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STUDY ON THE INTRODUCTION OF
DEVELOPMENT IMPACT FEES
IN KOREAN LAND DEVELOPMENT
By

J eong-Hyun Koo

A THESIS

Submitted to
Michigan State University
in partial fulﬁllment of the requirements
for the degree of

MASTER OF URBAN REGIONAL PLANNING

Department of Urban Regional Flaming

1997

ABSTRACT

STUDY ON THE INTRODUCTION OF DEVELOPMENT IMPACT FEES
IN KOREAN LAND DEVELOPMENT

By

J eong-Hyun Koo

The infrastructure ﬁnancing systems in Korea, represented as the Housing Site
Development Promotion Act, have not created reasonable standards for the cost-sharing
of infrastructure. Moreover, the impracticality of existing systems has caused discord
between local governments and implementing agencies.

Through the comparative analysis of ﬁve main themes between the USA, Japan
and Korea, a modiﬁed Development Impact Fees (DIF) system is recommended for
improving the cost-sharing of infrastructure under HSDPA. The cost-sharing principles of
infrastructure, the land development systems and infrastructure ﬁnancing systems are
compared. Before suggesting a modiﬁed DIF model, the requirements for introducing
DIF and problems in the Korean infrastructure system are studied.

Considering serious ﬁnancial difficulties of Korean local governments and the
centralization of administrative power, the suggestion to utilize DIF is useful in that: 1)
DIF plays an important role in linking physical planning with ﬁnancial program, 2) DIF
promotes the decentralization the authority in establishing infrastructure ﬁnancing
system, and 3) DIF reforms the impracticality and regressiveness of the existing

infrastructure ﬁnancing systems in Korea.

Copyright by
J eong-Hyun Koo
1 997

DEDICATION

To my parents and wife

ACKNOWLEDGEMENTS

To Roger Hamlin who guided me to make this thesis from the beginning.
To June Thomas who gave me a chance to start this thesis. To John

Metzger who taught me various details.

PREFACE

I am a professional working at the Korea Land Corporation (KLC). Many people
reading this thesis do not know about the real estate development process in Korea. I
offer this simple listing of the steps of development, so that such readers can better
understand the issues presented in the thesis.

Until very recently, nearly all housing and real estate development in Korea has
been accomplished by the public sector, or by quasi-public corporations such as the
corporation 1 work for. Therefore, I will explain how development utilizing the Housing
Site Development Promotion Act (HSDPA) works through my organization. The steps
are as follows.

1. Project Area Designation. The ﬁrst step is for the Ministry of Construction
and Transportation to designate an area for project development. In making
this decision, it takes into consideration the following: the status quo of
demand and supply of housing, the easiness of installing infrastructure, and
the balanced development of a community.

2. Implementing Agency. Then, an implementing agency is designated.
Implementing agencies are restricted to the public sector in HSDPA
development. Examples are local governments, Korea National Housing
Corporation, and KLC.

3. Development Plan Approval. Next, development plan is drawn up by the

implementing agency. The development plan is then approved by the

vi

10.

following agencies: local governments, and Ministry of Construction and
Transportation ( for project over 3,000,000 m2)

Execution Plan Approval. After approval of the general development plan, a
more detailed execution plan is approved, which includes engineering
drawings, ﬁnancing plans, etc. It is approved by local governments.

Finance. In general, funds are acquired for land acquisition and site
construction through money of KLC, advance sales of land to future
developers, and bond sales.

Land Acquisition. After the completion of plan approval, the implementing
agency acquires all land needed for site construction. No private land remains
in the project area. Eminent domain is used when necessary.

Site Construction. When all land is acquired, site preparation is completed
according to the execution plan.

Infrastructure Construction. The next step is for the implementing agency
to install all needed public infrastructure.

Sales of Developed Land. At this stage, project land is sold to private
developers. Developers may be quasi-public corporation like the Korea
National Housing Corporation. Money from the sale goes back into KLC’s
budget.

Building Construction. Developers then complete building construction

according to the development plan.

vii

11. Project Sale. Developers then have the right to sell housing units and ofﬁce
space to consumers. However, a ceiling price is ﬁxed for housing units.
The following ﬁgure graphically depicts the development process. This ﬁgure is

also included as Figure 2-1 in the body of the thesis.

 

 

 

TI Feasibility study I

 

 

Proposal for Designation of
Project Area
IA Ar MCT

I

Designation of Project Area

 

 

 

 

 

 

 

—‘ — —I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and Implementing Agency
Public MTC IA Negotiation on the,
F Cost-Sharing of
‘ Infrastructure
Sector Development Plan Approval IA ' I LG
LG ' IA
AIL
Execution Plan Approval
LG 4 IA
| Land Acquisition and I
Site Construction 7 [ml ll tion of
- x} - Infrastructure
+ I Selling Housing Sites I '
Private \I( ~
I Building Construction I

 

Sector

 

v IA: Implementing Agency
MCT: Ministry of Construction and Transportation
LG: Local Government

 

 

viii

TABLE OF CONTENTS

 

 

LIST OF FIGURES... ............ . ....................................................... XII
INTRODUCTION ........................ . .................................. . .................. 1
Background of Study .............1
Purpose and Method of Study 2
CHAPTER 1

LAND DEVELOPMENT SYSTEM AND
INFRASTRUCTURE FINANCING4

 

Concept of Infrastructure Costs ........................... 4
The Characteristics ofInfrastructure.... 4
Issues in Financing Infrastructure Costs ................................ 5

The Types ofInfrastructure Costs . ....7

 

The Cost-Sharing Principles of Infrastructure .........8
Relationship between Beneﬁts and Costs of Infrastructure .......... 8
The Beneﬁt Principle vs. the Causer Principle ............................... 9

The Application of the Cost-Sharing Principle................... . . . . ....1 l
Normative issues in the Cost-Sharing of Infrastructure....... . . . . . 1 2

Land Development Systems in the USA, Japan and Korea................13
USA: Subdivision Controls]3
Japan: Various Land Readjustment Techniques... .....16
Korea: Land Readjustment vs. Public Land Acquisition... . . . . . l 8
The Comparison of Land Development Systems
in the Three Countries .................................................................. 25

TABLE OF CONTENTS CONT.

CHAPTER 2
COMPARATIVE ANALYSIS OF INFRASTRUCTURE

 

 

 

 

 

FIANANCING SYSTEM IN LAND DEVELOPMENT..... . .....28
USA ............. .......28
Classiﬁcation of Financial Resources” ...28
Public Revenue Sources... .. . .29
Private Revenue Sources: Development Impact Fee (DIF). ... . . . . . .31
Japan 39
Guidelines for Housing Site Development ............................... .39
Defray Implementation System . .41
Korea 42
Housing Site Development Projects ........................................... .42
New Town Development Projects ................................................ 52
CHAPTER 3
REQUIREMENTS FOR INTRODUCING DIFS INTO
KOREAOOOOOO ..... O OOOOOOOOOOOOOOOOOOOOOOOOOO ......OOOOOOOOOOOOOOOOO ........... 56
Capital Budget Planning (CBP) 56
The CBP Process ....................................................................... 56
The Evaluation of CBP.. ... .....58
Potential for Introducing CBP into KOrea ...59
Capital Improvement Program (CIP) ...60

 

Outline of CIP ..........................................................................
Relationship between CIP and DIF
Necessity for Introducing CIP into Korea ................................

Circumstances for Operating DIF

 

Prerequisites for Introducing DIF ............................................
Direction for Introducing DIF.............. . ..
Usefulness of DIF ....................................................................

.60

...61
....62

.....63
.....63
...64
.....66

TABLE OF CONTENTS CONT.

CHAPTER 4
SUGGESTIONS FOR INTRODUCING DIF INTO KOREA ...... 69

 

Problems in the Infrastructure Financing System ........69
Intergovernmental Problems ............ , .......................................... .69
Conﬂicts between Interested Parties ............................................. .71
Project Cost Problems ................................................................... .75

Necessity for Introducing DIF into Korea ...........76
Financial Impact ofNew Town Developments... . . . ....76
Regressiveness in the Cost-Sharing of Infrastructure............ . . . ..78

The Suggestion of a Modiﬁed DIF Model ............................................. 80
CHAPTER 5
CONCLUSIONS ............................................................................... .83
BIBLIOGRAPHY ............................................................................. .86

xi

LIST OF FIGURES

Figure 1-1 Comparison Between the Beneﬁt Principle and

the Causer principle .......................................................................... l 1
Figure 1-2 The History of Subdivision Regulations ........................................... 15
Figure 1-3 Comparison of Land Development Systems

in Three Countries .......................................................................... 27
Figure 2-1 Summary ofPublic Revenue Sources . . . .......30
Figure 2-2 The Calculation of Additional Infrastructure Capacity ................. 35

Figure 2-3 Development Area by Implementing Agency: Table and Bar Chart..42

Figure 2-4 Housing Site Development Process through HSDPA................. . . . . .45
Figure 2-5 Land Price and Supply system of HSDPA ...................................... .46
Figure 2-6 Cost-Sharing of Off-Site Infrastructure by HSDPA..... . . .49
Figure 2—7 Diagram of Off-Site Infrastructure by HSDPA .......................... 49

Figure2-8 HSDPA and Non-HSDPA Infrastructure Costs: Table
and Bar Chart .................................................................. 51

Figure 2-9 The Composition of Project Costs in Five New Towns: Table
and Bar Chart ................................................................. 54

Figure 2-10 HSDPA and Non-HSDPA Infrastructure Costs
in the Five New Towns: Table and Bar Chart........ . . . .......55

Figure 4-1 The Relationship Between Interested Parties
in Housing Site Development: Table and Bar Chart ......................... 74

Figure 4-2 The Composition of Project Costs Covered by HSDPA: Table
and Bar Chart ...................................................................... 75

xii

LIST OF FIGURES CONT.

Figure 4-3 Financial Impact of New Towns on Local Governments: Table
and Bar Chart .................................................................... 76

Figure 4-4 Financial Impact of New Towns on the Local Tax Burden: Table
and Bar Chart ..................................................................... 78

Figure 4-5 Percentage Change in New Town Apartment Prices
, through 1997: Table and Bar Chart ......................................... 79

Figure 4-6 Modiﬁed DIF Model82

xiii

INTRODUCTION

Background of Study

Korea’s local governments have experienced tremendous changes both outside
and inside their boundaries. The changes affecting local governments are characterized
by the general phenomena of localization and globalization. Although the functional
distribution and delegation of power are insufficient to guarantee complete autonomy of
local governments, a new era of local autonomy in Korea began with the local autonomy
election in 1995 (Yang). Globalization has been deﬁned in various ways depending on a
particular perspective. Here, it is understood simply as the economic restructuring of the
world economy. All forms of privatization belong to the world-wide economic
restructuring trend (Hamlin). This rapid devolution of responsibility has caused some
strains in the development process. In many cases, localities do not have adequate
resources to meet service needs.

In this emerging stream of localization and privatization in Korea, the
infrastructure ﬁnancing system established during the previous era of centralized land
development has become inadequate. It causes discord in determining who shares the
cost of local infrastructure develOpment. In Korea, the Housing Site Development
Promotion Act (HSDPA) provides the primary legal framework for real estate
development. Land developers are required under the HSDPA to provide infrastructure
according to the causer principle. However, as will be explained in this study, HSDPA

has not created reasonable standards for the sharing of local infrastructure costs.

Moreover, the impracticality of existing systems has caused discord between local
governments and implementing agencies.

In the USA, local governments have instituted development impact fees (DIF) to
control disorderly urban development and to ﬁnance infrastructure costs caused by new
developments. DIF has been used to create a legal rationale and set of standards for
infrastructure cost-sharing.

Korea is now at a point in time to introduce the concepts and experiences of DIF
as a means for ﬁnancing infrastructure and guiding the development of urbanized areas
according to changes in land policies, such as the implementation of full-scale local
autonomy and the increasing participation of the private sector in land development.
Purpose and Method of Study

The purpose of this study is to explore alternatives for the proportionate sharing
of infrastructure costs in Korea. The study accomplishes this through a comparative
analysis of infrastructure ﬁnancing systems in the USA, Japan and Korea. A modiﬁed
DIF model is recommended for improving the cost-sharing provisions of HSDPA. In the
process of suggesting a modiﬁed model, ﬁve main themes are explored.

First, the concept of infrastructure cost is investigated along with establishing
principles of infrastructure cost sharing. The beneﬁt principle and the causer principle
are studied based upon the subject of burden and the standards for determining burden.
These principles are used as a conceptual reference in determining the best infrastructure
ﬁnancing system according to the characteristics of a development project and needed

inﬁ'astructure.

Second, the land development systems in the USA, Japan and Korea are compared
in terms of the roles of the public and private sectors. The infrastructure ﬁnancing system
cannot be well understood without considering the circumstances of land development.
Accordingly, this section is the precedent work which examines the infrastructure
ﬁnancing systems in three countries.

Third, a comparative analysis of the infrastructure ﬁnancing systems in these
countries is made. DIFs in the USA and Guidelines for Housing Site Development in
Japan have common features as local government strategies for ﬁnancing infrastructure
costs. In Korea, the provisions of HSDPA are used to stabilize housing price inﬂation
by supplying buildable lots on a large scale. This is why the Korean infrastructure
ﬁnancing systems, as represented by the provisions in HSDPA is impractical.

Fourth, the requirements for introducing DIF into Korea is discussed. To
introduce DIF into Korea, a carefully arranged Capital Improvement Program (CIP) has
to be prepared. In addition, Capital Budget Planning (CBP) is required to prepare a CIP.
In this section, CBP and CIP are examined as prerequisites for introducing DIF into
Korea. Finally, the circumstances for operating DIF in Korea are scrutinized.

Lastly, before suggesting a modiﬁed DIF model, problems in the Korean
infrastructure ﬁnancing system are studied in terms of conﬂicts between interested
parties. Subsequently, the necessity for introducing DIF into Korea is then presented
through the case study of Five New Town projects in terms of ﬁnancial impact on local

governments and the equity issue in the cost-sharing of infrastructure.

CHAPTER 1
Land Development System and Infrastructure Financing

Concepts of Infrastructure Costs
The Characteristics of Infrastructure

Infrastructure is another technical term for what has traditionally been called
public works or capital investment. In recent years, the absence of universally accepted
standards of what constitutes infrastructure has led to controversy among interested
parties (National Association of Counties, 1990). The extent and deﬁnition of
infrastructure may be different according to local governments.

Infrastructure can be categorized on the basis of either physical characteristics or
the degree of exclusiveness of consumption. These classiﬁcations are important in this
study, because they can be used as the rationale for determining the cost sharing of
infrastructure. Infrastructure has several characteristics. It serves an essential public
purpose, and has a long useful life. It is infrequent and expensive, and ﬁxed in place. It is
related to other government functions and expenditures, and is usually the responsibility
of local government (National Association of Counties, 1990).

