Value Capture Financing For Infrastructure Development in India

Value Capture Financing For Infrastructure Development in

India

Submitted By:
B.Rajesh Kumar R eddy
M.plan- 3rd Semester
Sushant School of Art and Architecture

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Value Capture Financing For Infrastructure Development in India

Contents
Abstract ...................................................................................................................................... 3
Chapter 1. Introduction .............................................................................................................. 3
Problem Statement ................................................................................................................. 3
Aim ........................................................................................................................................ 3
Scope ...................................................................................................................................... 3
Significance............................................................................................................................ 3
CHAPTER-2: Literature Review ............................................................................................... 4
Value Capture Financing ....................................................................................................... 4
Value Capture Financing Methods ........................................................................................ 5
Land Value Tax.................................................................................................................. 5
Changing Land Use............................................................................................................ 5
Betterment Levy Charges .................................................................................................. 5
Development Charges ........................................................................................................ 5
Transfer of Development Rights (TDRs) .......................................................................... 5
Additional FSI/FAR ........................................................................................................... 5
Vacant Land Tax (VLT) .................................................................................................... 6
Tax Increment Financing (TIF) ......................................................................................... 6
Land Acquisition and Development .................................................................................. 6
Land Pooling System ......................................................................................................... 6
VCF Economically Efficient.............................................................................................. 6
VCF appropriate condition ................................................................................................ 6
Challenges of Land Value Capture .................................................................................... 7
Chapter-3: Methodology ............................................................................................................ 7
Chapter-4: Case Study ............................................................................................................... 7
22@Barcelona, Barcelona Spain ........................................................................................... 7
Bandra - Kurla Complex in Mumbai ..................................................................................... 8
Expressway Outer Ring Road in Hyderabad ......................................................................... 9

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Value Capture Financing For Infrastructure Development in India

Abstract
Rapid urbanization in India has led to increase in demands in providing the
infrastructure and services in the urban areas. The source of funding for providing
infrastructure in the urban areas is from the central government, state government and urban
local body. Revenue for municipalities is in the form of user charges, taxes and fees and fines
for the maintenance of infrastructure. The external funding has been made by the central
government in the form of various schemes (Atal Mission for Urban Rejuvenation and Urban
Transformation, Smart City, JNNURM, Urban Transport) but these are not meeting the
requirements of infrastructure in urban area. So in India and other parts of the world urban local
bodies, state and central governments are looking for the external source of funding in the form
of land which is known as the Value Capture Funds. In India Ministry of Urban Development
has initiated VCF policy in 2017 to mobilize additional resources for the state and urban local
bodies. In this research paper I examine VCF model and its applicability in the context of India
for infrastructure development.
Key Words: Value Capture, Infrastructure, Authorities, Area Based Development
Questions:
1. What are the value capture finance tools used in India?
2. Is Land Based financing of infrastructure is economically efficient?
3. At what condition VCF is appropriate?
4. What are the challenges of VCF?
5. What are the impacts of VCF in Land Use, Economic Development and environmental
quality?

Chapter 1. Introduction
Problem Statement In India and also in other parts of the world there is a huge gap in
providing of infrastructure by the respective authorities due to lack of funding so in this paper
I am explaining about value capture finance tool to reduce some gap.
Aim To understand the importance of Value Capture Finance for urban infrastructure
development.
Scope This paper will look at value capture financing as a tool for funding infrastructure.
Significance As the government authorities are facing a financial issues this paper
demonstrates the importance of Land Value capture methodology and its impacts where it can
take a step ahead for the authorities to full fill certain gap.
India is urbanising at a fast face and population has been projected to 600 million in
urban area by 2031. This increment not only makes an impact in numbers but also place an
urban areas as a center of development. This urbanization has created a need to provide the
infrastructure in urban areas. The McKinsey report (2010) has estimated that around Rs 3,
25,000 crores are required annually by urban settlements for infrastructure sector. The high
powered expert committee has estimated that around Rs 39.2 lakh crores is necessary for urban
infrastructure for the period of 2012-31. Among this 44 percent is required for providing urban
roads. The operations and maintenance requirements for old and new assets is Rs 19.9 lakh
crores for the 20 year period. According to MoUD there is an investment gap of 65,000 crores
annually. So Central/State/Urban Local Body are looking for alternate choices for funds to

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Value Capture Financing For Infrastructure Development in India

fulfill the infrastructure. Amoung these one choice is the Value Capture Financing for
infrastructure development. Other than the value capturing in March 2015, The Securities and
Exchange Board of India (SEBI) passed regulation to issue municipal debt by the municipal
authorities and in September 2016 Ministry of Urban Development assigned cities credit rating
based on their assets and liabilities.

