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Land leasing and land sale as an infrastructure-financing option

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  • Peterson, George E.
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    Abstract

    Municipal land sales provide one option for financing urban infrastructure investment. In countries where land is owned by the public sector, land is by far the most valuable asset on the municipal balance sheet. Selling land or long-term leasing rights to land use while investing the proceeds in infrastructure facilities can be viewed as a type of portfolio asset adjustment. This paper shows that in China many municipalities have financed more than half of their high rates of infrastructure investment from land sales, for periods of 10 to 15 years. Much of the remaining investment has been financed by municipal borrowing against the collateral of land values. Other countries also have turned to land sales and leasing for infrastructure finance. From a local perspective, land sales have the advantage that they typically are free from the intergovernmental restrictions that require higher-level approval for increases in local tax rates or user fees and that restrict local government borrowing. However, financing municipal infrastructure investment through land sales creates special risks that are not recognized in most intergovernmental fiscal frameworks. One danger involves the use of proceeds to finance operating budgets. Risk exposure is exaggerated by the highly volatile nature of urban land markets and evidence that in some countries urban land values in 2006 reflected a real estate bubble. In the past, Hong Kong, a jurisdiction that has relied heavily on land-leasing to finance its infrastructure budget, has seen land sales fall to zero at the bottom of the real estate cycle. The greatest financial sector risk stems from municipal borrowing based on inflated land values offered as collateral to banks. Sound intergovernmental fiscal management will require tighter regulation of municipalities'financial leveraging of land assets to avoid excessive risk taking by local governments.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4043.

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    Date of creation: 01 Nov 2006
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    Handle: RePEc:wbk:wbrwps:4043

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    Keywords: Public Sector Economics&Finance; Municipal Financial Management; Public Sector Management and Reform; Regional Governance; Urban Governance and Management;

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    1. F. Deng, 2005. "Public land leasing and the changing roles of local government in urban china," The Annals of Regional Science, Springer, vol. 39(2), pages 353-373, 06.
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    Cited by:
    1. Lichtenberg, Erik & Ding, Chengri, 2008. "Local Officials as Land Developers: Urban Spatial Expansion in China," Working Papers 6834, University of Maryland, Department of Agricultural and Resource Economics.
    2. Chang, Zheng, 2014. "Financing new metros—The Beijing metro financing sustainability study," Transport Policy, Elsevier, vol. 32(C), pages 148-155.
    3. UCLG Committee on Local Finance and Development UCLG, 2009. "UCLG Policy Paper on Local Finance," Working Papers id:2206, eSocialSciences.

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