NEWS: Green infrastructure - Could public land unlock private investment?

Emerging economies need the private sector to help fund green infrastructure initiatives. Access to public land can be structured to make those investments more attractive.

Green infrastructure investments can confer many economic benefits on a country, from boosting growth and creating jobs to promoting sustainable industries and building resilience against climate shocks and other disruptions. But realizing this future requires investment, and for emerging economies especially, public funding alone is rarely enough. Private-sector investment is also needed, but many financial incentives used by governments in the past are becoming less viable. There is, however, an asset that many governments could use to bridge their green infrastructure financing gap: land.

To understand how wide the green infrastructure funding gap is, consider that across G-20 nations, private-sector-led infrastructure investments have remained below $160 billion in primary markets for each of the seven years leading up to the start of the COVID-19 pandemic in 2020. That’s equivalent to 0.2 percent of GDP, but studies show that 5.0 percent is needed. Private infrastructure investment is even lower in middle- and low-income countries, where three-quarters of such investments are still financed by nonprivate players such as the public sector, development banks, and export credit agencies.

In the years leading up to the COVID-19 pandemic, the private sector in some emerging economies benefited from significant tax breaks, subsidies, and derisking support in return for investments in critical infrastructure, such as offtake agreements that guaranteed equity returns on power generation. But the ability of many governments to subsidize the private sector has been constrained by fiscal pressure stemming from the pandemic and increased sovereign debt burdens.

The ability of many governments to subsidize the private sector has been constrained by fiscal pressure stemming from the pandemic and increased sovereign debt burdens.

Public real-estate portfolios could help governments overcome these challenges and attract private investment by either offering land as equity in projects or leasing it at a discount. Moreover, these incentives could be structured and evaluated for green-specific infrastructure builds to help governments meet their sustainability and conservation goals.

A sector mismatch

About 80 percent of the private infrastructure investment in middle- and low-income countries has been in the nonrenewable-energy and transport sectors.

Most private investment in middle- and low-income countries goes to sectors with high carbon footprints.

Globally, these sectors are among the highest emitters of fossil CO2 . And though fossil-fuel industries have generated most of the wealth for private investors over the past two decades, they are poised to become less attractive as the global drive to decarbonize embeds net-zero targets into many countries’ economic plans. Other factors—including the disintermediation of distributors and tighter and more inclusive labor regulations—are also disrupting fossil-fuel industries.

Power and transport are among the highest emitters of fossil CO₂.

Still, the net global shift toward cleaner energy is unlikely to prove sufficient for closing the green infrastructure financing gap. This suggests that governments could benefit from finding new ways to attract private investment in green infrastructure subsectors.

Boosting private-sector investment

Policy makers typically use four types of incentives to attract private investment: first, financial incentives including cash in the form of grants, loans, equity, and credit guarantees; second, fiscal incentives such as tax abatements, exemptions, and accelerated depreciation; third, subsidized inputs such as water, electricity, and feedstock provided at less than their usual cost; and fourth, regulatory incentives such as patent protection duration and changes to corporate, labor, or sector-specific regulations to improve the feasibility or attractiveness of an investment.

As fiscal pressures mount amid rising inflation, slowing global growth rates, and elevated public-debt levels, governments may find it harder to deploy these incentives. But there is a fifth incentive policy makers often underutilize: land portfolios.

According to one estimate, corporate and government buildings and the land associated with them accounted for 23 percent of global net worth in 2020.3 As things stand, many governments have large portfolios of untapped real-estate assets that can be monetized as equity or through leasing at preferential cost.

So how can governments assess how land stacks up against other, more traditional incentives?

They could evaluate each incentive on two dimensions: impact, for example, the extent to which an incentive might enable a government to attract private investors; and cost, for example, a combination of the burden on government budgets and strain on international commitments .

Land can be as attractive to investors as cash, but it costs governments  much less.

The assessment of an incentive may differ from one sector to another, but by these dimensions, land is often more efficient than other types of incentives: it may have a high impact, but it can present low financial and regulatory exposure for the government.

Making land relevant

Policy makers could enhance the value of land and, in so doing, make it a more attractive incentive for private investors. This could be achieved by choosing land that is close to inputs such as raw materials or demand centers such as urban metropolises; ensuring it has access to primary and secondary infrastructures such as transportation and utilities; and changing its zoning status to allow industrial and commercial use.