CHAPTER-2: Literature Review

Value Capture Financing
VCF represents an innovative means of maximizing a city’s assets. It is a finance
mechanism which not only shares the risks and costs of urban development between public and
private actors, but also the rewards. VCF sees some of the costs associated with making urban
development succeed internalized within the balance sheets of the developments themselves.
Public goods are consequently provided by urban development without the proportional draw
on the public resources which would otherwise finance them.
In the terms of the Ministry Of Urban Development Policy framework 2017 Value
capture financing tool is “to capture a part of the increment in the value of land and buildings,
in terms these value can be used to fund projects being set up for the public by the central, state
and ULBs”.
As per the Vancouver Action Plan – the founding document of the UN Habitat (United
Nations, 1976) –”The unearned increment resulting from the rise in land values resulting from
change in use of lands, from public investment or decision, or due to the general growth of the
community must be subject to appropriate recapture by public bodies”.
VCF in the world practiced widely on a formula that private land and buildings are
benefited from infrastructure provided by public authorities and policies. So by VCF can be
deployed to capture the increment value from land and buildings. As the funds can be utilized
for projects set up by central, state and urban local body. Land Value Capture has long been
advocated by international organizations as a funding source to support local improvements in
urban infrastructure and services. Developed countries across the globe have more often
adopted the concept of Land Value Tax (LVT), a method of raising public revenue by means
of an annual charge on the rental value of land. Land value taxation is currently implemented
throughout Denmark, Estonia, Lithuania, Russia, Hong Kong, Singapore, Taiwan and sub
regions of Australia, Mexico and the United States. The policy of Value Capture Financing in
different countries are:
Canada: The value of every parcel of land in Canada would be assessed regularly and the land
value tax levied as a percentage of those assessed values.
United States: Taxing the value of land at a higher rate and the value of the building and
improvements at lower one. Two rate taxation may be seen as a form that allows gradual
transformation of the traditional real estate property tax into a pure land tax.
Russia: Land Tax is a municipal tax levied on the cadastral land value and the applicable rate
varies depending on the use of the land and the property tax is levied on the buildings,
apartments, constructions and garages ranging from 0.1% to 2.2% depending on value of
property.

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Value Capture Financing For Infrastructure Development in India

Value Capture Financing Methods

Here are the methods described by the government of India of Value Capture Financing.
Land Value Tax This tool is used to collect the tax from the vacant land which help stabilize
property value. Considered as the most ideal value capture tool - used by countries like
Denmark, Australia, and New Zealand - is an annual land-value tax on the increment of (built-
up) land value. Apart from capturing any value increment, it helps stabilize property prices,
discourage speculative investments and is considered as least distortionary and most efficient
among all value capture methods. This is implemented in the Maharashtra and Tamilnadu states
imposed in state laws.
Changing Land Use By collecting fees for changing of land use
Betterment Levy Charges The collecting of revenue from land source one time for public
infrastructure investment or in schemes. Great Britain for a period imposed a betterment levy
equal to 40 percent of the land-value gain attributable to public investment6.This is also
exercised in the United States using special assessment district, whereby annual levies are
imposed on the district. An example of this is the WAVE streetcar system in downtown Fort
Lauderdale whereby the adjoining property owners would raise the funding gap required after
the central, state and transportation grants.
Development Charges (Impact fees) are area based and link the development charge to the
market value of land by carrying out periodic revisions. These funds are to be utilized for the
Capital Improvement and Decongestion Plan. Impact fees are levied, apart from the
development charges, on new constructions in an area where a large new public investment has
been announced. Such investments could include major roads and highways, metro rail,
industrial corridors, ports, airports, and any other public infrastructure facility. They are levied
to recover at least a share of the investment made. The impact fee generally vary depending on
the location, the land usage, and height. It is collected when the landowner applies for new
construction permission.
Impact fees are calculated based on the total cost of the project investment proposed
and the development potential within the influence area. To this extent, they are unique for
each project area and would require a project-wise notification.
Transfer of Development Rights (TDRs) used for trading development rights. The biggest
problem is the acquisition of private land which have been reserved for roads and utilities, open
spaces, and community assets in the City’s Development or Master Plan. One strategy that has
assumed wide acceptance in recent years is the allotment to the land owner of transferable
development rights equivalent to the extent of land foregone. This involves separating the
permissible development potential of the land from the land itself and allowing its transfer.
Accordingly, the land loser is compensated with additional F.A.R of an equivalent extent which
can be used by himself or transferred to a third party for use elsewhere in another zone provided
the infrastructure in the receiving zone supports the transferred F.A.R. A TDR certificate is
issued to the land owner and this certificate can be redeemed elsewhere. This opens up the
possibility of a market where such development rights can be bought and sold.
Additional FSI/FAR Collecting of extra charges for the providing of additional Floor Area
Ratio for the additional development beyond the rules. Given the acute scarcity of vacant land
and the adverse impact of the sprawl, it is desirable to encourage vertical development and
densification in certain areas. This can be done by incorporating higher F.A.R for these areas
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Value Capture Financing For Infrastructure Development in India

