FINAL - Technical Guidebook For Financing - Planned City Extension & Planned City Infill

TECHNICAL GUIDEBOOK FOR FINANCING
PLANNED CITY EXTENSION AND PLANNED CITY INFILL
TECHNICAL GUIDEBOOK
FOR FINANCING
PLANNED CITY EXTENSION
AND PLANNED CITY INFILL
Copyright United Nations Human Settlements Programme, November 2016
All rights reserved

United Nations Human Settlements Programme (UN-Habitat)
P.O. Box 30030, Nairobi 00100, GPO KENYA
Telephone: +254-20-7623120 (Central Office)
www.unhabitat.org
HS Number: HS/072/16E
Coordinator: Marco Kamiya

Principal authors: Miquel Morell and Agust Jover
Contributors and reviewers: Liz Paterson Gauntner, Rogier Van Der Berg, Joost Mohlmann, Elizabeth Glass, Salvatore Fundaro, Tefo Mooketsane
and David Kariuki
Editor: Michael McCarthy
Cover Photo: Canary Wharf Station: London Docklands vFlickr/Loco Steve
Design and layout: Eric Omaya

TECHNICAL GUIDEBOOK
FOR FINANCING
AND PLANNED CITY INFILL
TABLE
Table OF CONTENTS
of Contents
Purpose of this guide.................................................................................................................................................................... 1
1. The rapid financial feasibility assessment as the first stage of feasibility assessment........................................................ 4
2. Implementing urban plans involves long-term investments................................................................................................. 6

2.1. Principles of real estate feasibility metrics.....................................................................................................................................7
Time and the cost of money.........................................................................................................................................................7
Net present value (NPV)...............................................................................................................................................................9
The internal rate of return (IRR)..................................................................................................................................................10
Discounted payback...................................................................................................................................................................12
2.2. Methodological considerations of fragmented analysis................................................................................................................12
2.3. Financial analysis methodology of real estate development.........................................................................................................13
2.4. Financial analysis methodology of the land development process................................................................................................13
3. Delimitation of areas and determining planned land uses................................................................................................. 14
4. Breakdown of plan implementation costs: Concepts and sources of information............................................................. 15

4.1. The purchase of land..................................................................................................................................................................15
4.2. The costs of infrastructure provision...........................................................................................................................................17
4.3. Building costs............................................................................................................................................................................19
4.4 The cost of capital........................................................................................................................................................................20
5. Market prices and revenue flows........................................................................................................................................ 22
6. Future economic and financial scenarios, and the ability to anticipate macro- and micro-economic behaviour............... 24
7. Inflation: The feasibility analysis in nominal or real terms................................................................................................. 27
8. Differences between feasibility assessment for an individual landowner and for an entire plan area............................. 29
9. The financial impact on public finances.............................................................................................................................. 30

