The World Bank estimates that India will need to invest approximately $ 840 billion in urban infrastructure over the next 15 years. The Union Budget 2023-24 has already allocated ₹10 trillion towards capital investment and has identified one hundred critical transport projects for first and last mile connectivity.

Land is central to such interventions. But, land-related matters suffer from legacy problems that transcend across centuries of our history, and differently across states. As a result, the federal system of India includes land in the state list. Yet, land is a critical resource for economic activities and is a matter of national importance. Yet, programs like Digital India Land Records Modernization Program (DILRMP) by the Ministry of Rural Development and Model Act on Conclusive Land Titling (MACLT) are welcome steps at the federal levels to create national-level policies on land-related matters. The Value Capture Financing (VCF) Policy introduced by the Ministry of Urban Development is a welcome step. In this article, we stress the need for executing the policy so that innovative financing models could become a widely accepted reality.

When British tycoon Harold Samuel proclaimed ‘location, location, location’ as a mantra for buying real estate, he was, most certainly, insinuating at its connectivity and accessibility to public services. A piece of real estate is only as ‘prime’ as the infrastructure that envelops it. The construction of north-south flyovers in Mumbai boosted land prices and encouraged housing development in the northern sub-urban areas. Similarly, metro rail expansion in Delhi’s satellite towns has increased residential and commercial real estate activity in the suburbs. In Manila, while the urban metro main line in 2000 cost $655 million, adjoining land prices appreciated by a total of $3.4 billion!

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Traditional financing models pose a classic public goods problem: not everyone benefits but pays for public goods. Extant funding methods, like taxes and cess skewed the incentive structure to localized users. Through the LVC model, the upsurge in property prices can be captured, recovered, and reinvested locally.

Land Value Capture: a financing alternative

LVC is not a Twenty-first Century novelty. Administrative authorities in ancient and medieval Indian kingdoms often imposed higher grain levies on regions which were supplied with irrigation channels. India has seen some successes recently too. The city of Nagpur sells additional Floor Area Ratio (FAR) rights at a premium within a 500-meter corridor along the new metro lines. Spaces in Delhi metro stations are leased to retailers fetching the Delhi Metro Rail Corporation an annual rental of over ₹100 crore per year. Ahmedabad’s urban municipal body acquired a 1-kilometer strip of land along the new ring road, redeveloped it with civic utilities and transport networks, and earned ₹6 billion from its resale.

Common approaches

The most popular LVC tool is additional Floor Space Index (FSI) grants: i.e., monetizing the air rights above a building. Widely deployed in the suburbs of Mumbai, FSI enhancements have reaped one-time gains for the city, and at the same time ensured higher property taxes in perpetuity from denser construction. Sometimes, developers are required to construct parks, schools, affordable housing, etc. in private real estate projects. Cambridge city, Massachusetts generated 1000+ affordable housing units by mandating developers to set aside 20 per cent of floor area for low-cost homes in exchange for relaxed FSI. Hudson yards in New York is a similar example. At times, developers are required to shell out ‘impact fees’: the Hyderabad city has earmarked this corpus for improvement of the ORR corridor.

In India, the government’s underutilized land parcels around highways, railways, or in tourist destinations, are to be leased out to operators/managers for commercial use. The exchequer will partake the expected value gains through a revenue-sharing agreement with the private contractors.

LVC can help meet the carbon neutrality goals through regulations such as compulsory roof-top solar installations and rainwater harvesting systems. The resulting reduction in utility charges can be capitalized into financing ‘green’ retrofitting. Local governments successful in such endeavors must share their knowledge with others.

Challenges

While the idea has already progressed from theory to practice in many cities. But more is needed. We must ring-fence the LVC proceeds for use in identified projects only, dissociating them from the common pool of state funds. The flow of funds from the exchequer to the project’s developer must be explicitly determined and available for citizens to verify. To succeed, LVC needs enabling conditions and an easy institutional framework.

Further, we need real estate markets with clear visibility of land market conditions and delineated property rights. At the least, the property circle rates system needs a revamp. Hedonic pricing models offer as easy answer. The IIM Ahmedabad Agricultural Land Price Index has shown a strong potential for success. Awareness campaigns must sensitize the citizens who finance LVC.

Coordination among public and private corporations, and across levels of fiscal authorities is critical. We must learn from the challenges of the Dharavi Redevelopment Project experience. In Nagpur, revenues from sale of additional FAR along the metro corridor are shared equally between the metro project authority and the local municipal body.

LVC cannot be a one-size-fits-all scheme. It must be molded into the structural demands of local infrastructure. For example, within Columbia the city of Manizales financed new roads from ‘betterment levies’ charged differently to different beneficiaries. On the other hand, the city of Bogota levies uniform charges.

LVC is a self-financing and sustainable model for infrastructure development. It can be an effective funnel to fill the funding gap in India’s infrastructure needs. We need to progress further in this direction.

(By Prashant Das, an associate Professor in Finance & Accounting Area at IIM Ahmedabad, with contribution from Anchal Agarwal Jain and Yash Choudhary, who graduated with MBA from IIM Ahmedabad. Views are personal)