A Financing Mode of Urban Rail Transit based on Land Value Capture: A Case Study in City

Jun Suna, Tian Chena, Zuchen Chenga,*, Cynthia C. Wangb, Xin Ningc

a School of Civil Engineering and Mechanics, Huazhong University of Science and Technology, Luo Yu Road, Wuhan 1037, b Faculty of Built Environment, The University of New South Wales, Sydney, NSW 2052, Australia c School of Investment & Construction Management, Dongbei University of Finance & Economics, Dalian, China

【Abstract】While urban rail transit has gained increasing popularity, there are still many problems related to obtaining financial resources for constructing it in China. It is proved that the Land Value Capture (LVC) theory can provide theoretical support for exploring new financing mode of urban rail transit to solve these problems. This paper reviews the concept of LVC and the existing LVC finance mechanisms, in particular, Joint Development (JD). It is revealed that JD can’t be directly copied and reproduced in . The characteristics of land acquisition policy as well as the practice of rail transit construction in mainland China are summarized, and based on the findings, the Predetermined Land Reserve Mode (PLR) is proposed. The essence of this proposed mode is to link the reserve of specific land parcels with the relevant rail transit project and ensure it benefits from the predetermined land reserve. Rail transit companies, with the authorizations from the government, can reserve suitable land parcels prior to the planning and construction of the rail transit system so that they can capture the increased land value after the land transfer. PLR is a new finance mechanism based on LVC and it is different from JD under comparative analysis. Analytical results show that PLR has unique advantages. To demonstrate the performance of PLR, a case study of constructing the urban rail transit system in Wuhan City, China, is presented in this paper, and it shows that the PLR is well suited for financing the urban railway systems in cities of mainland China.

【Key words】Predetermined Land Reserve ; Mainland China; Land Value Capture; Rail transit; Joint Development; Project Financing

1 Introduction

The construction of urban rail transit in mainland China is in great demand and its investment scale has been increasing rapidly in recent years. From 2001 to 2005, the urban rail transit construction mileage is 399km, the investment is in the scale of about USD $ 29.90 billion*; from 2006 to 2010, it is about 885km and USD $ 74.74 billion; while in the recent 5 years (2011-2015), it has up to about 1,900km and USD $ 179.37 billion, which has increased 5 times compared to the first five years (Fig.1). And according to the national planning, it will construct 2,500 km in the next 5 years, which means by the end of 2020, the total mileage of rail transit completed nationwide will reach about 6,000 km. The preliminary planning for investment is USD $ 261.58 billion, which means average of USD $ 52.32 billion annually. The years in the future are still the peak of urban rail transit construction, so the governments will still have the intense financing demand.

* In this paper, CNY is converted to United States Dollar at the rate of CNY￥6.69 per USD $1.00 based on the exchanging rate in Aug, 2016.

300 3000

250 2500

200 2000

150 1500

100 1000 Construction mileage/km 50 500 Investment scale/billion doaller

0 0 2001-2005 2006-2010 2011-2015 2016-2020 Year

construction mileage investment scale

Fig.1. The construction mileage and investment scale in Chinese urban rail transit, 2001-2020 (Source: Collecting data from China Association of Metros. < http://www.camet.org.cn/sjtj/> accessed on 07.09, 2016)

Facing the huge demand for construction funds, various cities have been exploring the innovative financing modes of urban infrastructure, such as BOT, PFI, PPP and ABS, etc(Table.1). To some degree, those mentioned modes help to alleviate the tense situation in funding the construction of urban infrastructure. But the fact has not been substantially changed that the funding source of urban rail transit construction relies more and more on the government (Fig.2).It is due to tight schedule and the enormous demand for monetary investment. Therefore all local government authorities in mainland China are facing tremendous challenges and pressure in financing urban rail transit. They have to find new ways of financing to improve the situation. Table 1 The operation process and characteristics of some financing modes The operation process Characteristics of the mode The private sector builds the project (1)Concession agreement. at its own expense and then (2) A concession period. BOT operates the project, in turn receive (3)The private through operating the (build-operate-transfe the revenue from charging or project to recovery costs. r) selling within some years and finally transfer the project to the government (L. Y. Shen, 2002). The private company invests, Compared with BOT: designs, constructs and operates the (1)The private should completely return PFI infrastructure facility within a the project to the public with no debt. (Private Finance concession period and then returns (2)The private will charge fees from the Initiative) the project to the public, and charge government to recover the investment the government to recovery costs costs. (Sulafa M. Badi, 2016). PPP Cooperation of some sort of Compared with BOT:

（Public-Private- durability between public and (1)Public to participate in the project Partnership） private actors in which they jointly management and operation of the latter develop, construct the project and part of the project. share risks, costs, and resources (2)Private to participate in the project which are connected with the early stage, like scientific research, set up project (Graeme A. Hodge, 2007). the project. Issue bonds in the international (1)Rely on the project’s future revenue. ABS securities market and then use the (2)Investors can not directly participate (Asset-Backed project asset income to repay the in the construction and operation of the Securitization) cost project.