in the Master Plan. A two-tier F.A.R structure, with a certain basic F.A.R bundled with property
right and the remaining to be purchased, can be designed to enable value capture. The efficient
mechanism for F.A.R sale is to define variable neighborhood F.A.R limits depending on the
existing and new infrastructure and then auctioning the F.A.Rs in the market
Vacant Land Tax (VLT) is applicable on those landowners who have not yet initiated
construction on their lands. Vacant land tax can be a useful instrument to discourage
speculative hoarding of land, with attendant upward pressures on land prices, and incentivize
land owners to develop the land.
Tax Increment Financing (TIF) Tax Increment Financing is collecting the incremental
revenues from future increases in property tax or a surcharge on the existing property tax rate
is ring-fenced for a defined period to finance some new investment in the designated area. TIF
is the one of the most popular value capture mechanism in developed countries.
TIFs are especially useful to finance new investments in existing habitations. One
example is the Smart City project. Here since the seed funding comes from the government,
apart from being a financing tool, the escrowed tax-increment can be used to finance its
expansion to other areas in the city. In other words, the public investment made under the Smart
City program would be the seed capital to catalyze smart city interventions across the city. The
geographical focus would also enhance accountability by linking expenditure with outcomes
relevant to the local residents.
Land Acquisition and Development Acquiring the land and development land is used as a
resource.
Land Pooling System It is a system in which land pooled and divided into parcels and
infrastructure developed and some parcels are returned to the land owners. There are different
variants of such schemes depending on how the infrastructure development is financed. In most
cases, a share of the developed land is sold to finance its cost, whereas in others, the land
owners give a betterment charge to cover the infrastructure cost
Majorly these methods are used in various types of VCF. Types of VCF is Area Based
application and Project Based value capture. As the spatial distribution of the project benefits
which can be internalized in a benefit zone, it is economically efficient to finance projects by
tapping the increments in land values resulting from them.
VCF Economically Efficient
As Land value capture financing instruments to pay for infrastructure is the principle
that the benefits of infrastructure projects are capitalized into land values. When there are
spillover benefits it is still efficient to recover the cost from the land value increments.
The relationship between the land value capture and the cost of infrastructure supply
can be interpreted as an indicator of the efficiency of infrastructure provision. When benefits,
measured as capitalized land values, exceed the costs of installing infrastructure, infrastructure
is being undersupplied.
VCF appropriate condition
Land-based financing of infrastructure investment has the biggest payoff where there
is rapid urban growth. Under these conditions, land prices tend to rise rapidly, creating the
opportunity to generate significant revenue. Rapid growth also magnifies infrastructure
investment needs, requiring significant sources of development finance.

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Value Capture Financing For Infrastructure Development in India

Challenges of Land Value Capture

The various risks which are regarding to the Value capture finance. Real estate markets
are highly cyclical. The demand of land and the cost of land parcels are fluctuate eventually.
The revenue obtained from the land sales or development charges are being finance to develop
infrastructure and public income also some extent. As land revenue declines and at the same
time demand for the public spending to infrastructures declines. Hong Kong, China, is an
extreme example; it funds a large part of its public budget from the sale of land-leasing rights.
Proceeds from land leasing fluctuated between 229 percent of expenditure on public works
(and 34 percent of total government revenue) in 1997 to almost zero in 2001–03, when the
government suspended all sales of land for commercial use due to lack of demand and
precipitously falling land prices in the wake of the Asian financial crisis (Peterson 2007).
Municipal governments or local governments which faced profits from land based
transactions can turned the profits into profit-maximizing real estate developers, intent on
generating the maximum revenue available. This strategy can lead to aggressive accumulation
of excess land by public authorities, can lead to promoting inefficient urban sprawl and
displacement of households. A local government that wants to profit from land development
can limit development potential through zoning or density regulations that inefficiently restrict
development.

