What is Value Capture Financing (VCF)? Explain the components and working mechanism of Value Capture Financing (VCF)?
About Value Capture Financing (VCF)
Value capture is a type of public financing that recovers some or all of the value that public infrastructure generates for private landowners. It seeks to enable States and city governments raise resources by tapping a share of increase in value of land and other properties like buildings resulting from public investments and policy initiatives, in the identified area of influence.
How does it work?
Value capture financing (VCF) works on the conviction that public policy and infrastructure projects typically lead to improvement in the quality of housing, jobs access and transportation, yield other social benefits, and lead to the emergence of important commercial, cultural, institutional, or residential developments in the influence area. This, in turn, leads to an appreciation in land value in the neighborhood.
The VCF process comprises 4 key steps:
i.Value creation: Public regulations, policies and investments lead to creation of value
ii.Value realization by private owners: For instance, the investment made by a developer fetches a bigger monetary value when he sells housing units along a metro corridor planned by the government than he would have without the project
iii.Value capture: It involves the government and private owners agree to a sharing mechanism for the value captured
iv.Value recycle: The resources collected are ploughed back in other parts of the city to create fresh value
The different instruments of VCF are: Land Value Tax, Fee for changing land use, Betterment levy, Development charges, Transfer of Development Rights, Premium on relaxation of Floor Space Index and Floor Area Ratio, Vacant Land Tax, Tax Increment Financing, Zoning relaxation for land acquisition and Land Pooling System.
Traditional resource mobilization through direct sale of land, the most fundamental asset owned and managed by States and Urban Local Bodies is an inefficient form of resource mobilization. This innovative mechanism could also be used by for investing heavily in building national highways, railway projects, power generation and port infrastructure development.
Ministry of Urban Development is working to develop a comprehensive VCF framework so that it can be used efficiently and optimally across the country as a method of financing infrastructure and enhancing the finances of urban local bodies.