In partnership with CEPT University ICRIER s Program on Capacity Building and Knowledge Dissemination on Urbanisation in India (Supported by: Capacity Building for Urban Development Unit, Ministry of Urban Development) Land Based Financing Options in Indian Cities September 18, 2014 Hotel Regenta, Ahmedabad 1
Summary of the Workshop on Land Based financing options in Indian cities The conference on Land Based Financing options in Indian cities had two sessions. Dr. Isher Judge Ahluwalia, Project leader and Chairperson, ICRIER introduced the issues related to land based financing. Dr. Ahluwalia spoke about the growing investments required in urban areas in India, scarcity of financial resources and the need to look at land based financing as a mean to finance urban infrastructure. Following are the points covered in the opening remarks by Dr Ahluwalia: - Do we have clarity on land titles? Without clarity in land titles there could be many conflicts which would increase the transaction costs when trying to monetise the enormous value of public lands for financing urban infrastructure. - The issues arising from functioning in a federal system were highlighted. In particular, the instance of when the MMRDA and HMDA tried to sell land assets, and the income tax department of the Government of India tried to put their hand in the kitty, leading to considerable confusion. - Land based financing is a very complex issue in India and it is still unclear which tools impact fees, betterment levy, development charges, etc. should be used under which conditions. Session I: Land based financing in Gujarat Chair: Dr. Bimal Patel, President, CEPT University After welcoming the Managing Director of GIFT City, Dr. Patel talked about the long history of land based financing, especially the Town Planning Schemes (TPS) mechanism, in Gujarat. Following are the main points made by Dr. Patel: - The TPS mechanism has been used to levy only betterment charges. The land value increase on account of planning and reorganisation is captured using these charges. Through a brilliant innovation, instead of asking people for money the TPS now takes a little bit of land. This land is later monetised to finance the infrastructure.. - The Sabarmati river project is essentially financed by land based financing with no use of tax payer money. 2
Presentation 1: Ahmedabad Revised Development Plan 2021: Provisions related to land management and its impact on land based financing, Mr. H. N. Thakkar, Deputy Town Planner, Ahmedabad Urban Development Authority Mr. H.N. Thakkar talked about land pooling and management and focused on the process of planning in Gujarat in general and the Ahmedabad revised Development plan 2021 in particular. Gujarat is 37% urban, while India is only 27% urban. Ahmedabad is the 7th largest urban agglomeration in India and is the 3 rd fastest growing city in the world. The Ahmedabad region contains Gandhinagar Urban Development Authority & Sanand Special Investment Region within its boundaries. Mr. Thakkar spoke about the challenges of implementing development plan /master plan, creating a land bank for the urban poor and two-tier planning for development. The two tier planning includes: Development plan at macro level This includes a vision for the region and executing it within the planning process. Ahmedabad s planning has gone through several rounds of learning from their own mistakes and/or learning from other cities mistakes. The development plan procedure includes data collection and survey, studies and analysis, policy formation, and the preparation of the draft development plan. After the preparation of the draft development plan there is public participation. Here the public can raise objections or provide suggestions. After this, the development plan is submitted to the state government for approval. Ahmedabad has had three sanctioned development plans 1) the Ahmedabad Muncipal Corporation Development plan of 1965, 2) Ahmedabad Urban Development Authority Development Plan of 1987, and 3) Ahmedabad Urban Development Authority Development Plan of 2002. Currently Ahmedabad is also has a revised development plan for 2021 which has projected the population of 88 lakhs for Ahmedabad. The presentation revolved around the adopted principles of integration of land use, different planning proposals, and integrating the mobility plan. He substantiated his point by providing information regarding topographical data for: Lake and water bodies Soil classification Natural drain pattern Municipal land parcels Town planning schemes at micro level Gujarat and especially Ahmedabad has made considerable use of town planning schemes for planning relatively smaller areas. 3
