94200 Land Administration and Management KP7NCCPDCCVCT/QPIQNKC Social, Urban, Rural and Resilience Global Practice Land Administration and Management in Ulaanbaatar, Mongolia Social, Urban, Rural and Resilience Global Practice © 2015 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 1 2 3 4  15 14 13 12 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Contents Acknowledgments..............................................................................................................................vii Executive Summary............................................................................................................................. ix Abbreviations and Acronyms............................................................................................................. xv Glossary.............................................................................................................................................xvi 1. Introduction..................................................................................................................................... 1 Overview of Report................................................................................................................................... 2 Urban Expansion and Population Density................................................................................................. 4 2. Regulatory Framework and Practice of Land Management........................................................... 19 Laws on Land and Property Relations..................................................................................................... 20 Planning Standards and Regulations ...................................................................................................... 32 Land and Property Fees and Taxes......................................................................................................... 33 Discussion of Constraints and Obstacles to Land and Property Administration ................................... 37 3. Managing City-Owned Land ......................................................................................................... 39 Land Shortages in UB.............................................................................................................................. 39 Missed Opportunities in Land Value Capture ........................................................................................ 44 Inventorying and Registering Municipal Assets...................................................................................... 46 Valuation and Pricing of Land and Real Property Assets ....................................................................... 49 Discussion of Challenges to Public Land Management.......................................................................... 52 4. Urban Land and Property Markets ................................................................................................ 55 Land and Property Markets in Urban Development............................................................................... 55 Existing Land Use Patterns in Ulaanbaatar............................................................................................. 57 Constraints to Urban Land Markets........................................................................................................ 59 Discussion................................................................................................................................................ 62 5. Conclusion and Recommendations ............................................................................................... 65 Recommendations: Public Land Administration and Land Value Capture ............................................ 67 iii Appendixes A. The Evolution of Land Laws in Mongolia............................................................................................ 77 B. Forgone Past and Potential Land-Based Revenues in UB.................................................................. 83 C. Land Value Zones for Determining Land Fees in UB ......................................................................... 91 References......................................................................................................................................... 93 Boxes 2.1: Case Study: The Challenge of a Dual Property Registry in UB............................................................ 25 2.2: Case Study: Improving Revenue Collection through Integrating Information Systems: The Case of Arusha, Tanzania.............................................................................................................. 26 2.3: Case Study: Cadaster Database Tampering in UB............................................................................... 27 2.4: Case Study: Problems with Inheriting Property in UB......................................................................... 29 2.5: Case Study: Land and Property Transfer as a Commercial Transaction .............................................. 30 2.6: Case Study: Successful Land Administration in Georgia..................................................................... 31 2.7: Land Fee Assessments in UB .............................................................................................................. 35 2.8: Case Study: Missing Revenue from an Alternative Property Value Assessment in UB........................ 36 3.1: Additional Corruption Allegations Concerning Public Land Allocation in UB..................................... 42 3.2: Densification and Commercialization of Land Use in Central UB: The Case of the Mongolian- Indian Joint School .............................................................................................................................. 43 3.3: Unpermitted Development on Public Lands in UB.............................................................................. 44 3.4: Berlin’s Experience in Managing Surplus Property: Liegenschaftsfonds Berlin .................................. 46 3.5: International Debate and Lessons on Market Valuation of Government Land ................................... 50 3.6: Examples of Successful Land Auctions in Turkey and Egypt............................................................... 52 4.1: Zaisan: The Cost of Illegal Fringe Development ................................................................................. 59 5.1: Development Fees as a Source of Municipal Revenue........................................................................ 66 5.2: Using a Land Task Force in Establishing Strategic Land Management................................................ 67 5.3: Prerequisites of Successful Land Auctions .......................................................................................... 71 5.4: Property Valuation for Taxation Purposes: Area-Based Valuation....................................................... 72 Figures E.1: Road Hierarchy, Surface Area Coverage, and Population Density, UB and Selected Cities, 2003–12.................................................................................................................................................. x 1.1: Population Growth in Ulaanbaatar, 2001–11......................................................................................... 4 1.2: Changes in Built-Up Areas of UB, 2000–10 .......................................................................................... 5 1.3: Population Densities across UB, 2000–12 ............................................................................................. 7 1.4: Density and Population Gains in UB by District, 2000–13..................................................................... 7 1.5: Change in Total Area of Urban Expansion in UB by Type, 2000–10...................................................... 8 1.6: Road Hierarchy, Surface Area Coverage, and Population Density, UB and Selected Cities, 2003–12................................................................................................................................................ 10 2.1: Organizations Involved in UB’s Land Privatization Process ................................................................. 21 2.2: Procedures for Obtaining Land Use, Possession, and Ownership Rights in UB.................................. 24 2.3: Procedures, Times, and Costs in the UB Land Privatization to Ownership Process............................ 28 iv  |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a 3.1: National Drama Theatre Parcel and Commercial Building under Construction in UB........................ 40 3.2: Nontransparent Carving Out of Public Land for Commercial Use in UB before 2012 ....................... 41 3.3: Preventing Unauthorized Use of City-Owned Land in UB .................................................................. 43 5.1: General Classification of Urban Land Controlled by the Government of UB...................................... 70 5.2: Classification of Vacant Land in UB...................................................................................................... 70 Tables 2.1: Land Tenure Typology in UB................................................................................................................ 22 2.2: Land Use Zones for Regulation in UB.................................................................................................. 32 2.3: Property Tax and Grants from Upper Government as Shares of Local Government Revenue, UB and Selected Countries and Cities, 2007–09 and 2013 (percent) ................................................ 34 3.1: Estimated Forgone Revenues from Land Auctions in UB, 2011–12.................................................... 45 3.2: Progress of Inventorying and Registration of Municipally Owned and Controlled Assets in Ulaanbaatar (to end-2013)................................................................................................................... 47 3.3: Balance of Government-Owned Land, Ahmedabad, India.................................................................. 48 3.4: Nonfinancial Assets on Warsaw Balance Sheet, 2008 ......................................................................... 49 3.5: Estimated Revenues from Annual Land Use Fee by Type of Land Holders, 2014............................... 51 3.6: Starting Prices and Auction Revenues of Land Sales in UB, 2003–10 (MNT thousands)..................... 52 4.1: Khashaa Plot Prices from Khoroo 26, Songinokhairkhan..................................................................... 58 5.1: Potential Revenue Modifications for UB Budget................................................................................. 74 B.1: Scenario 1 of Forgone Revenues from Past Land Allocations............................................................. 83 B.2: Scenario 2 of Forgone Revenues from Past Land Allocations............................................................. 84 B.3: Scenario 3 of Forgone Revenues from Past Land Allocations............................................................. 84 B.4: Potential Future Revenues from Auctioning Surplus Land from Various Possession Holders............. 85 B.5: Potential Annual Revenues from Property Tax Based on Market Value.............................................. 85 B.6: Area of Commercial and Service Land, 2012 (m2)............................................................................... 86 C.1: Type of Land Use under Possession, and Use Rights for Land Value Zones, and Land Fees under Current Practice ........................................................................................................................ 92 Maps 1.1: Basic Land Use Categories, Ulaanbaatar, 2010 ..................................................................................... 6 1.2: Public Transport Routes in UB, 2013.................................................................................................... 12 1.3: Fire Risks across UB, 2013.................................................................................................................... 13 4.1: Average Khashaa Prices in UB, 2013 (million MNT/m2) ..................................................................... 57 4.2: Projected Distribution of Land Use Zones in UB through 2020 .......................................................... 60 C.1: Boundaries of Zones to Be Used for Determining Land Fees in UB................................................... 91 Contents  |  v Acknowledgments This report is based on close collaboration with the City markets. The concluding chapter with recommendations Government of Ulaanbaatar (UB), under the guidance of is a joint product of the authors of other chapters and His Excellency, the Mayor of Ulaanbaatar, Mr Bat-Uul. Meskerem Brhane. Geoffrey Payne, together with Chinz- An Advisory Group led by Vice Mayor Bataa and com- orig Batbileg, was responsible for chapter 2 on regulato- prising of the Property Relations, Strategic Planning and ry frameworks. Olga Kaganova, together with Chinzorig Policy, and Master Planning Departments provided data Batbileg, was responsible for chapter 3 on city-owned and pertinent feedback throughout the study. A presenta- land. Sandra Watson and Isabel Duarte Junior provided tion of the report’s findings was made to UB City’s senior administrative support. Michael Alwan was responsible for leadership during a meeting chaired by His Excellency editing and formatting the report. Bruno Bonansea created Mayor Bat-Uul. The results of that discussion have en- the maps and Rosten Woo designed the graphics. riched the final report. The team is grateful for the advice provided by peer re- The study was carried out by a task team led by Mesker- viewers Harris Selod, Joshua Gallo, Matthew Glasser, En- em Brhane (Lead Urban Specialist) and comprised of Da- rique Fanta, Keith Bell and Tony Lamb. This study has vid Mason (Consultant, Urban Planner), Geoffrey Payne benefited from the close guidance of Abhas Kumar Jha (Consultant, Urban Planner), Olga Kaganova (Consul- (Practice Manager, Social, Urban, Rural and Resilience tant, Land Specialist), Chinzorig Batbileg (Consultant, Global Practice) and James Anderson (Country Manager Land Specialist), Erdene Ochir Badrach (Operations Of- for Mongolia). This report was financed by Multi Donor ficer) and Rumana Huque (Senior Urban Specialist). Da- Trust Fund for Sustainable Urban Development under vid Mason was responsible for writing chapter 1 on the the close guidance of Ellen Hamilton, Lead Urban Spe- Urban Expansion of UB and chapter 4 on private land cialist, GSURR. vii Executive Summary The City of Ulaanbaatar (UB) is undergoing a historic tions about land as a designated public entitlement for transformation toward market-driven urban develop- residential use. There are several outstanding challenges ment. This growth remains strongly influenced by city the city faces in improving the administration of land and policy decisions that affect the supply and location of supporting the function of urban land and property mar- land for public and private uses. Private investment is kets to support investment and economic growth. concentrated in well-serviced land located in the central portion of the city and along major transportation corri- Low-density urban expansion and lack of infrastruc- dors, which represent a small part of the total built area ture combine to reduce residents’ quality of life and of the city. Mongolian law allows UB residents free ac- the city’s overall economic competitiveness. Moreover, cess to land for residential use, which is commendable the fact that large expanses of urban territory do not because it can reduce a substantial portion of the overall have infrastructure weakens the city’s attractiveness for cost of housing. Due to these land allocations, however, employers and workers among the highly competitive in- low-density urban expansion has occurred along the ur- ternational metropolitan areas in the region. Out of 869 ban fringes, which imposes heavy costs on transportation cities in the East Asia region with a population greater and the provision of basic utilities for city residents. than 100,000, only 182 (21 percent) have a lower popula- tion density than UB. The low-density urban form of the The current city administration clearly recognizes that city increases the need for private automobile use, which urban land represents one of the most important as- escalates traffic congestion and commute times, costing sets under its guardianship and management. In par- workers and firms time and money (see figure E.1). For ticular, the administration is making a systematic effort example, one third of ger1 area residents have a round trip to proactively manage land in the public interest. Notable daily commute of between two and four hours. Higher achievements include: (i) a nearly complete, current ac- density significantly reduces the costs of public service counting inventory of city-owned capital assets; (ii) sur- provision. For example, Bayangol has the greatest pop- veying, mapping, inventorying, and auditing public-use ulation density and highest number of streetlights in the land; and (iii) decisive administrative measures to stop city, but also has the lowest per-resident expenditures on and correct past practices of nontransparent and some- street lighting: one third less than Songinokhairkhan Dis- times unlawful land allocations to private sector actors, trict and three times lower than Sukhbaatar District. By and to protect public land from informal occupation. contrast, low-density growth of ger areas makes the costs of public infrastructure, such as roads, high, while heating However, such reforms are incomplete, and the city 1. A ger is a portable, single-room, tent-like structure composed of a felt administration’s efforts are constrained by existing or cloth covering and a collapsible wooden frame. It is similar in form national laws and regulations and conflicting percep- and shape to a yurt, which is found in other parts of rural Central Asia. ix Figure E.1: Road Hierarchy, Surface Area Coverage, and Population Density, UB and Selected Cities, 2003–12 Ulaanbaatar Helsinki Sapporo Washington DC Mongolia Finland Japan USA Urban Grid = 800m Total number of streets 6 22 19 14 Surface area occupied by streets 9% 30% 35% 29% Population Density = 100 people = 1/km 1,642/km2 2,872/km2 7,200/km2 4,066/km2 Sources: Graphic: Mongolia Ministry of Economic Development. Data: Population Register of Finland 2012; Barter, Kenworthy, and Laube 2003; U.S. Census Bureau 2012. Note: Population density is measured using administrative rather than built-area boundaries due to data constraints of comparable cities. km = kilometers; m = meters; km2 = square kilometers. x  |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a and sewerage to these areas would require public capital be allowed to have commercial, office, or other uses in and ongoing operating expenses at a level so prohibitive the same location or building. International best prac- that they often cannot be provided at all.2 The resulting tice suggests that single-use land use should not consist lack of central heating and sewerage leads to increased of more than 10–15 percent of overall urban land ar- air pollution and water contamination and the attendant eas (UN-Habitat 2013:28). By contrast, the current UB public health risks. Importantly, these disadvantages of Master Plan (MCUD 2013) designates a total of just 1.7 the low-density urban expansion fall disproportionately percent of land in the city for mixed uses, reducing to on the urban poor who live in these areas. 1.39 in future. Single-use residential zones are planned for 30 percent of the city, but these zones do not allow It is the city’s street system and land use plan, not pop- for commercial activities, which residents must reach ulation density, that contributes to traffic congestion. by traveling to other parts of the city. These restrictions Compared to other major cities in the region, UB has a on land use also inhibit investment in uses that markets comparatively high vehicle ownership rate and a low over- could otherwise support, raise the cost of development, all supply of road space.3 Existing street networks do not and discourage the economic and social benefits that cit- alleviate traffic congestion and do not support pedestrian ies accrue through density and efficiency of land use. activity. Figure E.1 compares 0.64 square kilometer (km2) sections of central city areas in UB and three other cities of Current laws and practices on land change frequently, comparable populations collected from 2003 to 2012. The which results in uncertainty for developers and inef- figure shows how downtown UB consists of large streets ficiencies in administration. Frequent changes in laws and superblocks with very few connections. By contrast and regulations have resulted in inconsistencies between Helsinki, Sapporo, and Washington, DC have a hierarchy them, which creates uncertainty among potential inves- of large streets for rapid movement and smaller streets for tors and anomalies in land administration such as leas- internal circulation around smaller blocks. This improves es that require frequent renewal. The use of the tenure vehicle and pedestrian mobility, especially if land uses are distinction between “possession” and “ownership” rights coordinated with road and transportation investments. for residential use is not clear in practice as both afford holders very similar rights. Firms and legal entities can- Urban planning regulations and approaches are out- not own land and must obtain possession rights, which dated and contribute to sprawl and land market distor- can be subject to frequent discretionary renewals because tions. Current land use regulations in UB are rigid and of the possibility that they can be terminated after only 15 encourage segregated, rather than mixed, land uses. Sin- years. This creates unnecessary confusion and uncertainty gle-use zoning allows only one type of land use in a given and can distort investment decisions in land due to per- area. For example, single-use residential areas would not ceptions that possession certificates will not be renewed. 2. For example, a 2009 World Bank study estimating infrastructure Land administration systems need to be more efficient costs found that water connections would cost between US$4,500 and transparent. There are numerous city and national and US$11,500 per household with heating connections between US$2,000 and US$8,000 per household (World Bank 2010). A more government organizations involved in land administra- recent World Bank survey estimates that 52.3 percent of ger house- tion, which leads to fragmentation and duplication of holds earn US$3,243 (MNT 6 million) or less per year (World Bank tasks for government organizations, as well as extra costs 2014a), suggesting the connection costs for these two services alone are far beyond the ability of many ger households to pay. and confusion for land service users. For example, privat- 3. UB has 378 registered vehicles per 1,000 inhabitants; nearly twice ization of a land plot involves nine organizations and 113 that of Cebu City, Seoul, and Shanghai and more than five times as many days for completion. Further, some administrative pro- as Hong Kong SAR, China. A measure of the proportion of urban area for cesses are duplicated by the Property Relations Depart- road space reveals that Manila, Shanghai, Ho Chi Minh City, Singapore, and Hong Kong SAR, China have between 4 and 9 times more road ment (PRD) and General Administration for State Reg- space as a proportion of total urban area (World Bank 2014c; 2015). istration (GASR), increasing the time and costs for both E x e cu t i v e S u m m a r y   |   xi government and land users. As a result, most users do not There is a greater and yet unrealized potential for increas- register their land ownership in GASR. The Tax Depart- ing the land/property revenues for the UB budget than ment and PRD have unclear responsibilities in assessing and the existing transaction tax. Even a modest (such as 0.40 administering property-related taxes and fees, which reduc- percent or less) land and property tax (on apartments, es their efficiency in collecting them. The quality of service to nonresidential properties, and land plots with houses) the public of various land-related offices varies substantially based on their market value, could generate an annual across the city: some offices provide clear guidance through sum equivalent to 35 percent of 2012 budget revenues. one-stop-shops while others may have absent or unqualified Auctioning surplus land held by budget organizations, staff and require applicants to visit multiple times. NGOs, utility companies, and other entities could gen- erate additional funds in total equivalent to 25 percent of Management of government land in UB has not yet the 2012 budget each year for the next 20 years.5 reached its full potential, technically or strategically, despite steady progress. Most importantly, the city has Land fee and tax policies along with land allocation no transparent, coherent land policy to guide public land practices provide little revenue because they do not re- management for the next decade, which risks the misallo- flect the market value of land and property. For exam- cation and undersupply of land for public uses. Complete ple, owners of nonresidential properties pay a tax based and accurate registry and cadaster records of all publicly on property book value, which is substantially lower than owned land parcels will help ensure that decisions to al- market value. The city collects little revenue from resi- locate all or part of these parcels for private uses are well dential properties and apartments due to exemptions and planned and coordinated. Data on public land locations substantial tax rate discounts. As a result, property taxes and availability should be widely available to both the make up only 2.9 percent of the city’s budget revenues, public and the city government. which is low compared to cities in both transition and developed economies (World Bank 2011). Additionally, UB forgoes significant public revenues that could be the previous administration's practice of directly allocat- derived from private investment in land due to the ing at a set price—rather than competitively auctioning— current weaknesses in land administration and man- valuable land in UB, including the central part, deprived agement. The public clearly understands that land and the city of revenues estimated in a range of 22–77 times the property in UB have a market value, as evidenced by the annual city budget for 2012, depending on assumptions. active real estate market. However, the city has yet to As a result, municipal revenues to meet basic public needs adopt international practices that allow government to are well below the city’s revenue generation potential. capture a part of this value through property/land taxa- tion and other value-capture instruments. Such revenues UB should take a proactive approach to improve the could be used to finance much-needed basic infrastruc- function of land markets and its own land manage- ture and amenities such as public parks. Instead, govern- ment and to capture a fair share of land market value. ment attention has been narrowly focused on reducing Although some progress has been achieved, important evasion of the transaction tax on property (where sell- improvements to land administration and management ers and buyers under-report transaction prices to avoid practices could be made by the city itself in the near fu- paying) through a proposed Land Exchange, rather than ture. Other efforts require a longer-term engagement with identifying other sources of revenue from property and other stakeholders, including ministry and legislative rep- improving the land registration system.4 resentatives. For example, the national law permitting 4. This form of tax evasion is well documented internationally. The is- 5. Such “true revenues” would substantially exceed any amounts that sue can be addressed at least partly by reducing the tax rate. However, UB could borrow from municipal bonds or other sources, which it introducing the proposed Land Exchange would not solve this problem. would then need to also repay. xii  |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a every citizen to obtain land for residential use in the city the areas that allow for mixed land uses. Land use at no cost and without any significant land tax, or the regulations should be used as a means to encour- practice of not taxing apartments, cannot be addressed age density levels that make the provision of in- by the city government alone despite the significant im- frastructure more affordable through the efficient pacts these laws have on UB. The city needs to partner use of urban land, rather than supporting devel- with other agencies and ministries involved in this sec- opment through allocating vacant land in fringe tor such as GASR, the Administration for Land Affairs areas or satellite towns far from infrastructure and Geodesy and Cartography (ALAGaC), the Ministry of services. Finance, and others to reassess how land tenure and tax- ation laws can improve the function of urban land mar- • City agencies responsible for developing both land kets and provide a source of public revenue in line with use plans and public transportation planning need international norms. The recommendations below high- to closely coordinate ongoing activities and partner light specific actions that are within the city’s purview, with ongoing street improvement projects aimed at and others that require a more strategic commitment enhancing capacity and connectivity. This would with other stakeholders. improve mobility by reducing the time people spend moving through the city and could support alternatives to private car use, including public IMMEDIATE ACTIONS UB CITY CAN TAKE transportation and walking. • Finalize the surveying and registration of publicly owned land. Conduct legal documentation and on- ACTIONS THAT NEED INVOLVEMENT the-ground audits of land held by all city govern- OF OTHER STAKEHOLDERS ment entities, including budgetary organizations and municipal enterprises, as well as land allocat- • The city needs to lead efforts to improve the effi- ed for possession to individuals, NGOs, and simi- ciency and transparency of land administration lar enterprises. This will help the city account for services, including titling and registration. Howev- available public land resources, and could improve er, since titling and registration procedures involve public land management decision-making. national government ministries, the city needs to partner with these organizations to establish a set • Create an interdepartmental Task Force (including of activities to improve the quality of these services representatives from districts) to develop a com- for city residents. A review of existing procedures prehensive, city-wide land management policy. The and requirements could help to identify steps that policy would be used to guide decisions on retain- could be consolidated or eliminated. Public out- ing or releasing public lands using the completed reach and information campaigns would clarify the inventory of publicly owned land and properties benefits of titling and registration and the associat- and a consideration of public need. Should public ed requirements. This streamlining would reduce lands be released for private activities, a system of the costs and uncertainty of acquiring, developing, competitive and transparent land auctions would and transferring land within the city and would en- allow the city to capture higher revenues than courage private investment. through direct allocation. • The practice of land valuation needs to be revised • Review zoning and development standards in or- so that taxes and fees better reflect market values der to allow more flexibility in accommodating of land and property, as is international practice. demands for different land uses and to increase This will require significant changes in current laws E x e cu t i v e S u m m a r y   |   xiii and the city will have to cultivate long-term strate- • Current land tenure classifications should be con- gic partnerships with other government ministries solidated to improve clarity and support for in- and parliament in order to develop and support vestment. For residential uses, possession is an un- these reforms. There are two areas where reform necessary category that could be discontinued and is most needed: (i) introducing taxation of prop- replaced by directly issuing an ownership tenure erty types that are not taxed at all (such as apart- designation. This would reduce the time and costs ments), and (ii) basing land/property taxes on currently required for residents to obtain owner- approximate (then individually assessed) market ship title by eliminating the requirement to first ob- values rather than the present practice of apply- tain a possession certificate. Legal entities should ing the 1997 value assessment for land and book also enjoy some form of secure, medium-term value for properties. For example, modest (less rights or long-term land leases rather than the than 0.40 percent) tax rates based on market val- more circumscribed possession and user rights ues of nonresidential properties would have in- they are currently afforded. This would stabilize creased the 2012 city budget by 23 percent; a 0.30 private investment because it could provide more percent tax on apartments would have increased robust and longer-term protection for commercial the budget by 20 percent. and legal entities. xiv  |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Abbreviations and Acronyms ALAGaC Administration for Land Affairs Geodesy MPD Master Planning Department and Cartography MUB Municipality of Ulaanbaatar ASRT Administration of State Registration of Titles NAPR National Agency for Public Registry DLO District Land Office NEMA National Emergency Management Agency DPLRD District Property and Land Relations NGO Nongovernmental Organization Department NSO National Statistical Office GASR General Authority for State Registration PRD Property Relations Department GDP Gross Domestic Product PUMA Platform for Urban Management and GUSIP Ger-area Upgrading Strategy and Analysis Investment Plan SPC State Property Committee MCA Millennium Challenge Account TF Task Force MCUD Ministry of Construction and Urban UB City of Ulaanbaatar Development UK United Kingdom MNCCI Mongolian National Chamber of UN United Nations Commerce and Industry USAID United States Agency for International MNT Mongolian New Tugrik Development CURRENCY EQUIVALENTS Exchange Rate Effective July 2014 Currency Unit = Mongolian Tugrik (MNT) MNT 1 = US$0.00054 US$1 = MNT 1,845 Vice President: Axel van Trotsenburg Country Director: Bert Hofman Country Manager: James Anderson Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager: Abhas Kumar Jha Task Team Leader: Meskerem Brhane xv Glossary Aimag: An administrative district equivalent to a Khashaa: A parcel of land allocated for private province. There are 23 aimags in Mongolia. residential use. District: This report discusses municipal districts Khoroo: An administrative unit a level below the (düüreg), which are a second-level administrative district municipal district. There are 152 khoroos in UB. that is separate from rural districts (soum). There are Soum: A rural administrative subdivision of an aimag. nine districts in UB, six of which are contiguous. There are 331 soums in Mongolia. Ger: A portable tent structure traditionally used by herders for shelter. A ger has a collapsible circular wooden frame that is covered with felt and heated by a small stove. xvi  |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Chapter 1 Introduction Urban growth is strongly influenced by the function of toralists from across the country seeking opportunities private land and property markets, along with the set for employment and an improved quality of life. The of property rights and land use regulations that under- city is home to 40 percent of the country’s population pin these markets (Feder and Feeny 1991; Payne 1997). and generates 65 percent of its economic activity (World Land markets have a direct and long-term influence on Bank 2012).2 urban form, transportation networks, access to employ- ment, and commercial centers as well as the location UB public authorities control a large amount of land. and supply of housing. When land markets are poorly The Capital City’s nine districts are comprised of 470,000 or opaquely regulated, information on prices is limited hectares, of which only about 10 percent, or 50,000 hect- or exclusive to certain interests; they can perpetuate and ares, is built land.3 About half of the city’s 1.3 million accentuate existing disparities of wealth, mobility, and ac- residents live in low-density ger areas or unplanned cess to services among urban residents (Deininger 2003). settlements that are characterized by improved resi- City governments have an important role to play in ad- dential plots (or khashaas) that contain gers, detached ministering land, managing publicly owned and con- single family homes, and uninhabited ancillary struc- trolled lands, supporting land-based financing strategies, tures. These settlements form 83 percent of the city’s and regulating the type and intensity of land uses through built area but lack basic services such as paved roads, zoning and planning standards.1 water, heating, and sewer connections, though nearly all residents in ger areas have some form of tenure se- Mongolia is one of the world’s fastest-growing econo- curity (World Bank 2015). These areas are also typically mies, with GDP growth surpassing 12 percent in 2013 home to recent migrants that have moved to the city in (World Bank 2013a). In recent years, the population of search of economic advancement. From 2000 to 2010 the the capital and largest city, Ulaanbaatar (UB), has grown significantly, due primarily to migration of nomadic pas- 2. This also includes the economic activity of firms headquartered in the city but which have operations in rural areas, such as the mining 1. Public land management refers to government decisions and ac- sector. tivity related to acquiring, holding, and disposing of publicly held 3. By comparison, the area of UB Capital City is more than 11 times land. Land administration refers to powers afforded to governments the size of the U.S. city of Denver, Colorado; 5.6 times the size of Cal- to define property and tenure rights, maintain registry and cadaster gary, Canada; and 6.4 times the size of Astana, the capital of neigh- records, impose taxes and fees, and set zoning and development stan- boring Kazakhstan. Each of these cities are landlocked, located at a dards over public or privately held land. comparable latitude, and are situated in steppes or plains. 