Deploying public finance to derisk private capital in innovation and infrastructure

As the heading suggests, this post points to a few thoughts on the challenge of deploying public funds to derisk and crowd-in private capital into those areas of innovation and infrastructure that are not attractive enough for commercial capital. 

I have blogged about public funding of innovation here and here, and this working paper is about public funding of infrastructure projects. The additionality with public finance arises from its risk-tolerant, patient, and concessional nature. 

An urban water supply or sewerage, or an industrial bulk water supply, or an electricity distribution, or a solid waste management, or a streetlight energy saving project, or a mass transit project, will not attract commercial capital on its own. Similarly, a fledgling startup making transceivers, or display and camera modules, or high precision resistors/inductors/capacitors, or compressors, or brushless DC motors, or anode materials, or aluminium extrusions, or designing a narrow band IoT chip or some other mid-value chip, will generally struggle to attract risk capital. 

But they can be derisked by blending with a layer of public finance. The challenge is how to do this derisking effectively. Specifically, the challenge is how public funds can be channelled to derisk these projects or sectors. 

This is less of a problem with grant funding involving smaller amounts, which is simple enough to be done through public entities. In infrastructure, such grants come in the form of viability gap financing (VGF), and in innovation, they are given to those in TRL 1-5/6 stages. The problem lies in the deployment of risk capital (debt and, especially, equity and structured instruments) by public entities. 

Given its administrative inflexibility and constraints, direct deployment of funds by the government itself is not only inefficient but also creates incentive distortions.

In the circumstances, the commonly suggested option is arms-length financing through Development Finance Institutions (DFIs). But this approach is seriously hampered by unreasonable expectations (about returns or at the least capital preservation) arising from a deficient understanding and acknowledgement that de-risking, by its very nature, entails a strong likelihood of losing money. It would involve investing in projects that would not attract commercial investors, by insuring for the additional risk borne by them. 

Further, even with an arm's-length institutional structure, a fully government-owned entity is subject to constraints that prevent efficient deployment of funds. 

The response to this problem has been to build institutional structures by partnering with private investors, even having majority private investors. This, it has been argued, will free them from the fetters and requirements faced by public entities. 

However, India’s disappointing experience with infrastructure DFIs starting from IDFC, IIFCL, and NIIF, as documented in detail here, raises questions about this response. In all these cases, instead of complementing private capital, the DFI has ended up competing with private investors in their choice of investments. Instead of funding those risky sectors, the DFIs chase the derisked sectors like power generation, renewables, transmission, highways, ports, and airports. 

In this backdrop, a commonly cited option, especially in the context of innovation financing, is to transfer public funds to commercial investment vehicles (or the Fund of Funds, FoF, strategy) and let the latter manage those investments. This looks great in theory, insofar as it aligns incentives and brings in private sector efficiencies. 

But it has one problem. The private investors will be primed to invest, at best, in those marginally risky projects rather than in genuinely risky projects (or sectors) that sorely need public finance to derisk them. So, instead of deriskingprojects or sectors, public funding will do returns amplification for private capital. 

Here, a big problem, a market friction, is the absence of a pipeline of such risky projects and sectors that investors can draw from. Their search costs are a significant enough deterrent for investors. In contrast, commercial investors have access to a widely known pipeline of investible projects or innovations. 

It is also the case that the envelope of such risk capital available to fund infrastructure and innovation is much smaller than the envelope of investible projects. Therefore, there is little incentive to go beyond the confines of the mainstream and search out and fund the riskier projects. 

In the circumstances, I can think of three options for the deployment of public funds such that we are able to realise its additionality, and not compete with and crowd-out private capital or end up being leveraged primarily for returns amplification.

1. Invest in FoFs, but with sharply defined funding mandates, almost prescribing the specific nature of projects to invest in, at least a part of their portfolio. However, this can be unsettling for the commercial investors and may turn away the GPs who sponsor the fund from accessing public funds. 

2. The DFI could announce its offering as a set of financing instruments that meet the derisking objective. They could include credit guarantees (in the form of first-loss buffers), longer tenor, lower interest rate or hurdle rate, lower liquidation preference and a lower charge on the waterfall, subordinate debt, and so on. The DFI should market these instruments and possible investment projects to commercial investors. 

3. The DFI could co-invest with private investors. This would entail the public entity scouting the project or entrepreneur, doing due diligence on it/them, and then shopping it to commercial investors with an offer of an attractive enough derisking financing layer. This would also require an acknowledgement of the fact that the role of public finance is to derisk and not maximise returns. This is perhaps the most ideal approach, one which mature entities like NIIF in infrastructure finance ought to be mandated to do.

The second and third options require highly capable and incentive-aligned institutions. Given weak state capability, that’s a demanding requirement. It is for this reason that even in developed countries, risk capital funding in infrastructure and later-stage innovations is largely deployed through FoFs, notwithstanding its aforesaid failings. 

But this reality should not be a reason to ignore the failings of the FoF strategy and step away from pursuing the second or third options.

Implementing TOD in India

I have blogged here outlining nine low-hanging fruits in urban planning, here on the use of land value capture instruments, and here on TDR trading platforms. This one examines why transit-oriented development (TOD) has not worked in India and what could be done. 

TOD is about densifying a defined neighbourhood around a transit station to minimise commute times. It would encourage people to use the mass transit system to commute between their offices and homes. TOD is especially relevant in the context of railway stations. 

Globally, many cities owe their expansion to TOD. London and Mumbai are good examples. I used Claude to extract the schematic maps conveying TOD developments in commuter railway stations around London and Mumbai over the 1991-2011 period. 

This is the London map for a longer 1991-2021 period.

The Mumbai map draws from the Marron Institute’s Atlas of Urban Expansion, and the London map uses the ONS census visualisations. 

Despite several efforts for nearly two decades, Indian cities have struggled with TOD. The only genuine integrated mixed-use station-centric development in India is Gurgaon’s DLF Cyber City + Cyber Hub + Rapid Metro (125 acres, ~15 million sq ft of office, 400,000 sq ft of F&B). The Gurgaon Rapid Metro is itself a private TOD example (built by IL&FS/DLF), covering 12.85 km and 11 stations. Both were built privately by DLF and IL&FS, predating the 2016 TOD policy by years, and the Rapid Metro became financially unviable and had to be taken over by HMRTC in 2019. The MGF malls at MG Road station, Sector 29 at HUDA City Centre, and the Golf Course Road density are all pre-existing development that happens to lie near a metro — co-location, not coordinated TOD.

