September 14, 2006Martim Smolka - [email protected] 1 Woodrow Wilson International Center for...

September 14, 2006 Martim Smolka - [email protected] 1

Woodrow Wilson International Center for Scholars

Washington DC , September 14, 2006

Martim O. Smolka

Losing Ground? Alternatives to informality

Programa para a Programa para a America Latina e o CaribeAmerica Latina e o Caribe

Programa para a Programa para a America Latina e o CaribeAmerica Latina e o Caribe

Comparative Urban Studies ProjectAccess to Urban Land


Setting the stage

Not doing such a good jobin conveying sufficientsupply of serviced landfor the urban poor ataffordable prices;

Regularization, and othersubsidies programs, etc.seem also short legged inaddressing the problem;

Thus the magnitude, persistence (and even expansion) of informality

Thus the magnitude, persistence (and even expansion) of informality

Market:Market:Market:Market: Public policyPublic policyPublic policyPublic policy


Outline Loosing ground: Informality growing faster than

urban population, and … of urban poverty

Revisit regularization – from curative to preventive

Not resolving! … may actually be contributing to problem

Rules of the urban land markets … untouched! A ‘third path’? – mobilizing land value increments

Beyond the subsidy and the 100 % tolerance models. The Usme and the Social Urbanizer experiments


Loosing ground: Informality growing faster urban population

Population BrazilIn Sub-normalsettlements*

1991 146.825.475 4.482.637

2000 169.799.170 6.535.634

Annual growth rate 1.64% 4.32%

*Defined as a set of 51 or more housing units occupying currently or in a recent period,

public or privately owned land by third parties, in a dense and un-orderly fashion

and lacking basic and public services.

Source: IBGE – Brazilian census Bureau

<


Growing % of informality Growing % of informality Number of ‘Barriadas’ and Population in Metropolitan Number of ‘Barriadas’ and Population in Metropolitan

LimaLima Period

# of Barriada

Population % in Lima

1920-1955 39 119,140 10.0

1956-1959 115 236,716 14.0

1960-1970 122 761,755 25.0

1971-1976 82 1,113,000 27.0

1977-1981 89 1,329,600 28.8

1982-1984 190 1,617,786 32.2

1985-1993 549 2,188,415 34.4

1994-2002 3653 3,843,230 46.8Source – Julio Calderon Mercado de Tierras Urbanas Propiedad y Pobreza. Lima, Peru: Lincoln Institute of Land Policy and SINCO Editores ,2006 p 102 – Elaborated with data from INEI 1997 and for 2002 from COFOPRI

Significant increase in last decadein spite of regularization programs!


Informality beyond poverty

Non poor in informal areas 3% in favelas > 10SM family income! (Abramo

2005) Rents in certain favelas > Minimum Wage ($100)

Poor in non informal areas 64% of poor outside ‘favelas’ (IPP – on Census

2000 IBGE)

InformalInformal PoorPoor


Causes of informality

ConventionalConventional PovertyPoverty Excessive regulation – hard to complyExcessive regulation – hard to comply Absence of social programsAbsence of social programs

Informality begets informality!Informality begets informality! Higher profitability – unfair competitionHigher profitability – unfair competition Signals from curative (regularization) programsSignals from curative (regularization) programs

High prices for serviced landHigh prices for serviced land Insufficient supply of serviced land at affordable prices Insufficient supply of serviced land at affordable prices


Regularization: Regularization: arguments in favorarguments in favor

Not regularizing not a political option Social/humanitarian reasons Negative externalities (?)

o Urban violenceo Health/epidemics etc.o Aesthetic reasons

Existing structures – housing etc. Convenience: cheaper than new developments

(?)

Not regularizing not a political option Social/humanitarian reasons Negative externalities (?)

o Urban violenceo Health/epidemics etc.o Aesthetic reasons

Existing structures – housing etc. Convenience: cheaper than new developments

(?)


Informal Settlements:Informal Settlements:Revisiting costsRevisiting costs

Bad quality of housing Most self produced – inappropriate for living!

Densities much too high (for what it is) Barrios en Caracas 251 hab/ha vs. Copacabana 305 hab/ha!

Hidden operation and maintenance costs in services and infrastructure of ‘alternative solutions’

e.g mail delivery, condominium sewage, garbage collection! Inadequate location

e.g. environment risk

Bad quality of housing Most self produced – inappropriate for living!

Densities much too high (for what it is) Barrios en Caracas 251 hab/ha vs. Copacabana 305 hab/ha!

Hidden operation and maintenance costs in services and infrastructure of ‘alternative solutions’

e.g mail delivery, condominium sewage, garbage collection! Inadequate location

e.g. environment risk

Unanticipated effects!


