Economists’ Views on the Global Economy

Land Acquisition for
Infrastructure Development
Through Land Trusts
AuthorNaoyuki Yoshino

By Naoyuki Yoshino & Nicolás Galarza Sanchez

Introduction
Land acquisition is one of the difficulties in infrastructure
investment. When the construction of a road is planned, city officials
have to negotiate with many landowners. This applies not only in
Asia but also in Latin America and other regions. Huge amounts oftime and money are needed. In Malaysia, the Ministry of Transport
says that about 50% of total construction costs goes into landacquisition. In Bangladesh, some of the landowners are working inforeign countries, which often makes land purchases impossible topursue. Japan has experienced huge problems in constructing
commercial buildings and condominiums. Land trusts have been
extensively used. Landowners can keep the land as their own andlease it to commercial developers and condominium developers; orthey could receive one room in a condominium as their own in returnfor giving up of ownership of the land.

Scheme of Land Trusts
Landowners entrust the land to a trust bank. The trust bank will be
the intermediator between the landowners and the infrastructurecompany (or infrastructure investor), and will make sure the land isproperly used and annual rent is paid to the landowner by the
infrastructure company (Chart 1).
Many developing countries do not have trust banks, but it ispossible to give a trust license to ordinary banks as long as they canestablish that they can function as solidly as a trust bank.
Landowners entrust their own land to the trust bank and watch tosee whether the land is properly used for infrastructure. They checkthe net revenues of the infrastructure entity, part of whose net
revenues are returned to the landowners every year in annual rent.
Land trusts often work better than purchasing the land fromlandowners. Some agricultural farmers receive huge sums of money
when they sell their land for infrastructure, and then purchase carsand refrigerators and so on. But the money they receive is often gonein a few years. On the other hand, land trusts give landowners anannual rent generated by the net revenues from infrastructure, suchas roads, railways, water supplies and electricity, for many years, notonly for their own generation but also for their children andgrandchildren.

58 Japan SPOTLIGHT • January / February 2020

AuthorNicolás Galarza Sanchez

The trustee (in this case, the trust bank) must manage the trust
asset by following the three rules stated below:I) Due care of prudent manager
Trustee must manage the trust asset with the care of aprudent manager.
II) Duty of loyalty
Trustee must manage the trust asset for the beneficiary
following the purpose of the trust. Trustee must not use thetrust asset for the benefit of itself or a third party.
III) Obligation to separately manage trust assets
Trustee must manage the trust asset separately from thebeneficiary’s property or any other properties.

Difficulty of Land Acquisition in Developing
Countries
This section will briefly present the results of efforts undertaken by
the Urban Expansion Program at the Marron Institute of New York
University working with two rapidly growing cities in Colombia,
helping them to make the minimal arrangements necessary toaccommodate the new dwellers providing the land necessary for thecity’s expansion.

CHART 1

Land trust for infrastructure investment
Trust
Bank

Landowners

Transfer ofmanagement
Dividends(Watchproperuse ofland)

Spillover Effects

Investors
RailwayCompany

Tax
Increase
New
Business
Increased
Employment

1. Reduction of costs of land purchase
2. Leasing contract
3. Future tax revenues can be used for repayment
4. Landowners keep their ownership
Source: Compiled by the authors

https://www.jef.or.jp/journal/

Economists’ Views on the Global Economy

TABLE 1

Rapidly growing cities in developing countries are probably theones with the biggest need to make plans to accommodate thephysical expansion that is produced as a result of population andeconomic growth. In this sense, the bulk of the urban population thatthe world expects will move to cities in developing countries. Those
countries will receive 19 times more people than those in thedeveloped world.
Intermediate cities in developing countries often have weakerinstitutional capacity to make arrangements that would leverage thisgrowth for more productivity, sustainability and inclusivity for the
dwellers of the city. To address this issue the Urban Expansion
Program has been providing technical assistance to intermediate
cities in Colombia and Ethiopia. The findings of the Atlas of Urban
Expansion led by the same research team shed light on thedisastrous consequences of unplanned growth – less area withinwalking distance of arterial roads; less share of built-up areas
allocated to arterial roads; more saturated areas with less unbuilt
land, just to name a few.
For this process projections were made to estimate the rate of
consumption of land per person according to population projections
by local authorities. These show how on average for the last 30 years
cities have increased their rate of land consumption on average at
2% per annum. In other words, densities have been declining at thesame rate. Contrary to traditional methodologies that advocate forsmart growth predicting that cities will decrease the consumption ofland per person, we project three scenarios – one where landconsumption remains constant; one where land consumption perperson declines at 1% per year; and the last one following the global
average of a 2% yearly decline. We obtained the following results forthe cities of Montería and Valledupar, located in Northern Colombia.
Their urban extent will have a roughly three-fold increase, as shownin Table 1.

