Content uploaded by Vladimir Yakunin
Author content
All content in this area was uploaded by Vladimir Yakunin on Apr 08, 2020
Content may be subject to copyright.
Vladimir Yakunin
D C (DOC) R I
Daisuke Kotegawa
C I G S
Pablo Ava
A C IR
Teresita Cruz-del Rosario
N U S
Dimitris Psarrakis
E P
Anna-Maria Chkoniya
E D B
Maxim Vilisov
CENTERO T T
Li Xin
S I IS
Jose Barbero
N U S M
CHAPTER
ECONOMIC EFFECTS OF
INFRASTRUCTURE INVESTMENT
FROM LANDBASED FINANCING
86
Building the Future oF Quality inFrastructure
Abstract
The challenges of the modern world such as urbanization and the urgent need to increase access to
infrastructure are forcing many countries to look for new solutions to support economic growth and a
sustainable development agenda Meanwhile there is the problem of the infrastructure investment gap
when state development institutions are in dire need of money to implement the long-term infrastructure
projects According to the Global Infrastructure Outlook the demand across countries and seven
sectors to for investment resources could reach trillion (Oxford Economics ) To solve
this problem the active participation of private companies is proposed through the framework of public–
private partnerships In July the Group of (G)Organisation for Economic Co-operation
and Development Task Force on Institutional Investors and Long-term Financing provided a supporting
note to the Guidance Note on Diversification of Financial Instruments for Infrastructure and SMEs to
theGFinance Ministers and Central Bank Governors and the G leaders Land-based financing was
indicated among innovative financial approaches its mechanism uses land jointly with financial andor
tax instruments (such as tax increment financing) so that infrastructure investment spurs growth in the
economic sector as a whole At the same time there are a number of challenges when applying this tool
that should be resolved for practical successful implementation
Challenge
Land-based financing (LBF) is an investment tool used by governments to generate income from private
land and then redistribute it through private actions with stakeholders We can see a promising side of
the land-based approach in developing countries since land can become a profitable asset with proper
management and tax measures and the national currency will be used to protect against risks Let us draw
attention to the complex aspects that require collective decisions
Investors may experience complex diculties
Some of these difficulties are associated with raising capital and investor confidence while others are
dictated by unformed money circulation tools Key concerns include a possible land asset bubble
misunderstanding of how “unlocking” land value may work risks lack of interaction policies among
others (UN-Habitat )
Governments do not know what to do and how
The policy of government participation and coordination with private capital should be formed with the
consideration of account tax managerial and sociocultural factors The key task is also to explain how
public authorities can exchange land assets for infrastructure assets This understanding should inspire
governments to provide the necessary institutional legislative taxation and other measures (OECD and
World Bank )
87
economic eFFects oF inFrastructure investment From land-Based Financing
Tax instruments may still be unpopular
Tax policy has been and remains a sensitive issue especially as developed-country models cannot
be replicated in the context of developing countries At least six land-based financing taxation tools
exist each with its own pros and cons Tax uncertainty thus forces governments to choose between
excessively high or insufficient rates opportunities and risks (UN-Habitat )
Decentralization is considered an inappropriate step
leading to loss of control
Decentralization is an important decision as it allows cities to grow therefore infrastructure should
not be too centralized either However this step is difficult for governments that must transfer the
management of vital assets to cities On the other hand cities cannot use effective tax management or
other measures because they simply have no rights to do so (OECD )
Working to solve this complexity of problems (which can include dozens of different objections and
controversial points) can help stakeholders start land-based financing and earn revenues
Proposal
Various solutions can be proposed for more effective implementation of the LBF tool
The first step is a systematic approach
and long-term participation
Designed solutions from time to time return us to the basic concepts related to investment taxation and
institutional approaches The first solution can be a systematic approach acting across disciplines in all
areas to obtain the most effective results A systematic approach involves investing in cities as a whole
but not in individual projects which is why land-based financing involves such complex (ie “core”)
measures as legislation municipal management taxes and even reforms Analyzing the highlighted
difficulties we suggest the following measures
What needs to be done
creation of unified tax legislative enforcing policies
sharing opportunities between the public and private sectors
focus on long-term expectations and stable land management
Long-term participation implies that the processes last long are complex and require certain changes
or upgrades The creation of infrastructure and the respective economy that appears around it and