1 number of households living in ger areas increased 149 records and the power to assign and enforce tenure rights percent, accounting for 68 percent of all new households for land within the administrative boundaries of the formed in UB over this period (Affordable Housing In- city. The city government can also use land as a means stitute 2014). to influence urban expansion and as a source of revenue through its powers to tax both private transfers of land and a portion of the value assessed to it. Securing claims OVERVIEW OF REPORT to occupy and improve land is a key government service, because it allows and encourages residents and firms to This report examines the status of land administration invest, exchange, and collateralize property with assur- and markets in UB. It complements previous economic ances that tenure and exchange activities will be protect- and sector work and technical assistance that provided ed by the law. Similarly, the city can improve its invest- guidance to the city to improve the reporting of budget ment planning with an accurate record and valuation of data. The passage of the Integrated Budget Law in 2011 publicly owned land and buildings. This information can has given the city greater latitude to explore new sourc- be useful both for investment planning and for prudent es of revenue, including borrowing and bond issuance. dispossession of these city-owned assets. As a result, the city is also considering use of municipal debt financing for infrastructure improvements. Recent This report is composed of five chapters. This chapter re- economic and sector work (World Bank 2013b) has pro- views recent trends in urban expansion and population vided assistance for the city to prioritize these goals; this growth in the city, including the extent of public network report builds on that work by examining how existing infrastructure coverage, variation in population density, land resources and tax instruments can be used as a pos- and the extent to which urban growth has encroached sible alternative to debt finance. This work is also in line into areas that present a natural hazard risk. Chapter 2 with the current Country Program Strategy for Mongolia outlines the regulatory framework and the current prac- (World Bank 2012). The strategy proposes improvement tice in land administration. Chapter 3 assesses practices of the country’s capacity to (i) equitably and transpar- in managing city-owned land. Chapter 4 surveys urban ently manage public revenues and expenditures, and (ii) land and property markets, including a discussion of improve the extension of basic services while reducing prices, existing constraints, and the influence of infra- exposure to natural hazards and pollution. This report structure on demand. Chapter 5 concludes with a sum- demonstrates how UB’s urban growth and expansion and mary of the key findings and recommendations drawing its current land administration and management policies on the findings of this report and lessons from interna- present opportunities for the city government to address tional experience. both of these areas. The purpose of the report is to critically assess how land, and by extension investment in land, is structured Historical Shift in Land Regimes through a discussion of existing legislation, regulations, Mongolia has experienced profound changes to the ur- and administrative procedures, and practices. Mongo- ban land sector since it began a shift from a command lian law4 assigns the city land management responsibili- economy to a market economy in 1991. Traditional- ties as a core service function. These responsibilities also ly, Mongolia was a largely nomadic society of pastoral- include the development and maintenance of cadaster ists moving frequently across large areas of the country. The country experienced a dramatic transition under a socialist political and economic system (1924 to 1991), 4. These powers are delegated specifically the 2002 Law of Mongolia on Land, the 2006 Law on Territorial and Administrative Units, and which was characterized by heavy state involvement in the 2011 Budget Law. the economy and public ownership of all land (USAID 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a 2004). During the Soviet period, land development oc- These measures have also enabled UB to achieve what few curred through direct state investment in property devel- other cities worldwide have managed by providing easy opment and construction. The provision of apartments access to secure land for all, irrespective of income. and the proliferation of state-owned enterprises preclud- ed the development of urban land and property markets The city’s land policy has contributed to its expansive because ownership rights were exclusive to the state and urban form and related problems of infrastructure cov- all transactions occurred under the guidance of master erage deficiencies and pollution. Since the transition to planning. This negated the need for land valuation, pric- a democratic government and market economy, rapid per ing mechanisms, or transparent and competitive alloca- capita economic growth and a relaxation of restrictions tions of public land. on in-migration to the city have outpaced the city’s ability to effectively administer land.7 The allocation of what in Legal and regulatory reforms have posed a new set other countries would be extremely large residential plots of challenges for land management practices and the has generated low-density urban sprawl. This urban form function of urban land markets. Since 1991, a series of has imposed such high unit costs of infrastructure provi- constitutional reforms have moved the country toward a sion that only central areas are connected to basic public market-based economy, which has expanded access to, utilities. All other areas have poor road access, negligible and ownership of, land. The 1992 Constitution confers public transport, no water or sewerage connections, and the right of fair acquisition, possession, and inheritance use coal for heating.8 All of this causes intense air, soil, of movable and immovable property.5 It also specified and underground water pollution. While secure tenure that foreign citizens could not own land. Subsequent has allowed the urban poor to invest in housing improve- legislation in 1994, 1996 and 2009 clarified property ments, the city has been unable to supply complementary rights and the procedures for securitizing land property public investments in many ger areas. through mortgage instruments, respectively.6 After 1997, public rental apartment units were transferred free of The city also lacks the tools and capacity to effective- charge to their residents, who were free to buy and sell ly manage public land assets and to capture the value on the open market. The 2002 Land Law privatized, free gained from the improvement and use of urban land. of charge, plots of land that were already occupied and Prior to recent actions by UB’s elected leadership that allowed by right new plots of land for all registered UB came to power in 2012, management policies and prac- residents up to 700m2. These rapid changes have support- tices largely failed to represent and protect long-term ed the densification of the central city area and sustained public interests during this unique transformation of ur- a growing construction and real estate sector in the city. ban space. Prior to 2012, public land was being allocated 5. However, private ownership of pastureland is forbidden. 7. Before the early 1990s, Mongolians needed official permission to 6. The revised Civil Code of 1994 contains articles on property-related move from rural to urban areas and obtaining such authorization was matters. It governs the creation, termination, and transfer of property difficult. A constitutional provision now allows Mongolians to choose rights and also the provision for contract and inheritance. The Civil where to live. The 1992 Constitution of Mongolia states that the citi- Code is also the framework for equal rights possession, use, and dis- zens of Mongolia shall be guaranteed the privilege to enjoy the follow- posal of family property. A 1996 amendment allows for mortgage of ing rights and freedoms: freedom of movement within the country, immovable property and includes land when it is transferred to pri- freedom to choose the place of one’s residence, the right to travel or vate ownership (USAID 2004:11]). The Land Law of 2002 (Articles 35 reside abroad, and the right to return to home country. The right to and 38) allows for the mortgage of land possession rights among the travel and reside abroad may be limited exclusively by law in order Mongolian entities. The Law on Collateral of Immovable Property of to ensure the security of the nation and population and to maintain 2009 regulates issues related to the use of immovable properties and public order (Chapter 2, article 16.18). related rights as collateral to secure the pledge, conclusion of mort- 8. A World Bank survey (2014b) found that less than 4 percent of ger gage agreements, and relations concerning the fulfillment of the ob- households used flush toilets and had access to the centralized, piped ligations. water supply. C h a p t e r 1 : I n t r o d uc t i o n   |   3 for commercial or private sector use which promoted the in figure 1.1. Of the nine districts, six are contiguous and inefficient distribution of valuable property and invited together compose the administrative boundaries of the patronage and corruption. This in turn undermined the urban core. These six districts comprise the administra- city’s ability to direct land use planning and urban growth. tive division of UB and are the area of reference for dis- As a result, the city is now experiencing a shortage of land cussion of urban growth in this chapter. for public use, not only in central built-up areas, but also in ger areas. Furthermore, the city lacks the needed tax Density is an important and desirable component of instruments and policies and is hence forgoing substan- urban growth. The close spatial proximity of people and tial land-related revenues it could have collected for in- different land uses gives cities economic dynamism, im- vesting in infrastructure, especially in ger areas. proves mobility, and supports social integration. Further- more, segmented land uses, where only certain uses such as residential or commercial are exclusively concentrated, URBAN EXPANSION AND increase the time and distance required to travel to and POPULATION DENSITY from these areas. Mixed land uses encourage a concen- tration of residential, retail, and public services, which UB’s urban growth mirrors regional trends in East improves access and enhances property values. Asia and the Pacific. Cities across the world are grow- ing both in terms of population and physical area (An- Satellite data reveal that the city’s built form has grown gel et al. 2011) and in the East Asia and Pacific region in substantially since 2000. UB is composed of nine districts particular (World Bank 2015). UB is no exception. Since of varying sizes and population densities, summarized 2001, the population of the city has nearly doubled from in figure 1.2. The city’s most densely populated districts, 790,000 to more than 1.2 million residents according to Bayangol and Chingeltei, are also the smallest districts estimates by the National Statistical Office (NSO) shown Figure 1.1: Population Growth in Ulaanbaatar, 2001–11 1,300,000 6 1,200,000 5 Population change (%) 1,100,000 4 Population 1,000,000 3 900,000 2 800,000 700,000 1 600,000 0 2001 2003 2005 2007 2009 2011 Year Population Mean Change Year to Year Source: National Statistical Office. 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Figure 1.2: Changes in Built-Up Areas of UB, 2000–10 TOTAL AREA (km2) Chingeltei 89.3 km2 Bayangol 29.5 km2 Chingeltei 89.3 Sukhbaatar Sukhbaatar 208.4 208.4 km2 Khan Uul 484.7 Songinokhairkhan 1200.6 Bayanzurkh 1244.1 Songino- khairkhan 1200.6 km2 CHANGES IN BUILT-UP AREA (km2) 2000 2010 Bayanzurkh 1244.1 km2 Bayangol 21.8 / 26.2 (+19.9% increase in district built area) Chingeltei 26.2 / 29.0 (+10.8% increase in district built area) Sukhbaatar 26.4 / 37.6 (+42.5% increase in district built area) Khan Uul 484.7 km2 Khan Uul 28.0 / 38.0 (+35.7% increase in district built area) Bayanzurkh 39.3 / 58.4 (+48.6% increase in district built area) Songinokhairkhan 47.7 / 73.4 (+53.9% increase in district built area) Bayangol 29.5 km2 Sources: Compilation drawing on data from National Statistical Office (NSO), Property Relations Department (PRD), and PUMA. Note: km2 = square kilometers. by area in the city. The other, much larger districts are at It also shows that the largest districts also have the largest least partly in the central urbanized area of the city, but gains, likely due to the availability of land for expansion. each extends far beyond UB’s urban footprint. They are composed largely of low-density ger settlements or un- UB has a low population density compared to other improved vacant, forest, or pasture land (see map 1.1). As cities in the region and other capital cities across the the total land areas of each district vary widely according world. As figure 1.3 shows, the city’s overall density is to administrative boundaries and not built settlements, low (ranging from 7,351 people/km2 in Bayangol to 3,516 the traditional measure of density as persons per square people/km2 in Sukhbaatar), with the most populous dis- kilometer (km2) of land is misleading. This report uses tricts, Bayanzurkh and Songinokhairkhan, being both the an analysis of satellite imagery from the World Bank’s largest and least densely populated. Bayangol, the most Platform for Urban Management and Analysis (PUMA) densely populated district, still has population densities tool to detail the expansion of the built environment of only comparable to older U.S. suburban communities of the city in order to describe changes in both population comparable areas and populations that surround New density and built up land coverage (World Bank 2015).9 York City and Los Angeles.10 Other East Asian cities are Figure 1.2 summarizes changes between 2000 and 2010, much more dense; Seoul has an average density of 5,920 and shows that the city has added a total of 73  km2 or people per km2, Singapore with 8,446 people per km2, about 39 percent more built area over the 10-year period. and Kuala Lumpur 3,306 (World Bank 2015). Other cit- 9. PUMA—the Platform for Urban Management and Analysis—is a tool that compiles demographic and land cover/land use data obtained 10. These include El Monte, California (area 24.7 km2; density 4,500 through both statistical databases and analysis of satellite imagery people/km2) and Patterson, New Jersey (area 21  km2; density 6,697 from 2000 to 2010. people/km2) (U.S. Census Bureau 2012). C h a p t e r 1 : I n t r o d uc t i o n   |   5 Map 1.1: Basic Land Use Categories, Ulaanbaatar, 2010 Land Use/Land Cover 106°55’E 107°00E 107°05’E Agricultural Land Discontinuous Low Density Urban Fabric (S.L. 10% - 50%) Discontinuous High Density Urban Fabric (S.L. 50% - 80%) Forest Industrial, Commercial and Transport Units Urban Greenery District Boundaries 48°00N Roads Sukhbaatar Chingeltei Songinokhairkhan Bayanzurkh 47°55’N 47°55’N Bayangol Tuul G ol 0 2 4 Kilometers Khan-Uul This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank GSDPM Map Design Unit Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 106°45’E 106°50’E 106°55’E 107°00E 107°05’E IBRD 41369 JANUARY 2015 Sources: Data from PUMA, MPD. ies in comparable economies such as Hanoi and Da Nang Recent urban growth in Ulaanbaatar has followed a pat- in Vietnam have very dense urban cores. A World Bank tern of low density. The largest districts by land area have study estimates that of the former at 18,800 people/km2 also seen among the greatest absolute population gains. and the latter at 8,800 people/km2—densities that exceed Figure 1.4 shows urban districts as bubbles based on their that of Bayangol (World Bank 2011).11 Only Bayangol, the land area plotted according to their population increases smallest and most centrally located district, has a popu- since 2000 and their population density (by administra- lation density approaching that of major regional urban tive, not built-up, area) levels in 2013. It shows that while centers. Bayangol and Chingeltei are smaller and more densely populated, the greatest share of population growth since 11. These estimates are based on average density of built-up urban 2000 has occurred in the larger, comparatively less dense areas, rather than using administrative boundaries. Average density excludes water and open spaces that are contained within municipal districts, particularly Songinokhairkhan, Bayanzurkh, boundaries, which can distort comparisons of density between cities. and Khaan Uul. The smallest districts have also seen the 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Figure 1.3: Population Densities across UB, 2000–12 Bayangol Bayanzurkh Songinokhairkhan 49% change in population 39% change in population 27% 12% change in population density 4% change in population density change in population 37% 35% 10% change in population density change in built-up area change in built-up area 17% change in built-up area 0 0 0 2000 2012 2000 2012 2000 2012 population population population 141,000 192,615 149,600 294,908 158,600 261,917 built-up area (km2) built-up area (km2) built-up area (km2) 21.8 26.2 39.3 58.4 47.7 73.4 population density population density population density 6,453.1 7,351.7 of built area (person/km2) 3,796.0 5,049.8 of built area (person/km2) 3,324.9 3,568.8 of built area (person/km2) Population Sukhbaatar Khan Uul Chingeltei Built-up Area 43% 30% change in population change in built-up area 17% change in population density 29% -2% change in population density change in population 28% 26% 19% change in population density change in population change in built-up area 10% change in built-up area 0 0 0 2000 2012 2000 2012 2000 2012 population population population 95,500 132,117 72,600 127,477 108,700 153,933 built-up area (km2) built-up area (km2) built-up area (km2) 26.4 37.6 28.0 38.0 26.2 29.0 population density population density population density 3,622.9 3,516.6 of built area (person/km2) 2,595.6 3,358.2 of built area (person/km2) 4,153.6 5,309.9 of built area (person/km2) Sources: Compilation drawing on data from NSO 2012, PRD internal document, World Bank 2015. Note: km2 = square kilometers. Figure 1.4: Density and Population Gains in UB by District, 2000–13 70,000 60,000 Sukhbaatar Population growth since 2000 50,000 Songinokhairkhan 40,000 Khan Uul 30,000 Chingeltei Bayanzurkh 20,000 10,000 Bayangol 0 0 500 1,000 1,500 2,500 2,000 3,000 3,500 Density (2013): persons/km² Sources: NSO, PRD. C h a p t e r 1 : I n t r o d uc t i o n   |   7 Figure 1.5: Change in Total Area of Urban Expansion in UB by Type, 2000–10 a. Total built area by coverage type (km2) b. Change in built area coverage type (%) 300 80 Total: 262.52 183.5 70 69.89% Low density 1% 250 +6.6 63.27% 60 200 Total: 189.45 50 119.9 Built area (km2) Percent 150 40 30 100 22.41% -2.91% 51.2 20 19.50% Industrial/commercial/ 42.4 transportation 50 10 9.74% -1.69% 8.06% Medium density 9.74 21.1 4.7 4.8 2.46% -0.62% Urban green spaces 3.8 2.02% -1.37% 1.84% 0 1.7 0.65% Construction sites 0.2 0.2 0 .10% -0.03% 0.07% High density 2000 2010 2000 2010 Year Year Source: PUMA. lowest amount of absolute growth, while Sukhbataar, Land Use Changes Songinokhairkhan, Khan Uul, and Bayanzurkh have had the largest absolute gains in population over this period. Since 2000, most of the urban growth of the city has consisted of low-density peripheral expansion. The This pattern of population growth is likely due to the density and distribution of urban population growth has availability of land and housing options in fringe ar- important consequences for both public investment pri- eas. Land and housing is scarcer and more expensive in orities and the quality of life of urban residents. Draw- central neighborhoods of the city that have already been ing from data from the World Bank’s PUMA tool, the built out. Land is more abundant and less costly on the report finds that from 2000 to 2010 the UB urban fabric urban fringes and it is easier for urban migrants to find has grown by approximately 73km2, though the majority more affordable housing in these areas. Options include of this growth (on average 87 percent of all new built-up newly constructed government housing projects, such as area in this period) has occurred in the form of low-den- those near Chinggis Khaan Airport, or obtaining a plot of sity development. Figure 1.5 shows the changes in ur- land for a ger or to construct a detached house. ban land area based on different types of urban land use 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Example of Mixed Land Use in UB Source: World Bank. categories, including high- and low-density fabric and rather, the proportion of medium- and high-density built large industrial- and transportation-related land surface form actually declined. modifications.12 The figure shows that the vast majority of this change comprised low-density development con- Segmented land uses and low-density urban form con- sistent with ger areas. The largest districts, Bayanzurkh tributes to traffic congestion. The density and form of and Songinokhairkhan, also had the largest increase urban street networks can improve access and mobility in built area, more than 88 percent of which consisted for vehicles and pedestrians. Figure 1.6 compares the of low-density expansion. No district grew in a manner street networks for a sample area measuring 800 by 800 consistent with measures of high-density urban form; meters drawn from Ulaanbaatar, Helsinki, Sapporo, and Washington, DC. The figure shows that given the same area of urban land, the other cities have a greater 12. Land use classifications are based on estimates derived from the analysis of satellite imagery. PUMA classifications include “Contin- number of streets, intersections, and surface area des- uous Urban Fabric,” where more than 80 percent of the surface is ar- ignated for ground transportation. As UB expands out- tificial (buildings, pavement, etc); “discontinuous high density urban ward from the central city area, the existing road network fabric,” characterized by 50–80 percent artificial surface coverage (the rest consisting of gardens, parks, trees, and exposed earth); and “dis- must accommodate longer trips by automobiles and bus- continuous low-density urban fabric,” with 10–50 percent artificial es. This is because the city center holds important gov- surface coverage. Supplementary analysis of the land uses classifica- ernment offices, along with employment and commercial tion this category estimates found that it closely matches what has centers. As commuters converge on one location—the previously been defined as “ger areas.” “Industrial, commercial, and transport” refers to large halls and warehouse-like structures in addi- city center—the entire road network is susceptible to de- tion to multilane highways and airports. lays from traffic accidents, signal malfunctions, and a lack C h a p t e r 1 : I n t r o d uc t i o n   |   9 Figure 1.6: Road Hierarchy, Surface Area Coverage, and Population Density, UB and Selected Cities, 2003–12 Ulaanbaatar Helsinki Sapporo Washington DC Mongolia Finland Japan USA Urban Grid = 800m Total number of streets 6 22 19 14 Surface area occupied by streets 9% 30% 35% 29% Population Density = 100 people = 1/km 1,642/km2 2,872/km2 7,200/km2 4,066/km2 Sources: Graphic: Mongolia Ministry of Economic Development. Data: Population Register of Finland 2012; Barter, Kenworthy, and Laube 2003; U.S. Census Bureau 2012. Note: Population density is measured using administrative rather than built-area boundaries due to data constraints of comparable cities. km = kilometers; m = meters; km2 = square kilometers. 1 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a of alternative routes. Without a comprehensive cost-ben- posed of a majority of gers and detached houses are more efit assessment of the existing road network, land use pat- likely to have a commute to work that is longer than a half terns, and alternative transit options, the current efforts hour than are apartment residents.15 Those who live in ger at street widening will likely induce more traffic without areas in particular face the longest commutes: 32 percent improvement of service (Cervero 2003; Hansen 1995; of respondents report a single-direction commute of be- Hansen and Huang 1997).13 tween one and two hours, representing a total commute of up to four hours. By contrast, 45 percent of apartment The efficient use of land promotes density and circu- residents report single-direction commute times of be- lation throughout the city. Density is encouraged with tween 20 minutes or less. Ger area residents are also less regulations that allow for the efficient use of land accord- likely to have a car or report being able to walk to work ing to market values and where a multitude of uses such and rely more often on public transportation for their as residential, commercial, and offices are within close commutes than those who live in apartments (World proximity to one another. This reduces the time needed Bank 2014a). This spatial mismatch of residential loca- to reach trip destinations, and for some residents, the tions from places of employment and consumption adds need to use automobiles. The proximity also encourages to the cost of mobility for ger residents, who must either people to make more trips, including by walking, cycling, purchase an automobile or rely on public or informal taxi cabs, or public buses. There are some good examples transportation systems. of efficient use of land with mixed uses,14 green space, and proximity to pedestrian traffic and public transit access in UB, as indicated in the photo here. Traffic congestion oc- Infrastructure Coverage and curs when land is used inefficiently. Inefficiency happens Vulnerability to Hazards when different land uses are separated by long distances that require commuting through private automobile or Inappropriate urban land management has contribut- through multiple transfers on public transportation sys- ed to uneven access to basic infrastructure, including tems (Brueckner 2000; Wheaton 1998). water, street lighting, paved roads, clinics, and schools. Spatial analysis illustrates that schools and clinics are pri- Urban land use patterns influence travel behavior and marily clustered around the central city area and coverage can contribute to congestion. Land prices are lower tapers off as the distance from the city center increases on the urban fringe of the city, which reduces the cost (map 1.2). Water service in new ger areas is delivered pri- of housing for poorer residents. However, residents face marily through truck-supplied kiosks rather than piped comparably higher costs to reach the city center’s com- water kiosks. Streetlights tend to follow major thorough- mercial and administrative services because they must fares, with much less coverage in newly developed fringe travel farther. A World Bank survey of UB residents found areas. Property with close proximity to these services that those living in sub-districts or khoroos that are com- commands a higher market value, which can make it dif- ficult for poorer residents to move close to where these 13. Induced demand refers to the finding that investments in over- services are provided. all road “supply”—in terms of road space—do not necessarily reduce congestion. As drivers usually do not pay for the use of road space, Infrastructure is an important determinant of land any increase in the supply simultaneously lowers the cost (in terms of time spent in traffic) to drivers to consume the additional space value, along with tenure and development rights af- through more driving. People who would not drive otherwise may forded to land parcels. The lack of even coverage of in- decide to drive, or people may change their typical commute route frastructure across the city has a direct impact on sustain- to make use of the additional space; both are seeking to reduce their commute time. 14. Commercial and residential are illustrated in the photo, but other 15. The survey is based on a representative sample of 3,000 households uses can also be accommodated with this form. (World Bank 2014a). C h a p t e r 1 : I n t r o d uc t i o n   |   1 1 Map 1.2: Public Transport Routes in UB, 2013 106°55’E 107°00E 107°05’E Microbus Route Bus Route Urban Areas Low Density Growth since 2000 District Boundaries Roads Sukhbaatar 48°00N Chingeltei Bayanzurkh Songinokhairkhan 47°55’N 47°55’N Bayangol Tuul G ol 0 2 4 Kilometers Khan-Uul This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank GSDPM Map Design Unit Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 106°45’E 106°50’E 106°55’E 107°00E 107°05’E IBRD 41370 JANUARY 2015 Sources: Data from PUMA, MPD. ing economic and social inequality. Streetlights improve Unequal access to services imposes time and cost bur- a neighborhood’s sense of security and can reduce the dens on city residents, especially the poor, elderly, and incidence of crime or vehicle accidents. For example, the disabled. The concentration of clinics and schools away cost in time and expenditures to reach schools, clinics, from fringe areas makes it more difficult for residents to or water kiosks represent a significant burden to urban reach these services, especially those who use them fre- residents living in the urban fringes. These residents are quently, such as students and elderly or ill people. As map also likely newly arrived and comparatively poorer than 1.2 shows, bus and microbus routes have limited service residents who live near the city center and enjoy proxim- coverage in fringe and mid-tier ger areas, especially Song- ity to these services. The disparity in access to services inokhairhan, Khan Uul, and Bayanzurkh districts. This will contribute to concentrating poverty in areas that lack raises the costs and time necessary to move throughout access to quality schools, health care facilities, or reliable the city because commuters must transfer either between water service, for example. routes or change modes (such as from minibus to public 1 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Map 1.3: Fire Risks across UB, 2013 Fire Risk: 106°50’E 106°55’E 107°00E 107°05’E Low Risk High Risk Built-up Areas District Boundaries 48°00N Main Roads Sukhbaatar Chingeltei Songinokhairkhan Bayanzurkh 47°55’N 47°55’N Bayangol Tuul G ol 0 2 4 Kilometers Khan-Uul This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank GSDPM Map Design Unit Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. 106°45’E 106°50’E 106°55’E 107°00E 107°05’E IBRD 41371 JANUARY 2015 Source: PUMA and NEMA. bus) in order to reach their destinations, especially if trips coal-burning stoves in ger areas. Spatial analysis shows originate far from the central city area. that flood risks are especially pronounced along the washes that drain into the Tuul River, particularly along Poor land management practices have allowed land al- Khoroos 4, 5, and 7 in Songinokhairkhan and along the location to occur in hazardous areas. Urban expansion Selbe River drainage in Sukhbaatar and Chingeltei Dis- has occurred in areas subject to flood, fire, and chemical tricts. Map 1.3 illustrates fire risks throughout the city, exposure risks. This will have the most serious impacts and that they are noticeably higher in peripheral areas on poor residents who are not able to move from these that have developed since 2000.16 The most common places. Khan-Uul, a growing residential area, is also ex- response activity of National Emergency Management posed to airborne hazardous chemicals from industrial and power-generating facilities. Besides wide exposure to 16. Interviews with National Emergency Management Agency (NEMA) this risk across the western portion of the city, there is a staff revealed that the agency has limited authority to effectively evict general public health concern about air pollution from squatters that illegally occupy city-owned land in flood zones. C h a p t e r 1 : I n t r o d uc t i o n   |   1 3 Agency (NEMA) is responding to fires in ger areas, of the city. The proposal is likely to further exacerbate which there were more than 70 major incidents in 2013. limited access to basic public utilities by large sec- Fire risks in ger areas are raised due to residents’ reliance tions of the city’s population. In addition, the costs on coal stoves for heating, poor connections to the power of providing access roads, water, and sanitation grid, haphazard construction, and the lack of proper road connections would likely be prohibitive. networks to facilitate rapid emergency response. These • The proposal to decentralize Ulaanbaatar runs risks are exacerbated by the piecemeal and uncoordinat- counter to the need to minimize transport costs. ed planning in these areas. Density levels outside the city center areas are al- ready too low for the economic provision of pub- lic utilities. However, the proposal to develop Master Planning to Guide Urban Growth sub-centers within the existing urban area is sensi- The city submitted a master plan document,17 the “Ulaan- ble and may facilitate linking northern ger areas to baatar City Development Master Plan 2030,” that was the main East-West public transport system. approved by parliament in 2013 as the authoritative doc- • The proposal to impose mono-functional land uses ument governing urban and regional growth plans. “The on all except 1.7 percent of the urban area (falling Ulaanbaatar City Development Master Plan 2030” is to 1.39 percent by 2030) insulates existing com- a detailed guide for future land use, economic devel- mercial activities from potential competition. This opment, and transportation planning. The document undermines choice and diversity of services and aims to direct future urban growth in the city through jobs realistically accessible for people, increases land use plans and controls. It also provides numerous commute times and costs, worsens road conges- recommendations related to regulatory (including zon- tion, and discourages future investment in the city. ing), legal, and financial reforms necessary to implement Cities gain economic strength through a density the plan across the nine districts of the city by 2030, by and diversity of different land uses. Internation- which time the population is projected to be 1.7 million.18 ally, it is recommended, as a good practice, to al- The plan also includes detailed projections of population low up to 40 percent of floor space to be used for and economic bases of future satellite cities. While it economic purposes and gradually decrease mo- contains a detailed evaluation of existing demographics, no-use zones to 10–15 percent of urban land (UN land use, and environmental and economic conditions, Habitat, 2013: 28). there are several weaknesses that could limit its use as an effective urban planning tool. Key concerns include the • Maximum permitted residential densities in UB following: are currently set at 460 people per hectare,19 which is low for high-value land in central locations.20 • A proposal to relocate large sections of the popula- Commercial developers are pressing for a relax- tion to satellite towns with very low density (4–14 ation of this requirement. Density standards in pri- persons per hectare) more than 50 kilometers from marily residential areas need to be based on realis- tic assessments of land prices. 17. This discussion pertains to the English language version of the document entitled “Adjunct to the Master Plan to Develop Ulaan- baatar City Till 2020, Development Trend Till 2030, Ulaanbaatar City Development Master Plan 2030, Summary Report Volume IV, “ dated 19. Ninth appendix of Mongolian “City and Settlement Planning and 2013 and authored by the Ministry of Construction and Urban De- Construction Code” (CCM 30-01-04). velopment, the City Governor’s Office, and the Urban Planning and 20. For example, densities in Shanghai, China range from 1,500–3,500 Drawing Institute. people per hectare. Even Calgary, Canada, which has a similar overall 18. There is anecdotal evidence that the total population of UB had population density to UB, has a downtown population density of 672 already reached 1.5 million in 2013. people per hectare (City of Calgary 2011). 