IDB study offers ways to finance sustainable urban growth
Cities in Latin America and the Caribbean are growing at breakneck speed. The million-dollar question is– how should they manage and finance their sustainable development so they can continue to expand and at the same time optimize the use of space and be a comfortable place to live in?
The key to renovate some areas, densify others, preserve the public heritage and enable new building locations could be in capturing the increases in property value. This could help cities manage their resources more efficiently and reduce their dependence on central governments, according to a new study released by the Inter-American Development Bank (IDB) titled Expanding Land Use and Value – Capturing Property Value Increases in Latin America and the Caribbean (only in Spanish).
The authors define “value increase capture” as municipalities’ ability to benefit from the real estate value rise that results from infrastructure improvements (access to highways, road paving, public lighting, sewers, etc.) or the implementation of new land-use rules (e.g., from rural to urban, or from residential to commercial). Typically, these increases, although they depend on public actions, benefit only private property owners.
The study stresses that there is no one formula to tackle all the different needs of the region’s cities. “We have found that resource capture mechanisms can vary dramatically, not just from country to country but also among cities within a same country,” says Andrés F. Muñoz, IDB specialist of Fiscal and Municipal Management Division.
Different capture formulas identified by the study include taxes, improvements fees, regulations, and construction rights sales:
- Taxesinclude property taxes and a variant called “tax increment financing.” These levies, quite common in the U.S., where they were introduced in 1952, allow municipalities to issue bonds to finance public investments based on the estimated revenue increase over a given period of time.
- Improvement fees, also called appreciation fees, are widely used in Latin America and the Caribbean, and particularly in Colombia, where they have been in place since 1921. By 2012, Bogota and eight other Colombian cities were in the process of collecting $1 billion each from these fees.
- Regulationsinclude a wide variety of mechanisms that the public sector can use to monetize the land value benefits generated by its interventions. The most common are levies or urban planning agreements: outlays in cash or kind in compensation for the right to develop. For example, in Puerto Norte, a location in the Argentine city of Rosario, the municipality required developers who won the right to build in a former portside area, to build roads and other amenities and to cede 15 percent of the land for public areas and facilities.
- Construction rights salesare mainly used in areas marked for densification. A minimum urban utilization rate is set, and any usage above that value triggers a compensation payment. In Sao Paulo, Brazil, potential additional construction certificates –a type of rights in which compensation is paid for at a market price determined by public auction– garnered $2.2 billion between 2004 and 2012. The proceeds were invested in infrastructure and housing projects.
The study, authored by Andrés G. Blanco, Andrés F. Muñoz and Vicente Fretes Cibils, surveyed 17 projects in nine cities from five countries in the region: Argentina, Brazil, Colombia, Ecuador and Uruguay.
“Urban land value capture is already reaching maturation point in Brazil and Colombia, where it has been in use for nearly 30 years; it is in a developing phase in Argentina and Uruguay, where some innovative experiences have already taken place; and is still in its initial stages in Ecuador, although the city of Cuenca is already making a systematic and effective use of special compensation for public investments,” indicates Andrés G. Blanco, IDB senior specialist of Housing and Urban Development Division.
Value capture is also expected to free up funds for social housing development, a feature still in its preliminary stages but already visible in cities like Bogota and Quito.
The study can be accessed and downloaded free on www.iadb.org/suelos
The Inter-American Development Bank is a leading source of long-term financing for economic, social and institutional projects in Latin America and the Caribbean. Besides loans, grants and guarantees, the IDB conducts cutting-edge research to offer innovative and sustainable solutions to our region’s most pressing challenges. Founded in 1959 to help accelerate progress in its developing member countries, the IDB continues to work every day to improve lives.
- Mildred Rivera