9.1. Parameterization and urban costs of the PCE..............................................................................................................................30
9.2. Financial impact of public funding..............................................................................................................................................33
Glossary....................................................................................................................................................................................... 36
Purpose of this guide
UN-Habitat, the United Nations agency promoters, and property developers), and and within entirely different regulatory
mandated by the General Assembly to they require sizable investments, particu- frameworksfrom small, rural municipal-
promote socially and environmentally sus- larly in infrastructure, land acquisition and ities to large, urban municipalities; from
tainable towns and cities, has designed purchasing, and construction. overall planning that encompasses an
dual methodologies for urban planning entire town to executive urban planning
for growing cities and governments There is an extensive academic and pro- with a narrow scope; from consolidat-
around the world. These approaches are fessional knowledge base of economics, ed, developed urban land (PCI) to urban
called planned city extension (PCE) and urban planning, and, in particular, public growth sectors in extension (PCE). Thus,
planned city infill (PCI), and serve as an finance, real estate, financial markets, this document is not intended to consti-
alternative to unplanned and chaotic ur- and social housing. However, there is con- tute a one-size-fits-all template applicable
ban expansion. siderably less knowledge of the financial to any PCE/PCI. On the contrary, it aims
dimensions of urban planning. This doc- to build an argument for the analysis of
UN-Habitats PCE and PCI methodolo- ument is the result of a process of reflec- the financial feasibility of urban planning.
gies take an integrated approach to the tion on the need to establish a baseline It addresses fundamental issues such as
drafting and subsequent implementation level of knowledge of these dimensions the different components of plan imple-
of plans for cities and are based on three necessary to generate successful PCEs/ mentation, a clear definition of whos
complementary pillars: urban planning PCIs. who in this development process, the
and design, regulatory framework, and impact supply and demand behaviour can
urban finance. They recognize that for Urban planning gives rise to projects all have on this analysis, the financial cost
urban planning to be implemented suc- over the world of very different scales and cost of capital, and the phase plan
cessfully, it is necessary to analyse the pre-
vailing regulatory framework and to accu-
rately assess the plans feasibility from the
standpoint of both the private and public
sectors.
UN-Habitats PCE and PCI methodologies
Developing a realistic and implementa- take an integrated approach to the drafting
ble financial plan is increasingly crucial and subsequent implementation of plans for
to the successful development of a PCE/
cities and are based on three complementary
PCI, as these urban plans have long lead
times involving multiple actors (e.g., pub-
pillars: urban planning and design, regulatory
lic administrators, private and public land framework, and urban finance.
1
for development as a key variable for de- In contrast, public sector financial feasibil- important to incorporate the costs of this
cision-making. Therefore, this work aims ity concerns public administrations role in infrastructure into the building phase and
to teach how to think through the finan- the plan being assessed, particularly the the revenue the final products can gen-
cial aspects of urban planning, and how impact of governments actions on public erate because the costs of developing
to adapt the analysis to the enormous finances, both in terms of the investment land and the setting of urban land pric-
diversity of circumstances in which urban undertaken and the future maintenance es must be compatible with the costs of
plans are developed and implemented. of infrastructure and the provision of ur- construction and the final prices paid by
Obviously, the line of argument proposed ban amenities (e.g., street cleaning, main- the market.
by this guidebook could be tailored into a tenance and management of facilities,
richer or more simplified analysis accord- waste collection, and urban park main- If an urban plan is implemented by a
ing to the magnitude and scale of the tenance). Thus, public sector financial public entity, it is because society de-
project. feasibility refers to the degree of budget- mands modern infrastructure as well
ary balance or imbalance that the costs as schools, hospitals, homes, factories,
When addressing the financial dimensions of administering the plan may impose shops, etc. Thus, the plan implementa-
of a PCE/PCI, it is crucial to consider the on public budgets once implemented. It tion process must ensure that the prices
plans feasibility from two different per- takes into account any potential income of various real estate assets such as these
spectives: that of the private sector and (mainly tax revenue), as well as govern- are in line with the demand for these
that of the public sector. A private sector ments ability to assume the capital invest- products, and are sufficient to finance
feasibility assessment considers the ability ment plan. In short, the relevant level of the costs of infrastructure provision and
of a given territory (each of the urban ar- governmente.g., local government, su- real estate development.
eas containing a PCE/PCI) to successfully pra-regional administration, state govern-
balance the costs and benefits incurred mentmust assess its ability to assume In short, we evaluate a PCE/PCIs capaci-
including the future income that may the investments called for by the PCE/PCI, ty to attain financial self-sufficiency con-
function as a return on investmentand and must determine whether it can sus- sidering its cost and the potential future
to gauge the extent to which this invest- tain the newly constructed city once it is income derived from the operation and/
ment project is attractive to a given devel- fully operational.2 or sale of assets acquired as part of the
oper. Thus, assessing financial feasibility PCE/PCI.
focuses attention of potential developers Often, the public sector activities entail
on the proposed investment during the transforming agricultural land into an It should be noted that plan implemen-
process of urban development and broad- urban environment with urban infrastruc- tation occurs in the context of a wide
ens its analysis to include all phases of the ture (e.g., transportation, water, energy, array of cultures and legal frameworks.
urban plans implementation.1 communications, and sewage). It is also The analysis of private and public sector
feasibility explained in this document is
1 Urban Planning and Regional Planning Working
not tailored to any specific legal frame-
2 M. Morell, Nous Reptes Econmics i Financers per a la
Group of the General Council of Economists, Necessary and Planificaci Urbanstica, IERM Papers Journal, Regi Metropoli- work, nor any particular distribution of
Important Economic Reflection on Urban Planning and Land tana de Barcelona Territori - Estratgies Planejament, no. 57, costs among public and private entities,
Use, Encuentros Multidisciplinares, issue 50. Available from 2014, pp. 97104. Available from http://www.iermb.uab.es/
http://www.encuentros-multidisciplinares.org/revista-50/in- htm/descargaBinaria.asp?idRevArt=385. nor any specific framework regarding
dice_50_2015.htm.
2
the distribution of the benefits of urban