The local government has the primary responsibility for the installation of
infrastructure. Without an adequate infrastructure, the local government cannot provide
the basic services for public health and safety for its residents. Local government’s
capacity to install and maintain infrastructure is one of the most important factors in
inducing commercial and residential development.

The quality of infrastructure inﬂuences decisions about the location and new investment

of private ﬁrms, since an efﬁcient infrastructure system can decrease production costs.

The quality of infrastructure also increases the value of land. In studying the feasibility
of land development, the condition of existing infrastructure is one of the most essential
elements to be considered.

Local governments have the largest share of ﬁnancial responsibility for providing
optimum inﬁastructure. This is because local governments and their residents are the
primary users of infrastructure. However, local governments increasingly fall into
difficult situations in ﬁnancing infrastructure. Local governments that cannot or will not
make up the growing amount of infrastructure cost risk the loss of both population and
economic activity.

Issues in Financing Infrastructure Cost

When a local government experiences population growth, some assume that
ﬁnancial beneﬁts are produced for all concerned. New land development can generate a
larger tax base, more tax revenues and create the opportunity for local governments to
expand infrastructure. This is not always true, however, because land development
causes new inﬁastructure needs to serve the new residents. It has been recognized that
developments could lower the value of the community without paying its share of the
infrastructure cost.

Generally speaking, local governments with too much growth have ﬁnancial
problems, if revenues don’t accrue fast enough to cover growing public costs. There are
three kinds of ﬁnancing infrastructure ﬁnancing problems faced by a local government
experiencing rapid growth. First, there is not enough increased revenue to cover increased

budget expenses. Second, there is not enough revenue early on to cover the front-end

costs of new public facilities (Nicholas, 1985). Third, there are conﬂicts in the cost-
sharing of infrastructure between local governments and the implementing agencies.

The ﬁrst problem is a result of inelastic tax bases that do not increase fast
enough to meet the increased infrastructure demands. Uncertainty of grant sources and
the voters’ refusal to approve higher taxes are other reasons for a lack of revenue. The
second problem is due to the up-front investments that are required to build
infrastructure. This is caused by the time lag between the installation of infrastructure and
the levy of taxes. The most frequently used solution to this problem is to borrow the
money needed by issuing bonds.

The defray implementation system in Japan was established in 1967 to cope with
these cash ﬂow problems, using agreements involving the central government ministries
and the housing and land development corporations. Within this system, the public
agency (the Housing and Urban Development Corporation), advances funds to be
invested by local governments that have ﬁnancial difﬁculties in installing infrastructure.
The infrastructure investment is then repaid to HUDC by local governments, as tax
revenues and user charges are generated by the land development.

The third problem is caused by the political, legal, and technical difﬁculties in
determining proportionate cost-sharing in infrastructure. In 1987, the National Council on
Public Works Improvement suggested that developers should be encouraged to ﬁnance
new infrastructure investments (Callies, 1994). However, the Supreme Court of Illinois

ruled in 1961 that if the infrastructure burden cast upon a developer is not speciﬁcally and

uniquely attributable to the development, then requiring a developer to pay for
infrastructure is an unconstitutional use of police power.
The Types of Infrastructure Costs

New land development causes additional infrastructure costs as well as generating
tax revenues. Infrastructure costs may increase for existing residents as well as new
residents. Infrastructure costs resulting from land development can be categorized as
either on-site, off-site costs, or “in—between” (Nicholas, 1985).

On—site costs are the regular infrastructure costs that occur within a development
area or that are directly related to a development. In most land developments, these
include the costs of road, water supply and sewer systems. The density or size of a
development is strongly related to the need for infrastructure. Generally speaking, the
bigger the development, the larger the needed infrastructure costs.

Off-site costs are those which affect the local government but have no direct
connection to new development. As a general rule, the burden of off-site inﬁ'astructure
costs is put upon the local government. However, local governments in most countries
have developed infrastructure ﬁnancing systems that have developers bear off-site
infrastructure costs to com with their ﬁnancial difﬁculties. Those systems are largely
based on the rationale that the beneﬁciaries from land developments have to pay for the
needed infrastructure costs.

In-between costs are those which can be considered as either on- site or off-site
costs. These include costs which might be considered as off-site infrastructure for a small

development, but as on-site infrastructure for a large development. Because of this

attribute of in-between costs, there is not always an Obvious policy for ﬁnancing
infrastructure (Nicholas, 1985). The incidence of in-between costs has created

controversy between local governments and developers over cost-sharing.

The Cost-sharing Principles of Infrastructure

Relationship between Benefits and Costs of Infrastructure

The beneﬁts from the installation of infrastructure can be categorized as direct
and indirect. The direct beneﬁts are deﬁned as the effective value obtained by the use of
infrastructure. The indirect beneﬁts are generated by the improved accessibility and
convenience created by the infrastructure. These indirect beneﬁts are then capitalized
into the land prices of a development area. Infrastructure costs are primarily ﬁnanced by
revenue sources from the public sector. Financing infrastructure costs with user charges
or special taxation conforms to the principle of equity, but revenue sources that mostly
consist of general taxes create problems of efﬁciency or equity because the beneﬁts
from installed infrastructure are both direct and indirect.

There are problems and limits to the relationship between the beneﬁts and costs of
infrastructure. First, the direct beneﬁt from infrastructure is often hard to distinguish. As
a result, infrastructure that is ﬁnanced by user charges is exclusively used, such as a toll
road or water supply system. Second, the indirect beneﬁt from infrastructure is estimated
by the increase in land prices. But land prices are affected by other factors besides
infrastructure. The increment change in land prices generated from infrastructure should

be used in calculating the cost paid by beneﬁciaries of a development project. The

infrastructure cost should correspond to the economic beneﬁts produced. However, this
is difﬁcult to operationalize.

The Beneﬁt Principle vs. the Causer Principle

The Beneﬁt Principle

Under the beneﬁt principle, those who beneﬁt from government-provided
infrastructure should bear the costs. This principle is not only theoretically rational but
also reasonable in establishing the proportionality between beneﬁt and cost. In the beneﬁt
principle, the infrastructure burden to project beneﬁciaries should be proportionate to the
beneﬁt received.

The beneﬁt principle has three advantages from an economic perspective (Wo,
1994). First, it creates efficiency in resource distribution, because the supply of .
infrastructure can be theoretically linked to the demand, which represents the preference
of the beneﬁciaries who have to pay for the infrastructure. Second, it prevents residents
from asking for excessive inﬁastructure, because only the demand from those who are
willing to pay for the cost is serviced. Third, it relieves local governments from the
political burden of levying more taxes. It also results in a sound revenue structure, and a
stronger tax base.

On the other hand, the beneﬁt principle has its own weaknesses due to the
extemalities caused by land developments in linking infrastructure beneﬁts with costs.
The beneﬁt principle can be justiﬁed, when the beneﬁt from a land development project
is generated only by installing infrastructure. The rationale for the beneﬁt principle will
be weakened, when the beneﬁt from a land development project is generated by other

factors besides the installed infrastructure.

10

Another weakness is the exclusive use of infrastructure. The beneﬁt principle can
be justiﬁed, when the infrastructure cost is paid by those who are exclusively using the
infrastructure that is installed for a land development project. However, some
infrastructure (such as parks and roads) carmot be exclusively used. Moreover, the
exclusive use of infrastructure may cause moral or social problems. Therefore, it may be
inappropriate to determine the cost-sharing of infrastructure solely by the beneﬁt
principle.

The Causer Principle

The trend toward private ﬁnancing of infrastructure is a move to apply the beneﬁt
principle in a slightly different context than in the past, by making new development pay
its “fair share” (ULI, 1986). This idea that development which requires new
infrastructure should pay for the cost, is known as “the causer principle”. Under the
causer principle, those who require new infrastructure should pay for that cost. While the
beneﬁt principle focuses on project beneﬁciaries, the cause principle emphasizes what
causes the need for infrastructure or potential damage that a development will do to
existing infrastructure.

The speciﬁcally and uniquely attributable test propounded by the Illinois Supreme
Court have something in common with the causer principle, in that both emphasize the
causal relation between a development and needed infrastructure. The court focused on
the origin of the need for new infrastructure and held that, if local government could

prove that the demand for the new facilities was speciﬁcally and uniquely attributable to a

11

particular land development, then such requirements were reasonable regulation
authorized by police power(Nicholas, 1991).

The causer principle also has its own weakness. First, it also has the problem of
free riders as the beneﬁt principle does. It can be justiﬁed, when installed infrastructure is
exclusively used by those who pay for the costs. Accordingly, the external effects by
infrastructure has to be considered in determining the subject of burden. Second, the
causer principle is ambiguous in establishing the standards for the degrees of burden. It
can not be the only measure for determining who bears how much costs, unless the causer
is one person or the conditions among many causers are equal.

The Application of the Cost-Sharing Principle

While the beneﬁt principle focuses on who beneﬁts from infrastructure, the causer
principle focuses on who causes the need for infrastructure and how much a land
development project will ﬁnancially affect existing infrastructure. In this respect, the two
principles have conceptual differences, as the following table shows.

Figure 1-1: Comparison Between the Beneﬁt Principle and the Causer Principle

 

 

 

 

 

The Benefit Principle The Causer Principle
Character- Those who receive beneﬁts Those who cause the need for
istics from the installation of infrastructure pay for the cost
infrastructure pay for the cost
Standard of Generated beneﬁts Caused costs
Burden
Subject of Beneﬁciaries Developers (Causers of external
Burden cost)
There must be a rational nexus There must be a casual relation
Principle between beneﬁts and the between a development project and
charge of infrastructure costs the need for infrastructure

 

 

 

12

Another cost-sharing principle of infrastructure is the “ability-to pay” concept
which is based upon redistributive goals. Under the ability-to-pay principle, residents
should bear ﬁnancial responsibility for government-provided infrastructure according to
their ability to pay (ULI,1986). The ability-to-pay principle considers the economic status
of residents to achieve equity in the distribution of infrastructure costs. This principle
alleviates the regressive effects of infrastructure cost-sharing.

The cost-sharing of infrastructure cannot be justiﬁed by any one principle,
because these three principles are interrelated. In Korea, it is more persuasive to apply the
causer principle to the cost-sharing of infrastructure, and then the beneﬁt principle and
the ability-to-pay principle can be applied as complementary references. The external
issues must be kept in mind to maximize equity in the cost-sharing of infrastructure.
Normative Issues in the Cost-Sharing of Infrastructure
The Relation with Land and Housing policies

The goals and priorities established by land and housing policies play an

important role in determining the cost-sharing of infrastructure, especially in Korea
which still has a centralized government system. Depending on the goals and priorities
among policies, governing the supply of buildable land, the improvement of the
physical environment, or the reorganization of urban spatial structure, the extemalities
of a land development may vary greatly (Ji, 1995). For example, if the supply of
cheap housing sites is prioritized over solving to trafﬁc congestion, then the society

should bear the external cost of an over-load to the trafﬁc infrastructure.

13

The EthicalﬁStandard in Cost-Shmf Infrastructure

The universal norms of society should be applicable to any cost-sharing principles
of infrastructure. One of these is the principle of equity. The concept of equity varies
according to cultural and historical tradition, and the political and economic system.
Accordingly, a social consensus about equity must exist before applying cost-sharing
principles of infrastructure. The other ethical principle is social justice whereby cost-

sharing principles of infrastructure should not make the poor more impoverished.
Land Development Systems in the USA, Japan and Korea

USA: Subdivision Controls

Inﬁ'astructure investment results in public land uses. It also inﬂuences the
development of private land. The construction of roads, waterlines, sewer lines, and
schools creates the pattern of what will be economically feasible and thus determines
private decisions (Levy, 1994). Accessibility is the main factor controlling the
development potential or value of land. Land values largely determine the intensity of
development. The value of land is created by its accessibility: its close proximity to
commercial, residential and governmental activity; and the ease with which it can be
reached from mass transit networks.

The pattern and the timing of infrastructure investment can thus be an extremely
powerful inﬂuence on land values and how land is used (Levy, 1994). There were no
infrastructure investment policies before the model planning and zoning enabling acts of
the 19203. These laws became the genesis of modern land development systems in the

USA. An immediate outcome of the model acts were regulations requiring developers to

14

provide necessary on-site infrastructure. Prior to the model acts, developers often
demanded that infrastructure be installed in each part of their development. The model
acts gave local governments a legal rationale for requiring developers to initialize those
costs. The object of development regulations became protection of the public.

Subdivision controls have been part of the land development system in the USA
going back to the early nineteenth century in the USA (Levy, 1994). Public development
has tended to be more the exception than the rule. Within the framework deﬁned by
zoning provisions and infrastructure requirements, the developer puts forth proposals
which are subject to public approval (Larsson, 1992). Subdivision controls typically
require the land subdivider to provide infrastructure as a condition for development
approval. Initially, these dedications were conﬁned to on-site infrastructure. However,
concern about the adequacy of infrastructure extended beyond the limits of the
subdivided property. Developers were then required to provide property or infrastructure
that was external to the development site.

But there were still problems. Land dedicated by a development was in the wrong
place, was too small, or for other reasons could not be reasonably used to satisfy
community demands for infrastructure. In addition, developers might build in piecemeal
fashion to avoid the threshold application of certain dedication and infrastructure
requirements. As a result, a system of payment in lieu of dedication came into use
(Nicholas, 1991).

Payment is usually made prior to and as a condition of ﬁnal plat approval. To

satisfy constitutionality tests, these “fees-in-lieu” payments are placed in funds earmarked

15

both by purpose and by the geographic area for which they were collected (SO, 1995).
Fees-in-lieu are similar to impact fees in concept and function. However, impact fees
need not be directly tied to in-kind requirements, and can more easily be applied to off-
site as well as on-site infrastructure. Impact fees are the most systematic, comprehensive
way of funding new infrastructure by new development.

R. Freilich and M. Schultz have classiﬁed the history of subdivision controls into
four periods, based upon infrastructure ﬁnancing system (see Table 1-2). As the
mandatory dedication of roads, parks, school sites, and open space was insufﬁcient in
dealing with the problems from urban sprawl that typiﬁed the urban USA, there
appeared a fourth phase of subdivision controls in the 19708: a linkage of zoning and
subdivision controls to the capital improvements program. The inﬁastructure ﬁnancing
system in the USA can be understood in the context of the land development system.

