Failure and opportunities of public value capture and developer obligations in Polish urban development

1Public bodies either use direct or indirect PVC instruments. Each of these builds on two different motivating rationales (Alterman 2012; Gielen. Sala & Cuadrado 2017).

Direct instruments seek to capture all or some of the value increase under the explicit or implicit rationale that this value increase belongs to the community and not to the landowner because he has not caused this increase (‘events’ 2 and 3 above). Direct instruments are considered wealth redistribution tools. Because of their normative and controversial character, direct tools need an explicit and detailed legislative base at the regional and/or national level. Direct tools have often led to (political) controversies and have often not been fully or sufficiently implemented. This is illustrated by the well-known British dispute over the taxation of land value increase that took place after publication of the Uthwatt report in 1942

The Uthwatt Committee discussed the introduction of a betterment levy to capture land value increase. A 100% betterment levy was introduced in the 1947 Town and Country Planning Act, and no development could take place without payment to the Central Land Board. The levy would apply where land in private ownership was sold to developers. However, the political controversy over the new regulation became clear soon after, when the subsequent Conservative government decided to abolish it with the 1954 Planning Act. Similarly, a 40% levy introduced by Labour in 1967 was abandoned by a Conservative government in 1971. The last major attempt in England to tax development gains was the Development Land Tax Act 1976, introduced by a Labour government. This betterment tax was severely modified by the Conservative administration that came into power in 1979 and was eventually scrapped in 1985 (Oxley 2006; Clusa & Mur 2007; Alterman 2009; Catney & Henneberry 2019).

However, the authors are not so pessimistic because there are also examples of countries that have successfully, or with partial success, introduced taxes based on direct rationales; the more so because many countries have been successful in introducing developer obligations (DO’s) based on direct rationales. A good example of the latter is Brazil (Gielen & Van der Krabben 2019).

Besides proposals of PVC based on a direct rationale (the community is the rightful owner of all or part of the increased value and should therefore capture it), other proposals have been put forward that are based on different, more pragmatic, ‘indirect’ rationales. This makes them indirect PVC instruments. The most common indirect rationale is that landowners and developers should internalize the costs of mitigating the impacts of their building plans; i.e., pay for the maintenance and improvement of existing public infrastructure, or pay for the new public infrastructure directly or indirectly needed to support the newly-developed (or re-developed) areas. The value of these impacts represents the social costs or compensation that the community that bears such costs can exact on the developer (Bowers 1992; Webster 1998). Proposals for indirect PVC tools do not challenge fundamental ideological principles and do not always require a detailed regulation, which make them easier to introduce than direct PVC tools. An example of indirect PVC tools in Poland is the contract between developers and the municipal roads authority (zarządca drogi), a form of DO under which developers commit to (re)build those public roads necessary for the development.

PVC tools can be charged as a periodic legal obligation (e.g., capital gains tax on land or buildings, the property tax, e.g., the Polish podatek od nieruchomości) or as a one-time condition to administrative decisions (e.g., taxes paid when land is transferred: the tax upon transfer of title, also known as stamp duty; or the land value tax

Land value taxes charge only the increase in the value of the land, while property taxes charge the increase in the value of the land and the buildings on it.

So far, these PVC tools are not related to administrative decisions about land-use regulations

Land-use regulation decisions are those that approve a rezoning, land-use plan, additional development rights, relaxation of existing land-use regulations, issuing of building permit, property subdivision or readjustment decisions. They prescribe new use and/or building possibilities for land that usually cause an increase in its economic value.

This distinction (PVC-tools charged independently or not from land-use regulation decisions) is relevant for their effectiveness (Muñoz Gielen & van der Krabben 2019). For example, property taxes are charged on all landowners independently of land-use regulation decisions, often proportionally to the market value of their property

But not always, e.g., the Polish podatek od nieruchomości is mainly based on plot and building surface area, regardless of market value; i.e., the Polish property tax is not ad valorem.

Non-negotiable developer obligations (N-NDO) have statutory status, which means that they are regulated, mostly in supra-municipal legislation that prescribes precisely their scope with legal standards and categorizations

Supra-municipal legislation can be produced at the national, regional, state or provincial level, depending on the institutional structure of the public administration in the respective country.

