utilities and green space. Local governments implement the levy and receive the revenues. The levy dates back to 1971 and is widely used, especially in the largest cities, Quito, Guayaquil and Cuenca. In most cases, it is accepted by landowners.
To expand the instrument in smaller local governments, the Development Bank of Ecuador created a subsidised line of credit in 2010 and offers technical assistance for its implementation. More than 80 out of the 221 local governments have used the line of credit and implemented the levy. The levy’s use by smaller local governments despite the administrative effort shows that the benefits are high compared to the costs. The levy is one of the main revenue sources for local governments.
The levy amounts to the estimated total cost of public works. Thus, local governments do not need to estimate the increase in land values. At the national level, a fixed impact rule based on the type of public work identifies landowners who will benefit and be charged. For instance, for new public roads and sidewalks, adjacent properties are charged. For sewer and water infrastructure, landowners are charged whose plots directly access these public utilities. For large projects such as bus rapid transit systems, all landowners in the municipality or entire neighbourhoods are charged. Oftentimes, even smaller projects such as sidewalk beautifications charge – up to a certain percentage – all landowners in the municipality. Local governments can set their own impact rules through ordinances.
Landowners then pay the levy according to a fixed formula, based on the distance to the new infrastructure, size and value of their properties. Local governments may grant discounts on or exemptions from the levy based on the socioeconomic characteristics of landowners. In Quito, landowners whose plots are valued below USD 70,000 are for example exempt. Else, landowners who participate in community works (mingas) can be exempt.
The levy is charged upon partial or full completion of public works. In Quito, it is charged annually together with the property tax over a period of years. In 2019, local governments raised USD 104,000,000 (0.1% of GDP) with the infrastructure levy. The main obstacle is local governments’ lack of political will to charge landowners.
Charges for development rights
Developers pay charges for development rights (concesión onerosa de derechos) to change the zoning of their plots or build at a higher density beyond an established baseline but within the maximum density permitted by the local plan or other specific planning instruments. These charges date back to a 2011 ordinance of the local government of Quito. The Organic Law of Spatial Planning, Land Use and Management (LOOTUGS) extended them nation-wide in 2016. Currently, only Quito uses them, albeit rarely. Local governments are responsible to implement charges for development rights and receive the revenues.
In Quito, charges for development rights are mainly used for the construction of eco-efficient buildings. Developers can buy building rights up to double the height planned in the city’s land-use plan. This happens in defined areas, including along bus rapid transit and metro systems.
However, the instrument has not been efficient. A complex model determines buildings’ eco efficiency. Moreover, development rights are sold without following urban planning objectives, mostly in already dense areas where the real estate market is dynamic. This has resulted in already-dense areas’ further development while underdeveloped serviced areas have not been densified. Often, charges for development rights were also minor improvements of the public space in the same areas where the developments took place. Thus, they have failed to be a redistributive instrument.
The price of development rights is calculated using a fixed formula, based on the estimated land value increase development rights generate. Developers can negotiate to pay in cash or provide serviced land, social amenities, public infrastructure or affordable housing. If developers choose to provide affordable housing, they must provide at least 10% of their project areas. The amounts of cash or in-kind charges, locations of sale of development rights and the density baseline are defined in advance in a jurisdictional ordinance or regulation.
In 2019, Quito raised USD 3,206,148 with charges for development rights (Municipality of the Metropolitan District of Quito, 2020[7]). No in-kind payments were made so far in exchange for development rights as developers prefer to pay in cash.
Developer obligations
In addition to charges for development rights (see section above), in Quito developers are subject to obligations to obtain approval for ‘special urban architectural projects’ (proyectos urbanos arquitectónicos especiales, PUAEs), such as large developments. The obligations consist of cash or in-kind payments. They are designed to compensate the cost of stronger use of public infrastructure and services resulting from private development. The local government is in charge of implementing the obligations and receives the revenues. However, it rarely uses the obligations.
There is a lack of political will to charge developers. Moreover, high discretion in negotiations often favours developers, reducing recovery. In recent years, this facilitated unsustainable and inequitable urban growth as a growing number of exclusive housing projects in high-demand suburban areas were approved.
The obligations are calculated using a fixed formula, based on the estimated land value increase development approvals generate. In most cases, developers negotiate to pay most of the charge in-kind. They provide land, public infrastructure or sometimes build affordable housing. Yet, in-kind payments have usually covered less than 50% of the public costs private development generated. Sometimes, developers may be required to pay in cash. Cash payments have usually covered less than 10% of the public costs private development generated.
Land readjustment
Land readjustment has not yet been used but has a legal basis. It is an instrument through public or private initiative to achieve an equitable distribution of the costs and benefits of development. However, the development and redevelopment of areas is still carried out on a plot-by-plot basis.
In 2019, the city of Cuenca started to transform its public housing company into an urban operator capable of managing complex urban interventions, including land readjustments. The urban operator proposed three partial plans regulating land readjustments, inclusionary housing, charges for development rights and other instruments, with relatively high acceptance by landowners.
Strategic land management
Strategic land management has not yet been used but has a legal basis. The 2016 Organic Law of Spatial Planning, Land Use and Management (LOOTUGS) mandates that local governments with more than 50,000 inhabitants create land banks to strategically manage their land. Implementation of the LOOTUGS has been slow. At the time of writing, only Quito has incorporated the concept of land banking into their new 2021 land-use plan.
To develop public land, the government can transfer construction rights (derecho de superficie) to private developers, which then develop public land in conformity with city planning regulations. The conditions of transfer, costs and period of validity of construction rights have to be specified in a contract between the government and private developer.
Historically, most local governments have provided public services without managing their land to recover land value gains that result from the new public services provision. They lack administrative capacity to buy land for public purposes as well as resources for land purchases, and face landowners’ resistance.
References
[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.