Participation of beneficiaries in financing urban services : valorization charges in Bogota, Colombia

World Bank Reprint Series: Number Ninety-nirne William A. Doebele, Orville F. Grimes, Jr., and Johannes F. Linn Participation of Beneficiaries in Financing Urban Services: Valorization Charges in Bogota, Colombia Reprinted with permission from Latd Ectnwnitics, vol. 55, no. 1 (Februiary 1979), pp. 73-92  Participation of Beneficiaries in Financing Urban Services: Valorization Charges in Bogota, Colombia William A. Doebele, Orville F. Grimes, Jr., and Johannes F. Linn I. INTRODUCTION facilitating urb-.n service proevision in the rapidly growing cities of developing Street improvements, sewer exten- countries. In the next section the major sioIns, and other services have been fi- conceptual issues facing valorization nanced in Bogota, Colonmbia, by valori- programs ate discussed. Section III pro- zation charges, a system of taxation by vides a record of practical experienice which the cost of public works is allo- with these issues by focuising on two cated to affected properties in propor- problems: the allocation of valorization tion to the benefits con'erred. Such charges, and the collection of charges. charges are designed to make urban ser- Section IV draws together the available vices largely self-financinp, thus reduc- evideence to assess the fiscal and finan- ing municipal tax burdens. Although the cial consequienices of valori/ation pro- concept has been traced at least to the grams and their impacts on land use and Roman Digest of the sixth century, with variations in most European countries and in the United States as "special D)oebele is Profec,sor of Advanced Environmental assessments," Colombia is one of the SltUdie,, Harvardti niversity, Grimes and l.inn are Econornists, D)e% eloprnuein Policv Staff. World Bank. few developing nations to lhave applied Research for this report wvas carried out during field it extensively.I Among Colomnbiaii visits to Colombia undertaken as part of World Bank cities, Bogota has been expanding rap- research projects 67(0-70) ("arban Public [-inances") citis, Bgotahasand 670.98 ("Urban Land Taxation and Control"), and idly, particularly since the 1950s. MNfany was supported by the Urban and Regional Economics recent extensions of the city's road and Division at the World Bank. This paper draws on two street network have been financed reports prepared ieparately by the authors (Doebele and Grimes [19771, and Linn 11976e1), which deal in greater through the valorization system, and detail with the issues discussed it, this paper. While much of the current programii to extend. gratefully acknou'ledpirng helpfful :omments received the sewerage system is supported in the from Richard Bird, Doug Keare, and Deborah Mc- ( artlhv, the authors remain respon%ible for any errors of same way, More than three decades of fact or interpretation in c*prcs,in. what is uniderstood experience with valorization in Bogota to be ilteir persorul views. may thus be instructive to other coun- IF-or a recent review of tle experience of other Latin American countries with betreititent cole'ction, the in- tries considering sinimilar techniqLuCS. tercsted reader is ref'erredl to Jorge Macon and Jose This paper analyzes the operation of Merino Mail6n [19771. Forearlier discussions of theCo valorization programs in ">ogota and bonhiban experience, see Rhoads anid Bird 119671, G(obernacikn del Valle del ('auca [19731, linedo [1 9741. evaluates the system as a means of Botero [ 1)75J, and Linn [19751. Land Economics -5* 1 Februarv 1979 Board of Regents of the University of Wisconsin Systemii  74 Land Economics incorne distribution. A closing section it difficult to pay valorization charges?' summarizes th> lessons from this ex- Valorization has developed several ways perience. of dealing with this problem. For proj- ects located in "sectors of low economic 11. BASIC' ISSUIES level," the amount to be recoveredl from beneficiaries may be reduced by ex- Colombian legishtion and practice on cluding a major share of project costs, valorization, like similar programs else- making up the difference from general where, have had to comr to grips with tax revenues.4 Alternatively, in deter- three issues: (1) Should the valorization mining the method of assigning the valo- charge be viewed as recovering a benefit rization charges, a formula may be used otherwise bestowed gratuitously on the which, though it recovers full project landowner by the State (that is, recovery cost, places a lower burden on low- of betterment), or primarily as a way of income areas. This in effect provides a increasing municipal solvency by re- subsidy to low-income owners from the couping the actual cost of public invest- other owners affected by the project. ment? (2) How is the principle of valori- Furthermore, a Local Paving Fund. zation