Economic analysis of a land value capture system used to finance road infrastructure: The case of Bogota, Colombia

Abstract

Bogota is a city that faces many problems, among them severe deficiencies in its road infrastructure. Financing of road infrastructure has been possible in part through a land value capture mechanism called "valorization charges". The purpose of this thesis is to analyze this financial tool from an economic perspective, using information from the 1992-1994 infrastructure plan of Bogota. A mathematical model is devised to approach this problem. Although valorization has not been specifically modeled in an urban economics setting, such a model derives from optimum taxation and optimum public good pricing theories. From the model two equations are obtained: the optimum valorization equation and the capitalization equation. Data on property values, income, characteristics of the properties, access measures, and valorization at individual property level, were collected in Bogota for two periods (before and after the infrastructure project). Based on the empirical study, it is found that: (1) Valorization charges depend on income and property values in the way predicted by the optimum model. (2) Valorization charges are not capitalized into property values. (3) Individual benefits estimated a-priori by the agency in charge of valorization are incorrectly predicted. (4) On average, the net increase in property values generated by the road infrastructure project 92-94 is of 46 percent beyond inflation effects.