Figure 1-2: The History of Subdivision Regulations

 

 

 

 

 

 

 

 

Phase Period Goals of Regulations Infrastructure
Financing
First Prior to A more efficient method of Mapping the location of
Phase 1928 selling land public area and streets
Second 1928 - A method to control urban Financing on-site
Phase WW2 development infrastructure
(Subdivision Enabling Acts)
Third WW2 - A method to control Financing off-site
Phase 19603 suburbanization infrastructure
Fourth After 19708 Timing and sequential A linkage of subdivision
Phase controls of residential controls to the capital
subdivision activity improvement program

 

Source: Reorganization from Callies (1994, p.148-p.151)

16

Japan: Various Land Readjustment Techniques

The principles of land readjustment originated with the laws of land transfer,
which were adopted by Frankfurt-am-Main in 1902. The concept of land readjustment is
described as follows:

When an area of the city is ripe for development, it is declared a land readjustment
project. A site plan is prepared by the municipality, subdividing the area into an
appropriate pattern of streets, parks, schools, and sites for other uses. A calculation is
made of both the costs of installing the necessary infrastructure and the probable total
value of all lots when placed on the market. Comparison of these two ﬁgures produces
the cost-equivalent rate, the percentage of lot areas that would produce exactly enough

money to recoup the costs of installing infrastructure (Doebele, 1982).

In general, land readjustment is considered an effective land development
technique in the following situations: When individual development is presented by
fragmented or inappropriate property subdivisions, when an older urban structure is to be
re-organized, when extensive new infrastructure is to be introduced in an earlier
subdivision, when neither public sector nor any individual landowner have sufﬁcient
resources to carry out the development (Larsson, 1992).

Land development techniques, such as the buying up of land, compulsory
purchase, expropriation or gradual adjustment are often expensive and inefﬁcient in these
situations. What is more, they cause resistance from the landowners. On the contrary,
land readjustment may be a means of achieving better and more ﬂexible panning. The
procedures of land readjustment opens up the possibility of active participation by the
landowners themselves, as well as a more equitable distribution of development proﬁts.

It can also be designed so that the land itself will cover the costs involved.

17

The earliest land development system in Japan originated with agricultural land
consolidation to increase the efﬁciency of production. In 1919, the ﬁrst City Planning
Act legitimized land readjustment for urban development purposes. Land readjustment
soon became so popular that it diverted energies from conventional city planning, and
was of great importance in rebuilding, both after the great earthquake of 1923 and the
bombings of World War 2. It was used as well in solving the land problems caused by
the construction of the high-speed rail line from Tokyo to Osaka (Doebele,l982).

With economic growth and rapid urbanization in the post-war period, a new
“ Land Readjustment Law” was passed in 1954 to cover not only arable land but the whole
urban area. Up to 15 percent of land could be commandeered for roads and green spaces
without compensation. Lots below a certain acreage could be acquired by compulsory
purchase (Larsson, 1992). In recent years, the excessive pressure on urban land has made
land readjustment much more difﬁcult to administer, but it has been one of the most
important forces shaping Japanese urbanization.

Land readjustment in Japan is an extremely ﬂexible instrument, and has been
carried out by a variety of initiators. These include individual private landowners, formal
land readjustment associations, prefectures and municipalities, the ministry of
construction, governors, heads of municipalities, and public corporations such as the
Housing and Urban Development Corporation, Japan Regional Development
Corporation, and the Local Housing Supply Public Corporation.

Aside from the prefectures and municipalities, private associations have been a

dominant force. These associations are comprised of all landowners and lessees. The sale

18

of cost-equivalent land is the major source of revenue for all types of initiators; national,
prefectual, and local government that share the cost of infrastructure. For example, if the
project contains an arterial road, the national government may subsidize up to two-thirds
of the estimated cost. Financing for prefectual and municipal projects is available from
the Special Public Enterprise Finance Corporation at a modest interest rate (7 percent)
for ten years. The land readjustment technique in Japan is used for a wide range of
development projects: urban redevelopment, growth management, new residential
development, distribution centers and reconstruction of disaster areas. The area in which
land readjustment has been applied increased each year since the law was passed in
1954.

While land readjustment in Japan eases the assembly and servicing of land, it does
not compel construction in the lots when infrastructure is completed. Because of the very
high demand, it is often to the advantage of the landowner not to sell in anticipation of
receiving higher prices in the ﬁrture. A system that is very efﬁcient in getting available
lots ready for building onto the market is very inefficient in actually increasing the
housing supply.

Korea: Land Readjustment vs. Public Land Acquisition
Characteristics of Korean Development Systems

A nation’s system of land development and infrastructure ﬁnancing can not be

grasped without understanding the economic, social, political and cultural aspects of its

society. Since Korea is a small nation with a very limited amount of usable land,

 

19

residential land development has always been a matter of prime concern for public policy
and planning.

The relationship between the central government and local governments also
affects the land development system. In advanced countries that already enforce a full
local autonomy system, the role of the central government is an auxiliary one. From the
beginning, local governments hold the authority in land use planning and development in
these countries.

Korea has had only a short history of a self autonomy system, and still depends
upon the centralization of administrative authority. The central government in Korea still
holds a lot of authority in land use planning and development. Therefore, local
governments remain subordinate to the central government. However, full-scale self
autonomy has been practiced in Korea since local autonomy elections in 1995. The local
governments have gained authority over land use planning and development, but they
have had difﬁculties in dealing with complex land issues.

Another problem with the Korean land use system is the tendency to impose
almost all land use regulations by law. A number of laws relating to land use planning
and development have been established by the relevant government ministries, but
conﬂict among these laws has impeded efﬁcient land use planning and development.

A land use system can be based upon two modes: the rational-technical mode and
the consultative-participatory mode. In Korea, the former is practiced. Land use planning
is done on the basis of a comprehensive-rational plan. Consequently, the ﬂexible
implementation of land use decisions, using negotiations between interested parties

through administrative discretion, is difﬁcult to achieve in Korea.

_:=r-- --—» ----_-p-——

20

Increasing Land Values in Rapid Urbanization

Similar to most major cities in developing countries through the world, urban
land values in Korea are increasing more rapidly than the general rate of national inﬂation
and the gross national product. The economic development of Korea has resulted in rapid
urbanization, creating an enormous demand for urban housing sites. The chronic excess
demand has continuously driven up land prices. This, in turn, has produced windfall
proﬁts for landowners and developers.

Housing site development has unique characteristics that make it difﬁcult for
supply to respond quickly to demand (Doebele, 1982), because of infrastructure which
must be provided by local government or other public sectors. The private sector is not
able to easily develop housing sites as quickly as rapid urbanization demands them.
Existing land owners may hold out for future potential proﬁt due to the rising market, and
the coordinated action of various public bodies is needed to provide the infrastructure
(Doebele, 1982). This situation leads to chronic excess demand in the housing site
market, which continuously drives up land prices in Korea.

The lack of resources in local government causes infrastructure to fall behind the
demands generated by new migration, producing an even greater shortfall between supply
and demand. If the situation is ever to be remedied, local governments must be able to
recapture enough of the wealth created by urbanization to permit the installation of new
urban infrastructure. Many land policies have been proposed to resolve these problems in
Korea, such as land banking, heavy capital-gain taxation on proﬁts from land sales, and

an area ceiling system on land holdings by any single individual.

21

Land Readjustment vs. Public Land Acquisition

Land development in Korea is facilitated through land readjustment or public land
acquisition. Any type of land development method can result in capital gains or unearned
income because of an imperfect market; land readjustment and public land acquisition are
no exceptions. This is why most countries intervene in land and housing markets. But,
govermnent intervention in land development often has the effect of producing winners
and losers among various interest groups. The issues raised here focus on the
distributions of proﬁts and costs among the various interest groups.

The principles of land readjustment go back to the Law Concerning Land transfer,
which was adopted by Frankfurt-am-Main in 1902 and has been used in Germany ever
since (Doebele, 1982). Korea introduced this system via Japan with the enactment of the
Colonial City Planning Act of 1934. Accordingly, the procedure of land readjustment in
Korea resembles Japan’s, though it puts more emphasis on action by the local
governments.

Overall, the late 19303 and early 19403 can be regarded as the opening era of
modern urban development in Korea. The land readjustment system played a principal
role in this era. The very essence of Land readjustment mechanism, namely ﬁnancing on-
site and even off-site infrastructure costs by reducing individual landowners’ land area on
the basis of cost-equivalent rate which is deﬁned as the percentage of lot areas to the total
project areas made local governments develop their cities with no ﬁnancial resources.

That is, land readjustment has been an indispensable tool for managing the

urbanization of Korea. Land readjustment projects (LRPs) account for 59 percent of all

22

land development activities. Korean LRPs have been used to ﬁnance the installation of
infrastructure and the improvement of housing sites, when ﬁnancial support is
unavailable from the government. LRPs are entirely self-ﬁnanced (Lee, 1995).

Fifty three LRPs in 22 cities had been completed or were in progress in 1945.
Massive destruction of housing units and major urban infrastructure during the Korean
War, from 1950 to 1953, brought about an urgent need to provide basic urban
infrastructure for residents as well as to revitalize the urban functions. LRPs again
emerged as the most efﬁcient method of solving these problems.

The procedure of LRPs in Korea is described as follows. The formal initiative for
a project comes from local governments who have the authority of designating a project
area. Individual landowners and associations are invited to take part, because most land
development project areas are designated in privately-owned land. Considering the
mechanism of land readjustment, there is no use to develop publicly-owned land by this
approach. If landowners have not indicated a desire to take the initiative, then the project
is taken over by the local governments.

After the local government has decided the implementing agency of the project,
the requisite data are collected and a draft project plan is completed. The plan has to be
approved by the local government. The project then enters the construction and
reallocation phases, which proceed more or less parallel. A plan of the new allocation is
drawn up and put on exhibition for two weeks.

Methods similar to Japan’s are applied to the calculation of the cost-equivalent

rate. The cost-equivalent rate formally was decided on the basis of area, but gradually

23

differentiated methods have been adopted for establishing value before and after. Thus
corrections are made for general location and for a position close to main streets. On
average, the cost-equivalent rate used to be one-third of the total area, but in recent years
it has very often come to half or more. Parallel to these measures, construction work
proceeds on infrastructure. Finally, land owners start to build housing units under the
regulations of the Construction Act.

In most cases, the landowners have not had sufﬁcient technical expertise to play
an active role in the development process. This has led many land owners to sell
prematurely to middleman or housing developers, who have then cornered most of the
proﬁts (Larsson, 1992). The procedure of selling land to cover the costs has frequently
escalated the level of prices, because at this stage both individuals and public authorities
have had a common desire to obtain maxirmun cost coverage. Therefore, the developed
lots have gone to those in medium to high income classes.

In the rapid urbanization during the 19603 and 19703, LRPs were used to supply
new housing sites that could accommodate the population inﬂux and subsequent housing
needs. However, LRPs diminished in use during the 19803, as the government began to
favor the public land acquisition method. This change was caused by the disadvantages of
the LRPs technique.

First, LRPs create an excessive rise in the land prices and speculation in and
around the project area. Due to both the inadequate relay mechanisms between land
development and housing construction, a substantial number of reallotrnent plots remain
idle without being improved, simply to reap the beneﬁts of capital gains brought about by

the transactions.

24

Second, owing to the rise in construction costs and an effort to retain more
housing lots for low-income housing sites, the average cost-equivalent rate increased too
much. LRPs have to depend solely on the sale of cost-equivalent land to cover the costs.
Thus, the portion of land returned to the landowners fell below half the original land
area, which provoked strong resistance from landowners.

Finally, LRPs are limited in their ability to adequately distribute development
proﬁts between implementing agencies and the landowners as well as to the landowners
themselves. This unequal distribution of development proﬁts has created much discontent
among the landowners.

At last, the Korean government decided to change the land development policy
from land readjustment to the public land acquisition approach, by establishing the
Housing Site Development Promotion Act (HSDPA) in 1982. The government also
founded the Korea Land Corporation to implement land development projects using the
HSDPA.

The basic objective of the public land acquisition approach is to solve the severe
housing shortage faced by an urban area, and to provide it with proper infrastructure. This
approach takes land away from the existing land owners through a total purchase of the
plarmed area. Until now, the public land acquisition approach has been the main land
development system despite the resistance of landowners unwilling to sell raw land, and
the difficulties of ﬁnancing project costs. Five new towns that were built in the Seoul
metropolitan area to halt the frantic housing price inﬂation in 1989 were also

implemented by public land acquisition.

25

One of the advantages of public land acquisition is that it controls land inﬂation
by supplying relatively cheap land. The disadvantages of this approach are the front-end
land acquisition costs imposed on implementing agencies and the competition for project
initiatives between local governments and central quasi-governmental authorities, such as
Korea Land Corporation, because of the guaranteed proﬁts by development projects.
This results in strained intergovernmental relationships concerning the cost-sharing of
infrastructure.

The Comparison of Land Development Systems in Three Countries

The comparison of land development systems is needed for making a comparative
study of infrastructure ﬁnancing systems. The three countries described here have a
strong conformity in that their land development systems are used as a means of
ﬁnancing infrastructure, despite the differences in the socio-economic circumstances.

Compared with the land development system in Korea, the land development
systems in the USA and Japan have several common features. First, most land
development is implemented by the private sector. Land developments in USA are made
largely by private sector through development permits of subdivision controls, PUD
system or requests for proposal of local governments. Only one fourth of land
developments in Japan are made by public sector through public land acquisition
approach, but the remaining three fourths are developed by private sector through various
land readjustment approach.

Second, the legal devices for the cost-sharing of infrastructure are prepared. Local
governments in the USA have developed a variety of Development Impact Fees

according to their political and ﬁnancial circumstances since the ﬁscal revolt of the

26

19703. Local governments in Japan have also developed their own Guidelines for
Housing Site Development containing the standards for development permits to private
sector and charging developers infrastructure costs.

Third, local governments play a more important role than the central government
in the development and supply of land. To say nothing of the case of the USA, local
governments in Japan have exercised most of the authority on developing land within
their jurisdiction and levying infrastructure costs on developers.

The features of Korean land development systems can be matched against the
above ones. First, the public sector monopolizes land development initiatives for
keeping the private sector from reaping unearned income created by rezoning
agricultural land to urban land. The lack of standards controlling the installation of
infrastructure impedes the private sector’s participation in land development. Second, the
central government still retains some authority over the land development process,
although the delegation of authority to local governments has accelerated since the local
autonomy election in 1995. Third, laws such as the HSDPA with special provisions to
facilitate projects, are utilized as the main method for implementing land development.
An undesirable result is that the plan for housing and land supply is not harmonized with

the long-term comprehensive plans of local governments.