A fundamental problem with TOD Policy formulation is the assumption that higher FAR, coupled with the benefits of living or working adjacent to a station, will by themselves translate into utilisation. In other words, it is assumed to be sufficient enough incentive for builders and home buyers to choose the TOD zone over its neighbourhood and elsewhere. Unfortunately, this is rarely the case. 

Worse still, governments tend to view TOD as also a large revenue generation opportunity from the flush of property developments. The combination of registration fees (in case of purchases), layout development fees, purchaseable FAR rate, building permission fees, etc., adds prohibitive cost layers for developers and buyers. They prefer to develop and buy elsewhere. The normalised expectation of high revenues also prevents governments from considering providing concessions. A gridlock ensues.

So how do other countries promote TOD?

The Tokyo region offers double or even triple FAR in TOD zones, and allows FAR transfer from adjacent lower-value land parcels. Most importantly, the zones have no development fees, with local governments recovering value through land appreciation and property tax growth, not upfront levies. MTR in Hong Kong also offers much higher FAR and does not levy any development charge, and even gives the land to the developer at pre-rail land values. Singapore has URA White sites where land use is left flexible, apart from a much higher FAR. The purchasable FAR rates are waived or significantly reduced. Additional FAR and no parking minimums in the US allow developers to build significantly more in the zones, especially for affordable housing. Australia allows FAR several multiples higher, fast-tracks permissions, waives off infrastructure levies for affordable housing, and even has lower property tax assessment. 

The common thread across all of these is that governments provide a package of benefits in the TOD zone. It always combines higher FAR (making more revenue possible per unit of land cost) with lower upfront charges (reducing the cost stack) and faster approvals (reducing holding cost and uncertainty). The Japanese and Hong Kong models go furthest by making the TOD zone not just more permissive but more profitable than any suburban alternative.

So what can cities in countries like India do?

Fundamentally, the objective of any TOD Policy should be to ensure that it makes building in the TOD zone more attractive than outside or elsewhere. 

Apart from higher land values, the TOD zone suffers from several other disadvantages - less likely to have larger vacant plots, more likely to be congested, noisier, and so on - that make them less attractive compared to their surroundings or the suburban areas. Besides, the surroundings of stations are not perceived as desirable residential locations. 

In the circumstances, there must be a significant incentive to crowd-in development into the TOD zone. Such incentives come from both urban planning instruments and fiscal concessions. Apart from additional FAR, the former could include a higher base FAR, a lower price for purchasable FAR, higher TDR loading, and a more generous TDR conversion rate. Fiscal concessions could include lower stamp duty, layout development fees, building permission fees, and property taxes. If there is a betterment levy or impact fees, the same may also be discounted for those desirable developments (like high-rise buildings). These benefits could be limited to developments initiated within a certain period.

This would also require a shift in the way governments view TOD. They should prioritise the development of the zone over the maximisation of revenues. In fact, foregoing current revenues to harvest future revenues should be the mantra. The foregone revenues would be offset within a few years by those from the economic activities triggered by the developments. 

In other words, the strategy should be to first crowd-in a critical mass of developments that is sufficient to sustain future development. Till this happens, revenue realisation should be strictly subordinate. This is especially required in the large Indian cities, which have poor urban planning and a culture of sprawling suburbs. 

The timing of TOD adoption is also important. The best time to initiate TOD is just before the project work starts, when land values are lower, and the market is being catalysed. The marginal response to incentives is likely to be much greater in the initial stages when property prices too have not gone over the roof. 

It may be useful to experiment in a few bigger cities by picking one or two locations (those with sufficient developable land) and providing a package of incentives for a period of 3-5 years. At the risk of repeating, the package should be designed keeping in mind the need to make the TOD zone significantly more attractive than its surroundings.

Weekend reading links

1. This captures the big problems with Chinese exports to Europe.

In the early 1970s workers at Dongfeng, or “East Wind”, imported American trucks to inform their early attempts at making off-road vehicles destined for the People’s Liberation Army. Nearly 60 years later Stellantis, the European owner of the Jeep brand, is partnering with Dongfeng to produce a new battery-powered version of the iconic American light utility vehicle for consumers in China, the Middle East and south-east Asia... International carmakers, struggling for survival amid an expensive transition to electric vehicles, are turning to China’s technologically advanced and cost-efficient factories as manufacturing bases for their global businesses. Foreign companies already account for around two-fifths of China’s car exports to Europe, when joint ventures with local groups are included, according to the Rhodium Group, a US consultancy... Indeed, Volkswagen, BMW, Nissan, Hyundai and others are increasing exports from Chinese factories with spare capacity to markets other than Europe and the US.

2. A new approach to making clean hydrogen. 

Most of the hydrogen the world uses today — mainly for fertilizer and refining — is produced using natural gas in a process that creates lots of emissions. In recent years, the United States and other countries have invested billions of dollars trying to make “green” hydrogen with wind and solar power, but it has proved difficult and expensive. Now a growing number of companies think a better answer could lie underground. Dozens of start-ups are trying to find large reservoirs of natural hydrogen thought to exist below the surface. Others, like Vema, are trying to stimulate the processes that generate that hydrogen, without any emissions. It’s a field often referred to as “geologic hydrogen.”...

Hydrogen is the most abundant element in the universe, and it gets made naturally in the Earth’s crust when certain iron-rich minerals react with water and rust. This process, known as serpentinization, often leaves behind rocks with a mottled green color. For a long time, many geologists believed that any natural hydrogen produced this way was unlikely to accumulate in large underground deposits because the tiny molecules would slip away through cracks in rocks. Lately, that conventional wisdom has been upended... By the 2020s, scientists were publishing papers estimating that natural hydrogen deposits underground could supply the world’s needs for hundreds of years. One promising location was North America’s Midcontinent Rift, an enormous formation of iron-rich basalt that stretches 1,200 miles from Kansas to Michigan... The Energy Department has estimated that geologic hydrogen could be produced for less than $1 per kilogram. That would be cheaper than hydrogen made from fossil fuels and one-sixth the current cost of making hydrogen from wind and solar power.

