Learn more about the climate–land value connection at our Land-Based Climate Finance page. 

In the Chinese city of Zhengzhou, a manufacturing center located roughly halfway between Beijing and Shanghai, eye-stinging smog routinely put the metropolis on lists of the most polluted cities in the world. About 10 years ago, local leaders joined a comprehensive national clean air action plan, initiated by multiple central government departments and designed to reduce emissions from industry, energy production, land use, and other consumptive activities. 

A few years later, the results were literally clear—nothing dramatic, but more blue skies, and enough of a difference to influence social behavior such as people’s willingness to travel and be outside. And a team of researchers discovered something else: the air-quality improvements correlated with across-the-board increases in property values. 

Using a spatio-temporal model that clearly quantified the association between cleaner air and land values, the researchers determined that improving air quality by 10 percent led to citywide increases in property values of 5.6 percent, said Erwin van der Krabben, professor at Radboud University in the Netherlands. Over time, that could translate to a potential uplift of $63 billion, Van der Krabben said. 

“We can predict, if you further improve air quality, how much value you will get, and so on,” said Van der Krabben, who is documenting the ramifications of climate action globally. He recently coauthored a Lincoln Institute working paper on air quality and land values in China with Alexander Lord of the University of Liverpool’s School of Environmental Science and Guanpeng Dong, professor of quantitative human geography at Henan University (Lord, Van der Krabben, and Dong 2022). 

The idea that environmental action leads to higher land and property values may seem obvious to some, but for the most part, it has not been well demonstrated. The kind of analysis done in Zhengzhou is important because it directly links environmental improvements to increasing value. Demonstrating that link is crucial in making the case for a financial tool that could be essential for addressing the climate crisis: land value capture. 

Once a little-known financial instrument, value capture is used around the world to help fund transit, affordable housing, open space, and other public infrastructure. The approach calls for developers and landowners to contribute a portion of the increases in property value, or land value increment, that are prompted by public investment and government actions. Municipalities use the resulting revenue for infrastructure or other projects that benefit the public (Germán and Bernstein 2020).  

As the world prepares to spend trillions of dollars in a massive effort to transition from fossil fuels, reduce emissions, and build resilience, value capture could help close the global climate finance gap, particularly at the local level. Establishing that what’s good for the planet is good for the economy, Van der Krabben said, gets to the heart of the fiscal argument to use value capture. In China, where land is state owned and leased to developers, land value increases get built into the price developers pay. “So if Chinese cities act in a rational way, if they invest that additional income from land leases, if they continue investing that in cleaner air, then you have this kind of virtuous cycle,” he said. 

Accordingly, increasingly sophisticated valuation and assessment methodologies are being deployed to describe the impact of government action on land and property values—and not just detailing how a new transit station or a flood-resilient park creates uplift in a local neighborhood, but how broader policies, like clean air requirements or the promotion of walking, biking, and transit, can have a positive economic impact across a wider catchment.  

The “virtuous cycle” analysis may make not only a powerful economic argument for a shared responsibility in financing climate action, but a moral one, too. In many places, private developers and landowners generally walk away with the windfalls created by public investments. 

“There’s a well-documented lack of funding for the action that’s needed to address the climate crisis,” said Amy Cotter, director of Climate Strategies at the Lincoln Institute. “Precious little of it operates like land value capture: created by the very action it enables, within local control.” Land value capture “won’t solve climate finance, but we see its significant potential to fill an important gap,” Cotter said. 

ONE COMPELLING FEATURE of the Zhengzhou air pollution case study is that the benefits were spread across an entire city. But a wide range of projects and policies that can contribute to climate resilience are manifesting themselves economically in urban contexts, whether at the scale of one city block or an entire neighborhood: 

• The Eco Efficiency Ordinance for the Metropolitan District of Quito, which won a Guangzhou Award for Urban Innovation in 2021, incentivizes energy efficiency and density by selling developers the right to construct taller buildings if the projects have green elements and are near transit. Since the city adopted the ordinance in 2016, 35 projects have been approved that penciled out so well, developers had no issues returning a portion of their profits through this value capture tool. The city will invest the $10.7 million raised so far in improvements such as parks and affordable housing, and is making the ordinance part of its new land use and management plan. 
• A study by the Center for Neighborhood Technology and SB Friedman Development Advisors found that green stormwater infrastructure installations in Seattle and Philadelphia, such as rain gardens and swales, resulted in statistically significant increases in sales prices of homes nearby (CNT and SB Friedman Development Advisors 2020). Doubling the square footage of rain gardens, swales, planters, or pervious pavement within 250 feet of a home is associated with a 0.28 percent to 0.78 percent higher home sale value, on average. 
• In Buenos Aires, a similar assessment of proposed blue-green infrastructure projects in the Medrano Stream Basin found strong potential for positive land value impacts stemming from both the reduction of flood risk associated with traditional gray infrastructure, and the improvements in public green space (Kozak et al. 2022). The authors cite a project that improved public access to the Paraná River in Santa Fe, Argentina, as an example of how this can play out; the revitalization of that waterway led to an average land value uplift of 21 percent within a 10-block band of the waterfront. 
• Major transit projects around the globe that are contributing to decarbonization goals, from Tokyo’s Tsukuba Express transit extension to the modernization and electrification of the interurban passenger railway in San Jose, Costa Rica, to London’s Crossrail project—the latter expected to achieve approximately 2.75 million tons of carbon savings over its lifetime—are being financed largely or in part by the assumption that property values will increase all along their corridors. 
• Developers and homeowners alike seek safety from rising seas and other climate impacts, and are willing to pay for that sense of security. Boston has established a Climate Resiliency Fund, to which developers contribute to help the city coordinate the construction of seawalls and natural systems to keep prized urban land high and dry. Contributing toward adaptation is increasingly seen as a small price to pay to safeguard real estate assets and ensure their continued inherent value, said Brian Golden, the recently retired director of the Boston Planning and Development Agency.  

