Excerpted from: Myths and Realities of Public Land Leasing: Canberra and Hong Kong (Land Lines Article)
Hong Kong's government...provides public officials with generous remuneration and fringe benefits to reduce the temptation of corruption.
This demonstrates that, in designing a public leasehold system, a government must consider...
...the need for a system of checks and balances to prevent opportunism or political maneuvering.
[The] issue of competition is particularly important for developing economies where local governments are eager to attract investment. They may be willing to compromise by collecting a smaller amount of land premiums and rent from both domestic and foreign land investors
. <--- exemptions, favoritism, Economic Development Zones.
The use of land as a source of public funds may require some level of inter- or intra-regional cooperation
to prevent developers from playing one government against another.
LAND SPECULATION AND LAND VALUE INCREASES (INCREASED REVENUES) DUE TO ARTIFICIAL SCARCITY
In Hong Kong the government's reliance on land revenues as a source of public funds presents another problem:
...its financial interest in land conflicts with its public role in stabilizing land prices.
The government has relied heavily on initial land premiums because demanding premiums from lessees during lease renewals has proven to be politically difficult
In addition, the assembly of land rights for land redevelopment involves high negotiation costs
because most land leases in Hong Kong have multiple leaseholders. These high costs deter private developers from undertaking land redevelopment
by acquiring lease rights and modifying contract conditions. As a result, the government is unable to utilize this method fully to recoup land value. As for the land rent, before 1997 the amount of annual rent paid by lessees was fixed and bore no relationship with increases in land value
These difficulties have encouraged the government to retain land value at the beginning of the lease
. <-- Value fixing
Yet, this method can work only if officials lease land slowly to private developers
. <--- Control of supply
A rapid disposition of land when its value is low would impede the government's ability to recoup land value in the future.
Restrictions on land supply, however, have encouraged private land banking and property speculation, leading to high land and property prices and making Hong Kong one of the world's most expensive cities.
Officials of other countries could avoid this problem by relying more on lease renewals, contract modifications and the annual land rent than on the initial assignment of leases to capture land value. The plausibility of doing so, however, remains an empirical question. The experiences of Hong Kong suggest that such an attempt could encounter strong public resistance and high negotiation costs.
ZONING LAWS AND MANDATORY DEVELOPMENT PROVISIONS
(not just natural "encouragement" by virtue of the tax)
In principle, public leasehold systems allow the government to manage urban growth by incorporating land use regulations into land leases. If lessees do not develop their land according to the lease provisions, the government has the right to take back the land
, a contractual right not available to the government when land is privately owned.
To take full advantage of this special land right, the government must be capable of enforcing the contractual agreements. Despite having the ability to repossess land, there is no evidence to show that enforcement costs under public leasehold systems are lower than those found under freehold systems
In Hong Kong...the government incorporates land use regulations into land contracts as conditions at the beginning of the lease. Unless lessees initiate a lease modification, these conditions will remain until the lease expires, which could be as long as 50 years in Hong Kong (and 99 years in Canberra).
The difficulties that Canberra and Hong Kong face in leasing public land show that...
...leasehold systems in and of themselves do not resolve land management problems
This does not mean, however, that leasing is not a viable means to manage land. In Hong Kong, the government retains a large portion of increased land value for public infrastructure investment. Canberra's public leasehold system enables the government to obtain low-cost land for building the Australian capital.
The important lesson is that...
...policymakers should not set unrealistic expectations on what public leasehold systems can achieve.
Failure to deliver their promises could frustrate a well-intended reform and bring the effort to a halt.
Because no land tenure system is perfect,
...the debate should not focus on the choice between leasehold and freehold systems. They are not mutually exclusive.
Instead, future research should concentrate on designing specific institutions according to...
...different political, economic and social contexts...
...to minimize problems associated with both systems.