to be applied in low-income established in 1964 to finance the paving neighborhoods? (3) How can a steady, of streets in low-income neighborhoods, self-sustaining series of valorization also excludes a portion of project costs projccts be maintained in the face of as long as all direct costs are recovered. liquidity and collection problems? Finally, an interest-free extenide(d pay- Valorization consists basically of the ment schedule helps low-income groups recovery of project costs, not a recap- meet their payments and, particularly in ture of all benefits the project is ex- conditions of inflation, lowers the real pected to confer. Bogota's officials ap- burden of the charge. pear to believe with Rhoads and Bird Together with a scarcity of experi- that in a growing city "the forecast of enced professionals, a central problem benefit exceeding tax will be true in of valorization programs has been the almost all cases."2 Informal studies con- difficulty of maintaining a financially ducted in Bogota support the thesis that self-sustaining, steadily growing port- charges seldom excerd project benefits. folio of projects. The expenditure trends Benefits are not ignored, since their reviewed in section IV demonstrate that calculation is the basis for allocation of project costs among properties. Never- Rhioads and Bird [19967, p. 4061. theless, the prevailing view is that it is tIn many cases the land value increase will also be much easier to use a broad conception of associated with increased earning opport uniti,s of the poor owncr-c.:cipanis, for instance by improving access benefit.s to as.sign relative costs than it is to enployrn-mnit. by raciliitSaiin commercia7l andi hanidi- to identify all project benefits and their craft activtisies on the premises. and by inc:reasing the distribution as a basis for 100 percent attractiveness of the prorty f,. boarders (u/uui'. However, these increased earnings are spread over time recovery, and do not solve the ownver's short-term liluldit%' prob- With little savings and limited means lem. of converting the increased land value I A 1958 statute specifies that all costs may be ex- cluded except the costs of land, indem-nities for damages into cash except by sale of their home, caused, the 20 percent for administration, and 0.15 per- low-incomre property owners often find cent for "representatives."  Doebele, Grimes and Linn: FinanJ_-ing Urban Services 75 the major component of the Bogota val- areas of the city; zones of historic inter- orization program (construction of est; and, particuLlarly in recent X'ears, streets and avenues) has been subject to sewerage trunk lines and drainage considerable fluctuations in activity. canals. Administered before 1972 by a These appear to have resulted mainly department within the B3ogoVi city gov- from the difficulty of planning and im- ernment, valorizat ion operlatiolns SinLce plementing large-scale public works on a that time have been the responsibility of sustained basis, and from problems of the semiautonomIIoLus Institllte of Urban liquidity and collection. Development IDU), created to exccite all major works in the lBogotLi SpeciLl District.6 The District Water and Sewer III. THE VALORIZATION PROCESS Enlterprise (EAAB) and national Minis- try of Public Works have also carried A. LegalandAdministrativeFramework out valorization projects within the Bogota metropolitan area. Collection of While some historians have traced ref- charges for these two agencies is done by erences to the idea of valorization in Co- the District (now IDU), for which it re- lombia to as early as 1599, in its present ceives a 20 percent commission. form valorization began in 1921 with a national law permitting recovery of in- B. Planning and Progrumming vestment costs for flood control and ir- Of PVorks rigation projects through a contribution of Works from benefiting property owners. The Selection of projects follow-s genier-al scope was subsequently extended by plans developed for the city. Projects for removing the limitation of recovery of the improvement of streets and avenues charges to costs incurred and by permit- are part of the Plan Vial, a comprehen- ting application to virtually all public sive transport plan prepared by the works projects, so long as they resulted District Planning Office which also in- in an increase in property values.5 To- cludes the parking facilities program. day, though all levels of government in Sewer construction is subject to the Colombia may recover project costs Master Plan for Sewers. As a major ex- through valorization, municipalities ception, local paving projects are ini- have been the principal users. tiated by local community boards (Jun- Bogota began applying the valoriza- tas de Acci6n Comunal), Norking in col- tion system for street construction in laboration with IDU in the various low- 1944, and in 1953 passed