The same appears to be true for individual homebuyers. They’ve always taken into account property characteristics and consumer preferences such as the number and composition of rooms or the quality of the local public schools. Now they want to know about—and might be willing to pay more for—features that make the home more resilient to climate change, according to Katherine Kiel, an economics professor at College of the Holy Cross in Massachusetts and author of a Lincoln Institute working paper on adaptation and property values (Kiel 2021). 

WHILE THE CONNECTION between environmental interventions and an uplift in values is positive news for property owners and developers, it has a complicated relationship with gentrification and displacement. One prominent recent example of green improvements affecting local economics is the daylighting of the Saw Mill River in Yonkers, New York, which transformed a downtrodden business area so dramatically that housing prices shot up all around the adjacent area, said Cate Mingoya, national director of Climate Resilience and Land Use at Groundwork USA. It was “the perception of a cleaner, greener space” that led to the increases, Mingoya said. 

“There’s nothing about the installation of trees or the daylighting of a river that forces landlords to raise rents so sharply. There’s nothing that says that landholders must be entitled to maximize profit from a system that is highly, and unfairly, regulated to their advantage,” she said. But property owners can and do cash in on these kinds of public investments, said Mingoya, who facilitates cross-sector partnerships to implement climate adaptation measures in vulnerable communities.  

Some communities seeking to temper green gentrification deploy measures that are “just green enough . . . where a limited number of improvements are made to low-income neighborhoods in an attempt to ward off displacement.” These efforts sometimes border on the absurd, Mingoya said: “Should they get 30 trees or 10 trees?” But they clearly demonstrate the growing awareness that green interventions and rising values are linked. (Strategically designed land value capture policies can help mitigate cases where environmental interventions are associated with gentrification and displacement, with provisions to increase affordable housing, for example.) 

Viewed from another perspective, bad environmental conditions that are unaddressed or only partially addressed have a negative economic effect. One recent report by researchers at several universities in Utah estimates that polluted air shortens life expectancy by two years and costs the state nearly $2 billion a year. Some local and state governments are keeping a running tally of the damage caused by climate change, according to the Pew Charitable Trusts, in preparation for litigation against fossil fuel companies. 

The absence of climate action—in cases when municipalities can’t or won’t implement resilience infrastructure and other measures to halt flooding, sea-level rise, mudslides, and the like—drives down values precipitously. A study of land subsidence in Java, Indonesia, where homes have sunk into unstable soil, found that the local practice of rebuilding on sinkhole sites—sometimes two or three times, done in the hopes of salvaging economic viability—did nothing to halt the decline in property values. The only solution for plummeting values, says the study, which was also led by Van der Krabben, would be a massive overhaul of water and soil management—or to give up on the land entirely. Indonesia is moving ahead with the wholesale relocation of its capital city, Jakarta, largely for this reason. 

In Miami, a big part of the argument for private sector contributions to resilience infrastructure is that without speedy action, more real estate is virtually guaranteed to be underwater. Seen in this way, protective measures do more than enhance land and property values; they stop values from being less than zero, by keeping land from becoming uninhabitable. 

EVEN AS EVIDENCE OF THE LINK between environmental action and economic uplift grows, many barriers must be overcome to make land value capture work. National urban development laws need to be reformed to authorize more local governments to mobilize land value increments and permit own-source revenue. Around the world, a pressing need remains to improve institutional capacity, good governance, land controls, and tenure systems. 

Governments will also need to keep in mind that land-based finance is just one way to fund climate and environmental initiatives, more suitable for closing gaps than for serving as the sole or primary source of revenue for a carbon-neutral world. 

Policy makers may also have to guard against overreach. The benefits of a new transit station on adjacent properties are “plain as day,” said Van der Krabben, so developers are more eager to contribute to such infrastructure. The ultimate payoff of an environmentally progressive citywide or regional policy—say, bans on fossil fuel heating and cooling systems in new construction, such as the natural gas bans enacted in major U.S. cities including Seattle, San Francisco, and New York—may be a tougher sell.  

“What you really want is for developers to contribute to regional investments, but that’s more difficult to negotiate. The benefits are more indirect,” Van der Krabben said. 

All the more reason, scholars say, to revisit the valuation and assessment practices that establish land and property value increases in the first place. More sophisticated valuation methods have improved assessment accuracy, said Lincoln Institute Senior Fellow Joan Youngman, citing the International Association of Assessing Officers (IAAO)’s technical standard on mass appraisal of real property designed to improve the fairness, quality, equity, and accuracy of valuation. Mass appraisal is defined in that standard as “the process of valuing a group of properties as of a given date and using common data, standardized methods, and statistical testing.” 

The assessment process may soon be aided by some technological wizardry. The International Property Tax Institute and IAAO both issued recent white papers on the potential use of Artificial Intelligence (AI) in property assessment. While AI poses some challenges and uncertainty, the hope is that it could produce more accurate values than those obtained by traditional approaches. 

When it comes to identifying the effects of public action and investment on land value, modern tools, data analytics, and statistical techniques will help identify and measure value increments, Youngman said.  

