The efficiency the construction of land management depends primarily on clearly defined ownership over construction land.  In practice, ownership, value of land and its use are closely connected terms.

How much does state monopoly cost us?, Jevrosima Škorić

 

Construction land - ''is land where construction of structures is allowed by spacial and development plans in accordance with this (Law on Construction Land, 2003) Law, i.e. land that may be developed with structures''. In urban areas it is is the main resource and thus attracts various interests all aimed at the same goal - gaining and increasing profit. Land is considered to be a general/public interest, regardless of the type of ownership (whether it is state or privately owned), and thus rationality of its use is constantly being observed.  The efficiency the construction of land management depends primarily on clearly defined ownership over construction land.  In practice, ownership, value of land and its use are closely connected terms. Ownership (property), value and use are essential for construction land management, and use of land is the basis for providing efficient management of land resources. The way land policy is defined in Serbia and the way it is put into practice is best described by facts, or to put it in other words - problems.

The leading role in defining land policy is supposed to belong to the state, whose task is to use various instruments and measures within its ideate, tax, market, financial and administrative policy in order to contribute to rational use of land and efficient directing of urban growth and development. The efficiency of urban land policy depends on differenent variables, as follows:

- Instruments of planning policy – refer to passing regulations in the area of urban planning and land development (building structures), and limiting development in certain locations.   

- Instruments of administrative policy – the most numerous, refer to limiting rights to use/keep undeveloped land; obligation to develop construction land; acquisition of land; obligation to preserve natural and cultural sites/structures; data base on land; etc.

- Instruments of taxation policy – apart from the usual tax duties: property tax, property income tax, property transfer tax, death and gift tax- there is another group of tax duties: land value gains tax, undeveloped land tax, change one use of land, commercial land tax (special tax applied on building of business premises, which in some cases applies even to flats). The above mentioned are instruments of tax policy that are not fully applied even in countries with developed market economy. Their implementation is selective, determined exclusively by the desired aims of land policy.

- Instruments of finance policy – existence of various financing and banking institutions such as investment funds, saving banks, credit cooperatives, institutional investors would create conditions for financing construction and production of construction land; defining the interest rate on the repayment of loans and subsidies; as well as developing secondary market of securities and capital.

- Instruments of land policy – refer to enabling free trade of construction land; selling land; the possibility of investing in advance in land, including private capital through specific projects, etc.

The mode in which the listed instruments will be implemented in practice depends on the aims of the urban planning policy defined on the state level, which apply to planning and implementing urban development plans, value of land, and socially acceptable development.

The precondition to existence and function of free market is the existence of a number of participants in both demand and offer. In a free market, prices of goods are formed in accordance with the principles of offer and demand, and are not affected by state intervention measures. Due to limited quantity, land available for construction belongs to the category of natural monopolies, and whenever there is natural monopoly there is also a property monopoly, so that any use of this resource has its own price expressed through rent. Rent concerns all transactions, including even players in the market (land owners, buyers or tenants; builders, buyers or tenants of premises; local government that implement investments in land development by building utility infrastructure).

Thus we come to the first and major problem in Serbia considering creation of the land market - ownership over land available for construction, which is each investor's arch - problem.

Ownership - basis for managing and use of construction land

Ownership over land is property, the broadest authority over land, and as legal term includes power in all ownership elements, such as the right to own (ius posendi), the right to use (ius utendi), the right to manage (ius abudendi) and the right to collect gains (ius fruendi) (Radonjić and Vujošević, 2002), thus being the basis for managing, using, disposing and collecting gains from land. Private owners of construction land may be private persons, companies, institutions, firms, etc. while public property owners of land may be legal entities such as central, regional, local and city authorities, as well as state public utility companies.  

In accordance with the Law on Assets Owned by the Republic (1995), ownership over property of towns and municipalities was centralized. Law on Construction Land has turned the whole Fund of City Construction Land into state property in 1995. For many years there has been a controversy about how reasonable the existing exclusivity of public ownership over construction land is. Is economic efficiency characteristic of private ownership alone, or is it simply that private ownership over construction land brings about more significant impulses for using it?

While searching for an answer to this question, it is necessary to take a look at a matter of so-called 'exclusion right', by which owner of a plot of land has sole right to decide on ways of using it. The owner of a plot of land freely makes decisions on how to use their plot of land and therefore bears all consequences of the decision alone.  