Unanticipated effects of Regularization:

Titling

Limit access to credit Peru: only 3.93% of 1,332,482 duly registered plots

received a loan (average US$ 5,596) - Riofrio 2006 Low priority

Ranked below 7th priority - in survey among ‘favelados’ in Rio.

Small valorization About 20% (Dowall 2003, Calderon 2002)

More informality! When granted before up-grading – may increase transaction

cost for ‘sub-standard formal land’ ! – ref vacancy chain.

Limit access to credit Peru: only 3.93% of 1,332,482 duly registered plots

received a loan (average US$ 5,596) - Riofrio 2006 Low priority

Ranked below 7th priority - in survey among ‘favelados’ in Rio.

Small valorization About 20% (Dowall 2003, Calderon 2002)

More informality! When granted before up-grading – may increase transaction

cost for ‘sub-standard formal land’ ! – ref vacancy chain.

Titling: after process of improvements


Signals updating of prices; Sub-dividers charging a premium according to the

expectations of public coming in to ‘fix it’! Opportunity costs;

Regularization (curative) vs. new urbanization (preventive)

The attraction of in-migration; Date of arrival vs. some (public) up-grading – ref Evidence

from Menna-Barreto 2000 The‘ day after.’

Average appreciation in the Favela-Bairro – 28.52% ! vs. value increment in new urbanization >100%!

Settlements stigmatized as irregular, even after 15 years!

Signals updating of prices; Sub-dividers charging a premium according to the

expectations of public coming in to ‘fix it’! Opportunity costs;

Regularization (curative) vs. new urbanization (preventive)

The attraction of in-migration; Date of arrival vs. some (public) up-grading – ref Evidence

from Menna-Barreto 2000 The‘ day after.’

Average appreciation in the Favela-Bairro – 28.52% ! vs. value increment in new urbanization >100%!

Settlements stigmatized as irregular, even after 15 years!Need more/better studies

Unanticipated effects of Regularization: up-grading


In Sum: Regularization does not In Sum: Regularization does not

necessarily contribute to:necessarily contribute to:

Price reduction;

Improve the capacity of the public

administration to provide serviced land;

Disincentive additional land occupations;

Capitalize residents/beneficiaries.

Price reduction;

Improve the capacity of the public

administration to provide serviced land;

Disincentive additional land occupations;

Capitalize residents/beneficiaries.

Need to find alternative solutions


Revisiting the Revisiting the ‘arguments’‘arguments’

Conventional wisdomConventional wisdom Re-qualificationsRe-qualificationsPeople are poor cannot pay for urbanization

Is already paying!(cost of being informal, land prices etc.)

Need to subsidize urbanization for the poor

Most subsidies models ex-ante or ex-post feed into the vicious circle of informality

External resources - should come from society as a whole

Already existing - latent resources in process itself of urbanization


Conventional models to provide serviced land for the urban poor

The subsidy model

The ‘tolerance’ model

InformalityLand value increment

Capitalization

expectations

Policies

Higher land prices


Alternative modelsAlternative models

Sanctions

InformalityInformality

Lower land pricesPolicyPolicy

Land value increment mobilization

Negotiation with sub-divider

UrbanizationUrbanization

Shared

Certainty


Stylised factsInformal

Formal‘popular’

UsmeSocial

Urbanizer

Net land 70% 50% 48% 50%

Land2

Ag use8

Urban2

(sanction)5

Negotiated

Infrastructure 9

Minimal21Full

174

(limited)18

Flexible

Mark-up (profit ratio)

11(58%)1

26(47%)

52

(15%)52

(18%)

Final price 26 55 243 28

(1) Profit margins by informal is underestimated since the ‘plot-area ratio’ is higher

(2) To be shared with landowners joining - USME land trust or sub-divider in SU

(3) Weighted average of price per sqm – ranging from land to commercial use at 70/m2 to In effect price for Social Housing lower

(4) Only includes the infrastructure investment internal to the project itself.


Social urbanizer and Operation Nuevo Usme - Tools:

Land acquisition mechanism At ‘non-contaminated’ prices

Value-capture - Mobilization of land value increment, from:

Rural-urban conversion Selling of building rights Urban infrastructure provision Land readjustment

Urban Operation – special zoning Special regulations for designated areas

Negotiations Recognition of sub-dividers expertise

Partnerships – Public-Private Public investing in private developments

Land acquisition mechanism At ‘non-contaminated’ prices

Value-capture - Mobilization of land value increment, from:

Rural-urban conversion Selling of building rights Urban infrastructure provision Land readjustment

Urban Operation – special zoning Special regulations for designated areas




3rd Path

Alternative – competitive to informal sub-dividers

Alternative – competitive to informal sub-dividers

Government OccupantsSub-dividers

Predictability

Pre-defined beneficiaries

Economies of scale

Sharing land value increments - among

Cost reductions

Base:


Recognition of Significant land value increments

generated in urbanization process; Cost of curative higher than

preventive; Being informal is expensive for

society and the occupants;


Land occupation Comparisons by alternative processes (1)

Formal Informal ‘Third Path’

Area to be occupied

Designated for development

Unfit for the formal market

Appropriate and encouraged for

occupation

Urban infrastructure provision

Prior to occupation

Long after the occupation – and

often only partially provided!