Armed with good practices, a theoretical rationale, and a growing list of cities around the world that have put value capture to use, those addressing the climate crisis hope the connection is becoming clearer between the massive public investments necessary to salvage the planet’s future and the economic bounty they provide—and, ultimately, the ways that bounty can be reinvested for the public good (Bisaro and Hinkel 2018, Dunning and Lord 2020, Van der Krabben, Samsura, and Wang 2019). 

Golden, the outgoing Boston planner, said he has sensed a “cultural shift” among landowners and developers, who recognize that public investments in resilience infrastructure plainly protect private real estate assets, making them more likely to help foot the bill. Requiring developers to help finance the berms, seawalls, and natural systems restoration that will guard against an estimated 40-inch sea-level rise along the city’s 47-mile coastline is seen as a matter of self-interest, Golden said—not only for individual development sites, but also for the continued prosperity of Boston as a regional economic engine. The private sector has exerted virtually no pushback on initiatives like the resiliency fund. “We have a lot of work to do,” Golden said. “They get it.” 

Anthony Flint is a senior fellow at the Lincoln Institute, host of the Land Matters podcast, and a contributing editor to Land Lines. 

Lead image: Zhengzhou, Henan Province, China. Credit: Zhang mengyang via iStock/Getty Images.

REFERENCES 

Bisaro, Alexander, and Jochen Hinkel. 2018. “Mobilizing Private Finance for Coastal Adaptation: A Literature Review.” WIREs 9(3). 

CNT and SB Friedman Development Advisors. 2020. “Green Stormwater Infrastructure Impact on Property Values.” November. Chicago, IL: Center for Neighborhood Technology. 

Dunning, Richard J., and Alex Lord. 2020. “Viewpoint: Preparing for the Climate Crisis: What Role Should Land Value Capture Play?” Land Use Policy Volume 99. December. 

Germán, Lourdes, and Allison Ehrich Bernstein. “Land Value Return: Tools to Finance Our Urban Future.” Policy brief. Cambridge, MA: Lincoln Institute of Land Policy (January). 

Kiel, Katherine A. 2021. “Climate Change Adaptation and Property Values: A Survey of the Literature.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (August). 

Kozak, Daniel, and Hayley Henderson, Demián Rotbart, Alejandro de Castro Mazarro, and Rodolfo Aradas. 2022. “Implementación de Infraestructura Azul y Verde (IAV) a través de mecanismos de captación de plusvalía en la Región Metropolitana de Buenos Aires: El caso de la Cuenca del Arroyo Medrano.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (February). [English version available.] 

Krabben, van der, Erwin, Samsura, Ary, and Wang, Jinshuo. 2019. “Financing Transit Oriented Development by Value Capture: Negotiating Better Public Infrastructure.” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (June). 

Lord, Alexander, Erwin van der Krabben, and Guanpeng Dong. 2022. “Building the Breathable City: What Role Should Land Value Capture Play in China’s Ambitions to Prepare for Climate Change?” Working paper. Cambridge, MA: Lincoln Institute of Land Policy (June). 

Climate chaos is affecting people everywhere around the world, including in the United States, and it is far past time to do something about it. To avert the most catastrophic impacts of this global crisis, we must transition to net-zero emissions by 2050 by investing in clean energy, electrifying our transportation, improving the energy efficiency of buildings, and removing greenhouse gases from the atmosphere. 

The transition to net-zero emissions will require unprecedented changes in land use and encumber similarly unprecedented investments. For example, MIT estimates that it would take eight million acres of land to meet the 2050 electricity demands of the United States with photovoltaics—that’s only three times the land area of all golf courses in the country, 40 percent of the total area of rooftops, or 16 percent of land area covered by major roadways. While we do not anticipate meeting all electrical power needs this way, these comparisons give us a chance to calibrate the challenge and our expectations about whether we can meet it. We can. 

As to how we’ll pay for it, the global consulting firm McKinsey recently estimated that the transition to net-zero emissions would cost around $275 trillion (about three times the global GDP) in public and private investment in new energy and land use systems over the next three decades, an increase of $3.5 trillion annually from current spending. For comparison, in today’s dollars, we spent around $500 billion over six decades to build the U.S. Interstate Highway System, around $180 billion to rebuild OECD countries in the two decades after World War II, $675 billion to fund the New Deal in the 1930s, and $850 billion for the American Recovery Act in the decade after 2009. In other words, our additional annual investments will exceed the total of all these “once in a generation” undertakings, each of which took a decade or more to complete. But unlike those projects, this effort calls for significant private contributions to supplement unparalleled public investment. 

Whenever we’ve encountered intractable financial challenges—like the infrastructure investment needed to serve two billion new urban dwellers in the next three decades—I’ve always responded with the same four words: the answer is land. Since our inception more than 75 years ago, the Lincoln Institute has obsessed over how land gets its value. In the last few years, we’ve tracked an exponential increase in interest in the potential of land value capture—the public recovery of the share of land value attributable to public actions. Places as diverse as Seoul, Korea, and São Paulo, Brazil, have shown how land value capture can pay for essential but seemingly insurmountable infrastructure needs. We know that investing in decarbonization can increase the value of land, and that the public can then recover a share of this value to pay for the investment itself. 