a comprehen- income neighborhoods. sive municipal acuerdo ("ordinance") For a derailed account of the legal history of valori defining the procedures in detail (A cuer- zation in Colombia and litigotfthe, see Doebcle oand do 41/1958). SubsequeInt legislation, Grimes [1977, pp.5 -81. while preserving the s) stem laid down in ' As is often thc case with capill cities, i1(lgoi;i en 1958, extended its scope to the finanicing joys a special status, Known technically as the "Disrrito f-'special de Bogotl." it combines the auihoriis of a de- of redevelopment in deteriorated pairts paartamento ("pro%ince") with those of a inun'icipaflit. of the city; parking facilities; open Its present boundaries include almost all of the urban- spaces; the construction of loading bays ized area, with room to spare, except at a few points at its northern and southiern extremities where urban and widening of streets in congested growtlh has overspilled its limits to a miiior degrce.  76 Land Econoinics Valorization projects must be ap- method a 1960 statute added a second proved by the District Planning Board system calling for a detailed study of and the Board of Directors of IDU, with each property, with emphasis on ten thc exception u- u sewer projects are en- features considered most ir'ipr)rtant in tirely 1;ider tyi' authority of the EAAB determining value.9 Board of Directors. Approval of the At the beginning of the suirge of valo- I)istrict (City) Council is also required, rization projects in BogotA during the ,a' e for street works of under 200 late 1960s, an ordinance was adopted imieter-s in length which may be author- stating that the Valoriiation Depart- ized by the mayor. Once approval is ment was not bound by either method, secLured, the staff of IDU prepares an but could proceed "in accordance with "Explanatory Memorandum of Provi- the characteristics of the project and the sional Liquidation," which covers the nature of the benefits, so that the result- scope and objectives of the project, its ing charges conform to legal norms and budgeted cost, the area over which the principles of equity" (Acuerdo 5/1967, aIlori,ationi clharges are to be distrib- Article 2). Today, the conicept of equal uted ("zone of influence"), the system parallel zones is seldom applied, al- by whiich the cost is to be allocated, a thouigh the zone of illfluenceC frequLenitly statistical analysis of the charges, and an does run parallel to the project. The ten aCCOUn1t of the le-ally reqLir ed selection factors of the 1967 StatUtC, on the other anid pariticipation of representatives of hand, have had a great impact on the the property owners.7 When this report way adnministrators think about valori- has been isslled, collection of charges is zation benefits, even though all ten are initiated and project works may begin. ' For a more detailed description of the format and contents of the "Explanatory Mlenioraida," vee C. Deterniining the Zone of Influelc( D)oebeleand Grimes[ 1977, pp. 16-18]. 4J A fiurther important issue is the saluation of land and4ilocating Charges and buildin's for acquisition in valorization Nworks. O)ne of ttle most impo)rtanlt tecMhiical Hlowever, this issue is not dealt vith in t paper since it One f te mot iportnt echncal is parallel to the task of the -.ipprais& of parcels tor problems in valoritation is to apportion property taxation and since, in fact, the same assess- tlle total cost of the project in an equi- ment techniques are used in both cases. Assessment pro- table manner.,8 In Bogouti, the admin- cedures as applied to valorization and property taxation are described in Doebele and Grimes [19771 and [inn i.;t rat ion of X aloiriiation has approached [1975]. this p-robleni with a set of doctrines Acterdo 7011960. The ten featuires are (a) lot size; defied y lw an trditon, hic it (b) frontage in relation to area; (c) distance fromn the (lefinleci by law and traiclition, whicl it Sproject; (d) lot shape; (e) topograpliv. (fD natural acci- has applied wviih great flexibility. dernts, suchll as flows of water or swa,ipincss; (g) prox- The basic B got~ ordinance of 1958 imiiity to low-income areas; (h) inputs which the owner pro vided vile ithod of allocatiig \!alo- Ihas oluntarily contributed totlhe project; (i) the change proide on mehodof lloatig vlo- in econom-ic activity oni the property brotgigt about by ri/al ion charges, which was to assign a the projcdt. e.g., frorm residential to commercial use ; prescribed benefit to eacih of a series of and (i) "Tte ecoiomici cotit(lios of ttic road on wilichi e aliy) w ide parallel zonfes along the tie property is located, sihli as destination, dematind for tiansportainon, acccssihiliry, etc., in cases whiere thces proJect (, cuirdo 41/1958). After an ad- circtimstances determine a greater or lesser attractionr of justitienlt to take aiccouint of variations in the heiterniciii emanating from the project" (a literal lot size and fr-oniage, charges could be iraimlation, apparently meaning that s eroerie because of previous economic activity, benefit more allocated. To this rather inflexible thian others).  