Infrastructure Financing Through Land Based Financing


Infrastructure Financing through land

The potential of using land based financing in Urban Local Bodies for infrastructure, has been mentioned by various studies. Commonly used land based instruments for financing urban infrastructure can be segregated in to three types:

Existing Land – Based Instruments

S. No.Land-Based InstrumentExamples
1.Monetary ExactionsBetterment charges, impact fees
2.Land ExactionsTown planning Schemes/ Area redevelopment schemes
3.Monetisation of underutilised Public Land assetsAuction, leasing out or giving the land parcel on rent

Source: The High Powered Expert Committee (HPEC) for Estimating the Investment Requirements for Urban Infrastructure Services; “Report on Indian Urban Infrastructure and Services”

Despite of the existing provisions there is much larger domain of underutilized land which exists, and thus this can be initiated with the monetizing of the public land as a significant source of financing urban infrastructure development.

The sphere of municipal taxation was comprehensive enough to include not just land tax but also tax on land values, however except a few local bodies levying/enhancing land taxes by local bodies, not much progress was observed. It has been said that a higher tax rate on land extrapolated the revenues thus with also helping in decreasing the interest of individuals in large speculative landholdings. A high land value tax rate would lead to a decline in the market value of land and provide a stimulus to develop all land to its full potential.[1] However, there is a disagreement which arises, that is, if there are skyrocketing tax rates associated with land values who would pay the higher taxes, also such skyrocketing tax rates would lead to repulsion from the public, and long stretched repulsion would cause a delay in collection of taxes, and thus a delay in the provision of infrastructure to the citizens. Countries such as the U.S. have had faced a similar problem.

In California, due to sudden increase in inflation, there was a sudden hike in Land Value. The state was suffering from inflation, as well a lack of funds to finance infrastructure. Thereby, the California government ended up assessing the property tax at 1978 land values to cover the fiscal gap (earlier the Land Value base was set on 1960’s level). This led to a huge chaos; some people who have fixed wages could not afford the property taxes, which led to a state wide revolt against sudden hike in property taxes. So much was the property tax hike that people had to sell their houses, teachers had to leave schools, as the schools no longer has any money to pay them a living wage. Meanwhile, libraries were shut down and municipal services deteriorated. California thus serves as one of classic examples of the negative effect of sudden increase in tax due to a hiked assessment of Land Value. Please note here, that countries such as USA, Japan and New Zealand levy property tax on land only.

[1] Sridhar,S.K.; Reddy,V.A.; “Land as a Municipal financing Option: a Pilot study from India”

Land as an asset to the Municipal Revenue and Infrastructure Financing

Land leasing and sales have been instruments which have been tested in other countries. One of the most prolific examples of the same is of China. It was in 1988 that the constitution of the state was amended and the ground lease system was formally passed by the government. IT was observed (Peterson, 2007) that many cities in china had financed most of their urban infrastructure such as roads, drainage, water systems from land leasing. The remaining part was financed using value against their balance sheets. Another important phenomenon observed (Chang 1997), was that most of land leasing revenues were assigned to municipal governments under the reforms of 1994, in the ratio of 5:95 (5% to central government and 95% to local government.

The earlier stated issue of the Proposition 13, which led to many revolts, proved to be a basic urban infrastructure enhancer as well a good, reap for the municipalities. This can be proved as California’s budget climbed from $55 billion in 1980 to $97 billion in 1992 – a huge leap of 75% increase. This also increased the job opportunities and slowly the incomes of California State rose to over 12%.

An Indian example presented by Peterson (2007) on land sales and auctions by the Mumbai Metropolitan Regional Development Authority (MMRDA). The astounding result is that sales from MMRDA land auctions un the Bandra- Kurla Complex generated a staggering Rs. 23 billion which was two times more than the total infrastructure investment done by the Mumbai Municipal corporation during 2004 -2005 which was Rs. 10.14 Billion and four times more than the total investment on basic urban infrastructure which was 5.4 billion, a small amount as compared to the land auction.

Various studies tries to answer the question whether land is a good source of revenue. With the use of international case studies and their institutional framework it can be proved how land proves to be magnificent mode of financing infrastructure.

Location and ActivityAmount and use of proceedsComparative Magnitude
Cairo, Arab Republic of Egypt: Auction of desert land for New Cities (May 2007, 2,100 hectares)$3.12 billion, to be used to reimburse costs of internal infrastructure & build highway connecting to Cairo Ring Road117 times total urban property tax collections in country; equal to 10% of national government Revenue
Cairo, Arab Republic of Egypt: Private installation of “public” infrastructure in return for developable land (2005–present)$1.45 billion of private infrastructure investment, plus 7% of serviced land turned over to government for moderate income housingWill provide infrastructure for a range of basic services covering more than 3,300 ha of newly developed land, without financial cost to government
Mumbai, India: Auction of financial centre land (Jan. 2006, Nov. 2007, 13 hectares) by Mumbai Metropolitan Regional Development Authority (MMRDA)$1.2 billion, to be used primarily to finance projects in Mumbai’s metropolitan transportation plan10 times MMRDA’s total capital spending in fiscal 2005; 3.5 times total value of municipal bonds issued by all urban local bodies and local utilities in India since 1995
Bangalore, India: Planned sale of excess land to finance access highway to new airport built under public-private partnership$500+ million. On hold; land will be used instead for ministry buildings and government-built industrial spaceMinimum sale proceeds were projected to considerably exceed costs of highway construction and acquisition of right-of-way
Istanbul, Turkey: Sale of old municipal bus station and former administrative site (Mar. and Apr. 2007)$1.5 billion in auction proceeds, to be dedicated to capital investment budgetsTotal municipal capital spending in fiscal 2005 was $994 million. Municipal borrowing for infrastructure investment in 2005 was $97 million
Cape Town, South Africa: Sale of Victoria & Albert Waterfront property by Transnet, the national transportation authority (Nov. 2006).$1.0 billion, to be used to recapitalize Transnet and support nationwide investment in core transport infrastructure.Sale proceeds exceeded Transnet’s total capital spending in fiscal 2006; equal to 17% of 5-year transport investment plan prepared in 2006
Bogotá, Colombia:

Betterment levy.

$1.0 billion collected in 1997– 2007, and $1.1 billion planned for 2008–15, for financing city street and bridge improvement program.Betterment fees finance 50% of street and bridge improvements. Other planned sources of financing: $50 million International Finance Corporation loan; $300 million international, peso-linked bond issue

Value capture is formulated on the principle that the beneficiaries of the urban infrastructure investments help capitalize land values by their corporation on paying property taxes which have been stated only after public acceptance. Public investment creates the increase in land values, thus it’s a highly debated and argued point under the various studies. Many countries have capitalized these value increments to finance and benefit the public by using various tools as land value capture, Community Investment Plans and Tax Increment Financing.

Source: Peterson, George E (2007) “Land Leasing and Land Sale as an Infrastructure Financing Option,” in Financing Cities, (eds), George E. Peterson and Patricia Clarke Annez, Washington, DC: Sage Publications and the World Bank.

Author: This article forms a part of Infrastructure Financing through Tax Increment Financing: A Case Study of Vijayawada by Amrita Bhatnagar. Amrita did her bachelor degree in Planning from School of Planning & Architecture, Vijayawada. During her studies many of her papers were published at various platforms. Economics & Urban Planning adds to her list of interest, she is an avid writer. During her college days she served at NOSPlan as Chief Editor & one of the founding member of Editorial Board at NOSPlan later she worked at Jones Lang Lasalle (JLL) & is currently associated with Center for Science & Environment (CSE).