But while the public sector strives to capture its rightful share of publicly generated land value, private landowners are walking away with even bigger spoils by arbitraging information, something that arguably exerts greater power in determining the value of land. Whether and how policy makers respond to the connection between information and land values will have a huge bearing on how much it will cost to reach net-zero carbon emissions by 2050, and how we pay for it. Which brings us to a slightly different land-based financing tool that is proving effective in countering land speculation and could yield even more revenue than capturing publicly generated values: the land value increment tax (LVIT). Before we delve into that tool, let’s explore the issue it’s meant to address.  

Information lies at the root of private land value capture, often called naked speculation, which has financed land development for centuries. Everyone knows the three biggest determinants of land value: location, location, location. The salient information for land speculation is advance knowledge of what will happen in specific locations. In the 1960s, the Walt Disney Company used shell companies to secretly purchase 27,000 acres of Central Florida swampland at an average cost of $200 per acre to build its Walt Disney World resort. Disney needed only 10,000 acres for the development, but it knew that news of its investment would drive up land prices for the whole region. The company kept its intentions under wraps to capture the land value increment for itself, while it also negotiated with the State of Florida for unprecedented private control of development on its lands. (That agreement is now in peril due to political conflicts with the state.) Once the future development was announced, the same land was valued at $80,000 per acre, a tidy windfall of more than $2 billion on an investment of just over $5 million. Disney leased the extra land to cover the costs of expanding its attractions to include the EPCOT center, among other things. 

The climate crisis and the prospect of mass extinctions have opened a whole new area of land speculation. Reports like the Intergovernmental Panel on Climate Change’s Climate Change and Land, which painstakingly documents both positive and negative climate impacts on land around the globe, are like catnip to investors looking to acquire land that will benefit from climate change. Land with privileged access to scarce resources like water, higher ground for those retreating from rising seas, or critical habitats targeted for conservation are prime targets for speculators. Ironically, environmental advocates unintentionally fuel speculation by producing detailed analytics to guide conservation efforts or to build the political will to promote climate resilience, only to see private investors use the data for profit.  

Leaving ethical considerations aside for a moment, the practical implications of land speculation are devastating. Conserving land to address the climate crisis or mass extinctions is already an expensive proposition. As Christoph Nolte, a social-environmental data scientist at Boston University, notes, the $4.5 billion Great American Outdoors Act of 2020 was designed to provide sufficient funding to protect the habitat for all endangered species in the United States. By his estimates, the funding will protect only 5 percent of the needed land, because land values are already much higher than estimated. 

Every dollar gained by land speculators represents an additional dollar of public, private, or philanthropic investment that will be needed to protect critical habitat or mitigate the climate crisis. If policy makers are serious about mitigating climate change or conserving land and water resources, they cannot allow private investors to stay 10 steps ahead of the public. 

There is one easy way to prevent the astronomical windfalls of land speculation. Among the many effective land policy instruments we’ve studied, the land value increment tax (LVIT)—a well-known and well-tested tool—is best for minimizing land speculation. A tax on realized unearned gains in land values, the LVIT has been applied at rates as high as 90 percent in places like Taiwan, where the tax now ranges from 40 to 60 percent. The revenues generated by the LVIT can be invested in climate resilience or habitat protection, ensuring that increases in land value are used for public benefit. Other land policies, like limitations on foreign ownership of land that minimize international speculation, are good supplements to the LVIT. 

Mitigation of the climate crisis and the prevention of mass extinction will require unprecedented changes in land use across the globe. In past issues I’ve discussed ambitious efforts to protect 30 percent of Earth’s land and water resources by 2030 and half of the planet by 2050. We’ll also need to transform the landscape to accommodate climate migrants and renewable energy production. Without proactive measures to minimize the impact of private land speculation, we will bankrupt the public weal and drain philanthropic coffers before we can make a dent in reducing global warming or protecting any species—including homo sapiens. It is hard enough to build the political will to tackle existential threats. Why would we unwittingly allow others to inflate the cost of our efforts for their own private windfalls? We already know the remedy we need to chill land speculation—an aggressive LVIT. Can we summon the courage to use it? 

A version of this article first appeared in Public Finance magazine, the journal of the London-based CIPFA (Chartered Institute of Public Finance and Accountancy). 

Image: Hsinchu and other cities in Taiwan have used a land value increment tax (LVIT) to counter land speculation. Credit: Sean Pavone via iStock/Getty Images Plus.

In San Diego, the owner of a newly purchased, median-priced home paid more than $9,000 in property taxes last year, about $3,400 more than somebody who has owned an identical home for 14 years, the average duration of home ownership in the city, according to a new study from the Lincoln Institute of Land Policy and the Minnesota Center for Fiscal Excellence.  

A result of the assessment limit contained in California’s Proposition 13, the disparity in tax bills for new and longtime homeowners in San Diego grew by $600 last year alone as property values increased, and it has grown by more than $2,000 in five years, according to the 50-State Property Tax Comparison Study.  

Assessment limits restrict the growth in the assessed value of a home for tax purposes, usually allowing a property to be assessed at its full market value only after it is sold. Over time, as the value of a home increases, its owner receives an increasingly large tax break. New and recent homebuyers make up for these tax breaks by paying higher bills. San Diego is one of 29 large cities with assessment limits analyzed in the study. In these cities, longtime homeowners receive an average tax break worth $1,600, a 30 percent discount compared with tax bills of new homeowners. 

Produced annually, the 50-State Property Tax Comparison Study provides the nation’s most comprehensive analysis of local property tax rates by calculating the effective tax rate—the tax paid as a percentage of market value—for 74 large U.S. cities and a rural municipality in each state. The study considers property tax exemptions, credits, the accuracy of assessments, and other factors to provide meaningful comparisons of tax rates and bills for residential, commercial, and industrial property. It also analyzes the key factors that drive differences in tax rates among cities. 
 