 

27

 

 

 

 

 

 

 

Figure1-3 : Comparison of Land Development Systems in Three Countries
'_Cl“assification ‘ , USA Japan 7 7 Korea * _ N f
The Role of - Private sector - Public sector - Public sector, such as
the Public and implements most of implements one local governments, and
Private land developments fourth of the total central public
Sectors amount corporations
- Public sector monopolizes
indirectly supports - Private sector takes development rights
the private sector charge of the
remaining three
fourths of the total
amount
Development - Development - Land readjustment - public land acquisition
Methods permitted by is the main method is the main method for
subdivision for implementing implementing land
controls land development development
- Land readjustment is
used for small-sized
projects in residential
areas
Infrastructure - Development - Guidelines for - Provisions are
Financing Impact Fee System Housing Site prescribed in Housing
System Development Site Development
- Defray Promotion Act
Implementation
System

 

Source: Reorganization from J i,1995; Hong, 1996

28

CHAPTER 2

Comparative Analysis of Infrastructure Financing System in Land

Development

USA

The Classiﬁcation of Financial Resources

In ﬁnancing infrastructure costs, the fundamental question of local governments
in the USA is whether projects should be ﬁnanced with “pay-as-you-go ﬁnancing” or
“debt ﬁnancing”. (National Association of counties, 1990). Pay-as-you-go ﬁnancing is
when local governments pay for infrastructure costs from revenues, such as taxes, user
charges or fees. Debt ﬁnancing occurs when local governments pay for infrastructure
costs from the issuance of debt.

Debt ﬁnancing is appropriate not only when other sources of revenue are
unavailable, but when economic, ﬁnancial, and planning considerations dictate its use
(National Association of Counties, 1990). The most widely used form of debt ﬁnancing
by local governments is a bond issue. Municipal bonds that are backed by the full faith,
credit and taxing power of the issuing locality are referred to as general obligation bonds.
Revenue bonds, however, are backed instead by a pledge of the revenue generated by the
facility that is being ﬁnanced (Levy, 1994).

Revenues that are used to ﬁnance ﬁnancial resources for infrastructure can be
classiﬁed into two types: public revenue sources and private revenue sources. Public

revenue sources include general taxes, such as property, sales and income taxes, special

29

taxes and user charges. Private revenue sources include development agreements and
development impact fees.

The more rapidly growing regions of the USA have been changing their
infrastructure ﬁnancing approach, from general taxes to special taxes and user charges,
as public revenue sources. There has also been a gradual shift from public revenue
sources to private revenue sources. Financial restrictions starting in the late 19703, such
as increases in construction costs, reductions in federal subsidies, and voters’ rejection of
bond issues have led to these changes.

Public Revenue Sources

Public revenue sources are classiﬁed into two forms: pay-as-you-go ﬁnancing and
debt ﬁnancing. With pay-as-you-go ﬁnancing, local governments pay for infrastructure
costs directly from taxes and user charges. With debt ﬁnancing, local governments
ﬁnance infrastructure costs through the issuance of debt.

Pay-as-you-go ﬁnancing and debt ﬁnancing have their own advantages and
disadvantages. Local governments are concerned with the effect of future growth on their
revenue structure and expenditure requirements, before they decide how to ﬁnance
infrastructure costs. The effects of future growth will vary according to the strengths and

weaknesses of local govemment’s economic and ﬁscal conditions.

 

30

Figure 2-1: Summary of Public Revenue Sources

 

Category Revenue Characteristics
Sources

 

General Taxes -Property tax is the principal and most stable local
revenue source of infrastructure ﬁnancing.

-Local sales and income taxes can be earmarked for
inﬁastructure ﬁnancing.

 

Pay-as- you- Special Taxes -Motor fuel and hotel room taxes require users to

go Financing pay for a portion of the Infrastructure they use.

 

User Charges User charges are the most appropriate for
infrastructure services that should be paid by the
people who directly beneﬁt from them.

-User charges must be able to exclude people who
do not pay for the infrastructure services.

 

General -It is the most secure form of debt that a local
. . ovemment can issue.
OblI atron g
g -Its advantages to revenue bonds are market
Bonds acceptance, low interest rates, and no reserve
requirement.

- Its disadvantages to revenue bonds are longer
preparation time, dependence on debt limitations,
and issuer’s general credit.

Debt Revenue -These are user- based securities backed by a
pledge of a particular revenue stream.

-Its advantages to general obligation bonds are no
requirements for approval, no dependency on debt
limits and debt seemed by end users.

- Its disadvantages to general obligation bonds are
reserve funds, coverage covenants, and limited
capacity.

 

Financing Bonds

 

 

 

Source: Reorganization from ULI, 1986, p.9-p.l6; National Association of Counties, 1990, 3tage3, p.8-
p.11; William, 1992, p.105-108, p.120-122

General obligation bonds are readily accepted by all investor groups, because the
most secure direct debt instrument is issued by local governments. Investors are willing
to accept lower interest rates in exchange for limited risk. This security makes investors

not require the ﬁmding of a debt service reserve. On the contrary, voter approval of

 

31

general obligation bonds requires local governments to a spend longer preparation period.
In addition, almost all governments are subject to debt limitations.

Revenue bonds do not require voter approval, because they do not pledge the
govemment’s taxing authority. They are considered the most equitable form of capital
funding because they are repaid by the individuals who beneﬁt directly from
infrastructure. On the contrary, issuers fund a debt service reserve to protect investors.
Issuers must also pledge or covenant to maintain rates and charges to provide some
margin for error.

Private Revenue Sources

While public ﬁnancing involves the sharing of costs among different segments of
local government or among different generations of residents, private ﬁnancing is an
individual payment of the speciﬁc infrastructure beneﬁt. The emergence of private
ﬁnancing to fund new infrastructure is the outgrowth of the political situation in which
many cities found themselves in the late 19703 and early 19803 of the USA (ULI, 1986).

Considering social response toward increased taxes and the growing size of
government, the politically acceptable solution was to seek alternatives that shifted the
burden of new infrastructure costs to developers, and to new residents. One of the
primary mechanisms local governments have utilized in funding and installing on-site
infrastructure generated has been the use of development exaction (Callies, 1994).
Besides, local governments required land or money from developers to meet the needs
for off-site infrastructure. Fees in lieu and Development Impact Fees have been employed

to make those who create these needs pay for them

 

32

Development Impact Fees
0 Historical Background

The development impact fee has evolved from public policies toward land use
and the provision of inﬁastructure (Nicholas, 1991). Local governments did not have
effective land use systems until the planning and zoning enabling acts were established in
the 19203. These acts mandated developers to install on-site infrastructure, and gave local
governments a legal rationale for requiring developers to carry the burden of
infrastructure costs. Subdivision controls initially required on-site infrastructure as a
condition for development approval, and later off-site infrastructure was also required.
The problem has been that dedicated land may be in the wrong place, generating the
need for a system of ﬁnancial payments in lieu of land.

Until the 19703, most local governments believed that new developments resulted
in an improved tax base that could be used to build better infrastructure (N icholas,l99l).
New developments would allow existing residents to use better infrastructure at lower
costs. On the contrary, however, many development projects have increased demand for
new infrastructure and added to the tax burdens of existing residents. A new land use
system was required to cope with these problems and absorb all of the costs which new
development imposed on existing residents. Inﬂation and the ﬁnancial difficulties forced
the local governments to consider all possible revenue-enhancing sources. These sources
include new user charges, negotiated exactions, and development impact fees.

From a political standpoint, the situations in the 19703 and 19803 of the USA
forced local governments to seek all possible revenue-enhancing sources. Voter resistance

to property tax coupled with intergovernmental funding cutbacks manifested itself in

33

rejection of new general obligation and revenue bonds for infrastructure needed to
accommodate new development (Nicholas, 1992). These revenue-enhancing sources
include new or higher user fees, privatization of some services, negotiated exactions of
new development requiring planning approval, and Development Impact Fees (DIF). The
most sophisticated form of them is DIF.

0 Legal Rationale for Development Impact Fees

Development Impact Fees (DIF) are fees or charges imposed on developers to
ﬁnance additional infrastructure that alleviates the detrimental effects caused by a
speciﬁed development. Development impact is measured by a service standard
determined in advance, which include roads, water and sewer facilities, schools, and
parks.

In rapidly growing states such as Florida and California, the courts are famous for
clearly deﬁning the conditions needed for DIF ordinances. Courts in Florida have
determined that DIFs should be characterized not as a tax, but as a regulation. In
general, DIF is regarded as a tax, if the purpose is to raise funds for expanding existing
infrastructure. DIF is regarded as a police power regulation, if it is imposed to ensure the
adequate supply of infrastructure caused by new development.

The legal rationale for development impact fees has focused on whether local
governments possess the authority to apply DIFs using existing systems. One of the most
important issues in imposing DIFs is determining a proportionate share of the

infrastructure cost. Local governments must show that impact fees imposed on the new

in:

 

 

 

34

development satisfy the three tenets of the rationale nexus test. The “rational nexus” test
is a determination of reasonableness. According to the Florida Supreme Court:

- There must be a reasonable connection between the need for additional
infrastructure and the growth resulting from new development
- The fees charged must not exceed a proportionate share of the cost
incurred in accommodating the development paying the fee.
- There must be a reasonable connection between the expenditure of the
fees collected and the beneﬁts received by the development paying the
fees (Nicholas, 1991).

Speciﬁc veriﬁcation of the rationale nexus depend upon: the necessity of
expanding infrastructure due to new development, the proportionality of required
costs, the responsibility of using fees in accord with imposition purposes, the
appropriateness of imposing fees according to development patterns, the
pertinence of infrastructure standards, the mode of payment, the timeliness of
infrastructure supply, and equity considerations.

0 The Determination of Proportionate Cost-Sharing of Infrastructure

The increasing cost of maintaining the existing infrastructure, combined with the
decline in public support for taxation alternatives, has forced local governments in the
USA and other countries to seek alternatives (Nicholas, 1991). Development Impact fees
were designed in response to these situations.

One of the most critical concepts used in determining impact fees is that the land
developer must bear a proportionate share of the new infrastructure caused by that
development. Proportionate cost-sharing can be accomplished by rational efforts to
maximize the degree of fairness in the impact fees. The criteria for a proportionate share

can be created through a test for rationality and proportionality.

“I“ A m... I‘ll“

35

Rationality requires the establishment of a connection (nexus) between new
development and the infrastructure required to accommodate it; the identiﬁcation of new
infrastructure cost; and the appropriate sharing of that cost in relation to beneﬁts
reasonably received (Nicholas, 1991).

The proportionality test requires more practical and technical processes which
depend on the characteristics and capacity of speciﬁc infrastructure that a new
development will need. The capacity of needed infrastructure can be calculated by
multiplying the service standard for that infrastructure by a demand unit, such as the
number of residents, households, or trip-ends: Capacity of Needed Infrastructure =
Service Standard x Demand Unit.

Service standards are the most disputed element in determining impact fees
between local governments and developers, because the demand unit is considered a
ﬁxed ﬁgure estimated from a development plan. The process of calculating infrastructure
capacity is as follows:

Figure 2-2: The Calculation of Additional Infrastructure Capacity

 

Type of Service Standard Demand Unit Calculation Additional

 

 

Infra- Infrastructure
structure Capacity
Parks 6.07acres/ 2,526 persons 2,526*(6.07 0.0153 parks
1 ,OOOpersons /1000)
Schools One student station / 0.6977 school-age 0.6977*1 0.6977 student
pupil children at one stations
station / pupil

 

Roads LOS D(no greater than Five trip-ends a (5*3.8) / 8,750 0.00217 lane-
8,750 vehicles / lane / day of 3.8 miles miles of roads

mile)

 

 

 

 

 

Source: Reorganization from Nicholas, 1991, p.84-p.87

36

The infrastructure cost can be calculated by multiplying the capacity of
infrastructure by the cost per unit of capacity: The Infrastructure Cost = The Capacity
of Infrastructure x the Cost Per Unit of Capacity. The calculated costs are then
adjusted by the consumer price index or interest rate, since infrastructure is usually
installed over several years.

After calculating the infrastructure cost, many other factors are considered to
achieve a proportionate cost-sharing of infrastructure . The Utah Supreme Court set out
seven factors that should be considered in establishing the proportionate cost-sharing of
infrastructure to be paid by a new development:

- The cost of existing infrastructure.
- The methods by which the existing infrastructure was ﬁnanced. (such as
user charges, bonds, special assessments, general taxes, and federal grants)

- The extent to which new developments have already contributed to the
cost of the existing infrastructure, such as through property taxes and
special assessments.

- The extent of ﬁrture contributions, such as user charges.

- The extent to which new developments are required to construct
infrastructure as conditions of development approval.

- Extraordinary costs in serving the new development.

- The time-price differentials inherent in fair comparisons of amounts paid
at different times (Nicholas, 1991 ).

As mentioned before, DIF has its historical background in subdivision controls.
Subdivision controls as the typical land development system in the USA are not relevant
to the Korean situations. Contrary to the situations in the USA, Korea has a very limited
amount of usable land with rapid urbanization. Accordingly, land developments in Korea

have higher density and fewer suburban-style single family housing units. For all that,

37

there may be universal factors applicable to infrastructure ﬁnancing systems of both
countries.

The above seven factors for the proportionate cost-sharing of infrastructure are
one of those. They should also be considered in the cost-sharing of infrastructure in
Korea. Due to the absence of an institutional inertia, however, practitioners rely upon
experience and traditional practice, leading to ad-hoc negotiations between local
governments and developers over the cost-sharing of infrastructure. Since development
impact fees are a product of evolving land policies, the equivalent system in Korea should
evolve in response to the speciﬁc conditions of Korean land development systems.
Downtown Linkage Programs

Downtown linkage programs are the urban version of development impact fees.
Five cities ( Berkeley, CA, Boston, MA, Jersey City, NJ, San Francisco, CA and Santa
Monica, CA) have adopted linkage policies since 1981. In the same way that developers
of suburban housing sites are required to pay for off-site infrastructures through
development impact fees, developers of large-scale downtown commercial development
are required to ameliorate the negative impact of their projects through linkage programs.

Linkage fees are different from impact fees in terms of the type of facility that is
ﬁnanced (Nicholas, 1991). Linkage fees are charged to install socially desirable
infrastructure that may or may not provide any beneﬁts to the development paying the
fees, while impact fees are usually charged to install infrastructure that directly beneﬁt
the development paying the fees. The basic premise of linkage fees is that new

development should bear costs to mitigate the social problems by new development,

 

38

while that of impact fees is that new development should pay the infrastructure costs by
new development.