Often, N-NDOs in practice offer room for negotiation, for example because prescriptions allow for interpretation, because they are ignored, or because they are prescribed after negotiations take place. Therefore, they could also be considered as negotiated DOs (NDOs). ‘Pure’ NDOs are usually vaguely regulated in legislation.

Some NDOs are more negotiable than others. When NDOs are prescribed in legally-binding local policy (e.g., land-use plans), this policy considerably reduces the room for the negotiating parties to decide which obligations can be asked for and agreed. For example, the afore-mentioned Polish negotiated contributions between the municipal road traffic authority and the developer are formally framed because the requirements of the road authority need to fit within the road and parking prescriptions of the legally-binding local land-use plan (miejscowy plan zagospodarowania przestrzennego, MPZP), which cannot be deviated from. Also, the requirements must be directly related to the development. However, often there is some room for interpretation, especially if there is no MPZP and there are unofficial negotiations before the approval of the MPZP, or if the development is only based on ad hoc, much more popular planning permits (decyzja o warunkach zabudowy, DWZ).

When NDOs are prescribed in indicative, non-legally binding local policy

E.g., non-legally binding master plans, or internal guidelines with no statutory value.

Sometimes NDOs are not or almost not prescribed in local policy anyway, so the outcome of negotiations will depend mainly on specific circumstances and the negotiating skills of the parties involved. In this sort of NDO, the room for negotiation is the largest

To our knowledge, the most elaborated literature about the role of discretion in the geographical and historical differences of developer obligations relates to England (e.g., Dunning et al, 2019 and Lord et al, 2019).

Public and private bodies play different roles in the different steps of land development, which are: land purchase and assembly; financing, land preparation and provision of the necessary infrastructure; land disposition. This leads to ‘active’ and ‘passive’ forms of governance in land development (Van der Krabben & Jacobs 2013; Hartmann & Spit 2015). Forms of governance can be subcategorized in order from more public and active to more private and passive: a) the nationalization of all land and public land selling, b) public land banking and public land selling, c) public-private land development, d) land readjustment and e) private land development. a) and b) include the possibility of public bodies selling land (freehold or leasehold) in its ‘raw’ state without developing it first, or instead of public bodies providing the infrastructure first and then selling serviced building plots. In a) and b) public bodies can capture the land value increase through the land price (or through a share of development profits in the case of model c), or they can prescribe in the selling contract that developers will construct the infrastructure, and, maybe, pay public bodies for other expenses. The other side of the coin is the financial risk, which may end up with a negative PVC, i.e., public bodies losing money and having to subsidize the public infrastructure.

See table 2 for an overview of the mentioned sorts of PVC tools.

Whether DOs are negotiable or not, in most countries their achievement depends on an agreement between the public body that tries to charge obligations, and the landowners/developers that must pay them. Most N-NDOs are compulsory in the sense that landowners cannot build if they do not contribute. But if they are not willing to build, public bodies cannot force them to contribute (except, and to a certain degree, in some types of land readjustment, in some countries, see below). This is partly why passive approaches (land readjustment and private land development, models d) and e) mentioned in section 3.4) are criticised as being ineffective: see, for example, the discussion in Spain since the 1970’s (Muñoz Gielen 2010) and in the USA in the 1960’s and 1970’s (Van der Krabben & Jacobs 2013), or the ongoing discussions in Switzerland (Lambelet & Viallon 2019) and Portugal (Morais & Correia 2019).

In land readjustment (LR) landowners share the final serviced building plots but, first, give free access to their land to allow the readjustment of properties and infrastructure provision, deliver the land needed for public infrastructure for free to the public body in charge, and pay a corresponding share of the readjustment and infrastructure costs (or alternatively deliver some serviced building plots as payment in lieu, the ‘cost-equivalent land’). Only those countries where public bodies have the statutory powers, under certain circumstances, to force reluctant landowners to work with the readjustment of their properties actually deploy LR in a significant manner, and not always (Muñoz Gielen & Mualam 2019; Muñoz Gielen & van der Krabben 2019; Zaborowski 2018). More or less successful examples include Germany (Umlegung), Spain (Reparcelación), Israel (Halukah Hadasha), Korea (Tojiguhoegjeonglisa-eob) and Turkey, where the possibility of applying ‘compulsory’ LR does not require the support of any number of landowners (Germany, Spain and Israel) or at least not of all landowners (Korea and Turkey). Here LR can diminish the dependency on agreement between public bodies and landowners, and thus offers the potential of increasing the effectiveness of DOs.