It has started attracting private capital.

Companies are racing to find the fuel. One of the best-funded start-ups, Koloma, has raised $400 million from investors including Amazon and United Airlines and has drilled exploratory wells in Iowa. HyTerra, an Australian firm, is searching for hydrogen and helium in Kansas and Nebraska. Not everyone thinks the best strategy is to search for natural deposits underground. A better idea, some say, is to create them. In Quebec, a startup called Vema Hydrogen plans to spend the rest of the year injecting water into its underground test wells to see if it can speed up the process of serpentinization that creates natural hydrogen underground... Vema has already raised $15 million and is working to raise more. There are ophiolites all over the Earth, including a ridge stretching from Costa Rica to Alaska, and the company is looking at sites in Oregon and California as well. Other start-ups, including one out of M.I.T. called GeoRedox, are developing their own approaches.

3.  Semiconductor chips are one area where China lags badly.

Chinese companies will most likely make just 2 percent as many A.I. chips as foreign firms do this year, said Tim Fist, a director at the Institute for Progress, a think tank in Washington. The production gap between Chinese and foreign manufacturers is especially big for memory chips, which are essential for the large calculations done by A.I. Companies outside China will make 70 times as much memory storage capacity this year as Chinese chip makers will, Mr. Fist said...The inability to get essential tools from ASML has been a major chokehold for Chinese chip makers. Since U.S. officials led an effort to lobby the Dutch government to block shipments to China, no Chinese company has been able to buy ASML’s most advanced tools. Instead, Chinese chip makers have recruited engineers with experience using those machines at TSMC, the world’s top chip maker. And now, Chinese start-ups are trying to make their own chip manufacturing equipment... China’s A.I. companies are trying to get the computing power they need by strapping together numerous less powerful chips. Huawei has taken such an approach... The chips Huawei does produce are prone to defects and use more electricity than cutting-edge foreign ones.

4. This is one of the greatest messages from a student to a teacher, Albert Camus to his elementary school teacher Louis Germain after he won the Nobel Prize.  

5. Japanification in demographics.

And this impact of smartphones is striking.

6. Soumaya Keynes has a good read on the history of export restrictions and their impact, and why trade wars will endure. 

7. Southeast Asian economies struggle on the face of rising inflation from the War.

Their currencies have weakened.

The Philippines and Indonesia have already raised interest rates. 

8. Good FT visual story on maritime chokepoints.

This is a good illustration of the extent of damage from the Strait of Hormuz closure.

In a sign of Bab el-Mandeb strait’s strategic importance, Djibouti – whose coastline runs along the waterway – is home to military bases of several major countries, including the US, Italy, France, Japan, and the sole People’s Liberation Army base outside China. The Bab el-Mandeb strait is among several trade chokepoints that, when blocked, require vessels to travel more than 8,000 miles. These also include the Strait of Gibraltar and the Suez and Panama Canals...

The knock-on effects of a blockage can be much more significant where there is no alternative route to fall back on, as with the Strait of Hormuz, the Øresund between Denmark and Sweden, and the Turkish straits, comprising the Dardanelles and the Bosphorus, which act as the gateway between the Black Sea and Mediterranean. With the Hormuz strait, says Jasper Verschuur, co-author of a study into the risks of the world’s 24 narrow straits, “there is no alternative for 80 per cent of the trade”.

This is India's exposure to various maritime routes

9. Sajjid Chinoy writes that India's economic problem is less of a current account and more a capital account problem, arising from the sharp decline in FDI and FPI inflows. In the circumstances, he argues that demand compression can be counterproductive by slowing growth. He suggests a combination of depreciation and augmentation measures for foreign capital inflows.

The objective must be to attract a large-enough quantum of near-term capital inflows across multiple avenues — even if it involves a subsidised swap — to change exporter, importer and investor behaviour, and prevent a destabilising overshooting of the Rupee.

I am not sure how this is at all possible precisely when capital is flowing the other direction.  

10. For all talk of private participations and efficiencies, the long-distance railway networks in continental Europe is largely state-owned - Deutsche Bahn (Germany), Ferrovie dello Stato (Italy), Renfe (Spain), SNCF (France), and SBB (Switzerland). The Economist writes about how Italo, the private high-speed rail operator co-founded by Luca Cordero di Montezemolo, is trying to disrupt the German network. 

11. Securitisation and deepening of financial intermediation in Europe. 

The securitisation market in Europe remains moribund, comprising around 0.3 per cent of GDP compared with 4 per cent in the US.

12. SpaceX's IPO prospectus takes the widest liberties with US securities law. 

13. K-shape in US economy.

And now in wage decline

14. Ukraine's drones are inflicting massive damage and casualties on Russia as the country forces its way into its most favourable situation since the war began.

Some intelligence reports indicate that a staggering 1.2mn Russian soldiers have been killed or wounded since February 2022, a casualty figure no major power has suffered in a single conflict since the second world war... Backed by some €90bn in EU loans, Kyiv is pouring resources into domestic arms production in a bid to reduce dependence on western weapons and the political constraints that often accompany them. It has moved at breakneck speed to scale up the manufacture of land, sea and air drones, artillery systems, electronic warfare equipment, and even ballistic and cruise missiles.

15. The consulting industry is threatened by AI.  

Few industries are debating AI’s implications more intensely than consulting, whose core work of research, summarising data and producing neatly designed PowerPoint presentations is highly automatable. Richard Susskind, co-author of The Future of the Professions, says consultants are more vulnerable than other mainstream professions in part because the work of junior staff “can now be taken on, with mild supervision, by increasingly capable AI systems”. The sector now has two new competitors, he adds: “the AI-empowered client and disruptive start-ups. Both challenge the conventional model.”... AI also threatens one of professional services’ foundational economic models: billing by time. When a bot can review thousands of contracts in minutes and draft complex documents in seconds, the relationship between hours worked and value delivered begins to break down. Increasingly, clients are demanding pricing linked to outcomes rather than labour inputs.

16.  