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00% 2001 2003 2005 2007 2009 2011 2013 2015 Year

Funds from government Loans and other sources

Fig.2. Comparison of funding source for urban railway systems in China, 2001-2015 (Source: According to data from China Association of Metros. < http://www.camet.org.cn/sjtj/> accessed on 07.09,2016)

It is proven that the Land Value Capture (LVC) theory can provide theoretical foundation for exploring the new financing mode of urban rail transit. This paper reviews the concept of LVC and the existing widely used LVC finance mode--Joint Development (JD). Because of the legal policy and experience factors, JD can’t be directly copied and reproduced in mainland China, so the paper proposes a new financing mode based on the LVC-- Predetermined Land Reserve (PLR). The specific description of PLR mode’s operating mechanism, and its comparison with JD is the focus of the paper. And it provides a case study of constructing the urban rail transit in Wuhan City, China to demonstrate the performance of PLR. The PLR mode has unique advantages. It can well adapt to Chinese land policy, make full use of the land value increment to make up the gap in rail transit construction funds, establish a sustainable development of rail transit investment and financing mechanism, let the funds to achieve a virtuous circle. The PLR mode is promising in the mainland China to meet the requirements of the rapid development of urban rail transit, to ease the huge financial pressure on the government in rail transit construction.

2 Literature review

2.1 Land Value Capture

LVC theory suggests forcing the beneficiaries of land value increment to return either some or all of the added value from infrastructure investment through some “capturing” methods (Batt, 2001). There is a long history of applying LVC theory and techniques in urban development policy and sourcing finance. It is based on neoclassical economic theory of David Ricardo (Proposed in 1817) that the unearned increment, resulting from public investment and/or market conditions should be returned to public by tax measures, etc. (Amborski, 2012). Henry George’s land reform in the 19th century also made a significant contribution (Batt, 2001). Indeed, “Land Value Capture” had not been widely used in formulating the regulations and policy of town planning in any country until the 1970s (Cervero, R., 2007). In the 1970s, the U.S. Department of Transportation re-interpreted LVC theory, and defined the LVC as “the process of entirely or partially returning the land value increment that was attributed to social contribution, back to the society”(Zhao and Larson, 2011). This capture can be realized by taxes or other financial means, or directly force beneficiaries (mainly real estate developers) to return the income essentially derived from the land value increment to public interest expenditure. Based on the previous research we integrated, LVC strategies can be divided into “indirect capture” and “direct capture”. Indirect value capture strategies rely on three broad categories of instruments: taxes，fees and regulatory. Fiscal tools (taxes and fees) require either a tax or fee to be paid by the private landowner to facilitate the capture of the value for returning to the public sector. Regulatory instruments, on the other hand, will lead to some form of public benefit that the landowner essentially provides from his increased land values. This may be imposed through some type of “in kind” contribution by private landowners for the public benefit (Smolka and Amborski, 2007). Regarding taxes on property in general and land values in particular mainly include land tax, land value increment tax, house tax and vacant land tax etc. (Brown-Luthango, 2011). By definition, they are levied for the additional value of land occupied by the land users. Direct capture strategies that are commonly used include Special Assessments，Planning Agreement and Joint Development, etc. Special Assessments refer to those property owners located within a designated geographic area, or “Special Assessment District (SAD)”, and require them to pay for special benefits accruing to their properties that are close to certain infrastructure improvement (Zhao and Larson, 2011). The use of Special Assessments reached its height during the period between 1900 and 1930, when there were both a critical need for the development of modern urban infrastructure and a rapid increase in property values. Today, all 50 states in U.S. authorize local authorities to use Special Assessments for financing local improvement projects(California Senate Local Government Committee, 2004; League of Minnesota Cities, 2008; Local improvement district manual, 2003), such as sewer and water infrastructures, road and highway construction and maintenance, and other transportation construction. Planning Agreement, also known as Planning Gain or Planning Obligations, is a mechanism to capture land value typically used in Britain which is based on the nationalization of development right. The local planning authorities gain benefits from developers through granting planning permission (Jun, 2005). A planning agreement is a legal mechanism through which a developer agrees either to accept a restriction on the use of the land or the operation of the development or to make contributions to a local authority (Luo, H. B., 2007). Joint Development (JD or TJD) is based on the premise that transportation investments significantly improve regional accessibility, and thus leads to higher land values around railway stations or other