1 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a • The extent to which land available for development International experience suggests that detailed master is put to efficient use within a given use zone leaves plans often require regular and substantive amend- considerable scope for improvement. For example, ments, or are replaced or abandoned (Sutton and Fahmi gardening and open spaces in city and settlement 2001; World Bank 1992). Comprehensive master plans areas are required to constitute at least 40 percent are too detailed, expansive, and cumbersome to adjust to of total urban apartment area and 25 percent of changing political and economic conditions that medi- apartment district area. Public green areas must be ate urban growth and expansion. Thus, master plans are a minimum of 2 m2 and a maximum of 5 m2 per likely to lose necessary public support and investment for person. These standards are more generous than completing them in their original proposed forms (Fly- required. Valuable productive land is being lost vberg 2005; Giezen 2012). The fact that the UB master and many areas in proposed new developments plan has been amended to designate an additional 10- lack a strong amenity value for residents and are year time horizon (2030) suggests initial difficulties in not suitable for recreational use. coordinating and executing the plan. • The estimated cost of implementing the plan is The current plan is overly optimistic about the likeli- US$16 billion (more than US$10,000 per person), hood that new, planned satellite cities will be complet- far more than the annual resource base of only ed and will attract residents and employers from the US$420 million. This suggests that adequate finan- city to them. The planned decentralization of people and cial and economic analyses were not carried out to economic activity through direct policy interventions align the Master Plan proposals with available re- will likely prove costly and incomplete without consid- sources. eration of local labor and housing markets, among other factors. Cities generate economic and social benefits from The current land administration system will pose sig- the physical density and the agglomeration effects afford- nificant challenges to implementing the Master Plan. ed by the close spatial proximity of people and firms to As a statement of intent, the Master Plan currently lacks one another (Glaeser 2010; Storper and Venables 2004). a sound economic and social basis for projected invest- Agglomeration in cities provides advantages for job seek- ments. It also does not provide the ability to respond to ers or workers wanting to acquire new skills, as well as diverse and changing needs and opportunities in the wid- for companies looking to hire from a diverse and concen- er economy and society. This inflexibility in the face of trated labor pool. Agglomeration also places firms from changing needs will likely result in major land market in- different but complementary industries in close proximi- efficiency. In addition, the Master Plan’s restrictive zoning ty, creating investment opportunities.21 It is not clear how regulations are intended to limit the area for construction dispersing and segregating industries and specializations via a “green belt,” beyond which new development would across the satellite cities as proposed in UB’s master plan take place in peripheral settlements. Some of these settle- will support agglomeration. ments will be planned and developed by private develop- ers based on competitive tenders. The plan also proposes The efficacy of master plans is reduced without public to relocate the universities to new campuses about two participation. Without appropriate regulatory support hours from their existing sites in UB, though the ratio- and the flexibility to respond to future changes in markets nale for this cost and disruption is not clear. A more prac- tical approach might be to identify specific land uses that require integration with, or isolation from, other land 21. For example, the headquarters of a large firm may regularly do uses (for example, isolating power generating stations or business with financial service providers, accountants, law firms that can write and review contracts, couriers, office supply wholesalers, ca- other polluting uses). A more flexible, demand-driven tering companies, and cleaning and janitorial services, among other and market-based approach can be permitted elsewhere. businesses. Each business benefits from close proximity to the others. C h a p t e r 1 : I n t r o d uc t i o n   |   1 5 and investment priorities, master plans alone are inade- Typically, cities and public agencies use master plans quate tools for growth planning. New directions in urban as informational and policy statement documents. planning practice emphasize more extensive and ongoing These plans do not include legal or technical specifica- involvement of stakeholders in setting needs and goals tions for accomplishing specific projects. Instead, more (UN-Habitat 2009). This “strategic spatial planning” ap- specific planning and regulatory instruments are either proach emphasizes continuous consultation with civil so- developed through the city’s own specific zoning and ciety and private sector groups to identify key priorities land-use codes and special area plan designations, or in particular sectors or geographic areas of the city over through other existing supralocal laws (such as land sub- time, rather than completing and implementing a single division procedures, establishing special tax districts, and authoritative master plan document. so forth). All of these instruments are intended to reflect the direction articulated in the master plan (Fulton 1999; In South Africa and the United Kingdom, local agencies Bell 2005). In the United Kingdom, master planning or- participate in and help coordinate public sector planning ganizes the development of specific sites or small neigh- regarding land, housing, infrastructure, and the environ- borhoods and includes economic and social analyses of ment (Harrison, Todes, and Watson 2008). Similarly, spatial predicted development impacts (Bell 2005). The purpose planning can be used to confer a special status and protec- of these approaches is to allow city policy makers more tion for residents of areas that face threats of displacement flexibility in identifying and responding to specific urban or eviction. For example, Belo Horizonte and Recife (Bra- development issues that the general plan could not oth- zil) have designated “Special Zones of Social Interest” in erwise possibly predict, or provide appropriate policy or low-income neighborhoods. These zones provide legal financial guidance. and regulatory tools for residents to secure access to land and housing, improve environmental conditions, and re- UB’s master plan mischaracterizes urban density and duce the threat of evictions (UN-Habitat 2009). its effects. The plan includes multiple references to “over- crowdedness” and “population centralization.”22 These Master plans should also include appropriate tools concerns are at odds with observed urban growth pat- for land market regulation. For example, the Republic terns, which suggest that the city’s population is grow- of Korea developed a similar series of master plans for ing fastest along the urban periphery and in settlements Seoul in the 1980s. The goal was to more evenly disperse which are sparsely populated—likely due to inexpensive industrial and residential land uses by identifying areas land prices. These terms are more appropriate character- that were suitable for development and those that were izations of congestion, which as discussed is due in part not. However, because the plans were too specific and in- to a lack of population density. Second, the plan suggests flexible in zoning and development standards and were that in the future the city will “intensely develop … in the applied by authorities unevenly, they largely failed to western and southwestern part,” (pg. 126) which roughly achieve their goal (Kim and Gallent 1998). More recent corresponds with the location of Khan Uul and Songi- plans, such as the revised Capital Region Rearrangement nokhairkhan districts, even though most recent popula- Planning Law, have attempted to steer growth through tion growth has occurred in Sukhbaatar and Bayanzurkh, the use of fees and levies on new development. The pro- which are located in the north and east. This is possibly ceeds are used for public investments, which offset the due to large public investments in apartments in these ar- costs of additional infrastructure, the future burden of eas. However, development is more likely to occur in plac- additional traffic, and other negative externalities. Under es where public investments in infrastructure will increase this approach, firms are able to use land markets to make land values, not simply where public housing is built. location decisions, but the government can intervene by passing on additional costs for public investment in cer- tain areas to the private sector. 22. See Master Plan Report (2013), pp. 13, 28, 41, 44, 166. 1 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a The plan’s proposal of establishing of city subcenters available to residents of new urban settlements. To some and its emphasis on alleviating traffic congestion are extent, the low-density development has been driven by laudable. In light of the recent urban expansion trend, the city’s land allocation and administration practices. the approach of identifying and supporting urban sub- Also, land prices are less expensive than comparable-sized centers as points for supporting public and private in- central locations. However, as the city expands outward, vestment are an important way to balance the population the unit cost of providing infrastructure in more distant density and diversity of land uses. The plan is also right to areas will rise. raise the issue of traffic congestion, which, given the con- centration of economic activity and desirable land and Urban expansion has also increased the residents’ risk real estate in the central city area, presents a tremendous of exposure to both new and existing hazards. The city’s barrier to adequate mobility and access within the city. uneven infrastructure coverage influences where peo- Given the comparatively low density of the city overall, ple will decide to settle, which may include areas with there is ample opportunity to consider how land markets known hazards. Major urban hazards include water scar- and land administration practices can be linked to trans- city, damage and loss of life from structure fires, flood- portation and housing policies. These could be adjusted ing, and earthquakes. In addition, air pollution is worse to encourage a greater level of average density along ma- in low-density areas composed of detached buildings and jor transit corridors, along with more evenly distributed ger dwellings, which rely on burning coal for heat. Ur- access to transportation and employment across the city. ban land policies and regulations should be based on a principle of public safety, including reducing the threat of death or harm from natural and manmade hazards to Urban Development Trends both people and property (World Bank 2013c). UB has grown rapidly, but much of this growth has UB’s master plan is detailed and ambitious but not taken the form of low-density ger areas. Based on com- without issues that may undermine its effectiveness. parison of population changes and land use types in the The plan forecasts future land use and economic devel- city from 2000 and 2010, the report finds that UB is not opment in the city, but without a clear consideration of a dense city in absolute or relative terms. Migration to the the structure of local land and labor markets necessary to city has been rapid in recent years. However, based on cur- support these goals. Despite the planned list of large-scale rent and future nationwide demographic trends, it is un- housing, industrial, and infrastructure improvements, likely that the city will ever much exceed a population of the criteria for siting and locating these improvements re- two million people—a modest size compared to other cit- main unclear. Furthermore, sources of financing for these ies in the region. Furthermore, the districts with the larg- improvements are not clearly identified. Since Mongolia’s est absolute and highest rates of population growth are transition away from a command economy, land has also the largest in area and the most sparsely populated. been among the last sectors subject to legal and market reforms. This delay has contributed to the city’s current The quality of urban service coverage in newly urban- built form and concomitant problems of congestion, lack ized areas is poor. Mid-tier and fringe ger areas have few- of infrastructure coverage, sprawl, and segmented land er and more widely dispersed health clinics and schools uses. The master plan, or any other strategic plan, is un- than the central city neighborhoods. Water service in likely to adequately address these problems without addi- these areas is provided through truck kiosks, which are tional policy considerations related to land and proper- less reliable and efficient than piped kiosks. Street light- ty market reforms. This balance of this report considers ing and public transportation coverage is also much less these challenges and offers recommendations for action. C h a p t e r 1 : I n t r o d uc t i o n   |   1 7 Chapter 2 Regulatory Framework and Practice of Land Management Ulaanbaatar’s (UB) current system of land adminis- free plot of land of up to 700 square meters (m2), even tration has supported rapid, low-density growth and though many plots are in practice smaller (between 400– attendant land challenges. UB’s land policies have suc- 550 m2). This entitlement for each individual, not house- ceeded well, relative to comparable cities that have un- hold, is possibly the most generous in any world city. It dergone such rapid growth. The city has made secure and also means that households may possess several plots in affordable land available at a scale and speed consistent different parts of the city. The low densities associated with demand. However, the way land policies have been with this plot size impose extremely high unit infrastruc- enacted has posed many challenges for the staff of cen- ture and transportation costs. Despite the large amount tral and local government agencies responsible for land of land that has been privatized at no cost for private res- administration. Similarly, those seeking access and rights idential use, exemptions and discounts to land fees and for use, development, or transfer of land and immov- taxes have reduced municipal revenues to a level that is able property have encountered difficulties. Meanwhile, insufficient to provide or maintain basic needs. Political legislation has been introduced at regular intervals (and commitment to this policy has generated an expectation revised in some cases) before the necessary regulations that the entitlement will continue indefinitely, raising is- needed for efficient implementation and enforcement sues of urban management that need a multi-sectoral ap- have been formulated. Not surprisingly, many activities proach to resolve.2 take place outside this shifting formal structure. be decided as follows: (1) for the citizen who is a registered resident These legal changes have not improved the regulation of Capital city in the Capital city and in any of the aimags and soums, of land and property markets in the city. Current land (2) all citizens, except those specified in the clause 1 of this article, in administration policies create a distortionary effect on lo- any of the aimags and soums, except the Capital city.” Article 2 of this law states that “Citizens of Mongolia, who were not registered with the cal land markets because they do not adequately restrict administration of an administrative unit on the day the Law on Land the supply of vacant land for private use; nor do they sup- Allocation for Mongolian Citizens for Ownership was approved, shall port incentives for private investment in land. All Mon- exercise its right to obtain land ownership once and free of charge for golian citizens registered to live in UB1 are entitled to a family use, after the citizen has solved his/her civil registration matters in accordance with the related legislation.” This article stipulates that people shall not be discriminated against regarding land allocation for 1. Article 3 of the Law on Procedures for Observance of the Law on ownership based on when they were registered with the Capital City Land Allocation for Mongolian Citizens for Ownership states that “the (Resolution No. 10/39). determination of the location of the land to be privatized, once and 2. Current policy includes a commitment to this entitlement until May free of charge, to the citizen of Mongolia as per the article 19.1.2 of the 1, 2018, though the period has previously been extended every time Law on Land Allocation for Mongolian Citizens for Ownership should there is an election. 19 LAWS ON LAND AND and local investors, who require sufficient security of PROPERTY RELATIONS tenure to justify investing in property development; and (ii) local groups, who need affordable access to land and The management of urban development and land markets housing. A recent proposal submitted to the Parliament presents a major challenge to all countries, irrespective in January 2013 to amend the Land Law together with of their level of economic and institutional development. four other draft and/or amended laws, namely the Law The structural changes introduced in the last 23 years in on Land Cadaster, Law on Land Fee, Law on Geodesy Mongolia pose particular challenges and have inevitably and Cartography, and the Law on Land Acquisition for required a fundamental shift from control towards more Unavoidable Public Need in May and June 2014 generat- indirect regulation. Other countries have undergone the ed a hostile response from civil society groups and oth- transformation from state-controlled land and housing er stakeholders, who portrayed it as permitting foreign systems to market-based systems; their experience sug- ownership of land. Although this was not the intention of gests it may take considerable time for UB’s private sec- the proposed amendment, the passions aroused led to the tor entities to develop capacity to identify and respond to amendments and drafts being withdrawn by the Prime emerging opportunities. Some market entities will have Minister from the Parliament. In fact, proposed amend- short lifespans, while others will benefit from the highly ments to allow land possession rights for foreign entities and politicized nature of city governance and expand faster land possession rights for pasture land were leading reasons than their capacity justifies. for the protest. The incident also demonstrated the need for greater public awareness and discussion about land The legal framework for land administration in UB has issues, particularly proposed legislation and regulations. changed rapidly and is inconsistent with the current administrative structures. Many new laws (see Appen- Following the proposal for the amendments of existing dix A) relating to land administration, titling, and prop- laws and the adoption of these new laws, a Parliamenta- erty valuation have been introduced since the 2002 Law ry Working Group was established in January 2013. The on Land, which established the types of land tenure to working group was dismissed following the withdrawal of be applied nationally (see table 2.1 for typology of land the proposed legislation from Parliament. The purpose of tenure types), and some of these laws have been amended the working group was to address the existing legislation more than once. For example, the 2003 Law on Alloca- regarding land administration, now that the principles and tion of Land to Citizens of Mongolia for Ownership has practices of a private land market system have been estab- been amended as many as five times (in 2005, 2008, 2010, lished. The Working Group planned to undertake a com- 2011, and 2012). This multiplicity of new and amended prehensive review and is considering the following issues: legislation has inevitably created some inconsistencies. For example, the 2013 Law on Investment (Article 12.1.1) • The legal definition of land. At present, land is defined now allows 60  +  40 years of land possession and use, as an intangible asset, much like mineral wealth. A which is also available to foreign entities, whereas Article proposal is now under consideration to define it as 12.2 of the same law states that land issues shall be regu- a tangible asset for purposes of taxation and use. lated by the Law on Land. • Procedures for land allocation. The wide degree of The series of changes and revisions to the legal frame- discretion accorded to governors at the city and work has led to considerable public confusion and district levels, makes land allocation subject to po- uncertainty. These changes and anomalies in the legal litical influence. A proposal is under consideration framework for land reflect the challenges facing cen- for administrative entities such as the Property tral and local government in balancing the needs of two Relations Department (PRD) to be responsible for groups while protecting national sovereignty: (i) foreign this function. 2 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Figure 2.1: Organizations Involved in UB’s Land Privatization Process Selection of New Information & Claim for Title Allocation Land Demarcation UB City Governor MPD Master Planning Department ALAGaC District PRD Office UB City PRD Office Mapping Company Notary Commercial Bank ASRT (formerly GASR) Source: N. Bolormaa, Land Administration Specialist. Note: ALAGaC = Administration for Land Affairs Geodesy and Cartography; ASRT = Administration of State Registration of Titles; LO = land office; UB = Ulaanbaatar. • How to improve coordination between urban and and enterprises manage the land and housing markets. land development plans. The land and privatization process, by which land is al- located into ownership, involves a total of nine organiza- • How to protect public land in urban areas, and im- tions. At the local level, district and UB City PRD offices prove enforcement. as well as the offices of the Governor of UB and Master Planning Department play critical roles. [National au- thorities involved include the Administration for Land Administrative Structure for Regulating Affairs Geodesy and Cartography (ALAGaC) and Gen- Land and Housing Markets in UB eral Authority for State Registration (GASR).3 Applicants must also make use of services from other providers in There are numerous city and national government or- order to complete land privatization, including notaries, ganizations involved in land administration in UB. banks, and surveyors. This multiplicity of organizations Figure 2.1 shows the key players in the land privatization for ownership process. Although UB is an intermedi- 3. The 2003 Law on State Registration of Right to Ownership of Prop- ate-sized city by international standards, a multiplicity erty and Other Rights Related to Property established the function of central and local public sector agencies, departments, and duties of GASR. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  21 creates overlapping and competing interests between lia, land is held under three tenure categories: land use, government agencies, which leads to fragmentation and land possession, and land ownership. These may exist on adds substantially to costs for both the public and private different plots within a given area and at different times sectors. This also creates powerful vested interests within for the same plot of land. Table 2.1 summarizes the main the political and administrative groups involved in land characteristics of each, together with the procedures and allocation, which mitigate against efficient administra- costs involved. This complexity can present confusion tion and needed reforms. and uncertainty for those who are unfamiliar with land certification and registration processes. International re- search has shown that the time (in working days), cost, Processes and Procedures and complexity of requirements to complete different The administration of land certificates presents un- land and property-related transactions are a major factor necessary challenges for residents and investors. The in determining the whether or not individuals or firms procedures for obtaining and occupying land in UB vary will invest, especially if decision outcomes are uncertain according to the form of land tenure involved. In Mongo- (World Bank 2014c). Table 2.1: Land Tenure Typology in UB Land use Land possession Land ownership Eligibility Mongolian citizens, companies, and Only available to Mongolian Mongolian citizens only. Land organizations. Also foreign residents citizens, companies, and cannot be owned by companies or and stateless persons, foreign organizations.a nonprofit organizations. Land can nationals, international organizations, be used for any approved purpose foreign legal entities, and foreign and can be sold on the open investment entities. market. No air or below-ground rights apply. The Land Law specifies that land use rights are allowed for Mongolian entities, but in practice this tenure type is granted to foreign entities. Foreign residents and stateless persons (1) for family/household use up to 500 m2 for housing and 0.1 hectares for vegetable/fruit fields; and (2) for foreign nationals, international organizations, foreign legal entities, and foreign investment entities for specific purposes, periods, and conditions. Duration Five years with possible five-year In theory for 15–60 years; can be Permanent. extension at a time for family/ extended for up to 40 years at household use. a time. In practice, possession rights often have been granted The use period for a foreign national, for only 5-year terms, though 15 international organization, foreign years is becoming increasingly legal, or foreign investment entity common following the shall be defined by Government Land requirements of the Land Law Law 17.1.2. (continued next page) 2 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table 2.1 (continued) Procedures The procedures are the same as in the Issued by Capital City governor Applicants with possession rights case of issuance of land possession in areas with infrastructure submit full personal details at rights for Mongolian entities. The or where there are plans for district level with details of the procedure is as follows: infrastructure connection based plot location, size and shape. UB on the opinion of the respective City land privatization division Applications submitted to DPLRD. district governor.e District reviews the application and the Approval is issued by Capital City governors issue the “possessor Land Ownership Certificate is governorb in areas connected to right certificate” in areas signed by UB City governor. This infrastructure and in areas planned lacking infrastructure or where Certificate is then recorded in to be connected to infrastructure in these have not been planned. the land title registry with GASR, accordance with existing plans and Commercial or industrial which as a national agency upon obtaining the opinion of the applicants obtain possession operates independently of the respective district governor.c District rights by PRD auction or PRD. Applicants then receive a governors approve land allocation tendering. Land was previously “registered land title,” commonly outside areas for which the Capital City allocated for possession directly referred to as the Pink Certificate. Governor approved land allocations, without tendering or auction usually areas lacking infrastructure or before the end of 2012. where there are no such plans. Time to DPLRD takes three months, GASR DPLRD takes three months, PRD takes three months, GASR process (in three days. GASR three days. nine days. working days) Costs • Survey: MNT 50,000 • Survey: MNT 50,000 No cost. The costs are paid in • Certificate: MNT 20,000 • Certificate: MNT 20,000 the process of obtaining the land • Certified cadastral map from PRD: • Certified cadastral map from possession certificate. MNT 2,500 PRD: MNT 2,500 • Registration with GASR: • Registration with GASR: MNT 10,000 MNT 10,000 Fees/taxes Land fees payable quarterly and Land fee payable quarterly Taxes payable, but are discounted collected from commercial entities. though in practice they are not by 98% and not collected in levied on khashaa plots of up to practice. 700 m2 in ger areas. The fees are also discounted by 95% and not always collected in practice. Source: Compiled from interviews with staff. Note: a. Article 7 of the 2002 Law on Land Allocation to Mongolian Citizens for Ownership provided for the privatization of state land holdings in parcels of up to 0.07 hectares in the Capital City and along the main roads connecting the aimag centers with UB (except soum centers), up to 0.35 hectares in the centers of aimags, and up to 0.5 hectares in the soums. b. Land use applications should be processed by the Citizens Representative Khural. As these are not working regularly, applications are processed by PRD, which collects relevant documents and passes them to the city governor for decision. c. Law on Land, 21.2.3. DPLRD  =  District Property and Land Relations Department; GASR  =  General Authority for State Registration;; PRD  =  Property Relations Department; UB = Ulaanbaatar. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  23 Figure 2.2: Procedures for Obtaining Land Use, Possession, and Ownership Rights in UB Applicant DPLRD PRD Governor GASR Check Submit required Check documents documents documents on LPIS database & field • Notarized copy of ID • Application form • Proof of residence When applicants apply for ownership right, • District Governor • Cadastral map makes decision for land • Payment receipt PRD records & checks on LPIS database possess and use right (Land Privatization • The capital city Information System) governor makes decision for land ownership right Decline Accept Receive The Governor notifications decision • The Governor decision – 2 copy • Cadastral map – 2 copy • Certification on land quality and characteristic • Contract Distribute the Receive the governor decision governor decision & make contract with applicant For Possession & Use Right For Ownership Right • Copy of ID • Copy of ID or birth certificate • Application form • Application form Submit relevant • Cadastral map (original copy) • Cadastral map (original copy) documents • Land use or possession right • Decision for land ownership certificate (original copy) right (original copy) • Copy of contract with land owner • Copy of certificawtion on land • Decision for land use and quality and characteristic possession right Check documents Receive property registration Send notification certificate The relevant procedures for obtaining land use, posses- are uncertain or too short. The procedures for obtain- sion, and ownership are shown in figure 2.2. ing land use certificates lack clarity, in terms of knowing what will be granted, certainty of outcome, consistency Tenure rights available to legal entities4—domestic and foreign—are weakened because and term lengths industrial enterprises owned by the city; 8 limited liability companies (LLCs) operated as joint ventures with the private sector (including 4. The UB city government consists of a complex maze of 710 legal the stadium, national park, and hospital); and budgetary institutions entities, which can be categorized as follows: city administration; 9 such as schools. The number of legal entities constituting the city gov- district administrations (as separate legal entities); approximately 60 ernment is very fluid, as new entities are formed quite often. 2 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 2.1: Case Study: The Challenge of a Dual Property Registry in UB Bold purchased a khashaa plot with a house on it from Nergui in 2004. The khashaa plot is located in Bayangol district in one of the prime ger area locations close to city center—the Zuragt area. After the purchase, Bold reg- istered the khashaa plot/land parcel with the District Land Office (now the District Property and Land Relations Department—DPLRD) and received a land possession right certificate. Bold then registered the house on the khashaa plot with the Administration of State Title Registration (now General Authority for State Registration— GASR) and received the immoveable property ownership title certificate. These processes were conducted and completed legally within existing procedures. Bold left Mongolia shortly afterward to work abroad for an extended period. He returned to Mongolia briefly in 2014 and applied to the Property Relations Department (PRD) to transfer his land possession right into land own- ership right. Bold was thereby exercising his right to obtain a land parcel once and free of charge for ownership according to the Law on Land Allocation to Mongolian Citizens for Ownership. To his surprise, PRD informed him that his land parcel had been allocated to Nergui for land ownership in 2006. Nergui was able to transform his already transferred land possession right into land ownership right with assistance of the Bayangol District Land Office and Land Administration Department of UB City (now PRD). He was even able to register it with the Administration of State Title Registration and obtain the immovable property ownership title certificate for this land. Currently, there are two immovable property ownership title certificates for property on the parcel: one is for the house on the land parcel under Bold’s name and the other one is for the land on Nergui’s name. The value and desirability of both the building and the land are now greatly diminished because improving, selling, or transferring either would require the consent of each certificate holder. Source: WB Team discussions with a lawyer specialized in land disputes. All identities and locations have been changed for purposes of anonymity. between the treatment of individuals and entities, and Some provide clear guidance on requirements, including continuity in terms of changing requirements (see box one-stop shops with Internet connections, but in others, 2.1). The procedures for allocating possession rights staff may not be available or familiar with the processes pose a number of problems, particularly for Mongolian that applicants need to fulfill (see box 2.2). As a result, the companies. The stated period of 15–60 years for the al- procedures lack clarity and many applicants are forced location of the land possession certificate lacks clarity into making multiple visits to complete the procedures. and consistency. Anecdotal evidence has shown that in Similarly, a World Bank survey of land office users carried practice many licenses are issued for periods as short as out for this study found that they hire informal assistants five years, imposing heavy costs for short-term benefits. who gather outside the office in order to help them collect Foreign investors face the same hurdles of uncertainty in and organize documents to complete land transactions. obtaining and renewing “use” rights. An extension term These assistants are not licensed or recognized by the city, of only five years is a further deterrent to investment which opens up the possibility that they can exploit or for outsiders who are new or unfamiliar with Mongolian mislead applicants. Their presence highlights the per- markets. ceived complexity of land office transactions among the general public. A related concern is that the outcomes of Residents also face difficulties in navigating land certi- possession rights applications are far from certain; they fication and registration procedures. The quality of ser- depend upon the decision of the governor rather than ex- vice provided by different land offices to citizens varies. plicit and transparent criteria. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  25 Box 2.2: Case Study: Improving Revenue Collection through Integrating Information Systems: The Case of Arusha, Tanzania Tanzanian cities rely heavily on own-source revenues collected through local taxes, including a property tax. However, the database held by valuation and tax collecting authorities is often separate from cadaster, engi- neering, or other departmental records. With assistance from the World Bank and DANIDA, the city of Arusha developed the Land Government Revenue Collection and Information System (LGRCIS) to centralize land and property records held by different city departments with the intent of improving revenue collection from four main revenue sources: property taxes, service fees, business licenses, and billboard permits. These sources com- bined constitute 64 percent of the city’s total revenue base. LGCRIS is composed of a comprehensive GIS database that links cadaster maps to valuation and tax collection records. It is possible to “map” the city according to areas or individual properties that have or have not paid tax- es. The Web-based format allows for the rapid generation of current reports on particular parcels. It also permits automatic updating of records based on new inputs, such as transfers of ownership through sales or inheritance, which reduces the incidence of filing errors from lost or mismatching paper records. The system not only allows the city to more efficiently locate and follow up with delinquent payers but also allows tax payers to file payments directly through commercial banks or mobile phones. Since the 2014 rollout, the total amount of property tax has increased by 327 percent, user fees 214 percent, business license fees 235 percent, and billboard permit revenue by 380 percent. Source: World Bank team analysis from Tanzania Strategic Cities Program internal documents. Allocation procedures also give government officials company based on their own interests or connections. wide discretion that could be misused. Unclear proce- This then places the applicant at a disadvantage, because dures for obtaining the land possession certificates for their decision to hire the recommended firm may in- household use provides staff in the District Property and fluence the final approval of their application. Proposed Land Relations Office with opportunities for abuse, even online application procedures would be used to allocate if not all staff do so.5 For example, applicants are required land directly for ownership in 52 locations (some 160,000 to hire a survey company as part of the application for ob- plots) without the requirement to obtain possession rights taining a plot. The land officer may recommend a certain first.6 Lack of oversight and the anonymity of the online system could invite abuse. Land officers would have the 5. Prior to the passing of the Land Law, some ger areas were developed ability to allocate some plots to online applicants while without formal approval and obtained ownership status later. At the same time, approval/permits were given on other ger area plots—in secretly retaining other plots for friends or relatives (see fact, the same official paper/possession right that ger area residents box 2.3). A more serious abuse occurred some years ago received when successfully applying for ownership. Such permits can when a number of land parcels were illegally and directly now only be obtained through an official process. However, it is re- allocated to individuals and legal entities without auction ported that some individuals with influence have acquired large areas of land or several smaller pieces of land (sometimes just one plot— or tender.7 0.07 hectares or a bit smaller) on the urban periphery. These plots are then subdivided for sale with a guarantee to the purchaser of eventual legal ownership. Under a code approved on September 20, 2012, indi- 6. This was the approach also adopted by a property rights project fi- viduals who occupy land without permission will no longer be eligible nanced through the Millennium Challenge Account (MCA). for ownership. However, occupants of land who can prove that they 7. The current municipal administration has attempted to correct such have been resident on their plots prior to this date are exempt. abuses. 