How do you define value capture for business? Our explainer article outlines in plain English how value capture works.
If a city or county builds a hospital, school, or park, or places a subway stop or highway near a neighborhood, the value of nearby properties can rise. Owners of apartments or shops nearby benefit from this increase and are the recipients of happiness. Value capture is the concept that the government is reclaiming some of the benefits for citizens.
Define value capture for business: The right place at the right time
One of the main ways infrastructure can generate value is the growth and diffusion of businesses, and it has become an increasingly hot topic. For example, real estate developers can quickly build a large apartment complex near a large highway. When looking for locations for a new laundromat or convenience store, the owners probably choose a property next to this condominium. Another circumstance could be that the land is re-rural from residential buildings to commercial real estate or even to industrial land when the land is re-allocated. Private owners of undeveloped land can have a huge impact on the property’s value.
Value Capture spreads wealth
A dilemma arises, however, from such profits for property owners. Remember that the highway (or hospital or light rail) was paid for by all taxes and should benefit the entire city or a large area, not just the owners whose immediate surroundings were lucky enough to be selected for public works. Value capture can be seen as a way to spread the value, because public works are just that.
Using Value Capture for Other Projects
One of the emerging ways of using value-added resources is to pay for other public works, including those that could promote the sustainability of the community. There are three main methods for using this land value capture.
1. Property tax
As property values rise, so do property taxes. Local authorities can receive not only property taxes, but also so-called collateral. This means turning future revenues into collateral to get money from investors – once the taxes have been brought in, investors can be paid off.
A second main strategy to define value capture for business is essentially to win profits from the value of the country itself – and in its truest form. In other words, if a company wants to build on land upgraded by a public project, as in the example above, it is agreed that it will have to pay additional costs for the added value.
One variant used in Australia is to collect surcharges, such as for residential complexes or other developments made on the property in question.
A third, less common method to define value capture for business is effective trade with land for future infrastructure projects. This means that a government can sell parcels (or the right to build on this land) to private investors. However, the agreement stipulates that investors are obliged to finance future public works in some form.
Value creation and the new urban agenda
When it comes to value creation, it is such a respected and prominent concept that the United Nations favors for its New Urban Agenda. One of the stated objectives of this comprehensive plan is to ‘establish an adequate supply of Community goods, including roads and open spaces, together with an efficient sample of buildable land’.
Habitat III was the global summit of the United Nations in 2016. At this Brazil event, value creation was one of the key concepts. Among the topics discussed was that private developers had to be persuaded to understand that the contributions of cities and other government agencies can significantly increase the value of their projects.
Value creation has been widespread in South America, Asia and Europe for decades – it is beginning to establish itself in the USA.
The MTR and Hong Kong
An example of the use of value added to finance sustainable public transport is that of the MTR. Hong Kong’s metro and bus systems are operated by a private company, the Mass Transit Railway Corporation. This society (which runs in parallel with municipalities or other public authorities, which frequently operate public transport) carries out a thorough added value.
The thousands of retail outlets in Hong Kong are made of great value by a smoothly functioning public transport system. In this case, the MTR receives profits from stores in shopping centers along the system routes. It also rents out space to retailers in its stations. In addition, the MTR has many buildings that are closest to its stations. With the proceeds from these projects, the MTR can finance its business and invest in its efficient operation.
In 2012, MTR made a profit of USD 2 billion; Passengers paid 185% of the operating fees.
Value Capture is not without controversy. As you can imagine, private investors and companies feel punished for buying and developing land (with additional fees). Some people see it as state interference.
Nevertheless, value creation is an exciting approach to generating revenue for financing important sustainable development projects. For this reason, as discussed in Habitat III, public authorities must clearly communicate that value creation in public projects is an important tool that should not be taken for granted.