transit platform (Cervero, 1994). It takes the principle of maximizing the overall benefits of developing rail transit and peripheral area. Participating parties such as rail transit companies, real estate companies and other economic entities, with the authority and guidance of city government authority, are flexibly combined in various ways to jointly carry the construction and development of rail transit and surrounding real estate, and share the risk and benefit of the joint development. JD considers the urban rail transit and real estate development or other related activities as a whole project so that it can makes overall benefits greater than any one single project through overall planning, design and construction (Luo, 2008). Specifically, in order to capture the land value appreciation brought by rail transit, the urban rail transit lines and station facilities are usually set in location with more potential and advantages in the real estate or commercial development (Zhao and Das et al., 2012). JD has been widely used in rail transit construction around the world, particularly in Japan, the U.S. and . It will be discussed in detail in the following section. In short, LVC theory is very useful to deal with the financial problem of infrastructure projects. It can be implemented through many different forms.

2.2 Urban Rail Transit and land value increment

Rail transit belongs to the category of “Public Goods” or “Quasi-public Goods”. Compared to other infrastructure, it shows more powerful positive externalities. Because of it enhances regional accessibility, reduces travel costs, and then drives the great appreciation of land value and real estate industry along lines. There is a large body of literature focusing on the incremental effect on surrounding land and property values with the development of urban rail transit. Studies show that the estimated impact of the rail transit on land/property values varies significantly (Voith, 1991; Laakso, 1992; Agostini and Palmucci, 2008; Pan and Zhang, 2008). The reasons mainly include the different estimation modes, impact indicators and factors, or differences on the original data collection due to the nature of the studies. In general, the value change caused by rail investments of land is higher than property(Mohammad and Graham et al., 2013), and commercial properties experience a greater increase in their rental values compared to residential properties (Debrezion and Pels et al., 2006; Debrezion and Pels et al., 2007). For example in United Kingdom, an increase of 2.2% has been recorded in housing property values near the Light Rail transit (LRT) stations, while the increase is 16.4% for commercial shops (Pagliara and Papa, 2011). In the traditional process of rail transit construction and operation, the rail transit project investors (generally refers to city authorities) are unable to obtain the external benefits brought in by the rail transit, however, the benefits fall into the hands of the land users and real estate owners along rail transit line. On one hand, the city authorities face enormous pressure on infrastructure financing. On the other hand, the authorities are unable to obtain the value-adding benefits brought in by the infrastructure development. Trapped by this dilemma, many countries and regions begin turning to use the LVC theory to solve the problem of rail transit financing (Du and Mulley, 2007), by capturing land value increment along rail transit line to realize the internalization of external benefits. Land value in general (and particularly in an urban context) reflects the value of public goods and services available to particular sites (Rybeck, 2004). Urban rail transit, in particular, can offer higher land value for the region than other infrastructure. LVC finance can be seen as a alternative method of revenue generation for urban rail transit systems. The basic assumption is to recover the capital cost of the transit investment by capturing some or all of the increments in land value resultant from the increase in accessibility (Andelson, 2000; Bowes and Ihlanfeldt, 2001). According to the benefits pay-back mechanism, investors should capture the added land value by some means and incorporate it in a land value financial framework, in which a link is established between the benefit of transit investment and its costs (Gihring, 2001; Fensham and Gleeson, 2003; Smith

and Gihring, 2006; Iacono and Lari et al., 2009).

