1 Urbanization in 2 towns in Sichuan Province Land Use and Land Pricing Issues Working Note By Alain Bertaud Revised July 19, 2006 9410 1. Introduction and scope of this study This short note on the urbanization of Mianyang and Suining (Sichuan Province) has been prepared as a background study for the proposed land component of the SUDP project. The objective of this note is to provide an answer to a number of questions concerning the economic justification and feasibility of the 3 land component sites in the proposed SUDP project (Pioneer Park and SEDZ in Mianyang and Xining in Suining). The questions to be answered are: (i) Is the proposed expansion of the city through the SUDP land component justified by projected demand for urban land? (ii) Does the location of the expansion is spatially and economically justified? (iii) Does the total compensation paid to farmers for their land equitably compensates current farmers’ revenues and assets and is this compensation close enough to market price to prevent an uneconomical expansion of urban areas? It is expected that the methods and lessons learned through the implementation of SUDP will help streamline national policies concerning urban expansion in China. 2. Urbanization in Sichuan Province Urbanization in China is seen as a necessary step toward economic development. Sichuan province, where Mianyang and Suining are located is less urbanized that the rest of China. In Sichuan Province the rate of urbanization in 2005 was 28% compared to China national average of 41.7% in 2004. China National development plan project that by 2025 the national rate of urbanization will be around 65%. Let us give an order of magnitude of the migration toward cities which is likely to take place in the future: in Sichuan province about 900,000 farmers would have to become urban residents to increase the rate of urbanization by just 1%. The difference in income between urban and rural population is a powerful factor of urbanization. In China, in 2005, the per capita net annual income of farmers was Rmb 3,255 as compared with Rmb 10,500 for urban residents. In 2005 the per capita income of the urban population in Sichuan was Rmb 10,100 close to the national China average. Increasing the rate of urbanization is part of the National Government strategy to stimulate the economic development of the Western part of the country of which Sichuan province is a part. The SUDP project aims at managing this accelerated urbanization by demonstrating through a pilot urban project how transforming undeveloped rural land into fully developed urban land can be accomplished in a financially sustainable manner resulting in spatially efficient cities. The proposed project also aims at demonstrating that farmers displaced by urbanization can be equitably compensated for their land and rapidly integrated into the urban economy with sizable economic benefits to themselves, their children and the urban community. 2 3. The spatial development of Mianyang and Suining The rapid modernization of Chinese cities and the increasing productivity and affluence of urban households require the recycling of the obsolete urban areas which were built more than 20 years ago. In the history of urbanization no cities have developed their economies as rapidly as Chinese cities did in the last two decades. As a result, a large part of the urban areas developed before the rapid expansion of the last 20 years is poorly adapted to the new urban economy. Older office buildings are ill adapted to the new economy because of their inefficient layout, obsolete plumbing and electricity network and lack of telecommunication network. Older apartments do not correspond to the new demand for space and modern plumbing facilities. Retail spaces are insufficient. While population densities are high in Chinese secondary cities, the floor area ratios are often low and make an uneconomic use of land. Within a period of 20 years the economy of Chinese cities shifted from largely low productivity labor intensive activities to high productivity capital intensive manufacturing complemented by a fast expanding tertiary sector. While this shift in economic activities also occurred in all the cities of the post industrial world, what makes Chinese cities unique is the extraordinary short period during which the change is occurring. Mianyang and Suining are typical of Chinese medium size cities developing rapidly by attracting high tech industries. These cities are attractive to high tech industries because of their benign environment, good city management, and the skilled labor produced by a performing education system. The urban/rural dichotomy in Chinese peri-urban areas Typical of most Chinese cities, the population of the urban area of Mianyang and Suining and its immediate surroundings is divided into two socioeconomic groups with different legal rights. The urban population has typically access to all city services while the “farmer” population has to rely on lower quality services in health and education provided by villages or rural collective. Farmers, however, can use land provided by the rural collective to build houses or workshops or even private rental housing without having to obtain a building permit from the city. Farmers can use the land allocated or rented to them by the collective and can derive income from it whether this income come from an agricultural activity or not. While farmers can transform the use of agricultural land freely without conforming its use to the city Master Plan, they cannot sell it. They cannot either obtain credit to develop infrastructure other than minimum access roads and rudimentary storm drainage. As a result farmers’ areas at the fringe of cities are often partially developed with row houses several story high, workshops, garages and warehouses intermingled with fields still used for agriculture, mostly for growing vegetables easy to market in the city nearby. The “farmers’ areas” are developed at lower densities than the adjacent urban areas but at higher densities than normal rural areas. The non agricultural uses in the farmers’ areas are fulfilling a useful function for the development of cities by providing a legally developed urban fringe of private rental housing, and space for workshops affordable to small entrepreneurs. 