In case of public property over land, there is no such right to decision-making, as no single person can exclude another person from the right to practice it. This right is dispersed to many people, thus leading to the impossibility of applying it effectively. Public ownership over land does not boost efficient use of land intended for construction. The existing monopoly of public ownership over construction land in Serbia hinders the creation and the function of land-markets. If the whole stock of construction land is in state property it is virtually impossible to perform trade transactions. The domination of private ownership is one of the basic preconditions for the proper function of any market of construction land.

The system of construction land use based on monopoly of public property leads to increased participation of state in resource allocation. This also refers to systems of market simulation, through public tender procedure open to potential users of the lease over construction land, which leads to reduced interest of foreign investors in investing capital in such countries. The fact is that there is no absolute security of foreign investment. Even if a foreign investor were the owner of a plot of construction land, the plot could be confiscated or nationalized. Naturally, changes as radical as the two mentioned occurred in communist revolutions. Therefore, probability that ownership rights may be lost is negligible, though existing.

A law from 2003 attempted to solve this problem, but it was not until the new Constitution was finally passed in 2006 (on referendum held on the 28th and 29th of October) that we got the solution - city construction land as resource is privately owned, and is subject to free trade to any interested party. In the new Constitution in Article 86 "private, cooperative and public property are guaranteed. Public property is state property, property of autonomous region, or local community property"(Article 86, 2006). Thus municipalities become owners of their property, gaining many advantages this way - one of them being the possibility of making debts, which is now possible for the Republic of Serbia, autonomous regions or local communities.

The incompatibility of the system of construction land use, based on the public property monopoly in Serbia, along with the system in market-economy oriented countries creates problems resulting in lack of motivation for foreign investment.  Consequences are – growth deceleration, re-structuring and internationalization of the economy of those countries, i.e. joining in international labor share. Advocates of public property over construction land believe that the existence of monopoly is not an obstacle to resource allocation and efficient functioning of the economy. Privatization of construction land and creating its market in our conditions would lead to high land prices.  Therefore they suggest to exclude at least central city areas from the re-privatization program, or to postpone its implementation. In order to boost construction land market is necessary to enable privatisation of land intended for construction, in those cases where there is no public interest to develop the system of land occupancy and establish the system of land lease.

However, the fact remains that investors are interested in investing in Serbia despite red tape and administration problems, as well as unsolved ownership – not because of favorable business climate provided by the state, but due to unfavorable business climate for investment in other countries in SE Europe, as investments in construction in Serbia bring profit margins of over 30%.

Unsolved ownership problems strongly influence the system of planning, managing, and economizing with land available for construction. Private initiative is a major driver of advancement and a fundamental condition for the establishment of the market, and it also enables forming of realistic land pricing, trading and managing. The strongest reason in favour of returning land ownership to private owners, through de-nationalisation, de-expropriation or sale, is connected to economically justified formation of real and realistic market and introducing principles of rational land management.

Still, the issue of ownership over construction land is not present only in Serbia, but also in Czech Republic, Romania, and Croatia. One of the first steps of many countries in the process of transition (i.e. Hungary, Poland, Slovenia etc.) was to pass laws on restitution of real estate property including land– with the aim of coming closer to market regulation. Without the market, all government acts on rational use of land, partially-free trading, realistic evaluation and making income, are useless.  

Restitution, although important, is not implemented in all countries in transition, and even where it is applied is often faced with problems. In most countries in transition this process is going very slowly, because it encounters many problems- for example records on land and land owners are badly kept due to poor updating efficiency of the institutions in charge. Therefore, reform of land registry and cadastre is one of the preconditions of reforms in transition countries (it takes 6-8 months in Prague to make record of certain changes in land registry, while in Bratislava it takes only 5 days; in Serbia the same procedure takes about a year).

The problem of privatisation of urban land is not considered as a whole, so in some countries in transition laws were passed at the beginning of transition without considering models and methods of implementation. The problem especially became apparent in urban areas where modernisation and development brought about turning agricultural land into land for construction, where infrastructure and public utilities were created to change the use of land, or where the old buildings were pulled down. In the new conditions it is really difficult to foresee all the possible models of returning land and buildings to the previous owners. The laws were amended or altered only after having encountered the problems emerging form their implementation. The experience of these countries reminds us of the necessity of urgent commencement of reforms.