Besides LR, other land policy instruments can influence the degree of dependency and hence also the results of DOs: expropriation (also known as compulsory purchase) and pre-emption rights (also known as right of first refusal, giving municipalities first-buyer’s right). These coercive instruments may support public bodies’ strategies, influencing the degree of dependency between public and private stakeholders (if landowners do not agree to the contributions, public bodies can threaten to acquire their land). Highly relevant here is the compensation to be paid to the landowners (based on the value of the land either in its previous or future use), which derives from normative conceptualizations, standards and approaches of legislation and valuation methods (Zaborowski 2018; Dunning et al. 2019).

Summarizing, in passive forms of governance, DOs often strongly depend upon agreement with landowners and developers, although less so when there is the possibility of compulsory LR and/or cheap expropriation and pre-emption powers. Section 5 shows how this applies to Poland.

As just seen, in passive forms of governance there is always some degree of dependency between public and private bodies. Therefore, bargaining often plays a crucial role. What is relevant is whether the legislation gives public bodies the statutory powers to condition the modification or approval of a land-use plan (the first land-use regulation decision that prescribes the use and building possibilities of land, also known as ‘rezoning’ in some countries) to the developer committing in an agreement to deploy and/or pay obligations. As far as the authors know, this happens at least in England, Spain, Portugal, Italy, Brazil, Canada, Switzerland, Indonesia, Korea and NSW Australia.

This is different from conditioning the building permit (so not the previous modification of the land-use plan) to obligations without any agreement (contract) backing it. The administrative issuing of the building permit does sometimes imply a legal obligation, based on public law, to pay or realize contributions, without any agreement securing their effective implementation. Many countries show that conditioning the land-use plan (so not the building permit) to an agreement (besides and above a possible legal obligation based on public law) is relevant for the effectiveness of DOs. First because, without an agreement, non-compliance can only be enforced through administrative law (often only the withdrawal of the building permit), while, where there is an agreement, municipalities can also enforce through civil law. Second because an agreement implies that developers have had a say in the development terms and obligations (instead of public bodies unilaterally prescribing them), which increases their commitment to deploy the obligations effectively. And third because, once the land-use plan is approved, landowners are already secure about the use and building possibilities of their land. As a result of this certainty, higher expectation values are already capitalized in the market and serve as collateral. Developers can rely on land price expectations and municipalities do not have any more leverage with which to negotiate. In other words, the ulterior issuing of building permits is less relevant in the power relations between municipalities and developers, especially if there is no agreement securing the contributions (Muñoz Gielen & van der Krabben 2019).

In another group of countries (the authors know of Canada in the 1960s and the Netherlands today), national legislation allows public bodies and developers to engage in voluntary negotiations about obligations that might result in a contract. But here, if developers refuse to reach an agreement, public bodies cannot, formally speaking, refuse the approval of the land-use plan; i.e., public bodies cannot threaten not to approve the land-use plan if the developer doesn’t sign the agreement. Signing the agreement must be voluntary, i.e., it cannot be made under the threat of not approving the land-use plan (Muñoz Gielen & van der Krabben 2019).

Besides these formal PVC tools, some other, informal, marginal tools have been developed: -

Informal (negotiated) betterment charge: sometimes municipalities make clear to the developer, after the land-use plan is approved, that the municipality is not able to construct the necessary public infrastructure. Municipalities are formally responsible for public infrastructure, but no sanction exists for not constructing it. Municipalities then also make clear that they wish the developer to agree to construct the infrastructure himself. Sometimes municipalities offer a contribution towards the costs, depending on the public interest of the infrastructure. Thus, developers might just wait and nothing happens, or build the infrastructure, possibly with a public contribution. This is thus a sort of non-statutory betterment charge, i.e., a voluntary and negotiated contribution in exchange for public investment in infrastructure

Of the four studied cases, only in one case could this informal betterment charge possibly have been used to make the developer construct a small park.