2 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 2.3: Case Study: Cadaster Database Tampering in UB Sukhbat obtained a land possession right certificate for 1,300 square meters (m2) of land in Songinokhairkhan dis- trict in 1997. The the land is desirable as it is located near urban infrastructure utilities and is included in the one of the ger area redevelopment sites. In 2003, he subdivided the land into two pieces of 700 m2 and 600 m2 each, transfered the 600 m2 piece to his brother Boldsukh, and retained the rest for himself. As required for subdividing land, in accordance with the law allowing ownership of up to 700 m2, Sukhbat hired a surveyor to complete the map as part of his application. Then Sukhbat obtained a land ownership decision from the UB City Governor. Yet, like many other land owners, he he did not apply to the General Authority for State Registration (GASR) to obtain the immovable property ownership title certificate for his land parcel, because his permanent residence is in another location. In 2014, Sukhbat learned from his brother Boldsukh that someone had removed the fences surrounding his land parcel. He went to Bayanzurkh District District Property and Land Relations Department (DPLRD) to report this and learn what may have happened. The DPLRD informed him that Sukhbat’s neighbor Itgel had obtained the land possession right certificate and then the land ownership decision of the UB City Governor. He then took the next step and received the immovable property ownership title certificate from GASR on Sukhbat’s land. Then Itgel sold this land to someone else, who was the person that had removed the fences. In the process of clarifying the circumstances, it revealed that the cadastral map, which had been completed done when the land was subdivied in 2003, was not recorded in the cadastral database. Also, it became clear that Itgel had persuaded an official to delete the parcel boundary in the cadastral database separating his and Sukhbat’s land parcels. Source: WB Team discussions with a lawyer specialized in land disputes. All identities and locations have been changed for purposes of anonymity. The purpose for the distinction between “possession” The time necessary to complete land property registra- and “ownership” tenure status is not clear. The benefits tion varies widely depending on the review body. The obtained by the possessor rights certificate are virtually time taken for the UB City Governor to make a decision identical to those of full ownership. “Possessors” are en- is the longest segment of both the registration and trans- titled in theory, if not in practice, to obtain formal credit fer processes. This is reported (see figure 2.3) as taking 90 and are discounted from paying full land fees for resi- days, but additional days may be required in registering dential use (full owners, by contrast, may be required to with GASR, resulting in a total registration period of up pay land taxes). At present, land ownership can only be to 108 working days and costs MNT 62,800. GASR re- obtained after obtaining the land possession certificate, a portedly completes the process of first registration of land two-step process that increases costs and times unneces- for ownership within an impressively short period of 9 sarily for both applicants and government. Although the working days at no cost.8 In 2014, Mongolia was ranked land possessor rights certificate does not entitle individu- by the World Bank as a commendable 27th in the world als to compensation in the event of land acquisition, this is generally not seen as a practical threat. They also know 8. Mortgage documents take three working days to be processed and that they are able to complete the process to register their issued. The cost is 0.05 percent of the mortgage amount for the service fee and MNT 5,000 (US$2.8) for GASR registration of the mortgage. ownership with GASR if this becomes important, provid- In cases of urgent registration, the cost is double and the documents ed the land is for residential/household use. are issued within eight working hours. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  27 Figure 2.3: Procedures, Times, and Costs in the UB Land Privatization to Ownership Process = 10,000 tugrik = 1,000 tugrik 1 = 1 day 30 = 30 days Steps Cost (tugrik) Time Required Organization in Charge Cadastral map surveying 1 1 1 Surveying Company 50,000 Take municipality letter 100 1 Municipality Print out cadastral map 2,500 1 UB City Land Office, Bank Take the application form 300 from District PRD 1 District Land Office, Bank Certify documents 10,000 1 Notary PRD at city level and DPLRD No Cost UB City PRD Office at district level check application 1 30 30 UB City governor decision No Cost UB City Governor 30 Take the decision certificate No Cost 1 District PRD Office Register at GASR No Cost 14 GASR TOTAL 30 30 62,900 30 23 Source: Authors’ compilation based on interviews Note: DPLRD = District Property and Land Relations Department; GASR = General Authority for State Registration; PRD = Property Relations Department; UB = Ulaanbaatar. 2 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 2.4: Case Study: Problems with Inheriting Property in UB Baatar obtained 150 square meters of land in Khan-Uul District and received a land possession right certificate legally in 2006. He built a five-story building for service/commercial use on that land. Unfortunately, he passed away before he managed to obtain the related immovable property ownership title certificate. Baatar’s widow, Khorloo, decided to make her youngest son Zorig the sole heir to the property and initiated the process to formalize the inheritance. Her decision was also supported by Baatar’s daughters Naran and Saran. However, another son, Bat, wanted sole inheritance of the property. Two different notaries issued a total of three inheritance certificates. One notary worked for Khorloo and her son Zorig and the other notary for Bat. The land possession right certificate and subsequently immovable property ownership title certificate were issued to Bat by the District Property and Land Relations Department (DPLRD) and General Authority for State Registration (GASR) based on the inheritance certificate issued in Bat’s name. Khorloo and Zorig submitted their inheritance certificates to DPLRD, but they were misplaced and eventually re-issued. Eventually, however, Bat managed to be- came the legal owner of the property, possibly through the support of the government officials involved in processing the certificate request. Khorloo and Zorig lost their claim to the property. The case demonstrates that the existing pro- cesses for transferring property through inheritance are not able to adequately distinguish legal and fraudulent claims. Source: WB Team discussions with a lawyer specialized in land disputes. All identities and locations have been changed for purposes of anonymity. in terms of the time taken to register a property.9 However, transactions are notarized in UB. In order to avoid un- this only captures the time for registration at GASR, which der-the-table transfers made to avoid sales tax obliga- is the very last step after obtaining the certificate. Transfer- tions, property can only be gifted to family members. The ring land rights generally takes about 30 days, a very rea- administrative system for processing transfers previously sonable period by international experience. Officially, the involved 26 steps, but has been reduced to 15 and the ac- UB City Governor or district governors must decide on the tion is completed within five days.10 In the case of sales transfer of land possession rights within 15 days. Based on contracts, a receipt for payment of the 2 percent tax on this decision, the PRD or DPLRD registers the transfer to sales of immovable property must be attached to the ap- make it effective. However, evidence suggests that in prac- plication for registration. As official sales are subject to tice, registration and transfer takes up to three months, a tax on the value, there is the possibility the buyer and which costs time and elicits uncertainty for investors. seller will either opt for a “transfer” or will agree to report a lower price to avoid the tax penalty. Transferring Land and Property Finally, the multiple municipal agencies that appli- cants have to deal with, including PRD and GASR, The current system of recording land transactions invites raises the cost of government administration consid- underreporting of sales and sales prices (see box 2.4). erably and deters applicants from completing land ten- Land with a possession right cannot officially be sold, ure procedures (box 2.5). Nevertheless, the processing but it can be “transferred,” which in practice means buy- ing and selling within a large informal market because 10. The service fee for transferring properties (sales contract) is no sales transaction price is officially reported. All land MNT  20,000 (US$11), including “gift transactions.” In urgent cases, the transfer can be done in eight working hours for double the service 9. Though this is down from an impressive 22nd in 2013. fee, that is, MNT 40,000 (US$22). C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  29 Box 2.5: Case Study: Land and Property Transfer as a Commercial Transaction A property located in Sukhbaatar district, located on the ground floor of a multistory building with a built area of around 400 square meters (m2) and land area of 558 m2, was sold in September 2013. The titles for the property included an immoveable property ownership certificate issued by the General Authority for State Registration (GASR) for the building and a land possession right certificate issued by the Land Administration Department of UB City (now the Property Relations Department—PRD). The parties negotiated the total sales price, payment conditions, who pays for the notary services, and other con- ditions. A “Contract for the Sale and Purchase of Immovable Property” was concluded and notarized. A fixed fee of MNT 300,000 (US$166.6) was paid for the notary service. This was necessary as the contract amount was more than MNT 500,000,000 (US$277,750). The contract concerned only the building. The contract was then submitted to GASR to register the change in ownership, which required submission of the following documents: • notarized contract for sales and purchase of immovable property • notarized IDs, company registration certificate, company statute (the notary fee for each ID and company reg- istration certificate is MNT 2,500 [US$1.4]; MNT 500 is paid for each page of the copy of the company statute) • immoveable property ownership certificate—original • receipt confirming payment of a 2 percent tax on the sale of immoveable property • service fee of MNT 20,000 (US$11); MNT 40,000 (US$22) in case of expedited/urgent registration • application for registration The immovable property ownership certificate was issued in two working days in the name of the buyer. The company received the certificate on the third day after it submitted the request for transfer of ownership of the building. If the transaction had not involved “land or land possession right,” then it would have been completed in three to four days. After the company received the ownership certificate, the parties entered into a separate contract to transfer the land possession right to the buyer. A notary service was used and a fee for 10,000 MNT (US$5.5) was paid, the fixed rate for this type of contract. The process was finished only after the immovable property ownership was transferred to the buyer as advised by the notary. The parties submitted the following to the Cadastral Division of PRD for the land rights transfer: • official request to of both parties to PRD to transfer the land possession right • notarized contract to transfer the land possession right • a confirmation from the PRD that all land fees due were paid, obtained from the Land Fee and Payment Divi- sion of PRD • original land possession right certificate and contract for land possession for citizens and legal entities • notarized copies of IDs, company registration certificates, and the immovable property ownership certificate (for each, a notary fee of MNT 2,500 (US$1.4) is paid) • payment of MNT 35,000 (US$20) to PRD for the land possession certificate The land possession right certificate was issued by PRD after three months. The Law on Land requires that a decision on the transfer of the land possession rights be made by the UB City Governor within 15 working days after submission. However, in practice this took about three months. Source: WB Team compilations based on interviews for this study. 3 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 2.6: Case Study: Successful Land Administration in Georgia Georgia has markedly improved its land administration and management systems since the pro-democracy Rose Revolution in 2003 (World Bank 2011). The case of Georgia has particular relevance for the Mongolian experience because both countries have recently undertaken a series of market and institutional reforms following a demo- cratic transition. Land reform has become key issue in both countries. The goal of the reforms was to separate and streamline land management and administration tasks and to re- duce the incidence of corruption in land certification and registration functions. To do this, Georgia: • created a new agency (National Agency for Public Registry—NAPR) solely responsible for land administration that was charged with issuing titles, and maintaining the cadaster and registry records • separated public land management responsibilities to other ministries • reduced registration time by offering online services and information about parcels, waiving notary require- ments in certain cases, and having a single caseworker in charge of applications • introduced a fee-based financing structure for NAPR in order to ensure proper fees are collected in a timely manner for services offered, which has made the agency fully self-financed and even generating additional revenue for the national budget As evidence of the success of these changes, Georgia has consistently ranked at the top of the World Bank/IFC “Doing Business” ratings, having the highest ranking (out of 183 countries) for property registration systems since 2012 (World Bank 2012:13). Sources: World Bank 2011; 2012. costs of applications for various forms of land tenure are UB. In 2014, the World Bank11 ranked Mongolia 74th in considered affordable for applicants. Hopefully, propos- the world in terms of issuing such permits. While this is als to expand one-stop shops will help reduce costs over not impressive, and is a potential disincentive to investors time, but the entrenched interests within the existing or- and developers, it is an improvement from 132nd in 2013. ganizations will not be easy to modify. More importantly, One outcome of this slow processing is the payment of the current need to obtain a possession certificate before “commissions” in order to facilitate approvals. In a similar obtaining ownership adds to costs for both applicants procedural improvement, it previously took 2–3 years and and the government. 700 signatures to obtain a permit to build. This was reduced to 35–40 days and 40 signatures in 2013 and has signifi- cantly increased the degree to which applicants complete Obtaining Construction Approvals the formal procedures. It is to be hoped that the proposed “one-stop-shops” e-governance program can streamline this Obtaining approvals for land development is costly process even further and for all applications within the city. and time consuming, and outcomes are uncertain (box 2.6). Anecdotal evidence suggests that it takes between 11. http://www.doingbusiness.org/data/exploreeconomies/ 6–12 months to obtain a building construction permit in mongolia#registering-property. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  31 PLANNING STANDARDS determining the acceptability of different uses rests with AND REGULATIONS the Master Planning Department. Human and financial resources for determining and enforcing land use norms Planning and building standards, together with regula- are modest, given the extent of the urban area and the tions, exert a major impact on the costs, and therefore rate at which it is changing. Moreover, some land use affordability and viability, of land development. While categories (such as semi-commercial and neighborhood planning and building standards specify the minimum commercial zones) are applied arbitrarily, which often acceptable quality of development, planning and building leads to contestation between the city and landowners regulations determine the location, nature, and extent of and developers. The Ministry of Construction and Urban permitted development. For example, inefficient or rigid Development (MCUD) is drafting a proposed Law on land use zoning and development standards may result in Zoning, to be followed by specific regulations and devel- developers refusing to invest in projects that are not com- opment standards. This presents an opportunity for the mercially viable, or offering bribes to avoid conformity. city to incorporate an alternative set of land use controls Strict segregation of land uses may also impose higher that allow for additional flexibility to respond to market transport costs and reduce the flexibility and diversity es- demands and social needs in urban land. sential to a thriving and convivial urban en- vironment. It is the possibility of close and Table 2.2: Land Use Zones for Regulation in UB frequent interactions between people that characterizes successful cities, and a broad Residential zones Suburban zones mix of land uses can best achieve this.12 RE-1 Single family housing zone SU-1 Farmer zone RE-2 Low rise residential zone SU-2 Traditional agricultural zone The key considerations in land use plan- RE-3 Middle rise residential zone SU-3 Natural conservation zone RE-4 High rise residential zone ning are to (i) maximize opportunities for RE-5 “Ger” zone Mixed use zones generating synergies between compatible MU-1 Semi-residential zone land uses, and (ii)  prevent incompatible Commercial zones MU-2 Semi-commercial zone uses that create risks to public safety, health, CO-1 Central business zone MU-3 Semi-industrial zone or the environment. Building height limita- CO-2 Satellite business zone CO-3 Neighborhood commercial zone Open space zones tions, floor area ratios,13 and plot coverage OS-1 Green built regulations affect the cost and viability of Industrial zones OS-2 Avenue, road developing a given site, including its market IN-1 Danger industrial zone OS-3 Restriction zone & area value. Within UB, there are 20 categories of IN-2 Heavy industrial zone land use zone for regulating the use, densi- IN-3 Light Industrial zone ty, height, or shape of buildings (table 2.2). Source: Ministry of Construction and Urban Development (MCUD). UB’s ability to plan for land use and apply development Some development requirements are consistent with controls is limited. At present, most areas of the city in- international standards, but these are difficult to en- clude a wide range of different uses. Responsibility for force because they are not adapted to UB conditions. The city’s building height limit of 51 meters for residen- 12. UN-Habitat (2013: 28) recommends that at least 40 percent of tial developments is reasonable, given maintenance costs, an urban area should be allocated for mixed land use and that mo- seismic risk levels, and the capability of the construction no-functional zoning should be reduced to no more than 10–15 per- industry. However, such developments are also required to cent of the overall urban land area. 13. The total permitted floor area for a given plot size, also known as have a 30-meter space around each side, 25 percent street the floor space index. level parking, and 50 percent underground parking, all 3 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a of which substantially add to the costs of construction.14 and transparent solution, which is largely in line with in- Public and civic buildings are required to be planned in ternational best practices. The compensation amounts for coordination with street and road networks and adjacent property acquisition will vary widely according to market land uses that may not be readily available. The planning conditions, but the total commitment amount for private guidelines require that for every 1,000 residents living compensation could be very high. For this reason, the law within a specified distance, there should be an adequately should only be applied when absolutely necessary. Every sized kindergarten, school, and clinic,15 but in peripheral effort should be made to ensure that adequate provision areas population densities are low, making it difficult to of public space is made in future land allocations and de- apply this standard. The permitted floor area ratio in UB velopments. varies between 3.4 and 4.7 depending on building floor heights, which allows for some level of efficient land use. But the maximum permitted plot coverage for buildings LAND AND PROPERTY FEES AND TAXES is 70 percent, which can also be too restrictive, depending Measures to increase land registration and capture rev- on the use and location. enue from taxation have not succeeded. As stated above, many households, especially in ger areas, do not see the Uncoordinated land plot allocation has increased the benefits of obtaining full land ownership as sufficient to need for regulations supporting eminent domain. Land justify the steps involved. As a result, the land market in plot allocation in UB has proceeded without appropriate UB still lacks formality and transparency, to some extent. set-asides for rights of way, easements, and public land Interviews with city officials and technical staff suggested for infrastructure, especially in ger areas. The proposed that people were reluctant to pay the required taxes and Law on Land Acquisition for Unavoidable Public Need fees after obtaining ownership rights, including the im- is intended to provide the city with the tools to reacquire movable property tax and land fees for possession rights. privatized land for public uses.16 The law allows for com- The fees discouraged buyers from completing procedures pensation based on objective assessments of market or for registered ownership and hence undermined support replacement value of the land and development on it. It of a formal land market. The revised Law on Immovable also stipulates an allowance to cover the costs of reloca- Property Tax (revision of January 9, 2004) was intended tion, transition, rehabilitation, and transaction. Another to overcome this reluctance by providing tax discounts provision is that independent assessors are appointed by on privatized residential land plots. This decision has yet both the city and landowner in order to arrive at a fair to result in an increase in ownership registrations with GASR. However, it has resulted in a substantial loss of po- 14. There currently is a trend among planning practitioners to relax or tential municipal revenues, since neither the property tax remove minimum parking requirements for new development, based for land ownership nor the land use fees for possession on the assumption that private developers are better positioned to es- timate parking demand for the proposed use. Underground parking rights for residential parcels are fully collected. in particular is very expensive. In Washington, DC, for example, the cost of building a single underground parking space is US$50,000. See Land taxes and fees in UB constitute a small portion Shoup (2011) for a summary. 15. These ranges are 300 meters for kindergartens, 500 meters for of annual revenues by international comparison. The schools, and 1,000 meters for clinics. property tax and land use fee are two different items in 16. The draft law allows compensation based on the market value or UB and Mongolia. However, together they constitute replacement value, whichever is higher, of the reacquired land and de- velopment on it, plus 10 percent of the value of the compensation for what in market economies is the property tax, which in the land and immovable properties as an incentive for surrendering most countries is assessed on land and improvements the property for public use, an allowance to cover the costs of relo- (buildings) together. In UB, the property tax and land use cation, rehabilitation, and transition. The draft law is consistent with fee together made up 11.9 percent of the city’s revenues in international best practices and provides land owners, possessors, and users a high level of protection. 2012. As table 2.3 illustrates by a comparison of property C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  33 Table 2.3: Property Tax and Grants from Upper Government as Shares of Local Government Revenue, UB and Selected Countries and Cities, 2007–09 and 2013 (percent) Grants from upper Property tax government Total local government Country (% of local revenue) (% of local revenue) revenues (%) City Australia 39 14 53 Canada 38 42 80 Toronto 42 21 63 France 34 29 63 Spain 23 36 59 Madrid 12 39 51 Bulgaria 20 70 90 South Africa 17 25 42 Cape Town 25 25 50 Czech Republic 6 28 34 Germany 5 48 53 Russian Federation 4 58 62 Finland 4 32 36 Ulaanbaatar 2.8 21.4 24.2 Sources: Brhane et al. 2013; Garzon and Freire 2014. taxes and transfers, land taxes and fees are much lower in land. It is worth noting that this type of free ownership UB than for local governments in many other countries. of urban land is practically unprecedented in market In several comparator countries, local governments re- economies, where most property owners, including indi- ceive a higher portion of grants from central government viduals, pay property taxes in one form or another. Free than does UB, which receives 21 percent of its revenues ownership of land in UB is another manifestation of the from central government transfers (World Bank 2013b). fact that government policies in UB (and Mongolia) are The tax on land in ownership for individual housing is lagging behind the country’s economic realities. Urban so low that individual owners of 102,481 privatized plots land in UB has high economic (market) value and many that occupy more than 5,218 hectares enjoy virtually free find ways to profit from this value. 3 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 2.7: Land Fee Assessments in UB Land fee assessments for a company Land fee assessments for an individual A company holding a land possession right, running a An individual holding a land possession right for citizens business activity in zone 1, and holding 400 m2 of land pays household use in the third zone and holding 400 m2 of land as follows: pays as follows: Land fee = value zone, type of use x land area Land fee = value zone, type of use x land area x 90% discount Land fee = 1 zone, business activity (352 MNT/m ) x land st 2 Land fee = 3rd zone, citizens household use (MNT 44/m2) x land area (400 m2) = MNT 140,800 (US$78) annual fee area (400 m2) x 90% discount = MNT 1,760 (US$1) annual fee. Sources: Government Resolution 152 of 1997 and Resolution 5/39 of the Citizens Representative Khural of Capital City from 2010. Land Fees for Land under Possession Land Tax (Immovable Property Tax) and Use Rights for Privatized Land Holdings The methods used to assess land and property values Much of the city’s privately held land enjoys substan- for taxes and fees are inadequate for the city’s land ad- tial tax discounts and exemptions that preclude it ministration needs. Unlike most cities worldwide, most from being an important revenue source for UB. Even residents of UB are not required in practice to pay land when fees or property taxes on residential property are fees or property taxes on land used for household/fami- payable, they are heavily discounted to the point where ly purposes. Methods for assessing land values as a basis collection costs represent a substantial proportion of the for determining relevant fees are complex and difficult revenues due. The Law on Land Fee (1997 Article 8.1.2), to reconcile with property values or the ability to pay. states that a 90 percent discount on the land fee is pro- There is no estimated market value used to assess land vided to Mongolian citizens who possess land up to 0.07 and property. The holders of land possession and use hectares for their household use. The land tax for the land rights pay land fees in accordance with the 1997 Law on privatized to Mongolian citizens for family/household Land Fee,17 which sets “value zones” and fee rates based use is 0.6 percent of the taxable value; this generates an on fixed land values determined by the Government (see annual tax rate of less than one U.S. dollar and is there- box 2.7). (Also see appendix C for the land value zones fore more than the cost of collection, removing any in- that are used for determining land fees). The value of centive to collect. In UBa 95 percent discount is provided privately owned land is also assessed through similar on the taxable amount, which is not actually collected methods, using a coefficient, base value, zone location, on residential property. For example, if the value of land and measures of infrastructure, ecological, and socioeco- is MNT  5,280,000 (US$2,933) then the land tax would nomic characteristics. In all ger areas, the coefficient is 0.3 be just MNT  1,584, an amount that is easy for people and the base value per m2 is MNT 44,000 (US$23.85), and to avoid paying or for the city to commit to collecting.18 hence the m2 value of land for privatization in ger areas is Furthermore, the Law on Immovable Property Tax (Ar- MNT 13,200 (US$7.3). The total value of land that is typ- ticle 7.1) exempts residential dwellings (including apart- ically being privatized—plots tend to be about 400 m2— is MNT  5,280,000 or US$2,933. These represent static assessed values for land and properties across the city— 18. The assumptions here are: a) MNT 5,280,000 x 0.6%: 100% = MNT 31,680 (US$17.6) 0.6% tax) not actual market values which tend to be far higher. b) MNT 31,680 x 95%: 100% = MNT 30,096 (95% discount on 0.6% tax) 17. Government Resolution 152 of 1997 and Resolution 5/39 of the c) MNT 31,680 − MNT 30,096 = MNT 1,584 (US$0.9) (annual Citizens Representative Khural of Capital City from 2010. tax to be paid after deducting the 95% discount). C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  35 ments and houses), immovable properties of state and also confusing and variable in application. For exam- local budget-funded legal entities, public facilities and ple, apartment owners do not pay fees or taxes on land immovable properties located in industrial and technolo- or their apartments. Yet, certain immobile assets are not gy parks from taxation. Residential dwellings comprise a exempt from taxation. Facilities and buildings owned by large part of the city’s built area. companies, NGOs, citizens, and foreigners are subject to a 0.6 percent annual immovable tax on the value of the The legal basis for property taxation is unable to re- asset; this increased on January 1, 2013 to 1 percent in solve anomalies in registration status. The Law on Im- central areas of UB. Land under commercial use is also movable Property Tax (Article 5.1) states that the taxable taxed according to the type of business, of which there value of immovable property, other than land, is deter- are over 50 different categories. In practice, there is a mined by the value registered with the immovable prop- lack of clarity with regards to the responsibility and di- erty state title registry (GASR). If there is no such regis- vision of tasks between the PRD and the UB Tax Office tration, the value is determined by the value that is used in estimating and collecting land taxes. For instance, for property insurance. If there is no property insurance, officials of the UB Tax Office maintain that UB PRD col- then the value will be established as the value that is re- lects taxes, while PRD officials believe that they are only corded in accounting books. As stated in Article 5.1 of responsible for calculating the tax rate. However, the the Law on Immovable Property Tax, the tax rate is from Law on Immovable Property Tax clearly states (Article 0.6 percent to 1 percent of the value. The rate is deter- 8.4) that land tax shall be assessed by UB PRD and the mined by the Citizens Representative Khurals of UB or tax inspector—the UB Tax Office—shall collect the tax aimag, depending on the location, use, market demand, for local budgets. This demonstrates clear weaknesses in etc. The tax is assessed annually based on the property accurately assessing and collecting appropriate taxes and value as of January 15 and collected on a quarterly basis. fees from private land. In most cases, the taxable value is the value recorded in accounting books, which is often much lower than the The rapid expansion of Ulaanbaatar in recent years market value. Assessing this value deprives the munici- has made it extremely difficult to establish an appro- pality of substantial revenues (see box 2.8). priate regulatory framework of planning and building standards, regulations, and administrative procedures The structure of land fee and tax administration is for accessing, developing, and transferring land and confusing to both citizens and public authorities. The property. To address this challenge, the UB government laws and regulations concerning land fees and taxes are is proposing the creation of a “Land Exchange,” report- Box 2.8: Case Study: Missing Revenue from an Alternative Property Value Assessment in UB In September 2013, a private company located in Sukhbaatar District sold about 400 square meters of com- mercial immovable property at market value for MNT 1.1 billion (US$611,000). However, the value recorded in the company’s books was only about MNT 50 million (US$27,750). The current rule of property taxation of com- mercial properties allows the use of the property’s book value for taxation. Therefore, the company had been paying only MNT 300,000 (US$166) annually in property taxes (MNT 50 million x 0.6%) instead of MNT 5,280,000 (US$2,933), which would have been due to the city on a market valuation. Thus, for this property alone, the city has been forgoing close to 4,000,000 MNT per year. Source: WB Team compilations based on interviews for this study. 3 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a edly through which all property transactions are to be it was reported that some payees delay payment by up to processed. However, this will only add another layer of five years without penalty. The revenues collected by the bureaucracy and cost to transactions without any appar- municipality are proving inadequate to meet the needs ent benefit to buyers or sellers. of urban management and need to be increased. Apart- ment owners should be taxed according to the value of their property, especially as values are increasing due to DISCUSSION OF CONSTRAINTS government subsidies on interest rates. Such options are AND OBSTACLES TO LAND AND politically difficult and would require a change in the cur- PROPERTY ADMINISTRATION rent legislation, which will not be popular. However, the The current system of land and property rights is ex- economic case is strong, especially since market values tremely costly to both the public and private sectors are increased by public sector investment that can only and does not provide investors and property owners continue when revenues are adequate. For these reasons, with good security. The separation of land and build- a public debate is needed to raise awareness and explain ing rights increases transaction costs and time, both how increased revenues would be used to improve the for property holders and for the government. “Use” and provision of essential services and public facilities and “possession” rights are not transferable without the direct improve the quality of urban life. involvement of government. Public entities (such as state schools and kindergartens) are granted possession rights Current land tenure designations need to be revised for only 5 to 15 years and hence need to update their to attract and retain investment in land and property. land rights on a regular basis. There is also evidence of For residents, possession and ownership rights carry few a significant mismatch between the records of the prop- differences in what they grant the respective holders, but erty registry and claims on land, which leads to frequent each requires an unnecessarily lengthy and confusing so- dispute: land-related conflicts currently represent a high licitation period. Firms are typically granted possession proportion of cases brought before the administrative rights for only 5 to 15 years, despite the fact that by law court. These factors combined present unnecessary time they should be for not less than 15 years and up to 60 and cost burdens on administration, firms, and citizens. years. Such short durations are absolutely insufficient for long-term investment in any type of capital construction The regulatory framework for land administration al- with long-term goals. Even if contracts stipulate a pos- lows for costly delays, uncertain outcomes, and oppor- sibility for extension, such contracts are not considered tunities for corruption. In the past, land titling had been secure enough by investors, who have the choice of tak- subject to political interference where titles were granted ing their funds to countries with more secure property to hundreds if not thousands of residents prior to elec- rights. Given the increased prices of land of certain areas tions. However, the current city administration has deci- of the city in recent years, there is a justifiable concern sively moved to address this problem. over foreign speculative investment in urban land. How- ever, wholly owned domestic legal entities must also be The current regulatory structure does not allow the afforded adequate protections for investment in land, es- city to draw adequate revenues from fees or taxes lev- pecially if they are seeking financing from domestic lend- ied on privatized land. At present, owners of apartments ers. Given the sensitivity of this issue, central and local do not pay property tax, and land owners in ger areas pay government leaders need to undertake extensive public such low rates that collection is not enforced. Revenues consultation and awareness programs outlining the issues from land fees are based on 1997 values, though market and options. This will help ensure that the process of for- values have since increased up to 20 times. The costs of mulating and enforcing laws and the regulatory frame- collection are high relative to the amounts collected and work on land enjoys social legitimacy. C h a p t e r 2 : R e g ul at o r y F r a m e w o r k and Practice of Land Management  |  37 In conclusion, the regulatory framework for manag- regulating urban land and housing markets in ways that ing urban development and the land market in UB has enable all income groups to gain affordable and secure changed significantly in the last two decades. There access to land in locations where they need it. The key has been a transformation from a state-controlled to priority remains how to protect the public interest in a market-based political and economic system, but ways that are responsive to changing market conditions. more needs to be done to maintain progress. The ex- Realizing this will require focusing on the key issues of perience of managing urban land markets available to protecting public health and safety and seeking to at- the political and administrative leadership is relatively tract private investment. At the same time, a reasonable limited in time. Many challenges remain, but no coun- proportion of the profit made possible by state action try, irrespective of its level of economic development or must be directed to meet the needs of existing and future length of experience, can yet claim to have succeeded in citizens. 