Investment in urban infrastructure such as new roads, public utilities or parks invariably increases real-estate prices. In Pakistan, stories of riches earned overnight due to new highways passing through agricultural lands are common.
Let’s look at the example of Lahore Ring Road. The original northern loop, completed in 2009, was built at an estimated cost of Rs53 billion, including the cost of land acquisition. The project was undertaken by the government’s own funds. While the road was of great benefit to motorists, the returns to landowners in adjoining areas were even higher, as it provided improved access to their lands. These returns, however, were enjoyed only by a handful of original landowners, lucky speculators or those who had access to privileged information, without any share for the government.
This greatly reduces the state’s incentive to build infrastructure solely for local considerations. Imagine the impact that a new interchange on Lahore-Islamabad Motorway can have on neighbouring areas. If the state can adopt a solution to claim a share in this increase, not only can it finance the interchange itself but can also benefit local landowners through increase in land value and citizens through better access. This precisely is the role of land-based financing.
Land-based financing (LBF), a term used for unlocking urban land values, provides a mostly untapped source for financing infrastructure development. The underlying idea is simple. If new urban infrastructure is going to increase the intrinsic value of land, the same increase can also be used to finance the project itself. Governments get access to this new source of finance and landowners’ assets become more valuable. It’s a win-win proposition if structured appropriately. India, China and so many other developing countries have successfully experimented with LBF transactions and financed a great deal of their urban infrastructure through this model. In Ahmedabad, for instance, the 76km city ring road was self-financed through an innovative land pooling and reconstruction framework, where the increase in land prices due to construction of ring road was channelled back to the government.
LBF can take many shapes and forms and in most cases is used in addition to other financing avenues. The most simple form includes land monetisation through sales or lease of land, but more complex models could include a levy on land developers around new infrastructure; a city-wide infrastructure charge to fund new projects or even collateralising state land to seek initial financing followed by repayment through sales/lease of land with much increased value. Such a structure can generate upfront revenues and reduce dependence on debt or service charges and toll payments.
During recent years, significant investment has gone into urban infrastructure in major Pakistani metropolitan cities. Ring roads, metros and urban transportation systems and solid waste management systems seem to have taken priority for all political parties, apparently following the lead of Punjab. But this improved infrastructure is also leading to rapid urbanisation and cities’ needs are outpacing these investments. While there are no recent precise estimates of infrastructure investment gaps for Lahore, Karachi or other major urban centres, according to an earlier World Bank study, the country needs to invest seven-nine per cent of GDP in infrastructure until 2020 to close its infrastructure gap. At current GDP estimates, this translates into approximately $20-25 billion worth of annual infrastructure investment inflows, required every year.
These hefty requirements far exceed public sector’s available fiscal space and LBF provides a viable alternative. It is not that LBF is an entirely new concept in Pakistan. Sales and lease of state lands, commercialisation fees charged by development authorities due to change in land-use, or even land acquisition for housing societies through sales of allocated land files are all examples of LBF. But there is a need to go for more advanced projects structures aimed at developing new urban infrastructure. This can unlock untapped sources of revenue for the government and support the political ambitions to transform cities.