3 Urban households on the other hands are able to buy housing from large well capitalized formal developers who themselves purchase land use rights from the Municipal government – who has a monopoly on land development and in the transfer of land use rights. Urban dwellers can rent or buy a shop or workshop in a formal urban development with full infrastructure services, but at prices which are at least double from the ones practiced in farmers’ areas. The population densities in formal urban areas in medium size cities are typically between 120 and 250 people per hectare, while densities in farmers’ areas close to the urban fringe are between 10 to 40 people per hectare. In Mianyang and Suining, as in most Chinese cities, the limits between formal urban areas and farmers, while clear-cut, follows idiosyncratic contours with enclaves of farmers areas surrounded by fully developed urban areas. The closest is a farmer area from formal urban areas, the densest it is, as farmer households get a great part of their income from urban activities. Figure 1: Map of formal urban areas and farmers area in Mianyang 4 Figure 2: Map of built-up areas and project area in Suining The linear expansion of Suining and Mianyang is typical of medium size Chinese towns. When Chinese cities need to expand, they naturally do so at the expense of farmers’ areas which are the closest to the urban areas and therefore the densest. Leap- frogging these areas could be costly, as it would mean leaving low densities unserviced enclaves inside fully serviced areas (see below “alternative pattern of land development”). This would greatly expand the length and costs of urban networks while also increasing commuting time. However, Chinese cities do not usually expand in the most economical manner from a spatial point of view, not because they want to spare semi developed farmers areas but because the lack of construction finance pushes formal development in a linear direction along already existing trunk infrastructure. The pattern of formal urban development in Mianyang and Suining illustrates this typical less than optimum approach (see Figure 1 and 2). The development in both cities follows the main intercity roads, leaving large enclaves of undeveloped land at very close distance from the city center. 5 The most economical way of developing urban land would be to develop land in a compact manner around the CBD as much as the topography permits. The most compact form for a city is a circle centered on its CBD. This compact form generates shorter trips, significantly save on energy1 and decrease the capital costs of utility networks. Of course topography often prevent cities from reaching the most efficient shape, this is the case in both Mianyang and Suining where very wide rivers and hills constrain spatial development. The development of the SUDP sites will significantly improve overall efficiency by decreasing average distance to the center as the population increases. Chinese urban planners are of course well aware of this fact and their master plans usually include compact land use centered on the CBD. However, developing areas between the radials constituted by inter-city roads requires large amount of initial capital because of the long negative cash-flow generated by large land development projects. Typically large land development projects, such as the one financed by SUDP, require advance financing to cover at least five years of negative cash flows. In the absence of advance financing cities tend to develop linearly along existing highways, by-passing areas which are closer to the city center but impossible to develop without making large primary infrastructure investments and without the availability of medium term financing. The development of urban land in China should be financially viable, as demonstrated by SUDP, and therefore should easily attract financing in the future, if the land itself could be used as collateral and easily and transparently transferred in case of foreclosure. Under current legal practice, it is not certain that undeveloped or even developed land could be used as collateral. Further, Chinese planners – because of their lack of experience in land markets – tend to see the development of infrastructure mostly as civil works construction or environment improvement rather than as a self financed, self contained land development operation. SUDP attempts to provide an example of self sufficient land development which should facilitate in the future Municipalities’ access to medium term financing, if the collateral use of the land and the possibility of foreclosure by a third party could be made clearly legal. The research for financial viability of self contained schemes would also improve land use planning as the discipline of markets will ensure that the land developed will be at its best and higher use. 4. Demand for land in Mianyang and Suining Because of the rapidly changing economic conditions in China demand for land is difficult to predict with accuracy. On the other hand, the homogeneity, predictability and strict application of municipal land use regulations decrease the uncertainty encountered in countries where regulations adapt more quickly to changing consumer preferences. Five main factors contribute to the demand for land in Chinese cities: (i) demographic growth coming for migration from rural areas; (ii) new households’ formation among the already urbanized population; (iii) increase in residential floor area consumption per person; (iv) growth of the service and retail sector; and (v) growth of the industrial sector. 1 For a detailed discussion of city shape and efficiency see “The Spatial Organization of cities" Bertaud , 2004 at HTTP://alain-bertaud.com ) 6 Of course, each factor could be further disaggregated into sub-factors. For instance, the increase in floor area consumption is related to an increase in urban income and to an increase in building industry productivity combined with variations in the price of building materials and the price of land. However, the objective here is not to model the entire urban sector but to determine with a reasonable level of confidence the likely demand for land in Mianyang and Suining during the 8 years period between 2006 and 2013 during which the land developed under the project will have been entirely sold; or in other words, whether the area of land developed under the SUDP project is likely to find users immediately after having been developed. We will use a normative approach which is well adapted to the current situation in China and which is the only