Using Land for Financing Urban Infrastructure in India
Most urban areas in India are growing at a rapid pace, fast outpacing the speed of provision of urban utilities. In underdeveloped areas in Africa, cities with more than half a million residents are supposed to double within 15 years by 2030. (Romanik, 2017). The rapid growth of many Indian cities has put in focus the requirement of investments in creating and upgrading urban infrastructure. While many sources of funding exist, most are a form of loan which require payback with interest. As infrastructures are created for public good, many projects such as drainage lines or non-tolled roads do not generate enough revenue to pay back the loans.
The HPEC report on estimating infrastructure costs estimated a requirement of investment of over Rs. 39.2 lakh crores over the span of 20 years in India, keeping in mind the net rural-urban migration and growth of cities.
The urban local bodies are unable to keep up with the demand for basic amenities such as water supply and drainage, as they are cash-strapped. However, because of this growth, land values are increasing in urban areas, and a large proportion of this land is owned by the government.
Land-based financing is a process that utilizes the change in land value brought about by modifications in government regulations and uses this monetary value to create infrastructure in the city. This can be brought about by using regulatory instruments such as increasing property tax, betterment levies, and development charges (Ahluwalia & Mohanty, 2013) In other cases, the local government may even sell land in an acceptable manner to raise capital for providing essential utilities (Peterson, 2013).
Sources of funding urban infrastructure
Funding by donations or international assistance and loans is a burden on a developing nation, and is taking a backseat. Decentralization of authority has ensured that now ULBs and cities are responsible for developing themselves, and it is not the sole responsibility of the national government. All these factors put the huge monetary pressure of upgrading a rapidly growing city’s infrastructure on an often cash-strapped urban local government.
Infrastructure finance can be sought in multiple ways, using municipal bonds, Public-Private Partnerships, loans from banks and international infrastructure financing institutions (Shiromany, 2012). However, all of these require bringing in a partner or other stakeholders that the ULB is answerable to. In order to avoid that, leveraging existing assets of the government can be a viable option.
To empower cities to be fiscally stable, a mix of national schemes, transfer of funds between different scales of the government, and increasing the city’s own source of revenues is required. Citizens resist direct increase in property taxes which may have been introduced to increase a ULB’s own revenue, especially when the increase is not direct fees for water supply or electricity use (Romanik, 2017). With many sources of funding becoming unviable, lands belonging to different government agencies is seen as an important source of funding, even though land is often underutilized in terms of capital and tax revenues. Given below are a few methods of utilizing land for raising funds, which will be elaborated upon in the paper.
Utilizing Government-owned lands
Identifying Land to be used
Public lands are held by multiple levels of government — from ULBs to national government, along with ministries like Defense and Railways. To utilize any land owned by a government, the first step is creating a land inventory. Land inventories contain the location, size and name of each land parcel, legal title, existing and proposed land use of the parcel and the valuation in the current market (Peterson, 2013).
The next step is to identify what land parcels are in surplus to the body. This step is often time-consuming as these decisions can be challenged at a later stage, or may be politically influenced. Recognizing underutilized or unused land parcels is essential for leveraging it for funds. According to the Policy Research Working Paper by Peterson (2013), Indian Railways has designated 43000 hectares of its land as disposable, valued at over Rs. 2800 crores. Similarly, Airports Authority of India owns 20,000 hectares of prime value land in the vicinity of airports in the country. Thus, creating land records and inventories of public lands, which are accessible to different levels of government as well as to the public, is important so as to retain transparency about land sales and leases.
Methods of utilization of land
Sale
Sale of public lands can generate high one-time revenue, and infuse much needed capital to the budget of the local government. Strategic land asset management, practiced widely in China, is a way to utilize land values to specifically finance urban transport and infrastructure. This approach is more entrepreneurial in nature. According to estimates, 60–70% of China’s urban infrastructure investment is a result of sale of municipal lands (Peterson, 2013).
Some international examples of lands sold by government include disposal of closed military bases in the USA, Canada and Australia, which were identified as surplus and thus marked disposable. Yet another example is that of Montreal Port, where the City of Montreal disposed of land belonging to the old port when a new port was set up. As the transport ministry declared the port lands as surplus, the local government tied up with the central government to transform the area as a tourism hub. The land was sold to a subsidiary Canada Lands Company, similar to an SPV, which then took charge of the redevelopment (Peterson, 2013). The city of Cairo auctioned over 2000 hectares of desert land for creating new cities in 2007, which raised $3.12 billion that was channeled towards financing the Cairo Ring Road and other infrastructures. The amount raised was 10% of the national government’s revenue.
In the Indian scenario, Mumbai Metropolitan Regional Development Authority (MMRDA) auctioned 13 hectares of land in 2006–07 (Peterson, 2013), raising $1.2 billion which was utilized in financing the regional transportation plan. The amount raised by sale was over ten times the value of MMRDA’s annual budget, and higher than any revenue generated by sale of municipal bonds in India.
Lease
Public lands that are leased to private parties tend to be undervalued (Peterson and Kaganova, 2010). This may be due to poor land and market valuations by the government, but it also allows for corruption and political misuse of public properties as these lands are undervalued in exchange for mutual benefit.