City

Locating the area needed for expansion
Next, an analysis was conducted to locate the most suitable places
to allocate such growth. This was done in coordination withinformation available and also using vernacular knowledge of local
government officials. Once the areas where expansion would occur
were identified, we used the cadaster’s Geodata base of the cities to
identify property lines and determine boundaries and also make an(unit: ha)

Rapid growth of cities in developing countries

Urban Extent 2010Urban Extent 2040 As Multiple of 2010

Montería

3,598

10,314

2.9

Valledupar

2,474

7,696

3.1

Source: Compiled by the authors(unit: ha)

TABLE 2
City

Area Required

Area Disrupted by
Road Construction

Number of Owners

Montería

6,716

445

984

Valledupar

5,222

342

138

Source: Compiled by the authors

inventory of owners and a characterization of plot sizes. As is not
surprising, the intensity of the fragmentation on the plots located on
the fringe of the cities reduces as land is still sold by hectares andnot by square meters. Yet the numbers of properties on the outskirtsof these cities (in the cadaster’s Geodata base) was rather significant.
In Valledupar, we found that the 5,222 ha necessary to accommodate
the expansion of the city covered some 330 plots of land. The
amount of plots was much higher in Montería, about nine times as
many plots as in Valledupar – namely 2,712 plots.
The plan of expansion seeks to secure rights of way for theowners of the land to be used for an arterial grid as much as
possible and thus only a limited percentage of the land will be used
for expansion, and for that reason only the owners of that landthrough which corridors actually go will be compensated for theirloss of the land due to the expansion of the city. This exponentiallyreduced the number of owners affected by the arterial grid layout.
The area required for the corridors in Montería would be 445 ha
reducing the number of landowners to 984, whereas Valledupar
would require 342 ha which would reduce the number of landowners
to 138. Although drastically different, both cities still present a very
high number of landowners to negotiate with (Table 2).

Price of land and municipal budget
We looked at the cadaster and market prices of the land. We wereable to access the budget numbers of Valledupar. The city has a total
annual spending budget of $8.1 million. If the market cost ofJapan SPOTLIGHT • January / February 2020

59

Economists’ Views on the Global Economy

purchasing the land amounts to $1.49 million, the city would need toallocate 20% of its total annual budget just to buy land. And although
this might seem easy to amortize in the long run, it is very unlikelythat such a share of the budget could be allocated to that item,
particularly by governments that have no possibility of reelection andthat have myriad issues to address.

Simple Comparison Between Land Purchase &Land Trust
In this section we propose an analytical framework to understandthe role of a land trust in long-term development. We consider a
Present Value Model (PVM) as it provides a way to relate the current
price of land to the infinite streams of future earnings from holding
the land. In the classical rent theory, David Ricardo, the British
political economist, mentioned that land rent is the payment that thelandowner receives “for the use [by himself or someone else] of theoriginal and indestructible powers of the soil”. Although this was putin the context of agricultural use, we will extend this notion to theuse of land for non-agricultural purposes (infrastructure,industrialization, etc.).
The cost of land purchase = Annual rent/discount rate
If the discount rate is 10%, the cost of the land purchase will be
1/10 of annual rent which will be paid to landowners. Infrastructurecompanies do not have to prepare a huge amount of money at thetime of construction. The annual rent can be created by annual
revenues received by infrastructure companies which will reduce theinitial cost that should have been paid to the landowner for its
purchase.

Infrastructure Investment & Spillover Tax Revenue
Traditionally, infrastructure investors used to receive only user
charges received from infrastructure investment. However, in thispaper we propose to utilize the spillover tax revenue generated froman infrastructure project to reduce the cost of infrastructure
investment. In Financing Infrastructure in Asia and the Pacific:
Capturing Impacts and New Sources (Asian Development Bank
Institute, 2017), Naoyuki Yoshino, Matthias Helble and Umid

60 Japan SPOTLIGHT • January / February 2020

CHART 2

Expansion of infrastructure investment:
capturing spillover tax revenues
Non-affected region

Highway(User charges)(low rate of return)

Spillover effectNon-affected
Employment
regionPrivate investment
SME development
Spillover effect
Increase of property tax revenue

Source: (Yoshino, Helble and Abidhadjaev, 2017), Asian Development Bank Institute