One of the main drivers of variation in tax rates is the extent to which each city relies on the property tax. In Bridgeport, Connecticut, for example, residents pay one of the highest effective property tax rates on a median-valued home, but they pay no local sales or income taxes. Birmingham, Alabama, by contrast, has some of the lowest effective property tax rates, but its residents pay significantly more in total local taxes than Bridgeport’s—$3,201, per capita, compared to $2,221 in Bridgeport—because Birmingham also relies on local sales and income taxes. 
 
A second major driver of variation in tax rates is the difference in property values in different markets. Cities with high property values can collect the same revenue with a lower rate than cities with low property values. For example, to collect $3,424—the average amount collected for a median-valued home in the study—the effective property tax rate would need to be 20 times higher in Detroit, which has the lowest home values in the study, than in San Francisco, which has the highest home values.  

Other factors in the variation of property tax rates include differing levels of local government spending, and differences in how various classes of property, such as residential, commercial, and industrial, are treated relative to each other. 
 
The study found that among the largest cities in each state, the average effective tax rate on a newly purchased, median-valued home was 1.3 percent in 2021, with wide variation across cities. Three cities had effective tax rates that were at least double the national average, and eight had rates that were less than half the average.

Highest and Lowest Effective Property Tax Rates on a Newly Purchased Median-Valued Home (2021) 

The study also finds significant variation in effective tax rates for commercial property such as office buildings. In 2021, the average tax rate on a $1 million building was 1.9 percent in the largest city in each state. Detroit and Chicago had the highest rates, at more than double the national average, and Cheyenne, Wyoming, and Seattle had the lowest rates, at less than half the national average. 

Highest and Lowest Effective Property Tax Rates on $1-Million Commercial Property (2021) 

The report is available for download on the Lincoln Institute website: https://www.lincolninst.edu/publications/other/50-state-property-tax-comparison-study-2021

Will Jason is the director of communications at the Lincoln Institute of Land Policy. 

Image: La Jolla Coast Aerial. Credit: Art Wager via GettyImages. 

Competition among providers of infrastructure is often limited, because the investments required to build and maintain infrastructure are so extensive, durable, and immobile that the cheapest way to serve a given market is often with a single firm. This phenomenon is known as natural monopoly in economics jargon. How best to protect consumers from this lack of competition has been a topic of intense debate in infrastructure circles, and it’s one that is summarized in the recently published Lincoln Institute book Infrastructure Economics and Policy: International Perspectives. 

Privatization   

In the 19th century, virtually all modern infrastructure—including canals, railroads, steamships, electric power, streetcars and subways, telegraph and telephone systems, and local water supplies—was built and operated by private companies. Most of these systems were nationalized or municipalized only after the turn of the century, and often not until the 1960s and 1970s in those developing countries that declared their independence around that time. 

These new state-owned enterprises (SOEs) sometimes performed well at first, but often grew less efficient, provoking consumer complaints of high prices and poor service as well as government concerns about the burden of funding large SOE deficits. These concerns helped provoke the most recent round of privatization reform, starting in the 1990s and 2000s. Privatizations were relabeled as Public-Private Partnerships (PPPs) to emphasize the hoped-for cooperative nature of the reforms. Greater emphasis was placed on developing the means to regulate prices that would be accepted as fair by both investors and their customers. 

Antonio Estache, a professor at the Universite Libre de Bruxelles, summarizes research on this recent round of privatizations in chapter 11 of the book. Estache’s findings will leave both critics and supporters of privatization disappointed. For example, he estimates that private finance accounts for only 17 percent of total finance for the typical PPP project, with the bulk of the remainder still to be raised through government bonds and loans or by grants or loans from international financial institutions. By sector, privatization is much more common in ports and electricity generation and relatively rarer in electricity distribution, roads, water, or sanitation. 

Particularly troubling are Estache’s interpretations of research on the effects of private ownership on performance. Ownership alone does not appear to significantly improve infrastructure access and affordability for the poor. Ownership may have an effect on costs, but that influence may weaken once the “easy” measures to increase labor force productivity have been exploited. Estache blames this disappointing performance on the failure to address major governance issues including “corruption, lack of technical skills, lack of commitment to allocate the resources needed to get the regulatory job done, and lack of accountability for failing on any or all of the previous issues.”  

Regulation 

Given that controversy over monopoly played an important role in the nationalization of private infrastructure companies in the first half of the 20th century, it is not surprising that a great deal of energy has been devoted to devising price-setting schemes for PPPs that would be accepted as fair by both consumers and investors. The most popular approach has been to use competitive bidding, to award a contract to build and operate an infrastructure facility for a fixed term, say 10 or 30 years. However, this approach works well only if the contract is relatively complete, in that it anticipates all important future developments and provides workable contingencies for them. Contracts that prove to be incomplete typically require politically controversial renegotiation. Furthermore, the risk that a contract will prove to be incomplete increases greatly with the duration of the contract, and infrastructure investments typically require long contracts. 

In chapter 12, Sock Yong Phang, professor at Singapore Management University, uses several case studies to examine two alternative strategies to competitive contracting: cost-of-service regulation and price-cap regulation. The former allows the regulated firm to charge prices sufficient to recover specified accounting costs; the latter specifies the maximum increase in prices allowed in a set period, usually five years, but allows the firm to keep the difference as profit if the actual price increases are less than the increases allowed under the cap. 