Concomitant – with occupation or with

predictable planning

Land Use norms and Regulations

Compliance with standard master plans definitions

Established informally by occupants

Flexible, adjusted to the type of area and

occupants

Role of public administration

Fiscal regulation of licensed project

Tolerance of irregularity or

omission.

Sponsored from conception to

implementation.


Land occupation Comparisons by alternative processes (2)

Formal Informal ‘Third Path’

Occupants/target groups

Able to purchase with full credit credentials.

Groups with no other alternatives

Previously registered and approved for

participation

Lot prices/affordability

Market based, usually for those above

middle-income level

Based on lot size and type of services, not

price per se.

Negotiated with sub-dividers in advance

Competitive to informal

Funding/financing

Private banking system and/or self-

financing by developers

Cost borne by occupants paying up

front

Mobilization of land value increment from

urbanization

Relations among actors/agents

Competitive market relations

Complicity through illegal transactions

Negotiated partnerships with

clear liabilities


Conclusions

Current policies not sufficientCurrent policies not sufficient

Need to change the rules of the game for the property market

Need to change the rules of the game for the property market

Existing latent resourcesExisting latent resources

Informality has to do with the functioning of urban land markets

Informality has to do with the functioning of urban land markets

Value Capture?


Martim Oscar SmolkaSenior Fellow and Director of the Latin America and the Caribbean Program

Lincoln Institute of Land Policy113 Brattle StreetCambridge, MA 02138, USAPhone direct : 1- (617) 503 2155

or 661-3016 ext. 155Fax: 1- (617) 661-7235e-mail: [email protected]:\\www.lincolninst.edu


Hyperlinks


Has %

Land for expansion (Plan de Ordenamiento Zonal POZ) 795 100

Land object of the operation 701 88

Net Urbanizable area 601 76

Usable area (AU) 379 48

Usable area for Social and priority Housing VIS y VIP 247 31

Expected population 285,000

Total - housing units 63,300

Density of housing per Ha (gross) 126

Usme operation


Usme project

$ Per sqm

Assessed land value for raw land $1.91

Fully urbanized land value $24.00

Cost of investment internal do the project $17.11

Net value to be shared among landowners

$5.98


Social Urbanizer: Public-private partnershipPublic-private partnership

Public urban norms and regulations more flexible, speed up the licensing process, reduce the legal requirements, and recognize progressive, step-by-step urbanization. transfer of development rights as a stimulating

mechanism for private developers. access to specific lines of credit direct public investments in urban infrastructure

Private – sub-divider share land value increment lower land prices for low-income buyers


A Social Urbanizer is a real estate developer registered with the municipality who is interested in developing in areas identified by the government as suitable for low-income housing, and who agrees to operate according to certain negotiated terms, including the affordability of the serviced plots

A Social Urbanizer is a real estate developer registered with the municipality who is interested in developing in areas identified by the government as suitable for low-income housing, and who agrees to operate according to certain negotiated terms, including the affordability of the serviced plots

Social Urbanizer

Eligible Social Urbanizer


Eligible Social Urbanizer Registered real estate developers, Contractors already working in the

informal market, Landowners and Self-managed cooperatives.


A signal that raises prices: A signal that raises prices: premium/overpricingpremium/overpricing

The expectation that an parcel will eventually be regularized allows the subdivider to speculate on its value.

The expectation that an parcel will eventually be regularized allows the subdivider to speculate on its value.

Ref. POA – Purchase and Sale Agreement...

The prominent buyer is aware that a settlement is not urbanized, and

that urbanization should be pursued together with the municipal government

through participatory budgeting...


The opportunity costs of The opportunity costs of regularizationregularization

Regularization (curative)

New urbanization(preventive)

Favela in Rio de Janeiro:

US$ 4,000 per familyGuarapiranga (11 favelas) Sao Paulo

US$ 7,962.10 per plot (average 52m2)

US$80 per m2

•ECIA urbanized plot <US$ 130 per m2

•SMU/Rio de J urbanized plot US$ 55 - m2 ... unsubsidized

US$153 per m 2

In Bogotá, the cost of correction is 2.7x times the cost of urbanization in planned areas (Aristizabal and Gomez 2001).

In Bogotá, the cost of correction is 2.7x times the cost of urbanization in planned areas (Aristizabal and Gomez 2001).