Chapter-3: Methodology
A question has been raised why the urban local bodies, state governments are not able
to fulfill the gap between the infrastructure and the requirement. After little bit analysis this
topic then a point came out in which majority of the portion is lack of funds. Then I find one
of the tool which is using around the world and in India recently that is value capture financing.
This tool is using regarding to the area based and a project based.

Chapter-4: Case Study

In the below some of the case studies of Value Capture Financing which are
implemented in India and around the world has been explained.
22@Barcelona, Barcelona Spain
The main aim of the project is to develop the new innovative district at Poblenou,
Barcelona, Spain. The area proposed to develop the 4 million sq.m gross floor space in which
the office space is of 3 million sq.m and the remaining land use for the recreational, residential
and other purposes. The estimated value is of about 14 billion euros.
In 2001, Barcelona City Council issued a new urban planning regulation which changed
the land-use designation of 115 privately-owned old blocks in the south east of the city from
industrial (22a) to services (22@). This allows for more productive uses on the land. Density
rights were also increased. These changes dramatically increased the land’s potential value to
private owners, giving them the opportunity to make significant profits. The City Council
therefore has strong leverage over the private sector to encourage them to contribute to the
wider transformation of the area. Potential value was made tangible through the private sector
planning and development of land parcels within the 4 million sq.m 22@Barcelona district as
described in the development profile. To date, construction is either planned, underway or has
been completed for 67% of this total area.

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Value Capture Financing For Infrastructure Development in India

The City Council uses its leverage in a number of ways. In exchange for a planning
permit it 1) demands rights to 30% of the total land area of the proposed development or the
equivalent current monetary value of the land be transferred to the city (which is decided on a
case by case basis); and 2) charges a development levy of EUR 80 per sq.m of land developed
(which is updated annually). The transfers and levies are donated directly to the publicly-owned
22@BCN company.
Public sector led re-investment: The monetary and in-kind land contributions of the
private sector developers are reinvested in full into the 22@Barcelona district by the public
body 22@BCN. The 30% land transfer or equivalent monetary value of the land is used to
construct social housing (4,000 units), knowledge-based infrastructures (such as incubators,
telecommunications, student accommodation and R+D centers) and green spaces. The
development levy is used to fund the delivery of the 22@Barcelona ‘Special Infrastructure
Plan,’ which prescribes the holistic development of the area towards a knowledge-based
economy primarily through infrastructure development. . Private sector led re-investment: In
the 22@Barcelona model, the private developers only contribute to the recycling and
reinvestment process indirectly via 22@BCN.
As it is assumed that average rate of return on investment of between 6% and 7% per
annum. It is very difficult to estimate the value of the public works which have been enabled
by VCF. It is expected that EUR 180 million will be spent on infrastructure improvements in
the area. Though the figures for the value of the destination marketing, student and social
housing, and green spaces and facilities are not available it is likely that on the completion of
the project the value of the community-orientated improvements to the local area will reach
beyond EUR 1 billion.
22@Barcelona leads to growth of employment and the raise of land value leads to the
economic growth in the area. The development of the area is residential and recreational leads
to better living conditions and also connectivity with the working life is easy. Urban density
leads to the cause of heat islands.
Bandra - Kurla Complex in Mumbai
Bandra Kurla Complex (BKC) was created with an aim to develop an alternate central
business district (CBD) in Mumbai with commercial activities having reached a point of
saturation in South Mumbai. It was constructed with the purpose of meeting the demands of a
rapidly increasing population and as a decongestion measure for South Mumbai and for raising
significant resources for financing massive regional infrastructure.
Mumbai Metropolitan Region Development Authority (MMRDA) was appointed as the
Special Planning Authority for the development and implementation of the BKC project in
1977. The BKC complex provides two lakh jobs and is a hub for corporate and commercial
activities in the city, housing many prominent institutions and covering a developed area of 19
hectares. The complex offers almost 1, 17,000 sq. m. of commercial office space. MMRDA
paid Rs. 956 crores over a period to the State government for 208 hectares of the land at BKC.
A part of 121 hectares was proposed to be developed as a financial and business center, known
as Block G of the area Land Sales by Mumbai Metropolitan Regional Development Authority
(MMRDA) at Bandra-Kurla Complex in Mumbai, India.