However, when done intentionally to fund infrastructure, it may be success, as seen with Sabarmati Riverfront in Ahmedabad. Land created by river training was plotted and highly regulated, but sold at high premium, and realty was leased years in advance to completion of the project. The incoming revenue has allowed for the infrastructure project, managed by the SPV Sabarmati Riverfront Development Corporation Ltd, to be self-financed, with no dependence on municipal funding and has created a city level infrastructure by leveraging locational benefit (SRFDCL, 2021). A similar mix of leasing and sale is being used for the Mumbai Port Trust Eastern Waterfront project.
Buy and Lease
Yet another method is land acquisition and pooling for the intention of long-term leasing at higher prices. Seen in China, municipalities had sole authority in acquiring land at urban fringes from agriculturists at values far below market prices, using eminent domain. These lands were pooled and leased for a period of 30–70 years with upfront payment as in a sale, bringing in high cash flow that was redirected for financing infrastructure (Peterson, 2013).
Compensation for land acquisition for public works
Even in sale or redevelopment of public lands, there may be stakeholders with claims, which needs to be addressed before a land parcel is sold or leased. For example, when a Public Sector Undertaking like Airport Authority sells land, the onus of providing infrastructure to those land parcels falls on the local government, making it a stakeholder to this project. Thus, it may claim compensation for the cost of infrastructure that it now has to provide. Providing compensation and resettlement costs eats into the net gain made from such divestments, slowing down the funding for other projects that were dependent on the sale or lease (Peterson, 2013).
In India, as in most of Asia, stakeholder claims are being considered more and more seriously, and government has to pay for any squatter clearance, relocation, provision of new housing, and compensation of lease of land at market prices if leasehold land is taken for sale. Compensation is paid in form of statutory and ex-gratia compensation, as mandated by Land Acquisition Act (2013). For determining compensation value, land records, inventory and market valuations are essential.
Land Value Capture for Non-Government Owned lands
Land value capturing is a tool utilized by urban local governments to charge higher fees and taxes to property-owners, to raise revenue which is then re-invested in urban infrastructure projects that benefit the city at large (Hart, 2020). While applicable to all cities at large, this tool is especially beneficial to cities in developing nations when land value capture can be implemented correctly. However, one of the challenges of this method is to effectively integrate land development planning with transportation and financing mechanisms.
Property Tax
Property tax is a stable revenue source for local governments. Increasing taxation can directly increase revenue, however, this can be met with resistance from citizens if there has been no substantial improvement to their property. The challenge lies in creating and maintain land records and titles so as to charge and recover this tax from the property-owners.
Development Charges
Development charges or betterment charges may be charged at a premium to developers for improving access to utilities for the site. This increases the value of their projects and generates revenue for the local government. Impact fees may also be charged for large projects that require overall upgradation of municipal infrastructure (Juneja, 2021). For example, in Bogota, Colombia, betterment levies charged over 2008–2015 collected $1.1 billion, which financed half of the projects improving streets and bridges.
TDR and building rights
Local government may introduce a scheme of utilizing Transferable Development Rights, or buying fungible FSI from the government by paying extra fees, which can also be a method of capturing land value. These methods are in practice in Greater Mumbai under the jurisdiction of MCGM, where plots under height or development restrictions are allowed to sell their leftover FSI, which can then be bought from the government at a premium by builders. Similarly, up to 30% extra fungible FSI can be bought for providing balconies in residential projects in Greater Mumbai (Shah, 2013).
Town Planning Schemes/Land Readjustment schemes
In a TPS or land readjustment scheme, land owned by different individual owners is pooled. One part is kept by the government in lieu of providing basic amenities of infrastructure, parks, schools etc. The returned land sizes are smaller, but the value increases due to better services, and the government stands to gain land parcels in return, which can then be leased or sold as discussed above.
Case Studies
Land Value Capture — Hyderabad outer ring road development
Hyderabad city created an outer ring road as an expansion to the city, with the intention of selling off the lands to find the roads and other amenities. They enforced a three-pronged control measure to ensure the project would succeed, including using a Development Deferment charge, i.e., land owners had to pay higher taxes for not developing the lands in time. This road project is partially funded by JICA and is an investment of over Rs. 16,000 crores (Express News Service, 2021), with an aim to develop urban fringes and raise funds by sale, property tax and other charges.
TPS — Magarpatta Scheme, Pune
In the Magarpatta scheme, 200 farmers came to an agreement to pool their lands without municipal support and form the development authority, which would then develop the entire area, create utilities and amenities, and carve out land to be leased or sold to multiple office buildings to generate revenue. This created the Magarpatta township outside Pune. While the farmers received smaller plots of land than they initially gave, they also received returns to the tune of 15 times that of their land vale investment (Ahluwalia & Mohanty, 2013). This example shows that land value capturing is not just the domain of governments, it can be practiced privately as well.
Earmarking revenue for urban development projects
Earmarking refers to automatically transferring the proceeds of a land sale by the government towards funding urban development projects (Peterson, 2013). It is usually rigid in nature when specified for particular use, and poses problems during times of financial stress. There are other limitations, i.e., the revenue generated may fall short of, or be surplus to the value estimated, leading to lengthy re-calculations.
