Value Capture Financing: A Pathway to Equitable Development and Rapid Infrastructure Expansion

Infrastructure development in India, particularly in the realm of National Highways (NH) and state/district roads, faces significant challenges. These include rising land acquisition costs, the need to maintain reasonable toll charges for users, and ensuring rapid development to support commerce and industry. With a growing focus on equitable development, Value Capture Financing (VCF) emerges as a sustainable and inclusive model to address these challenges.

This article explores the current challenges in financing infrastructure projects, highlights innovative approaches such as those adopted in Andhra Pradesh and Maharashtra, and outlines the transformative potential of VCF as a policy instrument for equitable value distribution.

Challenges in Infrastructure Development

1. Rising Land Acquisition Costs

• Delays in Land Acquisition: Landowners often resist acquisition due to low compensation rates, while neighboring landowners benefit from value appreciation post-project completion.
• High Financial Burden: Land acquisition forms a significant portion of project costs, particularly for highways and industrial hubs. Post laying of roads, acquisition of land by state for development of commercial or Industrial hubs will become much more costlier.
• Litigation Risks: Disputes over compensation delay project timelines and escalate costs.

2. Balancing Toll Charges and User Affordability

• Cumulative Toll Burden: Frequent toll payments for segmented roads often result in costs that exceed public transport fares for private vehicle users.
• Public Opposition: High toll charges can lead to dissatisfaction among road users, especially for essential connectivity routes.
• Revenue Sustainability: Toll revenues need to cover not just construction costs but also maintenance, creating pressure to increase charges.

3. Need for Rapid and Balanced Development

• Commerce and Industry Growth: Efficient road networks are critical for economic development, especially for regions aiming to attract industrial investments.
• Maintenance and Upkeep: Ensuring that roads remain in good condition requires consistent funding, which is challenging without sustainable financing models.
• Integration Across Levels: Coordination between the center and states is essential for balanced development of NHs, state roads, and district roads.

Innovative Models: Lessons from India and Abroad

1. Andhra Pradesh’s Capital Region Development Model

• Land Pooling Mechanism: Under the Andhra Pradesh Capital Region Development Authority (CRDA), landowners pooled their lands and were compensated with developed plots near the planned capital city. This approach ensured that landowners benefited from future value appreciation rather than being permanently displaced.
• Equitable Value Distribution: By sharing future benefits with landowners, the model reduced resistance to land acquisition and accelerated project timelines.

2. Maharashtra’s Mumbai-Nagpur Expressway

• Industrial Hubs Along the Corridor: The Maharashtra State Road Development Corporation (MSRDC) acquired land not only for the highway but also for industrial and infrastructure hubs along the corridor. Revenue from leasing or selling land in these hubs helps offset road construction costs.
• Transit-Oriented Development Principles: Though not explicitly labeled as TOD, the integration of industrial hubs aligns with TOD principles by leveraging infrastructure investments to spur regional growth.

3. Global Examples

• Hong Kong’s Rail + Property Model: Land near transit hubs is developed and leased to fund infrastructure costs.
• Japan’s Urban Transit Development: TOD strategies focus on integrating commercial and residential development with transport projects.
• United States’ Value Capture Financing: Mechanisms like betterment levies and tax increment financing (TIF) help fund highways and urban transit projects.?

Value Capture Financing (VCF) as a Policy Instrument

What is VCF?

VCF captures a portion of the value created by infrastructure projects to fund their development. By ensuring that beneficiaries contribute to the costs, it creates a sustainable and equitable financing mechanism.

Proposed Applications of VCF

1. Betterment Levies: Levy taxes on landowners whose properties appreciate due to infrastructure projects.
2. Land Pooling: Encourage landowners to pool land in exchange for developed plots or revenue sharing.
3. Development Charges: Impose fees on real estate developers who benefit from proximity to highways or hubs.
4. Commercial Hubs: Develop industrial or retail hubs near highways to generate revenue from leases or sales.

Quantifiable Parameters for VCF Implementation

1. Additional Land Acquisition: Acquire up to 15-20% additional land beyond the highway’s immediate requirements to facilitate future industrial and infrastructure hubs. Example: For a 100-km highway corridor, acquire these lands in a buffer zone of up to 5 km on either side for potential development.
2. Tax Increment Financing (TIF): Impose a progressive levy on commercial and residential land within 0-5 km radius of the project: 0-1 km: 1-1.5% of property value annually. 1-3 km: 0.75-1% of property value annually. 3-5 km: 0.5-0.75% of property value annually.
3. Reduction in Toll Charges: Redirecting 15-25% of VCF revenues can reduce toll charges by up to 10-20%, improving affordability for road users.
4. Revenue Enhancement for Local Bodies: Local municipal or panchayat bodies can see a 15-30% increase in annual revenues from betterment levies and development charges. ?

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Benefits of VCF

1. Equitable Value Distribution: Landowners who lose land are compensated fairly, often with opportunities to benefit from future development.
2. Reduced Toll Charges: Revenue from VCF mechanisms can offset project costs, allowing for lower toll rates for road users.
3. Faster Project Implementation: By reducing resistance to land acquisition, VCF accelerates timelines.
4. Sustainable Financing: Creates self-sustaining models for infrastructure development without overburdening taxpayers.

Policy Recommendations

1. Institutionalize VCF as a Policy

• Make VCF a standard instrument for financing infrastructure projects across India.
• Develop a clear legislative framework to guide its implementation.

2. Integrate VCF in NH Projects

• Apply VCF principles to National Highways to reduce costs and ensure balanced development.
• Use mechanisms like betterment levies and development charges to subsidize toll rates.

3. Adopt Land Pooling Models for Urban and Rural Hubs

• Extend the Andhra Pradesh land pooling model to roads near metros, towns, and rural hubs.
• Offer smaller residential or commercial plots near industrial hubs to landowners as compensation.

4. Encourage Public-Private Partnerships (PPPs)

• Collaborate with private developers to monetize land near infrastructure projects.
• Use PPPs to share risks and benefits equitably.

5. Monitor and Adjust

• Regularly evaluate the effectiveness of VCF mechanisms.
• Adjust policies to ensure fairness, efficiency, and public satisfaction.

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Conclusion

Value Capture Financing (VCF) represents a transformative approach to addressing the challenges of rising land acquisition and infrastructure costs while balancing affordability for road users. By aligning the interests of landowners, developers, and the public, VCF ensures equitable value distribution and fosters sustainable economic growth. The success of models in Andhra Pradesh and Maharashtra demonstrates the potential of VCF to reshape India’s infrastructure financing landscape. It’s time for policymakers to institutionalize VCF as a cornerstone of India’s development strategy.

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