The case of Jagodno-Wojszyce in Wrocław shows the best results of the four case studies (see Figure 1). Here the only DOs that delivered some results were the obligatory contract with the road traffic authority (which ensured that the developer pays 95% of the total construction costs of the internal roads, 31.5 of 33 million PLN) and an informal NDO in exchange for approval of the land-use plan (in a unilateral letter of intent, the developer secured the free delivery of 20% of the land needed for these internal roads). The overall picture in this case shows however the dramatic imbalance between the public gains and losses: the municipality provides 80% of the land for internal roads, all the land and construction costs for the greenery, and the reconstruction costs of an adjacent principal street connecting this area with the central part of the city (53.7 million PLN). At the same time, the revenues from the planning levies were marginal; (only 36,932 PLN because the developer bought most of the land before the approval of the MPZP) and from the opłata adiacencka from land subdivision (only 12,182 PLN because most of the land was already subdivided). The municipality will need to purchase the land necessary for social or educational facilities, if not from the state agency KOWR, then from private owners. And of course, it will have to pay the construction costs of these facilities.

Figure 1

The case of Wierzbicka in Radom also illustrates the dramatic imbalance between public gains and losses (see Figure 2). Here the only DO that has provided some results so far is the informal NDO in exchange for the approval of the land-use plan: the developer provides a very small amount of the land needed for the reconstruction of an adjacent road and less than 5% of the costs of this reconstruction. It is expected that the contract with the road traffic authority will force the developer to pay for the connection to the roads that must be reconstructed. The planning levy and the opłata adiacencka from land subdivision will not be applied and the formal infrastructure related betterment charge will, if applied, only charge a minimum share of the costs to the developer and other owners in the area.

Figure 2

In the case of private land development, Polish municipalities do not dispose of coercive land policy instruments and therefore there is very high dependency on agreements with the developers and landowners in order to secure contributions.

Poland has at its disposal a land readjustment regulation (scalenie i podział nieruchomości), but it is almost never used in practice. Land readjustment may be implemented only in areas covered by a binding land-use plan (MPZP). It may be ordered by local authorities or by the landowners of at least 50% of the land (LR then becomes compulsory for the rest, although in the case of a built-up area all owners must consent). However, despite the fact that there is the possibility of compulsory LR, in practice LR is almost never used. An important problem is financing. Local authorities cannot obtain land for free, and landowners only have to pay the afore-mentioned statutory betterment charge (opłata adiacencka) afterwards, which cannot charge much. Therefore, the municipality must pay 100% compensation for the land acquired for public use, in compliance with the expropriation regulations (see further), and advance the costs of infrastructure provision without certainty about the future revenues from the betterment charge. In sum, LR is not advantageous for municipalities, and landowners prefer piecemeal urban development (preferably based on the easy to obtain planning permit DWZ) in which they obtain the maximum price for their land and do not need to coordinate actions with other landowners. Poland is, by the way, not alone in this. There are also many other countries with ineffective LR-regulations, in the sense that they do not provide any significative package of DOs

For example, in Israel, properties can be compulsorily readjusted and municipalities often proceed with this. However, there is no legal provision (neither within the LR-regulation nor outside of it) that obliges landowners to provide the infrastructure or pay for it. As a consequence, after the readjustment of properties and the delivery of the property title of part of the land to the municipality, often the infrastructure is not provided so the development does not take place. Therefore, municipalities seek agreement with landowners or developers representing them in order to finance the public infrastructure (Muñoz Gielen & Mualam 2019). Turkey also has an LR-regulation which, until the 1980s, was used frequently, but it allowed only contributions for on-site, ‘hard’ infrastructure not exceeding 40% of the development area and excluding the costs of infrastructure provision. Consequently, since the 1990s, municipalities prefer large-scale developments to follow a straight private sector-led approach, while LR is still applied mostly in smaller developments (Sense Turk & Belgin Gumru 2019). Korea had a well-functioning LR in the reconstruction period after the Korean war (1962–1983), but this was abandoned because it allowed only for the costs of direct necessary public infrastructure and did not allow additional value capture (e.g. no social/affordable housing). Since then, municipalities prefer, as in Turkey, a straight private sector-led approach (Kresse et al. 2019). Switzerland has a totally voluntary LR-regulation in place that does not support PVC (except in the Vaud canton; Lambelet & Viallon 2019). Portugal has had an LR-regulation since 1999 (Perequaçāo) that includes the statutory possibility of compulsory application but, in practice, the consent of all landowners is needed, which severely hampers its implementation (Morais de Sá & Dias Correia 2019). Colombia has had an LR-regulation since 1997, but it is almost never applied in practice, despite the possibility of compulsory readjustment where the owners of at least 51% of the land support it.