planning.
There are countries where the right of

land ownership belongs to government,
meaning the benefits of urban planning
belong to the public. Alternatively, there
are countries where the benefits of ur-
ban planning belong to landowners.
Between these two extremes exists a
gradation of models employing different
distribution rules, such as indirect tax-
ation throughout the entire process of
plan implementation and direct taxation
on the benefits of infrastructure provi-
sion and real estate development.
Obviously, the private sector feasibility

assessment of a PCE/PCI should always
analyze the results from the standpoint
of who assumes the investment risk. In
contrast, public sector financial feasibil-
ity assessments are concerned with the
effects on public budgets.
Finally, it should be noted that this doc-

ument is not intended to be a compre-
hensive or definitive guide for the private
and public sector feasibility assessment of
PCEs/PCIs. Urban planning is pluralistic
and multifaceted, and occurs in a mul-
titude of different cultural and political
contexts. Nevertheless, this guide aims
to provide a solid methodological foun-
dation for evaluating the financial dimen-
sions of urban plan implementation.
Rubavu district UN-Habitat
3
01 The rapid financial feasibility assessment as the first stage of
feasibility assessment
The rapid financial feasibility assessment four-year periods, six-year periods, etc.).
is the first stage of feasibility assessments Table 1 provides an example.
and represents an initial evaluation of the
prospects for implementing a particu- The rapid assessment does not entail
lar plan. It aims to eliminate financially analyzing the feasibility of a particular
unsound proposals by reviewing three urban plan, but instead focuses on as-
main components of an urban plan: 1) sessing implementation actions related
reporting the amount of investment re- to the overall organizational structure of
The rapid assessment is quired by a plan; 2) indicating funding the territory, scheduled works, and the
programmatic in nature, sources by identifying the public and/or public or private investments required to
private entities responsible for financing implement the plans provisions.
meaning it establishes
each proposed action, paying particular
priorities and logical attention to the provision of basic in- In short, the rapid assessment informs
sequences of events frastructure (e.g., streets, roads, green stakeholders of the costs of developing
land, inventories planned investments,
that enable the plan areas, public service networks, public fa-
cilities, etc.); and 3) scheduling the nec- assigns them temporary implementation
to materialise without essary investments according to priorities priorities, and designates those responsi-
delays or disruptions and needs (e.g., over three-year periods, ble for their implementation.
The rapid assessment is programmatic in nature, meaning it establishes priorities and

