Many cities in developing countries, mainly in south-east Asia are experiencing rapid economic and population growth which in turn generates demands for housing, land, motor vehicles, and travelling. They are contributing to fast city expansion and sprawl which add more stress to the existing transportation infrastructure as those cities often solely depend on private vehicle traveling. The dependence on private vehicles travelling leads to issues such as congestion, air pollution, lengthy commutes, and social inequality. Those cities have one thing in common, which they all are dependent on private vehicle urbanisation. To remedy the pressing issues, cities in developing countries started to invest in many forms of public transportation: bus rapid transit (BRT), light rail, metro, or cable gondolas. However, they often face fiscal barriers as those projects can cost millions.
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Governments from developing nations should not only rely on tax revenue or international loans to fund the transportation infrastructure alone. They should tap into the untapped potential of their cities for additional sources of funding via Land Value Capture (LVC). LVC is a public financing method that can generate revenue through various activities from public intervention that result in increments of land value in the area. Think of a dilapidated area and the surrounding area that has cheap land value, but its value will soar once the government pool the budget to convert that area into a public garden park because of the improvement of the amenities that are now desirable. LVC works on this scenario. It captures the potential added value of the land from the investment of the government, in this case, the development of transit stations. LVC is divided into two main categories: development-based, and tax- and fee-based.
Development-based LVC
- The government makes money by selling or leasing the land to developers or they charge for the development rights. Mostly government will receive the up-front payment, leasehold charge, or annual rent collection based on the duration of the lease’s term.
- The government get the developers to contribute either physically or financially to the construction of the station facilities as the result of investment toward transit lines. This action requires well-coordination between the government, transit agencies, and developers.
- The government earn money by selling air rights. The government will make the building height adjustment regulation in order to raise funds means that the developer will be able to build and sell more units to their projects.
- Landowners in the area pool their land for sale in order to raise funds and partially bear the expenses of the development cost. This action stems from landowners, but the government should be taking the leading role to make it successful.
- The government implements urban redevelopment schemes in the area. This approach is almost a combination of all the previous four points. It is the joint actions of the government, landowners, and developers. The government changes or modifies the regulation/zoning code in order to incentivise development projects (allow for extra floors). Landowners and developers work together to pool fragments of land into a single site and the developers are obliged to build necessary infrastructure such as parks, access roads, or low-cost housing. This approach is popular in Japan.
Tax- or fee-based LVC
- The government taxes the property owners more once the property owners benefit directly from the development within the area of investment.
- The property owners within the area of planned development will be taxed more based on the expected rise of property tax. This practice is mostly used in the United States.
- The government simply collect taxes or the tax of the value of the land and buildings combined in the developed area.
However, development-based LVC is a preferred choice because its practices have less friction from the public since it does not involve collecting additional taxes directly from property owners and businesses. Tax- or fee-based LVC has outlined the taxing on property owners who benefit directly from the development, yet the means of measuring the direct benefit are often arbitrary, and the accuracy of the estimated increase of benefits is also not clearly defined or agreed upon. On the other hand, development-based LVC can bring revenue directly to finance the transit station from establishments (restaurants, hotels, leisure, parking, retail shops) that operate based on riders, and transit operators. Moreover, it overcomes the challenges of weak enforcement of tax collecting systems, mostly in developing countries, where cadastres are outdated and the capacity to collect taxes is still limited.
Enabling Factors
To implement LVC, governments, especially cities in developing countries have to consider a few points and put them to their advantage. Firstly, there should be strong demands for growth such as rapid urbanisation, strong economic growth, the emergence of middle-income households, and high housing demand. Secondly, it is about having a clear vision of their cities’ transit masterplan. Transit infrastructure investment should be the top priority for spatial development strategies, and the masterplan should not be rigid, but flexible toward the demand of the market. Moreover, policymakers should impose policies to reduce private vehicle dependence by tackling urban sprawl problems and increasing the density of housing. Planners should make consistent planning of transit networks, from local masterplans to regional masterplans, to make sure that ridership demands are met at the maximum and always put transit development at the top priority. Thirdly, the governments need to diversify the funding sources such as from fare revenue, introducing congestion charges, or redirecting funds from urban highways/underpasses/overpasses to transit investments. Lastly, operating in an entrepreneurship manner. The government and stakeholders need to have stronger leadership in taking on the project development. It is not only to reduce the friction between ministries or government bodies but also to lead the project to generate profits to sustain the development and operational costs. Autonomy operation of half government and half private ownership shall be encouraged in this case. Additionally, all stakeholders must share the costs, benefits, and risks accordingly with full transparency and fair rules.
Disclaimer: This article is a summarisation into a bite-sized text derived from Chapter 1 of Financing Transit-Oriented Development with Land Values by World Bank Publications. Please refer to the book for details.