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Value Capture Financing For Infrastructure Development in India

Year and Use Price per square meter

1993 30,000
1995 42,500
1998 Sales suspended because of Asian financial
crisis
2000 86,000
January 2006 1,53,000
November 2007 5,04,000

The growth of rate in the period of 14 years is 22.33% of the value. In the last financial
year (2006-2007) the growth is of 320% which is tremendous growth. MMRDA has raised
around Rs.51 billion from merely 13 hectares of land (in 2006 and 2007) which is ten times
capital (2005-2006) of MMRDA capital and five times the amount raised for annual
infrastructure investment by Mumbai’s municipal authorities in 2004-05. The FSI of the land
in Block G has been increased from 1 to 3 for residential and 2 to 4 for commercial purposes,
thereby making an additional built-up area of 3.05 lakh sq. m. available for residential and
33.11 lakh square metres available for commercial purposed which are further proposed to be
sold by the MMRDA
In the case of Mumbai as the development authority has purchased land from the state
government and then these land parcels have been sold on different rates according to the
yearly. The amount obtained from the various auctions shows that it is necessary to provide
necessary infrastructure in the Bandra Kurla area. Later on the authority is planning to provide
Mumbai Urban Transport project (MUTP) to facilitate for 22 million residents of Mumbai.
From the past the land values in Mumbai is high and after the development the
development of commercial area the rates are much increased. The revenue obtained from this
project has risen the revenues of development authorities and also it generated lot of
employment. The development of MUTP it benefit 22 million residents to convenient transport.
Expressway Outer Ring Road in Hyderabad
In Hyderabad a 1-KM stretch along the sides of 162 km outer ring road has been
designated as a growth corridor. The aim of the corridor is to develop well develop and well-
connected urban settlements and satellite townships around the Hyderabad Metropolitan area.
The Hyderabad Metropolitan Development Authority has introduced Special Development
Regulations along the Growth Corridor. A special impact fee is levied on any development that
takes place along the corridor for ensuring development of the ORR and other related facilities.
The growth corridor is divided into two Special Development Zones (SDZs) where
SDZ1 includes areas within or inside the ORR (towards the City) while SDZ2 pertains to areas
outside the ORR (away from the City) and within the ORRGC. The Hyderabad Municipal
Corporation levies an impact in order to mitigate the impact of increased commercial
construction activity along the zone classified as ORGCC. As to attract incentive is given for
large townships projects 10-25% discount of impact fees, 20-30% discount on impact fees for
IT/ITES projects. Hyderabad Growth Corridor Limited (HGCL) a special purpose vehicle was
set up in order to execute the construction of the ORR. The project cost is estimated as Rs.
6,696 crores. The rate of the impact fee is reduced 50% by 2017 to improve the construction

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Value Capture Financing For Infrastructure Development in India

activity on the Outer ring road. The first slab pertains to buildings up to 17 floors while the
other slab includes buildings above 17 floors. The impact fees for areas falling within the
jurisdiction of GHMC will range from Rs. 500 to Rs. 1500 per sq. m. while the impact fees for
areas falling within the jurisdiction of the Hyderabad Metropolitan Development Authority
(HMDA) will range from Rs. 175 to Rs. 500 per sq. m.
Development of 1 Km stretch along the ORR has provided revenues for the government
authorities. As to increase the development of the built up area the authority has decreased the
impact fee to increase the development. As the development leas 324 sq. km area has been to
built-up area where the previous land use is agriculture. And for the future scenario the area is
going to be converted to urban sprawl leads to economic effect.
Reference:
“Value Capture Finance Policy” by Ministry of Urban Development – Government of India
(2017)
“Value Capture from Infrastructure Investments for Smart Cities” by National Institute of
Urban Affairs (2016)
“Tax Increment Financing as a Value Capture Strategy in Funding Transportation”- Zhirong
Jerry Zhao, Kirti Vardhan Das, and Kerstin Larson, November 2015
Mohanty, P.K. (2016). Financing Cities in India: Municipal Reforms, Fiscal Accountability
and Urban Infrastructure
Ahluwalia, I.J. and Mohanty, P.K. (2014). Unlocking Land Value for Financing Urban
Development in India
Suzuki, H., Murakami, J. Hong, Y. and Tamayose, B. (2015) Financing Transit-Oriented
Development with Land Values
Mohanty, Dr. P.K. (2003). City Development Strategy and Comprehensive Municipal
Reforms: The Approach of Hyderabad City
George.E.Peterson (2009): Unlocking Land Values to Finance Urban Infrastructure, the World
Bank
Joe Huxley (2009): Value Capture Finance Making urban development pay its way, Urban
Land Institute

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