Phang argues that the evaluation of these two approaches depends on the priorities and objectives of the regulator. The use of cost-of-service regulation implies concern about the financial health of the regulated firm, and especially its ability to raise capital, while the use of price-cap regulation suggests concern about the firm’s technical efficiency and record of innovation. Other possible goals include access and affordability for the poor or protection from monopoly abuse.  

In chapter 13, Sir Ian Byatt—a pioneer in the practice of price-cap regulation as the regulator of Britain’s water industry during the first two decades after its privatization—describes the challenges faced and the lessons learned during his tenure. Two themes emerge: first, the importance of the regulator being politically sensitive and proactive, and second, how many other critical decisions a regulator faces besides periodically setting the allowed caps on prices. These decisions include the firm’s capital structure, quality of service, treatment of ancillary activities, and the possibility of competitively contracting for major stand-alone facilities. The combined lessons of Phang’s cases and Byatt’s tenure illustrate the practically irresistible pressures for, and potential pitfalls of, regulatory mission creep. 

State-Owned Enterprises 

SOEs were considered a key to economic growth by many developing countries in the post-colonial period of the 1950s and 1960s. The private sector often consisted of small traders and enterprises without the resources or appetite for the heavy investment that was generally thought to be needed at the time for development. The attraction of SOEs faded in the face of their disappointing performance, leading to various reform efforts in the 1970s and 1980s and ultimately to the privatization of many in the 1990s and 2000s. However, SOEs remain significant players in the infrastructure sector, especially in China and India. 

In chapter 14, O. P. Agarwal, who has worked on transportation and energy policy for the government of India, the World Bank, and the World Resources Institute, and Rohit Chandra, an assistant professor at Indian Institute of Technology Delhi, examine the changing roles of SOEs. 

Agarwal and Chandra map the global landscape of SOEs and compare the performance of SOEs versus the private sector. Despite their less efficient performance, SOEs still have plausible reasons to exist; for example, the inability of the market to supply classic public goods such as local road networks. Most important, Agarwal and Chandra recognize the evolving role of SOEs over the last decade as they have become more versatile through innovations in organizational form, financial management, PPPs, and private contracting. 

In the end, no single solution has emerged to the competition problems caused by infrastructure’s reliance on costly, durable, and immobile investments. Private ownership is common in many developed countries, particularly in certain sectors such as telecommunications and electricity generation. SOEs are very important as well, however, and dominate infrastructure in China and India, the world’s most populous countries. A great deal of effort has gone into the design of regulatory schemes to replace the standard approach of long-term contracts awarded by competitive bidding processes. While there have been notable advances, particularly with price-cap regulation, so far every scheme has its limitations. 

José A. Gómez-Ibáñez is the Derek C. Bok Professor Emeritus of Urban Planning and Public Policy at Harvard University. Zhi Liu is senior fellow and director of the China Program at the Lincoln Institute of Land Policy. They are the editors of Infrastructure Economics and Policy: International Perspectives. 

Image: London Skyline Credit: Nikolay Pandev via GettyImages.

Infrastructure upgrades and facilities are desperately needed around the world, but governments often struggle to pay for the high costs of developing and maintaining them. The newly published Lincoln Institute book Infrastructure Economics and Policy: International Perspectives includes two chapters that address issues related to infrastructure finance, including the development of innovative and replicable financing models. 

Basics of Infrastructure Finance 

In Chapter 9, economist Akash Deep of the Harvard Kennedy School explains why financing is a key challenge in infrastructure development. Governments must typically pay the costs of infrastructure up front, while the benefits are spread out over many years. This difference between the timing of costs and benefits is generally bridged through borrowing.  

It is important to note that financing differs from funding. The funder is the entity that ultimately bears the cost of the infrastructure, either the general public (in the form of taxes) or the direct users (in the form of user charges). Those who finance the project are the borrowers and lenders who reconcile the timing of the benefits and costs. Those borrowers and lenders can be public or private. The capital structure can be determined to reflect the riskiness, and the cost of financing, and thereby the financial value of infrastructure. Proper structuring and risk allocation can make infrastructure finance more efficient and less risky. 

Because infrastructure investments often have a long payback period, investors are typically less interested in infrastructure than other assets. Deep illustrates the potential for innovation in financing infrastructure, including efforts to tap the huge and growing savings in insurance and pension funds. Managers of such funds prefer the combination of modest but stable long-term returns that infrastructure offers, but they are often required to maintain their debt portfolio at investment grade or higher. One solution developed by the European Investment Bank is to provide direct financing (in the form of subordinated debts) or financial guarantees to make the investment less risky for insurance and pension funds. 

A more widely imitated innovation is infrastructure funds modeled after those pioneered by Australia’s Macquarie Group in 1996. The Macquarie Group introduced features such as pooling equity from multiple projects, active asset management, financial engineering, and listing on capital markets–reforms that made infrastructure equity funds more liquid and especially attractive for pension funds. Infrastructure funds have attracted both institutional and retail investors, thereby significantly expanding the pool of equity available for infrastructure investment. 

Infrastructure Finance through Land Value Capture (LVC) 

The benefits and costs of infrastructure are typically specific to the location where the project will occur. In urban locations, where the supply of land is limited and the infrastructure on it is often immobile, the benefits created by infrastructure often result in an increase in the value of land. In such cases, the public sector can fund infrastructure improvements by imposing property taxes, selling development permissions, or utilizing similar measures to capture all or part of the uplift in land value that the improvements create. Such measures ensure that the parties who benefit from the improvements pay to support them. 