Downtown impact fees were designed to reduce detrimental extemality from
large-scale commercial development on day care, employment, housing, open space and
transportation. Commercial developers have the option of either paying impact fees or
providing the required facilities or services (Nelson, 1988). Formula or negotiated
development agreements are used to calculate the amount of impact fees. Developers
must agree to these requirements in order to obtain development approval, as in suburban
housing site developments.

Boston, San Francisco, and Santa Monica have adopted a linkage program that
connect large-scale commercial development with housing, transit and other facilities
since the 19803 (Keating, 1986), although the revenue stream has declined with the
slowdown of downtown ofﬁce construction in these cities. In all of the cities where
downtown linkage development policies have been proposed or adopted, they have
sparked intense debate (Porter, 1985). It seems to be due to the indirect relationship
between new development and the need for the speciﬁed facilities in linkage fees.

According to Keating, only a few cities in the USA are likely to adopt linkage
policies, and the effects and legality of linkage are still unresolved. Whether linkage fees
will be subjected to the same tests as impact fees must be resolved by the courts (
Nicholas, 1991). The above facts make it difﬁcult to decide whether linkage fees as a
relatively new concept are appropriate for the booming commercial districts of Seoul.

Seoul City Government has enforced Development Fees on Large-Scale Buildings since

 

‘3 I...“

39

1994, focusing on decentralizing economic activities in the Capital Region rather than
mitigating the negative effects of downtown growth.

Japan

Guidelines for Housing Site Development

Background

Japan experienced urban sprawl arid chaotic development around its metropolitan
areas with the process of rapid economic growth, causing ﬁscal stress to local
governments. Local governments prepared guidelines for the installation and payment of
infrastructure, to relieve the ﬁscal stress they faced due to the rapid increase in demand
for these facilities (Kang, 1987). They requested developers to carry the installation costs
of infrastructure according to these guidelines.

Japan introduced the development permit system and the prior negotiation system
with revisions to the City Planning Act in 1968 (Wo, 1994). This made it possible to
regulate housing site development projects through comprehensive land use planning, and
provided a legal basis for local governments to enforce the administrative guidelines.
This guideline administration has been used to alleviate the detrimental inﬂuence of
rapid urban sprawl.

The Guidelines for Housing Site Development (GHSD) in Japan were based upon
"the Standard for Implementing the Site Development Project” established by a local
government named in San-Ki City (Kang, 1987). The ﬁrst GHSD that required the

developer to carry infrastructure cost was made by Cheon-Seo City in 1967. After that,

40

the GHSD concept started to spread across the country, particularly in metropolitan areas
such as the Tokyo Region and the Yokohama Region.
The Scope and Stanm of GHSD Regulation

Although the GHSD is administrative in its form, it is strong enough to force
developers to bear the burden of infrastructure costs. The scope of GHSD regulations
differs according to the local governments and the size of projects. GHSD has
contributed to the orderly development of housing sites, and has improved the existing
legal system for land development, but GHSD has also been criticized severely.

GHSD is not a law or an ordinance, but only a voluntary agreement between local
governments and developers. As a result, GHSD is criticized as a unilateral exaction
without the legal basis. The most severe criticism of GHSD is that the cost burden
imposed on developers is excessive. These excessive costs are included in the total
project costs which then raises the sale price of developed land. The increase in land
value near the project area imposes an extra burden on local governments in providing
new infrastructure in the future.

Another criticism is the lack of standards for calculating infrastructure costs. This
has led to excessive costs for developers. The scope of infrastructure which has to be
installed by a land development project differs according to the size of project. Finally,
the fees imposed by GHSD are not earmarked for the installation of infrastructure which
is exclusively used by those who pay for the fees. The burden of infrastructure cost is not

linked to the beneﬁt produced by infrastructure.

41

Defray Implementation System

In principle, local governments raise funds for installing infrastructure through
tax revenues, intergovernmental revenues, or bond issues. Local governments
experiencing rapid growth almost always lack the money to pay for new infrastructure.
In Japan, the central government has prepared various special measures for ﬁnancial
support, such as interest rate subsidies and a defray implementation system.

The defray implementation system is an infrastructure ﬁnancing method in which
public agencies (such as the Housing and Urban Development Corporation) provide the
initial funds for infrastructure costs, which are then repaid by local government (Hong,
1996). This method is based upon agreements among ﬁve central government ministries,
and is restricted only to the projects implemented by public agencies.

This system has allowed local governments to install infrastructure without
experiencing serious ﬁnancial burdens, borrowing funds at low interest rates of 4.5
percent. In addition, Japan has introduced another similar system whereby public
implementing agencies directly install infrastructure for land development projects in
place of local governments.

The infrastructure ﬁnancing system in Japan has been evolved through the
experience of local autonomy for over 50 years. While local governments have
developed the Guidelines for Housing Site Development to cope with rapid urbanization,
the central government has taken measures to alleviate the ﬁnancial burdens of local

governments in installing infrastructure.

42

Korea

Housing Site Development Project
Implementing Agencies

As mentioned in Chapter 1, the most frequently used land development method
in Korea is public land acquisition authorized by the Housing Site Development
Promotion Act (HSDPA) of 1982. HSDPA allows the public sector, such as local
governments, the Korea National Housing Corporation and the Korea Land Corporation
(KLC), to participate in land development projects through public land acquisition and
the use of eminent domain.

Among the public agencies, KLC has developed 44.2 percent of the whole
housing site development projects. Local governments and Korea National Housing
Corporation have developed 39.0 percent and 15.7 percent respectively. On the average,
KLC developed around half of the whole housing site development projects by areas.

Looking into development area ratios of implementing agencies by the year,
these trends have been a little bit changed since 1990, when the localization in Korea
began. Local governments insisted their priorities to develop the land within
jurisdiction. It is expected that the discords on development initiatives between local
governments and central public corporations is increasing with the progress toward local

autonomy.

 

I

100%
90%

80% ,

70%
60%
50%
40%
30%
20%
10%

0%-

43

Devolopment Area Ratlo by Implementing Agencles

 

 

 

Development Process

92

93

95

 

D KLcT

- Local
Govn.

- KNHC

 

The development processes under HSDPA is composed of three steps: the

designation of a project area and implementing agency, development plan approval, and

execution plan approval. The project area and implementing agency are designated by the

central government, the Minisn'y of Construction and Transportation (MCT).

The approval authority of development plans and execution plans were entrusted

to local government from the MCT in 1995. This is a result of the progress toward full

local autonomy in Korea. Sudden changes in approval authority, however, has led to “trial

 

44

and error” development, especially in the cost-sharing of infrastructure. In fact, the “trial
and error” problems are largely a result of the lack of human resources and institutional
devices in the local governments.

After obtaining approval, the implementing agency begins land acquisition and
starts site construction. When the construction is completed, the developed housing sites,
(including lots for commercial use) are sold to the private sector at the price prescribed by
the HSDPA. The purpose of price regulation is to assist low-income people to acquire

their own houses more easily.

 

45

Figure2-4: Housing Site Development Process through HSDPA

 

 

ﬂE_| Feasibility study I

1

Proposal for Designation of
Project Area
IA e MCT

I

Designation of Project Area
Publ'c and Implementing Agency
1 MTC > IA Negotiation on the
Cast-Sharing of

DLevelopment Plan Approlvzl 1 Inmsmcmre

 

 

 

 

 

 

 

 

Sector

 

 

 

 

 

 

IA<-———» LG
11

[L Ezecution Plan Approval

 

 

 

Land Acquisition and
Site Construction

if

‘dkl Selling Housing Sites

 

 

Installation of
~ Infrastructure

 

 

 

 

 

 

Private I Building Construction 1

Sector

 

IA: Implementing Agency
MCT: Ministry of Construction and Transportation
LG: Local Government

 

 

 

The land prices prescribed by HSDPA are different according to regions and

uses. In the case of Seoul and Pusan metropolitan areas, primary school sites, rental

46

housing sites and public housing site less than 60m’ are sold at 70 percent to 100 percent
of project cost. Middle and high school sites and Housing site transferred through
negotiation are supplied at project cost. In general, over 70 percent of housing sites are
sold to private developers less than the project cost. The lowest prices are on lots with
homes that are rented or sold to low-income people.

Detached housing sites and housing sites of which plot area exceeds that of public
housing site are supplied at appraised prices. Sites for commercial use are supplied at
highest bid prices. The implementing agencies compensate the loss from sites supplied

less than project cost by selling sites for commercial use at appraised prices.

 

 

 

 

 

 

 

Figure 2-5: Land Price and Supply System of HSDPA (Unit: % of Project Cost)
Price * . . Use . ‘ Seoul and Large Towns Other Areas
, ‘ I ‘ ‘ Pusan Areas "
Free Roads, Parks Donated to
Local
Governments

Primary School Sites 70 7O 70
Less
than Rental Housing Sites 90 80 70
Project , . .
Cost Public Housmg Sites

- Less than 60m‘ 90 90 80
- Between 60m2 and 100 90 80
85m’

Relocation Housing Less than Costs Less than Costs Less than Costs

Sites
At Other School Sites 100 100 l00
Project
Cost Housing Sites 110 110 110

Transferred through

Negotiation
Higher Detached Housing Sites Appraised Price Appraised Price Appraised Price
than
Project Housing Sites whose Appraised Price Appraised Price Appraised Price
Cost Plot Area is in Excess of

that of Public Housing

Site

 

 

 

 

 

47

Source: Reorganization from Housing Site Development Promotion Act

The Cost-Sharing of Infrastructure through HSDPA

The existing housing site development projects in Korea are classiﬁed into
thirteen kinds, based on the several laws, including both the land readjustment and the
public land acquisition method. Above laws have their own infrastructure standards
suitable for the purpose of development. For example, the Urban Redevelopment Law
used in dilapidated urban area has different infrastructure standards from those of
HSDPA used in suburban area. Infrastructure standards prescribed in these laws are
uniformly applied to the whole nation. That is, they are not ﬂexible enough to reﬂect the
regional and locational characteristics of installing infrastructure. The ﬁnancing
mechanisms in these laws largely based on the causer principle assumes the form of
development exaction or fees in lieu in the USA.

Among these, the most frequently used law is the Housing Site Development
Promotion Act, because it has various measures for facilitating project procedures, such
as the use of eminent domain, and rezoning from agricultural use to residential use.
HSDPA is the only law prescribing the cost-sharing of off—site infrastructure. The
infrastructure provisions of the HSDPA outline those who should install the
infrastructure for a housing site development project. The road, water supply and sewer
facilities which are over 200m from the boundary of the project area should be installed
by the local government. The implementing agency is required to install the remaining
section of roads, water and sewer systems from 200m to the project area boundary.

Electricity, gas, district heating systems and communication facilities which exist

outside of the project area boundary should be installed by those public corporations

48

who supply these services, such as the Korea Electricity Corporation and the Korea
Communication Corporation. HSDPA also allows the central govermnent to subsidize
up to half of project infrastructure costs. This has just a declarative meaning. Instead,
HSDPA has been used to ﬁnance infrastructure costs which are not directly related to the
land development projects.

Finally, HSDPA prescribes that implementing agencies to install infrastructure at
their own expenses, followed by repayment of the cost, similar to the defray
implementation system used in Japan. While the Japanese defray implementation system
is widely utilized in Japan to ﬁnance infrastructure costs, the same one in Korea has not
been used much. It is because the Japanese central government with enormous trade
surplus has had affluent ﬁnancial resources needed for enforcing defray implementation,

but the Korean central government has not secured ﬁnancial resources to do so.

 

49

Figure 2-6: Cost-Sharing of 011- Site Infrastructure by HSDPA

 

 

 

Item Content
Those - Road, water supply, and sewer: Local government
Who Should
Install the - Electricity, gas : Those who supply the service
Infrastructur _ _
e - Communication : Central government
Range of - Road: The excess part of 200m from the boundary of project area
Installation

- Water supply and sewer: The excess part of 200m from the boundary
of project area

- Electricity, gas, district heating systems : To the boundary of project
area

- Communication: To the boundary of project area

 

 

Burden of Those who install the infrastructure
Cost (the central government can subsidize up to half of the cost)

 

 

Source: Reorganization from Housing Site Development Promotion Act

Figure 2-7: Diagram of Off-Site Infrastructure by HSDPA

 

Urbanized Area Project Area

 

 

 

L..._ .J

 

 

 

 

 

 

 

 

 

 

 

The Excess Part of 200m_‘ 200mL J
" T 'l
Existing Infra. Off-Site Infra. On-Site Infra

 

 

 

Special measures by HSDPA is to supply cheap buildable land by lowering
infrastructure costs in small to medium-sized housing site development projects.
However, large-sized projects or even “New Town projects” have been developed by
HSDPA. Consequently, the infrastructure provisions of HSDPA has become impractical.

This impracticality has made most local governments compel implementing agencies to

50

bear “extra costs beyond HSDPA”, which are over their proportionate share. For example,
they impose conditions to install roads irrelevant to the development project in an
approved development plan. At last, this results in ad. hoc negotiations in determining
the cost-sharing rate of infrastructure of housing site developments.

In summary, impracticality of the provisions in HSDPA, the lack of local
government ﬁnancial resources, and the designation of project areas by the central
government through top-down approach, bring about unproductive discords between
local governments and implementing agencies.

The Extra Costs of Infrastructure in HSDPA

The infrastructure costs in HSDPA can be broken into two elements: the costs
covered by HSDPA, and the extra costs beyond HSDPA mentioned before. The
composition of infrastructure costs in Figure 2-8 shows that the extra costs amounts to
46.1 percent of the total, while the costs covered by HSDPA is 53.9 percent. The extra
costs is described as the unfair burden imposed on implementing agencies besides the
costs by HSDPA through the approval processes of development plan or execution plan.
For example, they include all the costs needed for installing roads, water supply and
sewer systems exceeding 200m from the boundary of project area. In most projects,
roads take the largest portion of the total extra costs.

The regional distribution of the extra costs is another problem. As shown in
Figure 2-8, Kungki province (which is adjacent to the Seoul Metropolitan Area) accounts
for 41.6 percent of the total extra costs. Kyungbuk and Jeonnam also account for a

comparatively large amount of the extra costs, from 10.8 percent to 16.2 percent. The rest

 

of the regions account for a very small amount of the extra cost, ranging from zero to 3.4

percent.

