Sale or Long-Term Lease of a Municipally-Owned Site through an Arm’s-Length Transaction

Land assets are an important ingredient of subnational government finance in many developing countries. Direct sales of land by subnational governments are a clear example of “capital” land financing. In this scenario, a municipality’s goal is solely to maximize the price, or fair market value, it receives for its land. It can then invest the proceeds into urban regeneration and sustainability efforts.

Auctions are the most common form of such disposal of public land and can be used in sales or lease agreements. They are used to generate the highest price of a given parcel of land based on its highest and best use, specifically a predetermined land use or development mix and established building envelope through FAR or a combination of lot coverage and building height. Auctions are not widely used. There are usually concerns among policy makers and the general population that auctions could trigger an uncontrolled increase in land prices. These concerns are unfounded. However, at the same time, when there is no clear medium-term plan for the disposition of public land, auctions can artificially raise prices due to a perceived scarcity of land.

The reality however is that by virtue of maximizing the price that the government receives for the land, auctions are an important market-based land allocation mechanism that reflects real demand. They are also very effective in countering speculation. What is needed in this case is a clearer understanding by developers of opportunities of public land coming to the market over a short- and medium-term horizon to prevent a rapid rise in land prices. The drawback with auctions is that the government receives the maximum price for the land based on demand but is unable to influence the resulting development beyond what the planning and building codes require.

There are many successful examples of the use of auctions as a source for funding city regeneration projects. Auctions were first used in the Arab Republic of Egypt in 2007, when a one-day sale of 2,000 hectares of public land generated US$3.12 billion in revenues—which was equivalent to about 10 percent of the previous year’s government revenues. The Mumbai Metropolitan Regional Development Authority auctioned land in the city’s new financial center in 2007, and generated US$1.2 billion to help finance projects within the regional transportation plan (Peterson 2009). Singapore has earned billions of dollars by cleaning up parts of its waterfront, selling the reclaimed land, and reinvesting proceeds towards implementing the city’s future land use management and investment plans. Beijing, China, too, has used auctions to enter into a land lease arrangement of 50 years for commercial development, and 40 years for industrial development projects, generating revenues that help fund large-scale urban infrastructure.

The sale or lease of land at administratively determined prices to eligible buyers or lessors is a widely used method, including in much of the Middle East (Egypt, Kuwait, and Saudi Arabia, for example). Usually, in such cases, the government sets eligibility criteria (for instance, being a national of the country, not having received prior government assistance) and then either uses prioritization criteria (such as female, single-headed households; young married couples; disaster-affected households; those relocated due to public works, and so on) or alternatively operates on a first-come, first-served basis. In the Republic of Yemen, until 2011, the government would offer public land grants for any investment project beyond a value of US$10 million (World Bank 2009).