The missing link in India's FAR market - a trading platform

I blogged here on nine low-hanging fruits in urban planning in India, and here on the actual use of land value capture instruments in India. This post will discuss the Floor Area Ratio (FAR) and Transferable Development Rights (TDR) transactions in Indian cities. 

Fundamentally, FAR, beyond a certain limit that comes with property rights, can be purchased at a defined rate (up to the master plan limit). Further, when land is given up for a public purpose, instead of receiving financial compensation, the landowners can get additional FAR that can be traded (as TDR) and availed in certain predefined locations. Finally, the TDRs can be transacted through an institutionalised platform. 

The table below shows the status of FAR and TDR transactions across Indian states.

Clearly, while all states have the requisite policy and legal frameworks in place, the actual implementation (in terms of FAR sold and revenues realised, and TDRs issued and transacted) has been limited, except in Maharashtra, and to some extent in Hyderabad. 

Mumbai is the most complete illustration of FAR and TDR. It allows for purchaseable FAR (or premium FSI) of 0.5 to 0.84 over the base FSI, depending on the road width abutting the plot (nothing below a road width of 9 m). It is sold at 35-50% of the Ready Reckoner Rate (RRR), varying for residential, industrial, and commercial uses. The revenues are shared between the Brihanmumbai Municipal Corporation (BMC), the state government, and the State Road Development Corporation (MSRDC). BMC itself has so far earned over Rs 14,000 Cr from premium FSI sales. 

TDRs are issued (in the form of a Development Rights Certificate, DRC) by BMC for defined instances where land is surrendered for public purposes at the rate of 2.5X for the island city and 2X for suburbs against the surrendered land. It can be used across the municipal corporation limits (with some specific exclusions) in the range of 0.17 to 0.83, depending on the road width (cannot be used below 9 m roads). The TDR generated is indexed at the RRR, and an equivalent floor space is allotted at the receiving plot. Since April 2026, Mumbai has moved into a fully electronic trading platform for TDRs, and manual record keeping has been dispensed with. 

An electronic trading platform is essential for unlocking the full potential of TDRs. It is particularly important since it significantly enhances TDR liquidity, enables efficient market clearing, brings transparency and certitude for landowners, and also prevents fraud and abuse. Mumbai is the only place with a blockchain-secured, workflow-automated e-trading platform that allows for buyer-seller bidding and matching. 

A major reason for TDR trading failing to operate across states is the manual and opaque nature of the records and the problems with trading them. It forces cities to impose restrictions like limiting TDR to the same locality or zone, thereby sharply diminishing liquidity and deterring land owners from accepting TDRs. Until a state moves to a properly dematerialised exchange, secondary-market price discovery stays opaque, and TDR rates trade at significant discounts to face value. This is the main reason why so many landowners say, “We want money, not land.”

An illustration of its value comes from the experience of Hyderabad’s TDR Bank, which is currently only a depositary and coordination platform, though integrated with its building approval system. In the absence of a trading platform and the associated transparency and liquidity (and also the misguided unlimited FAR provision), in order to trigger TDR transactions, the state government was forced to come up with a government order (GO Ms No 95, March 2026) to mandate TDR utilisation for high-rise buildings. 

All told, even highly urbanised states like Tamil Nadu, Gujarat, AP, Telangana, Karnataka, and Haryana have struggled to realise the potential of TDRs due to thin secondary markets that deter efficient market matching and price discovery. 

An electronic TDR trading platform can significantly address these constraints and simplify TDR issuance by bringing complete transparency and allowing its trading across the city, thereby increasing liquidity and raising its attractiveness and credibility for land owners (both sellers/owners and buyers). 

How do other countries and cities undertake TDR trading?

The table below captures how TDR trading happens across a few cities/countries. 

Brazil's CEPAC is the gold standard for an exchange. It is the only system globally where development rights are explicitly structured as securities. As an aside, this also makes Mumbai’s success especially remarkable. CEPACs are auctioned by the Federal Bank of Brazil and can only be used in designated urban operation areas; they must be authorised by the CVM (the Brazilian equivalent of the U.S. SEC) to be traded on the B3 stock market, and have raised over USD 2.7 billion across 15 years from Faria Lima and Água Espraiada Urban Operations, with funds reinvested in transit, roads and parks. In Rio's Porto Maravilha, all CEPACs were wholesale-auctioned to Caixa Económica Federal, which financed all infrastructure improvement and 20 years of service costs without further public outlay. 

In this context, I have a co-authored working paper here, where we propose the establishment of a similar exchange for trading FARs with mechanisms similar to those in Mumbai. 

So what should be the design for a trading platform for TDRs? 

The wide diversity across states and cities, coupled with the weak state capabilities, necessitates a qualified approach in designing TDR trading platforms for Indian cities. Besides, the TDR is a local commodity, whose trading is inherently local. A three-level design may therefore be prudent. 

At the first level, as discussed here, there’s a need for a standardised national protocol layer, authorised by SEBI and MoHUA, and operated through a SEBI-approved entity. This layer could do four things: (a) define a Development Rights Certificate (DRC) standard with a unique national ID and QR code; (b) provide a centralised dematerialised depository with its eKYC, escrow, etc.; (c) set eligibility, disclosure, and dispute-resolution norms; and (d) supervise a national audit trail. This layer would enhance the credibility and efficiency of the platform. 

Each municipal authority (BMC, GHMC, BBMP, CMDA, APCRDA, GMDA, DDA) could operate a city-bounded marketplace on the common rails, and trading within a master-planned area only. It could borrow from the Mumbai e-TDR, which has a single nodal bank (SBI) and one blockchain-secured ledger. This would be supported with a municipal TDR bank inside each metro exchange. It could be designed as a public buyer-and-lender of last resort that holds inventory, sets a price floor, and even guarantees loans collateralised by DRCs. This solves the landowner objection of “we want money, not land” by giving every certificate-holder a guaranteed cash exit at a reserve price.

This three-layer structure also matches India’s existing regulatory plumbing in trading platforms. Mutual funds, government securities, and electricity markets are organised with a national legal and depository spine, with state-specific trading layers on top. 

The smaller cities in each state could have a pooled market, administered by an appropriate state government entity. Or it may be useful to start with the larger cities, and expansion to be done based on the emerging feedback.

