To Shore Up a Crumbling City

by Gordon Abiama

The sprawling city of Lagos -- Africa's most populous urban center -- is crumbling. The city has been in dire financial trouble since Nigeria's seat of power moved to Abuja in the mid 1980s. Social infrastructures in the city are stretched nearly to the breaking point as a result of continuous population explosion.

This situation has thrown Governor Bola Tinubu into a state of desperation -- given his somewhat exaggerated promises to deliver improved municipal and social services to the electorate. Last year the Governor, in his desperation to shore up his crumbling city, gave his support to a very remarkable bill that has since been drawing rants and raves from tax specialists, industrialists and property investors. It is a law to consolidate all land charges in the state centrally.

Under the new law, charges accruing to the state government from all landed properties (except those designated as exempted) are to be calculated by a new formula that is bewilderingly complicated. But in plain words, the law presents a leeway by which the bustling city of Lagos will tax itself out of existence.

The calculations are to be done by the state's ministry of finance while each of the 20 local government councils are empowered by the new law to do the actual collection on properties in their domain. Here is the "magic" formula:

LUC = M x (LA +LV)+BA x BV x PCR

Let me help you out: LUC is the Annual Amount of Land Use Charge in Naira; M is the Annual Charge Rate, expressed as a percentage of the Assessed Value of the property; LA is the area of the land parcel in square meters; BA is the Total developed floor area of Building, in square meters; PRC is the Property Code Rate for the Building, which accounts for the building being of higher or lower quality in the neighborhood and which accounts for the degree of the completion of construction of the Building.

The formula's complexity is compounded by the fact that it contains quite a number of unknowns. Apart from LA, BA and LV (land value), which are known or can be determined, BV (building value) is open to abuse if not professionally handled, while BA, M and PRC are all discretionary. The Property Code Rate (PRC) and Annual Charge Rate (M), according to the law, shall be fixed by the Commissioner of Finance.

An avalanche of protests greeted the introduction of the new land use charge law from all corners of the state on different platforms. While some quarreled with the sneaky way the law was enacted without inputs from stakeholders, others in the legal profession expressed grave misgivings about the inherent contradictions within the law and other existing ones.

One industry executive declared that the consolidation of Ground Rent and Tenement Rate is in itself faulty. "Ground rent forms part of a contract between Government and an allottee in respect of a particular property. Can the Government turn around to unilaterally amend the terms of an existing contract?", he queried.

The formula really has two components, a ground rent, and a charge on the building, which is commonly referred to as the "Tenement Rate". Tenement rate -- which was 10 percent of the annual rental value of property -- has for long been a source of revenue to local governments. This tax has been widely unsuccessful, due to implementation problems -- and the general disincentive cause by taxes levied on buildings. The tenement charge is passed on to the occupier of the property -- not paid by the owner who collects the rent. The landlord on the other hand paid the ground rent which was quite nominal.

Property market operatives have mainly analysed the Lagos land use charge law purely from the angle of the concept of Yield -- which is a criterion generally used to evaluate investment opportunities. Yield on properties in Lagos, they say, currently ranges from 2.5 percent in high value Ikoyi suburbs to about 12 percent in the hinterland. This projection compares favorably with yield from other investments such as Shares (3 to 10 percent) or Savings (5 to 22 percent). They assert that the property market will become an "investor hostile environment" if the government collects a significant "land use charge" - which is not really a land use charge at all, but a charge based on the capital value of the entire property, and thus a large penalty to sites that are already well-developed.

Should the law be allowed to operate, investment funds will shift to other opportunities like stocks, shares or savings -- or move to locations with higher yields like Abuja and Port-Harcourt. The emergence of Ota town in neighboring Ogun State as an industrial town was a direct fallout of the Land Rates Act of 1984, industry executives point out.

The Lagos Chamber of Commerce and Industry described the new land edict as "draconian, punitive" and capable of stultifying industrial growth. The Chamber also faulted the property valuation methodology, adding that it is not only inequitable, but arbitrary and punitive. It went on to call for the removal of the perceived provisions in the edict.

The apprehensions of industry operatives seem well founded as the land use charge law appears to be chasing the shadow rather than the substance in the drive to raise funds to shore up the city.

By taxing improvements, the government is unwittingly discouraging production. Land speculators who hold valuable land are encouraged to cash in on socially created land values with, effectively, no taxation. The land speculator escaped attention of the government, which probably has not realized the dangerous role he plays in any economy.

The manufacturer proposing to build a factory to set up an industry is made to pay an even steeper price than before. This hampers his competitive power in all markets, thus affecting his profits, which in turn eats up opportunities for the worker.

Late last year, the Mafoluku Local government Council, in a bid to enforce payment according to the land use charge law by telecommunications giant Siemens got a rude shock when the company refused to cooperate and instead threatened to relocate to another state that is considered "investor-friendly". The local government backed down and instead settled for the old rates it has been collecting from the company.

Two different rulings of the High Court have, however, confirmed that the land use charge law remained in effect in the state. This latest of the court decisions -- which upheld the validity of the land use charge law -- was in the case brought against the state government by Shell Petroleum Development Company.

For now the Lagos state government is more concerned with the short term pecuniary gains the new law will rake in -- to the detriment of sustainable development.

In the final analysis, property investors would be left with no choice but to raise the rent of properties which in the long run will have an adverse effect on the economy of the state. Sooner or later, empty, derelict or underused structures will dot the city of Lagos, resulting in massive loss of jobs and housing. The state government should be made to understand that taxing the value of land alone is the surest means of eliminating skewed development patterns, improving housing, stimulating production and eliminating land speculation.

Land Value Taxation (LVT), which is revenue based on the value of opportunities and services received by site-holders, gives a compelling incentive for the redevelopment of cities like Lagos -- cities that are crumbling fast under the weight of confiscatory taxes.

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