The Government of Karnataka and Bangalore Metro Rail Corporation Limited are exploring ways to offset the heavy economic burden of expanding the metro rail transit network in Bengaluru. Land value capture (LVC) is a public financing strategy that can recover a portion of the real estate value that development along the metro corridor generates for private property owners. Deployed effectively, LVC can help fund the growth of mass transit and allied infrastructure.

Several LVC mechanisms are under consideration in Bengaluru, but are yet to be implemented. Inherent shortcomings in planning, policy, and institutional frameworks prevent the market from optimizing the benefits of transit-oriented development (TOD), which in turn negatively impacts LVC.

In this practice note, we first evaluate and assess the potential for TOD and LVC to evolve in tandem with specific reference to the Bengaluru metro and, second, posit strategies and recommendations to reorient policies to leverage TOD as an opportunity for LVC, and vice versa. Our learnings are illustrated through case studies of two typical metro stations – an inner-city neighborhood and an upcoming area in the periphery of the city.

Executive Summary

Background

As of October 2020, India has 678 kilometers (km) of operational metro lines and another 457 km of approved routes. A further 462 km of lines are under construction (The Metro Rail Guy n.d.). Indian cities are veering toward building metro rail transit (MRT) systems to improve mobility and encourage compact growth. The downside is the heavy cost that creating city-scale infrastructure exacts on public coffers. Local and subnational governments are now exploring innovative financing or value capture mechanisms along with government grants and market finance as a supplementary source of funding. These mechanisms, when used effectively, can support the sustained growth and maintenance of the MRT as well as improvements in allied areas. Properties benefit from the increase in value due to proximity to the MRT, and land-based value capture (LVC) mechanisms help governments gain a revenue share from the property owners. Revenue from value capture offsets a portion of the costs and complements government grants and market borrowings. It has therefore become increasingly important to, first, explore the potential for harnessing value capture mechanisms to contribute to public revenue and, second, document instances where this has been successfully accomplished.

The Bengaluru Metro gave us an opportunity to capture substantive insights into the impact of MRT on real estate development along the metro transit corridor. Though the Bengaluru MRT has reported operational profits, the repayment of their domestic and international loans could take up to four decades. BMRCL is working on a TOD policy and has explored several LVC mechanisms to reduce the loan burden and bolster local contributions. Through this analysis, we have worked to better understand some typical challenges and opportunities for value capture in ways that benefit both the TOD communities and the government.

LVC and TOD: The Synergistic Link

In this practice note, it is our aim to, first, evaluate and assess the potential for TOD and LVC to evolve in tandem with specific reference to the Bengaluru MRT and, second, posit strategies and recommendations to reorient policies in Bengaluru to leverage TOD as an opportunity for LVC, and vice versa.

We focused on the following areas:

  • How building metro stations leads to real estate development and value creation in the vicinity of the metro corridor
  • How TOD policies around metro stations can support LVC
  • How LVC and TOD can support each other to enable metro infrastructure development

We present this as a preliminary analysis based on a report we prepared for the Asian Development Bank (ADB) in 2019 to evaluate value capture potential along Bengaluru’s metro rail Phases 1 and 2. We illustrate our learnings through case studies of two metro stations: Indiranagar, an inner-city neighborhood, and Thalagattapura, an upcoming area in the periphery of the city. We selected these stations for our analysis as each offers a typical example in its category. We hope that this practice note will provide essential information to planners and decisionmakers (particularly those engaged with Bengaluru’s metro rail development) and aid them in developing a policy environment for better LVC through TOD.

Opportunities to Optimize LVC

The increased accessibility the metro provides has created a positive impact on real estate and business opportunities around metro stations. In our study of the Indiranagar and Thalagattapura metro stations, we observed that enhanced connectivity resulted in some inner-city areas evolving into commercial zones and stations on the periphery of the city, were emerging as lucrative markets for housing. This growth signals a major potential for future development and opportunities for LVC in the form of tools, processes, and institutional frameworks. In that regard, this would be the right time to implement some of the institutional frameworks that the government has been contemplating but has not yet constituted, in particular, a fiscally empowered integrated regional transport authority for the city that can help coordinate land-use transport integration and finance TOD. Appropriate regulations and incentives through the city’s master plan for plot amalgamation and revitalization of TOD areas can encourage real estate investments, thereby increasing the potential for LVC. Moreover, mechanisms such as ring-fenced financing and community participation can help the government reinvest at least part of the revenue earned from LVC for local area improvements in a transparent manner. The ability of the transit agency to raise and invest revenue can help it engage in public-private partnership (PPP) projects, which is good for the development-based LVC mechanisms being piloted in the city.