Applying land value capture to public investments

Donald Shoup, the famous urban planner, posed this great question that goes to the heart of infrastructure finance: “How do you finance a project that has a return much higher than its cost, but nobody wants to pay the upfront cost?”

The answer lies in land value capture (LVC), a topic that I have blogged on numerous occasions (see here and here). Specifically, two instruments, betterment levy on existing developed properties, and impact fee on those which are undergoing development, have the potential to raise significant revenues. 

In theory, LVC spans the spectrum from appropriating directly through ownership of a part of the developed land (through the likes of land pooling) and indirectly through one-time and/or recurring charge (betterment levy or impact fees). 

The former, the best example is Gujarat’s historical town planning schemes (TPS), is perhaps the most ideal approach, insofar as it cleanly appropriates a share of the land itself (typically 40-60% of the total land). The problem is that it is an engagement-intensive activity requiring both high credibility and state capability, both deficient across state and local governments. The best illustration of this is Andhra Pradesh’s struggling experiment to develop its capital at Amaravati by pooling land through a TPS. 

TPS entails that the state takes over the lands, develops infrastructure, and leaves developed plots for the landowners, all this within some defined period of time. The combination of the political economy of real estate and weak state capability creates a time inconsistency problem that erodes the credibility associated with such schemes. 

It is also for this reason that, despite numerous efforts over the last three decades, there are still very few instances of genuinely successful slum housing redevelopment schemes in Indian cities. And there are numerous examples of badly delayed and poorly executed such projects. 

In the circumstances, the best bet with LVC in the context of countries like India is to collect a share of the incremental value as a charge on some urban planning instrument. It is the instrument with the fewest implementation difficulties. 

Consider the numerous ongoing infrastructure projects across the country, ranging from national highways and expressways to metro railway projects, airports and ports, data centres and industrial clusters, and generally any large investment that leads to the development of an area. In all these cases, there’s an immediate spike in property prices, which is almost completely appropriated privately. If some share of the property valuation increase can be appropriated through the LVC instruments, then it can be securitised to fund the projects themselves, at least a significant share of the cost. 

Illustrative examples will include the nodes in the Delhi-Mumbai industrial corridor, stations in the Mumbai-Ahmedabad high-speed rail and the Regional Rapid Transit System(RRTS), vicinity of Navi Mumbai Airport, the corridor abutting Bharatmala pariyojana, the vicinity of several new airports like Jewar and Bhogapuram, and so on. None of these has any specific betterment levy or impact fee charged on properties in their influence zones. These are all massive missed opportunities and large revenues foregone. 

The formally reported claims of LVC revenues from all these are either in the form of unlocking value through sales or lease of government properties, or, in a few cases, they include the sale of lands acquired through TPS. 

In every one of these projects, the intent of capturing land-value gain from the project announcement onwards exists somewhere on paper. In practice, though, the only meaningful capture has come from in-kind land pooling, lease revenue/premia from sale of publicly-owned land, and a few development/impact-fee tweaks. The second one (lease revenue or premiums from sales of public lands) is pure monetisation and should not be confused with LVC. 

A true betterment levy or impact fee, in the form of a charge on existing private property in the influence zone, payable from the first transaction after project announcement, has effectively not been deployed at scale in any of these projects. Therefore, the aggregated, publicly disclosed revenue from "pure" LVC instruments (betterment levy + impact fees, excluding land sales/leases/concession fees/toll/UDF) is very small, even negligible, relative to project cost in every case here. The genuine “capture” that has occurred is overwhelmingly through public-land monetisation or in-kind retention of pooled land, where the former leaves the increment on third-party private property untouched.

Perhaps the only true significant examples in India are the impact fees in a corridor of 1 km abutting the Hyderabad Outer Ring Road (ORR) (though its success in terms of realisation is a matter of debate), and the 1% metro cess on property purchases in Mumbai to fund the metro railway project. A promising effort with the Navi Mumbai Airport Notified Area (NAINA) was that of the 50% betterment levy on the increased property value notified in 2013, which was immediately reduced to a notional 0.05% following political opposition. 

The political economy is an important consideration. Every such big public investment immediately invites large speculative purchases, especially by politically and bureaucratically connected individuals. They are an important sink for the large volumes of black money that slosh around the local economy. Vast sums are invested in the name of third parties (benamis) who front the local connected and influential. Throwing sand in the wheels of this speculative activity, much less appropriating a part of the windfall increments as public revenues, will be resisted to the hilt by the aggrieved interests. 

It is therefore important to be careful while designing the LVC instrument. It should depend on the nature of the infrastructure project. The objective should be to capture the increment in land value that the incumbent land owner enjoys from the public investment by charging the first transaction after the project announcement (which triggers the spike). Ideally, it should also try to avoid penalising the buyer, who has internalised and paid for the land increment. However, if the increment is ongoing, like with a corridor that undergoes continuous development, there’s a case for also capturing the increment flows over time through an appropriate instrument. 

It is also important to differentiate between brownfield (betterment levy) and greenfield (impact fees) areas. 

Accordingly, the most appropriate betterment levy on existing (developed or brownfield) property owners (who are not likely to transact) comes from a cess on their property taxes. In theory, if the property taxes are indexed to the market value, there would be no need for a separate cess. However, this is never the case since the property prices are generally linked to the guidance or ready reckoner rates fixed by the local authorities, which are always lower than the market value, and the wedge widens after local property booms. 

For properties undergoing development, the ideal option would be to charge from those selling the property. However, this is complicated and can be captured, and that too only partially (given the aforesaid wedge between market value and guidance value) from capital gains taxes. Administering this is infeasible (imagine two kinds of capital gains tax for land, where there’s land value increment from public investment and the rest). In the circumstances, for such properties, the options are to levy a charge on either the registration fees, the change of land use fees, the layout development fees or the building permission fees. The assumption would be that the charge shapes market expectations and cascades across the property market and is internalised by everyone in the property transactions chain. 