generates income takes a long time Ultimately such a large-scale problem as the provision of clean water
in developing countries requires the largest amount of investment as well as needing effective measures
88
Building the Future oF Quality inFrastructure
This is therefore not a project that investors and governments can start merely gathering enough capital
While using a long-term (systemic) approach countries can also solve the missing-middle problem by
introducing private capital to public funds (UN-Habitat )
Launching decentralization and
transferring rights to municipalities
Institutional reform is a must for the implementation of land-based financing Whether there is a
meaningful intermediary government between the national government and the local government it is
often the case that the central authority must adopt enabling legislation creating the legal framework
for the land-based financing instrument The local government must then adopt a local ordinance
implementing the instrument and setting out the details for its administration within the local context
Municipalities will be able to gain the institutional capacity to manage debt or a portfolio of built assets
This will open the way to balanced capital management Central and local authorities can be involved in
a dialogue to build win-win frameworks when decentralization becomes an effective measure not a risk
from a financial point of view among others (OECD )
From this perspective we can see reform as an opportunity to exchange municipal provision of services for
public–private partnerships which improve the quality of services delivered Grantfinancing of municipal
infrastructure can be replaced by debt financing Finally cities will be able to get quality services operating
with capital and developing infrastructure which is the basis of economic development However before
giving municipalities elevated rights it is necessary to understand that they can come to a certain financial
stability Municipal revenue streams can be improved by rational fiscal policy in other words the stability of
own-source revenues
In developing countries the government can be far from the people and grant projects do not provide
effective results especially systemic ones But decentralization makes the government closer to society
Decentralization as a set of policies and frameworks delays revenues where it works elected officials
become more responsible and the development of local government capacity increases
Land shows advantages by generating revenue
Public and private participation in land-based financing changes the outlook on what land can give
Byselling or leasing publicly-owned land economies receive income for infrastructure investments
Economies guided by the opinion of specialists should provide that the expectations from land financing
should not be overstated but rather rational The obtained revenue cannot be used in the operational
budget but must work to developing the complex infrastructure
The other related question is How does the value of private and public wealth compare? Is it possible
that public action andor investment can lead to increased private wealth? Public actions can increase
the well-being of all who are connected with the land There are many tools such as partnerships and
joint participation of the public and private sectors but another side is adherence to the policy by users of
services
89
economic eFFects oF inFrastructure investment From land-Based Financing
Parties receive income that can be further invested and capitalized Common goals bind the parties and
lead to a common result such as infrastructure development
Land financing can be used to
cover the cost of providing public goods
cover the cost of providing public infrastructure investments
stimulate the ecient use of land
receive state compensation for the private use of land owned by the party-state
cover the costs of managing private construction
increase tax revenues
create a land registration system
The parties must also understand that land is a unique asset That is why sociocultural norms highly value
land and can be perceived as a difficulty if we are not sensitive to them People must know in advance
what kind of land can be used how it relates to the people and what are the possibilities to develop it
Taxes are becoming a living tool
for infrastructure development
Properly selected tax measures in combination with an understanding of the land-based tax regulation at
all levels can play a key role in the infrastructure financing process Recurring taxes on land and buildings
can serve as follows
finance local infrastructure costs
provide benefits in public finances
lead to land value sharing
It is also important to consider the following factors
Compatibility of tax policy with the traditions of property management andor taxation in the country
Creation of a fiscal cadastre linking real estate with taxpayers This allows parties to track all existing
communications with a certain land
Tax policy should be formed taking into account modern realities If markets are ready to introduce
certain rates then it can be set
Administrations should participate in the creation of tax policy and propose their measures literally
influencing the process of infrastructure development in real time
90
Building the Future oF Quality inFrastructure
Tax policy should be the subject of active discussion in every country Many tools can be reviewed and