2.3 Joint Development Mode in practice

In practice, JD has a variety of specific pattern. It can be categorized by the characteristics of the development and sources of the funding. Different countries and regions have different focus on JD, thus they use different specific patterns. Joint development of rail transit and real estate in Japan, began in the early 1920s by the Hankyu Railway Company, firstly used in the Osaka area. Because this joint development strategy has achieved a great success, it was widely adopted in Tokyo and elsewhere in Japan by rail transit companies (Ohara and Uno, 1989). Japanese railroad companies generally take rail transit as the core, and real estate, tourism, hotel facilities, shopping centers and other retail services etc. as ancillary businesses, the most important business strategy is to carry out land management and rail transit operation simultaneously (Xu, 2010). The U. S. links rail transit network with the needs of retail, commercial and housing directly so that it can reduce the use of private cars, improve land utilization. There are several specific modes of joint development in the United States, such as the transit corridors，the transportation-belt renovation project and the joint development of the transition area (Tong and Weng, 1994). The success of joint development, such as Washington area, was heavily influenced by WMATA's policy on the acquisition and disposal of land rights in the system. WMATA has the right to purchase, lease and, if necessary, recover land use rights along the route, has the right to purchase land for the purpose of implementing TOD （Cevero,2004）. And then local government authorities in consultation with development companies, proposes joint development programs, and commit to provide additional investment return rate for joint development programs to attract private capital (Cervero, 2007). Singaporean metro lines constitute a ring network with a total length of 109 km. There are 4 metro lines in Singapore, namely the north-south line, east-west line, north-east line and the loop line (Han, 2011). More than 70% of land in Singapore is owned by the government authority. The right of urban land development is basically controlled by government authority, and the public housing construction is a most distinctive feature in Singapore (Hui and Ho et al., 2004). Rail transit joint development strategy in Singapore is often associated with public housing construction, of which the main pattern is to build a large number of residential and grass-roots public service facilities in the early stage of new housing comprehensive development. Commercial land near the rail transit will not be developed in the early stage. Land value will rise when the new town is developed up to a certain scale. Then the land will be transferred to private developers gradually and systematically through auction or bidding. Local government will attract high-density investment by this way so that the potential of the new town center will be fully realized. Hong Kong Metro is recognized worldwide as a very successful operation mode of rail transit project. Hong Kong Metro has made full use of the rail transit financing experience from Japan, the US and Europe. It has formed a mature “Metro + Property” joint development mode. Every year the miscellaneous revenues collected from Hong Kong Metro system except the tickets’ income (revenues from real estate development, leasing and property management etc.) accounted for about 25% of total revenue, and it increases year by year (Cervero and Murakami, 2009). It not only greatly compensates for the lack of funds for rail transit construction, but also improves the profitability of rail transit operation. Table 2 uses the characteristics of the development and sources of the funding to show a comparison of different specific patterns of JD in different countries and regions.

Table 2 Comparison of JD in different countries and regions Characteristics of development Sources of funds (1) Focus on commercial real estate The funds for construction and operation development. of the joint development project are (2) Focus on the construction of real mainly provided by the joint estate ancillary facilities. (Priemus development companies and other private Japanese mode and Konings, 2001). capital. The city authority provides land, and part of the development land can also be provided by the private owners.(Sheng,2011) (1) Focus on the transit-oriented Basically the same as Japanese mode. development, urban planning. (Sheng,2011) (2) Reduce private car use. American mode (3) Many joint development projects of a small area with rational planning. (Mathur and Smith, 2013). (1) Combined with the construction Funds and land for rail transit of public housing. construction are provided by the city (2) Reserve land prior to authority. The development companies Singaporean mode infrastructure development. (Han, are responsible for not only the funds 2011). used in rail transit operations, but also the development and construction of real estate properties along the railway lines. (1) Relying on the advantages of the Ticket sales; station business and metro system to carry out a variety of railway-related business, including business. station retail, advertising, Hong Kong’s mode (2) Some real estate properties are telecommunications, external not for sale, and can only be rented. consultancy services; property and other (Cervero and Murakami, 2009). business. (Ruan,2016)

3 Practices and application barriers of JD in mainland China

3.1 Early practices of JD in mainland China

In 2003, China promulgated the “Notice from the General Office of State Council on Strengthening the Construction and Management of Urban Rapid Rail transit System”. Its Clause 5 specifies that “Income of city authorities from the land increment along urban rail line should be mainly used for the construction of urban rail transit projects”. JD, with Japan and US as representatives, and Hong Kong “Metro + Property” mode are presented as exemplary in mainland China. In fact, during early 1990s, drawing lessons from the successful experience of foreign and Hong Kong rail transit construction, some cities in mainland China, according to their own characteristics, have already put forward that urban rail transit development bundle combined with land utilization, which was similar to JD. Guangzhou city was the first mainland city that took comprehensive development mode in its rail transit construction. In

