Transferable development rights: A robust policy tool to address India’s urban infrastructure voids

By 2030, India’s economic growth is expected to be accompanied by a shift in its underlying demographics. World Bank data shows the country’s population has increased at a compound annual growth rate of 1.2% during the period 2011–2017 and is expected to reach 1.5 billion by 2030. We’ll see an increasing trend of urbanization, a peaking of the population in the working-age group, and a larger share of this population employed in the services sector. Already over the last decade the urban population increased at an annual rate of 2.4%; estimates project that around 42% of India’s population will be urbanized by 2030—from 31% in 2011. This is one of the issues we’re tracking very carefully at NITI Aayog, an Indian strategy and policy institution chaired by the Prime Minister. The views reflected in the article are personal and not of NITI Aayog. 

Urbanization has a direct correlation with the economic growth of any nation. Cities bring people and knowledge together, however messily, driving structural transformation. Yet policymakers worldwide are nervous about embracing urbanization’s full potential, likely due to the lack of appreciation of the externalities that cities bring and their impact on economic growth and development across the country. In India, with the paucity of financial resources at the Urban Local Body (ULB) level, moreso in the post COVID-19 scenario, to finance infrastructure is another major impendent.

For India’s economy to leap forward further, sustainable and innovative urbanization— grounded in strong policy—needs to take high priority.  The Ministry of Housing and Urban Affairs coined the Value Capture Finance Policy Framework in 2017 in which Transferable Development Rights (TDRs) is among the policy recommendations that can be adopted at state, and ULB levels.

How would this value capture tool work? To support the demographic shift and meet the infrastructure needs of present and foreseen urbanization, we need huge investments. Land acquisition is often required for urban infrastructure purposes and is predominantly costly and time-consuming process.

Here, land acquisition is rendered much easier. The basic concept of TDR is that credit for floor space index (FSI) is received on surrender of land needed for public purposes. By means of explanation, FSI is the ratio of the built-up space on a plot to the area of the plot - a regulation to control cities’ densification and growth patterns. This FSI credit can then be used on a remaining plot or on another plot in a permitted zone. It can also be traded with real estate developers or any third person, monetizing its value. This works well when developers use FSI credits to construct additional floors in the receiving area than would otherwise be permitted, recovering the cost of purchasing TDRs.

The policy instrument provides flexibility to authorities to compensate landowners through issuing Development Right Certificates that can be used at present market value without incurring any actual outflow of money . Presently, this method is being used in Mumbai, Hyderabad, Ahmedabad, and other major cities in India.

Globally, New York City pioneered the use of TDRs. The city follows a system wherein the transfer of unused development rights from one zoning lot to another is allowed in limited circumstances. This mechanism is mainly used for preservation of heritage buildings, open spaces, or cultural resources and is a way to compensate property owners for the loss in revenue on their properties. The system is market-driven and voluntary.

Similarly, the City of São Paulo in Brazil has implemented an instrument called Certificados de Potencial Adicional de Construção, or CEPACs, (translated as “certificates of additional construction potential bonds”) as a tool to create development rights for up-zoning. These rights are used only in certain areas of the city designated for public investments. The rights are sold to developers to raise funds, which are then used for financing infrastructure construction. An important aspect of this instrument is that the total number of CEPACs is determined and capped by the municipality.

In order to ensure robustness, and thus facilitate the appetite of potential investors and landowners for this policy instrument, in India ULBs would need to address the apprehension among landowners about the commercial value of TDRs. While TDR certificates have FSI credits, their monetary value depends on the overall property market in the city and hence is uncertain. They may also not provide for timely compensation, as suitable buyers may not be available when the money is required by the TDR certificate holders. Therefore, a robust mechanism should be adopted to enhance the commercial value of TDR certificates and prevent fraudulent transactions. This will go far to make the instrument more acceptable to the market and bankable.

As an alternative to TDRs, globally many cities have allowed FSI to increase with few limits, while the overall development is controlled through environment, health, safety, transportation, traffic planning, and city master plans. In this case there would be no need for transfer of FSI, as it is unlimited to the extent it is viable and subject to constraints on the height and parameters set by these master plans. Nevertheless, in the case of Indian cities, where most ULBs need liquid funds to buy land and implement infrastructure, TDR seems to be a more feasible alternative, that can also be implemented under a suitable hybrid structure, along with FSI relaxation, or in a phased manner.

For India to leap onto the double-digit growth trajectory and achieve the $5 trillion GDP mark, it’s high time the nation capitalizes on the externalities that cities and urban areas generate. To do this, the states and ULBs should adopt robust and innovative policy measures to enable sustainable development.

Disclaimer: The content of this blog does not necessarily reflect the views of the World Bank Group, its Board of Executive Directors, staff or the governments it represents. The World Bank Group does not guarantee the accuracy of the data, findings, or analysis in this post.

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