Strategic Use of Land in Infrastructure Financing
A lot of developing countries do not have the finances required to build large scale infrastructure projects. However, these countries do have large parcels of lands in urban areas. There is a dire need for infrastructure projects in the developing world. Cities like Beijing, Mumbai, Karachi and Bangkok are bursting at their seams due to high population. Huge populations also imply a shortage of land which leads to sky high prices.
All these cities need rapid infrastructure development. However, the lack of finances limits the capability of the state to increase the development in the region. In such cases, the value of the land can be unlocked. In this article, we will explore the possible ways of using land as a strategic asset that can be used to finance infrastructure projects.
Why Land can be Used as a Strategic Asset?
In most countries of the world, land ownership is bifurcated. This means that most of the urban lands is owned by private parties. At the same time, large tracts of land outside the cities are owned by the government. These lands have either been acquired by the government or one of the many public sector enterprises for different purposes. Many of these purposes may now be outdated and obsolete.
For instance, in many areas land was acquired to build industries just outside of cities. However, now many of these industries have become obsolete and the size of cities has also expanded. As a result, these factories have now become sources of pollution. The government would be better off if it could find a way to unlock the value of land and then use it to build infrastructure projects.
In this article, we will have a closer look at the various ways in which the value of a land parcel can be unlocked.
Levies on Private Developers
Many countries have started levying some charges on developers when they develop areas adjoining big cities. Typically, the task of providing basic amenities such as water, electricity and sewage needs to be done by the government. This means that the cost of providing these services also needs to be borne by the government. In order to do this, the government has to undertake infrastructure projects. However, many times the government does not have the money to invest upfront. As a result, the development of these areas gets delayed.
However, in many countries, governments allow developers to construct residences and offices in an area if they are willing to contribute to the general infrastructure development in that area. This means that private developers are expected to help in building roads, providing electricity, water and even sewage facilities in the newly developed areas. Most of the times, developers are more than happy to share this cost. This is because the land parcels are located strategically and hence are valuable. Also, since they lack basic infrastructure facilities, the developers end up acquiring these land parcels at rock bottom prices.
Capturing Gain in Capital Values
Value capture is a mechanism which is commonly used by government bodies to share in the capital gains which accrue to the general public as a result of infrastructure projects. This can be better explained with the help of an example. For instance, if the government builds an airport or a flyover in an area, the price of the land adjoining the project also goes up rapidly.
Many economists are of the opinion that since the government is the driver of such projects, they should create a mechanism to capture the gain in the price of land. This will ensure that the gain in capital values accrues to all taxpayers and not only to a handful of residents who happen to live in the area. In several parts of the world, governments have tried to levy a 30% to 60% tax on the capital gains which have resulted from such projects.
However, this idea is very difficult to implement. For instance, the value of capital gains cannot be easily ascertained. Hence taxing the capital gains is tedious and prone to errors. Also, there is a problem of divisibility. Many people do not have the cash required to pay the capital gain tax. Hence, compliance with the tax is an issue. People are sometimes forced to sell their homes to pay this tax.
Outright Sale and Leasing
The third method which can be used by the government is relatively simple. The government can simply sell or lease its land to the highest bidder. The cash released from these sales can be redirected towards the development on infrastructure projects. This method allows the government to focus on infrastructure projects which are strategically important and which provide a higher yield.
This method can also be used to bridge the infrastructure divide between the urban and the rural areas. This is because the land prices in urban areas are very high. One of the reasons behind these high prices is the fact that the government has spent a lot of money in building the necessary infrastructure. If the government liquidates the land in urban areas, it is just unlocking some of the value that it had created by building the infrastructure. This value can then be transferred to the rural areas by using the money to build infrastructure projects in rural ad backward areas.
The bottom line is that land is an extremely strategic asset. Also, since the government owns large tracts of land all over the world, it is well placed to exploit the higher prices in order to build infrastructure in areas which lack it.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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- Infrastructure as an Asset Class
- Infrastructure Finance Projects: Major Sources of Funding
- Why Doesn’t the Private Sector Invest In Infrastructure Projects?
- The SPV Structure in Infrastructure Finance
- Financing Needs of Infrastructure Projects at Different Stages
- Different Types of Contracts for Infrastructure Projects
- Distribution of Risks in an Infrastructure Project
- Risks Faced By Infrastructure Projects in Emerging Markets
- Bank Loans vs. Bonds: Debt Financing In Infrastructure Projects
- Key Decisions to Be Taken During Infrastructure Bond Issuance
- Parties Involved in Infrastructure Debt Issuance
- External Credit Enhancement in Infrastructure Financing
- Revenue Bonds and the Cash Trap Mechanism
- Managing Revenue Risks in an Infrastructure Project
- Cost Overruns in Infrastructure Projects
- Causes for Cost Overruns in Infrastructure Projects
- Third-Party Risks in an Infrastructure Project
- Vendor Finance in Infrastructure Projects
- Securitization in Infrastructure Finance
- Leasing in Infrastructure Finance
- Strategic Use of Land in Infrastructure Financing
- Usage of Collateralized Debt Obligations (CDO) in Infrastructure Finance
- Infrastructure Investments in Renewable Energy
- Should the Government be an Equity Partner in Infrastructure Projects?
- Lifecycle of Public Private Partnership (PPP) Projects
- Payment Mechanisms in Public-Private Partnerships
- Adjustment Mechanisms in Publich-Private Partnership (PPP) Contracts
- Early Termination of a Public Private Partnership