Autumn 1992, Guangzhou city launched the overall property development projects along the Metro , and in the first phase, 32 parcels of land along the Metro Line 1 with a total area of 364,000 m2 (Zheng, 2003) were included. Guangzhou city authority allocated all of these parcels to the Metro Corporation, and then the Metro Corporation selected the appropriate property developers to jointly develop the property along the lines, these co-developers provided the capital for constructing properties and paid the land development fee to the Metro Corporation. In this mode, the Metro Corporation only shared the project benefits with a fixed allocation for metro construction and operation, and it did not need to carry the risks and possible losses in the property development. Afterwards, Shanghai, Shenzhen, Beijing and some other cities had also begun using comprehensive development mode in their rail transit construction. At that time there is no national legal basis in China for comprehensive development mode. Given this background, some cities enacted local laws and regulations in order to create a favorable legal environment for comprehensive development mode. For example, in 1994, Guangzhou authority issued the “Regulations of Construction and Management of Guangzhou City Metro System”, in which the Clause 4 specified that “the comprehensive development within metro construction planning area” belonged to “metro construction”, Clause 6 was provided for the allocation of land revenue, and Clause 10 defined the delimitation of metro construction planning control area in detail. Another example is, Shanghai authority issued “Regulations of Shanghai City Metro Management” in 1997, and it provided that “Within the scope of land for metro construction determined by the urban planning, the rail transit company has the priority in engaging real estate, business and advertising and other business activities.” In 2002, the “Regulations of Shanghai City Rail transit Management also adopted it. Shenzhen, Beijing and so on have also issued similar regulations. These regulations provided the legal basis for land acquisition in comprehensive development mode until the promulgation of the “Property Law” in 2007.

3.2 Barrier in the application of JD within mainland China

JD has many advantages, however, since the implementation environment of China is quite different from what is in Japan and the US, copying the JD mode completely in the construction of urban rail transit system in mainland China will meet barrier. Differences in legal policy are mainly reflected in the land supply system and methods. Contrast can be seen from Table 3 that the private land ownership and supply method in Japan and the U.S., all provide a great convenience and suppuration for the successful implementation of JD. In JD, the city authorities should strictly control the land during the planning and construction of rail transit. The parcels then will be allocated or sold at low prices to JD company at the appropriate time, and the rights of land use, development and management are given at the same time (Luo and Qi, 2007). Under the system of land public ownership, the land is completely under the control of the government, jointly developed led by the government. But in the private ownership system, private and government can both provide land for joint development, the development is market-oriented, private sector initiative and participation are high. Hong Kong has the same land ownership and land transfer system with mainland China. It adopts the land public ownership system, and the Hong Kong Government has the absolute rights of land management, use, development and transfer. Land leasing is carried out by the Hong Kong Lands Department and is divided into three modes: auction, tender and agreement. But their land development and utilization system are different. In mainland China, the development of land is divided into two stages. "First stage" is the first-level development of land, in simple terms is to deal with the land to achieve the necessary construction conditions for the later property development, to transfer the land from uncultivated land to cultivated land. "Second stage" is the second-level development of land. It is to develop property on the land, such as commercial property development. The supply of land used for

non-public welfare in the second stage can only be realized through bidding, auction and allocation, except for very few that are specifically allowed; in the first stage development it is mainly conducted by the government or with the authorization of government through agreement-based assignment, allocation. While Hong Kong does not separate the first and second development and can give all development rights to the rail transit company through agreement. In Mainland China, land for rail transit construction belongs to urban infrastructure land. According to the Property Law (2007) Clause 137, Urban Real Estate Law (1994) Clause 24 and Land Management Law (1986) Clause 54, which specify that urban infrastructure and public utility land can be obtained by city authorities’ allocation. However, other development land along rail transit belongs to commercial land. The Property Law Clause 137 clearly states that “Commercial land, such as land for industry, commerce, tourism, entertainment and commercial residential buildings, as well as the same land with two or more intended land users should be acquired through tender, auction or other public bidding methods”. Therefore, in mainland China, urban rail transit construction project owners (rail transit companies) can obtain the right of second-stage development for land along rail transit line only by bidding or auction, instead of directly obtaining by agreement-based assignment or allocation from the local government authorities. However, due to the bidding system for commercial land, this approach will force rail transit owners to publicly compete against the commercial property developers if in strict accordance with the provisions of the “Property Law”. This will increase the rail transit Company’s development cost, reduce the financing effect. The original intention of joint development cannot be well achieved.

Table 3 Differences in JD between Japan, the U.S. Hong Kong and mainland China Acquisition of land use along the Laws and regulations Land policy rail transit The United States covenant gives Private the metropolitan area transit U.S.A Interstate Compact ownership authority the right to purchase, lease, and recover the land use rights. National land comprehensive Private Planning according to the land use Japan development law ownership plan (Zheng, 2003). The Mass Railway Transit Hong Kong government use Corporation Ordinance agreement in accordance with the Public Hong Kong (1978) minimum premium without the ownership Underground railways subway give the land to the subway Ordinance (2000) company

Agreement-based assignment, The Land Management Law allocation give the first-stage Public mainland (1986) development ownership China Property Law (2007) Bidding and auction give the second-stage development