Figure 2-8: HSDPA and Non-HSDPA Infrastructure Costs

(Unit: Million Won')

 

 

 

 

Region Total Costs by HSDPA Extra costs ﬁatio by Region
Seoul 185,207 111,810 60.4% 73,397 39.6% 18.3%
Pusan 17,423 17,423 100.0% 0 0.0% 0.0%
lncheon 6,756 6,756 100.0% 0 0.0% 0.0%
Kyungki 287,319 120,772 42.0% 166,547 58.0% 41.6%
Kangwon 45,819 33,733 73.6% 12,086 26.4% 3.0%
Chungbuk 15,554 14,104 90.7% 1,450 9.3% 0.4%
Chungnam 42,212 32,312 76.5% 9,900 23.5% 2.5%
Jeonbuk 29,714 16,135 54.3% 13,579 45.7% 3.4%
Jeonnam 104,997 40,121 38.2% 64,876 61.8% 16.2%
Kyungbuk 87,504 44,432 50.8% 43,072 49.2% 10.8%
Kyungnam 33,240 26,664 80.2% 6,576 19.8% 1.6%
Jeju 13,568 4,800 35.4% 8,768 64.6% 2.2%
Total 868,773 468,522 53.9% 400,251 46.1% 100.0%

 

 

 

 

 

 

Source: KLC internal data
' 1,000 won approximately equals 1 U.S. dollar

 

350,000 4

300,000 -

200,000

Million Won

150,000

100,000

50,000

250,000 -

 

 

HSDPA and Non-HSDPA infrastructure Costs

 

 

 

I I Costs by HSDPA
i

I: Extra costs

 

 

52

The distribution of the extra costs are important for the local governments, because they
are used to install infrastructure which become the basis for economic development and
growth. The arbitrary deviation in the regional distribution of the extra cost indicated in
Table 2-6 indicates that the cost-sharing of infrastructure by HSDPA has been made on
the basis of ad-hoc negotiations.

New Town Development Projects

The Socio-Economic Bac_kground of Five New Towns

The Korean government announced the New Town Development Plan in 1989.
Two New Towns were conceived to be built in the next ﬁve years: Bundang (for 420,000
people) located south of Kangnam, Seoul; and Ilsan (for 360,000 people) located
northwest of Kangbuk, Seoul. A month later, three other New Towns
(Pyungchon, Sanbon and Joongdong) which had originally been planned as housing
complexes were included in the plan.

The Five New Towns were built in response to the problem of housing price
inﬂation. Housing prices in the Kangnam area of Seoul, which serve as the barometer of
housing prices in the Seoul Metropolitan Area and other big cities in Korea, increased by
30 to 50 percent in six months. This frantic housing inﬂation during 1989, largely due to
the rapid growth of the Korean Economy, widened the economic disparity between home
owners and non-homeowners.

This housing price inﬂation became a major cause of social disorder. The
inﬂationary effects on general prices and wages were considerable. Coupled with labor
disputes, rapid price inﬂation threatened the social stability as well as the economy,

creating an urgent need to halt the inﬂation. The Ministry of Construction and

 

53

Transportation identiﬁed the major cause of house price inﬂation as the shortage of
supply due to the lack of affordable land in Seoul, as housing demand sharply increased.
The Extra Costs of Infrastructure in Five New Town Proiects

To cope with these situations, the government had to adopt a strategy to supply
cheap land: Five New Town Projects. The government also chose HSDPA as the most
efﬁcient existing land development system to implement New Town Projects. This
choice brought about the same kinds of problems of the cost-sharing of infrastructure as
in housing site development projects: ad.hoc negotiation situations in determining the
cost-sharing rate of infrastructure.

The project costs of housing site development projects are composed of land
acquisition costs, construction costs, and infrastructure costs. However, the project costs
of the Five New Towns are different from those of general housing site developments in
terms of the amount of infrastructure costs borne by developers. The infrastructure costs
of New Town Projects account for the largest portion of the total project costs as shown
in Figure 2-9. The Infrastructure costs of Bundang and Ilsan amounted to 43.3 percent
and 43.2 percent respectively. The infrastructures cost of Joongdong and Mulkeum

occupied 28.6 percent and 25.8 percent respectively.

54

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

{'i—‘Tg'h ref-97 'T"ﬁ8"'ccm'posTti6n armies—(663311711?'F'iva' New T'owns 3
EFroiect Total Cost Land Acquisition Construction n ras ruc ure
name ' (Millibn Won) ' ' Cost cost ' " ' Cost ,
gJoongdong 344,486 100% 177,478 51.5% 68,632 19.9% 98,376 28.6%
gPy'u'n’gchon ”"'1',228,T31 '1‘00'%' "540,600 ' 44.0% ”"'1'88,6‘8"4 15L4% ' 499,447 40.6%';
E‘B'un'da‘nq” 4,169,643 100% 1,261,883 303% ”1",1'0‘0’2’6'1 "264% "1,807,499 43.3%'
Ellisanmm‘” ""2,660',"1'59 100% " 888,013 7' 33.4% "622,667 "23.4%' ' 1,149,479 43.2%;
1Mulkeum" 2,187,670‘100% ' 591,810 27.1% 1,030,960 47.1% 564,900 25.8%’
,Total 10,590,689 100% 3,459,784 32.7% 3,011,204 28.4% 4,119,701 38?]:
rSource: KLC in ernal data I
f The Composition of Project Costs in the Five New Towns
I 100%
1

80% 1
1 7 ‘/
1 60% .. _ , _7_ ., g" Dﬂ'ifrastruEture "1
1 ‘ Cost
~ 40% 77 1 .Construction
1 g, - ,7 a

1
20% .. . Land
Acquisition
0% Costi
Joongdong Pyungchon Bundang Ilsan Mulkeum

 

Project Nam e

These infrastructure costs in the New Town projects can also be broken down
between the costs covered by HSDPA and the extra costs beyond HSDPA as in housing
site development projects. Figure 2-10 shows that the amount of the extra costs beyond
HSDPA is positively related to the project area. Larger new town projects have more
non-HSDPA extra costs. The extra costs in Five New Towns caused by the impracticality
of infrastructure provisions of HSDPA almost amount to four times of the costs covered
by HSDPA. The impracticality of infrastructure provisions in HSDPA is that the
implementing agency has the responsibility to install infrastructure for only 200m from
the boundary of the project area, and reached the climax in the Five New Town Projects.

On the whole, ad.hoc negotiation situations caused by this impracticality had two

negative effects on the participants of New Town developments. First, new residents

55

experienced inconveniences from the delay of installing infrastructure. In New Town

developments, it caused a serious social problem. Second, all participants of

developments,

received economic losses from these raised costs.

such as new residents, implementing agencies and local governments

Tab lo 2 :10”: H S 1') PA" a n d N?) n -l-l S D P A In nighnature” C o s temln' Fiv e Ne w "T own a

(Unit: Minion won);

 

1
Costs by HSDPA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Project Name Total Area Extra Costs

' (1.000m 2) "ae'ybna’nson """ 1
Joong dong 98,376 1,213 25,478 25.9% 72,898 74.1%1
‘r‘ayun’ge'h'bn' 499,447 5,105 "”"2"oo,'781 40.2% 29'8‘,’6”'6‘6‘ 59.8%1
”Bunda'ﬁ‘g’” ' ' """i’;807,499 19,691 182,018 10.1% 1,625,481 "89.9% "
jii’sa'h "'"1",’1’49,479 """”“1’5,736 """1'”7‘7",’4"24 15.4% 972055 ”84.6%”?
EM ul'keu’m ' 554,900 “10,104 "211,100 3’7.’4‘%' 353,800 62.6%1
gTotal 4,119,701 51,850 796,801 19.3% 3,322,900 80.7%1
1 HSDPA and Non-HSDPA Infrastructure Cost: In Five New Town: ‘
51
1’1
14 1..
.11 ..
11 1..
L1 1
1 Déﬁra
1 Costs
..1 1-Cosls by‘

HSDPA ‘

 

11 Joong dong
1

Pyungchon

Bundang

Project Nam I

Ilsan

 

 

Mulkeum

 

56

CHAPTER 3
Premise for Introducing DIFS into Korea

The Capital Budget Planning (CBP)

The CBP Process

Capital Budget Planning is a planning tool that selects and constructs publicly-
funded physical improvements and community facilities within the constraints of the
budget. The planning process of Capital Budget results in a ﬁve or six-year Capital
Improvement Program as a multiyear plan that projects spend for all anticipated capital
projects. Capital Budget represents the ﬁrst year of the CIP (National Association of
Counties, 1990). An important distinction between CBP and CIP is that the one-year
budget may become a part of the legally adopted annual operating budget, whereas the
longer-term program does not necessarily have legal signiﬁcance (So, 1995).

The Capital Budget establishes a link between ﬁscal policy and land use policy.
First, it creates a ﬁnancial management system that controls and monitors revenues and
expenditures. Second, it implements the land use plan by funding speciﬁc actions or
projects which may be formally connected to the comprehensive plan. Finally, it
coordinates capital spending decisions with other housing and community development
policies. As an actual example, the Florida state legislature mandated that all local
governments prepare capital improvement element for their comprehensive plans in
1985 (So, 1995). The Michigan State Municipal Planning Act also stipulated that
planning commissions should prepare six-year CIP to implement comprehensive plans.

A budget is composed of two parts: the capital budget and the current budget (J i,

57

1995). While the capital budget includes the unrepetitive incomings and outgoings, the
current budget describes the repetitive incomings and outgoings. Namely, CBP is
divided into current revenues and expenditures and long term revenues and expenditures.
The capital budget is superior to the current budget in obtaining consent for issuing bonds
from a local assembly.

Those who favor capital budgets or double budgets, criticized the classical
ﬁnancial theory and established the theory of deﬁcit ﬁnances to overcome depression: a
budget system which makes up the deﬁcit budget, and then repays bonds. They
emphasize that issuing bonds makes no changes in the amount of net assets, if incomings
from bonds are appropriated for capitalistic outcomings.

CBP in the USA was established in the 19408. Public investment projects which
had been loosely executed in the 19203 drove local governments to the verge of
bankruptcy. During the 19305, local governments were concerned about various urban
development projects, and dependent upon federal government subsidy. Local
governments could not rely upon a deﬁcit budget and bond issues to ﬁnance new
development costs because of their limited ﬁnancial resources. These circumstances
facilitated the development of CBP in the USA.

Local governments that lacked ﬁnancial resources introduced CBP to justify the
validity of bond issues. Bond issues could lead to intergenerational sharing of
inﬁastructure costs on the basis of the beneﬁciary principle, without depending on tax
revenues. The urban development projects executed over a long period needed the

backing of CBP as a form of long-term ﬁnancial planning.

58

The making process of CBP generally begins with a physical improvement plan
or master plan, which plans for the growth of a region over the next 10 to 25 years. The
local government forms an organization to make a six-year Capital Improvement
Program (CIP). The process of CIP begins by listing all potential public investment
projects. Financial analysis of the revenues and expenditures of the government is then
conducted. Debt redemption, the trend of property tax, and new tax sources are
considered at this stage. The priority order of development project is then adjusted on the
basis of the ﬁnancial analysis. The priority order list is modiﬁed based upon the
available ﬁnancial resources, such as special assessments, user charges, and
intergovernmental subsidy.

The Evaluation of CBP
The Advantages and Disadvantages of CBP

The long-term characteristics of CBP are for the ﬁnancial planning activities of
local government. CBP results in a ﬂexible and elastic budget that balances ﬁnancial
investment by dividing the capital budget and the current budget. CBP satisﬁes the
beneﬁciary principle and contributes to the formation of local government assets. The
cost of infrastructure which is used across generations is ﬁnanced by issuing bonds to
share the intergenerational burden equally. CBP easily shows changes in a local
govemment’s net assets and social overhead capital, making it possible to assess and
analyze the expenditure of a budget. Finally, CBP improves citizen understanding of
ﬁnancial structure of the local government. CBP allows citizens to easily grasp the

relationship between revenues and expenditures.

59

The most difﬁcult issue in CBP is choosing the subjects of budget expenditures. It
is also very difﬁcult to appraise the value of public facilities correctly, since market
value of public facilities does not exist. CBP can be abused to cover up the deﬁcit of a
current budget. Increased amount of debts can weaken the credibility of a local
government. Finally, there is a possibility for distortion of resource distribution, because
CBP focuses on the capital budget.

The Potential for Introducing CBP in Korea
The Limitations in Introducing CBP at the Local Level

CBP is not an unfamiliar system in Korea. However, socio-economic
circumstances obstruct the application of CBP in Korea. One problem is that local
government ﬁnancial structure varies greatly between large-sized cities and small-to-
medium sized cities. Therefore, the ability to introduce CBP is different according to the
size of cities and their ﬁnancial independence from the central government.

Another problem is the frailty of local government ﬁnancial structure which lead
to greater government control over budget and development policy. These
circumstances make it difﬁcult for local governments to independently execute
development projects. CBP can best be used by local governments with strong and
independent administrative and ﬁnancial capacity.

The Measures for Introducing CBP

The introduction of CBP requires ﬁnancial resources, which depend upon bond

issues and borrowing. However, issuing bonds in Korea is not easy. It requires a local

assembly vote and central government approval. A sensible approach would be making

60

Capital Improvement Plans and capital budgets in some selected model cities, where
incoming revenue was guaranteed.

CBP will require the budget to be more closely linked with the development plan.
The integration of a development plan and a budget is necessary for the efficient
implementation of development projects. A substantial medium-range local ﬁnancial plan
as prescribed in the Local Finance Act is an important stepping stone to the introduction
ofCBP.

Finally, the process of budget preparation also needs to be reorganized to connect
development plans with the budget. Especially, a budget can be more effective, if the
experts in the ﬁeld of urban planning or development participate in the process of
making up the budget.

The Capital Improvement Program (CIP)

The Outline of CIP
A Capital Improvement Program (CIP) is a method many local governments use
to assess and ﬁnance their infrastructure requirements (National Association of Counties,
1990). An effective CIP has two aspects: an administrative plan to identify infrastructure
projects, and a ﬁscal plan to ﬁnance the costs of these projects. The local government
planning and budgeting functions can be incorporated through the CIP processes. The
planning functions, such as a comprehensive plan and an infrastructure plan, are fulﬁlled
based on the budgeting function, particularly the annual operating budget.
The best CIP process includes a planning document dealing with both available

ﬁnancing sources and the feasible timing of infrastructure cost. By making a CIP, a local

61

government can implement its infrastructure project consistent with its growth policy and
ﬁnancial capabilities. It is not an easy task for various departments in a local government
to cooperate with each other to install infrastructure. A CIP can act as a guideline to
harmonize the installing, timing, and ﬁnancing of infrastructure cost among various
departments in the local government. In addition, it can facilitate coordination and
cooperation between local government and other government units.

An effective CIP execution process involves several steps: identifying projects,
setting priorities, performing a ﬁnancial impact analysis, assessing funding sources,
developing and adopting the capital improvement program, preparing and implementing
the capital improvement program, and monitoring the capital projects planning process
(National Association of Counties, 1990).