Hurdles to Implementing LVC

Several LVC mechanisms are under consideration by BMRCL, but are yet to be implemented. There are multiple factors responsible for this lag:

  • Spatial considerations
    Existing planning and regulatory provisions have not helped the market adhere to TOD objectives, leading to a suboptimal outcome for LVC. The difference in the urban fabric of the inner-city areas vis-à-vis the peripheral areas of the city poses an obstacle to both TOD and LVC. The inner-city areas are harder to redevelop due to traditionally smaller land parcels and fragmented ownership. The small sizes of existing plots mean that new construction projects are unable to take advantage of the maximum FAR, as they are curtailed by zoning regulations such as setbacks and ground coverage. Plot amalgamations are not incentivized, and this hinders the potential for LVC, which is levied on the basis of the floor area of developments. Developers are unable to leverage the TOD incentives provided in the form of additional buildable area rights by the government. Additional buildable rights are provided in a limited area of only 150 m around stations, which further limits the potential and opportunity for implementing LVC. In the case of outlying areas on the periphery of the city, where clubbing plots is more feasible, it is the lack of infrastructure and services that deters real estate investments.
     
  • Policy- and governance-related considerations
    The city does not have an institutional structure to enable coordination between the various public agencies tasked with service delivery. Bengaluru city’s master plans and its transit projects are prioritized by different agencies. The absence of a nodal body working with a composite picture results in dispersed decision-making. Each public agency acts on a narrow area of responsibility, which leads to conflicts that hamper systematic and planned development. As a consequence, many TOD areas remain untapped for development by the government. Regulations and plans do not adequately respond to local problems such as small plot sizes and multiple ownership of land parcels. This prevents landowners and developers from achieving the desirable goals of TOD. Residents along the metro corridor need to see local improvements that can enhance the public realm. The government is missing out on the opportunity of gaining the approval and confidence of citizens through its delay in undertaking such improvements. As a result, residents lack confidence in public-welfare-focused and proactive governance, and this results directly in public resistance to the fee-based LVC mechanisms proposed by BMRCL.

Recommendations for Scaling Up LVC and TOD

Appropriate regulations and incentives through the city master plan for plot amalgamation and revitalization of TOD areas can encourage real estate investments, thereby increasing the potential for LVC. If BMRCL is able to raise and invest revenue earned through LVC, it can redirect its efforts toward forging PPPs. PPP projects can drive the development-based LVC mechanisms being piloted in the city. Our recommendations, based upon our analysis, are as follows:

  • Revamping the regulatory framework and establishing tools, processes, and institutional frameworks: The government is in the process of considering new institutional frameworks. Implementing and empowering these would boost TOD as well as the uptake of LVC. The Unified Metropolitan Transport Authority (UMTA) can help coordinate land-use transport integration for the city. The Urban Transport Fund (UTF) can drive fund generation and finance for TOD. Mechanisms such as ring-fenced financing and community participation can help the government reinvest at least part of the revenue earned from LVC for local area improvements in a transparent manner, thereby securing public buy-in for TOD and LVC.
  • Policy reorientations: Our two case studies of Indiranagar and Thalagattapura metro stations demonstrate that the city government will benefit by shifting from siloed planning of land use and infrastructure to integrated urban planning that synchronizes projects to deliver development in TOD zones. The most effective strategy for the government would be a hands-on approach to development in the city in collaboration with developers and the community rather than relying on regulating the market alone. Revenue from LVC needs to fund local area development rather than being exclusively utilized for financing the MRT infrastructure. The upcoming TOD Policy and Master Plan revision provide an opportunity for driving this coherence.
  • Strategizing for value capture and value creation: The link between value capture and value creation can be strengthened by designating TOD areas as special zones in the city, which will encourage a compact-built form, especially around mass transit. This will ensure that government investment in area improvements leads to maximum impact. The government needs to develop entrepreneurial capacities to help it learn and adapt with changes in real estate markets and shifts in opportunities. Quick wins, such as projects that advance the goals of TOD in collaboration with private stakeholders, can be good for building confidence within the government as well as for strengthening people’s trust in the government’s efficiency. This much-needed change in public perception and confidence would increase public willingness to pay for LVC.
  • Scaling up across the city: Formulating policies with a long-term perspective would entail investing in the opportunities that exist today so that TOD and LVC become sustainable over a longer period of time. LVC when combined with other sources of funding can enable the government to take on more complex urban planning interventions. For instance, Town Planning and Land Readjustment Schemes can facilitate organized infrastructure penetration. The government also needs to set out common priorities and facilitate a shared vision among the public agencies that are jointly responsible for planning and implementing services within the TOD areas of Bengaluru. Finally, BMRCL—the city’s metro transit agency—needs to be, first, empowered with a prominent role in planning and, second, equipped with financial capabilities for it to take a leadership position in implementing TOD and LVC along the metro corridor in Bengaluru.