4 Predetermined Land Reserve mode

According to the actual implementation of “Metro + Property” joint development mode in mainland China, the cities would face legal obstacles in land acquisition. Some deregulated the “Joint Development Mode” by enacting local laws and regulations. However, these regulations have lost effectiveness after the promulgation of the Property Law (2007). The actual domestic situation determined that even the widely acknowledged Hong Kong mode can’t be directly copied and reproduced. Some cities begin to turn to the mode that combines land reserve system and infrastructure construction. We contribute to existing practice by putting forward Predetermined Land Reserve Mode (PLR), a new mode for urban rail transit financing by utilizing land reserve, and its essence is to link the reserve of specific land parcels with rail transit projects and get benefit from the predetermined land reserve to replenish rail transit investment directionally.

4.1 The Mechanism of Predetermined Land Reserve Mode

Different from the traditional Land Banking (LB), in which the land is reserved by the government, the revenue is used for all infrastructure construction (Zhao X.F., 2008), PLR combines the diversified land reserve in the primary market with the large urban rail transit projects. In PLR, the rail transit company with the authorization and delegation of the government reserves the land, bears the financial pressure. And the local government authorities can access the income from the development of the land parcels in the neighborhood of the rail transit by this approach. It internalizes the positive external impacts brought by rail transit construction and applies the special fund to balance the finance of large rail transit projects. The mechanism of PLR is shown in Fig.3. In PLR, local government authority gives the right of first-stage land development along rail transit to the rail transit company for Predetermined Land Reserve project. In essence, rail transit company which is in charge of Predetermined Land Reserve project do not conduct land reserve and management independently, instead it carries the duty on behalf of the Municipal Land Reserve Center, Rail transit company merely has the right of first-stage land development. Its work scope of land reserve is ended before the transaction of the land in the market. This mode can well solve the legal problem in commercial land acquisition specified by “Property Law” (2007).

Increase the Value

① Joint with Land Reserve Center Planning Department

② Authorize Supervise Determine

Rail Transport Rail Transport ③ Reserve Proposed Reserve Construction Fund for Rail Company Cost of Land Land Transport Reserve Construction ⑤ Return

Financial Department Complete and Deliver

Hand over ④ Land Transfer Bid and Land Exchange Center Income Auction

Fig.3. The framework of PLR

Land Reserve Center and Planning Department jointly determine the proposed reserve land parcels. ①

Rail transit company needs to require authorization and accept supervision from Municipal Land Reserve Center. ② Rail transit company is responsible for financing and specific land reserve work.

③ Finishing reserving, rail transit company delivers the land parcels to Municipal Land Exchange Center or Land Reserve Center. Land Exchange Center trades the parcels through bidding and auction, and ④ obtains the land transfer income. .

The land transfer income will be handed over to Financial Department first and then returned to rail transit company. The government finance department will deduct the necessary taxes, land reserve costs and ⑤ other transaction costs, and the remaining land transfer income will be fully returned to the rail transit company through a rail transit construction special fund.

4.2 Comparison between JD and PLR

Both JD and PLR take LVC theory as the theoretical basis. JD is a very mature model, widely used in many countries. PLR is an innovation in respect of China's land policy and law. There are some differences between them, PLR is mainly used in the first stage of development, the funds it obtained mainly from the one-time land transfer revenue. JD is applied to all stages of development, the funds it obtained mainly from sustained and stable land rent, property development and business income. PLR operation and financing cycle is shorter than the JD. JD is mainly concerned about the traffic stations, the

development of complexes and building the transportation hubs. PLR does not only focus on nodes, but also concerned about the plots along the railway. Specific analysis of comparison between JD and PLR is shown below†: (1) Operating Objective  The objective of JD is to meet the rail transit construction and operation funding needs, ultimately improve the urban traffic systems and services through overall planning and construction of traffic and property, to convenience residents’ travel, reduce the use of private cars and so on to achieve urban function upgrade.  The objective of PLR is to compensate the funding gap for rail transit project construction, promote the construction of rail transit, ease the government financing pressure, and establish a standardized and sustainable rail transit investment and financing mechanism to achieve a benign cycle of fund. (2) Operating Party  The operating party of JD can be the group composed by developers with the appropriate qualifications and the rail transit company or just the rail transit company, the single or temporary joint development company both has corporate legal personality, able to carry out land development and operating activities independently.  The primary operating party of PLR project is the rail transit company. It needs to acquire prior consignation or authorization from land reserve center. Indeed, the rail transit company plays a role as “branches” of land reserve center instead of carrying out land reserve and operation independently in its own name. (3) Operation Pattern  JD is jointly developing the rail transit and land resources. It mainly focuses on the station with a large flow of people. The integrated development which combines commerce, advertising, superstructure and other properties can utilize rail transit and land resources comprehensively. It obtains sustainable revenue directly used in rail transit.  PLR reserves land in the neighborhood of the proposed rail transit projects. The rail transit company, authorized by the government, is responsible for financing and conducts the specific land reserve process, and transfer these land parcels. The land transfer revenue is earmarked for the construction of rail transit in the form of special fund. (4) Operating Cycle  The JD project operating involves the full authority of land development. It will make flexible arrangements for land development and management according to the market needs. Its cycle include construction and operating the rail transit and the properties.  PLR project only involves the first-stage development of land. Its work scope of land reserve is ended before the land transaction, doesn’t include carrying out the subsequent commercial property development.

