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Capturing land value for investment Capturing land value for public investment is a method unique to local governments. It works on the principle that public works raise surrounding land values, so their costs should therefore be shared by local property owners. Land-based financing has a long history in city development and infrastructure financing in Europe and the United States, and has also been implemented in Asia, Latin America, North Africa, and Turkey, especially where cities are growing rapidly. The enormous urban growth in China over the past two decades has been partially financed by these land value capture mechanisms. The Asian chapter explains how rules were adapted to allow China’s cities to use land as collateral for loans, and gives examples of success stories. Landbased financing mechanisms are closely related to land management and planning, which are also crucial to the provision of ba-
sic services. Most importantly, land-based financing requires the development of land ownership records which, in the long run, make for easier ‘own revenue’ mechanisms to be developed (see Box 4). Closing the financing gap will require countries to mobilise financing from a variety of sources, which may include reducing costs (via efficiency gains or cheaper service options), increasing basic sources of finance (i.e. tariffs and taxes) and mobilizing repayable finance. Marshalling local savings for local capital investments will benefit national economies, prevent savings from being invested abroad, and reduce foreign- currency borrowing requirements. Given rising pressures on public finances in donor countries, transfers are unlikely to grow significantly in the coming years, meaning that these resources will need to be spent strategically to maximise their leveraging capacity and effectiveness.
Box 4. Land-based financing of urban improvements Some land-financing techniques generate revenue before infrastructure investment is undertaken, while others involve borrowing during the construction period, with debt repaid from subsequent increases in land value. In low- and middle-income countries where it is difficult to obtain long-term credit to finance urban infrastructure, the up-front nature of the revenue generated by land financing adds flexibility to financing decisions. However, land-financing instruments are not long-term generators of recurring revenue for operating costs. They are capital financing opportunities, whose revenues should be dedicated to capital costs and used to finance significant leaps forward in infrastructure capacity. Principal tools and related examples: Land asset management: public entities undertake a strategic examination of their balance sheets and decide to exchange underused or vacant land for infrastructure. A critical element of this approach is to lease or divest non-core land assets so that local government can concentrate its financial resources and management on core infrastructure. Sale of development rights: Sao Paulo (Brazil) sold additional construction rights (to construct at greater densities in an urban areas or convert rural land