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Can Leasing Public Land Be An Alternative Source of Local Public Finance?

Yu-Hung Hong

January 1996, English

Governments of some former socialist countries and the People’s Republic of China are thinking of leasing, instead of selling, public land. One objective of land leasing is to capture the future increased land value as a government revenue for public infrastructure investment. Yet, the debate on whether or not public land leasing can help the state financially is unsettled because there is no generally agreed-upon criteria to assess the land-value-capture experience under public leasehold systems. The purpose of this paper is to suggest such criteria and apply the proposed method to evaluate the Hong Kong leasehold system. The author found that the Hong Kong Government captured about 39 percent of the land-value increments occurring between 1970 and 1991 from land leased in the 1970s. More important, the captured value financed 55 percent of the average annual infrastructure investment between 1970 and 1991. These findings indicate that land leasing can be an important source of public funds.