Chapter 10, written with Yu-Hung Hong, former director of the Samuel Tak Lee Real Estate Entrepreneurship Lab at MIT, and Du Huynh of Fulbright University Vietnam, examines the record of land value capture around the world. Value capture is especially promising in developing countries, which have enormous infrastructure needs but fewer alternative funding sources. Chapter 10 focuses on the experiences of Brazil and Vietnam with one of the most important types of value capture—the sale of development rights.  

The case of São Paulo, Brazil, is internationally known and widely praised; the city developed a market-oriented value capture program, auctioning Certificates of Additional Construction Potential, or CEPACs, to developers in exchange for the right to build at greater density in designated areas. The city has used the proceeds to pay for affordable housing, transportation upgrades, and other public goods. 

The case of Ho Chi Minh City, Vietnam, is more controversial: through ad hoc procedures, the city sold the development rights to convert rural land for urban development. Both cases confirm that sales of development rights can generate substantial proceeds, often more than enough to pay for the extra infrastructure needed for the associated development. But the examples also show that successful implementation requires a clear and widely accepted delineation of property rights. Also important are a system of registries and impartial courts to record and protect those rights, a realistic and reasonably detailed land use master plan, and politically skilled sponsors. 

As both chapters illustrate, governments around the world are finding innovative ways to finance infrastructure. Given the urgent need for global infrastructure investments and upgrades, these methods should be more widely implemented and embraced.  

José A. Gómez-Ibáñez is the Derek C. Bok Professor Emeritus of Urban Planning and Public Policy at Harvard University. Zhi Liu is senior fellow and director of China Program at the Lincoln Institute of Land Policy. They are the editors of Infrastructure Economics and Policy: International Perspectives. 

Image: Octavio Frias de Oliveira Bridge, São Paulo, Brazil. Credit: R. M. Nunes via iStock/Getty Images Plus. 

Several major sources of radical uncertainty are currently affecting the performance of infrastructure and will likely shape infrastructure in the future: climate change, automation, the sharing economy, and the COVID-19 pandemic. Our book, Infrastructure Economics and Policy: International Perspectives, recently published by the Lincoln Institute of Land Policy, attempts to determine how the infrastructure sector should cope with these radical uncertainties. 

Three chapters of the book assess the impacts of climate change, automation, and the sharing economy, respectively, and discuss how public policies should respond to these challenges. The COVID-19 pandemic erupted while we were preparing the book, and little evidence was available on which to assess its impacts on infrastructure. These impacts are becoming increasingly clear now as data and empirical studies are emerging, and we have included our thoughts on them below.  

Climate Change 

Severe weather conditions and natural disasters due to climate change can seriously disrupt infrastructure services and damage or destroy infrastructure facilities, from transit lines to power lines. These impacts typically vary from one locality to another. For example, forest fires are a major concern in California, while rising sea levels are more important to Miami. As a result, Henry Lee, the author of chapter 18 of the book and a faculty member at the Harvard Kennedy School, argues that effective adaptation policies will mainly emerge at lower levels of government, in a bottom-up process.  

Lee predicts that the magnitude of investments in climate-resilient infrastructure over the next few decades will be unprecedented. He discusses the characteristics of these investments and the scope of the transitions that will be required in the transportation, electricity, and water sectors. After identifying the governance challenges that underlie all climate mitigation and adaptation options, Lee proposes changes in governance to enable more effective planning, delivery, and management of infrastructure. His main messages are as follows: 

• Honoring the commitments made by many nations to achieve net-zero emissions by 2050 will require unprecedented investments in infrastructure.  
• Local governments are likely to lead in developing adaptive policies, since the nature and extent of climate damages vary so much by location. 
• The electricity sector will be by far the most affected by efforts to mitigate emissions as electricity replaces direct burning of fossil fuels for mobility, heating, cooling, and manufacturing and as countries shift to solar, wind, and other renewable sources that require more sophisticated and extensive grids and standby capacity to remain reliable. 
• In the water sector, changes in precipitation will require some areas to import water, increase desalinization, or encourage conservation by raising prices. 
• Transportation infrastructure will be the least affected, although many vehicles are likely to be powered by electricity or hydrogen.  
• For these investments to succeed, four changes in the governance of infrastructure are needed: (1) reduce the number of agencies and levels of government with overlapping responsibilities; (2) streamline the process for siting facilities; (3) address stranded financial and human assets; and (4) reduce the bias for spending on disaster relief rather than disaster prevention. 

Autonomous Vehicles 

The second radical uncertainty examined in the book is automation and other new technologies that have emerged rapidly in recent years, thanks to advancements in information technologies such as cloud computing, the internet of things, and artificial intelligence. Whether these new technologies will revolutionize the infrastructure sector is the central question examined in chapter 19 by Shashi Verma, director of strategy and chief technology officer at Transport for London (TfL). Verma reminds us that fundamental infrastructure change typically comes only very slowly. Then, using autonomous vehicles (AV) as a case study, he discusses the economics of AVs, the likely impacts of automation on other modes and consumer behavior, and the institutional challenges it faces before its widespread acceptance. He offers the following advice: 

• AVs may prove to be among the rare fundamental changes in infrastructure technology, on par with the invention of the internal combustion engine, and especially disruptive to our cities. 
• Policy makers should take actions to prepare for the arrival of the technology, including licensing, allocation of road space, economic support to public transportation, and control over pricing structure. 
• Between one-half and three-quarters of the cost of a taxi ride covers hiring the driver. If AVs could save on driver cost, this would stimulate an increase in travel and pose an existential threat to public transportation. The latter would be competitive with AVs only during peak hours and even then, only where it is protected from traffic congestion. 
• Road congestion would likely increase greatly with the rising use of AVs unless there is a large increase in ride-sharing. The only unmitigated benefit would be a large reduction in the land required for parking. 