possibility considering the data currently available. For the demand for residential land – which represents the bulk of the land developed under the project – we were able to check the validity of our model by using the residential sale data between 1999 and 2003. The sale of other land categories is more erratic and more difficult to interpret as there are a large amount of demolition and land reconversion for commercial and industrial buildings. Over all land use projection for Mianyang and Suining The projection of land demand is based on historical data for population growth from 1999 to 2004. The base year is 2004, for which we could obtain land use data disaggregated between residential, commercial and industrial use. Community facilities are included into residential use, administrative building are included in the commercial category. The total floor space of apartments sold each year between 1999 and 2003 was used to calibrate the model. The demand for land is projected up to 2013, which corresponds to the year when all the land developed under SUDP is projected to be sold. We therefore compare the land developed under SUDP by type of use (residential, commercial and industrial use) to the land which would have to be developed to accommodate land demand in the 3 sectors (residential, commercial, industrial) in each city. The values of the parameters and assumptions and formulas used for the projection of land demand are shown in annex 1. Table 1 summarizes the findings of the land use projection for Mianyang and Suining up to 2013. 7 Table 1: Demand for Land in Mianyang and Suining Overall city growth As seen on Table 2, the average increase in the built-up area of Mianyang between 2006 and 2013 is projected to be about 2,600 ha, corresponding to an average growth rate of 6% per year. The land development growth rate is faster than the demographic rate (2.3% per year) for a number of reasons: the increase in floor consumption per households; the development of suburban areas at lower floor area ratios than the one used in the center; the increase in the proportion of areas used for services, administrative buildings and commerce; the increase in floor area consumption per person for office building and for industries, as the older overcrowded buildings in the center or close to the center are replaced with more spacious buildings in the suburbs. The built-up area of Suining is projected to grow at 5% per year during the project period, while the commercial and office land use (which included government administrative buildings) is projected to grow at 14% per year. This is due to a massive relocation and redevelopment of office and commercial building already under way in the center of Suining. The proportion of land occupied by commercial and administrative building – 6% of total built-up – is projected to be still relatively modest in 2013 in spite of the high growth rate. The proportion of land devoted to industries stays about constant at about 23%, in Mianyang and 16% in Suining, while the proportion of land developed for services increases from the current 5% to 13%. This evolution in land use is consistent with the evolution of the economy where market driven forces become more dominant than the normative rules used in a command economy. In the long run the proportion of industrial land should decrease in proportion of the overall land developed when markets play an increasing role2. However, until the practice of using “negotiated price” rather than auction to dispose of industrial land is abandoned, Chinese cities will maintain a high proportion of industrial areas. The SUDP sites will provide about 40% of the projected demand for land in Mianyang and 19% in Suining. 2 See “Bertaud, A. and B. Renaud. 1997. “Cities without Land Markets: Lessons of the Failed Socialist Experiment.” Journal of Urban Economics. Vol. 41, No. 1, Jan. 8 Residential land The calculation of the demand for land during the project period is based on the projected rate of demographic growth in the city for the project period, the current net residential floor space consumption per capita, the projected annual increase in floor space consumption per capita, the ratio between net and gross residential floor space, the average floor area ratio in new residential projects, the ratio of roads, community facilities and open space based on current projects and regulations. The details of the calculation for each city are provided in Annex 1. The demand for residential land between 2006 and 2013 based on the above parameters is projected to be about 1,620 hectares for Mianyang and 1,300 hectares for Suining. The area of residential land put on the market under SUDP in Mianyang, 469 ha, represents about 29% of the total projected demand for residential land in the entire city of Mianyang. For Suining, the 251 hectares of residential land developed under SUDP represent 19 % of the projected demand. Industrial land The projection of the demand for industrial land is based on: the city demographic trend and the demographic projection contained in the master plan3; the projected change in the proportion of the active population, employment figures in the sector in 2004, the current and projected consumption of industrial land per worker. The practice of pricing land “at cost” or through “negotiated price” rather than using a market price as it is done for commercial and resiidential land will probably about maintain the high ratio of industrial land until the practice is discontinued. The demand for industrial land between 2006 and 2013 based on the above parameters is projected to be about 640 hectares for Mianyang. The area of industrial land put on the market under SUDP in Mianyang, 332 ha, represents about 52% of the total projected demand for industrial land in the entire city of Mianyang between 2006 and 2013. There is no provision of industrial land in Suining under SUDP. Commerce and office space The projection of the demand for commercial and office space is based on the city demographic historical trend and projection and the projection of the proportion of the active population; on the share of the sector employment which is on land dedicated to the sector (a large part of the service sector, specially in retail is located on the ground floor of residential buildings and the land consumed by these establishments are counted with residential land); the evolution of consumption of floor space and land per worker. The demand for commercial land and office space between 2006 and 2013 based on the above parameters is projected to be about 313 hectares for Mianyang and 242 ha for Suining. The area of commercial and office buildings land put on the market under SUDP in Mianyang, 241 ha, represents about 77% of the total projected demand for this 3 The demographics projection of the master plan are rather conservative implying a decrease in the rate of historical demographic growth, and in a way contradicting the projected economic growth which historically has been always correlated with demographic growth. The demand calculated in this paper is therefore conservative, as it is based on master plan demographic projection which are lower than historical trends. 