By CPA|CS Nancy Mwacharo
Value-Capture and Land-Based Financing for Municipal Growth
Urban areas across Kenya and much of the developing world are under intense fiscal pressure. Municipalities must expand infrastructure and services to match rapid urbanization, yet their revenue sources, such as property rates, business permits, and parking fees remain insufficient. Traditional intergovernmental transfers, while critical, are unpredictable and politically sensitive.
One underutilized approach is value-capture and land-based financing. These instruments allow municipalities to convert rising land and property values often created by public investment into reliable revenue streams for reinvestment.
Value capture is the principle that public actions (such as building a road, expanding water networks, or zoning changes) increase private land values, and that part of this unearned gain should flow back to the public sector to finance further improvements. Rather than raising broad-based taxes, municipalities can structure fees, levies, or joint-development schemes tied directly to the increased value.
Global Examples
In Bogotá, Colombia, the city introduced a betterment levy. This is a fee charged to landowners when the government builds new roads, transit lines, or other public projects that increase the value of their land. For example, if a new highway is built near someone’s property, that land usually becomes more attractive and worth more money. Instead of letting only the landowner benefit, the city charges a portion of that “extra value” to help pay for the project. Over time, this approach has financed a large share of Bogotá’s Road network.
In the United States, many cities use a tool called Tax Increment Financing (TIF). Here’s how it works: when a new development project is planned, the government measures the property tax revenue in that area. That amount is frozen, and any extra tax collected as property values rise is used to pay for the project itself—often through loans or bonds. Cities like Chicago and Denver have used TIF to fund billions of dollars in redevelopment. However, it requires careful. financial management so that the city doesn’t take on more debt than it can handle.
In Japan, a different model called land readjustment is common. Private landowners in a neighbourhood agree to pool their land so that the government can redesign the area by adding new roads, parks, and other services. Once the improvements are complete, the land is returned to the owners. Even though each plot may be smaller than before, its value goes up because the area has better infrastructure and is more attractive for living or business. This way, both the community and the government benefit, and the government doesn’t need to spend as much money upfront.
In Hong Kong, the government owns all the land and leases it to private developers for use. Developers pay large sums in lease premiums, and these payments make up a major share of government revenue—sometimes more than 30% in a given year. The money is then used to fund public services and development projects. This system works well in Hong Kong because of its unique land-ownership laws, but it may not be easy to replicate in countries where most land is privately owned.
Applicability in Kenya’s Urban Context
In Kenya, municipalities such as Nairobi and Mombasa already have legal powers under the Urban Areas and Cities Act and the Public Finance Management Act to collect property rates, development charges, and user fees. These powers can be adapted to support land-based financing. For instance, Nairobi could introduce a form of betterment levy whenever major road expansions or new commuter rail stations are built. If a new BRT (Bus Rapid Transit) line or expressway increases land values along its corridor, a small charge on the benefiting landowners could help pay for the project.
Mombasa, with its busy port and surrounding road network, could also apply development charges on property developers who benefit from improved port access roads. Instead of relying solely on national government transfers, these fees would capture a share of the increased land value resulting from public investment and reinvest it in additional infrastructure.
Counties around fast-growing areas, such as Machakos (Mavoko municipality), could experiment with land readjustment when planning new residential or industrial estates. By pooling land and then redistributing serviced plots of smaller but more valuable sizes, municipalities can expand roads, sewerage, and water systems without needing heavy upfront cash.
Meanwhile, though Kenya does not follow Hong Kong’s full public land leasing model, municipalities could make better use of public-private partnerships (PPPs) on county-owned land. For example, leasing county land near transport hubs or markets to private developers, while retaining a share of the rental or sales revenue, would mirror aspects of Hong Kong’s approach.
These methods are legally feasible within Kenya’s framework if tied to county finance laws, property rating systems, and clear public participation. The challenge is not so much legal as political will, transparent land management, and building administrative capacity to value land fairly and collect these revenues.
Challenges and Safeguards
One of the biggest challenges with land-based financing is land management. For these tools to work fairly, municipalities must have accurate land valuations and clear land registries. If property values are not updated or records are incomplete, any levy charged may appear arbitrary and invite disputes. Strong land information systems are therefore the foundation for value capture.
Another important safeguard is public participation. Asking property owners to pay extra levies for public projects can easily become politically sensitive. Without open communication, citizens may see it as an unfair tax. Municipalities must clearly explain why the charges are being introduced, how the money will be used, and the direct benefits to those paying. Transparency builds trust and increases compliance.
Equity concerns also need careful attention. While property owners often gain from rising land values, not everyone can afford new charges, especially low-income households. If not well designed, these levies can worsen inequality or even push vulnerable residents out of upgraded neighborhoods. Municipalities must consider affordability and include protections—such as exemptions or phased payments for lower-income groups.
Finally, there is the issue of fiscal discipline. Value-capture revenues are linked to real estate markets, which can rise and fall. If a municipality assumes overly optimistic projections and spends in advance, a market slump could destabilize its budget. The safer approach is to make conservative estimates, use these revenues as a supplement rather than a replacement of core funding, and ensure borrowing is managed within legal limits.
Here are Kenya-specific examples for each challenge: –
• Nairobi’s land valuation roll has faced delays in updates, leading to disputes over property rates and the fairness of charges.
• The County Governments Act (2012) requires public input in budget and project planning; failure to engage often leads to court challenges.
• In Mombasa, market relocation projects have shown how low-income traders can be displaced if affordability measures are not built in.
• Some counties have overestimated revenue projections in their finance bills, creating budget gaps when collections fall short.
Conclusion
Value capture and land-based financing offer municipalities innovative ways to fund urban growth without relying solely on unpredictable transfers or increasing conventional taxes. By aligning public investments with private land value gains, cities ensure that the benefits of development are shared more fairly between government and property owners.
For Kenya’s municipalities, the potential is significant. Nairobi, Mombasa, and other fast-growing towns can adapt global models such as betterment levies, development charges, and land readjustment within existing legal frameworks, such as the Urban Areas and Cities Act and the Public Finance Management Act. These tools, if well designed, could unlock sustainable funding for roads, markets, transit, and other critical infrastructure.
However, success depends on strong land management systems, genuine public participation, equity safeguards, and conservative financial planning. Without these, value-capture could face resistance or even backfire. With them, municipalities can create steady revenue streams that reduce overdependence on national transfers, attract investment, and deliver tangible improvements to citizens.
In short, adopting land-based financing in Kenya is not just a financial option but a strategic move toward building resilient, inclusive, and self-reliant urban economies. The global examples offer a clear roadmap—what remains is local adaptation, political will, and professional management to make it work.
County executives and municipal boards should take the bold step of piloting at least one or two value-capture tools to demonstrate their potential and build public confidence in sustainable urban financing.
The writer is a Municipality Manager
