LAND – A POSSIBLE SOURCE OF FINANCING URBAN INFRASTRUCTURE?

LAND – A POSSIBLE SOURCE OF FINANCING URBAN INFRASTRUCTURE?

 A few months ago, the Hyderabad Urban Development Authority (HUDA) auctioned 69 acres of land for Rs. 703 crore, and said they would use the funds to partially fund the Outer Ring Road in that city. This example - and others across the country – highlights the potential of urban land as a source of financing urban infrastructure. However, besides one-off anecdotes, we have not done this in any coherent, structured manner. To put the auction figure in context, this one transaction generated four times the annual property tax collection of Hyderabad Municipal Corporation. Paradoxically, our cities are starved of revenues when urban land prices are exploding.

 One country that has used land as a significant financing source is China. In a presentation on Shanghai’s infrastructure development, Qiu Wenjin, a city official, stated that in the 16 years between 1989 to 2004, Shanghai invested 2300 billion RMB (about $300 billion) in fixed asset investments, of which 540 billion ($70 billion) was allocated to urban infrastructure. Where does such huge amounts of money come from? He said, “The answer lies in investment and financing reform to amplify the government investment effect. ‘Using the money of the younger generation’ (i.e. borrowing), ‘Using the money of the elder generation’ (i.e. land sale) and ‘Using the money of the current generation’ (i.e. savings) summarise the three periods Shanghai has gong through.”

 In the first period - mid 80s to early 90s – Shanghai borrowed money. It established 10 big government investment companies as the main financing entities, covering industry and urban construction. In the second period – the mid 90s – financing was mainly through land sale. As Wenjin says, “Land source is a huge amount of wealth in the government hand. But for a long time, it remained idle.” Shanghai utilized land value of the peripheral city, generating close to $15 billion. In the third phase of the late 1990’s, after the Asian financial crisis reduced land values, investments were financed through domestic savings.

 However, while there is much to learn from the Chinese model, there have also been criticisms: of funds being generated outside the budgetary system – called extra budgetary funds or EBFs; of massive corruption; of mis-allocation of investments into shopping malls and commercial complexes.

 In an analysis of Chinese public finances, academics Bird and Wong said, “Extrabudgetary funds (form) 18-27% of GDP. EBFs are not all bad, of course. They have provided considerable and arguably desirable autonomy to local governments. (But) they have also added considerably to the obscurity of the general public finance scene in China. No one really knows what is going on within the bowels of China’s complex and opaque fiscal system.” The report goes on to say, “Getting public money is never easy. Unfortunately, spending it sensibly seems to be equally difficult, or so the Chinese experience suggests. The general quality of reporting at subnational levels is poor, financial reports are difficult to compare, and it is an extremely complex exercise to consolidate government financial information.”

 In addition to these fiscal issues, there are other concerns. In a report titled, “Effects of land acquisition on China’s economic future”, Chengri Din writes of the need to “achieve a balance between farmland preservation and urban spatial expansion”, and of fair compensation to farmers – “Zhijiang province alone has more than 2 million farmers who have lost their farmland. In 2002, more than 80 percent of cases filed by peasants were related to land acquisition.” 

Clearly, if we can learn how to monetise land from the Chinese, we should also take lessons on how not to do this. At a fundamental level, there is the question about who ultimately owns land, related to a society’s beliefs about the relationship between people and land. There are concerns about the “commodification of land”, its treatment as a marketable product to be sold for profit. These concerns are related to ideological positions about development and markets. My own sense is that we are no clairvoyants, either opponents who want to reverse market-based development, or advocates who want to accelerate the pace, believing that India is already moving too slowly. Risk is inherent in all decisions. Our best course would be to respect the democratic structure that we are building alongside our economic machine, to help us understand and respond to the pulse of the people as we move ahead.

 If we want to use land as a source of financing our urban infrastructure, we need to focus on four key issues. First, the institutional structure for urban land monetisation needs to place city governments at the centre. Hyderabad Municipal Corporation needs to be driving land management, not special vehicles like HUDA. Second, the manner of land assembly needs to be clearly stated. The first order of business is to compile a land bank of all publicly-held land before any acquisition is made. As one example, the state of Rajasthan has compiled a state-wide Urban Land Bank. Third, the uses to which land sales are applied requires a Land Funding Policy. This could identify appropriate infrastructure with marginal cost recovery – solid waste disposal sites, sewage treatment plants, public spaces, city roads, affordable housing, etc. And fourth, complete transparency in how the funds are managed – none of the extra-budgetary stuff of the Chinese model. There is no justification in opening the funding taps if the buckets of our cities’ budgets have holes in them.

 We are walking a razor’s edge as cities look towards land as a source of financing urban infrastructure – if we don’t do it right, it can result in misappropriation, inequity, environmental degradation; if we do get it right, however, we can accelerate the infrastructure build-out so that we are not constantly playing catch-up; reduce the debt that cities will otherwise have to carry; and build sustainable cities that cater to the needs of all residents.

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The author is founder of Janaagraha. ramesh@janaagraha.org