Value capture

India’s urban population has grown by 32% from 2001 to 2011 as compared to 18% growth in total population of the country.

As per Census 2011, 31% of the country’s population (377 million people) live in cities, and contribute to 63% of the country’s GDP. The urban population is projected to grow up to 600 million by 2031.

With increasing urban population, the need for providing better infrastructure and services in cities is increasing.

Currently, the different sources of revenue that municipal corporations have access to include: (i) tax revenue (property tax, tax on electricity, toll tax, entertainment tax), (ii) non-tax revenue (user charges, building permission fees, sale and hire charges), (iii) grants-in-aid (from state and central governments), and (iv) debt (loans borrowed from financial institutions and banks, and municipal bonds).

While cities are now required to raise more financing for urban projects. Value capture can be used as a source for urban fund.

Value Capture as practiced widely in the world is based on the principle that private land and buildings benefit from public investments in infrastructure and policy decisions of Governments (eg. change of land use or FSI).

Appropriate VCF tools can be deployed to capture a part of the increment in value of land and buildings. In turn, these can be used to fund projects being set up for the public by the Central/State Governments and ULBs. This generates a virtuous cycle in which value is created, realized and captured, and used again for project investment.

The different instruments of VCF include: land value tax, fee for changing land use, betterment levy, development charges, transfer of development rights, and land pooling systems.

For example, Karnataka uses certain value capture methods to fund its mass transit projects.  The Mumbai Metropolitan Region Development Authority (MMRDA), and City and Industrial Development Corporation Limited (CIDCO) have used betterment levy (tax levied on land that has gained in value because of public infrastructure investments) to finance infrastructure projects.

Practice questions:

Which of the following can be the source for urban funding apart from municipal taxes?
      a)  Municipal bonds

      b)  Loans borrowed from financial institutions and banks

      c)  PPP

      d)  All

Ans: d

Exp: According to the Smart City Mission cities may raise these funds through: (i) their own resources such as collection of user fees, land monetization, property taxes, etc., (ii) finance mechanisms such as municipal bonds, (iii) leveraging borrowings from financial institutions, and (iv) the private sector through Public Private Partnerships (PPPs).

 The Ministry of Urban Development started assigning cities with credit ratings. What is the benefit                    of it?
     1.It helps investors decide where to invest and determine the terms of such investments (based on                 the expected returns).
     2. It helps the government in providing fund to cities in better form.


      a)  Only 1

      b)  Only 2

      c)  Both

      d)  None

Ans: a

Exp: In September 2016, the Ministry of Urban Development started assigning cities with credit ratings.  These credit ratings were assigned based on assets and liabilities of the cities, revenue streams, resources available for capital investments, accounting practices, and other governance practices.

Of the total 20 ratings ranging from AAA to D, BBB is the ‘Investment Grade’ rating and cities rated below BBB need to undertake necessary interventions to improve their ratings for obtaining positive response to the Municipal Bonds to be issued.  By March 2017, 94 cities were assigned credit ratings, 55 of which got ‘investment grade’ ratings.

Credit ratings indicate what projects might be more lucrative for investments.  This, in turn, helps investors decide where to invest and determine the terms of such investments (based on the expected returns).