World Bank Responses to the Problem of Informal Development: Current Projects and Future Action

World Bank Responses to the Problem of Informal Development: Current Projects and Future Action Prepared for the Workshop: Informal Settlements Real Estate Markets Needs Related to Good Land Administration and Planning Joint FIG Com3, UNECE CHLM, UNECE WPLA March 2007 Victoria Stanley Ellen Hamilton Radhika Srinivasan Gavin Adlington

Illegal and informal settlement is a severe problem in many countries in the Eastern Europe and Central Asia Region (ECA). Some estimates for Serbia put the number of illegal structures (buildings or parts of buildings) at 1 million. In Albania informal settlements are significant in size, containing up to one-quarter of the population and 40 percent of the built-up area of major cities in which they are located. In Macedonia a survey in 2004 found that substandard or informal settlements account on average for 11 percent of the population of the 14 largest cities. Currently the World Bank finances some 20 projects in the ECA region focused on land administration and supporting secure and efficient property markets. Early projects were focused on farm restructuring, cadastre and titling as the necessary pre-conditions for an active property market. More recently, Bank financed projects seek to address some of the more complex issues of land policy including how to respond to the issues of illegal and informal settlement. The Bank also has a large number of projects in the urban sector that touch on these issues focused on infrastructure upgrading and municipal finance. Detailed analytic work has been done in Albania and Macedonia, as part of urban sector studies, to begin to understand the nature of this complex problem and how to address it. UN Habitat, among others, has defined informal settlement as: i) residential areas where a group of housing units has been constructed on land to which the occupants have no legal claim or which they occupy illegally; ii) unplanned settlements and areas where housing is not in compliance with current planning and building regulations. However, definitions abound and are often country specific in terms of its development history. The term informal is used to refer to buildings or building extensions constructed without conforming to existing urban plans and without the necessary building or occupancy permits; such buildings constructed prior to current control requirements; building constructed on stateowned land and lacking the necessary permission. The housing may be substandard and lacking in necessary infrastructure or it may blend in perfectly with surrounding housing stock. Illegal and informal settlements impact the property market, as the informal buildings may not be bought and sold on the formal market, are probably not registered and may attract lower prices. At the same time, one of the causes of informal settlement is the lack of affordability and availability of formal housing whether because of official policies limiting or preventing new housing development or a lack of interest of authorities to stimulate housing development. If the market for formal housing is very thin, people are driven into the informal sector. Owners of these buildings may have difficulty accessing credit and mortgaging their property without formality. Illegal and informal settlements also impact on the government s ability to manage and plan land use as these owners illegally occupy parkland, build in former industrial zones that are unsafe for residential housing, or occupy land that may have more productive commercial or social uses. Owners of illegal buildings may not pay property taxes thereby reducing the revenue available to government to provide services. Some informal and illegal development may lack necessary basic infrastructure (water, sanitation, street lighting) and the unplanned nature of the development makes providing these services more costly. These developments may also lack basic social infrastructure including schools, parks and health clinics, adding to the social exclusion of these residents. 2

Informality also both contributes to, and is a result of, corrupt practices. Informal payments may be required for access to land, building permissions or for formal registration. Citizens may have no option other than to remain informal due to lack of funds or the right personal contacts. For developers informal payments and corrupt practices increase the cost of doing business and may discourage private sector investment in real estate development. Clearly this is not a problem that land administration agencies alone can solve as it involves multiple levels of government and major policy choices. What are the strategies to respond to the existing illegal and informal settlement? Is there a legal framework for formalization? How does a country prevent future illegal and informal building? What are the needs for infrastructure upgrading and how will they be met? What is the role of central government policy makers, municipalities, private sector developers? And what is the role of land administration agencies? The World Bank, through its project financing, has begun to work with a number of countries to address some of these issues. Detailed analytic work has been done in Albania and Macedonia, as part of urban sector studies. A few key findings: The absence of a recent regulatory plan (land use plan) and approved local regulations for land use. Plans may be out-dated or incomplete. Many specifications like setbacks, width of major roads, floor area ratio, and maximum heights may have to be negotiated project by project. This practice increases the cost of construction by causing lengthy delays and creates the impression of arbitrariness and opportunities for corruption. If the process is lengthy and unclear, many citizens may not have the knowledge, time or funds to follow the procedures. The lack of funded municipal programs to build primary infrastructure. Without the benefit of current infrastructure network plans, developers are obliged to build and finance their own off-site links between their units and the existing network, or extensions of the network. This leads to fragmentation of the system, making it uneconomic and expensive to maintain. Individuals may have no access to infrastructure or may buy illegal hook-ups. The difficulty of acquiring undeveloped land, officially and legally, for construction. Most vacant land around cities is either encumbered by disputes over title or claims for restitution, or belongs to the government and is therefore not on the market. The ability of developers and individuals to find out about available land is hampered by incomplete records and multiple agencies/ministries responsible. High transaction costs in the formal sector, complex processes and unresponsive institutions. In many countries the costs in time, money and number of offices visited to formally construct and register a building are substantial. Again, lengthy and confusing processes may encourage the informal sector, and the absence of strong enforcement by the responsible agencies also contributes. Governments, at both the national and municipal level, must act in coordinated way to deal with this problem, including: 3

