LFMI proposes launching a reform of land market regulation in Lithuania

The LFMI has completed a thorough analysis of Lithuania’s policy of land market regulation and formulated recommendations that could be followed in reforming land market regulation.

Land market regulation in Lithuania has been criticised both by the country’s citizens and business representatives and by international organizations monitoring the business environment and public administration – the World Bank, the International Monetary Fund and others.

Land market regulation in Lithuania is fraught with essential problems: land owners are heavily restricted by documents of territory planning that not just fail to ensure the protection of neighbour’s interests but are also inflexible, politicised and complex. The flaws of the system exert the most deleterious effects on small land owners who have scant financial, economic or political leverage. The Lithuanian Free Market Institute has made an in-depth analysis of Lithuania’s policy of land market regulation and framed recommendations to be followed in overhauling the system of land market regulation.

Land market regulation is one of the roadblocks to foreign investments in Lithuania.
· In its concluding statement to Lithuania in 2007, the International Monetary Fund concluded that “The land restitution program introduced uncertainty in property rights, but even when it is completed, these uncertainties are likely to persist on account of cumbersome land planning processes.”

· According to the Business Environment and Enterprise Performance Survey (BEEPS), developed jointly by the World Bank and the European Bank for Reconstruction and Development, nearly twice as many companies reported to have faced difficulties in starting to use land in 2005 as compared to 2002.

Land market regulation is one of the factors that cause people’s discontent.
· According to Lithuania’s Map of Corruption 2001-2005 developed by Transparency International Lithuanian Chapter, both residents and company managers polled indicated two areas related with land regulation as being among the five most corrupt procedures. These areas, according to the respondents, were changing the purpose of land use, issuance of permits for construction and reconstruction, and agreement on the text of documents.

· The lack of land plots for residential construction is among the primary factors behind surging prices of real estate in Lithuania.

The existing system of land-use planning is not fit to meet the needs of businesses and people for the following reasons:
· Land-use planning is inflexible and can hardly keep pace with the changing reality.

· The central system of territory planning does not ensure stability because even general territory plans (master planning) undergo very frequent modifications.

· Complicated procedures lead to inaccuracies in land-use planning.

· The central planner’s power to adopt arbitrary decisions builds preconditions for corruption.

· Neighbours are not the primary persons with whom construction activities in their neighbourhood are being coordinated. They often have no real chances to exert an affect on the development in their neighbouring land plot, although, formally, the involvement of society is encouraged and supposedly guarantees mutual agreement.

It is fallaciously assumed that market regulation bears no costs on residents. It is also widely believed that it is possible to devise a perfect mechanism for territory planning if only public officials, responsible for shaping territory plans, were “cultivated and educated” in the proper manner. It is unjustifiably stated that planning can be implemented only by the state, not private individuals, and that private individuals will not provide “public goods” – parks, parking lots, playgrounds, etc.

The following presents the guidelines for reform:

The main goal of land-use regulation should be to ensure the best opportunities for Lithuanian people to use territories by vouchsafing the protection of their property – the property must be safeguarded against activities performed by other owners, the state and the municipality.

General territory plans must outline only the principal directions of urban development and prescribe in detail only public investments that business and residents might adjust to. General territory plans must not envisage private investments and activity.

Territory planning must ensure in the first place the interests of individuals directly related with the territory being shifted, i.e. neighbours. Neither regulations setting the terms of land plot use nor formal inclusion of neighbours into the process of territory planning can ensure that agreement satisfying both parties’ interests will be reached. They also inhibit the development of neighbour communities based on long-term mutual agreements. Therefore it is needed to abandon a demonstrative simulation of society’s involvement into the process, while encouraging neighbours’ participation in territory planning based on private agreements.

Protection of immovable cultural objects must rest on the principle of private property protection and seek that objects of cultural heritage were used by the public, were alive and so retained preserved. Privatisation of protected territories would enable them in the future to “discover” their value anew and would ensure their protection in the long run.

The supply of land plots would increase, if the number of requirements regarding what type of activity can be undertaken in a specific territory were reduced and if land owners were allowed to choose commercially the most attractive type of land use. As a result:

– preconditions would emerge for prices of real estate to go down;

– pressure to build residential houses in the territories containing nature and cultural objects would be diminished. Incentives for corruption would be also curtailed;

– if prices in the real estate market decreased, the Lithuanian Government would have more abilities to complete the land restitution process by compensating residents the real market price for land plots. Currently, authorities avoid paying compensations based on the market price.

Land market regulation is one of the strategic areas of the Lithuanian Free Market Institute set for 2005-2007. LFMI’s goal in this area is to transfer the basic decisions regarding the use of land and territory planning to private owners and their communities.