The state of Gujarat has had the following town planning acts: 1) The Bombay Town Planning Act 1915: provision of town planning scheme was provided in this act, 2) Bombay Town Planning Act 1954: The provision of development plan, 3) Gujarat Town Planning & Urban Development Act, 1976: Provided for planning for the urban development area. Presentation 2: Land based financing mechanisms adopted for large scale urban projects (Case of Sabarmati River Front Development and Bus Rapid Transit System), Dr. Vatsal Patel, Chief Town Planner, Ahmedabad Municipal Corporation Dr. Patel began by highlighting the issues with large-scale urban projects in India, pressures on urban local bodies for delivering basic services, lack of both technical and financial resources with urban local bodies, and influences of direct/ indirect control on service provision. He observed that land based financing is an efficient way for providing financial sustainability to large-scale urban projects. The major resources of capital are from Government of India and the state government, loans from local financial institutions like HUDCO and other agencies, and land based financing. His presentation focused on two large urban projects i) the Sabarmati Riverfront Development Project (SRFDP) and ii) Transit Oriented Development (TOD) along the BRTS network in Ahmedabad, and how these projects were leveraging land values for financial sustainability. The Sabarmati Riverfront Development Project (SRFDP) The Sabarmati River flows through the center of the city of Ahmedabad. The total project area is 204 hectares of which 162 hectares are reclaimed land. 19.69% (40.36 hectares) of the total project area is reserved for roads. 14.5% of the total project area (29.71 hectares) is meant for mixed land use. This land is meant for sale. 18.38% (37.66 hectares) and 13.4% (27.46 hectares) of the total land area are meant for open spaces and gardens, respectively. The guiding principles for the project ensure : - consistency with present use and future potential of adjacent areas. - a harmonious and memorable skyline. - that the development does not wall off building in adjacent areas. - that the entire river edge remains public. - generation of sufficient revenues to pay for the project. 4
Thus financial sustainability was one of the guiding principles of the project. The total cost of the project is Rs 1,200 crores. The total revenue from this project accruing from the sale of land is Rs 1,500 crores. The surplus amount is to be kept in a corpus fund reserved for operation and maintenance of the infrastructure. As an outcome of the project, it is hoped that the project will lead to planned densification. Transit Oriented Development (TOD) along the BRTS network As per the formulated policy, 200 meters wide band of area shall be demarcated on both side of the BRTS route as Transit Oriented Development Zone (TOD/TOZ) instead of development of specific transit oriented nodes. This would act as a catalyst for the real estate market. One of the objectives of the project is to encourage people to use public transport. It is anticipated that this will lead to a well-planned systematic densification of the area of about 3-4 times greater than the existing density. It is assured that finance would be generated by generation of TDR and sale of additional FSI. Discussant 1: Dr. Ravikant Joshi, Urban Finance & Management Specialist, Advisor to CRISIL Following are the main points made by Dr Joshi: - The first presentation did not provide how one is going to fund the revised development plan. One item missing was the usage of land as a tool for finance. Mr Thakkar only showed us what land parcels are available with the government and the mappings of such lands are available with the authorities. - The Baroda municipal corporation has not spent any money for land acquisition. That s the hallmark of the land pooling technique, which has been utilised in Gujarat. It is an indirect way of land based financing. - In the Sabarmati project 15% of land is available for the purpose of sale. Further, they have provided considerable land for all of their green and open spaces. - It was highlighted that town planning schemes have a lot of positives but they sometimes take 8-10 years. This should be taken into consideration in working out the cost. There is a need to consider the time dimension while working out the financing for town planning schemes. - Transfer of Development Right (TDR) becomes profitable only with artificial scarcity. This means initially you allow that area to be developed at lower Floor Space Index (FSI) and then exploit the artificial price appreciation. However, low FSI leads to green field encroachment all over city. - Land prices around major transport projects appreciate but the property tax mechanism in India fails to capture them. Further, for densification, extra TDR is given in an unplanned manner. This leads to tremendous pressures on the existing 5
infrastructure provision. There is a need to use differential FSI in a planned and systematic manner in order to raise resources. Discussant 2: Mr. Anand Sahasranaman, Executive Director, IFMR Following are the main points made by Mr. Sahasranaman: - It would be essential for every city to get a very precise understanding of the land parcel they own. A recent study showed that 48% of all public land in Ahmedabad would be enough for financing all infrastructure investment in the region for the next 20 years. - Under the TPS in Gujarat, land acquisition is a very feasible tool. This scheme needs to be applied much more widely across India. - In larger cities we can see that some of the land based schemes work primarily because values of land are pretty high in these cities. In small and medium cities, if we consider land use planning as an essential part of the strategic organisation, the question that naturally arises is how one can plan for their development. These