Policy makers may also control the extent to which they transfer the value of land to private investors. Historically, three models, listed as follows based on their increasing levels of value, have been used:

1. Land as government’s equity contribution to a project. For example, the government of Andhra Pradesh, a state in India, provided land to a private investor for a 13 percent equity stake in Rajiv Gandhi International Airport in Hyderabad.
2. Land leased at a discount to the private sector. For example, South Korea offered ten-plus-year industrial land-lease grants at lower-than-market rates, with sizes and terms depending on the project scope.
3. Land given as a grant. For example, the Hong Kong government has provided sites to private hospitals at zero premium, but often with requirements such as a proportion of free or low-cost beds and reinvestment of operating surpluses to improve and expand hospital facilities.

The applicability of each model varies among sectors depending on the typical role of land in each sector. These land incentives contribute to the shift away from governments’ traditional role of providing direct subsidies toward an enabling role in which it provides land on which private-sector organizations can develop and operate commercial enterprises.

Making land work for infrastructure and conservation goals

Historically, governments have underutilized land. The challenges have included a lack of technical expertise to find and value land and bureaucratic hurdles caused by the need to coordinate land transactions with infrastructure and zoning, which requires working across ministries and levels of government. And because the land market is notoriously inefficient in some countries, those governments have to create a mechanism to engage transparently with developers and investors.

To manage these risks and increase the use of land as a lever to direct private capital to green infrastructure in line with conservation goals, policy makers could establish dedicated organizations to do the following:

• Determine the highest and best use of public land parcels, including which parcels might be suitable for partnerships with the private sector.
• Establish appropriate compensation or alternate housing for people affected by the transfer of public land to the private sector.
• Maintain a centralized digital land register that can facilitate land transactions in a timely fashion.
• Make land incentives contingent on investment in specific green infrastructure.
• Ensure that conservation goals are not compromised through unnecessary land development by weighing the benefits of developing land versus the potential impact on conservation (that is, looking at the total balance-sheet impact) before any such land-related investment decision is made. (For example, the City of Toronto, Ontario, is developing a “climate lens” to inform its decision making. Once fully implemented, this will ensure that all proposed projects and initiatives requiring budget approval will be assessed in advance for their effect on greenhouse-gas emissions and climate resilience. And McKinsey has developed a methodology to evaluate where safeguarding natural capital could have the biggest impact on climate, economies, and health.)

The entities overseeing these decisions could take the form of a government department, such as the Hong Kong Lands Department, or government-owned corporations, such as the Copenhagen City and Port Development Corporation in Denmark, which is responsible for driving regeneration by rezoning the land and partnering with private developers.

Regardless of the form, these entities are more likely to deliver on their missions if they are centers of excellence with professional governance and top-notch talent that can help governments maximize commercial and developmental impact by leveraging their untapped land assets. Denmark and Hong Kong have both shown success with this approach in recent years. The Copenhagen City and Port Development Corporation’s redevelopment of the North Harbor alone brought in $15 billion, $5.8 billion of which was used to construct the Copenhagen metro. The corporation also developed a “new town” called Ørestad, which by December 2016 boasted 10,000 residents and 17,000 employees; the Bella Center, the largest exhibition center in Scandinavia; DR Village, the headquarters of the Danish Broadcasting Corporation (DR); and the Copenhagen Concert Hall.

Hong Kong’s MTR Corporation, which runs the mass-transit railway, has also delivered significant financial and social benefits to the region, including excellent transit, new and vibrant neighborhoods, opportunities for real-estate developers and small businesses, and conservation of open space. The whole system operates on a self-sustaining basis, without the need for direct taxpayer subsidies. MTR’s railway system covers 221 kilometers and is used by more than five million people each weekday. It not only performs well—trains run on schedule 99.9 percent of the time—but actually makes a profit. It generated a net profit of HK $9.6 billion (US $1.2 billion) in 2021,8 even though MTR fares are relatively low compared with those of metro systems in other developed cities.

Using government land to attract private capital to green infrastructure initiatives may be novel for some countries. But in the current environment of fiscal constraints, this incentive could help emerging economies achieve multiple objectives, from driving decarbonization goals to creating jobs and building the foundation for a more sustainable, resilient future.

Source: Mckinsey