Knowing the local conditions, it can be said that there is the need for reform of the system of land use in terms of ownership, no matter how complicated and complex the task may be. These changes will bring about changes in the system of planning and space development in terms of the introduction of more flexible planning regulations, having market oriented systems as models (in market-oriented economies real estate has a prominent role, as about 20% of GDP is created from use of land or buildings).

Former statements of Serbian Minister of Economic Relations with Foreign Countries, Mr Milan Parivodić, can often be heard announcing reforms in the areaes of real estate and land. He says that the major changes should start by abolishing state monopoly over land available for construction, and by reforming legislation in the areas of planning and construction. The change into private ownership will enable owners of buildings/constructions to own the land below their property as well. According to Mr Parivodić, changes of the law on construction will shorten the time necessary for obtaining building permission, which would intensify volume of construction business, and thus reduce prices of property. Mr Parivodić believes that Serbia needs the so-called "one stop shop" institution, where in one place investors would get all the necessary information and licenses for investments.

Construction land market

The unified construction land market does not exist, but each city has its own specific features concerning central city areas or specific locations. Unlike in Serbia, in EU countries there are departments whose task is to follow changes in land prices. Following is done continuously, noting and analysing basic factors leading to changes in construction land prices (change of land purpose of use, level of utility infrastructure, location, etc.).

In market oriented countries, the very idea that land is inseparable from the idea of the market and guaranteed free trade. All features and specific characteristics of land derive from its market-oriented use.  So far, no system has been found that could successfully replace the system of land market. The pre-condition for its functioning is free decision making, which means no state interference, limiting monopoly and free flow of information. The construction land market could function better if it was independent from planning, and even better from the profitability point of view. However, its imperfection, insufficient level of information flow, and sensitivity to monopoly limitations all inevitably lead to state intervention aimed at preventing illegal activities and protecting public interest.

The effects of supply and demand influence the formation of market prices, which are the equivalent to expected profitability of construction land use. Thus demand for construction land is demand for business premises and/or residential buildings (housing). The basic function of construction land market is allocation of construction land.  Construction land market laws provide that the highest bidder gets the location. Apart from that, in construction land market there is also profit allocation related to ownership over a specific construction unit. The land market is very specific and imperfect, thus the need for establishing legislation and regulations on urban planning and construction. Furthermore, it is important to provide conditions for creating land reserves managed by public authorities (land-banks) so that the state could directly intervene in the land market, for example by offering land in order to influence prices and timely developing construction land by utility infrastructure, or cost saving. A very important task of the state is creating a framework for development and dissemination of know-how and skills, through educational system reform and adjusting curriculum and syllabus to real needs to produce experts for performing jobs from this area.  In a majority of countries there is a lack of educated professionals and staff that could in a satisfactory way do jobs related to reforms, establishing institutions and developing the land market. Insufficient know-how slows down the transition process.  

Preconditions for implementing land policy

The earlier practice of countries in the transition process shows that state and municipal authorities were the champions of all investment decisions and had unlimited right to acquire land and property. Many characteristics of a developed land market were restrained for years, because the market itself did not exist– there was no private property, estimating market value of land was based on state regulations, there was no land market, and therefore there was no land management in its real sense. Urban land was under strict state control. As there were no private property or market mechanisms, there was no economy based land price determining either.

Countries in the transition process are facing problems of restructuring their economies, as well as the need for new investments. As the first years of transition are characterised by a decline in economic activity and lack of funds, the fundamental task of the state was to provide conditions for attracting foreign investment. One important precondition for foreign investors is establishing private ownership over land. This was a necessary step for starting the investment processes, since anyone wishing to invest capital requires full legal security – the basic knowledge that they are building structures on their own land. The positive practice in countries with developed markets proved that without a reform of legislation it is not possible to establish an efficient system of land management, especially in urban areas.

Development is boosted by state through its institutions and public urban planning. To what extent does planning mechanisms contribute to development, is still an open issue. The earlier experience of the countries in transition are in favour of the facts – land was publicly owned, state acquisition was done for public purposes only and by the prices determined by the state institutions, public utility infrastructure was financed from public sources, planning of land use was done in accordance with the norms defined by the state bodies in charge. Even today, in some countries where the process of transition started many years ago, the influence of a planning system still does not have sufficient effect on development.