3 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Chapter 3 Managing City-Owned Land Improving land management in the city of Ulaan- land, including land held by other budget entities (such as baatar (UB) will allow the city to both expand revenue schools) and city-owned enterprises. Current weakness- capture from other sources and make more informed, es in the land management system discourage strategic strategic decisions about public land and property. The planning and invite corruption or even debt financing, city controls 16,096 hectares of urban land that is used while in fact city-owned land could provide a more im- for government facilities or public uses and is not subject portant revenue source than current practice allows. to private allocation or up for sale.1 Public land manage- ment refers to how UB makes decisions about its land, including whether it will be retained, transferred, or dis- LAND SHORTAGES IN UB possessed. With effective public land management, UB There is a shortage of land for public purposes, due in can ensure that city-owned land is used to provide quality part to weaknesses with the registry and legal cadaster. public facilities throughout the city and that the alloca- This is a typical challenge faced by many countries around tion of land is aligned with long-term planning goals. De- the world: among property owners, governments tend to tailed and accurate recording of public lands in the regis- be the least concerned about getting their property rights try and cadaster is also essential. Registration, along with registered in the legal cadaster. Indeed, data provided by the use of market-based valuations of public lands and the General Authority for State Registration (GASR) indi- property, gives the city important tools for maximizing cate that of a total of 76,598 buildings registered, only 22 the revenue generated from land allocation, which can be are government owned. The primary reason government used in turn to support other public investments. buildings are not being registered is that the cadastral parcels associated with government buildings are not ful- There are several weaknesses in the city’s current public ly surveyed and mapped and in some cases are not even land management system. The previous chapter demon- accurate.2 The lack of title/cadaster registration exposes strated the obstacles related to land administration and the challenges faced by firms and individuals in accessing 2. From the cadaster viewpoint, government-owned real estate (or im- and transferring privatized land. This chapter will detail movable property, such as land parcels and buildings/facilities) is for the most part not registered at GASR because of the large volume of the challenges the city currently faces in managing its technical preparatory work required. However, this technical issue can be easily addressed if the government decided to register its property. 1. This does not include 3,969.5 hectares of land for road and infrastructure, In fact, the PRD’s division in charge of UB properties has suggested 152,616 hectares of pasture and agricultural use land, and 71,829 hectares completing preparation of the cadastral information needed for title of forest area. All figures are totals from the six contiguous districts from registration of properties held by all municipal entities. However, this data provided by the Property Relations Department (PRD) for 2012. work was not budgeted in 2014 and it is not clear when it will take place. 39 Figure 3.1: National Drama Theatre Parcel and Commercial Building under Construction in UB a. National Drama Theater parcel b. Commercial building under construction Sources: PRD (map), WB Team (photo). government-owned buildings and land to a number of public land. For example, a sample cadaster map (figure risks. First, non-transparent transactions can result in the 3.1) for the National Drama Theatre does not identify the privatization of public buildings without the required de- parcel that has been carved out for a commercial tower liberation and assessment, which can lead to loss of reve- currently under construction behind the theatre. nue for the city. At particular risk are buildings controlled by municipal enterprises and joint ventures. Second, pri- Open public land such as streets, squares, and vacant ar- vate encroachment on government land can take place eas between buildings was surveyed and mapped in an through shifting borders of parcels controlled by govern- aggregated way in six districts in 2013. However, this in- ment entities—both on paper and on the ground. This ventory lumps together two very different types of land: results in an informal reduction of public land holdings. public-use land (such as streets) and the land that can be treated as vacant and potentially available for in-fill con- While UB has made several attempts to inventory pub- struction (such as large gaps between apartment build- lic land, its approach lacks a strategic land management ings). An additional constraint is that these parcels are focus. The two databases at the Cadastral Division of the not clearly demarcated and there is no entity assigned to Property Relations Department (PRD) that contain infor- manage it. For instance, in the case of a public school, mation on municipal land parcels are at best incomplete and school management is responsible for the land; once a at worst inaccurate.3 It is also unclear if records are updated parcel is surveyed and demarcated, a land possession cer- in a timely manner when land holdings change. There are tificate is issued. However, in the case of public land like a delays in land registration and cases of encroachment on square or space between apartment buildings, there is no land parcel and no entity is directly responsible for it. As a 3. The land parcels of 710 city and city-owned entities are partially included in these databases, and these organizations have possession result, policy makers and land managers do not know the rights over the land they occupy. amount of buildable vacant land within UB’s jurisdiction. 4 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Figure 3.2: Nontransparent Carving Out of Public Land for Commercial Use in UB before 2012 a. Twin Towers along Seoul Street built on a parcel b. Commercial building under construction on a parcel that carved from the Mongolian-Indian Joint School was initially a kindergarten but later privatized for use as a hospital. The two-story building is being demolished to build a new multistory commercial building. Source: WB Team. There are several weaknesses in the current practice fragmented across different organizations and previous that reduce the ability of the city to keep track of pub- mayoral administrations. lic land or generate appropriate revenue from its al- location. Private development is driven through direct The lack of strategy and coordination in the conversion solicitation of land by a developer, who may promise of public land for private sector use may be creating to provide a minimal amount of public facilities (such a shortage of land for public purposes. This is because as schools or clinics) in exchange for obtaining certif- during 2001 and early 2012 land was allocated for private icates and development permissions. Yet it is unclear construction by “carving” out parcels from bigger sites whether any of these public facilities are completed as occupied by public buildings (see figure 3.2). The prob- planned after the land is allocated. Concise data and lem with this practice is that such “carve outs” were allo- information that could inform policy makers and the cated on a parcel-by-parcel basis, rather than through a public on land allocations is lacking (except for the strategic and systematic long-term planning process that data on individual plots in ger areas),4 and the data is would preserve some land for current and future public 4. This includes (i) the amount of land allocated each year by direct sus land paid for, and (iii) the total and per square meter (m2) revenue allocations and by auctions, (ii) the amount land allocated for free ver- obtained through allocations each year. Chapter 3: Managing City-Owned Land  |  41 Box 3.1: Additional Corruption Allegations Concerning Public Land Allocation in UB The daily news website www.medee.mn reported that in 2013 the Prosecutor’s Office reviewed 14 significant cases that were filed with charges related to corruption and abuse of power. The cases were sent to Prosecutor’s Office to initiate legal proceedings, but each case was eventually dismissed. Examples of the dismissed cases include the following: Transfer of 5,000 square meters (m2) land from the Mongolian National Chamber of Commerce and Industry (MNCCI) to the World Trade Center nongovernmental organization (NGO). The case was filed against possible abuse of power by the chairman of the MNCCI, who is also a member of parliament. The director of the Mongolian-Indian Joint School was accused of selling land possessed by the school to third parties in parcels of 422 m2, 837 m2, and 450 m2 (see figure 3.2 and box 3.2). The examples highlight the regularity of allegations of corruption related to public land allocation in the city and demonstrate the need to support transparent land management practices. Source: http://medee.mn/main.php?eid=40901. needs.5 As mentioned previously, it is also not clear how Another 9 schools either did not have proper land certif- well the registry or cadaster documents the allocated icates or have had other problems associated with their carve-outs, leading to inaccurate records of amount and land rights. Similarly, of the 169 kindergartens, 24 (or 14 location of land for public purposes (see box 3.2). percent) experienced a reduction in their land holdings, and 15 (9 percent) lacked adequate documentation for Public school properties have been common sites for their land possessions. Anecdotal accounts indicate that land “carvings.” The PRD’s 2013 review of land held by not only schools and kindergartens but other public orga- state-owned schools and kindergartens6 across the city’s nizations (such as hospitals) have been routinely engaged six urban districts found that of the 111 schools invento- in such conversions. ried, 28 (or 25 percent) experienced reductions in their parcel size due to the carving of land for other functions. UB’s current approach is to preserve or even increase the land held by schools and kindergartens when fea- sible. Although the conversion of publicly owned land 5. For example, officials at one of the city’s main districts who regularly deal with land issues were interviewed for this report in October 2013. for private use was done officially through governors’ They expressed a strong concern that while little land remains for pub- decisions, the current UB government has been review- lic use, the city government continued to allocate the few remaining ing the legality of allocations made prior to 2012 and in parcels to private holders. 6. This work was conducted according to the DecreeА/625 of the early 2012, especially those taking land away from pub- Governor of Capital City on “Inventory and registartion of land pos- lic entities (schools, hospitals, parking lots, vacant pub- sesed by the schools and kindergartens” of June 25, 2013. The work licly owned parcels, and so forth). This is commendable. included verification of possession right certificates (and conducting For example, it canceled some previous land allocations registration if needed), exploration of adjacent areas for possible ex- tension of the school/kindergarten land area, and clearing emergency carved from school/kindergarten grounds, if there had exits for schools and kindergartens. been no construction. Furthermore, as a part of im- 4 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 3.2: Densification and Commercialization of Land Use in Central UB: The Case of the Mongolian-Indian Joint School A governor’s decision issued in September 1999 allocated 10,000 square meters (m2) of land for a school located along Seoul Street, in Sukhbaatar District. By March, 2012, thanks to a series of decrees issued by governors, the grounds of the school were reduced to just 2,327 m2. Five companies and four individuals were recipients of these land parcels. Some of the declared land uses include education, garage, offices, apartments, and mixed- use. The Twin Towers shown in figure 3.2 are among these properties. All holders, including the school itself, have possession rights of 5–15 years. Source: World Bank analysis based on data provided by PRD. proving land management, the city government is also land in the central city for possession and use rights was attempting to prevent unauthorized use of government stopped in 2012. The city council also issued a decision to owned land by mapping such land and posting warning allocate land only through auctions or tenders as stated signs (see figure 3.3). in the Law on Land, although as of the writing of this report, no allocations have yet been made. The current Furthermore, UB has improved its land management city government has taken corrective action by requiring practices by stopping direct allocations and adopting those who received land through direct allocation to pay auctions for future sales (see box 3.3). The direct al- the initial auction price, which would have been the min- location of close to 1,300 acres (about 500 hectares) of imum amount of revenue that would have been obtained Figure 3.3: Preventing Unauthorized Use of City-Owned Land in UB a. Land that had belonged to a school was given to a private b. Vacant land between apartment buildings in Chingeltei company, but the new city administration reinstated the land District. The sign reads “It is PROHIBITED to carry out to the kindergarten. any activity on state-owned land without permission. A criminal liability will be imposed.” Source: WB Team. Chapter 3: Managing City-Owned Land  |  43 Box 3.3: Unpermitted Development on Public Lands in UB In September 2012 two teenagers, a school girl and a university student, were killed in separate incidents under similar circumstances; both cases highlight the problems of illegal development in Ulaanbaatar. In one incident, a girl returning home from school was struck by a cement pumper installed on a truck at a construction site Bayangol District near State Hospital No. 3. Later that month, a boy was walking past a construction area near the Tengis movie theater when he was struck by a falling iron fastening bar. In each of these cases, the construction sites did not have approved building plans or appropriate permits for construction. The land occupied by State Hospital No. 3 had originally been allocated for the construction of a private hospital, but a 13-story apartment building with commercial and service facilities was carved out of the parcel and built instead. The first seven stories of the building were under construction without building permits. Similarly, the land near the Tengis theater had permits for the development of a 16-story commercial and office center. However, the development plans were changed without approval, increasing the land area and expand- ing the project to 22 stories. These incidents underline the importance of the need for transparent and effective land management and ad- ministration for public safety and liability reasons. In each case, the developer sought to change the use of public land allocated for another purpose in order to maximize private returns. Development that occurs outside of official plans, approvals, and permits places the public at risk. With unpermitted development, there is no guar- antee that the siting and layout of the buildings or the construction techniques and materials are appropriate and compliant with standards. Sources: Mongolian Internet sites, including http://www.zuuniimedee.mn/Show.aspx?category=11&code=490; and http://so- ciety.time.mn/content/42937.shtml. Many more related stories can be found on the Internet using search engines for Есyгэн охины хэрэг (the case of the girl Yusugen near State Hospital No. 3) and Барилгын осол тэнгис кино театр (the construction site accident near the Tengis movie theater). if the land was auctioned according to the requirements at below-market prices. When parcels are carved out of of the Law on Land. The government also revoked the publicly owned land, it is not clear what prices, if any, the possession titles of 91 individuals and legal entities and city charged as such transactions have not been disclosed repossessed 246 hectares of land after giving the opportu- or monitored. Interviews with private sector developers nity for them to pay the initial auction price. suggest that they have received public land free of charge, after identifying desired plots and preparing a land-use plan. A common way developers justify such an arrange- MISSED OPPORTUNITIES IN ment is to propose some small portion of the land be used LAND VALUE CAPTURE for social purposes, while most of the obtained land is Under current allocation practices, the city is not cap- used for commercial development. turing its fair share of the market value of the conver- sion of land from public to private use. Instead of sell- Current land auction practices do not adequately cap- ing land rights via open, transparent auctions, public land ture market values of public lands being allocated. The has been primarily allocated through direct transactions, city previously used an “initial auction price” for direct and apparently only some land recipients pay for land but land allocations, but even this amount is typically far low- 4 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table 3.1: Estimated Forgone Revenues from Land Auctions in UB, 2011–12 Sites Estimated forgone revenues from land auctions “Twin Towers” on the Mongolian-Indian school site (land US$4,349,502 allocated from 2010 to June 2012) The commercial tower behind the National Drama Theater US$8,450,328 (land allocated in 2009) On a comparative scale: About 6% of total UB revenues in 2012 What could be built for this amount: About 4.5 schools, 3,900 m2 each Source: WB Team estimates. Revenue estimates are based on assumed floor areas for each building. er than final auction prices. Annual revenues from auc- ues in allocating or privatizing ger parcels for household tions exceeded revenues from direct sale prices by 50 to use. As already discussed, UB residents may receive up 300 percent, at least before the financial crisis, when pay- to 0.07 hectares of land for residential purposes free of able demand for land collapsed. Furthermore, the higher charge. When this public land becomes private, the city auction revenues were captured in spite of the question- charges a tax of MNT  1,584 per parcel in ger areas, re- able quality of those auctions, suggesting that high-qual- flecting a base land value set by the government in 1997. ity auctions could produce even more revenues. The However, even this price is not charged. The fixed value commercial buildings carved out of public land (on Seoul of these parcels without discount was set by the govern- Street and the National Theater—see figure 3.2) illustrate ment at MNT 13,200 per m2 By contrast, current market the magnitude of forgone revenues. These two sites alone, prices of such parcels vary widely, from MNT 11,300 to totaling less than 2,000 m2, could have produced close to MNT 38,400 (US$6 to US$21) per m2.9 Therefore, in pri- US$13 million in 2011–12 (or more than MNT 24 billion vatizing well-located parcels free of charge, the city for- based on very conservative estimates.7 Table 3.1 provides goes up to US$8,400 (equivalent to MNT 15,360,000) on a comparative scale for these forgone revenues: a 400 m2 parcel. Holders of the parcels capture this value when they resell their homes at market value or rent out This report estimates that the cumulative forgone rev- parts of their land or homes to others. enues of about a 10-year period (from 2003 to early 2012) from commercial/service use allocations since The two processes discussed above—land conversion for 2003 and from land holdings for household use that private commercial uses and the city’s failure to capture exceed a standard plot size across the city are roughly land values during such conversions—are one-time ac- 22–77 times the total city budget of 2012, depending tions and are usually not reversible. It is therefore im- on assumption.8 Similarly, UB does not capture land val- portant to understand the land management practices currently in place—such as inventorying and registration 7. These estimates are not a formal appraisal. They are rough but con- systems, valuation, and processes for land allocation—so servative estimates made using the “residual land value” method and that policy makers can take corrective action. See box 3.4 assumptions about market prices of real estate and construction costs for an example of conversion for private commercial uses. as they were in 2011–12. The estimates also assume that the city ex- ercises a reasonably unified policy that well-located sites under public control are allocated predominantly via auctions. 8. Details of this estimate and underlying assumptions are shown in 9. According to a sample of sale prices in the Mongolian Central Bank Appendix B. database. Chapter 3: Managing City-Owned Land  |  45 Box 3.4: Berlin’s Experience in Managing Surplus Property: Liegenschaftsfonds Berlin Liegenschaftsfonds Berlin is a wholly state owned company responsible for marketing and managing city-owned properties no longer needed for public purposes. It aligns marketing with the state of Berlin’s economic, urban development, and housing policy goals; and sells properties at market value. City boroughs receive a share of profits as an incentive to agree to property disposal. The company employs a staff of around 120 people, whose scope of activity comprises the documentation, valuation, management, and marketing of over 4,500 surplus properties owned by the State of Berlin. Since it was founded in 2001, it has concluded contracts for a total of nearly 6,300 properties comprising a total area of almost 16 million m², which generated over €2 billion for the State of Berlin. Its portfolio contains residential, commercial, mixed-use, industrial, special-use, and niche-properties, which it sells both to private buyers and project developers. The company determines a portfolio for each year, and its Steering Committee participates in defining sales goals and sale procedures for each property, choosing from three forms of competitive procurement. Sale of properties for over €3 million or below market value requires approval of the supervisory board and Berlin’s House of Representatives. Sources: Liegenschaftsfonds presentation, 28 February 2011; and http://www.mipim-berlin.de/mipim_13/partners/liegenschaftsfonds /index.html. INVENTORYING AND REGISTERING Overall progress to date is summarized in table 3.2 and MUNICIPAL ASSETS detailed further in this section. Many city-affiliated legal entities have land and proper- ty that has not been adequately registered. The complex Inventorying for Accounting Purposes city government comprises over 700 legal entities, includ- ing the administration, nine district administrations, 60 Land held by UB or affiliated legal entities is not rec- city-owned industrial enterprises, eight joint ventures ognized as a fixed asset for accounting purposes. The with private sector interests, and budgetary institutions fixed assets of the city are subject to inspection and in- including schools.10 The assets of all these entities are not ventory at least once every four years, as part of a nation- entirely inventoried and registered because the city has wide exercise, in accordance with the Law on State and not fully conceptualized and established such a practice, Local Property (Article 70.4).11 Each of the over 700 legal although it recognizes the importance of both accounting entities in UB submits its balance sheet to the PRD once and property rights. However, the inventorying and reg- istration along both lines is undergoing a very dynamic 11. The government issues an order to the SPC and to governors of development in UB, though very substantial gaps persist. aimags and the Capital City to conduct a periodic inventory. The SPC then outlines the required regulations and procedures and establishes the Central Commission to carry out this work. In UB, the PRD is 10. The number of legal entities constituting the city government is in charge of implementing this activity, which was last conducted in very fluid, as new entities are formed quite often. 2012. 4 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table 3.2: Progress of Inventorying and Registration of Municipally Owned and Controlled Assets in Ulaanbaatar (to end-2013) Assets/property Inventorying for accounting Registration at cadaster databases Land Land can be recorded and valued as part of Not registered in the state title registration system inspection and inventory of state property (Law at the General Authority for State Registration on State and Local Property, Art. 70) (GASR), mainly for technical reasons. For title registration, “cadaster parcels” should be formed In practice, land held by government entities is by surveying parcel borders and mapping them. not recognized yet as a tangible capital asset (or as a fixed asset) and has not been inventoried for Some of the land parcels held by the over 700 accounting purposes. municipal legal entities are reportedly surveyed and recorded in various PRD databases. Public-use land (streets, squares) and vacant land that is not parceled was inventoried in aggregate in 2013; this data is managed by PRD. Building/facilities Nearly completed and regularly updated in the Not registered in the state title registration system special database initially developed by Property at GASR because the associated land parcels are Relations Department (PRD), currently merged not ready for registration, which is a prerequisite for into the State Property Committee (SPC) system. building registration. Other capital assets Completed and regularly updated, similar to Not intended to be in the cadaster databases (linear infrastructure, buildings equipment, etc.) Source: WB Team, collected at assessment interviews with city officials. a year, which has led to development of a database for in- Registration for Legal Purposes ventory of capital assets.12 Although the Accounting Law The national standards for reporting land uses according requires that land be included in accounting inventory to the Law on Land are not helpful for modern, pro-active and valuation, implementation regulations (Ministry of government land management because these classifica- Finance 2009) treat land as an intangible asset in the same tions do not distinguish between land that is under gov- vein as intellectual property or mineral resource licenses ernment control and that which is under private entities. held by state and local organizations. This information is important for public land manage- ment because it can guide the government on many crit- ical issues, including potential shortages of land for specific 12. Until the end of 2012, the assets were recorded in a distributed functions or potential surpluses that could be mobilized for database, designed in-house by PRD, with a central server and ad- other purposes. For example, the standards stipulate a very ministrator housed at the PRD, and terminals in all districts of the detailed list of land uses for developed areas, such as “art city where some of the data is entered. However, starting from 2013, the SPC has introduced a nationwide computer system for state and and cultural organization,” “educational organization,” local property information. This system is replacing the previous PRD and so forth. However, these categories do not show how in-house database and is being introduced by similar organizations in much land is occupied by “educational organizations” all aimags. It is maintained by PRD and is accessible by the SPC on- and how much of it is under public and private entities. line, which can retrieve the information directly. When the database is finalized, the once-every-four-years inspections and inventorying will Table 3.3 shows a detailed balance of government land likely be replaced by audits. registration in Ahmedabad, India that UB could emulate. Chapter 3: Managing City-Owned Land  |  47 Table 3.3: Balance of Government-Owned Land, Ahmedabad, India Central and state Grand total by all Municipal corporation governments levels of government Share of grand total No. of Area No. of Area No. of Area within study Registration plots (hectare) plots (hectare) plots (hectare) area (%) Residential 2,370 1,579.15 1,120 1,358.95 3,490 2,938 26.6 Industry (general + special) 394 291.09 90 1,200.94 484 1,492 13.5 Commerce 90 29.63 129 11.67 219 41 0.4 Institution: education, health, research ISRO 17 17.16 9 54.03 26 71 0.6 Service 13 13.33 3 3.91 16 17 0.2 Utility: treatment plant 10 154.73 1 3.24 11 158 1.4 Park, open space + recreational, agriculture, forest 1,129 601.37 66 48.31 1,195 650 5.9 Cemetery 13 14.42 11 5.54 24 20 0.2 Airport — — 1 402.74 1 403 3.6 Cantonment — — 1 483.91 1 484 4.4 Wholesale market 1 0.43 — — 1 0 0.0 Other, multipurpose 105 59.23 22 — 127 59 0.5 No defined use 593 341.00 52 — 645 341 3.1 Roads — 3,111.80 — — — 3,112 28.1 Sabarmati River — — — 480.47 — 480 4.3 Other water bodies — — — 346.64 — 347 3.1 Railways — — — 452.02 — 452 4.1 Grand total public lands by ownership 4,735 6,213 1,505 4,852 6,240 11,066 100.0 Source: Constructed from the data in World Bank (2013). Note: — Not available. ISRO = Indian Space Research Organisation The current system of land inventorying in UB does not discussion in connection with table 3.5). In short, it appears provide decision makers with simple yet critical information that UB land inventorying has been beset by (i) fragmen- such as the current balance of land possessed by government tation of responsibilities and (ii) the lack of a strategic ap- entities and its allocation for various uses, or the amount of proach to land management as a distinctive function of buildable land still vacant within built areas. Furthermore, government. Further, PRD has been directed to focus on a existing data on land holdings is not sufficiently analyzed, range of issues (such as cadaster/property registration, IT/ otherwise it would likely raise red flags about, for example, GIS solutions, and so forth), but has not been empowered excessively large holdings of some land users (see a further to focus on land policy and strategic land management. 4 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a VALUATION AND PRICING OF LAND Table 3.4: Nonfinancial Assets on Warsaw AND REAL PROPERTY ASSETS Balance Sheet, 2008 Valuation and Pricing Asset type Share of GDP (%) Land valuation and pricing is an important compo- Total assets (financial and nonfinancial) 100 nent of good land management practice. There are three purposes for pricing and valuation of public prop- Nonfinancial (capital) assets, total 94 erty. This data informs, first, the accounting and finan- Including: cial reporting of capital assets owned and controlled by government entities, and second, the taxation of land and Land 80 property and related recurrent revenues (such as land use Building, improvements 8 fees) from the private sector. Third, pricing and valuation informs decisions on land and asset management, such as Infrastructure whether to dispose of or retain certain properties. Land Equipment Not available valuation rules for financial accounting/balance sheet purposes are usually defined by national accounting Source: Kaganova and Buczek 2010. standards. In most countries, accounting rules are set up by the ministry of finance or treasury in accordance financial assets amounted to 120 percent of GDP in 2010, with some international standards. However, market with land accounting for 22 percent of the total. land valuation for financial accounting in the public sector is a highly debated issue among governments and In Mongolia, rules for valuation of capital assets for experts. Some maintain that valuation and pricing do accounting purposes in the public sector are incom- not ensure prudent decision making in the public inter- plete.13 Given that UB has not yet established a balance est (see box 3.5). sheet that is in line with international norms, it is diffi- cult to compute the value of its capital assets. However, Valuation and pricing of government land and proper- qualitatively, one can assume that, like Warsaw, most of ty in UB rarely reflects market values. The experience of UB’s public wealth is concentrated in its public land. This other cities in post-socialist countries suggests that gov- ernment land, if appraised at market value, would com- prise the largest share of all nonfinancial assets. For exam- 13. However, the national government undertook a nationwide reval- uation and resetting of the initial values of state and local assets in ple, in Warsaw, nonfinancial assets account for 94 percent 2009, according to the methods outlined in the “Methodology for re- of the total public assets, and the land alone accounts for valuation of state and local property” approved by the Minister of Fi- 80 percent of the total assets (table 3.4). In many other nance (Ministry of Finance 2009). The methodology provides detailed countries, public “nonfinancial” (capital) assets, such as instructions for revaluation of (i) buildings; (ii) land possession rights; (iii) engineering infrastructure, roads, bridges, and public spaces; and government land, buildings, infrastructure, and equip- (iv) movable properties (such as machinery, equipment, vehicles, and ment, constitute the largest component of public wealth furniture). The value of “land possession rights” is defined per square and exceed the value of financial assets (Bova et al. 2013). meter. It depends on the type of land use (residential, services, and so forth) and is differentiated by five zones (see Appendix C). The method For example, in the Republic of Korea, the total stock of valuation is based on the “Methodology to determine the starting of nonfinancial public assets amounted to 126 percent price for auctioning of land possession and use rights,” approved by of GDP in 2011. Land and tangible fixed assets account Resolution No. 136 of 2007 of the Minister for Construction & Urban for the lion’s share—95 percent—of these assets, with the Development. The reference value per square meter of land varies from MNT 1,060 to MNT 31,812. However, this land valuation for account- land alone accounting for 54 percent of total public assets ing purposes has not yet been done. Most importantly, this accounting (Bova et al. 2013). Similarly, in Japan, total public non- methodology would value the land well below its current market value. Chapter 3: Managing City-Owned Land  |  49 Box 3.5: International Debate and Lessons on Market Valuation of Government Land About 50 countries across the world either have adopted accrual accounting or are doing so, based on expecta- tions that this transition would enable them to manage their finances better, including the production of balance sheets. While usefulness of balance sheets is broadly recognized, there is less consensus on the introduction of full accrual accounting and budgeting in the public sector. There are two most common approaches governments use to valuing capital assets on the balance sheet: the historic cost and fair market value. Australia, the Netherlands, New Zealand, and the United Kingdom use fair market value for both buildings and land, while Canada, Denmark, Kyrgyzstan, Serbia, and the United States use historical costs, with depreciation (except land, which is valued at the original cost, without depreciation). The debate over the pros and cons of both concepts of accounting valuation—historic cost versus market val- ue—and their methodological implications continues. Opponents of market valuation argue that it wastes public resources to assess market value for land and property that is not marketable (such as national parks); opponents further argue that market valuations can be volatile due to changing market conditions and can also be manipu- lated. Opponents of the historic cost approach argue that such valuation leads to substantial undervaluation of government land. The implications of land accounting at historic cost for former socialist countries are significant. The majority of municipal land was obtained by local governments free of charge, as part of property devolution from central governments that did not account for the land at any value. In Kyrgyzstan, for example, such freely obtained land is not recorded on the municipal balance sheet at all, despite the fact that land market values can exceed munic- ipal budgets many times over, even by partial accounting. Hungary has recognized the fundamental distortion created by assigning zero value to local government land. In 2000 a compulsory revaluation of municipal land was conducted, following which approximate market values were assigned. Source: Kaganova 2012b. reinforces a central argument of this chapter: government es for land auctions. However, a complete market-based land has to be managed prudently and strategically, so valuation of municipal land and recording of such values that its value can be captured for funding infrastructure. was abandoned, and at this time, the market value of mu- nicipal land is not recorded as part of the land invento- There have been efforts to integrate a market-based ry process. Qualitative data on the value of nonfinancial valuation approach into land management, but this (capital) assets in UB also remain incomplete. As shown work has not been sustained or completed. It should be earlier, only “produced assets,” such as infrastructure and noted that in UB, total market-based valuation of govern- buildings, have their values systematically recorded in ment land is predominantly a policy issue, not a technical the inventory-for-accounting database. For municipal one. Indeed, the PRD has been monitoring the land mar- “produced assets,” the asset inventory database contains ket and land values since 2004. It attempted revaluation the initial value (at cost), the depreciated book value, and of municipal land, notably in 2010 and 2013, to reflect the depreciation. Apparently, market-based revaluation is the five-fold increase of land market values in the zon- also possible, but information on land values is not yet ing process, land use fees, land taxes, and starting pric- included in the database. 