Polish municipalities can exercise a pre-emption right to acquire the land, but this is only possible in a limited number of cases (buying back leased public land, historical monuments, land needed for public use and especially in designated urban regeneration areas). Also, land prices are established by the market, which includes profit expectations about the future use possibilities and leads to high compensation sums.

Finally, when public bodies want to expropriate land for public infrastructure, there are two cases. The first case is ‘soft’ infrastructure (e.g., schools, greenery, public facilities) for which necessary land can be expropriated only through the normal procedure, which is long, complex and expensive because the compensation is based on the future use and building possibilities. The only alternative is thus to negotiate with the landowners and pay high prices. The second case is road infrastructure which, as for railways and airport infrastructure, follows a special expropriation procedure, much faster than the first, but leads also to high compensation sums.

Not only Poland, but also many other countries encounter problems with high compensation sums because it is the future use that must serve as the basis for compensation; for example the Netherlands (Muñoz Gielen 2019a) and Portugal (Morais & Dias 2019). Some countries tried to prescribe the previous uses as the basis for compensation, but have not always been successful in actually lowering compensation sums

until the 1980s, in Italy, the compensation in case of expropriation was based on its previous use, but, since then, judicial scrutiny has brought paid compensation amounts closer to the future use value (Pogliani 2019). In 2007, the Spanish government, pursuing an effective (i.e., cheap and excluding speculative values) expropriation, prescribed that compensation sums must be based on former uses, but it is not yet clear whether this provision will endure judicial scrutiny (Muñoz Gielen & Lora-Tamayo Vallvé 2018).

Thus, Polish municipalities do not have coercive instruments to force development because neither LR, nor pre-emption rights nor expropriation are feasible and/or affordable. Hence, Polish municipalities largely depend on (formal and informal) agreements with landowners and property developers. This ends up most of the time with municipalities having to purchase the necessary land from private owners based on market prices or, if lucky, for a lower price from other public agencies that happen to own land in the development area

This was the situation in the case studies. Only in the Jagodno-Wojszyce case in Wrocław did the developer hand over some land for free (20% of the plots needed for internal roads).

As broad, and theoretically well-thought, as the set of PVC tools in Poland may seem, these tools are rather ineffective in practice. This is to say that Polish PVC tools fall very short of providing enough financial means for proper public infrastructure in newly-developed areas. The only PVC tools that, to the best knowledge of the authors, provide significant revenues are public urban land lease (użytkowanie wieczyste) and the property tax (podatek od nieruchomości). The authors believe, however, that they are still not used to their best advantage. In addition, further research is necessary to explore the potential of the sale of undeveloped land to developers, and also to explore the more active involvement of the public sphere in the development of said public land. Eventually, this could serve to determine whether there is the potential for public bodies to obtain higher revenues than now.

Landowners selling their land after rezoning should be charged a planning levy (opłata planistyczna), which, however, does not constitute any significant public revenue. All landowners profiting from public investments in infrastructure should be charged a formal betterment charge (opłata adiacencka), no matter their financial background. However, this does not render significant results either. It is unclear whether this betterment charge has any potential, given there seems to be only one country in Europe where it is successful, albeit to a limited extent: in Germany (Hobma 2014).

The same applies to the two formal DOs (i.e., the opłata adiacencka, in exchange for a public decision on plot subdivisions, and a contract between a developer and the road traffic authority in exchange for a building permit), which do not bring great results in practice. They merely provide some income that contributes to the construction costs of a basic package of road infrastructure directly connected to the development, if any.

Beside these formal tools, several informal tools have been developed, however, not a single one of them is capable of rendering satisfying results. Adding to this general failure of PVC tools, most urban development in Poland is done without land-use plans, based on ad hoc planning permissions that impose little to no requirements on developers. Usually, then, the developers of privately-owned land provide only a minimum package of the absolutely indispensable road infrastructure (if at all); oftentimes access roads are even not paved. Since 2015, two new laws have increased the possibilities to force commitments in specific circumstances (urban revitalization areas and deviations from existing land-use plan), but it remains uncertain whether these will render any result.