9 type of land use in the entire city of Mianyang between 2006 and 2013. In Suining the demand is projected to be about 242 ha of which 42% would be supplied by SUDP. Because the projections above covers only a fraction of demand for various land use and the SUDP sites are the largest projects by far implemented by the municipal government in the 2 cities, under a lower demand scenario the projected SUDP land supply would in any case be lower than the 100% projected demand. Further, because the supply of residential land in the SUDP project is much lower than projected demand (29% in Mianyang and 19% in Suining) if excess supply appeared in industrial or commercial land, this excess area could easily be converted into residential land and easily absorbed. 5. The location of SUDP sites and spatial development policy The pattern of development of the two cities – consisting in developing in a linear manner along rivers and inter city main roads as illustrated on Figure 1 and 2 – differs significantly from the stated objectives of the master plan. This is a very common phenomenon as master plans in most of the city of the world are notorious for being ignored for opportunistic or even often practical reasons. The SUDP project will reverse the spatial linear trend and will be a concrete step in the implementation of the master plans (see Figure 3). Figure 3: Mianyang and Suining Master Plans The current spatial policy implicit in the master plan of cities like Mianyang and Suining could be summarized as follows: (i) redevelopment of older areas, and (ii) consolidation of under-used areas and agricultural enclaves within the existing urbanized radius. The location of the SUDP sites in Mianyang and Suining as shown on the maps of Figure1 and 2 illustrates this policy. Both sites are part of a consolidation in-fill strategy rather than an extension of the build-up area farther away from the city center. In Mianyang the current built-up area expands up to 14 km from the city center while the SUDP sites are between 2.5 and 7 km for SEDZ and between 3 and 9km for Pioneer Park. In Suining the built-up area expands up to 11 km from the center while the Suining 10 site is located between 1 and 5 km from the center. Both sites are therefore part of a consolidation of existing semi-developed rural enclaves rather than expansion of the built-up area further away from the city center. The gross densities used in SUDP in the 2 cities (178 p/ha in Mianyang and 141 p/ha in Suining) are high by international standards and are consistent with the stated urban policy in China of maintaining compact cities with a reduced footprint. The current consolidation policy – developing land closer from the city center than the current urban fringe – is associated with an intense urban renewal of the traditional city center. The urban renewal in the center aims at demolishing old warehouses and obsolete factories which were built mostly between 1950 and 1980 and which use the centrally located land very inefficiently. Some of these factories are relocated in the newly developed land. Some apartment housing built during the same period is also being demolished because its low living space standards and run down infrastructure does not correspond to current demand and use centrally located land inefficiently. Most of the land recovered through urban renewal is being recycled either by developing new housing, office buildings or public parks. The land use standards of the new areas make more efficient use of land by using higher floor area ratio, mixed land use in the case of apartments – the first 2 floors are often used for retail or office space – and a lower building footprint, allowing for wider sidewalks and public landscaped pedestrian space between high rise buildings. The overall spatial policy of infill and renewal should result in more compact cities, more efficient public transportation and a better urban environment because of the larger areas dedicated to pedestrians. The urban renewal projects in the center and the consolidation of semi-urban enclaves – as the ones developed in SUDP – are two complementary components of the same strategy aiming at developing compact dense cities. This strategy compared favorably to the one used in central and eastern European cities where cities expand mostly through suburban green field development while the central city and the immediate suburbs are grossly underused by obsolete industrial land and decrepit public housing for which there is little demand. 6. alternatives spatial development models The current spatial strategy described above, which is used in Mianyang and Suining, is not the only one possible. Indeed many cities in the world follow strategies which are much less interventionist than the one used in China. While the strategy used in Mianyang and Suining have many benefits described above they have also costs. The costs of the strategy consist mostly in the high amount of demolition and displacement of households and firms. There is a risk that an undervaluation of the assets destroyed – tangible and intangible – might results in much lower net benefits than planned. This is the reason why for both an equity and economic rationale it is necessary to measure as accurately as possible the real costs of demolition and displacements. Because of the time and resources devoted to the RAPs we are confident that the costs of the strategy have been fairly evaluated and that the net benefits of the project are positive. The RAPs contain a detailed inventory of area and quality of the land under cultivation, and area and building standards of all the buildings which would be demolished. However, it is