o Provide an enabling legislative framework for land use planning and land management that is market-driven, demand responsive and not excessively restrictive, and delegate requisite competencies to local governments while ensuring sufficient implementation capacity. o Improve State and municipal land use planning and development control mechanisms, as well as regulation and enforcement. In particular, ensure that local authorities responsible for land use planning and development control have the necessary staff, skills and capacity to monitor and enforce the plans and regulations. o Improve the efficiency and effectiveness of the state and municipal bureaucracy that provides such services as building permits, occupancy permits, etc. Simplify the procedures so that following the rules is fast, simple and inexpensive for citizens. o Ensure that there are measures in place to reduce informal payments and other corrupt practices. o Strengthen Land Information Management systems to provide the necessary data to support the planning, regulatory and enforcement systems. o Provide alternative dispute resolution systems and the development of legal aid programs for low income property owners or possessors to level the playing field. Finally, there are important social dimensions to the problem and the solutions. In several countries in ECA, one of the worst consequences of living in a informal settlements is not the lack of title to the land or formal registration, but the fact that households need to show they live in a formal structure in order to be able to prove residence which allows them to collect many benefits, including unemployment, or access to local schools for their children. Informal settlements present significant hardship for many of the residents, particularly due to the lack of adequate social and infrastructure services and they perpetuate a spatial form of social exclusion that is damaging to society and to the younger generation especially. The potential success of any formalization effort hinges on: (i) effective mobilization and participation of informal residents; (ii) assessment of the demand for regularization/formalization and potential resistance from various stakeholders; and, (iii) identifying vulnerable groups and developing a design that will ensure that the needs of the poorest and most vulnerable residents are met. Other parts of the world have addressed some of these issues, particularly urban upgrading and formalization and there are lessons learned. The World Bank has a history of involvement in these projects, but within the ECA region has focused on housing and municipal infrastructure and land administration projects. Recently the World Bank has begun to look at the issue of informal and illegal development. A number of new projects/initiatives are underway and are detailed below. 4

In Albania an Urban Sector Review was recently completed and looked at the challenge of regularizing and integrating the informal settlements in Albania. Bringing these settlements into legal status and linking them to the urban networks remains one of the key challenges for Albania if it is to modernize and integrate its urban economies. There are several reasons for more urgent action: (i) the informal settlements are significant in size, containing up to onequarter of the population and 40 percent of the built-up area of major cities in which they are located; (ii) they present significant hardship for many of the residents, particularly due to the lack of adequate social and infrastructure services, (iii) they perpetuate a spatial form of social exclusion that is damaging to society and to the younger generation especially; and (iv) the absence of adequate sanitation and drainage risks weakening the environmental sustainability of the urban areas. Although the pace of their expansion has apparently slowed, it is in the informal settlements where spatial and demographic growth is happening and where the policy and legal conflicts all came together. The Albania Land Administration and Management Project has been prepared and will begin implementation in late 2007. The specific objective of the project is to improve the efficiency and effectiveness o f land administration and urban management through enhancing tenure security, improving urban planning, land management and development control, supporting property valuation and taxation, and financing investments in urban infrastructure and services. The components of the project are: a) Security of Tenure and Registration of Immovable Property Rights which focuses on improving service delivery of the Immovable Property Registration Office (IPRO) and completion of first registration of immovable property; b) Urban Land Management including formulation of urban land management regulations and property valuation and taxation; and, c) Municipal Infrastructure to enable proactive urban growth management and enhancing urban land market efficiency by prioritizing and implementing selected infrastructure investments and services, in accordance with strategic investment plans'. The component will also support the implementation o f the address system. The government of Albania has initiated a process to legalize informal settlements through the establishment o f a new agency (called ALUIZNI) responsible for coordinating the legalization processes and issuance o f certification o f ownership. There is a need, however, that this agency coordinates its efforts with the IPRO; otherwise, certificate of ownerships issued by the new agency may not meet the technical and legal requirements established in the IPRO to register the titles. This could undermine tenure security in the long run in the country. A recently completed paper analyzes informal settlements (novostroiki) in Bishkek (Kyrgyz Republic). A combination of rapid rural to urban migration in the post-transition years and the collapse of government-supplied housing resulted in government handouts of unserviced land to in-migrants for housing construction. Analysis of the survey and focus group findings suggest novostroiki residents encounter difficulties in four broad areas: Registration of land, housing and residents: High fees, poor quality construction, difficulty in collecting the required documentation all contribute to the nonregistration of land and housing without which households cannot fully use their property. An even larger problem is posed by the lack of official registration ( propiska ) without which residents cannot vote or access social benefits, and have difficulty enrolling children in school or in registering for military service. 5

