Financing Urban Infrastructure Using Land Value

As cities continue to grow due to rising populations and rural to urban migrations, the demand for urban infrastructure has increased. With people living in informal settlements due to the high cost of living in urban cities, governments are trying to accommodate such residents by relocation and upgradation. However, a more significant problem is the provision of urban infrastructure. Infrastructure refers to the built environment and includes the transport, sanitation, water supply, waste disposal, and telecommunications network (Burdett, 2018). The capacity of urban infrastructure is quickly reaching its limit and local governments are scrambling to provide municipal services to all their residents (World Bank, 2020). Investments in urban infrastructure have many constraints and that is why governments are looking towards alternative ways of financing the provision and sustainability of urban infrastructure. Continue reading to understand how cities can use land value to finance their urban infrastructure needs. 

Investments in urban infrastructure are needed to provide basic municipal services to areas that are newly developed due to urban expansion. Meeting the demand for a safer and more reliable water supply, implementing better waste disposal practices, and developing transportation solutions for greater urban mobility require collaborations and investments from governments and public bodies. Infrastructure development is also integral to the economic productivity of cities. Urban infrastructure is usually financed by three main sources namely, the operating savings of local governments, grants from higher levels of government, and borrowing (Asian Development Bank, 2020). Each of these avenues is now becoming more constrained as local budgets are mostly used in the maintenance and service of existing infrastructure, and higher levels of governments often have to limit grants to cities in favour of fiscal management. Due to decentralisation policies, local governments are also being held responsible for urban infrastructure investments. 

Investments in urban infrastructure can have a massive impact on land value (Peterson & Thawakar, 2013). An additional option for local infrastructure development can be found in capturing land value gains by development activity for public investment. Public work projects such as the construction of roads, water supply systems, and mass transit systems produce immediate benefits that can be capitalised into surrounding land values. Many developing countries continue to underutilise their public lands that could be sold and converted into valuable public assets. Western countries extensively used this concept in the 19th century for financing their urban infrastructure (The World Bank, 2009). The method has several advantages as it can generate revenues upfront, increase the efficiency of urban land markets, and rationalise urban development. Public-private partnerships can be used for the implementation of techniques that allow for utilising different land-based financing techniques, bringing the practice into developing countries at a much faster pace. 

In terms of investments in urban infrastructure, market financing is understood as the borrowing of money from private financing institutions at market interest rate (Hayes, 2021). However, market financing of municipal service infrastructure is not limited to just borrowing, as the sale of land in open auctions can also raise financing for investments on market terms. Betterment levies, a one-time tax or charge on land value gain, are designed to capture a part of the increase in the market value of land sold for infrastructure investment (World Bank, 2021). An impact fee can also be charged from developers that compensate for the cost of infrastructure expansion (Kenton, 2018). Companies can also sell their land assets in return for infrastructure assets by allowing private companies to develop surplus lands in their possession. Lastly, the highest impact can be derived from public-private partnerships where the developer installs public infrastructure in exchange for land. These instruments show that directly incorporating principles of market finance can support the efficient operation of the urban land market. In simpler terms, all development projects that are carried out in urban areas can be capitalised for land value capture. 

When land is developed, the surrounding areas feel an impact on its value. If this impact can be defined in terms of a benefit zone, it can become a way to finance infrastructure projects. Impact fees are also a more economically efficient system that finances growth in infrastructure. However, even if land-based financing has significant benefits, it should not become the sole way of financing the entire budget. Most land-financing techniques generate revenue upfront and reduce the dependence that comes with fiscal borrowing. Revenue can also be generated before the actual development of the land. This direct nature of the investment makes it a viable option for those countries where credit-based financing is difficult to obtain for large scale development projects. 

The government of Pakistan holds vast amounts of land with huge potential for urban development. Some of the most valuable property in the country is currently in the hands of the government. However, most of these lands lie vacant or underutilised. Public sector organisations also own large swathes of rural and urban land that require efficient urban planning. At the same time, Pakistan’s major cities are deficient in urban infrastructure and need support in terms of planning, investment, and growth. This makes the question of using surplus lands for the financing of urban infrastructure a necessity for Pakistan. The country can generate large amounts of revenue if public organisations agree to sell off some pieces of their surplus land. This land can be traded among public organisations and pave the way for efficient urban development projects. Thereafter, the proceeds generated by the sale and development of this land can be used to develop urban infrastructure in Pakistan.

Cities are growing due to rising populations and rural to urban migrations. The demand for urban infrastructure is also rising with the needs of the population. Providing and maintaining this infrastructure requires financial resources which are not always found in abundance. As traditional methods of funding municipal infrastructure become more and more constrained, the use of land value for the finance of urban infrastructure offers a promising future. The sale and development of surplus government and public lands can generate enough revenue to kickstart the provision of urban municipal services. Therefore, the financing of urban infrastructure through land value is one of the most innovative uses of land value in the real estate sector.

Asian Development Bank. (2020). MANAGING THE RISKS OF PUBLIC INFRASTRUCTURE FINANCING: TOWARDS SUSTAINABILITY. 

Burdett, M. (2018). Urban infrastructure. Retrieved from https://www.geographycasestudy.com/urban-systems/

Hayes, A. (2021). Financial Markets. Retrieved from https://www.investopedia.com/terms/f/financial-market.asp

Kenton, W. (2018). Impact Fee. Retrieved from https://www.investopedia.com/terms/i/impact_fees.asp

Peterson, G. E., & Thawakar, V. (2013). Capturing the Value of Public Land for Urban Infrastructure: Centrally Controlled Landholdings. Retrieved from World Bank Group: https://openknowledge.worldbank.org/handle/10986/16879

The World Bank. (2009). Unlocking Land Values to Finance Urban Infrastructure. 

World Bank. (2020). Urban Development. Retrieved from https://www.worldbank.org/en/topic/urbandevelopment/overview

World Bank. (2021). Betterment Levies. Retrieved from https://urban-regeneration.worldbank.org/node/15