Sao Paulo's value capture strategy leads to a 'massive windfall'

Wed, 2014-05-28 06:00 -- Jesse Berst

Approaches to financing infrastructure projects vary around the world, so it's always useful to see what's working elsewhere.

An interesting glimpse at a financing tool being used successfully in Latin America comes from Folha de S.Paulo columnist Leão Serva, who highlights a value capture approach by Sao Paulo, Brazil.

As Serva explains it, the city identifies a zone where it wants to see redevelopment – one example he cites are Sao Paulo's squatter settlements, known as favelas. The city issues bonds that are sold to developers at auction. These bonds give the developers the right to build bigger buildings than zoning laws would normally allow. Revenue from the bonds is then invested back into infrastructure – roads, housing, etc. in that same redevelopment zone.

In Sao Paulo's Água Espraiada neighborhood, luxury high rises stand where the favelas once did. But revenue from the bond sales that allowed the high rises helped pay for public housing for the ousted favela population to move into.

Writes Serva: "Developers don’t seem to mind bidding for these bonds, at least in areas such as Água Espraiada where there is tremendous demand for new construction. And the auctions have yielded the city a massive windfall. In 12 years, São Paulo has raised about R$ 4.5 billion, or close to $2 billion in U.S. dollars, through these sales. About three-quarters of that total came from the Água Espraiada area alone."

As with most any municipal financing strategy, Serva notes there are pros and cons with value capture. He quotes a Dallas, Texas consultant involved in the rail transit line planned in the Dallas-Fort Worth area, which plans to use value capture for a big chunk of the project.

“Value capture is not a magic bullet,” warns Scott Polikov, founder of Gateway Planning consultancy. “It’s a way to fill a financing gap when there’s a gap. But you still have to have a large proponent of the public infrastructure on the public-sector side. Value capture will never fully close the gap.”

Read Serva's full article here. And if you haven't already, download the Smart Cities Financing Guide launched by the Council earlier this year for more on financing infrastructure. It includes both case studies and in-depth analysis of 28 tools that cities are using. Among them are several based on developer exactions – for example the linkage fees that Boston has used to develop affordable housing.  You can download the Financing Guide for free, although a brief, one-time registration is required.

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Jesse Berst is the founding Chairman of the Smart Cities Council. Click to learn about the benefits you receive when you join the Council for free. Follow @Jesse_Berst and connect on LinkedIn.