* In each subtitle, the first characterization describes about JD, and the second one is about PLR.

5 Case study

Wuhan city is one of the earliest cities that have obtained the right to plan and construct urban rail transit in China. As the 7th city which has operated rail transit successfully, Wuhan city began the construction of rail transit as early as December, 2000 and finished the first transit (LRT Line 1) in 2004. By the end of 2012, Wuhan urban rail transit has formed an “H” shaped network across the River with a total length of 73.4 km, which comprises of the Metro Line 1 as well as Phase I of and (Fig.4). In the long term overall plan, Wuhan city will further extend and enhance the network of metro line and expand the coverage in downtown area. The goal is to establish a complete network with a total length of 220 km which contains 7 metro lines, and 3 of them go across the Changjiang (Yangtze) River.

Fig.4. Building program of Wuhan urban rail transit network

According to relevant regulations of the State Council and the actual situation of Wuhan city, the project’s approval document requirements that the capital ratio of Metro Line 1, Line 2 and Line 4 should be 42%, which means the total investment will be at least USD $ 6.69 billion. The main source of the capital is fiscal budget funds and land transfer income of local government authority. In the Wuhan government’s financial planning, the proportion of land transfer income accounts for 21.98% of the total capital. In the land auction of Wuhan city in 2010, the P (2010) No.150 land parcel reserved by Group had been traded at the price of USD $ 0.58 billion, which updated the record of the city's highest land transaction price. No.150 parcel is located in Jiyu Bridge, close to Metro Line 2 (Fig.4). The size of PNo.150 parcel is 12.57 hectares. So per hectare of No.150 parcel is USD $46.20 million. The land parcel is of a relatively regular shape and flat terrain (Fig.4). The density of buildings is lower than the average level in downtown so that the work of demolition and site preparation is less difficult. As one of the parcels reserved for the construction of Metro Line 2, No.150 parcel was entrusted to

rail transit company---Wuhan Metro Group to reserve with the authorization of Land Reserve Center at the end of 2006, of which process was synchronized with Metro Line 2 planning. After nearly three years of reserve, the parcel had been open tendered by Land Exchange Center of Wuhan city in 2010. The proceeds, after deducting the related taxes and fees, were returned to Wuhan Metro Group for the construction of Metro Line 2. Construction of Metro Line 2 and reserve of proposed reserve parcels, including No.150 parcel, were completed according to the PLR. The main implementation process and key points are shown in Fig.5 and Table 4.

Implementation process of Predetermined Land Reserve Mode

Planning Department Land Reserve Center Subject of Operation Financial Department Regulatory Department

Prepare a project investment estimate Design phase Third-party audit the Prepare a financial financial balancing of Determine the balancing scheme Predetermined financial balancing scheme Land Reserve scheme and proposed program reserve land parcels

Delineate the scope of land reserve

Authorize the work of land reserve Supervise and audit Implement- Implement land the cost of land ation phase of reserve reserve land reserve Participate in Inspect and accept inspection and the land reserve acceptance completed

Transaction Trade the parcels phase after land reserve

Establish the Predetermined Land Reserve fund Phase of fund return Return the cost of land reserve Supervise whether the funds are in place Funds used for rail transport construction

Fig.5. The main implementation process of PLR

Table 4 The key controlling points of PLR Phase Key controlling points Design phase of Predetermined Land Reserve Determine the capital balance scheme and reserve land project parcels Implementation phase of land reserve Control the land reserve cost