Regularization: Opportunity Regularization: Opportunity costcost

‘Repairs’ costs of irregular settlements 2.7 times that in new planned areas (Aristazabal y Gomez 2001) Guarapiranga program – US$ 153.- /m2 (Rocha et al. 2001) Average cost of about US$ 40 to 70.- /m2

o 14 projects (Favelas in 7 cities in 5 States of Brazil) – US$ 3,400.- average (Caicedo & Izar 1999), or

o Favela-Bairro in RJ (1st phase) – US$ 3,500 to 4,000.-o Caracas US$ 57.20 /m2 (ref. CONAVI)

Cost of fully servicing land in new development US$ 15 to 35.- /m2 (ref. Latin American data)

In general: Loose accounting and negligent records about real costs!

‘Repairs’ costs of irregular settlements 2.7 times that in new planned areas (Aristazabal y Gomez 2001) Guarapiranga program – US$ 153.- /m2 (Rocha et al. 2001) Average cost of about US$ 40 to 70.- /m2

o 14 projects (Favelas in 7 cities in 5 States of Brazil) – US$ 3,400.- average (Caicedo & Izar 1999), or

o Favela-Bairro in RJ (1st phase) – US$ 3,500 to 4,000.-o Caracas US$ 57.20 /m2 (ref. CONAVI)

Cost of fully servicing land in new development US$ 15 to 35.- /m2 (ref. Latin American data)

In general: Loose accounting and negligent records about real costs!


The expectation of The expectation of regularizationregularizationis a factor in irregularizationis a factor in irregularization

Irregular land occupations and elections. Miguel Arraes, Roriz, etc.

Date of arrival in settlements. Evidence of H. Menna Barreto (2000).

Temporary settlements become permanent. Riofrio 1991.

Peru – irregularity from 17% (1961), to 38% (2000) (Calderón 2001)

Irregular land occupations and elections. Miguel Arraes, Roriz, etc.

Date of arrival in settlements. Evidence of H. Menna Barreto (2000).

Temporary settlements become permanent. Riofrio 1991.

Peru – irregularity from 17% (1961), to 38% (2000) (Calderón 2001)


Dates families arrived vs. regularization programs (favelas Santa Lúcia II and Esmeralda)

0

5

10

15

20

25

30

35

antes de1970

entre 1970e 1974

entre 1975e 1979

entre 1980e 1984

entre 1985e 1989

entre 1990e 1994

entre 1995e 1998

pe

rce

nta

ge

m d

o t

ota

l d

as

fa

míl

ias

mo

rad

ora

s

Sta Lucia Esmeralda

Up-grading Up-grading


Dates families arrived vs. regularization programs(Areas: V. Olinda and Barão de Uruguaiana)

0,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

40,00

45,00

50,00

antes de1970

entre 1970 e1974

entre 1975 e1979

entre 1980 e1984

entre 1985 e1989

entre 1990 e1994

entre 1995 e1998

pe

rce

nta

ge

m d

o t

ota

l d

e f

am

ília

s m

ora

do

ras

V. Olinda Uruguaiana

Up-grading Up-grading


The ‘day after’ regularizationThe ‘day after’ regularization

Average appreciation in the Favela-Bairro – 28.52% ! (from 15.3% in Caminho do Job to 42.5% in Parque Royal). => value increment R$ 4,000.00 (28% of value (ex-ante) of

R$ 14,000.00. Contrast with value increment in new urbanization >100%!

Market does not recognize upgrading! Settlements stigmatized as irregular, even after 15 years! Higher turnover (> 8%?)

Cashing Filtering up or down?

Average appreciation in the Favela-Bairro – 28.52% ! (from 15.3% in Caminho do Job to 42.5% in Parque Royal). => value increment R$ 4,000.00 (28% of value (ex-ante) of

R$ 14,000.00. Contrast with value increment in new urbanization >100%!

Market does not recognize upgrading! Settlements stigmatized as irregular, even after 15 years! Higher turnover (> 8%?)

Cashing Filtering up or down?

Few available studies!

(ref Abramo).


Belem Informal housing occupying 25% of the

area and 1/3 of the population 93 favelas (Censo 2000), in 1990 they

were ‘just’ 20! Population growth (ref. Ipea, 1999)

Total = 2,2 % per year. Informal areas = 6,8%.

No access to sewage network in 95% of the city!


Usme Project (tools) Land acquisition mechanism

At ‘non-contaminated’ prices Value-capture

Participación en plusvalíaso Rural-urban conversiono Selling of building rights

Contribución de Valorizacióno On urban infrastructure provision

Land readjustmento POZ and Plan Parcial


Social Urbanizer (tools) Urban Operation

Special regulations for designated areas Land value increment – ear-marked to area

Value-capture – (Selling of) Building rights (CODC)



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