Relationship between CIP and Development Impact Fee (DIF)

The comprehensive plan and capital improvement programming (CIP) provide a
foundation for DIF. The process of making a comprehensive plan and CIP are formally
comprised of three distinct steps: the development plan (projections of population,
employment and land use); the infrastructure plan (dimensioning of speciﬁc
infrastructure); and the capital improvement program (comparisons between revenue and
infrastructure costs).

In the development plan process, population and employment of the project area
are projected. In the infrastructure plan process, population and employment are
translated into future demand for needed infrastructure. Infrastructure plans also include

the costs and the installation timing of infrastructure. The critical point of the CIP process

 

 

 

62

is to identify the revenue resources for the infrastructure cost. Impact fees can then be
assessed to raise revenue for infrastructure which is not fully funded.
Necessity for Introducing CIPs into Korea

One of the most signiﬁcant problems with the present Housing Site Development
Promotion Act (HSDPA) is that the project area designation process is inharmonious with
the comprehensive plan and a long-term development strategy of local governments. This
problem basically results from the designation of a project area by the central government
which is concerned about supplying housing sites without the consideration of the
balanced development of the locality.

The enforcement of full local autonomy in Korea and the resulting consolidation
of the local government authority will allow localities to make their own housing site
development plans. Under full local autonomy, housing site development will be
implemented as a part of the local development strategies, not as a way to expand the
housing supply.

To cope with these situations, there is a need for introducing CIP into Korea. CIP
as a multiyear plan (usually ﬁve or six years) projects expenses for all anticipated
infrastructure projects , and is able to link the local govemment’s planning functions with
budgeting functions. It should be logically extended ﬁom the local government’s annual

operating budget, and the comprehensive land use plan.

 

 

63

The Circumstances for Operating DIF
The Prerequisites for Introducing DIF

The introduction of Development Impact Fees (DIF) into Korea will require an
appropriate comprehensive plan, a carefully arranged Capital Improvement Program, and
an impact assessment and monitoring system (Ji, 1995).

Development Impact Fees have to be supported by a CIP of good quality. This
CIP should include deﬁnite service standard for infrastructure, and a linkage between
the land use plan and infrastructure capacity. A CIP is also needed to establish standards
for measuring development impact and calculating the infrastructure costs. Linking DIF
to a CIP is a fundamental step in determining the proportionate cost-sharing of
infrastructure. In Korea, there exists comprehensive plans which contain the service
standards for infrastructure as a substitute for CIPs, but these standards are not enough to
satisfy the requirements of DIF.

The service area of infrastructure has to be delimited. This is related to the service
standard used for CIP. It allows the service area bearing impact fees to receive beneﬁts
from a speciﬁc project.

The DIF should measure the impact of new development on existing
infrastructure. DIF should not require new development to bear the costs generated from
the deﬁciency of existing infrastructure. The rationale for imposing DIF is weakened, if
the service level of existing infrastructure is enough to absorb the impact of new

development.

 

64

The measurement of unit impact should transform the general service standards
for infrastructure into a speciﬁc allocation of inﬁastructure. The quality of a
comprehensive plan and the consistency of CIP are important issues at this point. The
service standard and geographic service area of infrastructure are the basis for
developing a measurement unit in determining the needed infrastructure costs.

There may be an excessive burden on a developer when more than the
infrastructure costs are imposed on new developer. The best solution to this problem is to
complete a ﬁnancial and economic analysis that determines the characteristics of
revenues and expenditures. This kind of analysis is indispensable for enforcing DIFS.

Finally, the process of imposing DIF may create serious ﬁnancial problems,
unless it is executed in a systematized way. One of the ways to deal with this problem is
to integrate the process of imposing the fee into the process of development approval.
The expenditure of revenues generated from DIFS is then part of the CIP allocated based
on the priority of investment and available ﬁnancial resources.

Directions for Introducing DIFs

DIFS are a growth management tool used by local governments to pay for
additional infrastructure caused by various development projects. DIF is based on the
concepts of the causer principle and the beneﬁt principle. DIF is a legal device that
effectively shifts new infrastructure costs to the beneﬁciaries of new development. DIFS
can be characterized as a form of regulation, rather than a tax, in that regulation is applied

in a limited area, while a tax is applied to the whole nation.

 

 

11.

 

 

65

DIF is closely related to the concept of urban carrying capacity, which is deﬁned
as the acceptable limitation to the various outer development pressures on a designated
area. Local governments in Korea are able to implement DIFS based on this concept. 1

Local governments designate a certain area on the basis of the comprehensive
plan. A designated area is sure to arouse developers’ interest. Local governments
determine the optimum carrying capacity of this area. It means the acceptable level of
developing a designated area based on the predetermined service standards is able to be
maintained. Local governments require a developer to perform a development impact
analysis on a proposed project. They decide whether to accept the proposal. Finally,
local governments levy impact fees on the developer. The levied impact fees should be
used to install additional infrastructure within the framework of CIP.

The technical elements for effectively operating DIF in Korea are as follows:

- The standards for calculating fees is set on the basis of the number of households
in the case of residential development, and the size of the development area in the case of
nonresidential development.

- Local governments should make their own CIPs to expand and install
infrastructure. These include a list of development projects, the standards for service level
, and the methods for calculating infrastructure costs.

- Local governments should present the rationale nexus between the burden of
infrastructure costs and the beneﬁts from new development. This can be veriﬁed by

investing collected fees on infrastructure planned by local governments’ CIPs.

 

 

66

- Developers can choose to install needed infrastructure determined by CIP,
instead of paying fees. Developers’ contribution to the installation of infrastructure have
to be rationally and fairly subtracted from fees.

- Local government can exempt developers from paying fees when the project
increases housing affordability or generates new employment.

- The timing for imposing and collecting fees is an important meaning to those
involved with land development projects. DIFs should be imposed on developers at the
stage of the development plan approval, and collected at the stage of building permit
approval.

- The collected fees should be reserved and earmarked for the targeted
infrastructure. The collected fees should also be kept in special accounts or separate
accounts that are not mixed with other general revenues.

- Unused fees should be refunded at the request of the buyers of developed land
or housing.

Usefulness of DIF

Generally speaking, the usefulness of DIF in Korea can be found in that the
ﬁnancial resources of Korean local governments are insufﬁcient to satisfy the growing
demand for infrastructure. Private developers are unable to depend on local governments
who lack resources to install connectors, water and sewer systems at their own expenses.
A public developer like the Korea Land Corporation will bear the infrastructure costs

which are not directly related to a development project.

 

67

DIF facilitates ﬁnancial decentralization by strengthening the role of local
government. This kind of ﬁnancial decentralization makes infrastructure investments
more efﬁcient by matching the supply of infrastructure to the diversity of personal
preferences.

DIF requires a high level of professionalism in planning along with a wide range
of data that is not usually available in Korea. The lack of effectiveness in urban planning
and ﬁnancial program in Korea is largely ascribed to the use of inappropriate and
outmoded concepts or techniques. DIF is able to play an important role in linking
physical urban planning with ﬁnancial program.

Second, the execution of DIF needs legal rationale. Admitting the short history of
Korean planning law, this can not be a serious problem. In Korea, local governments lack
the legal authority to make their own land use regulations. The authority of establishing
DIF ordinance to regulate the detrimental effects of urban land development and to
ﬁnance infrastructure costs should be given to local governments.

Third, DIF will raise the price of developed land by shifting the ﬁnancial burden
of infrastructure to new residents, thereby diminishing the affordability of housing to low
and middle-income classes. The USA experience shows that growth management
measures such as DIF have contributed to a rise in housing prices. However,
infrastructure costs do not necessarily become larger because of DIF. On the contrary,
DIF is able to prevent existing residents from bearing unreasonable costs. DIF is a better
method of ﬁnancing infrastructure costs than general revenues, because the cost-sharing

in DIF is based upon the beneﬁciary principle.

 

 

 

 

68

Most private developers in Korea will resist having to bear the sudden fees by the
introduction of DIF, because they have enjoyed free rides in ﬁnancing infrastructure costs
up to now. However, the experience of operating DIFs in the USA shows that private
developers realized that their proﬁts did not decrease as much as expected, because they
shifted their new burden to new residents. Consumers will be satisﬁed with DIF if the
beneﬁts produced are more advantageous than paying for local taxes. They may not be

uncomfortable, if they know how their money is used.

 

 

69

CHAPTER 4
Suggestion for Introducing DIF into Korea

Problems in the Infrastructure Financing System

Intergovernmental Problems

One of the most powerful provisions in the Housing Site Development Promotion
Act (HSDPA) is the authority to rezone agriculture areas to residential or commercial
areas, allowing the designation of a project area on cheap agricultural land near urban
suburbs, thereby reducing the price of developed land. This has resulted in a number of
housing site development projects implemented by central quasi-govemmental
authorities to conﬂict with the comprehensive plans or long-term development strategies
of local governments.

The impracticality of the infrastructure cost-sharing provisions of HSDPA makes
these conﬂicts even worse. The uniform requirement that the implementing agencies to
install only 200m from the project boundary without considering the project size and
locational characteristics is the leading cause of conﬂict with local government.

In the beginning, the HSDPA was established for developing small to medium-
sized housing site projects in the suburban areas. However, HSDPA has been used for
developing large-sized housing site projects, and even the New Town projects which
were usually located at a far distance from suburban areas. This misguided application of
HSDPA has resulted in the Korea Land Corporation paying for infrastructure costs
amounting to almost four times as much as that for HSDPA housing site development

projects.

 

‘-__“-

70

The lack of the local government’s ﬁnancial resources and the central
govemment’s subsidies are other causes of above extra costs, besides the uniformity
impracticality and uniformity of HSDPA. Local governments assert that requiring the
extra costs are fair and proper, because the proﬁts generated by development projects are
passed over to the implementing agency and only the liabilities of maintaining
infrastructure.

On the other hand, the implementing agencies protest that bearing the extra costs
are too burdensome, especially with the extra costs of infrastructure which are irrelevant
to the project. They point out two negative effects by the extra costs in the housing site
development projects.

First, the housing site developments implemented by the public land acquisition
approach of HSDPA has the implementing agency make front-end investment to acquire
the raw land. The front-end investment which generally amounts to 30 percent to 70
percent of the total project costs have caused implementing agencies to suffer severe
ﬁnancial difﬁculties. The extra costs make the ﬁnancial difﬁculties of implementing
agencies even serious.

Second, the extra costs which are included in the project costs raise the price of
developed land. This runs counter to the establishment purpose of HSDPA: the massive
supply of buildable land. This also causes conﬂicts in the cost-sharing of infrastructure

between interested parties.

 

71

Conﬂicts between Interested Parties
Land Owners

In principle, the proﬁts that landowners can obtain from housing site
developments through the public land acquisition approach is the difference between the
disposal price of land to the implementing agency, and the purchase price of land
included in maintenance expenses. HSDPA provides landowners with special
considerations, such as priority rights to buy developed lots below project costs to
appease the complaints of landowners. Although landowners are the direct interested
party in the development project, they are excluded from taking development proﬁts and
forced to move out because of the very nature of the public land acquisition.
Implementing Agency

The proﬁts of implementing agencies are represented by the difference between
the total sale price and the total project cost. The implementing agencies under HSDPA
are restricted to public sector entities, such as the Korea Land Corporation (KLC) and
local governments. KLC has enjoyed an exclusive status as a quasi-govemment authority,
because most local governments in Korea can not compete with KLC in term of ﬁnancial
resources and human resources.
Private Housing Construction Compm

Private companies participate in the process of development by constructing
housing on the supplied lots and then selling the constructed housing. Housing prices in
Korea are regulated by a variable price ceiling system, which is set to reﬂect changes in
land and housing construction costs, ﬁxed on standardized criteria of labor wages and

material prices.

 

72

The housing prices established by private housing construction companies are
also regulated by this variable price ceiling system, because private developers can
purchase the lots at below project cost. The proﬁts of private housing construction
companies are different from that of land developers, because the sale prices of housing
units built by private housing construction companies are regulated by the variable price
ceiling system.

New Residents

The “proﬁts” earned by the new residents in HSDPA developments are
represented by the difference between the price of sold housing on an HSDPA site and
the price of other existing housing. Due to the variable price ceiling system used to halt
housing price inﬂation, new residents can purchase cheaper housing than nearby existing
housing. Consequently, the “proﬁts” of new residents are windfall proﬁts caused by the
regulatory housing supply system of Korea. They also enjoy the beneﬁts of on-site and
off-site infrastructure installed by the implementing agencies, without paying for it. In
Korea, the new residents beneﬁt most from housing site development by the public land
acquisition approach.

Local Governments

The local governments face both gains and losses from the housing site
developments implemented in their jurisdiction. They have the legal responsibility of
installing and maintaining infrastructure caused by housing site development projects
before new residents start to move in. They also have the authority to levy various local

taxes, and can use the infrastructure investment to activate their local economy and

 

 

73

development. However, there is a time lag between the securing of revenues and the
installing of infrastructure, due to the front-end investment of infrastructure.

Another issue is the discrepancy between implementing agencies who pay for
the external costs of housing site development , and the beneﬁciaries who actually use
the infrastructure. In the public land acquisition approach, all of the infrastructure costs
are not included in the project costs, to allow for stability in housing prices through the
supply of cheaper land. Consequently, the infrastructure costs which are not included in
the project costs are paid by the development proﬁts of implementing agencies.

As a general rule, development proﬁts should be restored to the society as a
whole, because they are windfall incomes. If the proﬁts of implementing agencies are
instead invested in infrastructure used by the new residents, the society as a whole is then
subsidizing the new residents, who are usually above middle class. This contrary to the
beneﬁt principle, which is the most important tool for achieving equity in the cost-sharing

of infrastructure.

 

 

74

Figure 4-1: The Relationship Between Interested Parties in Housing Site Development

 

 

Central Government Designating Preject Area

 

 

 

Tax Revenues T 1 Tax Revenues

 

 

 

 

’ /
Local Government \

 

 

The Application Execution Plan Approval
of Approval Development Plan Approval

 

 

Sale of Developedjlmplementlng Agency \ Land . . .
Land Acqursrtron
Payment of Land Price

 

 

 

 

 

 

 

 

Private Construction Landowners
Company

 

 

 

 

 

 

Housing Constructio Payment of Housing Price

 

 

 

 

 

New Residents Neighboring
— Residents

 

 

 

 

 

 

 

 

 

In summary, although interested parties participating in a housing site
development project are in conﬂict with development proﬁts, they, in the end, share these
proﬁts. Housing site development projects are described as a kind of positive-sum game
in which all participants enjoy proﬁts. In New Town developments, new residents who
were middle and upper income classes beneﬁted more than land owners or the
implementing agency did. This caused regressive distribution mechanism in the

development process.

