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Governance and Public Sector Managemen

Innovative Value-Capture Financing Mechanism and Functioning Cities for Achieving Sustainable Urbanization

  • Project Name: The Urbanization–Poverty–Inequality Triangle in Asia and the Pacific
  • Region/Country: Regional/All Developing Member Countries
  • Sector and Themes: Governance and Public Sector Management
  • Year: 2013
  • Project Leaders: Jiang Yi
Innovative Value-Capture Financing Mechanism and Functioning Cities for Achieving Sustainable Urbanization
A collaborative effort led by several ADB regional and thematic departments helped in understanding the complex urbanization–poverty–inequality triangle. In the photo is ADB Vice President Bambang Susantono and delegates in the High-Level Round Table Discussion held in Bangkok, Thailand in May 2019.

To function as a vibrant job market, cities need affordable and efficient public transport that is well regulated.

—Yasuyuki Sawada, chief economist, ADB

Development challenge

ADB estimates that urbanization plans will cost $1.7 trillion between 2016 and 2030. They will require innovative funding mechanisms for the necessary infrastructure projects. Value capture is one such mechanism that has great potential to provide governments with substantial revenues to fund their ambitious objectives. It aims to identify comprehensive benefits of infrastructure investment projects and find mechanisms so that beneficiaries contribute proportionately to the funding of the investments. To support these funding needs, ADB needs to bolster its understanding of the relationship between urbanization, poverty, and inequality; and increase its capacity to implement mechanisms like land value capture to help DMCs fund sustainable plans.

Solution

A collaborative effort led by several ADB regional and thematic departments helped in understanding the complex urbanization–poverty–inequality triangle. Research by ADB and ADBI culminated in a deeper appreciation for the potential of land value capture as an innovative funding mechanism for infrastructure projects. The project worked with universities and think tanks to provide evidence-based case studies and quantitative research solutions to highlight the potential of this approach and provide steps for its implementation in big cities.

Knowledge products and services delivered

The project supported datasets in infrastructure financing. A database built on novel geo-referenced urban data spanned 43 economies from the Asia and Pacific region. It used satellite-based remote sensing data from 1992 to 2016, providing valuable data for research on urbanization. It collected shape, area, population, and city characteristics covering 1,500 cities in these economies. Another database collated detailed trip data from Google Maps in selected Asian cities to obtain up-to-date measures and understanding of congestion across major cities in the region.

The project produced several evidence-based reports including Sustaining Transit Investment in Asia’s Cities: A Beneficiary-Funding and Land Value Capture Perspective.. The report provided quantitative analysis on the potential for land value capture and presented steps to implement this in megacities like Bangkok, Jakarta, and Manila. It also generated 32 background papers and 10 research papers on the urbanization–poverty–inequality triangle and value-capture financing, which were widely disseminated through workshops and conferences with the DMCs.

ADB
The project generated background papers and research papers on the urbanization–poverty–inequality triangle and value-capture financing, which were widely disseminated through workshops and conferences.

Impact and results

Research on urbanization-related topics has led to policy dialogue and work on urbanization–growth issues. The Government of Indonesia has included land value capture as a funding mechanism for public investment projects in its National Medium-Term Development Planning 2020–2024 and has requested ADB’s advice on this. An ongoing project in coordination with NITI Aayog, the premier policy think tank of the Government of India, is sensitizing state governments on urbanization issues as they relate to growth and economic opportunities.

Lessons for Replication

This project provides a template for countries to design and implement land value capture to fund infrastructure projects by increasing government revenues. The project can also inform development of city-related geo-referenced databases, which can be a valuable resource for research and policy making. The project highlighted the importance of active stakeholder engagement and participation at every stage.

ADB

Adopting land value capture in cities like Jakarta, Bangkok, and Manila creates a triple win. The first win is that it helps finance metro systems and thus improves overall urban mobility. The second win is that if used properly, it reduces the subsidy levels required in running metro systems, since the money can also go toward operating costs. For the third win, the money generated from land value capture creates the fiscal space to use government finance productively for other sectors—such as health, education, and slum improvement.

—Bambang Susantono, Vice-President for knowledge management and sustainable development, ADB