Different countries have different rules regarding earmarking of funds from sale and lease of public lands. In UK, funds raised from sales are directed to the central budget, and are used to pay debts. In China, revenue from leasing of public lands has to be used to finance infrastructure. In Australia, all proceeds of land sales go to a consolidated fund, for which a budget of expenditure is prepared.
In India, funds from land divestments are directed towards specific projects like metro construction, which in turn increase land values of surrounding areas, which can progressively be used for land value capture using a slew of taxations and betterment charges.
It can be understood from the various examples discussed here that there is no single universal solution as to how land may be utilized. In fact, land divestment may not be the best solution in every scenario, and simply increasing taxation is bound to have repercussions. On the other hand, uncontrolled sale of Transferable Development Rights and other development rights will only undermine the Development Control Regulations. However, these concepts may be combined with other forms of infrastructure financing to give the best results.
Countries like South Africa and Australia have legislations ensuring that even their government bodies pay property tax to the local government, ensuring that there is less property hoarding, and that government itself identifies and disposes of surplus land to avoid high taxes (Peterson, 2008). This in turn creates new land which may be leased or sold off, bringing in a high cash flow. Similarly, land values can be compromised to an extent for large MNCs which offer to set up factories and offices, in turn providing employment and constructing basic amenities and schools and hospitals on their own, as we see in many steel townships in India. In all these cases, land value plays an important role in negotiating for better infrastructure for common good.
Discussed below is the summary of the examples discussed here, the methodology used in each case to raise funds, and the method of utilization of the funds.
In conclusion…
Much of land is India is owned by the government, and poses an excellent opportunity to be utilized to finance urban development projects. Considering the lack of public utilities in many cities — slums, poor housing quality, no water connection or sanitation, improper drainage and urban flooding etc. — land is a powerful instrument to generate revenue. However, land is a sensitive issue as well, with much resistance by land owners to unsympathetic planning schemes that involve acquisition of land. While higher compensation benefits the stakeholder, it reduces the net monetary gain from the transaction.
Thus, there should be a strategy to unlock land value in multiple stages. Initially, land inventory should be done to identify surplus land and find its market valuation. Targeting vacant and unused lands first would infuse in money without much legal hassles. Disposal of public-owned land is always under scrutiny as it is susceptible to be undervalued for political gains. Therefore, taxation instead of change of land titles cuts much of the bureaucracy involving identification and sale of land. Bringing in strategic taxation and allowing private developers to pool land by personal acquisition is an intermediate step. Only after this stage should more complicated transactions, which involve resettlement by government, be done.
While many Indian cities have started value capturing of lands, much work remains to be done in Tier II and III cities regarding land inventory, valuation, and creating a desirable market for investment, for this method to work effectively.
Bibliography
1. Ahluwalia, I. J., & Mohanty, P. (2013). Unlocking Land Value for Financing Urban Development in India. Retrieved from ICRIER Working Paper: https://icrier.org/Urbanisation/pdf/Ahluwalia%20and%20Mohanty_Unlocking_Land_%20Value.pdf
2. Express News Service. (2021, February 23). Centre’s nod to Hyderabad’s Regional Ring Road. Retrieved from New Indian Express:https://www.newindianexpress.com/cities/hyderabad/2021/feb/23/centres-nod-to-hyderabadsregional-ring-road-2267528.html
3. Hart, M. (2020, December 18). Developing Cities Need Cash. Land Value Capture Can Help. Retrieved from World Resources Institute wesbite: https://www.wri.org/blog/2020/12/how-landvalue-capture-can-help-developing-cities
4. Juneja, P. (2021). Strategic Use of Land in Infrastructure Financing. Retrieved from Management Study Guide: https://www.managementstudyguide.com/strategic-use-of-land-in-infrastructurefinancing.htm
5. Peterson, G. E. (2008, August). Unlocking land values to finance Urban Infrastructure. GridLines, pp. 1–4.
6. Peterson, G. E. (2013). Unlocking Land Values for Urban Infrastructure Finance: International Experience — Considerations for Indian Policy. Urban and Disaster Risk Management Department, Sustainable Development Network — The World Bank.
7. Romanik, C. (2017, May 17). The Role of Land in Financing Infrastructure in Cities. Retrieved from LandLinks.org, USAID: https://www.land-links.org/2017/05/role-land-financinginfrastructure-cities/
8. Shah, D. (2013). Fungible FSI and Cessed Buildings in India. Retrieved from Redevelipment of Housing Society Main website: https://www.redevelopmentofhousingsociety.com/articleshowcase/society-matters/fungible-fsi-and-cessed-buildings-in-mumbai
9. Shiromany, A. (2012). Financing Urban Infrastructure for Implementing Urban Resilience.Retrieved from TERI.org: https://www.teriin.org/projects/apn/pdf/day2/Financing_of_Infrastructure_Development_TERIGo a.pdf
10. SRFDCL. (2021). Business with SRFDCL. Retrieved from SRFDCL: Main Website: https://sabarmatiriverfront.com/business-with-srfdcl/