Environmental hazards. Ash, poor drainage, flooding and exposure to other environmental hazards increase health problems and threaten agricultural livelihoods for residents in some novostroiki. Access to basic infrastructure: Even residents of the oldest novostroiki and relatively well off lack access to clean water, adequate roads, public transport, and reliable electricity. Although the survey did not cover more recently established novostroiki, it is clear from observation that infrastructure deficit is more serious for newer settlements. Access to basic educational and social services. Although a high percentage of novostroiki residents are children, access to schools is limited and children study in either overcrowded neighborhood schools or commute to more distant municipal schools. Preschools are not available. The government (central and local) has played an active role in efforts to upgrade / formalize novostroiki areas. That said, the government s role has been largely reactive, not proactive; the government responds to the evolving situation in the novostroiki, but is not anticipating how the situation may evolve in the future in order to develop long-term strategies to address. The multiplicity of institutional actors and responsibilities create difficulties and confusion for novostroiki residents. The most important next step for the Government is to move from reactive policies and programs to a proactive and better integrated strategy, including: pooling financial and human resources in support of an integrated approach; enhanced responsiveness to community needs; and better targeting of government resources. Most importantly, government strategy and policy needs to address not only the problems of the existing novostroiki, but also plan for future development. The Bank expects to support this process through development of a new project. In Serbia the Real Estate Cadastre and Registration Project (RECRP), financed by a World Bank credit and implemented by the Republic Geodetic Authority seeks to complete the real estate cadastre in urban areas of Serbia where the problem of illegal construction often complicates the systematic registration procedures. Buildings that do not have full and correct permits for construction (known as illegal buildings) are a major problem in Serbia and adjoining countries. While no government endorses the practice of constructing buildings without approval, should the relevant land administration agency be involved in policing the problem? Is this not a matter for other departments and agencies within the government, which should act to resolve the problem if they consider it necessary. Like the taxation authorities (who collect taxes on illegal buildings), the land administration agency should not discriminate against illegal building and properties when creating the cadastre or registering documents. All properties and all transactions should be registered. It may be necessary to show in the record for an illegal building that the building does not have construction permission papers. The RECRP in Serbia has taken this approach, documenting and registering illegal construction and thereby building a more complete record of the urban landscape. This is has been done successfully in other projects. The Land and Real Estate Registration Project helped to regularize 500,000 illegal constructions in the Kyrgyz Republic (excluding Bishkek). This was done as part of the on-going systematic registration process and resulted in a 6

significant growth in the use of property as collateral for credit; during 2005 Gosregister registered US$418 million equivalent in mortgages. In the Republic of Azerbaijan a new Real Estate Registration (RER) Project has been prepared that seeks to ensure that there is a reliable, transparent and efficient real estate registration system supporting the real property markets and suitable systems for the management and use of Stateowned immovable property. Azerbaijan has a significant problem with illegal and information development particularly in the area around Baku and the Absheron peninsula. Over the long term the government will need to regularize the illegal developments that have occurred in urban areas and include all real estate in a comprehensive series of information systems. Spatial information (mainly in the form of digital maps) and information about real estate and their owners or occupiers in an open system are fundamental to monitor the use, or misuse, of the nation s primary asset - its real estate. The RER Project will also analyze the level of informal settlement occurring through the rural to urban migration and influx of internally displaced persons. City and town municipalities are not coping with the influx and pilot work in two Baku sites will systematically assess the scope and complexity of the problems. The project will help to develop policies and a strategy, and possibly legislation if it is needed, for dealing with the problems nation wide and will help people in the pilot areas to regularize their holdings. Once the basic information is available and the policies developed, the next phase of intervention can then include providing a more equitable real estate taxation system, regularization of informal developments in urban areas and the development of better planning and service provision by local government. In more developed economies spatial information is used by local government for planning and managing public transport, health services, schooling, social services, infrastructure services, etc., because all such services are based on knowledge about the location and density of the population. The current project will provide the basic spatial information needed for these information systems. The Bank s analytic and project work on illegal and informal development in ECA is at the beginning and many more questions remain. How each country comes to terms with the existing illegal and informal development as well as addressing how best to prevent future such development will differ depending on history, geography and other factors. Changing demographics and increasing decentralization in many countries in the region will also impact these choices. Again the solutions will require action at all levels of government and the mobilization of residents of the informal settlements. 7

References Albania Urban Sector Review, January 2007, World Bank Report No. 37277-AL Albania Land Administration and Management Project, Project Appraisal Document, January 2007, World Bank Azerbaijan Real Estate Registration Project, Project Appraisal Document, February 2007, World Bank Macedonia Issues in Urban and Municipal Development, Policy Note, November 2006, World Bank Report No. 37278-MK Macedonia Real Estate Cadastre and Registration Project, Project Appraisal Document, February 2005, World Bank Kyrgyz Republic, Urban Novostroiki Settlements: Issues and Options, draft. January 2007. World Bank. Serbia Real Estate Cadastre and Registration Project, Project Appraisal Document, April 2004, World Bank Cities Alliance. Cities Without Slums Action Plan. http://www.citiesalliance.org/index.html 8