It may be useful to keep in mind some principles while designing the LVC instrument. In theory, it can be charged on the first transaction for a property in the influence zone after the project announcement as a significant windfall fee, or on all transactions for a period (that reflects the time for the project to realise its benefits). A simple and practical strategy would be to impose a one-time cess (on the property value) on the first transaction on the property. A flat levy/fee, while administratively appealing, does not address the diversity in the types of development projects and their widely varying land value impacts. 

An analysis of the projects mentioned above points to a few problems, even where some LVC framework exists. For one, the first transaction after the project announcement rule is not legally embedded. Most Indian betterment-levy provisions trigger at project completion (e.g., Section 37 of the DD Act 1957; Section 66 of the Bombay/Gujarat TP Act 1954/1976). By then, the original landowner has typically already transacted, and the increment has been captured privately. This is not only economically inefficient but also invites public discontent and political opposition. 

Policy makers create confusion and skirt accountability by conflating land monetisation with value capture, as is the case with CIDCO, YEIDA, or DSIRDA. Alternatively, user-side instruments like User Development Fees (UDF) in airports, and tolls and concession fees on highways, also get lumped as LVC. 

As the aforesaid discussion shows, designing an efficient (in terms of capturing value from the incumbent land owner at the time of project announcement) and least distortionary (in terms of not adding unreasonably to property development costs) LVC instrument requires careful thought and design. 

As an illustration, I asked Claude to estimate the likely LVC revenues from the development of the newly announced data centre projects in the Visakhapatnam area in Andhra Pradesh, and other investments in the state.

It estimates a realisation of Rs 700-1500 Cr annually from the application of LVC instruments to the Google AI hub catchment, Bhogapuram airport zone, defence clusters, and metro corridors. Even half of this would be greater than the combined property tax revenue collection of all the state’s 117 municipalities. 

As an implementation strategy, it may be useful to align incentives and design a revenue-sharing mechanism among all public stakeholders, especially the local government. So, for example, instead of all the LVC revenues from a national highway or other central government project going to the project development entity, a part should be shared with the local government. This creates the required local incentives to enable effective adoption of any LVC scheme. 

In terms of policy mandates, it is time to mandate that all large public investment projects be accompanied by the adoption of LVC instruments by the local governments. This would entail the following: (a) notification of a LVC influence zone around the project, (b) notification of the appropriate LVC instrument and the LVC rate, (c) enabling a statutory framework and a physical mechanism for its collection, and (d) a transparent and public accounting of the realisations. 

As a first step, all states should be encouraged to adopt an LVC policy, borrowing from MoHUA’s LVC policy. It may be useful for the Government of India to build on this policy and formulate a model document on both betterment levy and impact fees that can be issued as administrative orders by the state governments. To incentivise this, the Ministry of Finance should consider making this a mandatory requirement to access the 50-year interest-free capex loans being given to state governments under the Special Assistance Scheme for Capital Investment (SASCI).

The model documents and guidance on each of the betterment levy and impact fee instrument options may be useful to ensure that LVC instruments are adopted in letter and spirit. The documents should contain the detailed implementation design of the instrument, and the same should be incorporated into the financial closure, state support, and all other agreements associated with the project, and should be institutionally coded into the system along with the project announcement. All project appraisals should have tightly defined and enforceable requirements on LVC. 

Finally, the central government's support for any project should be made contingent on the realisation of the LVC proceeds in both letter and spirit. This should become an integral part of the financing culture of all large projects in India. This is one of the very few big bang low-hanging fruits in the mobilisation of public revenues, especially for fiscally strapped urban local bodies.

Weekend reading links

1. Samsung's spectacular turnaround, from being in the doldrums as late as in 2024.

This month its market value, which has soared by 400% in the past year, hit $1trn for the first time, propelled by furious spending on artificial-intelligence infrastructure. In the first quarter of 2026 its operating profit rose to 57trn won ($38bn), more than eight times as much as a year before. Analysts expect profits to keep rising at a blistering pace, thanks in particular to the seemingly insatiable demand for its advanced memory chips... Semiconductors accounted for 61% of sales and 94% of operating profits in the first quarter. It is one of just three firms capable of making at scale the memory chips needed for ai, alongside SK Hynix, a South Korean rival, and Micron, an American one. The number of memory chips Samsung sold in the first quarter was up by about 20% on the preceding three months, but the average selling price rose by 90%.

2. The Economist argues that the calm in global oil markets despite a supply shock of some 14 mb per day can be traced to the 4 mbpd of increased exports by the US and the 4.5 mbpd of reduction in Chinese imports, coupled with rationing across countries. 

3. As the rise of AI threatens white-collar jobs and increases the returns to capital, The Economist proposes some measures to redistribute the gains. 

If employment falls, income that once went to workers is likely to show up as high profits in AI firms, chipmakers, data centres or elsewhere in the supply chain. Clever tax reforms, such as levies on corporate profits that are above a normal return on capital, on land and on natural resources, could capture these rents. The case for inheritance taxes to prevent the entrenchment of a capital-owning elite looks even stronger than before. At the same time governments could help workers adjust. Public wage-insurance, which smooths out falls in income after job losses, can help workers find better opportunities (and so can eventually pay for itself). Denmark’s active labour-market policies, in which the state helps people find and train for new occupations, have been proved to cut spells in unemployment... 

A last set of radical ideas, such as the partial nationalisation of ai firms. This week a South Korean presidential adviser floated a citizens’ “dividend” from AI businesses, sending the local stockmarket down by 5%, before backtracking. In America politicians murmur about giving citizens shares in AI companies via “Trump accounts”. In economic terms there is little difference between a well-designed tax system and a government stake in the private sector—and countries without AI giants will have to rely on taxes rather than seizing shares in foreign companies. But America may find that some public ownership is the best way to make the social upside from the technology transparent.

4. The changing face of Reliance Industries.

5. America's remarkable productivity growth miracle since the pandemic (it predates the AI boom).

Now with AI coming of age, the productivity spurt is likely to continue. 