5 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table 3.5: Estimated Revenues from Annual Land Use Fee by Type of Land Holders, 2014 Average Average Average Annual Average fee per fee per plot size Number Land area revenue fee per m2 payee payee per user Type of land user of payees (m2) (MNT ‘000) (MNT) (MNT) (US$) (m2) Residential 2,498 14,819,549 546,601 37 218,815 132 5,933 Budget organizations 839 49,915,603 542,867 11 647,040 389 59,494 NGOs, political parties, 155 1,939,692 125,645 65 810,616 488 12,514 religious organizations Commercial and services 9,294 89,135,877 12,936,198 145 1,391,887 837 9,591 Public utilities and 124 11,781,081 527,478 45 4,253,852 2,559 95,009 infrastructure Manufacturing and mining 2,894 115,193,471 3,225,002 28 1,114,375 671 39,804 Total 15,804 282,785,272 17,903,790 n.a. n.a. n.a. n.a. Source: Calculated based on the data provided by the PRD. Note: n.a. = Not applicable. The city stands to gain substantial revenues if mar- shows that budget organizations hold, on average, ex- ket-based valuations are to be used to inform tax and tremely large plots—almost 6 hectares each—while pay- fee schedules. Table 3.5 provides a more detailed snap- ing very low land fees. Many of the budgetary organiza- shot of the expected 2014 land fee revenues for six types tions do not need such large tracts of land. If this data of land users/possessors, based on the current rates. The is accurate, the excess could be identified and managed table also presents basic characteristics of land holdings strategically. For example, some excess land can be cut (such as average plot size) and fees (such as average fee off as separate parcels and marked as “golden reserve” per square meter and per parcel). The table shows that for future public use or land swaps or sales, while other the city still has a potential to both (i) densify land uses land can be auctioned to raise revenues for infrastruc- and (ii) increase revenues from this land. For example, ture investment. Potential revenues from auctioning such households possessing land for residential use hold large excess land are estimated in Annex D. It is also possible parcels (almost 0.6 hectares), which is more than is need- that budget organizations have formal or informal pri- ed for individual residential use. A more fair and efficient management of land would either redistribute the land in vate land users on their sites that are not reflected in the excess of the parcel size that is stipulated by law or charge data, which suggests that government land is used illegally market rates for holding the extra land (if the latter was and the city is not obtaining its rightful revenues. The data not done yet). Annex D provides estimates of potential shown in the last column of table 3.5 indicate that the city revenues if such a policy was introduced. needs to conduct an audit of land uses and users, starting with the first three categories listed. Such audits should be Improving the inventory of public land would allow performed regularly and become a part of prudent land for more strategic public land management. Table 3.5 management. Chapter 3: Managing City-Owned Land  |  51 Table 3.6: Starting Prices and Auction Revenues of Land Sales in UB, 2003–10 (MNT thousands) 2003 2004 2005 2006 2007 2008 2009 2010 Total auction revenues 270,353 59,787 1,173,665 1,636,788 512,540 2,350,550 — 371,780 Total of asking prices 66,801 245,590 326,871 486,011 351,806 8,102,992 515,800 1,413,360 Increase of auction revenues 305 −76 259 237 46 −71 −100 −74 over starting prices (%) Source: Data provided by PRD. — Not available. Direct allocations of land provide substantially less number of manifestations, two of which were discussed revenue than do competitive auctions. When land is above: the lack of a long-term, cohesive land manage- properly inventoried and parcels are sensibly selected for ment strategy or policy, and the lack of monitoring of the auction, the returns can be much higher than set prices massive conversion of public-use land into private-use from direct allocations. Table 3.6 provides evidence that land, which has led to a shortage of land for public uses in in normal market conditions (that is, when the market is built-up areas. Fragmentation also leads to duplication of not in distress as during the 2008 financial crisis), auc- functions, in particular between the central and city gov- tions produce substantially higher revenues than direct ernments. For example, this is apparently the case with allocations at starting prices. The immense potential of registration of public property. There is also insufficient land auctions as a source of budget revenues is illustrated cooperation between the city government and district by the examples from around the world in box 3.6. administrations on land allocation to the private sector: parcels are often allocated without districts being con- sulted or involved in the decision making. Similarly, dis- DISCUSSION OF CHALLENGES TO tricts are not sufficiently involved in capital investment PUBLIC LAND MANAGEMENT planning. Given that a clear and articulated land policy is As already noted, UB does not have an effective man- lacking, it is unclear who decides on issues that become agement system for its most valuable resource—gov- implicit, default policy (for instance, that land is allocated ernment land. This is a multifaceted problem that has a for not longer than 15 years). Regarding land invento- Box 3.6: Examples of Successful Land Auctions in Turkey and Egypt In Istanbul in 2007, the auction of an old bus station and former administrative site produced US$1.5 billion, which is equivalent to one-and-a-half times the city’s municipal capital spending in 2005. In Cairo in 2007, an auction of desert land for new towns generated US$3.14 billion—equivalent to about 10 percent of total national government revenues and 117 times greater than the (very low) total urban property tax collection in the country. Source: Peterson 2009. 5 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a rying, there is little clarity in terms of responsibilities of and (iii) what building is allowed on the land and with land holders versus the PRD, and there is duplication of what density. If the city would implement a clear-cut and responsibilities. consistent policy and practice that land for nonpublic capital construction is allocated only by auction, then an The city forgoes revenues that could be captured from increase of annual budget revenues of at least 10–30 per- using market-based valuation in land management cent could be realized for several years to come. How- and allocation. First, until recently, land was being al- ever, in order to gain such revenues, the city needs to located to the private sector for free or at prices below align its land releases with conditions in the real estate what could be obtained through good-quality auctions. market to selectively release land that would provide an Forgone amounts depend on many factors, including (i) acceptable return (that is, not sell land at the bottom of the condition of the real estate market (is it active or in the market). Moreover, one-time revenues such as land crisis/cyclical decline), (ii) whether investors can obtain sales cannot be relied upon as a long-term sustainable well-located government land without going to auctions, source of revenues. Chapter 3: Managing City-Owned Land  |  53 Chapter 4 Urban Land and Property Markets The function of land markets in UB reflects current overview of recent trends in land and property sales activ- shortcomings in land administration and land man- ity throughout the city. It concludes with an assessment of agement practices. Previous chapters have discussed the function of urban land markets based on an analysis the institutional fragmentation and the delays associated of interviews with stakeholders and secondary data. The with obtaining and transferring land certificates. Zoning chapter finds that while property markets for residential and development standards influence private investment land are active, there are a number of constraints that priorities by artificially creating surpluses or shortages of reduce both public and private investment in areas that different land use types. Continuity of land tenure, espe- could sustain and expand the value generated by market cially for legal entities, is uncertain. On the other hand, activity. allocations that are free or not based on market values, along with current tax and fee assessments of land, are linked to a time (1997) that no longer reflects current LAND AND PROPERTY MARKETS market conditions in the city. This represents a tremen- IN URBAN DEVELOPMENT dous public subsidy to certain types of property (such as The manner in which cities expand is contingent upon residential khashaa plots and apartments) and not others the function of land markets. International experience (property held by legal entities). These policy preferences and research on urban economics has shown that a num- selectively impose costs or gains that are reflected in the ber of factors influence the supply and demand of urban prices and activity of private property markets in the city. land. These include the type and enforcement of tenure and development rights assigned to the land, as well as The market for urban land has been one of the last the proximity of land to infrastructure, amenities, and areas of liberalization reforms in Mongolia. However, public services such as clinics, schools, and public safety the function of land markets is closely related to urban (Dowall 2010; Dowall and Clarke 1996). The prevalence land administration practices, each of which has im- of informal or service-deficient areas is an outcome of in- portant consequences for urban development, housing, efficiently functioning land markets. transportation, and infrastructure provision. This chap- ter introduces the reasons for supporting inclusive and transparent urban property1 markets and provides a brief that features immobile improvements that are understood as “real 1. “Property” in this chapter refers to both (i) a vacant land plot with property” in common law countries. Unless specified, property does a legal description and record, and (ii) a land plot with a legal record not refer to apartments or multifamily dwellings. 55 The types of development rights assigned by govern- tribution of enforceable property claims (such as titles3), ments influence the market value of urban land. Zoning regulatory limits on the supply of land, or uneven invest- and development standards regulate the types and inten- ment in infrastructure and other amenities. sity of uses permitted on a land parcel and effectively con- trol land supply. Development rights—including zoning, Public investment in infrastructure increases land building standards, and tenure claims—influence pric- values. The market value of land grows when it is ser- es by signaling the level of risk and the costs associated viced with infrastructure provided by local governments, with investing in a particular plot of land. However, when including streets, sidewalks, lighting, heating, drainage, these are overly specific, inflexible, and unresponsive to water, and sewage connections. Similarly, land values re- market demands, they impose costs and risks to potential spond well to proximity to schools, health facilities, po- property owners and developers, distorting the market lice and fire protection, and public transportation stops. value of land and discourage investment (Gyourko and Typically, these investments precede land development Glaeser 2003; Ohls et al 1974).2 The constrained supply and the value they add to land greatly enhances its mar- imposes additional costs on land owners, which are sub- ket value. However, where property rights are vague or sequently reflected in the costs of the activities the land unenforced, illegal or informal land development may supports, such as housing prices, rents, and leases of of- occur before infrastructure investment, which greatly fice and commercial spaces. On the other hand, regula- increases the costs of providing it. Finally, international tions that accommodate mixed or complementary land experience has shown that while it is possible to extend uses and those that allow for flexibility in reviewing and infrastructure coverage after land is developed, both the approving proposed development projects encourage a time required and marginal costs of building and main- range of investment types. taining connections to each property are extremely high (Werlin 1999). However, because regulations by their nature support certain types of land uses and exclude others, they can Proximity to services, amenities, and transportation artificially restrict the supply of land for particular are important determinants of land value. The value of uses. The location of desirable amenities and land use land is partially determined by its proximity to other ser- rights increases the market value of land in places where vices and amenities. Plots that are close to paved roads, there is demand. Since poor residents have less ability to public transit stops, or key pedestrian routes tend to be rent or purchase property in areas with high market val- worth more than plots that are not. The central core of a ues, they will naturally move to land that costs less and is city provides particular advantages to people and firms therefore easier to obtain, often through informal sales or that locate there because different land uses are located rental agreements or through squatting. Such vacant land close together and movement is rapid and inexpensive. In is inexpensive because it may be located far from the city a capital city such as UB, the central area offers proximity center, is held by an absentee owner, or has environmen- to government offices and associated legal and adminis- tal contamination or susceptibility to a disaster such as trative services. In other cities, the central core may also floods or landslides. Slums and informal settlements are be composed of a primary industry along with a chain of symptomatic of land markets that are functioning poorly overlapping and supportive financial, logistical, and legal (Dowall 2010). Informality may reflect the unequal dis- services. Larger cities may also have multiple cores (what 3. This is not to say, however, that formal legal title is always neces- sary or is always beneficial to the poor. For example, the higher land value that title imparts in many cases comes with an obligation to pay 2. Evidence suggests that inconsistent, lengthy, or uncertain approval fees and taxes based on that value. See (Payne 2002) for an extended processes—not regulations or fees per se—are factors that significant- discussion of land tenure forms and their implication for housing the ly inhibit investment activity (Mayer and Somerville 2000). urban poor. 5 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Map: 4.1: Average Khashaa Prices in UB, 2013 (million MNT/m2) CH16 CH18 106°50’E SH10 Prices for residential khashaa plots 106°55’E 107°00E Northern 31.7 in thousands of tugriks per sq/m: SH09 CH15 SB14 BZ21 Eastern 30.3 Damba Darjaa 28.2 Lowest price SH28 CH14 Western 27.7 ar BZ24 Chingeltei CH13 SB13 Southern 27.7 baat CH12 SH08 SH11 CH07 BZ09 S uk h Highest price SH07 BZ27 SH26 CH11 SB12 Khoroo Boundaries Songinokhairkhan BG22 BG23 CH10 SB11 BZ22 BZ19 BZ05 District Boundaries SH05 BG09 32- IIN-Toirog 46.1 BZ02 BZ04 SH06 SH31 BG10 BG11 CH08 CH09 SB09 SB10 SH01 BZ23 Major Roads SH02 SH23 BG21 BG12 CH06 SB07 BZ01 BZ17 BZ28 BG13 BG15 CH05 SH27 SH30 CH04 SB06 BZ07 KT MC-Ikh zasag 29.1 SH22 SH03 BG19 BG14 BG16 SB08 BZ03 SH04 BG07 BG08 BG18 SH19 3rd microdistrict 39.8BG06 BG17 CH02 CH03 CH01 Center 51.1 BZ15 City BZ16 47°55’N SH15 SH14 SH12 BG02 SB04 BZ06 BZ18 BZ08 47°55’N SH13 BG05 SH29 SH17 SH16 SH18 Bayangol SB05 SB03 SB02 SB01 BZ25 BZ14 BZ13 BZ10 21st microdistrict 28.7 BG04 BG03 BZ12 Uliastai 27.4 BG01 KH01 KH15 BG20 KH03 BZ26 Bayanzurkh Zmz zlt 13.3 KH02 Tuul G SH20 ol KH05 BZ11 KH04 0 2 4 Kilometers KH07 KH09 KH06 Khan-Uul KH11 This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information KH10 KH16 shown on this map do not imply, on the part of The World Bank 106°55’E GSDPM Group, any judgment on the legal status of any territory, or any 106°45’E 106°50’E Map Design Unit endorsement or acceptance of such boundaries. IBRD 41372 JANUARY 2015 Source: World Bank Team with data from Tenkhleg Zuuch (2014). is called a “polycentric” form) around which different property prices decline as the distance to the city center industries and specializations cluster (Champion 2001; increases. This is not only because of physical distance Waddell and Shukla 1993). and lower densities but also because network infrastruc- ture services such as water, central heating, sewage, and roads diminish in quality and coverage. Map 4.1 shows EXISTING LAND USE PATTERNS the average price of khashaa plots according to location IN ULAANBAATAR in the city. It shows a steady decline in land plot values the further they are from the center. Average prices on the Access to infrastructure and proximity to the city cen- western edge of Songinokhairkhan, for example, are only ter are important factors in determining land values. a quarter of those in the downtown area. Land in the city center is scarce and commands the high- est market value in the city, up to $1,000 per square me- ter (m2).4 As is typical with a monocentric city, land and with rents averaging about MNT 28,000/m2 (US$15.6) and an annual rental return of approximately 24 percent. According to a developer 4. In recent years, Mongolia’s rapid economic growth and the modest and local bank, this market may currently be saturated. There are sev- tax laws have stimulated the growth of a high-end apartment market eral factors that support this conclusion. First, commercial mortgages geared toward foreign investors from Europe, expatriates, and Mongo- are expensive; term lengths are relatively short (15 years) and feature lian professionals. This market comprises about 11 percent of the total high interest rates (15 percent or more). Second, developers for these residential space, and currently commands prices between MNT 1.28 projects rely on presales to finance about one third of construction to MNT 5.0 million (US$711–US$2,778) per m2 and unit sizes of 100 costs, and local banks do not finance presale loans. Third, about 30–50 m2 or more—among the highest in the city. Given the rapid growth of percent of new residential highrise buildings are not completed due to this market, renting luxury properties is a lucrative investment scheme, weak business plans and few local sources of developer finance. Chapter 4: Urban Land and Property Markets  |  57 Table 4.1: Khashaa Plot Prices from Khoroo 26, Songinokhairkhan Private Public investments investment Sample Electri- Water Bus Street Central Piped Dwelling Price per property city Kiosk stop frontage Sewage heating water area m2 (MNT) Vacant 1 ✔ ✔ ✖ ✖ ✖ ✖ ✖ plot only 5,714 land 2 ✔ ✔ ✔ ✖ ✖ ✖ ✖ plot only 9,286 ➞ 3 ✔ ✔ ✖ ✖ ✖ ✖ ✖ plot only 17,143 4 ✔ ✔ ✖ ✔ ✖ ✖ ✖ 37 m2 25,714 5 ✔ ✔ ✖ ✖ ✖ ✖ ✖ 80 m2 101,796 Improved 6 ✔ ✔ ✔ ✔ ✔ ✔ ✔ 60 m2 235,714 land Sources: Data from selected commercial bank records and public listings in Shuurkai zar, a real estate periodical, from December 2013 to March 2014. Note: m2 = square meters Urban land values vary widely across the city depend- Property prices vary according to infrastructure cover- ing on location and infrastructure coverage. On aver- age in newly developed areas. Table 4.1 shows six con- age, the mean price in the city of serviced vacant land current khashaa plot sales prices from Khoroo 26. The is MNT  300,000–500,000/m2 (US$176–US$294). How- properties are organized according to the level of ameni- ever, a typical 700 m2 plot in the outer ger area without ties and investments, shown from the top (vacant land) infrastructure can range in price from approximately toward the bottom (occupied property).6 The right col- MNT  1,428/m2 to up to MNT  10,000/m2 (US$0.79– umn shows the asking price for the property. Vacant land US$5.55). Improved khashaa prices in central ger areas properties (numbers 1–3) feature minimal infrastructure command a much higher price, ranging from 160,000 connections and the asking prices for each are similar; MNT/m2 up to 1.6 million MNT/m2 for plots in designat- they likely vary by location, as suggested by the proximity ed redevelopment areas.5 This high value is due to build- of property 3 to a bus stop. Access to electricity and wa- ings and improvements constructed on the plot, as well as ter kiosks is common across the properties. But connec- access to infrastructure and proximity to amenities in the tions to piped water, sewage, central heating, and trans- downtown area. These prices are comparable with those portation provide justification for much higher market of apartments, even though the quality and type of con- prices—as seen in property 6, which enjoys the greatest struction in khashaas, along with infrastructure coverage such as water and central heating in these places, may dif- 6. The table provides an approximation of the value added to khashaa fer significantly. plots through investment in infrastructure. Due to data constraints, these prices cannot be considered representative of marginal price gains from property improvements. Rather, the table is meant to dis- 5. These figures are from interviews with real estate and appraisal pro- tinguish the number and quality of improvements to khashaa plots is fessionals obtained between October 2013 and April 2014. reflected in a local property market. 5 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a number of amenities. The table also shows that private propriate for directing future development, especially in investment (in the form of housing construction) can en- existing fringe areas along the southern edge of the city. hance the value of land, although complementary public investments are important for supporting these gains. The properties that include dwellings (numbers 4–6) vary CONSTRAINTS TO URBAN in price, likely due to the location of the property and the LAND MARKETS size and quality of the building construction. The city faces a number of obstacles that constrain the The existing zoning structure supports fragmentation function of urban land markets. These barriers have in land uses. Map 4.2 shows the planned distribution influenced the physical expansion of the city and have (through the year 2020) of land use zoning categories contributed to unequal access to public services among throughout the city based on the approved Master Plan residents in different parts of the city. The country’s Land (MCUD 2013). Mixed commercial office and residential Law (guaranteeing a plot of land for urban residential uses are clustered around a small downtown area around use) should be recognized as a progressive shelter policy Sukhbaatar Square. Industrial and manufacturing uses because it provides a low-cost, widely accessible form of remain concentrated on the western side of the city in secure tenure for the urban poor. However, land is trans- Khan Uul and Songinokhairkhan. Low-density residen- ferred to residents without the cost of securing infrastruc- tial areas are almost entirely found in the northern fringe ture that improves the market value of any investment of the city. In the southwest near the airport, a planned made. This reduces access to formal sources of finance. subcenter integrates several land use types, though it is The Land Law sustains an informal market where land located far from the rest of the city. In part, these land use and property values are misrepresented or not reported categories simply reflect existing conditions, though it is and where transfers and attendant rights given to land unclear to what extent that these zoning standards are ap- plots could be subject to corruption (see box 4.1). Box 4.1: Zaisan: The Cost of Illegal Fringe Development Zaisan is a neighborhood located on the south central edge of Ulaanbaatar at the base of Bogd Khan mountain. While the area is officially designated as a special protected zone, over the last decade hundreds of apartments have been constructed there. Zaisan’s location and superior air quality initially made it an attractive alternative to the city core for investors and wealthy home buyers. However, because development proceeded against official planning standards and without official approvals, heating and infrastructure connections are unevenly distribut- ed, schools are lacking, traffic circulation is poor, flood risks are present, and the design and siting and setbacks of buildings is disorganized. Due to the disputed legal status of the area, property rights of land holders are in question. The accumulation of these negative impacts has now been reflected in the local property market. Real estate professionals indicated in late 2013 and early 2014 that prices are dropping and vacancy rates in some develop- ments remain at 10–15 percent. The case demonstrates that land and property values are sensitive to a set of de- velopment rights, planning controls, and public infrastructure coverage. When these are absent or incomplete, the value and demand for these properties will decline. Source: Interviews for this report carried out with real estate agents and appraisers. Chapter 4: Urban Land and Property Markets  |  59 Map: 4.2: Projected Distribution of Land Use Zones in UB through 2020 Source: MCUD 2013. 6 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Land markets in ger areas are not well documented, al- same period, another commercial bank’s lending portfo- though it is clear that transactions are common. While lio averaged 8 percent. A prominent commercial mort- most properties are registered, representative prices are gage lender reports that only about 10 percent of its not widely available. Therefore, estimating the size and mortgage lending is for khashaa properties. In 2012, two volume of the market for land and improved khashaas banks combined had lent mortgage finance for only 167 is difficult. In interviews with real estate agents who sell improved khashaas, representing only 2.1 percent of the ger area parcels, they estimated that there are between annual estimated sales volume.10 The low rate of mort- 300–400 parcels on the market in a given week, of which gage disbursement in ger areas reflects the limited access about 150 are sold. This suggests an annual turnover to formal credit mortgages and the limited value khashaa rate of about 4 percent of the total amount of residential plots provide as a source of collateral.11 parcels in the city.7 This figure likely underestimates the total volume of sales, since it is based on anecdotal data There is limited use of commercial loan products for on plots that are advertised or brokered by an agent. As housing improvements in ger areas. A World Bank sur- a comparison, there are over 210,000 apartments in the vey of UB residents finds that only 15 percent of respon- city, with about 700 sales per month, representing an an- dents used formal loans for home improvements in the nual turnover rate of 17 percent, suggesting a very active last five years (World Bank 2014b). Of this total, 5 percent market.8 of ger area dwellers reported using a commercial loan and the rest obtained finance through a salary or pen- Property markets in ger areas tend toward informal or sion-backed loan. A comparable number (12.4 percent) cash transactions. Real estate firms in the city tend to used money borrowed from friends or family members. deal with apartment and office properties and relatively The vast majority (60.4 percent) used cash from earnings. few firms broker sales in ger areas. There are several ex- This suggests that amount of money that households use planations for this. First, plots in these areas are worth for home improvement projects is limited and there may less and so are less attractive to brokers given the market be interest in affordable loan products for these purposes. value and amount yielded through commission rates.9 Second, commercial banks report that ger residents com- Mortgage amounts for properties in ger areas are com- prise a small proportion (less than 10 percent) of their paratively small, which suggests they have low market commercial mortgage portfolio, which suggests that values. The average size of mortgages for properties in ger mortgages may be too costly and unnecessary to finance areas is approximately MNT 9.1 million (US$4,920). As- purchases in these areas and that savings-based cash suming a 30 percent down payment, the average market transactions are the primary means of exchange. value of these improved khashaa plots is MNT 11.8 mil- lion (US$6,012). However, this estimated value reflects Land and property are also obtained through commer- only a small portion of the market, and likely skews to- cial mortgages, though this is far less common than ward the higher end because of both the income require- purchasing apartments. Since 2011, one commercial ments for accessing finance and the long-term costs in- bank’s mortgage lending to improved khashaa plots av- curred through servicing the debt. Ger area residents who eraged just 3.6 percent of the total portfolio. Over the are informally employed also may not be able to provide adequate proof of income for debt service. Bank respon- 7. There is a total of approximately 120,000 plots, and on average about 150 are sold per week. (150*52)/120,000 = 0.043. 10. Assuming an average of 150 plots are sold, 167/(150*52) = 0.021 8. Interview with Tenklh Zuuch on April 15, 2014. 11. An earlier World Bank survey (World Bank 2010) estimated that 9. Our interviews suggest that commissions for real estate sales vary fringe and mid-tier ger households had a loan penetration rate of 4.7 from 1.5 to 3 percent of the sales value. and 2.2 percent, respectively. Chapter 4: Urban Land and Property Markets  |  61 dents indicated that residential plots are rarely consid- use and widespread and affordable access to this land by ered as appropriate collateral because of the their limited right. However, as newly allocated land seldom contains market value relative to the size of a typical mortgage for adequate infrastructure investments, its value is mediated an apartment, which would be at least three times the only by improvements from the owner or possessor and typical khashaa value. the location of the plot relative to roads or bus stops. Else- where, such as Zaisan, where land was allocated illegally Access to information about prices and property regis- and property rights are ambiguous, market activity has tration status is a widespread challenge. Accurate data declined due to perceived investment risks. As a result of on both formal and informal property prices is difficult these practices, property investment clusters in areas with to obtain for several reasons. First, official records only both clear and secure development rights as well as public capture formal transactions, often those underwritten investments in infrastructure. Each of these enhances the with a mortgage contract. Also, transactions may in- market value of privately held land and property. clude two different contracts; one with the real market price and other with a lower price figure. The lower-price The city should align infrastructure investments with contract will then be registered with GASR to avoid pay- land use regulations that support mixed uses and ing the sales tax. It is likely that many sales transfers are access to transportation. Land values are enhanced deemed “gifts” in order to avoid sales taxes.12 There is also through both public investments in infrastructure such as evidence that the national apartment mortgage subsidy piped water, central heating, sewage, schools, and health program influences the reporting of sales prices in order facilities. Strategic investment in road improvements and to conform to eligibility requirements. This prevents the public transportation stops can also enhance the value of collection of accurate data on housing prices, which in land along these corridors while also improving mobility. turn makes it difficult to assess the current and future The city can also invest in newly densifying areas of the supply and demand trends across the city. Real estate pro- city (also referred to as subcenters) where some services fessionals also report that obtaining accurate and timely have organically concentrated (transportation hubs, road information on properties registered at GASR is diffi- intersections and limited commercial activity) by locat- cult and costly due to privacy provisions in the General ing service centers and allowing mixed residential and Law on State Registration. Additionally, the structure of commercial uses. Enabling the subcenters would provide property sales taxes does not distinguish between long- alternatives to the central city area, which commands the term ownership and short-term investments. This could highest land prices and which can be costly and difficult encourage speculative investment, especially in areas of the city where property values have risen considerably in to reach for residents that live on the outskirts of the city. recent years. The city’s land and property market is active and ma- turing, although a large segment does not rely on for- DISCUSSION mal sources of finance. For most residents, land and property purchases are done without formal finance. Im- Land allocation policies have directly impacted urban provements to land, such as home construction, are also expansion by encouraging inefficient land consump- not financed with loans or savings. While cash transac- tion. Unlike many growing cities where land is scarce and tions are rapid and convenient, they are not recorded or expensive, UB has a large supply of land for residential published, which makes it difficult to track and record market transaction patterns. Poor residents may also be 12. These contracts require notarization, but there is anecdotal evi- dence that notaries have recently favored recording actual transaction at a disadvantage in informal markets because they may prices in order to avoid disputes. have less information about comparable properties and 6 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a market trends. Banks are disinterested in using land as organization.13 Its main goals are to support professional collateral, both because it has low market value relative to development of real estate agents and firms in the city the cost of a loan product, and because it is illiquid due to and to identify key challenges faced by the private sec- the large number of land plots. They will extend loans for tor involved commercial real estate transactions. For ex- properties that have a greater market value, which would ample, it may take 3–12 months to complete a property be enhanced through infrastructure investments. transfer where possession or use rights apply. This is a major cost and an impediment to the operation of an ef- The city should establish and support accurate record- ficient market, especially given fluctuations in prices due ing of transaction prices and volumes of all land and to macroeconomic changes. These efforts toward profes- property. Representative data on sales prices and trans- sionalization are commendable—currently no licensing action volumes is limited. This is due in part to the tax is required to broker transactions. Not all consumers can imposed on registered transactions, which encourages or need to use the service of real estate agents, but the people to underreport values or rely on cash transactions. consolidation of professionals in this field in UB suggests The most detailed data are collected by banks and real an increasing degree of formality of land and property estate firms, but they reflect the market of upper-income market transactions. Real estate agents provide repre- groups and or properties eligible for mortgage finance. sentation and brokerage services to their clients, who In order for UB to develop appropriate interventions to may be unfamiliar with property markets and local price support affordable housing, small to medium-sized en- conditions. To obtain membership, agents must obtain a terprise growth, there must be a representative and easily license demonstrating their competency, which can dis- accessible database that can be used for understanding courage malfeasance under the threat of expulsion. Their transaction patterns. These data can be used for devel- activities also promote clearer and more transparent re- oping housing subsidies or support for populations that cording of price listings and sales of properties, which are are unable to purchase or finance land and property for needed to assess market trends in order to provide accu- residential or commercial use. rate advice to their clients. The city should support the professionalization of the 13. Nearly all of the firms we spoke with have less than 10 years of real estate sector. The commercial real estate sector in experience. Estimates suggest there are about 30 agencies operating UB is relatively new and is currently developing a profes- in the city, although there is a high turnover and many do not last long. Commission rates vary according to the extent of work involved, sional association, the Mongolian Real Estate Profession- but range between 2–6 percent of the value of property involved and al Association, to act as both a networking and advocacy reportedly 5 percent in ger areas. Currently, no licenses are required. Chapter 4: Urban Land and Property Markets  |  63 Chapter 5 Conclusion and Recommendations This report has provided an overview of the spatial, insti- The city has grown rapidly since 2000, though overall tutional, and market structures that contribute to the dy- it has a very low density. Low-density development car- namics of urban land investment and exchange in UB. This ries long-term costs that are born both by the city gov- chapter summarizes the main findings of the report and ernment as well as residents. The city government does suggests action that the city government can take to improve not adequately capture land value gains, and it similar- the practice of land administration, more effectively manage ly lacks necessary financial tools for infrastructure im- urban land markets, and pursue additional revenue streams provements in low-density ger area settlements. Servicing to finance public services to reach underserved areas of the these areas is much more expensive than servicing vacant city. The recommendations are organized by distinguishing land. Low-density and segmented land uses encourage actions related to land administration and management. traffic and congestion. As a result, residents must spend Some actions are within the purview of the city govern- time and money in order to reach their jobs and commer- ment. More fundamental legal and institutional reforms cial centers, or to access public services such as schools will require longer-term strategic partnerships with other and hospitals. Houses and gers that lack central heating national government stakeholders. instead rely on coal heating stoves for much of the year, which presents a long-term public health risk due to air The expansion of UB has been driven by inexpensive, pollution. accessible land. The city’s land policy is unique by inter- national standards in that it provides individuals broad The current iteration of the Master Plan does not ade- access to a large plot of land at a low cost. Yet because the quately address underlying problems in the urban land supply of land is so large, without public and private in- market. The current plan does not offer justifications for vestment to improve the land, its market value tends to be future projects in terms of the advantages or cost efficien- very low. The generous land allocation policy has allowed cies. Land use plans and zoning encourage low-density the city to expand at a low density. Land and property development and the construction of new and distant markets are active, but there are few accurate resources to satellite cities without detailed analysis of why industries estimate price trends and volumes of different properties. and residents would choose to move there. The Master This is because an unknown amount of market activity Plan should be used to guide strategic, long-term land takes place as cash transactions, which are either not re- development in the city rather than as a means to direct ported or purposefully understated to avoid taxes. specific, detailed investments. 