The Sharing Economy 

The third radical uncertainty examined in the book is the sharing economy. Sharing is an economic model of acquiring, providing, or sharing access to goods and services using online platforms. What impacts might the sharing economy have on infrastructure services and assets? In chapter 20, authors Andrew Salzberg and O.P. Agarwal explore this question using a case study of urban transportation. Salzberg is responsible for public policy at Transit, a leading public transportation app in North America, and before that worked as an executive at Uber. Agarwal served in the Indian Administrative Service and the World Bank and is currently chief executive officer of World Resources Institute India.  

Over the last decade, new methods of sharing motor vehicles (Zipcar, Car2Go, Uber, Lyft, DiDi, Ola, and others) and smaller motorized electric vehicles like e-bikes and scooters (Bird, Lime, Gojek, etc.) have grown rapidly around the globe. Salzberg and Agarwal discuss the potential benefits, costs, and risks of shared vehicles, and argue that the sharing economy model has the potential to improve the use of fixed assets and thereby allow wider access to services. However, the current experience of shared vehicles in the U.S. indicates that the market penetration remains tiny, as most people still prefer individualized mobility services. Therefore, whether the service will grow to a significant size remains uncertain. The authors predict that new regulations will emerge to address the disruptive impact of this model on traditional businesses. More important, public policies related to road and parking pricing and congestion charges will be crucial to the future of the sharing economy in the urban transportation sector. Their chapter also delivers the following specific messages: 

• The sharing economy is not an altruistic neighbor-to-neighbor exchange, but a digital transaction connecting asset owners with users by taking advantage of improvements in technology. 
• In theory, car sharing could greatly increase asset utilization, since personal cars are used only about five percent of the time. Simulations have shown that a ubiquitous shared vehicle network—using right-sized vehicles, potentially including AVs, and moving 100 percent of motorized travel—could dramatically reduce peak-hour congestion, the number of vehicles on the road, and the roadway and parking infrastructure needed to accommodate a given quantity of passenger travel. These model results are optimistic, however, in that they assume that travelers will shift to a sharing mode that is highly efficient from a systemic perspective. In reality, the long-term decline in carpooling suggests how difficult it is to convince two or more people to ride together in the back of a car. 
• Infrastructure managers could encourage sharing by imposing per-vehicle congestion charges or by designating priority lanes for carpools. 
• The future of micromobility services, such as electric scooters and bikes, seems especially dependent on designating street space where the vehicles could be safely operated by people with different levels of skill. 

The COVID-19 Pandemic 

During the production of the book, researchers were actively studying both the effects of infrastructure on pandemic severity as well as the effects of the pandemic on infrastructure. One of the first studies of the former appears in chapter 3, in which the World Bank’s Sameh Wahba, Somik Lall, and Hyunji Lee argue that infrastructure shortages and affordability challenges have exacerbated exposure and community contagion risk from COVID-19 across poor neighborhoods in developing cities around the world. Many other cities, including some of the major cities in China and Europe, adopted the opposite policy of attempting to reduce contagion by deliberately limiting access to infrastructure through lockdowns, quarantines, and other similar measures. How successful these measures have been in reducing the spread of disease and whether those reductions are worth their often-substantial economic costs is a matter of continuing and intense debate. Other emerging takeaways include: 

• Public transit systems around the world lost much of their ridership and passenger revenues. Moreover, these systems seem unlikely to be able to fully bounce back even after the pandemic is over. Former riders are now more used to working at home and meeting online, and are more inclined to view riding on crowded public transportation as a health hazard.  
• The consequences of a long-term shift from public transit to driving would be a financial disaster for public transit operators and traffic gridlock in our largest and most congested cities. It is important to consider what public policies are required to revitalize public transit systems, and to enable them to cope with future pandemics. 
• A likely increase in public infrastructure spending is an important part of post-pandemic economic recovery programs. The primary objectives of these programs are to increase employment and revitalize the economy, and this funding can speed up the delayed construction of public infrastructure works, clear maintenance backlogs, and perhaps finance some “shovel-ready” projects. The key question is whether this is the right time for increased public investment for new mega-infrastructure projects. 

Policy makers often assume that infrastructure investment would have significant multiplier effects on other parts of the economy. However, a review of empirical analyses of economic stimulus programs, presented in chapter 2—authored by Gregory Ingram (former president of the Lincoln Institute) and Zhi Liu—suggests that in developed economies, infrastructure spending has little stimulus effect in the first several years, after which the economy is likely to have begun growing again anyway. These analyses find little to no short-term economic impacts, even when the long-term economic impacts are clearly positive. The small short-term impacts are due in part to the substantial time required to prepare and construct a project and in part to the crowding out of private investment by public investment. Therefore, it is important to select and include the most valuable and shovel-ready projects in the stimulus programs.  

José A. Gómez-Ibáñez is the Derek C. Bok Professor Emeritus of Urban Planning and Public Policy at Harvard University. Zhi Liu is senior fellow and director of the China Program at the Lincoln Institute of Land Policy. 

Image: A woman in the back seat of a rideshare. Credit: halbergman via GettyImages.