There are many possible explanations for the general failure of PVCs in Poland. An obvious one is the lack of any longstanding tradition of property tax and, as of today, the lack of political will to disrupt this status quo. However, there exist three more possible explanations, based on the reflections presented in sections 4 and 5. The first is that the normative base of the planning levy (opłata planistyczna), based on the rationale that the increase in land value, created by the land-use plan, belongs to the community — at least in part — and not only to the landowner, clearly collides with the conservative view of land property rights in Poland. Poland was one of the few former socialist states in Eastern Europe where collectivization of farmland failed, having encountered fierce resistance. This might explain the lack of political will to improve a planning levy that has never delivered significant revenues. Poland is not unique in this aspect; in Western Europe, North America and Australia PVC tools based on direct, more normative rationales are not very popular either, although successful examples of such tools can be found in Southern Europe, Latin America and Asia (Alterman 2012; Muñoz Gielen & van der Krabben 2019).

The second possible explanation is the lack of feasible or affordable coercive land policy tools common in many other countries, i.e., land readjustment, pre-emption rights and expropriation. This makes Polish municipalities highly dependent on particular agreements with landowners and developers. Again, this is not a uniquely Polish phenomenon.

Where Poland stands in sharp contrast to most developed countries is in its denial of the basic principles of bargaining processes in urban development: an effective development control system (urban development must follow land-use plans) combined with the possibility of approving these land-use plans contingent upon a developer’s contractual commitment to contribute. As mentioned before, a dichotomy exists in Poland in that a development is possible pursuant to a land-use plan (MPZP) or to ad hoc planning permits (DWZ). The majority of new buildings are authorized through the second option. Polish municipalities are in an unfavourable position to negotiate in general, and this is especially the case in DWZ developments. Here, the municipalities cannot easily refuse issuing them. But also, in construction undertakings performed under MPZP, Polish municipalities do not have much leverage as they cannot formally waive this plan if the developer refuses to commit to a contribution agreement.

The Polish case is extreme by international comparison. True, there are other countries where it is formally forbidden to make the approval of a land-use plan contingent upon signing of a contract (e.g., the Netherlands today, or Canada in the 1960s). However, in these cases, negotiations are perfectly normal and allowed, as long as they are voluntary. In practice, a development agreement that includes contributions is de facto a condition sine qua non for the approval of a land-use plan (Muñoz Gielen & van der Krabben 2019). Poland goes even further by formally not admitting the possibility of a voluntarily agreed development contract that is linked to the approval of a land-use plan.

Often, Polish municipalities approve the land-use plan before there is any specific development initiative, i.e., before a developer submits an application for building. Therefore, when it does happen, there is no more practical possibility of requiring a development agreement. When a developer submits an application and comes to speak with the municipality, the land-use plan is already adopted and hence the land prices have already capitalized the increase in value. Developers are comfortable with waiting precisely because the land-use plan is already approved (or, in the areas without any land-use plan, because developers expect no problems in obtaining an ad hoc planning permit, DWZ) and high expectation values are already capitalized in the market and serve as collateral. Certainly, this does not stimulate any private commitment to the implementation of public infrastructure. At this point, the only negotiation permitted is one with the municipal road authorities to provide a basic package of road infrastructure (which includes only the construction costs and not the necessary land plots) in exchange for the building permit. Municipalities must pay the construction costs of all other public infrastructure and provide all necessary plots (which they have to purchase at market prices often from the same developer who is thus profiting from the construction of public infrastructure). As the case studies showed, some informal manoeuvring room for municipalities to make this approval contingent upon additional contributions by a developer only exists if the land-use plan is yet to be approved. This situation is rarely taken advantage of to obtain some of the needed land plots for free. And even if it does happen, the contributions are rather modest.

It appears as if Poland has chosen a theoretical and ineffective approach to PVCs, instead of opting for a pragmatic approach: to use the impact of land-use plans and planning permits on land markets as a tool to restore the equilibrium in the balance of power between public and private parties in urban development; between public interest and private economic goals. Polish legislation should explore the possibilities of making the approval of a land-use plan and planning permits contingent upon a developer’s contractual commitments to contribute. The 2015 Revitalisation Act and the 2018 lex developer took some timid steps in this direction, but their application is limited to specific situations. The experience with these regulations should be studied further in order to elaborate more effective regulations and policies in the area of developer obligations.