6. Egypt may well be the leader in land monetisation to promote economic growth in any substantial form.  (HT: Adam Tooze)

Since 2015, Egypt has increasingly contributed public land as equity, while foreign investors provide capital, development expertise, and project execution. Once a project is completed, revenues are shared according to pre-agreed division... in 2023, Egypt appointed the bank’s International Finance Corporation as its advisor for the asset monetization program, leveraging its experience supporting emerging markets. While land monetization has been tried elsewhere, Egypt’s projects are among the largest... For the Ras el-Hekma development on the country’s North Coast, Egypt contributed approximately 40,600 acres of state-owned land along the Mediterranean. The UAE (via its ADQ sovereign wealth fund) committed roughly $35 billion, the largest foreign direct investment in Egyptian history. Egypt received immediate foreign currency inflowsfor the land, a 35 percent stake in the project, and long-term profit participation... A similar project, also on the North Coast, is Alam el-Aroum/Samla near Marsa Matrouh. The Qatar Investment Authority-linked Qatari Diar is investing almost $30 billion, which includes a $3.5 billion upfront land payment for some 20 million square meters and $26 billion in development investments. A revenue share for Egypt (15 percent after cost recovery) is part of the deal.

Another arrangement is in place for Egypt’s New Administrative Capital (NAC). About thirty miles east of Cairo, the NAC is designed as the government seat and a commercial hub; reports estimate total development costs of up to $58 billion, including infrastructure and governmental, commercial, and residential districts. Foreign direct investment plays a role in specific sub‑components like the Central Business District (CBD) and future free-trade‑zone ventures. Chinese banks led by the Industrial and Commercial Bank of China provided 85 percent of funding for twenty towers in the CBD. The China State Construction Engineering Corporation developed the CBD; Gulf investors (such as the United Arab Emirates’ DP World) developed commercial parcels. The state monetized land incrementally for the NAC, and parcel sales financed development, without increasing Egypt’s debt.

All this appears very impressive. While the article paints a picture of success, it would be interesting to peel layers and scrutinise this. 

7. This is anecdotal, but tells a lot about why India lags in manufacturing.

8. Spain is undertaking an ambitious experiment in immigration.

Since 2022, Spain’s foreign-born population has surged by an annual average of 665,000, the equivalent of adding a city the size of Málaga each year. Last year the country accounted for roughly one-third of the total increase in the EU’s immigrant population, according to the Rockwool Foundation, a Berlin think-tank. Supporters say the influx has given Spain’s ageing society a much-needed burst of economic vigour. Critics call it a poorly planned strategy that is straining the country’s infrastructure and creating new social tensions... In less than a quarter of a century, Spain’s foreign-born population has gone from one in 20 residents to almost one in five, a higher proportion than even the US... Last month the Spanish government’s most contentious immigration move to date took effect — a sweeping amnesty giving at least half a million people the chance to gain residency and work permits and move out of the shadow economy... applicants must prove he was in Spain before January 1 this year and has been there for five consecutive months.

The country is already experiencing an acute housing shortage, has among the highest youth unemployment rates at over 10%, and the anti-immigrant Vox party is running third. The final outcome on the rapid rise in immigration is yet to be known. 

9. Ruchir Sharma points to an area where China trails badly behind the US, the negligible role of the renminbi as an international currency. 

With a 17 per cent share of global GDP, but only 2 per cent of central bank reserves, China is trailing 30 to 40 years behind previous superpowers at a similar stage of their ascents... Britain at its peak accounted for 40 per cent of trade, but 60 per cent of trade payments were in sterling. China by contrast has a leading 15 per cent share of global trade, but only 2 per cent of trade bills are invoiced in renminbi...

China will remain an incomplete superpower until it can match this financial firepower. For decades, it has kept its financial system more tightly sealed than any other major nation. It now ranks in the bottom fifth of nations by international investment position, which captures the level of foreign ownership in the domestic market. Foreigners own less than 5 per cent of the stocks and bonds in China, one-fifth the level in the US. Its home market is something of a local prison. Beijing has generated economic growth with heavy infusions of government money, corralled at home by capital controls. Its money supply has multiplied sixfold since 1980 to 230 per cent of GDP, among the highest in the world. This liquidity sloshes around inside the walled economy, much of it in the domestic debt market, battered lately by a property bust. Beijing is wary of easing controls, lest it unleash capital flight.

10. The US has been the biggest oil export beneficiary of the Iran war.

11. The booming market for whey protein.

Prices for whey protein isolate have soared fivefold to €28,000 a tonne since 2023, outstripping cheese and butter prices by more than four times as producers struggle to keep pace with a booming protein market... Thirty years ago whey was primarily used in animal feed or spread on farmland as a fertiliser. Whey is the liquid separated from curds during the cheesemaking process. Now, dairy groups upgrade the liquid by filtration to produce whey protein isolate, a valuable ingredient for use in sports supplements as well as groceries such as yoghurt, bread and fizzy drinks, as weight-loss drugs and the protein megatrend propel demand. “This is reshaping the economics of dairy,” said Jose Saiz, analyst at Expana, a commodity market information service. “It used to be a product with no value . . . now cheese could become the byproduct of whey production.”

12. The UK's experience of small altnets driving broadband expansion and lowering prices has come with excesses. 

Over the past decade, more than £31bn has been raised to roll out full fibre broadband across the UK, with private equity giants, including Macquarie and KKR, backing upstart challengers — or “altnets” — in the sector. Yet despite the initial investor optimism that the “altnets” could snatch customers away from industry leaders, the firms have been dogged by high build costs, lower-than-expected customer uptake and a sharp response from the country’s largest provider — BT’s Openreach — to deploy its own fibre infrastructure. The destruction of shareholder value has been brutal. At the last count, the “altnets” posted losses of more than £1.5bn in 2024, according to Enders Analysis. After accumulating some £9bn of net debt as of 2025, some companies have already been placed into administration, while others have fallen into the hands of lenders... 

Prior to the “altnet boom”, which accelerated from 2021 onwards, only 24 per cent of Britons had access to full fibre internet, according to Ofcom. Fast forward five years, that number is now more than 78 per cent, with altnets serving almost 20mn homes with full fibre, according to Assembly Research. By next year, Ofcom estimates 95 per cent of UK homes will have full fibre, putting it in line with Europe’s leaders, including Spain and Luxembourg, where regulators encouraged full fibre rollout earlier than the UK. The “altnets” have also forced BT’s telecoms infrastructure provider Openreach and Virgin Media O2 to expand their own fibre networks, giving consumers a choice between providers who are now forced to think faster and harder about how to up their game. This added competition has meant prices have fallen, with the average monthly real-terms list price of UK full fibre broadband falling from £62.38 in September 2021 to £43.46 in September 2025, a drop of 30 per cent... altnets are taking close to 1mn [customer] lines from BT annually.

