Integrating Land Financing into Subnational Fiscal Management

Land assets have become an important
source of financing capital investments by subnational
governments in developing countries. Land assets, often with
billions of dollars per transaction, rival and sometimes
surpass subnational borrowing or fiscal transfers for
capital spending. While reducing the uncertainty surrounding
future debt repayment capacity, the use of land-based
revenues for financing infrastructure can entail substantial
fiscal risks. Land sales often involve less transparency
than borrowing. Many sales are conducted off-budget, which
makes it easier to divert proceeds into operating budgets.
Capital revenues from sales of land assets exert a much more
volatile trend and could create an incentive to appropriate
auction proceeds for financing the operating budget,
particularly in times of budget shortfalls during economic
downturns. Furthermore, land collateral and expected future
land-value appreciation for bank loans can be linked with
macroeconomic risks. It is critical to develop ex ante
prudential rules comparable to those governing borrowing, to
reduce fiscal risks and the contingent liabilities
associated with the land-based revenues for financing infrastructure.