Transaction phase after land reserve Select the timing of transaction

Phase of fund return The allocation of land transaction income

Construction of Wuhan Yangtze River (2004) pushed up the value of the land parcels within Jiyu Bridge area. What was more important was that the planning and construction of Metro Line 2 (2006) made a significant influence on these parcels, which led to the average Floor Price (land price per floor area) of some parcels rapidly increase from USD $20.37/ft2 in 2004 to USD $145.49/ft2 in 2012 (Fig.6). As indicated by the growth trend of average Floor Price given in Fig.6, the planning and construction of Metro Line 2 had greatly affected the value of proposed reserve parcels and enhanced the value of surrounding land, which PLR mode intends to capture. The No.150 parcel, besides part of it was used for the construction of metro tunnel ventilation shaft, had been readjusted and reserved to balance the construction fund of Metro line 2. Reserves cost of No.150 parcel was USD $ 0.15 billion and the expected transaction price was USD $ 0.54 billion. Eventually, No.150 parcel had been sold for USD $ 0.58 billion. After deducting the reserve cost of USD $ 0.15 billion and other expenses, it successfully funded the construction of Metro Line 2 with nearly USD $ 0.34 billion. This is about 15% of the total investment of Phase I of Metro Line 2, (USD $ 2.23 billion), and made the greatest contribution to financing Metro Line 2 among all of the reserved parcels. The successful auction of this parcel，without doubt，marked that Wuhan urban rail transit has made significant achievement in the practice of PLR.

200.00 180.00

) 2 160.00 Open tendered and traded ft 140.00 120.00 100.00 80.00 Beginning of 60.00 Planning and construction of Metro Line 2 Floor Price (dollar/ land reserve 40.00 20.00 0.00 2004 2006 2008 2010 2012 Year

Fig.6. Average floor price of land parcels within Jiyu Bridge, 2004-2012 (Source: Collecting data on China Statistical Database. accessed on 07.09,2016)

In addition to the P (2010) No.150, there are many such land parcels, such as Southern Hong Guang SOHO, Dragon Harbor, Wuhan 1818 Center and so on. Their house prices rose by an average of 10% when the Wuhan Metro Line 2 opened. Song (2016) investigated 36 property projects around Wuhan Metro Line 2 within 2000 meters for the sample, researched the Wuhan Metro Line 2’s impact on the housing prices. The analysis showed that after the metro planning housing prices around rose slightly; two months before the metro open, housing prices rose sharply; after the subway opened, housing prices continued to rise; 6 months after the subway opened, housing prices to maintain steady growth.

6 Conclusion

This paper indicates that the application of LVC theory in urban policy and infrastructure projects has a long history, and it has brought in the inspiration to financing the rail transit projects. Specific value capture strategies, including JD, have been widely used around the world. The demand of large funds in rail transit construction brings in huge pressure on the government’s finance capability in mainland China. So the paper proposes that LVC can provide a theoretical basis for the innovation of rail transit financing mode in mainland China to ease the government’s pressure. The early practices of implementing JD in mainland China are summarized, and the result reveals that the success of JD is dependent on the maturity of operation and management, as well as the underlying policies that secure a favorable environment for JD’s successful implementation. Therefore, while JD is useful, the differences in legal policy and other factors determine that JD cannot be directly copied and reproduced in mainland China. Based on the research, this paper proposed Predetermined Land Reserve Mode (PLR). The mechanism framework of PLR is presented. The essence of PLR is that the rail transit company, with the authorization from the government, reserves the suitable land parcels prior to planning the rail transit projects, and the land value increment due to rail transit construction is predetermined for its own construction. The objective is to establish a sustainable investment and financing mechanism for rail transit project and achieve a benign cycle of funding. Compared with JD, one of the biggest unique advantages of PLR shown by the comparison analysis is PLR can quite well meet the requirements of the current land transfer policy in mainland China. In the case study, the main implementation process and key controlling points of PLR are presented and discussed. The case study demonstrates the potential of PLR is very promising. And since 2003, land finance has been one of the main sources of fiscal revenue of local government in China. In 2011, the national land transfer income is USD $510.71 billion, accounting for the proportion of local fiscal revenue up to 60% (Fan, 2015). In 2014, the national land transfer revenue is USD $707.42 billion, an increase of 3.1%.In 2015, it is USD $554.49 billion, falling down 21.6%, but still a huge revenue. Though influenced by land use structure policy adjustment and the real estate market, the land transfer revenue has declined, it still accounts for a large part of the revenue. So the PLR mode would continue to function in China under new circumstances and in the future. To further enhance this research, there are more than one directions can be explored. In particular, some issues are concerned in the implementation process, such as risk and cost control. These aspects play significant roles in the realization of final financing goals. This research starts a valuable exploration, and PLR can be further enhanced.

Acknowledgement

The study is supported by National Social Science Foundation of China (Grant No. 12CJY066).

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