applied regardless of how they worked in developed countries since the market specifics vary greatly from
region to region Annual property taxes may be revised and other tools reinstated Betterment levies
especially when collected as special annual assessments can increase attractiveness for private investors
Developer exactions can mitigate the
expected negative eects of development
The objectives with which this tool may be used are region specific The infrastructure of each country
may have its own characteristics But for example developer exaction (one-time fee paid up-front
by developer as a precondition for public approval to develop land) may offset the municipal costs
associated with larger water and wastewater lines building demand for vehicle access public spaces
among others
Parties should contribute to establishing developer exactions at many levels such as legal planning
engineering and administration levels
This tool has its negative sides such as high prices which are returned to users of services Therefore
fees should be considered with caution in a system of comprehensive measures to ensure infrastructure
projects and systemic reforms
Investors should not be afraid “to enter this plot of land”
Private capital still assesses the risks of investing in developing countries There are several systemic
measures that can be taken by states and implemented at a broad level
supporting the institutional capacity of municipalities
creating a monitoring and reporting system to control decentralization
implementing measures related to debt financing
regulating the introduction of infrastructure
the public sector still has to provide important parts of the projects
governments should focus on dialogue with the private sector
Finally the debt must be expressed in the local currency since foreign income is limited in this sector
The use of the local currency also prevents the risks associated with fluctuations in exchange rates and
solves many issues of private investors
It is also worth making it clear to investors that land is an excellent source of income besides the fact that
it may be a traditional little-used state asset
91
economic eFFects oF inFrastructure investment From land-Based Financing
Land has many advantages
the management of land is more transparent land is in a fixed place
land financing may allow subnational governments to gain independence
taxes related to land ownership are generally less risky for the tax system as a whole compared to
other types of property
Many studies highlight the link between the level of urban infrastructure and economic growth
povertyreduction and the quality of life According to Mathur to of economic growth depends
on how a city’s infrastructure is developed (Mathur ) Transport is one of the most important areas
for working in this space Although the mechanism for obtaining benefits from transport infrastructure is
more like cost recovery it is a necessary step to build an effective economic chain at all times and taken
at a higherlevel
Creation of consistent policies
Consistent policies imply a holistic work of the land-based financing mechanism Parties should also
receive information on the detailed plans and projects directly taking into account the systemic approach
Data on land parties partnerships and legislation should be communicated to the parties and publicly
disclosed
Important points to note are
registration of land identification of connections—land cadastre
systemic legislation—each norm of which is in agreement with another norm
support for processes involving state participation
It is also possible that social policy is a lost moment and specialists ought to pay attention to other
negative effects associated with the growth of economies in developing countries The infrastructure will
serve as a basis for solving the set tasks but social analysis may also play an important role
However there is still an extremely important condition to be mentioned All these solutions to reduce
the infrastructure gap will only work in developing countries with growing economies It cannot be done
in crisis situations or in total poverty In conditions of severe poverty starvation or unemployment
infrastructure development will most likely not be considered a priority field That is why the first thing
a government should do is stabilize the national economy and most preferably create conditions
to support constant growth Thus countries are the stakeholders on which the development of
infrastructure also depends Governments representing the will of the whole country can find an
opportunity for dialogue with the private sector municipalities developers and civil society to provide
quality services without which further growth and investor profits will not be possible
92
Building the Future oF Quality inFrastructure
REFERENCES
Mathur O P The Financing of Urban Infrastructure Issues and Challenges Paper presented at
Mobilizing Finance for Infrastructure Conference April Ahmedabad India
Organisation for Economic Co-operation and Development (OECD) Selected Good Practices for
Risk Allocation and Mitigation in Infrastructure in APEC Economies Paris OECD
OECD and World Bank G20/OECD/WB Stocktake of Tools and Instruments Related to Infrastructure
as an Asset Class Paris OECD
Oxford Economics Global Infrastructure Outlook. Oxford UK Oxford Economics
United Nations Human Settlements Programme (UN-Habitat) Leveraging Land: Land-based
Finance for Local Governments. Nairobi UN-Habitat