cities might need to build up their land banks. Can some of the other ideas (such as betterment levy) be applied there? How should one think about creating the land banks in these cities? - Accountability is a major challenge when it comes to land based financing. What happens to the proceeds from the sales? What happens to the plan that is being presented as being the one that will be used at the time of action required? General Discussion: The main issues that came up during the discussion are listed below: - The TPS s success depends on well functioning land markets as prices play an important role. Price discovery in TPS is done as follows: Land sales are done with an open auction and it is an absolutely transparent system. - Is the land sold in TPS enough to finance the infrastructure and whether there are some calculations that are done to establish this? It was revealed that there are tools available for financing the TPS viz. 1) betterment levy, 2) sale of land and 3) FSI. However, majority of the funding comes via sale of land, which is generally restricted to 7 to 8 % of land. - For TPS to be used in other parts of India one needs the enabling conditions in terms of a strong legal environment. 6
- FSI as a financing mechanism was discussed in great detail. Restricting FSI and then using it as a currency is being done in Mumbai to finance various amenities. However, this has distorted the land markets in Mumbai. - Through discussions it was also revealed that in Ahmedabad, planners guide the markets, while in Hyderabad, markets guide the planner. Mumbai on the other hand is dominated by market forces. Session II: Case studies of Mumbai and Hyderabad, Chair: Dr. P.K. Mohanty, Former Chief Secretary, Government of Andhra Pradesh. In his opening remarks, Dr Mohanty highlighted different land based financing instruments that are used: - Property Taxes: Mumbai and Ahmedabad have good property tax collections while other cities do not have a good base. - Vacant Land Tax: Mumbai and Ahmedabad do not charge a vacant land tax. Bangalore and Hyderabad have a vacant land tax. - Transfer of Property: Stamp duty is an important source of revenue for state governments and in the case of Andhra Pradesh there is some transfer made to the municipalities. Presentation: Land based financing in Mumbai and Hyderabad, Mr. V. K. Phatak, Former Principal Chief, Town and Country Planning Division, Mumbai Metropolitan Region Development Authority Following are the main points covered by Mr. Phatak: - In urban India there exists a tremendous backlog of infrastructure. In order to address this, one requires tremendous investments to upgrade the existing infrastructure network. Given the issues with conventional financial mechanisms to raise revenues for the urban local bodies in India i.e. deficit in revenue raising powers, insufficient inter-governmental transfers and limited market borrowings, one has to look at land based financing in order to raise resources for infrastructure financing. - The following land based financing options are available: benefit tax, land value increment tax, impact fees, sale of development rights, regularising unauthorised developments, incentive FSI and unlocking value of public land. - Most states levy a development charge but they lack buoyancy as they are generally prescribed in absolute value. Maharashtra changed the rate to percentage of ready reckoner land rate in 2010. 7
- Land value increment tax has been successful in Colombia while UK s attempts have been unsuccessful. Overall there is a problem of measuring the benefits accruing from an infrastructure project, thereby affecting its acceptability. In India, the TPS has provisions for betterment levy. MMRDA also provides for betterment levy but has never used it. - Impact fees require a legislative backing to be successful. This is highlighted in the case of Impact Fees in the United States. They are only used for investments in new developments and not for existing backlog. Impact fees generally require a capital investment plan. - Sao Paulo has successfully used sale of development rights to finance redevelopment of areas (urban operations). They do this by auctioning development rights CEPACs. Chennai, Mangalore Mumbai, and Ahmedabad make use of development rights to raise revenues. However, Mumbai s attempt was struck down by the high court and the town planning act has since been revised. - Fees charged for regularising unauthorised development have been a lucrative source of revenue for Maharashtra and Andhra Pradesh. - TDR in the United States is used for conservation of the farmland and heritage buildings. It is an indirect fiscal tool in order to avoid monetary compensation. In Mumbai the success of TDRs is due to constrained land supply. - Public lands in urban areas are inefficiently used and can be used in a strategic manner to finance the infrastructure requirements in cities. However, most such public lands are owned by authorities or ministries belonging to the state or central level and channeling the funds to local infrastructure would be a challenge. - In the year 2014-15, it is estimated that collections from octroi for MCGM are the most important, followed by revenues from land based instruments and revenues from property tax. - Over the five years from 2010-11 to 2014-15, per capita Land Based Financing Collections for MCGM have increased by 162 percent whereas GHMC has seen a fall in per capita LBFCs. - Receipts from land based financing should be only used for capital expenditures. - Revenues from land based financing instruments should be seen as supplementing other avenues and should not be seen as a substitute to conventional sources of local finances. - Regularisation of unauthorised development should not be seen as a legitimate fiscal source. - It is important to have one single tax and avoid multiple levies on the same base. This will lead to greater acceptance and hopefully would not affect the real estate market. 8
