Wednesday, December 28, 2016

Land Value Capture for Infrastructure Financing

By Abhishek Das

The concept of Land Value Capture is gaining significance as governments across the world are looking for sustainable modes for financing infrastructure projects. The basic principle behind Land Value Capture is that legitimately created value belongs to its creator. So, if it is evident that there is a rise in the value of immovable properties,due to infrastructure investment by government, the government has the right to capture this increased value.
The requirement of government investment in infrastructure development is rising steadily.More so,in developing countries, which are experiencing massive urban expansion. In the case of India, the budget outlay for infrastructure for the financial year 2016–17 was 2200 billion rupees ($32 billion). The projects include construction of new airports, metro rails and expansion of road networks. This will result in the escalation of land prices in the vicinity of these projects. At present, private developers make use of the benefits of land value increment. The urban local bodies in India are yet to capture this rise in land value.
Land value capture is done in two steps:
  • Value creation (and)
  • Value recovery

Betterment taxes, land pooling, sale of development rights, land readjustment and formation of special assessment districts are some of these practises. The success of the system is dependent on three stages of implementation.
  • Identification of the benefactor
  • Quantification of the increase in property value (and)
  • Collection of the increased value (or a part of the value)

The city of Bogota in Columbia has been successfully implementing Contribucion de Valorizacion – a form of betterment taxation –for almost a century now. Many of the infrastructure projects in the city are financed by this revenue. Mass Transit Railway Corporation (MTRC) of Hong Kong has also implemented the LVC concept successfully. MTRC operates without government subsidy and is highly profitable. Around 80 per cent of the total income of MTRC come from property business.
In Gujarat, betterment tax can be collected by the Gujarat Town Planning Scheme if there is an increment in land value after implementing Town planning Scheme in an area. But this provision in not utilised and no such tax is collected. The local administration of some Indian cities increased the stamp duty to capture the addition in land value. For example, in the case of Nagpur Metro, an additional stamp duty of one percent is to be levied for 25 years on all property transactions. The problem here is that the additional stamp duty falls on the entire residents of Nagpur, whereas,people who have property near the metro corridors are the only benefactors. The Delhi Development Authority (DDA) has prepared a land-pooling scheme, which was approved by the Ministry of Urban Development in 2015.But DDA is yet to implement the scheme.
The urban local bodies in India find it difficult to implement LVC mechanisms because of the lack of capacity to do so. Development activities in Indian cities are carried out by different development authorities of central and state governments. For large projects, such as metro rails, special bodies are created.These special bodies do not have the power to impose tax on land, and often do not coordinate with the urban local bodies. Consecutively, the urban local bodies do not capture the additional land value because the project is not implemented by them. Even if the urban local bodies attempt to do so, the fundamental idea of LVC is questioned, because it is not the developer entity that captures the benefits of the development. What is the solution to this dilemma? The solution is to make the urban local bodies capable of implementing the infrastructure projects. Empower them so that they can implement financing mechanisms and strategies to capture the increment in land value.

Abhishek Das is Research Associate at CPPR- Centre for Urban Studies. Views expressed by the author is personal and does not represent that of CPPR.


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