Unlocking the Dead Capital

November 18, 2010

Loup Brefort, Country Manager for Serbia, The World Bank

This article was published in NIN weekly magazine on November 18, 2010
Author: Loup Brefort, Country Manager for Serbia, The World Bank

Those of you who have seen the Hugh Grant film “The Englishman Who Went Up a Hill But Came Down a Mountain” will know the importance of land measuring and registering. Namely, the whole village in South Wales got upset when English geodesists proclaimed the Ffynnon Garw to be a hill, not a mountain. And all of the fuss was caused by 16 feet (4.8 meters).

This – fictional – story had a happy ending as the villagers brought up the soil to make the Garw 1,000 feet (304.8 meters) high and thus qualify it as a mountain. But what I am concerned here with is whether the Serbian real effort to properly register land and immovable property will also have a happy ending.  Indeed, back at the beginning of 2000s Serbia embarked on an endeavor to put its real estate cadastre in order, with support from the World Bank and other donors. Yet, after all these years, the Foreign Investors Council recently reiterated its view that “regulation of property rights, especially in relation to building land” remains one of the major impediments to new investments. In fact, significant improvements in registration of property rights have been achieved through the Cadastre project, but it is getting those property rights in the first place that continues to be a problem. This is because it is difficult to get access to land and then very difficult and/or time consuming to get building permissions and occupation permits.

Why is it important? Experts have found out a direct correlation between a nation’s wealth and having an adequate property rights system. This is because real estate is a form of capital and capital raises economic productivity and thus creates wealth. In a number of countries too many citizens cannot access this capital because their ownership rights are not adequately recorded. This makes it a “dead capital” that cannot be used as collateral for a loan which might be used to start a business, for example. According to the famous Peruvian economist Hernando de Soto, the value of the extralegal property worldwide is largely in excess of 10 trillion dollars! In Peru, he led a far-ranging and very successful administrative reform that resulted in giving titles to more than 1.2 million families and helped some 380,000 firms to enter the formal economy.  How much “dead capital” waiting to be brought to economic life is lying around - Belgrade alone with at least 200,000 unregistered structures?

The May 31, 2003 issue of the famous magazine “The Economist” quoted that approximately 15% of GDP in a developed economy is generated through construction and real estate market activity. However, Serbia has a poor history of construction permitting. It is currently ranked at 176th place out of 183 countries in the World Bank Group’s Doing Business 2011 and it is estimated that up to a million properties in Serbia do not have the required documentation. The processes for acquiring, developing and investing in property is not considered transparent enough and is a huge disincentive to the business community. State owned and municipally owned property is not utilized to its best advantage in terms of generating revenue or providing public services. The loss to the economy in terms of lost revenue from property taxes and poor use of property assets (which support local government financing), and the opportunity cost of reduced business development, foreign investment and loss of fees and tax revenues is enormous – is possibly in the hundreds of millions of Euros per year.

The ongoing Real Estate Cadastre and Registration project implemented with the support of the World Bank has dealt with some aspects of the real estate market. The project has been successful in greatly reducing the time taken for registration of property rights from several months in 2005 to a couple of weeks in 2010 – with some offices providing services in a few days. The amount of credit being provided through mortgages has increased several fold and Web sites with information and access to property data have been developed. Service standards have been implemented and programs providing legal assistance and complaints procedures have been adopted and implemented.

It is now important to build upon this successful project with interventions dealing with access to land, the use of property by public bodies, planning and construction permitting. The information about land can also be used to implement a better and more equitable property tax system and better use of public assets for local government financing. E-government procedures can be used to improve the transparency and efficiency of providing access to land, building permitting and better, decentralized, government.

This is the soil that needs to be brought in to complete the mountain and unleash the potential real estate wealth still lying unused in Serbia.