What Happened?
Sao Paulo, Brazil, has leveraged Value Capture to raise nearly $2 billion to support roadway improvements and new housing infrastructure. Value Capture provides municipalities with funding by selling bonds to developers.
The Goal
Value Capture is part of an innovative financing tool that many cities in Latin America are taking advantage of when seeking our sources of public revenue to pay for infrastructure projects. Value capture models involve cities creatively using regulation, planning and investment to get more value from available land. In Sao Paulo, city officials upzone an area to enable more intense development.
To generate the capital, city leaders identify a redevelopment zone and issue bonds which are sold to developers through an auction. Developers purchase the bonds and are then entitled to build larger buildings and infrastructure that what is normally permitted within the area. The profits made from the bonds are then put toward public projects including housing, roads and other infrastructure construction within the redevelopment zones selected.
Sao Paulo has been issuing redevelopment bonds for the past 12 years, which has generated nearly $2 billion to fuel essential projects in underserved areas.
Making Value Capture Work
While Sao Paulo utilizes upzoning to generate a windfall, other cities may enact a value capture model with public investments. An area in need of redevelopments to spur economic activity may benefit, for example, from construction of a public transit line nearby. When more amenities are added to, or improved in an area, land value increases and economic activity rises. The foundation of value capture models are all the same: generating capital to be redistributed to citizens equally through public projects.
According to Martim Smolka’s policy focus report on value capture, Latin American countries are passing legislation to support value capture principles and tools to mobilize projects for the benefit of the community at large. When implemented properly, value capture strategies can result in regional economic stabilization and fiscal decentralization. Proponents of value capture also report increased social awareness, support for public-private partnerships and demand for equitable public policy responses to fiscal and social issues.
How value capture can work locally depends on land laws of the region. In Brazil, landowners have limited property rights compared to the United States. Therefore, selling building rights to developers was effective in generating capital. In the United States, on the other hand, cities leveraging different tactics to access funding including:
- Property taxes
- Special assessments on developers
- Tax-increment financing
- Developers to pay a share of infrastructure costs
Value capture models are designed to supplement funding strategies when gaps arise, not provide 100 percent of the capital needed for public infrastructure projects. Smolka argues the success of a value capture effort depends on a variety of factors including:
- Management skills to handle a variety of agencies and resources
- Research, best practice and information sharing to overcome obstacles and enable long-term sustainability
- Community members recognizing a problem and understanding public intervention will provide a greater benefit or solution
Teaming Up For The Greater Good
Gov1 has stayed abreast of the latest trends in public-private partnerships that are enabling local projects to launch despite gaps in public funding.