65 Box 5.1: Development Fees as a Source of Municipal Revenue Cities can raise revenue to pay for infrastructure by requiring developers pay a fee for the right to build. The basis for development fees is that any new private development, such as apartments, offices, and commercial spaces, production uses impose additional burdens on the existing public infrastructure or require expansion. The developer then pays a fee, which the city uses to offset the extra infrastructure demands that the project will impose. A new apartment complex, for example, will house more families and increase the need for new or larger schools. It will also place additional burdens on the city’s overall water, power, and heating needs once these lines are connected to the system. Development fees are a one-time charge assessed on anybody before they can start construction. The fees amounts are in proportion to the expected cost needed to provide the service improvement. Fees can be charged in several ways, such as per square unit of developed area (sometimes differentiated by land use, so that developers of com- mercial real estate pay more than builders of single-family homes, for example); according to a zone system based on location; or as a proportion of estimated construction costs. The city uses the fee revenue to pay for addi- tional infrastructure, such as additional school space, trunk water lines, lane space on access roads, and so forth. Development fees represent an important source of revenue for many cities across the United States and Eu- rope. In the Balkan region, for example, they constitute up to half of local government revenues (Garzon and Fri- ere 2014). In the United States, they are one of several tools used to support urban growth while also generating revenue for service provision. They are also a less-risky alternative to municipal borrowing, and also transfer more of the government’s infrastructure investment risk on to the private developers. However, there are several caveats to the use of development fees. First, because development fees represent an additional cost to development, a fee that is too costly may limit private investment in construction or en- courage illegal development (Peterson 2009). Second, it can be difficult for cities to assemble enough fee rev- enue quickly enough for large public investments. This is the case when new developments are relatively small, infrequent, and spread across the city (Fulton 1999). Finally, setting up the development fee that would generate sufficient but not excessive revenues is a difficult task, and the use of these revenues in transitional economies is sometimes criticized for being not transparent. Sources: Fulton 1999; Garzon and Friere 2014; Peterson 2009. The proposed Land Exchange will not provide a stable to use the Land Exchange would discourage reporting of revenue source and will continue or exacerbate current either the transaction itself or underreporting the price market distortions.1 The city’s proposed Land Exchange of sale. The volume and price of land and property trans- is aimed at improving the reporting of land and proper- actions in the city would remain poorly understood and ty transactions for taxation purposes. There is no com- the city would continue to only gain a small portion of parable institution in other cities for these purposes and the possible revenue derived from transfers. The report the assumed benefits of the Exchange practice remain recommends that the city improve existing administra- unclear both for the city and the public. The added time tive and tax structures related to land and property (see and cost imposed through requiring a buyer and seller box 5.1). For instance, UB could strengthen the cadastral 1. Critique of the Land Exchange as a concept and institution was pre- procedures and land registry, through which all titles and sented to the UB government in a separate document. individuals will still need to be registered. 6 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a RECOMMENDATIONS: PUBLIC the land management and administration structure in the LAND ADMINISTRATION AND city. At a minimum, the following issues should be ad- LAND VALUE CAPTURE dressed in the strategy:2 The report provides recommendations that are clustered • Complete and maintain the current inventory and around two main areas: (i) actions that can immediately registration of city-owned buildings and land be taken up by the city, primarily focused on improving management practices for the land it owns; and (ii) lon- • Policies and procedures for valuing and pricing of ger-term policy reforms that need action from nation- public land al-level actors. • Procedures for land and property allocation • Land related actions needed for improving the in- vestment climate Recommended Actions for Improving Public Land Administration and • Use of land sales and privatization revenues Management in the Short Term • Principles of acquiring land from the private sector The city government should begin to develop an explic- for public purposes (eminent domain) it land management policy and strategy for publicly • Transparency of information on land owned land. This could begin with the establishment of a temporary interdepartmental Task Force that includes • Intention to develop and implement a strategic representatives from district offices (box 5.2). The Task land allocation plan for surplus vacant land Force would be charged with developing a long-term • Institutional framework for overcoming fragmen- comprehensive strategy for land administration, conduct tation in land management and administration land audits to identify underused public land, and devel- op suggestions for overcoming the current limitations of 2. See details in Kaganova (2012a). Box 5.2: Using a Land Task Force in Establishing Strategic Land Management The City of Nis, Serbia (population 255,500) created a special temporary Task Force (TF) to improve land manage- ment. The TF was composed of the Mayor; Advisor to the Mayor (Acting TF Chair); a member of the City Council; Head of Property and Inspection Department; Head of Finance, Local Revenues, and Procurement; Acting Head of Planning and Construction Department; Deputy Public City Attorney; Head of Information and Communica- tion Technology (ICT) Department at City Administration; Financial Manager, Municipal Enterprise for Construc- tion; and Representative of the Republic Geodetic Department (Cadaster). The TF focused on four activities: i. inventorying land ii. conducting demonstration land auctions based on current best approaches to offering land to investors iii. developing land policy iv. developing a Strategic Land Management Plan (continued next page) C h a p t e r 5 : C o n clu s i o n and R e c o m m e n d at i o n s   |   6 7 Box 5.2 (continued) According to participants, the TF played a critical role in improving land management for the following reasons: • The TF functioned with a “think tank” capacity because it combined the expertise and knowledge of multi- ple departments. • The inclusion of the member of the City Council on the TF allowed the group to informally liaise with the Council and prepare the members for the suggestions and recommendations the TF would provide. • Similarly, TF members from two central government institutions (a local branch of the State Cadaster Agency and the municipal court) secured cooperation with agencies that held data critical for land inventorying • Unexpectedly, the TF also helped to depoliticize the land management issues. Although TF members repre- sented different political parties, the temporary nature of the TF, the technical nature of the tasks considered, and the use of a Chatham House Rule provided some level of anonymity to participants and allowed for more candid discussions. The Chatham House Rule allows participants to discuss opinions, ideas, and infor- mation from a meeting without mentioning the identity of the person responsible for them. These aspects supported a collaborative and constructive environment for the work of the TF. • The TF became an important setting for knowledge transfer from the technical assistance provider to mem- bers of the TF. • The temporary nature and cross-department composition of the TF was a good platform for developing and preparing permanent organizational changes that were eventually introduced. Key results of TF activities included: • In 15 months, a newly developed database on municipal land was populated with 15,835 parcels identified in the Real Estate Cadaster; of those, 3,011 parcels were verified in field audits. • The city successfully auctioned five municipal parcels, despite the fact that the auction happened in the middle of the financial crises (March 2010). Factors of success included: (i) preparation and formal approval of a new set of good-quality procedures and legal documents, substantially attuned to efficiency expected by potential buyers, and (ii) marketing of the sites by a professional brokerage company. • “Big picture” principles for the draft of the city’s land policy (though the policy was not formally adopted). • Formulation of central issues to be addressed in the Strategy of Land Management and partial solutions (also not formally adopted). Room for Improvement: • One of the overall lessons learned and incorporated into land management practice was that the City Ad- ministration needs better “public diplomacy” and a good public relations approach in order to educate and influence the public opinion and to secure the understanding and support of particular groups such as local business circles and political parties. Source: NORC 2013. 6 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a The Task Force needs to include representatives from oped (built-up) territories. The moratorium should all relevant departments dealing with municipal land be lifted once districts’ needs for land for public and property within the city government. It should also uses are jointly identified and agreed upon between include representatives from each district, 2–3 members the city government and the districts. of the City Council, and representatives of related state agencies such as the Ministry of Construction and Ur- • Introduce rigorous periodic audits of municipal ban Development (MCUD), General Authority for State land. Audits should begin with the biggest land- Registration (GASR), Administration for Land Affairs holders, including individuals, budgetary organi- Geodesy and Cartography (ALAGaC), and the Ministry zations, nongovernmental organizations (NGO), of Finance. The Mayor should chair the Task Force, which political parties, and religious organizations. The should be led by the Head of the Property Relations De- main purposes of the land audits include (i) ver- partment (PRD). The Task Force will be most efficient if ifying whether these entities are in need of the it functions on the basis of an agreed upon agenda and entire parcel for carrying out their activities, or if schedule, and is facilitated by experts with knowledge of they have some excess land; and (ii) checking for international good practices in managing government the presence of other users on the parcels and, if land. The Task Force’s initial duties should include: they are present, investigating their status (such as informal arrangements, encroachments, formal al- locations not yet reflected in land inventory, and Immediate Actions for Improving so forth). Management and Administration • Institute a proactive, long-term, planned approach • Consolidate the existing land inventory data and to release land for private activities. This should be further develop it, in order to provide the Task Force based on a reasonably complete inventory of mu- and policy makers with clear systematic data on land nicipal land, an assessment of current and future possessions of all the legal entities that constitute the public needs, and a classification of the available city government. The database should also include land. A possible approach to the classification is potentially buildable vacant land. Incentives should presented in figures 5.1 and 5.2. be provided for entities to identify and release back to the government the excess land they hold. This would allow the city to have better control over land Generating Revenue for the City’s assets and make more informed decisions about Investment Budget through Land whether to allocate or retain land in a reserve. UB should also ensure that the inventoried land is reg- Auctions istered in a legal cadaster so as to secure its rights. The city should integrate land management into cur- rent budgeting and accounting practices. For account- • Institute a practice by which decisions on allocating ing purposes, the municipal balance sheet should treat land parcels for private activities are made with the land as a fixed rather than an intangible asset, per stan- participation of a district government on whose ter- dard international practice. This land should be evaluated ritory the parcels are located. This would allow the and inventoried at its market value. UB should begin with district more control over planning future land use inventorying the most valuable land. Even when land is needs and public service priorities. transacted noncompetitively, such as when it is allocat- ed to an NGO or is used as collateral, market valuation • Continue the moratorium on allocating vacant mu- should apply. For instance, if land is allocated to munici- nicipal land for private economic activities on devel- pal enterprises or joint ventures, it should be recorded at C h a p t e r 5 : C o n clu s i o n and R e c o m m e n d at i o n s   |   6 9 Figure 5.1: General Classification of Urban Land Controlled by the Government of UB All governmental land (urban) For public uses Other land Policy decision Group A: Group B: Group C: Mandatory Discretionary Surplus (vacant) land (cemetery, water station, (public tennis court, (for private use) etc.) etc.) Classification needed for good management Figure 5.2: Classification of Vacant Land in UB Surplus (vacant) government land Portfolio of plots to sell to owners of Portfolio to plan Group C: adjacent sites for auctions Surplus land (for private use) Golden Sites not Sites for reserve Small plots/ suitable for capital for future off-cuts capital construction release construction market value in the balance sheet of these entities as the 4, there is a large amount of surplus land currently held city’s contribution. The costs of property-related liabili- by various entities, especially by the city’s budget entities. ties (such as site decontamination) should be incorporat- An incremental auction release of this land for the pri- ed in valuation vate sector can produce a significant revenue source for the city. This report estimates that roughly 10 percent of This detailed inventory of public land can be used to public land is in excess of the needs of the entities holding guide decisions to auction publicly owned land that is them (city organizations, NGOs, political parties, public currently underutilized. As already discussed in Chapter utilities, and so forth). The release and auctioning of this 7 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Box 5.3: Prerequisites of Successful Land Auctions • Sites are located in areas where investors want the land • Permitted land uses are based on market demand • Effective marketing (sufficient time for advertisement, broad advertisement • Transparent auction process (transparent processes such as verbal auctions with open access to the public, etc.) • Timing when demand is strong Source: Kaganova et al. 2012. land at current market prices would result in additional Recommended Actions for Improving revenues for the city at over five times its total budget for Land Administration and Management 2012. Assuming the release of this land takes place over in the Longer Term the next 20 years, land auctions could provide an addi- tional 25 percent of the total budget for 2012. (See appen- dix B for details.) Reforming Property Taxation for Revenue Generation The city should consider property taxation as a means International best practices on public land auctions sug- to increase its revenues. The central government and gests that the city should undertake the following actions: UB, together, need to reconsider the policy and regula- tions related to land and property fees and taxes, regis- • Introduce a universal principle that all well-located va- tration, and transfer. These should be regulated within cant land should be allocated for private economic ac- a broader context of intergovernmental fiscal and insti- tivities through auctions only (with special-case excep- tutional relations. The purpose is to increase UB’s reve- tions preapproved by the City Council). Good-quality nue base through two mainstream options, which can be auctions are critical for both generating interest combined: (i) establishing a stable, annual, inter-govern- from potential bidders and excluding opportuni- ment transfer from the central budget to the UB budget; ties for collusions and corruption. Box 5.3 outlines and (ii) introducing the land and property tax that re- some general features of successful auctions.3 flects, at least to some extent, market values of properties • Identify prime city-owned land for auction in order and is imposed on owners of land, apartments, individual to attract private capital. Link land auctioning with homes, and nonresidential real property. In addition, the public investments in infrastructure, as auctioning city government needs more power in defining parame- infrastructure-equipped land may help to defray ters of the land fee and property tax. the cost of infrastructure. Currently, the city obtains only a small portion of the • Introduce a rule that revenues from sales of land value of land and property, even though it is respon- rights and privatization of land are held in a sepa- sible for granting land permissions and providing rate fund. The fund should be earmarked for capital infrastructure to the city. A property tax system that re- investments only. flects the market value of land and nonresidential property would provide a substantial increase in revenue for the city 3. More details are provided in Kaganova (2012). (box 5.4) and could be used for investments in infrastruc- C h a p t e r 5 : C o n clu s i o n and R e c o m m e n d at i o n s   |   7 1 Box 5.4: Property Valuation for Taxation Purposes: Area-Based Valuation There are several methods for conducting property valuation for taxation. A property tax is derived from a combination of a tax base and a tax rate. The tax base refers to the value of the property taxed, which in de- veloped economies is based on some portion of the property’s market value.a A tax rate applied to the taxable value results in the tax amount due for payment. In developed economies, price information on most types of land and properties is widely available and can be used to estimate the market value and compute the tax base. However, in areas where market price data are inaccurate or incomplete, accurate property tax valuation is much more difficult. The capacity of a government to collect accurate market price data on individual prop- erties and develop a valuation system for tax purposes is complex and takes years to establish. Area-based valuation is the simplest technique and has been implemented in countries where market-based valuation systems are weak or do not yet exist, including Hungary, the Slovak Republic, Slovenia, Romania, and the Czech Republic. Area-based valuation is a simple first-step toward developing more sophisticated mar- ket-based valuation systems as more reliable price information becomes more available and tax assessment capacity improves over time (Norregaard 2013). In the most basic form, the tax base is determined by the floor or land area of the property, which is combined with a base value per square meter. The base value should also be updated every 3–5 years to reflect inflation and general market trends. The tax rate can be fixed or adjusted according to the type of the property. This resembles the system that is already in place in UB, though the price assumption for the tax base does not reflect current market values. An area-based system can be adapted in order begin to accommodate variations in market values of land. For example, tax rates on land and property can be set to vary according to their location relative to amenities (such as schools, hospitals, and transportation hubs, among others) throughout the city. Properties that are located near amenities can be taxed at a higher rate than those that are further away, as is done in Chile and Romania (Bahl 2009). This approach allows the property tax structure to have some sensitivity to differences in market values of property based on location prior to developing more precise price records or price estimates for indi- vidual properties in order to improve the accuracy of tax base. Sources: Bahl 2009; Norregaard 2013. Note: a. Market value is the most probable price that can be expected for a particular property in a sale between a typical buyer and seller under the following assumptions: • An open and competitive market exists for the type of rights involved in the transaction. • The buyer and seller are acting prudently in their best interest and without undue stimulus. • Marketing efforts were adequate and a reasonable time was allowed for exposure of the property on the open market. • Payment was made in cash or comparable terms. ture-deficient areas. Apartments and individual homes them as a means for funding future expenses and repay- should also be eligible for taxation based on market val- ment of debt. This is especially germane to any discussion ues. In contrast to income taxation, property taxes are of using borrowing instruments like municipal bonds, less regressive for the poor and represent a more stable because funds obtained through borrowing are not real source of revenue. As property taxes represent a stable revenues—they need to be repaid over an extended peri- and reliable revenue source, the city needs to consider od, at a cost. 7 2   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Land tax and fee policies should be based on market budget (under Scenario 1 assumptions; see table B.1 in valuation. At present, the city has very limited power to appendix B) to 119 percent (under Scenario 2 assump- define the land fee and land tax, as they are generally set tions; see table B.2 in appendix B). Table B.3 in appen- nationally and at very low levels. Since the city primarily dix B presents a potential increase of recurrent annual acts as an implementer of national policies, it should take revenues from the property tax under the more modest a more proactive role in convincing the national govern- assumption of the annual tax constituting only 0.3 per- ment to change how taxes and fees are set. cent of the property market value. And still the budget increase from the property tax alone would be about 35 The city’s revenue will increase significantly if it were percent of UB’s total 2012 budget. It is worth noting that to tax land and property holders. Table 5.1 presents il- these additional annual revenues well exceed the amount lustrative examples for options to introduce new forms of that the city might get through one-time borrowing. land based taxes and fees and for increasing existing tax- es and fees to more reasonable levels. This is intended as A tax on privately owned land and property could be background information for initiating policy discussions a large and stable source of revenue for UB. The city and is not meant to depict a program of property tax re- needs to develop a strong justification for reforming land form. The introduction of property tax reform requires and property taxes and engage a broad set of stakehold- careful design and assessment of feasibility, including the ers within the national government, other sectors and the cost of implementation. Key issues to address include general public to show how these reforms would be in obtaining consensus from the majority of payees and se- their mutual interest and benefit. Currently, the city faces curing a gradual increase of the amounts that people and a large funding gap for engineering and social infrastruc- companies would pay. The latter is important, because ture and services.4 Whether ownership of land, individual drastic single increases of the fees and taxes may lead to homes, or apartments in UB and other cities should be public protests and unrest (as in the case of Hong Kong taxed is clearly a national policy issue. But it affects UB SAR, China, when the government attempted to increase disproportionately, given the higher concentration of peo- land lease fees. ple, demands for infrastructure, and need for sustainable revenue sources it has relative to other cities or rural areas The findings of this study suggest that the biggest single- of the country. UB’s economic activity contributes the ma- source increases can be expected from: jority of Mongolia’s GDP. Revenues collected by the city (which could be significantly enhanced) are also a sub- • Taxing apartment ownership stantial source of revenue for the national government. • Taxing nonresidential properties based on their market value, and Regulatory Reforms on Land • Releasing public land for private sector activities at The city should also consider regulatory changes to re- market prices. duce the costs and risks associated with investing and Taxing nonresidential properties at 0.42 percent of their market value would increase the 2012 budget by about 4. Note that insufficient funding is not the sole reason why UB may continue lagging behind on improving and increasing infrastructure 23 percent. Similarly, taxing apartment ownership could and service provision. There are two other reasons. First, the current produce nearly an additional 20 percent increase to the capacity of the city to deliver capital investment lags behind the city’s city’s 2012 budget (at an annual tax rate of 0.35 percent of plans; in 2012, UB executed only 62 percent of its planned capital in- apartment market value). Further increases would occur vestment. Second, the existing sprawl of ger areas and further spread, monofunctional and low-density development stipulated in the new if tax rates were also to increase. The estimated increas- Master Plan make provision of modern infrastructure to many these es would range from about 56 percent of the 2012 city areas prohibitively expensive (for more discussion see Chapter 1). C h a p t e r 5 : C o n clu s i o n and R e c o m m e n d at i o n s   |   7 3 Table 5.1: Potential Revenue Modifications for UB Budget Potential annual Share of UB addition to UB 2012 2012 budget budget levels Type of revenue (MNT thousand/%) (MNT thousand/%) Assumptions underlying increases Total UB budget revenues 347,288,249/100% n.a. n.a. Borrowing* 52,093,237,350/15% The maximum allowed by law Asset (property) sale tax 7,577,905/2.2% n.a. n.a. Property tax: On nonresidential buildings 13,250,184/3.8% Channel 1: Channel 1: This increase is based on improving basic tax At least administration only (i.e. tax rolls and collection), leading 1,987,528/0.6% to a 15% increase from the 2012 revenues Channel 2: Channel 2: The tax is assessed on the property market 79,501,104/22.8% value; the market value is on average 10 times higher than the book value; the taxable value is 70% of the market value; tax rate—0.6%. Result: the annual tax = 0.42% of the market value. Example: A company that owns a 400 m2 commercial unit in Sukhbaatar District, with the book value of MNT 50 million and pays the annual tax of MNT 300 thousand would need to pay the tax of MNT 2.1 million and would be able to sell the unit for MNT 500 million. On apartments None Number of apartments—170,771 Average market value—MNT 113,554,788 Scenario 1: Scenario 1: Taxable value—70% of the market value; 67,871,526,157/19.5% tax rate—0.5% of the taxable value per year. Result: the annual tax = 0.35% of the apartment’s market value. Example: annual tax = MNT 397,442 Scenario 2: Scenario 2: Taxable value—70% of the market value; tax 135,743,052,314/39% rate—1% of the taxable value per year. Result: the annual tax = 0.7% of the apartment’s market value. Example: the annual tax = MNT 794,884 On individual homes None Number of homes—62,362 Average market value— MNT 14,922,339 Scenario 1: Scenario 1: Taxable value—70% of the market value; 3,257,054,256/0.9% tax rate—0.5% of the taxable value per year. Result: the annual tax = 0.35% of the house market value. Example: the annual tax = MNT 52,228 Scenario 2: Scenario 2: Taxable value—70% of the market value; tax 6,514,108,512/1.8% rate—1% of the taxable value per year. Example: the annual tax = MNT 104,456 7 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table 5.1 (continued) Potential annual Share of UB addition to UB 2012 2012 budget budget levels Type of revenue (MNT thousand/%) (MNT thousand/%) Assumptions underlying increases Land tax Too small to collect Number of land plots to tax—102,481 Average market value—MNT 11,100,000 Scenario 1: Scenario 1: Taxable value—70% of the market value; 3,981,386,850/1.1% tax rate—0.5% of the taxable value per year. Result: the annual tax = 0.35% of the plot market value. Example: the annual tax = MNT 38,850 Owners of Scenario 2: Scenario 2: Taxable value—70% of the market value; tax apartments in 7,962,773,700/2.2% rate—1% of the taxable value per year. Result: the annual condominium tax = 0.7% of the plot market value. Example: the annual buildings do not pay tax = MNT 77,700 either land tax or land use fee It is assumed that the property tax on apartments, being based on their market value, already reflects the land value Land use fee 28,136,869/8.1% Component 1 Component 1: (annual fee): • Possessors of residential land pay an average 8,471,601,384/2.4% commercial-use rate for extra land above 538 m2 per plot • Budgetary organizations, NGOs, political parties, and religious organizations pay an average commercial- use rate for extra land above 7,000 m2 per plot Component 2 Component 2: (one-time fee for • This is a rough and conservative estimate that obtaining land): assumes that plot for individual housing are still From 10% to 50% allocated as currently, for free • This revenue may vary from year to year State property lease revenue 1,022,820/0.3% Property privatization 638,761/0.2% revenue “Hook-up charge” Not considered here Sources: The number of apartments and individual homes—from GASR data; the number of privatized land plots—from PRD. The average market values of apartments, homes, and land plots are derived from sample of transaction prices for 2012 provided by the Central Bank of Mongolia. C h a p t e r 5 : C o n clu s i o n and R e c o m m e n d at i o n s   |   7 5 transferring property. There are a number of changes the long term, UB and Mongolia in general would benefit that can be introduced through national administrative from modernizing the property rights system. This would reforms within the city and in partnership with other include (i) allowing land ownership for legal entities as ministries and agencies, including the Administration for well, and (ii) replacing “possession right” and “use right” Land Affairs Geodesy and Cartography (ALAGaC) and by leases. Possession and use rights for legal entities could GASR. These include consolidating and streamlining the be combined to become a long-term land lease (60 years). procedures necessary for obtaining and transferring land Foreign legal entities should also be eligible for these leas- title certificates. UB can also develop tools and outreach es, provided they meet certain requirements and under programs that can improve public awareness, transparen- strictly defined terms, conditions, and periods. Increase cy, and accountability for the services provided by these the duration of possession rights allocated to private sector offices; they are not well understood by the public. actors for capital construction to 60 years as currently al- lowed by the law. This would reduce the cost and burden The MPD should review proposed land use and zoning of the system for both the government and private sector. regulations in areas across the city. The review should aim to ensure that zoning designations are relevant to The current practice of allocating low-cost urban land the local context and can support mixed uses at a level for residential use needs to be reconsidered. While the approaching UN-Habitat’s suggestion: up to 40 percent right for citizens to own land is embedded within Mon- of floor space in any neighborhood should be designated golia’s Constitution and is out of the city’s purview of for economic use (UN-Habitat 2013). Mixed-use zoning control, it has in current practice presented serious and is especially advantageous along existing transit corridors overlapping challenges to UB. The city needs to develop and intersections. A complementary approach would in- long-term partnerships with national government stake- clude reviewing and relaxing standards that place caps holders including the Ministry of Finance, the Ministry on density levels or that specify minimum requirements of Construction and Urban Development, and others in (such as parking spaces). These would allow developers order to explore possible reforms to the Law on Alloca- more flexibility to match market conditions at different tion of Land to Mongolian Citizens for Ownership, when locations and relieve them of additional and unnecessary the eligibility period for obtaining land ownership once cost burdens. and free of charge expires on May 1, 2018. The study has found that the expansion of the city’s built form, along The city could better support private investment with with a number of environmental, economic, and qual- more substantive reforms to current land tenure laws. ity-of-life challenges faced by UB residents is closely The current system of “possession,” “ownership,” and “use” linked to the almost free availability of land for every rights adds unnecessary time, confusion, and costs for resident. This practice limits the market value of urban firms and residents. Ownership rights should be granted land because of the costs associated with providing in- to eligible residents without requiring a preliminary pos- frastructure to newly developed areas. The low value session certificate. This would reduce the cost and burden both reduces private investment in these parcels and of the system for both the government and private sector limits the city’s ability to capture revenue from their im- in administering the title and registration system. Over provement or sale. 7 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Appendix A The Evolution of Land Laws in Mongolia Mongolia’s transition to a market economy since the use land, meaning to undertake a legitimate and concrete 1990s has been marked by the introduction, and sub- activity to make use of some of the land’s characteristics sequent amendment, of many laws relating to land and in accordance with contracts made with owners and pos- property. Prior to the democratic revolution, the 1971 sessors of land. These three categories provide the legal Law on Land Utilization applied throughout Mongo- foundation of land markets in UB. lia. This was revised in 1994. The current Land Law was passed in 2002 in the same year as the Law on Alloca- The Law on Allocation of Land to Citizens of Mongolia tion of Land to Citizens of Mongolia for Ownership, for Ownership has been amended several times, in 2005, (both enacted in 2003). These laws and their subsequent 2008, 2010, 2011, and 2012, suggesting that initial propos- amendments represent an important step forward in land als were based more on political enthusiasm than careful ownership and