# **Box 6: Economic incentives for local governments to sell land use rights and initiate urban construction projects**

Economic incentives – here referring to financial payoffs received from certain activities – also play an important role in incentivizing cadres and private actors. Urban planning and development in China have been influenced by two important factors: fiscal re-centralization and the land use rights system.

- _Fiscal re-centralization:_ Under the tax sharing system (TSS) introduced in 1994, subnational governments receive approximately half of all collected taxes but they account for approximately 80% of total budgetary government expenditures (Wong, 2013a; World Bank, China 2030 Report: 55).

- _Land use rights system_ : With the 1988 amendment of the Land Administrative Law, stateowned and collective-owned land use rights can be transferred for the payment of a conveyance fee (Lichtenberg and Ding, 2009: 58). If urban development requires the use of collectively owned land, it has to be first converted to state-owned land through requisition and a compensation has to be paid, including subsidies for resettlements. As there are no markets for rural land, this amount is determined by an administrative formula (Lichtenberg and Ding 2009:58). The land use rights for the area converted can then be transferred again, for example to private developers (Kaufman, 2012: 42).

The interaction between fiscal re-centralization and land use rights system has substantially affected top city-level cadres’ investment and revenue raising decisions. Facing growing expenditure needs and insufficient resources from the formal fiscal system, **local governments have significant economic incentives to sell land use rights and initiate urban construction projects** :

- The revenues received from the sale of land use rights have become the most **important source of extra-budgetary income** for local governments (Man, 2011: 12). While the sale of land use rights accounted for only 9.3% of local budgetary revenues in 1999, this number has risen to an average of 30% (McKinsey Global Institute 2009: 87; Kaufman 2012: 42).

- The institutional structure of the land transfer process also enables local governments to **make significant profits** . The compensation required for requisitioned agricultural land, based on the administrative formula, is usually much lower than the conveyance fees governments receive from private developments (Lichtenberg and Ding, 2009: 58). Estimates and anecdotal evidence suggest, conveyance fees are approximately 10 to 20 times the value of compensations (Tian and Ma, 2009: 603; Lichtenberg and Ding, 2009: 58).  In addition, prior to the transfer, the price for the land sale is often intentionally driven up by increasing values through infrastructure construction such as investments in highways, metro stations, or even airports (Wei and Zhao, 2009: 1034).

Given these economic incentives, city expansion “always pays off, whether people end up living there or not” (Kaufman, 2012: 43). At its most extreme, these economic incentives can lead to the emergence of ghost cities such as Ordos City in Inner Mongolia.

**Environmental impact:** As the institutional structures encourage especially the development of land at the urban fringes, this increases the risk of **urban sprawl and wasteful land use.** Due to the need to compensate and relocate residents, it is much easier and more profitable for the government to develop new areas at the city’s periphery than available land within the city.  In order to curb such excessive behavior at the local level, the central government should decrease its strong focus on GDP growth and allocate more funds to the local level.

_Source: Kaufman (2012)_ In summary, insufficient political incentives and severe budget constraints at the local level disincentivize local cadres to faithfully implement national environmental mandates. As a 21