Doebele, Grimes and Linn: Financing Urban Services 77 rarely applied in a single case and many around 1.0, are theni multiplied with the new ones have been added. basic coefficient to arrive at a value 1. The Coefficient System. As a rough known as the final coefficient. Ex- first approximation of distributing total pressed, on a per square meter basis, the project cost according to benefits, a final coefficient is an index of the esti- "basic coefficient" is established for an mated benefit received by the parcel in "ideal lot" measuring 10 meters of question relative to benierits on every frontage by 25 meters of depth. The esti- other parcel in the zone influenced by mated rise in the value of properties af- the project. When multiplied by the fected by the project is used to measure number of square meters in each parcel, the benefits conferred. Generally, but the final coefficient gives what is called not always, the distance of the parcel the parcel's drea virtual. As can be seen from the project determines its position frorm, the above, the drea virtual, al- in the range of benefits. A curve is then though expressed in square meters, is constructed between properties receiving not an area at all but a neasure of bene- the greatest and the smallest benefits, so fit received by the parcel as a whole, that values can be given to properties ranked in scale relative to all others. with intermediate increases. The sum of all dreas virtuales is then To adjust for any lot not 10 bv 25 divided into the total budget of the proj- meters, a second coefficient, tht, "coef- ect to yield a standa,ird conversion factor ficient of form," is used. Foll6wing con- for all properties. This factor (in pesos ventional assessment practices of most per square meter) is then multiplied with countries, it is held that of two lots equal the drea virtual to derive a valorization in size or external dimensions, the one charge for each lot which is in proper with less street frorntage will have the weight relative to charges on other par- lower value. The coefficient of form ad- cels, yet still yields the amount needed to justs for lot shape using the following cover the budcgeted costs of the project."' formula: I = 3.9174(F + 1) I44p .404 [1] '" In nm:ilrcnaiIcal terins this procedure can he miun. marized as follows: where I is an "index of form,'" F is Derivation of irea virtual for each property t: frontage, and P is the perimeter of the A,f1,K1 = A, lot. The index, which typically varies be- Standard cotnversion factor: tween 0.9 and 1.3, is lower the nar7rowxer and longer the parcel. Guiiidelines for use by nonspecialized personnel make the formula relatively easy to apply. Valorization tax burden Other frequently employed coeffi- A41 - C, cients irclude topography, land u.se, i socioecoi omic compnositioni of the c, C Ij neighborhc,od, and additional infltiences ICI1KI beyond even those enumerated above, where A, r: area of prupert i; A,`>tiret virtual of prop- beyonde vn o th ose v esnomerted a vex- erty i; C - total cost of priicc . c, =valorization tax on These other variables of benefit, ex- prnopcrt i; K - coctlicicrit of factor i for property l; IT presscd in terms of coefficients varying -productoperator;and fI standardconversion'factor.  78 Latnd E- conoinics. TABLE 1 basic coefficient a single curve, with the CARRERA 68. AUTOPISTA MEDELLIN TO highest point at the edge of the road and 71)1 M1 lF RS SOUITH WESI OF CAL.L.E 68: lowest point at the 500-meter parallel PROVISI)NAL BU.D(IT line. These values per square meter were (In (Colhomian pesos) determined to be 75 and 5, respectively; Value to land andi constrtuctioni to intcrvening points were dctermnined by he ackluirted .......... .........4.84(1.845 interpolation. Two imiodifications were Value ofworks...................9,685,232 made to the basic curve. All direct front- Subtotal ................... 14,526,077 age parcels were increased in value by 35 4tministratixe bos1...... 05 percent as they were judged to have Contt:genctes ..................... 726,304 "evident and disproportionate" benefit Inte.;est at 6",, for 11) months ..........20,304 Sblt................... . 0 from being on an arterial highway. In Hono.raria to. re.resentates 5.s6,63 addition, project lots in a subdivision -2 which already had urban services and Total Project Cost . ..... had ceded land for construction were Source. Technical Section. Department of Valorization, given a 25 percent lower coefficient. Bogota, Colombia. Following standard practice, the mod- a20X), of 14,526.077.prcieth 5', of 14,526.077. ified basic coefficient was muiltiplied by Q0.15', of 18.883.90