land use. Both these laws provide for reg- analysis of the likely consequences on land and housing ulation of transactions related to ownership and use and markets. The Law allows for the allocation of land once are currently subject to ongoing review. Specifically, they and free of cost to all Mongolian citizens, irrespective of make some important improvements to land tenure and age and for family needs until May 1, 2018 (according to rights regarding pasturelands. In addition, the Law on the latest revision of this law), though ownership is tied Allocation of Land to Citizens of Mongolia for Owner- to the land fee system that the government introduced in ship regulates the allocation of land for ownership and 1997 under the Law on Land Fees.1 The Law on Land Fees the types and sizes of land to be owned; the Law also in- concerns only those who have land possession and land dicates the power of local administrations and the pro- use. A land tax is imposed on those with land ownership. cedures for enacting land ownership. Local governments Land tax—that is, property tax—is regulated by Law on are given the power to appropriate land under local spe- Immoveable Property Tax. The system of determining cial protection, and the central government possesses the land value is the same for all types of land tenure the rights to acquire land under possession of citizens, (ownership, possession, and use). The land fees vary from entities, and organizations, for “special needs” (USAID 0.1 to 1 percent of the base land value in cities, villages, 2004:10-11). The law defines three categories of land ten- and other settled areas. The fee is determined by central ure and rights, namely (1) to own land, meaning to be in legitimate control of land with the right to dispose of it; (2) to possess land, meaning to be in legitimate control of 1. Land ownership is tied to land, that is, the immovable property tax system. Land possession and use are tied to the land fee system, but land in accordance with its intended use and terms and the land value for taxation and fee payment are both tied to the Law conditions specified in respective contracts; and (3) to on Land Fee. 77 government, taking into account location and land use, It also states that as well as socioeconomic, geological, and environmental parameters. UB is divided into five land valuation zones The PRD/Sh. Tumurbaatar/shall organize activi- depending on location and income level and is applied ties to allocate land for ownership in accordance uniformly to properties in each zone. with the relevant laws for those Mongolian citi- zens who have not obtained land for ownership Initially, demand for completing the procedures for full for family use and who were registered to settle ownership was modest and many residents retained their permanently in the Capital city from local areas possession rights. It was widely thought by politicians before May 30, 2013, i.e. before the approval of and officials that this might be because people were re- the Resolution on determining the location and luctant to pay the necessary land (immovable property) size of the land to be allocated for ownership for tax after obtaining ownership rights. To overcome this family use, No. 10/39 of the Capital (city) Citi- reluctance, a decision was made to provide tax discounts zens Representative Khural (Council) from May on privatized residential land plots by revising the Law 30, 2013. In this resolution the more than 15,000 on Immovable Property Tax (revision of January 9, 2004). hectares of area in 52 locations were identified For land or property owners, taxes are estimated on an for allocation of land for ownership. annual basis and charged quarterly. However, as these are based on land values in 1997, revenues represent a low Existing cadastral law does not include procedures for proportion of current land values and in practice taxes on property registration and there is no legal framework for residential plots are not collected. addressing and resolving disputes during cadastral sur- veys. There are three types of cadastre: (1) multi-purpose Demand for residential land resulting from urban pop- cadastre (forest, agriculture, urban, and water resources); ulation increase in UB led the Governor of the Capital (2) legal cadastre (tenure and use status) and; (3) fiscal and Mayor of Ulaanbaatar City municipality to pass Res- cadastre (valuation for tax, use, and assigned fees). Illegal olution A/726 of July 30, 2013. This restricts the alloca- encroachments of plot boundaries, combined with oc- tion of land for ownership in the 52 locations for people casional survey errors, have resulted in increasing land who move to UB from local areas. The resolution is titled disputes since the administrative court was established “Some measures to prevent over concentration of popu- in 2004. In 2011, a total of 645 cases were considered, lation, issues of employment, to prevent from distorting of which 161 related to land disputes. In the first seven normal pace of public services, transportation and com- months of 2013 alone, a total of 816 cases were heard, munication in the Capital.” Among other clauses, the res- of which 274 were related to land disputes; this was an olution is intended to increase in both the number and proportion of the total cases. This increase is partly because more people are liv- Temporarily suspend allocation of land posses- ing in the city and more are aware of legal options. Of the sion rights for family use to the citizens from ru- total, an estimated 30 percent go to higher courts for res- ral areas who resettled in the Capital after May olution. Cases relating to claims of corruption are heard 30, 2013, which is the date when the Resolution in the criminal courts. on determining the location and size of the land to be allocated for ownership for family use, No. In some cases, according to the judges of the administra- 10/39 of the Capital (city) Citizens Representa- tive court, some land disputes occur when land is allocat- tive Khural (Council), was approved. This tem- ed to an individual but not occupied, possibly as the per- porary suspension is (shall be valid) until the son already occupies a plot with other family members completion of the Capital (city) ger area re-plan- elsewhere. Rural migrants unfamiliar with urban land ning projects. administration may then occupy the plot, erecting a ger 7 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a and a fence, only for the plot to be found later by the legal erty values and prices. The Law on Property Valuation allottee. However, if the original allottee of a land posses- (2010) determines the legal and institutional framework sion certificate does not occupy the plot within two years, for property valuation. It sets the activities, rights, and their claim for possession rights is void and the settler is duties of the state organizations, citizens, and legal en- entitled to have it re-registered in his or her name, though tities related to property valuation. Article 8 states that such cases are rare.2 Some land disputes involve claims valuations are to be conducted in accordance with inter- against the governor and others are between individuals. national and national valuation standards. It also states Of those against the governor, about half are successful. that the State Central Administrative Organization in A statute of limitations of 30 days exists beyond which Charge of Finance and Budget, in collaboration with oth- claims cannot be submitted.3 Cases are usually opened er related organizations, shall endorse a methodology of within 7 days of submission and must be settled within property valuation. In practice, this involves the Ministry 105 days according to the law, but some take up to a year. of Finance and MCUD jointly approving a methodology/ Judges are actively involved in visiting sites, interviewing regulation for compensation valuation when acquiring claimants and researching the records. land.4 The concepts of land and property valuation are based on evidence from actual transactions in a transpar- The Law of Urban Development (amended 2008) regu- ent and open land and property market. But in practice, lates “relations arising between state, economic entities because of high taxes and lack of mechanisms to state the and citizen in rational and purposefully planned utiliza- “real” transaction prices when registering the property, it tion of land and territories of towns and villages with the is difficult to find out the real price. aim to establish optimal structure for regional develop- ment.” The law empowers the Governor of the capital city The problem is due to the impact of the taxation system to organize land allocation and implement works as part and lack of mechanisms to report transactions. There are of the city Master Plan and establish the Construction and also some technical issues such as lack of databases with Urban Development Department managed by the Chief real transaction prices that are maintained and used by Architect. The law also stipulated that participatory plan- relevant government agencies, and lack of professionals ning principles are to be applied and reflected in urban such as appraisers. This presents major problems of land development actions and activities. In the event of com- management and indicates that land and property valu- pulsory resettlement of landowners, the law requires the ation are not sufficiently based on evidence from actual state to pay compensation to the owners and also meet transactions in a transparent and established land and relocation expenses. The Ministry of Construction and property market. Urban Development (MCUD) is currently rewriting this law, though no draft was available at the time of writing. The frequent introduction of laws relating to land and property has also given rise to anomalies that may de- Given the lack of clarity in land prices for different uses ter investment and development. For example, while the and locations within UB, it is logical that emphasis is Land Law prohibits foreigners and foreign entities from being placed on methods of estimating land and prop- obtaining possession rights, the new Law on Foreign In- vestment (Article 9) states that “Mongolia shall accord to 2. This does not apply in the case of land ownership as this is perma- nent. 3. An unofficial translation of the Administrative Procedure Law of 4. See Article 8.2 of the Law on Property Valuation. The actual word- Mongolia 2002 (Article 6.1) states that “Unless otherwise stipulated ing is: “Alone or jointly with other related organizations, the State Cen- in the Law a citizen, or legal entity which considers that the illegal tral Administrative Organization in Charge of Finance and Budget administrative act of the administrative body or official infringed it’s shall endorse a Methodology of property valuation in accordance with rights shall submit a complaint to higher instance administrative body characteristics and purpose of respective item of property valuation within 30 days since receipt of the act or finding out about the act.” and require to comply with.” A p p e n d i x A : T h e E v o lu t i o n of Land Laws in Mongol ia  |  79 foreign investors no less favourable treatment regarding aspects are presented in Article 5.1.3, which states that the possession, use, and disposal of their investments “state special need refers to articles 13.3.1.–13.3.3. and than that accorded to Mongolian investors.” Article 13.3.8. of the Law on Land,” and Article 5.1.4, which de- 10.1.1 provides that foreign investors shall enjoy the right fines unavoidable public need as meaning “activity, infra- to possess, use, and dispose of their property including structure and structure that is unavoidably needed for the the repatriation of investments that were contributed to public and serves the public interest and secures public’s the registered capital of a business entity with foreign in- rights to live in healthy and safe environement [sic] and vestment. Article 21 offers business entities with foreign safety as speficied [sic] in article 6 of this law.” Concern investment leases of up to 60 years, extendable once for was expressed by some local observers that the law could a period of up to 40 years. However, Article 10.2 states be used to remove people for commercial, not just stra- that foreign investors are required to conform to the laws tegic, reasons. However, Article 6 states that land shall of Mongolia. As the Land Law expressively prohibits for- be acquired only for specified purposes, such as special eigners from obtaining possession rights, it remains to be protection land, national defense, and inter-aimag pas- seen how the difference between a lease and a possession ture reserves, while public needs include land for state/ right will apply in practice. national infrastructure, and land for schools to be built with state or local budgets. The introduction to the draft There are an insufficient number of qualified profession- law also states that land expropriation should be the last als in either the public or private sector to bridge the gap resort and based wherever possible on negotiation. It will between inadequate market-derived data and evidence not permit any private sector entity to acquire land based from other sources. The city intends to prepare land value on assessment of public needs. The law will also ensure rates and norms that will limit land values. This displays that the land, housing, livelihood, or income of affected an excessively optimistic approach to market manage- entities after land acquisition will be at the same or better ment and is more likely to increase, rather than reduce, level than they were before it. existing market imperfections and possible distortions. However, the draft Law on Land Acquisition for Un- Compensation for any land acquired is defined in Article avoidable Public Need is intended to balance the inter- 4.1 5 is based on the “replacement value” or “market value,” ests of the public and the private land/property holders whichever is higher. Valuation practice in Mongolia follows when implementing public projects (such as public in- international practice, which defines “market value” as frastructure and schools). The draft law does not focus on land values etc., though this must be addressed from the estimated amount for which a property the perspective that the entities affected by land acquisi- should exchange on the date of valuation be- tion must be compensated fairly. This is because the land/ tween a willing buyer and a willing seller in an property appraisal for compensation purposes is differ- arm’s-length transaction after proper marketing ent in some principal aspects compared to land/property wherein the parties had each acted knowledge- appraisal for other purposes. The law applies equally to ably, prudently, and without compulsion. those owning, possessing, or using land. It is expected to ensure that adequate levels of compensation are paid and An alternative option is listed in Articles 11.1.2–4, which other assistance is provided to private landowners whose entitles those whose land is being acquired to receive land is to be acquired. compensation in the following forms: cash; direct re- placement, that is, receive the compensation in the form A key basis for any law of land acquisition is the defini- of land and structures that are of similar size, quality, tion of public interest that forms the basis for acquisition. and utility, for loss of land and immovable property; or a In the unofficial English translation of the draft law, these combination of the two, plus loss of income sources. 8 0   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Regulations and bylaws required to implement the draft possession rights to foreign entities. It is worth noting Law on Land Acquisition for Unavoidable Public Need that codes for many existing laws and norms relating to were presented to parliament, together with the set of land and property do not yet exist. It is clearly vital that four other land-related laws,5 but subsequently with- citizens are made fully aware of their rights and options drawn due to the withdrawal of the Law on Land, which for appeal against perceived unfair treatment under this created public controversies around the provision of land and other relevant laws and codes. A final consideration is that the information on property 5. The set of land-related laws included (i) Law on Land, (ii) Law on boundaries and ownership claims is often incorrect and Land Cadastre, (iii) Law on Land Fees, (iv) Law on Geodesy and Car- tography, and (v) Law on Land Acquisition for Unavoidable Public adjudicating these disputes and correcting legal records Need. represents a significant use of public resources. A p p e n d i x A : T h e E v o lu t i o n of Land Laws in Mongol ia  |  81 Appendix B Forgone Past and Potential Land-Based Revenues in UB Table B.1: Scenario 1 of Forgone Revenues from Past Land Allocations Total collected revenues from Total forgone Estimated past allocations revenues market (auctions and direct as % of value per m2 Total estimated market allocations) 2003–13 Total forgone 2012 UB Land use type Area (m2)* (MNT**) value (MNT) (MNT***) revenues (MNT) budget**** Commercial and 89,135,877 286,772 25,561,673,719,044 23,112,663,000 25,538,561,056,044 Service Excess residential land under 13,363,215 107,570 1,437,481,037,550 1,437,481,037,550 possession Total 26,976,042,093,594 7,768% Note: * The area of commercial & service land is calculated based on the data provided by PRD and includes the following types: Trade, all types of services; Business activities; Liquid gas fuel stations, fuel stations, storage, wholesale markets & centers; and all types of garages. The excess residential land under possession is calculated as the land above 583 m2 per holder: 14,819,549 – 583 x 2498, where the total in this category, 14,819,549 m2, and the number of land holders, 2,498, are provided by PRD. ** The market value for commercial and service land is estimated as a city average market price for land for multi-apartment buildings in the fourth quarter of 2013, according to “Overview of the Market Value of Real Estate 2013 Year, Quarters 1–4,” by the real estate company Tenkhleg Zuuch. The market value for the excess residential land is taken from the same report, but for the cheapest Songinkhairhan District. *** Based on the data provided by PRD regarding the auction revenues for 2003–12 and direct sales revenues for 2007–12. **** 2012 City Budget was MNT 347,288,249,000. m2 = square meters; PRD = Property Relations Department. 83 Table B.2: Scenario 2 of Forgone Revenues from Past Land Allocations Estimated Total revenues from past Total forgone market Total estimated allocations (auctions ALTERNATIVE Total revenues, as value per m2 market value and direct allocations) forgone revenues % of 2012 UB Land use type Area (m2)* (MNT**) (MNT) 2003–13 (MNT***) (MNT*****) Budget**** Commercial and 89,135,877 286,772 25,561,673,719,044 23,112,663,000 12,757,724,196,522 Service Excess residential land under 13,363,215 107,570 1,437,481,037,550 1,437,481,037,550 possession Total 14,195,205,234,072 4,087% Note: * The area of commercial & service land is calculated based on the data provided by PRD and includes the following types: Trade, all types of services; Business activities; Liquid gas fuel stations, fuel stations, storage, wholesale markets & centers; and all types of garages. The excess residential land under possession is calculated as the land above 583 m2 per holder: 14,819,549 – 583 x 2498, where the total in this category, 14,819,549 m2, and the number of land holders, 2,498, are provided by PRD. ** The market value for commercial and service land is estimated as a city average market price for land for multi-apartment buildings in the fourth quarter of 2013, according to “Overview of the Market Value of Real Estate 2013 Year, Quarters 1–4,” by the real estate company Tenkhleg Zuuch. The market value for the excess residential land is taken from the same report, but for the cheapest Songinkhairhan District. *** Based on the data provided by PRD regarding the auction revenues for 2003–12 and direct sales revenues for 2007–12. **** 2012 City Budget was MNT 347,288,249,000. ***** Assumes that only 50% of the commerce & service land could generate market-value based revenues. m2 = square meters; PRD = Property Relations Department. Table B.3: Scenario 3 of Forgone Revenues from Past Land Allocations Estimated Total revenues from past Total forgone market Total estimated allocations (auctions ALTERNATIVE Total revenues, as value per m2 market value and direct allocations) forgone revenues % of 2012 UB Land use type Area (m2)* (MNT**) (MNT) 2003–13 (MNT***) (MNT*****) Budget**** Commercial and 89,135,877 155,972 13,902,701,007,444 23,112,663,000 6,928,237,840,722 Service Excess residential land under 13,363,215 66,371 886,929,942,765 886,929,942,765 possession Total 7,815,167,783,487 2,250% Note: * The area of commercial & service land is calculated based on the data provided by PRD and includes the following types: Trade, all types of services; Business activities; Liquid gas fuel stations, fuel stations, storage, wholesale markets & centers; and all types of garages. The excess residential land under possession is calculated as the land above 583 m2 per holder: 14,819,549 – 583 x 2498, where the total in this category, 14,819,549 m2, and the number of land holders, 2,498, are provided by PRD. ** The market value for commercial and service land is estimated as a city average market price for land for multi-apartment buildings in the fourth quarter of 2013, according to “Overview of the Market Value of Real Estate 2013 Year, Quarters 1–4,” by the real estate company Tenkhleg Zuuch. The market value for the excess residential land is taken from the same report, but for the cheapest Songinkhairhan District. *** Based on the data provided by PRD regarding the auction revenues for 2003–12 and direct sales revenues for 2007–12. **** 2012 City Budget was MNT 347,288,249,000. ***** Assumes that only 50% of the commerce & service land could generate market-value based revenues. m2 = square meters; PRD = Property Relations Department. 8 4   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Table B.4: Potential Future Revenues from Auctioning Surplus Land from Various Possession Holders Potential revenue assuming 10% of land is Estimated Potential revenue assuming surplus and re-allocated market value 10% of land is surplus and on auctions, as % of 2012 Land use type Area (m2)* per m2 (MNT**) reallocated on auctions (MNT) budget Budget organizations 49,915,603 286,772 1,431,439,730,352 412% NGOs, political parties, religious orgs. 1,939,692 258,095 50,062,441,880 14% Public utilities and infrastructure 11,781,081 143,386 168,924,208,027 49% Manufacturing 52,878,346 28,677 151,640,290,104 44% Total 1,802,066,670,363 519% Note: * The market value of land held by budgetary organizations is estimated similar to commercial / service land as of the 4th quarter of 2013, according to Overview of the Market Value of Real Estate 2013 Year, Quarters 1-4,” by the real estate company Tenkhleg Zuuch. The market value is discounted for other uses assuming that this land is located, on average, in less desirable places that may command a lower market value. Table B.5: Potential Annual Revenues from Property Tax Based on Market Value Potential annual revenue Potential annual revenue from property tax, with Number of Estimated total market from property tax, with 0.3% tax rate, as % of Land type properties value (MNT*) 0.3% tax rate (MNT) 2012 UB Budget Non-residential Buildings 14,214 18,928,834,285,714 56,786,502,857 16% Apartments 170,771 21,206,001,238,000 63,618,003,714 18% Land plots with houses (khashaas) 102,481 2,013,454,455,100 6,040,363,365 2% Total 120,404,506,571 35% Note: *Market value of nonresidential buildings is estimated assuming that market values are on average 10 times higher than book values. Apartment and khashaa market values are based on prices from 2013 sales price averages for old and new units. Khashaa assumptions: Mean price/m2: 33,700, Mean size 583 m2. Appendix B: Forgone Past and Potential Land-Based Revenues in U B  |   8 5 NOTES ON APPENDIX B TABLES Data and Data Sources The City of Ulaanbaatar (UB) has foregone potential rev- Area of commercial and service land enues by (i) providing land for free or at lower-than-mar- ket-value prices for commercial and service uses, and (ii) Table B.6: Area of Commercial and Service by providing some individuals with land for household Land, 2012 (m2) use that is in excess of the average size of an individual land plot in the city (see details in table 3.5 in the report). Commercial and services land, by typea Land (m2) Estimating forgone revenues requires making assump- Trade, all types of services 28,385,884 tions, because some critical data does not exist and also be- cause the forgone revenues would depend on the land pric- Business activities 47,229,595 ing policy of the city government. Drawing on the available Liquid gas fuel stations, fuel stations, 13,414,309 data from auctions and land prices on the private market storage, wholesale markets & centers between 2003 and 2012, the estimates are as follows: All types of garages 106,089 • The full amount of foregone revenue is about 77 Total land under commercial/service use 89,135,877 times the UB budget for 2012. Source: Property Relations Department (PRD). • Under more conservative assumptions it is about Note: a. Land types are as defined in the land balance provided 40 times the UB budget for 2012. by PRD as a part of their calculations of the expected revenues from land use fees for 2014. • The very minimal estimate is 22 times the UB bud- get for 2012. Area of excess residential land in possession Potential future revenues from repossessing and auc- (not privatized) tioning excess land held by budget organizations, non- The data on residential land for individual housing still governmental organizations (NGOs) (including political held in possession (that is, not privatized) is shown in ta- parties and religious organizations), public utilities and ble 3.5 of the main report and constitutes 14,819,549 m2 infrastructure, and by the manufacturing sector are es- of land held by 2,498 land tenants. This translates to 5,933 timated at about 5 times the UB budget for 2012. Given m2 per land holder and indicates that these people control that release of this land should not exceed the absorption land parcels that are 10 times bigger than the city average capacity of the land market, if this land is released over (a city’s average parcel for individual homes is 583 m2). the 20-year period, an average annual addition to public Given this, we assumed that the city may charge, retroac- revenues would be 25 percent of the UB budget for 2012. tively, market prices for this “excess land.” The area of this excess land is calculated as follows: 14,819,549 – (583 x Finally, if property tax on nonresidential buildings, apart- 2,498) = 13,363,215 m2. ments, and land plots with individual houses (khashaas) is based on their market values, this would add annually other 35 percent of the UB budget for 2012. Market value of land for commercial/service use When estimating revenues forgone because land for This appendix describes the data, data sources, and as- commercial/service uses was allocated without charging sumptions used for these estimates. It is important that the land’s market value, one issue is to decide which the estimates are used or referred to with a clear acknowl- market values to use for the estimates. Given that annu- edgement of these assumptions. al amounts of land allocated or converted for such uses 8 6   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a since 2003 are not known, it makes no sense to try recon- This land value is used for Scenario 1 (full forgone value structing annual dynamic of land values. Therefore, two estimate) and Scenario 2 (conservative forgone value es- price approximations are used. timate) as explained below. • First, we used a one-time snapshot based on the Second, we used a time-average land value over the pe- current land prices, which is commonly used for riod from 2003 to 2013, assuming that land prices were rough estimates. The market values per square increasing linearly, from 25,172 MNT/m2 in 20031 to meter are taken from the report “Overview of the 286,772 MNT/m2 in 2013. The time-average value is then Market Value of Real Estate 2013 Year, Quarters as flows: 25,172 + (286,772 – 25,172)/2 = 155,972 MNT/ 1-4,” by the real estate company Tenkhleg Zuuch m2. This represents 54 percent of the land value under the (www.zuuch.mn and www.shinebair.mn). This re- previous assumption. port provided the most detailed data, segregated by types of real estate and by district. We used 286,772 This land value is used for Scenario 3 below, which esti- MNT per m2 as the market value of commercial/ mates the minimum forgone revenues. service land, which was the price for land zoned for multi-apartment buildings, averaged across the city, in the fourth quarter of 2013. This price was Market value for excess residential land used for the following reasons: (individual housing) Regarding prices for the excess land held for individual • The price of land for multi-apartment buildings housing, we assumed that its actual use should be thought is used as a proxy for all other types of commer- of as commercial/service as well, given that it is excess cial/service uses. This is a legitimate approxima- land. However, assuming that these parcels are located tion because in UB, and elsewhere in the world, outside of central UB, we took the average market price multi-apartment buildings are a common type of of land zoned for multi-apartment buildings in the dis- commercial real estate. Of course, land for other trict with the lowest average price in the entire city, Song- types of use can have different prices. For exam- inkhairhan, as the proxy for the market price of excess ple, land for offices and fuel stations can cost more residential land. This value, as per the Tenkhleg Zuuch than for apartment buildings (assuming a compa- report, is 107,570 MNT per m2 and was used in Scenario rable location), while land for storage can cost less. 1 and 2. In Scenario 3, we used a time-average over the However, on average, using the value of land for period of 2003 and 2013, assuming a linear increase from multi-apartment buildings as a proxy for all com- 25,172 MNT/m2 in 2003 to 107,570 MNT/m2 in 2013. The mercial/service land is apparently well justified. time-average value is than 25,172 + (107,570– 25,172)/2 Also, in UB, this category of land has the best-doc- = 66,371 MNT/m2. umented prices. • This price was not the highest recorded average price for land in the city. In the same fourth quar- Foregone Revenue Calculations ter of 2013, land for construction that already had The revenues forgone in the past are estimated for two technical specifications had an average market types of land only: commercial/service and excess land price 413,665 MNT per m2. held for household needs. The estimate does not include what appears to be excess land held by NGOs or budget • The price 286,772 MNT per m2 is consistent with estimates for land for commercial/service uses 1. According to a 2003 article in the daily newspaper Zuunii Medee, the city sold at auction a total of 10,740 m2 of land for 270,353, 000 from other sources. MNT, or 25,172 MNT/m2. Appendix B: Forgone Past and Potential Land-Based Revenues in U B  |   8 7 organizations, as discussed in the report in connection percent of all currently commercial/service land was al- with table 3.5; such land could potentially be allocated located or converted into such uses since the transition for commercial uses, at market values. Instead, the excess began and hence could have been allocated or converted land held by budgetary organizations, NGOs, and other at market prices. Given the explosive growth of commer- users is considered to be a source of potential future rev- cial and service activities in UB during its market tran- enues. Three different scenarios of forgone revenue are sition, this assumption appears to be quite conservative. presented below. Scenario 3 uses the time-average land value of 155,972 Scenario 1 is based on the assumption that market pric- MNT/m2 for commercial/service land and applies it only es could have been charged from ALL holders of com- to the land assumed to be allocated/converted since 2003 mercial/service land, if the allocation/conversion for (table B.3). For excess household land, the value is also such uses had been done through auctions or at auc- time averaged as 66,371 MNT/m2. Given that this scenar- tion-equivalent prices (that is, at open market prices) and io applies two conservative estimates—about the price if these prices were charged retrospectively from holders and the amount of land allocated/converted—it should of such land who obtained it before 2003. This calculation be considered as the very minimum estimate. is presented in table B.1. Implementation of this scenario would require (i) charging market land prices for the land Further, all three scenarios assume that the market values allocated for commercial/service uses and for the excess should be charged for all the excess land held for house- residential use since at least 2003 (which is the first year hold needs, because there are no legally or socially justi- for which PRD has data on land auction revenues), and fied reasons for such excessive holdings. (ii) charging these prices for the land that was already in possession before 2003, which implies introduction of a Finally, all three scenarios recognize that the city has col- strong policy of retroactively charging these holders for lected some revenues from land allocations since the tran- the land’s market value. sition, from land auctions and from direct sales of land rights. The total amount collected, MNT 23,112,663,000, This scenario also uses the 2013 land prices for both com- was calculated based on the data provided (in two differ- mercial/service land and for the excess household land. ent documents) by PRD: Scenario 2 considers the case when only after-2003 al- • Revenues from land auctions from 2003 to 2012, in locations/conversions for commercial/service land are the amount of MNT 6,375,400,000 charged the market prices (table B.2). In other words, this scenario acknowledges that the retroactive charge of the • Revenues from direct sales of land rights from 2007 market value from “old” (pre-2003) holders of such land to 2012, in the amount of MNT 16,737,200,000 could be too strong of a policy, given the past, pre-market views that the land should be a free resource. However, This amount has been subtracted from the total revenue as indicated earlier, data for the area of land allocated for to calculate the foregone revenue only. commercial and service uses since 2003 do not exist.2 In the absence of this data, it was assumed that at least 50 To get a sense of the scale of the forgone revenues and for potential future revenues, they all are compared to the en- 2. At least the WB team was not able to obtain this data, despite several tire UB city budget for FY 2012 (which was MNT 347,288 requests to PRD. million), as shown in tables B.1–B.5. 8 8   |   L a n d A d m i n i s t r at i o n and Management in U l a a n b a ata r , M o n g o l i a Potential Future Revenues turing sector. Calculations are based on the assumption that the excess land constitutes 10 percent of each of these Table B.4 presents estimates of the potential revenues categories, and utilize 2013 market prices as explained in from reallocation (via auctions) of excess land held for the table. four different land uses: budget organizations, NGOs (including political parties and religious organizations), Table B.5 presents potential revenues from the property public utilities and infrastructure, and by the manufac- tax, if it would use the property market value as a tax base. Appendix B: Forgone Past and Potential Land-Based Revenues in U B  |   8 9 Appendix C Land Value Zones for Determining Land Fees in UB Map C.1: Boundaries of Zones to Be Used for Determining Land Fees in UB Source: PRD 2010 (Attachment 2). 91 The land valuation zoning boundaries shown on the map m2 for each of the 15 types of land use. See table C.1 for C.1 and the table C.1 below were approved by the Capi- land fee assessment and collection from the holders of tal City Representatives Khural Resolution No. 5/39 on land possession and use rights in Ulaanbaatar. According “Renewal and Temporary Use of Land Valuation Zoning to this table there are five valuation zones. Although the and Land Fee Rates to Be Imposed” on July 16, 2010. This title of the Resolution No. 5/39 states that it is for “tem- resolution revised the previously used zones and rates per porary use”, this zoning and fee rates are still applicable. Table C.1: Type of Land Use under Possession, and Use Rights for Land Value Zones, and Land Fees under Current Practice 1st zone 2nd zone 3rd zone 4th zone 5th zone Base value of 1 hectare of land Base value of 1 hectare of land (MNT440 million) (MNT 40 million) land fee land fee land fee land fee land fee per 1 m2 per 1 m2 per 1 m2 per 1 m2 per 1 m2 No. Type of land use coefficent (MNT) coefficent (MNT) coefficent (MNT) coefficent (MNT) coefficent (MNT) 1 Citizens household use 0.2 66 0.1 53 0.1 44 0.3 12 0.2 8 Budget organization (only for 2 0.2 88 0.15 68 0.1 44 0.4 16 0.3 12 official use) 3 Trade, all types of services 1 440 0.6 264 0.3 132 1 40 0.5 20 Business activities (except trade 4 0.8 352 0.5 220 0.2 88 0.8 32 0.4 16 and services) Storage, fuel station, wholesale 5 1 440 1 440 1 440 1 40 1 40 markets and centers All types of garages (on and 6 1 440 1 440 1 440 1 40 1 40 underground) 7 Public transport 0.2 88 0.15 66 0.1 44 0.5 20 0.4 16 Heating, communication, energy 8 0.6 264 0.3 132 0.2 88 0.7 28 0.5 20 (electricty) 9 Railway station, airport a. buildings and facilities 0.6 264 0.4 176 0.3 132 0.8 32 0.6 24 b. protection zone 0.3 132 0.2 88 0.1 44 0.4 16 0.3 12 Political party, NGO, international 10 organization and its representative 0.3 132 0.2 88 0.1 44 0.8 32 0.4 16 office 11 Religion, monastery 0.8 352 0.6 264 0.4 176 0.7 28 0.6 24 All types of manufacturing (except 12 0.6 264 0.4 176 0.1 44 0.4 16 0.2 8 agricultural) 13 Agricultural manufacturing 0.4 176 0.15 68 0.1 44 0.4 16 0.2 8 New manufacturing in the suburbs 14 0.1 4 0.1 4 of the city (5 years) 15 Mining land a. exploitation 0.8 32 0.8 32 b. manufacturing 0.5 20 0.5 20 Source: PRD 2010 (Attachment 3). 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