Abidhadjaev argue that infrastructure projects can generate spillover
effects through an increase in property tax, corporate tax, income tax
etc. which can also be used as an incentive for private landholders.
As demonstrated in Chart 2, the area highlighted in yellow gains
from a newly built highway (as shown by the red line). This positive
spillover effect is possible if this new highway generates more
employment through an increase in private business and private
investment along both sides of the highway.
In macro estimation, Yoshino and Masaki Nakahigashi used atrans-log production function in Japan to estimate the direct effect of
infrastructure investment and spillover effects (“The Role ofInfrastructure in Economic Development”, ICFAI Journal ofManagerial Economics 2, 2004). The direct effect of infrastructure
investment is created by the construction of infrastructure that will
increase the output of the region. Spillover effects will have twochannels. One is that water supply and electricity will prompt theconstruction of new office buildings and new housing, which will
increase the efficient use of land. New roads will invite
manufacturing industries along them. The second channel is toincrease employment in the region – namely, infrastructure such as
water supplies, railways and roads which will attract businesses,

Economists’ Views on the Global Economy

restaurants and new residents into the region. New businesses willbring new employment to the region, which will contribute toincreases of consumption and housing starts. GDP in the region willfurther increase.
Yoshino and Nakahigashi estimated the direct effect of
infrastructure investment and its spillover effects by the use of
macro data of Japan. In the high growth period of Japan, the direct
effect of infrastructure investment that increased output was 0.696
estimated by use of the trans-log production function. The spillover
effect of increasing output induced by an increase of private capital
was 0.452. Infrastructure can invite private businesses to the region.
The possible spillover effect of the output increase from new
employment created by infrastructure projects was 1.071 in the
period of 1956-1960. New shopping malls and restaurants will open
which will increase employment along with new infrastructure. The
biggest spillover effect was to increase employment, which
contributed to an increase in output (Table 3).
These increases of output created by spillover effects will increasetax revenues whose average rate is 20% in Japan{0.305=(0.452+1.071) $10.20}. If 50% of the increased tax revenues
were returned to investors in infrastructure, it would have increased
the rate of return by 21.9% (=(0.305x1/2)/0.696). These significant
increases of rate of return would have attracted private investors into
infrastructure investment. In the past, all these increased tax
revenues were taken by the government and were not returned toinvestors in infrastructure. Investors in infrastructure only relied on

TABLE 3Macroeconomic effect of infrastructure
investment
Spillover Effects Estimated from a Macroeconomic Trans-log
Production Function
1956-60

1961-65

2001-05

2006-10

Direct effect (kg)

0.696

0.737

0.114

0.108

Indirect effect (Kp)

0.452

0.557

0.091

0.085

Indirect effect (L)

1.071

0.973

0.132

0.125

20% returned

0.305

0.306

0.045

0.042

Increment

43.8%

41.5%

39.0%

39.1%

Source: Yoshino and Nakahigashi (2016)user changes such as highway tolls, train tickets, water tariffs, etc.

Land Trust Law in Japan
In Japan, trust business can only be carried out by entities
licensed under the Trust Business Act (Act No. 154 of 2004, as
amended) and financial institutions licensed under the Act for
Financial Institutions’ Trust Business (Act No. 43 of 1943, as
amended). Until the early 1990s, trust business was monopolized byeight financial institutions, of which seven were known as trustbanks. Following the reform of the financial system in recent years,
today over 200 financial institutions and entities are licensed to carryout trust business in Japan. The trust business can be handled not
only by trust banks but also by ordinary banks which obtain a trust
license.

Efficiency Gains from Land Trust Policy
Recent political upheavals resulting from the industrialization drive
through forcible land-grabs in many parts of Asia (India, Indonesia,
Nepal, and the Philippines) point to the need for a sustainable policy– a framework that results in a positive sum game, benefiting
landowners without hurting growth prospects. We propose land
trusts or land leases for the development of infrastructure
investment and industrialization purposes. It will ease negotiations
between landowners and infrastructure companies. Further, the costof land purchases will be drastically reduced by the annual rent paid
to landowners. Thailand has passed a new law that will make land
trusts possible in Thailand, in effect from Nov. 1, 2019. If similarlaws can be established, land trusts can be used in many othercountries, which will make various infrastructure investment
possible for their sustainable growth.

Naoyuki Yoshino is dean and CEO of the Asian Development Bank Institute,and professor emeritus of Keio University, Tokyo. Nicolás Galarza Sanchez isdirector of cities at the Ministry of Housing, Cities and the Territory, and visiting
scholar at the Marron Institute of New York University.

Japan SPOTLIGHT • January / February 202061