A multitude of irrational features of land use such as total devastation of some city areas, or inadequate use of central city areas by unprofitable users, all derived from the absence of adequate land policy. Spatial planning, especially of urban areas, was not based on the profitability of city land, thus the use of the city land was not directed to that goal. The lack of market mechanisms disabled capitalisation of property by the stakeholders who could develop the land with utilities and infrastructure. Institutions that were entrusted by the state with the task of land management were not capable of additional capital creation from their operations, as their operating was not business in the market sense of the word. Side effects of such a situation were quasi-fiscal mechanisms that did not present economy land features, nor did they enable reproduction of public utility funds or other funds- low prices of public utility services brought about the constant lack of funds and thus disabled proper developing of new areas which were being used for construction, and also hindered development and improvements to the existing infrastructure network of central city areas.   

In states with an established trade economy, construction land property system is based on existence and domination of private ownership over these resources and its free trading. At the same time, these states have technology and capital which they are willing to invest abroad, and the existence of monopoly of public ownership over construction land in some states like Serbia creates a variety of problems for this type of investment. It is especially pronounced when a foreigner is investing in construction of buildings.

The incompatibility of the Serbian system of using construction land based on the monopoly of public ownership with the system of states in the trade economy makes problems regarding investing foreign capital lead to deficiences in such investment. Consequences of such a situation have direct adverse effects on the growing and restructuring of Serbian economy.

Advocates of public ownership over construction land, however, maintain a standpoint that monopoly is not an obstruction for trading or efficient functioning of economy. Moreover, they claim that privatization of construction land and establishing a land market will result in higher prices –therefore, in their opinion, it would be better to exclude central city areas from the program of re-privatization, or at least to postpone the whole process. Public ownership over construction land leaves more possibilities for state intervention. It is also easier to protect public interests and to implement land policy.

On the other hand, private ownership over construction land gives priority to free trade and distribution of this resource and prevents local governments' autocracy in allocation of construction land and implementation of land policy. Ownership over land gives its users a certain level of security and stimulates inflow of new investments. In some cases, lease-holding over land is an even better option. It is especially in good form in cases when a city wishes to keep a certain level of control, and leaseholders (or, in other cases, private contractors without property) want the right to manage the property. Practice in Denmark and Sweden knows a 'half-way solution'- a compromise for solving these problems. A lease can last for as long as 50 years, or even for an unlimited term, which has had beneficial effects on prices. A lease is very similar to private ownership, but it is not the same. In all such transactions with land, owners keep ownership, but allow trading of rights and interests for using construction land. The leaseholder has an obligation to pay a rent during the period of lease– more than 50 years or for an unlimited term. In the Netherlands and Sweden, some municipalities lease public construction land, while some other municipalities sell it. At the same time, in Israel there is a long tradition of land lease. Leasing land requires efficient legislation in the areas of property and taxation. Amsterdam and Stockholm are bright examples of good control, proper guidance of urban growth, and effecitive use of the lease, as there is coordination between the planning and financial department and the department for public works.

In Serbia, monopolies in the area of construction land has led to the non-existence of a proper land market; there is a practice of administrative allocation of construction land; fees for construction land development act like substitute mechanism for providing local public income (as there is no private ownership, tax is not a basic public income of local communities); state and local governments are corrupt and uncontrolled; there is an inadequate administrative system without public accountability; and there are no ownership rights and legal security in this area.

There is an ongoing competition for attracting foreign investments among the states in the region. South East Europe, which will join the EU very soon, has great potential, and a regional real-estate market will develop in the same way as markets in other parts of Europe. This imposes a great challenge on Serbia because, in spite of its potential. It is possible to lag behind other countries, unless Serbia implements quick reforms in the areas of real-estate and land.

Jevrosima Škorić (1977), Public Enterprise for City Construction and Development Novi Sad, jevros(at)eunet.yu
Author has studied at the Faculty of Economics, Novi Sad (finance and accounting) and  University “Braća Karić”, Beograd (banking and finance management). She is a permanent contributor of professional magazine M2, area of urban planning, land developmnet and real-estate.