Discussant 1: Prof. Abhay Pethe, Department of Economics, University of Mumbai The main points made by Prof. Pethe were: - The take away from the paper is the fact that in terms of exploiting land based financing, we are far from being anywhere near satisfactorily placed in India. - It appears that by way of pre-requisite, we need the land market to be functional. A pre- requisite will be to have good documentation of public lands and their management for which enough literature and best practices in the world are available. Thus ownership and management of private and public lands are issues of great significance. - Land is a potent spatially located resource. We need to reflect on the meaning of land based financing/leveraging for infrastructure. Whereas there is the actual mass of land which is given, the effective land supply is a derived concept which depends on the parametric environment, the state of the economy and policy framework. - The theoretical pedigree for land based financing is provided by Henry George: only one tax; the land tax. - Let us look at the incentive structure underlying the Henry George position: Taxing any income created due to human effort is a disincentive hence should not be taxed. As a corollary, only such increases in value of land that are in the nature of externalities, should be taxed away (no effort by the land owner). Thus the inspiration clearly, is Ricardian logic, where the rents were in the nature of unearned income due to a differential, which led him to take the famous position that the interests of the land lords are inimical to the interests of the society. - Do resources coming from regularisation or penalties qualify as land based financing? What about the learning from it viz., the perverse incentive that it creates? Is it a good idea to create bad policies and then enjoy the fruits (contra economic principle)? - Capturing the increase in land value is acceptable, but who gets the spoils? Can or should one leverage land for economic growth in an egalitarian manner? - Are some elements in land based financing easier for green field projects as compared to brown field ones since the latter are already being burdened by State and Central taxes. - In the context of developing countries, given the inequality of stocks and flows (at the mean level of flows) extant in the economy, leveraging lands (especially private lands) will necessarily increase the inequalities. Public expenditure programs must mitigate this process. - Public policy will have to navigate through the problems related to the optics of anti-poor policies and to that extent will be difficult to carry out. 9
Discussant 2: Mr. B. P. Reddy, Urban Planning Consultant, Andhra Pradesh Urban Finance and Infrastructure Development Corporation Limited - Hyderabad has tried some innovative ways to extract value of land for financing infrastructure needs. Under Dr. Mohanty s leadership as municipal commissioner of GHMC Hyderabad has levied many charges on land development. - Land can be a major source of finance. At different stages one makes use of different land based financial tools such as 1) a non agricultural levy is applied for converting agricultural land to a non agricultural use 2) a charge is applicable for a change of land use from residential to commercial etc. - The objective of building penalisation scheme was not to make revenues but was to provide an opportunity to residents on unplanned layouts to improve their structures. General Discussion: The main issues that came up during the discussion were: - Hyderabad levies around 15 charges/fees on land values. However, since these fees are charged at different stages of land development, it could be said that it is justifiable. - Mumbai makes use of FSI to raise resources. Planners do not decide the FSI in Mumbai. There are different forces that decide the FSI. When FSI was raised by 0.33 in Mumbai it was not raised by the planners or MCGM; it was planned by the Finance Minister of the state government and the revenue raised was to be shared between the state government and the MCGM. By contrast, Hyderabad does not have any concept of FSI. That is why Hyderabad has to levy more charges for infrastructure provision. Market mechanisms control the height of the building in Hyderabad. This is done through the use of Impact fees. Buildings that want more floor space will have to pay higher impact fees. - Fees for regularising unauthorised development are an important source of revenue for some cities. However, this is setting a bad trend as this incentivises inefficient planning, which leads to unauthorised development. 10