 

 

75

Project Cost Problems

The project costs covered by HSDPA are classiﬁed as either direct or indirect .
The direct costs include land acquisition costs, construction costs, and direct expenses
and moving expenses. The indirect costs include general management expenses and other
indirect expenses. The cost price is calculated by dividing the total project costs into the
sellable land. The extra cost of infrastructure required by local government raises the
cost price.

Figure 4—2: The Composition of Project Costs Covered by HSDPA

 

Composition Calculation Method

 

Land Acquisition Cost Compensation Cost and Related Expenses

 

 

 

Direct Construction Cost Site Construction Cost, Design Fees and Related
Expenses
Cost Direct Expenses (Land Acquisition Cost + Construction Cost) x Direct
Expenses Ratio
Moving Expenses Basic Infrastructure Cost

 

Indirect General Management Direct Cost x General Management Expenses Ratio

 

 

 

Expenses
Cost Indirect Expenses Direct Cost x Indirect Expenses Ratio
Total Direct Cost + Indirect Cost

 

 

The Korean government lacks ﬁnancial resources but can not depend on the market
mechanism to solve the chronic land and housing problems. The land and housing policy
of Korea has been used to supply land and housing for the over middle-income classes
who already have purchasing power. This land and housing policy depends on
governmental intervention, such as the variable price ceiling system. But governmental
intervention in land and housing markets has aggravated the distortion of land and

housing prices, providing economic beneﬁts to the over middle- income classes, which is

 

 

 

 

76

contrary to the beneﬁt principle. The problems with the cost-sharing of infrastructure in

Korea can not be separated from land and housing policy.
The Necessity of Introducing DIF into Korea

The Financial Impact of New Town Developments

The Bucheon, Anyang, Seongnam and Goyang are the cities where New Towns
have been developed in Korea. These cities obtain tax revenues from various local taxes,
such as the real estate acquisition tax, property tax, inhabitant tax, and integrated land
tax. The ﬁnancial impact of the New Towns on local governments depend on the size of
the New Town project, the transaction prices of New Town apartments, and the existing

ﬁnancial base of local governments.
:“ F m an w'

New Town A a LocalTaxes ""'E'xc'ept'

A n , ' " , '1' ’02".

3413
65.9%

9'65 , ,99 .
G b . 5,170 ,213

' MTC Statistical Data ornitheﬂNVe'w To’wnSmHm

Flnanclal lmpactofNewTowne on Local Government

 

1 100%

 

m
Clty(New Tow n)

 

1D19§TlfoceTITane7§ ,. ,
...... 90% From New Tow n(A-B)‘ 1. , ,_
30* ., .1982 LocalTaxes
1 70% 1 Except New Tow n(8)1
_ 60% W --., ’ *’ ’
1_ 50% .,
1 40%
30%
' 20% ,,
1 10% ,
0%
c o E O E
, a 5 s

 

77

As shown in Figure 4-3, the average proportion of 1992 local tax revenues from
New Town developments amounted to 28.7 percent. In Goyang City, which has a
relatively weak ﬁnancial base, this amounted to 65.9 percent. On the other hand, in
Bucheon City, which has a strong ﬁnancial base, the New Town amounted to only 10.9
percent of local tax revenues.

Considering that most off-site infrastructure costs were ﬁnanced by the Korea
Land Corporation, the ﬁnancial impact of New Town development on the local
governments is tremendous. However, these additional tax revenues are not considered in
determining the cost-sharing of infrastructure, unlike the Development Impact Fees in
the USA.

As a result, New Town Developments decrease the per capita tax burden of local
governments. As shown in Figure 4-4, Goyang City (which has a weak ﬁnancial base)
experienced a decline of 19.9 percent in per capita tax burden. Bucheon and Anyang,
which have relatively large populations and strong ﬁnancial bases, declined 11.1 percent
and 9.7 percent respectively.

Local government should not impose a ﬁscal burden upon developers beyond
their proportionate share of infrastructure costs. However, KLC has paid for more than
its share. The cost-sharing of infrastructure between local government and the
implementing agencies has been made on an ad-hoc basis without considering the

rationale of proportionality.

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

‘F rg‘ura ILATFln'a‘ii'cla'l‘lin pact o’f‘N’eW'T owns 'o'n'L‘oaar'r ax'B'u’r'de n ,
1 . LoceITex Burden before New Towne LoeelTex Burden after New Towne Retlo 1
1 Clty Tax Amount Pop. PerCaplte Tex Amount Pop. PerCIplte (A-B)IA1
: V (Million W511“ (P'ers'ont TextA) (w'dm‘ ' N 7‘ 7' ' T'lx(B) ' 1
{Bucheon 117,240 688,349 170,321 129,982 858,349 151,433 11.1%1
1Any|n6 ' 125,077 ""540251 ' w2:11.571; ' 148,089 "”‘7‘0'8325'1' ' 27091091 " 9.7% 1
1Seongn|m 173,998' 645,793 “269,433 777233.669 4,035,793 225,594 16.3%1'
’Goynngﬂ ' 65,102 257,834 2521496 1071991“ 553.934 202.293 19.9%”"'
1Totel 431,417 2,132,227 225,781 619,731 3,136,227 197,604 12 5%
Soume:MCTStuntmalDam
1 1 . 1
1 The leterenceln PerCeplte Tex Burden ‘
' 1
300,000 1
1250,1300 .. V 1'
, 1.
1200.000 1
_1 150,000 1"
1 1H
‘ DPer ’1
-1 100.000 . 1 Capna 1
Tax(A) 1
(Won)
1 50,000 1 Per 1
. 1 Cepna 1
1 Tax(8) 1
f‘ 1 ° ‘

 

 

 

 

 

 

Bucheon

 

 

.i .....,....

Anyeng

Seongnam

   

Goyang

 

1

Regressiveness in the Cost-Sharing of Infrastructure

As mentioned before, most of the infrastructure costs of the New Town projects
are paid from the development proﬁts of KLC. The New Town was built to control
housing price inﬂation through the supply of cheap land. For that reason, developed lots
in the New Towns had to be sold within a certain price limit. This forced private housing
developers who bought these lots from KLC to sell their housing under the control of the

variable price system. This kind of market intervention allowed the new residents to

beneﬁt most from development.

1

 

 

79

 

 

  

 

 

 

 

 

Percentage Change in New Town Apartment Prices, through
1997 1.
250.0% 1
200.0% . l”
150.0% . _ g N
. 1 ~
0000/ ............ , _ ;?3_
1 +Pyungchon 1 , ,,
1M) 1 + Bundang l 1 , ,
1+llsan 1W
500% 1 1 +AV9- 1 1..--..0...m__..
16- 26- 36- 46- Over *’ 7 0 , .1
25 35 45 55 55 1 WW. _
Pyung Pyung Pyung Pyung Pyung 1

 

 

l i

i 1 . l 3
Figure 4-5 shows the percentage increase in New Town apartment prices. The

 

1997 sale prices of the New Town apartments are 127.3% higher than the original sale
prices, on the average. The increase in New Town apartment prices show a strong and
positive relationship with the size of the housing units. The Bundang New Town and

Pyungchon New Town achieved the highest percentage increases at 169.4 percent and

 

80

133.0 percent, respectively. This is due to their location in the vicinity of the Kangnam
area of Seoul, which has the highest housing prices in Korea.

The increases in New Town apartment prices essentially result from the variable
ceiling price system, which created a gap between the prices of existing apartments and
New Town apartments. Moreover, the investment of KLC’s development proﬁts into off-
site infrastructure, such as the inter-city highway system and metropolitan subway
system, have also contributed to the increases in New Town apartment prices. The
residents of New Towns have doubly beneﬁted from these two factors.

The New Town development proﬁts of KLC that should be invested for the
public interest were instead used for the residents of the New Towns. This regressiveness
in the cost-sharing of infrastructure brought about a regressive distribution of beneﬁts in
the process of land development. The experiences of operating Development Impact Fees
in the USA will be a valuable guide to improve these regressive situations, despite the

peculiarities of the Korean land and housing market.

The Suggestion of a Modiﬁed DIF Model

The introduction of DIF into Korea should be done gradually. The prerequisites
for DIF, such as a carefully arranged capital improvement program, are not fully part of
Korean land development systems. Accordingly, a modiﬁed DIF model is suggested as
an alternative for improving the impractical aspect of HSDPA.

As mentioned in Chapter 2, the development process under HSDPA is comprised
of three steps: the designation of a project area and an implementing agency; the

development plan approval and the execution plan approval. In development projects

 

 

81

through HSDPA, the negotiations over the cost-sharing of infrastructure are made at the
stage between the designation of a project area and the approval of development plan.

A suggested model for improving the infrastructure ﬁnancing system in Korea
focuses on the negotiations between the local government and the implementing agency.
Namely, a Capital Improvement Program or the equivalent of CIP must exist before
designating a project area.

The implementing agency and the local government should cooperate with each
other in making CIP or the equivalent of CIP, based on the development plan and
analysis of ﬁnancial impact. The cooperation and mutual trust between two interested
parties is one of the most important elements in making an effective CIP. After the
designation of a project area, the proportionate cost-sharing rate of needed infrastructure
is determined through the step of development plan approval. The key elements in
determining cost-sharing are the service standard and the demand unit of infrastructure.

The implementing agencies and local government predict the development proﬁts
and local tax revenues from an approved development plan, which includes the land use
and infrastructure plan. The CIP and the cost-sharing of infrastructure can be modiﬁed by

changes in development circumstances, such as land acquisition and site construction.

 

 

82

Figure 46: Modiﬁed DIF Model

 

Implementing Agency Local Government

 

I Feasibility Study I
I .

 

 

 

Making Development -, Capital Improvement Program ' Financial Impact
Plan - (or Equivalent of CIP) Analys‘s

 

 

 

 

f
Proposal for Designation of

Project Area
IA 4 MCT

i

Designation of Project Area
and Implementing Agency
MCT ¢IA

 

 

 

 

 

 

 

 

 

 

 

 

 

)5

 

Development Plan Approval

 

Prediction 06 Decision of Cost-Share of Prediction 01'
Develomnent Profits Infrastructure Tax Revenues
- I. l

 

 

L
7

LLG Execution Plan Approval
Feedback

 

-Feedbaclq

I - .
I Implementation of the Pro] ect |———

IA: Implementing Agency
MCT: Ministry of Construction and Transportation
LG: Local Government

 

 

 

 

 

 

 

83

CHAPTER 5

SUMMARY AND CONCLUSION

This thesis has explored an alternative for the improvement of existing
infrastructure ﬁnancing systems in Korea through comparative studies of the land
development systems in the USA, Japan and Korea. In this study accepted infrastructure
ﬁnancing cost-sharing principles have been outlined and are used as a conceptual
foundation in searching for alternatives to improve the existing infrastructure ﬁnancing
system in Korea that was established in the era of centralized land development. In
particular, the causer principle and the beneﬁt principle were discussed. This study
concludes that, in Korea, it is more suitable to apply the causer principle to infrastructure
cost-sharing, and then utilize the beneﬁt principle as a complementary reference. The
external issues, such as free riders, have to be kept in mind to maximize equity in the
cost-sharing of infrastructure.

This study, then, completed a comparative study of land development systems as
a precedent for the investigation of infrastructure ﬁnancing systems. The characteristics
of Korean land development systems are matched against those of the USA and Japan. In
Korea, the public sector monopolizes land development initiatives. The central
government still retains some authority over land development by holding the authority
of designating project areas. A special law, such as HSDPA is utilized as the main
method for implementing land development.

The comparative study of the infrastructure ﬁnancing systems of these three

countries indicates that DIF in the USA and Guidelines for Housing Site Development in

 

84

Japan have been instituted as local government strategies for ﬁnancing infrastructure,
while the provisions of HSDPA are used as a part of housing and land policy for
stabilizing housing price inﬂation. That is, the infrastructure ﬁnancing system in Korea
has not attracted its fair share of attention from policy-makers.

To introduce DIF into Korea, a carefully arranged Capital Improvement Program
(CIP) has to be prepared, and Capital Budget Planning (CBP) is required for a successful
CIP. That is, DIF has to be supported by a strong CIP. This CIP includes a deﬁnite
service standards for infrastructure, and a linkage between the land use plan and
infrastructure capacity. A CIP is also needed to establish standards for measuring
development impact and calculating inﬁ'astructure costs. Linking DIF to a CIP is a
fundamental step in determining the proportionate cost-sharing of infrastructure.

The Korean infrastructure ﬁnancing provisions in HSDPA deserve criticism
because of their impracticality. HSDPA established as a part of land policy for stabilizing
housing price inﬂation was endowed with special measures on the cost-sharing of
infrastructure costs: the excess part of 200m from the boundary of a project area must be
installed by local governments or those who supply the service.

The special measures, however, turned out to be too impractical to solve the
ﬁnancial difﬁculties of local governments, creating ad.hoc negotiation situations
surrounding the cost-sharing of infrastructure. In addition, the inadequate capacity of
local governments in Korea to plan and ﬁnance infrastructure have been an obstacle in
efforts to improve these impracticality.

The Five New Towns developed by HSDPA were the most extreme example of

this. The implementing agency of New Town Projects (KLC), paid for almost four times

 

 

 

85

the infrastructure costs prescribed by HSDPA. The excessive infrastructure burden borne
by KLC have been paid by its development proﬁts which should be restored to society as
a whole. This created a regressive distribution mechanism by granting the most beneﬁts
to the middle and upper income classes.

This thesis suggests a modiﬁed DIF model as an alternative to improve these
problems in the existing HSDPA. It is a gradual approach in that it can be applied within
the limitations of existing HSDPA. The main points of the modiﬁed DIF model are the
preparation of CIP as the prerequisite for DIF and a decision-making process for cost-
sharing between local governments and implementing agencies. In addition, the standard
for the proportionate cost-sharing rate should be made based on the beneﬁt principle to
reform the distortion in the distribution of development proﬁts.

Considering serious ﬁnancial difﬁculties of Korean local governments and the
centralization of administrative power, the suggestion of DIF is useful in that: ﬁrst, DIF
plays an important role in linking physical planning and ﬁnancial program. Second, DIF
promotes to decentralize the authority of establishing inﬁ’astructure ﬁnancing system.
This will help local governments to establish legal systems suitable for their own
circumstances. Finally, it reforms the impracticality and regressiveness of the existing
infrastructure ﬁnancing systems in Korea.

Finally, the importance of technical factors, such as the standards for service level
of infrastructure and calculating impact fees , can not be overlooked in introducing DIF
into Korea. However, the speciﬁc examinations of these technical factors are beyond the
scope of this thesis of which purpose is to explore a general direction for improving the

existing infrastructure ﬁnancing systems in Korea.

 

86

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