13. Alan Beattie argues that EU has initiatied several trade measures against China, though their implementation has been weak, primarily due to internal opposition within the bloc. 

One of the recent instruments with a bit more bite is the Foreign Subsidies Regulation (FSR), launched in 2023 and designed to level the playing field against state-backed Chinese companies bidding for contracts or producing and selling in the EU. It’s notable that it gives a lot of investigatory and decision-making powers to the Commission, specifically to the internal market and competition directorates, which are used to having autonomous powers. By starting investigations into their operations, the FSR has managed to get some Chinese companies to pull out of public procurement bids. But when the EU tries to use its internal market powers to investigate supposedly subsidised Chinese businesses trading in the single market, it becomes clear just how strongly Beijing is willing to resist. Last week, in an investigation dating to 2024 into the Chinese cargo scanner company Nuctech, Beijing cited new supply chain security laws to forbid Chinese companies to comply with requests for information, saying Brussels’ extraterritorial reach was illegitimate.

14. Arvind Subramanian and Devesh Kapur on the contrasting tales of India and China in monetisation of lands by urban local bodies. 

China’s land revenues increased from less than 1 per cent of GDP to more than 10 per cent at its peak. In contrast, India’s revenues have stagnated at about 1 per cent of GDP through the entire growth phase. Put differently, the Chinese government’s collections from land revenue for every urban resident that was available for spending were about 15 times more than India’s in 1999; at its peak in 2020, this multiple increased to 225.

15. As AI capex surges, there are growing doubts about whether it will generate the returns required to justify it.

For each of these hyperscalers, I collected the consensus estimates of analysts for the capital expenditures and revenues between 2025 and 2030. In these five years, capital investments are expected to rise by 20 per cent a year, a growth rate never seen before in this industry. Meanwhile, revenues are expected to grow 15 per cent annually. If we make the heroic assumption that there are no costs, then the additional revenue is the profit these companies are expected to make from their additional investments in AI data centres. Yet, even under these extremely optimistic assumptions, I calculate the implied return on investment is highly negative for all of them except Amazon. These numbers show that if the hyperscalers continue on the current trajectory, the AI boom will become a story of one of the largest destructions of shareholder value in history... If the hyperscalers want to generate, say, a 10 per cent return on investment, they would have to find an additional $2tn to $5tn in revenue a year. A tall order for a group of companies that currently generates revenues of just $1.5tn per year.

See this comparison with the technology, media and telecom (TMT) bubbles of the late nineties.

In 2025, US businesses invested almost $1.5tn in IT equipment and software. At the peak of the TMT bubble, it was $466bn or $829bn when adjusted for inflation. Indeed, the US economy is growing solely because of the tech boom. I calculate that over the past four quarters, 93 per cent of US GDP growth was explained by tech investments. Even at the peak of the TMT bubble, it barely reached 60 per cent.

16. Tim Harford points to evidence that retailers jack up prices in response to shocks much faster than they bring prices down, and that retailers make their money not so much during the upcycle than in the downward phase.

Johannes Brinkmann and Nikhil Datta of the University of Warwick recently published an analysis of the impact on petrol and diesel prices of the oil price shock in 2022, following Russia’s onslaught in Ukraine. They found that in the UK, retailer margins compressed: the wholesale price of diesel rose by 39 pence per litre, while retail prices only rose 16 pence. This is the opposite behaviour to that predicted by the greedflation hypothesis. A natural explanation of this price compression is that retailers feel under more intense scrutiny when prices are rising. Brinkmann and Datta show that searches on the petrolprices.com website increased dramatically when prices did — and that areas where such searches were more common were also areas where the price compression was more intense. 

Brinkmann and Datta’s analysis is merely the latest in a long tradition of research describing “rocket and feather” pricing at the pump — capturing the idea that pump prices neither faithfully track the ups and downs of the crude oil market, nor exaggerate them — instead, they shoot up like a rocket but drift down again like a feather. What is more, the quick surge upward reaches prices less lofty than one would expect; it is during the slow descent that retailers make their money. Fifteen years ago, Matthew S Lewis and Howard Marvel noted that customers spent more effort searching when prices were rising, even though there was little benefit to that search, since most retailers were charging similar prices. When pump prices were falling, there was more variability from forecourt to forecourt and a higher return to shopping around, but most customers did not bother, feeling content that prices were moving in the right direction.

17.  Preference shares are a complicated instrument.

The “preference” investors receive — usually a slightly higher dividend — comes at the expense of voting rights. Preference shares therefore arguably resemble the worst of both worlds of debt and equity. Like bonds, they do not offer any influence over the company’s decision-making. Like ordinary shares, they do not come with a contractual claim to annual payouts as dividends are subject to management discretion. Such non-voting shares have been a prominent feature in corporate Germany. Four of the 40 blue-chips in the Dax have used them to establish substantive two-tier share structures for years: Volkswagen, Porsche and BMW, the three auto giants, and glue and detergent maker Henkel. All are dominated by controlling families who hold a tight grip over the firm. 

Two further Dax companies — Merck and Fresenius — are listed as “partnerships limited by shares”, a German legal structure known by its acronym KGaA, that makes some shareholders more equal than others through other means. Deutsche Bank listed its asset management arm DWS as a KGaA in 2018, too, warning at the time that this structure could dent its valuation. Yet the club of German blue-chips with differential voting rights will soon become smaller after BMW shareholders voted to abolish preference shares last week at its annual meeting. The group’s 54.7mn preference shares, representing 10 per cent of BMW’s equity, will soon be swapped into ordinary shares with voting rights... In the US, dual-class share structures have become increasingly popular as fast-growing tech groups want to tap public markets while keeping outsized voting power for insiders. Elon Musk’s SpaceX even wants to grant its CEO 10 times as much voting power as external investors.

Sample this about SpaceX  

Elon Musk's special class of shares currently gives him control of 85 per cent of the voting power at SpaceX.