logical sequences of events that enable the plan to materialise without delays or disrup-
tions. In other words, it determines how the plan will be executed.3
The rapid assessment also seeks to secure agreements from government entities to carry
out the investments called for by the plan. By estimating the capital expenditures expect-
ed to be undertaken by government, it serves as the first step towards a public sector
feasibility assessment (which will be discussed in greater detail below).
3 J. Esteban, LOrdenaci Urbanstica: Conceptes, Eines i Practiques, 2nd Edition, Diputaci de Barcelona, Collecci Estudis-Srie
Territori, 2007.
4
Table 1: Inventory and descriptive table for the investments planned under the rapid assessment
STAGE PLAN (SIX YEAR) STAKEHOLDER ALLOCATION1 (%)
Nature of the Needs Needs for Total cost Priority
2
I II III PD CoR DoR GoR Other
investment extension (USD)
Streets Public 1,323,000 m2 - 26.7 M A X 100%
Electricity 10 Kw/HH/day
Power station PPP - - - A X 50% 50%
Network Public 66 KM - 5.2 M A X 100%
Water 9.5 m3/Ha/day
Plant Public 1 - 1.5 M A X 100%
Network Public 66 KM . 3.2 M A X 100%
Potable WAP Public Within 250 m 0 A X 100%
Sewerage Public - - 100.8 M A X X 100%
Public lighting Public Lamppost - 2.6 M A X X 100%
Internet Public - - - M X 100%
SWF Public - - 640,000 A X 100%
Public function
Market Public Within 1,000m 3 A X 100%
Public toilet Public Within 1,000m 3 199,000 A X 100%
Community center Public Within 500m 1 300,000 M X 100%
Youth center Public Within 500m 1 300,000 A X 100%
Library/ learning center Public Within 2,000m 3 60,000 M X X 100%
Police and fire stations Public Within 2,000m 3 600,000 A X 100%
Home for orphans, aged, Public Within 2,000m 3 182,000 A X 100%
Local court Public Within 5,000m 1 - B X 100%
Mediation center Public Within 2,000m 3 189,000 M X 100%
Education
Nursery school Public Within 500m 6 749,000 A X 100%
Primary school Public Within 500m 6 858,000 A X 100%
Secondary school Public Within 2,000m 3 900,000 A X 100%
Technical school PPP Within 10,000m - A X 100%
University PPP Within 10,000m 1 - A X 50% 50%
Health
Health post Private Within 500 m 3 - A X 100%
Maternal and child HC Public Within 2,000 m 3 - A X 100%
Hospital Private Within 5,000 m 1 - A X 100%
Transport
Car park (bus stop) PPP Every plan area 3 2,000 A X 50% 50%
Entertainment
Sport facility Public Within 1,000 m 3 232,000 A X 100%
Neighbourhood park Public Within 500 m 3 - M X 100%
1
PD: Private developer / CoR: City of Rwanda / DoR: District of Rwanda / GoR: Government of Rwanda.
2
A: High priority / M: Medium priority / B: Low priority
5
02 Implementing urban plans involves long-term investments
Implementing urban plans generally in- each plan. In financial terms, the complex- The financial analysis is the result of com-
volves a series of investments made over ity stems mainly from the time horizon of bining time and money. Regulations that
a number of years in a given territorial the project, and from the market. This affect the development process need to
context, according to planned land uses is the case with real estate development be incorporated into the timeframe of the
defined by the urban plan. projects that require different time frames financial analysis.
(in terms of years), including the timelines
The plan implementation can be ex- for detailed planning, infrastructure pro- As shown in Figure 1, the drafting of ur-
pressed as a series of spending flows vision, real estate development and the ban planning is the first stage of the land
corresponding to the costs of infrastruc- release on to the market of final property development and real estate develop-
ture provision and subsequent building products. These varying timeframes have ment process, and the release on to the
as planned, and expenditure and income implications for the markets ability to ab- market of the final property products is
flows corresponding to the return on sorb the new supply volume generated (in the final stage. Considering the entire
property products placed on the market. some cases, the time horizon may even process involves taking into account the
The temporary balance between negative span one or more generations). These planning phase and the implementation
and positive flows requires a funding as- are therefore operations that, regardless of these plans, as well as the construction
sessment that determines the profitability of the legal obligations required by each phase and the release on to the market
of the urban development. legal framework, need their own financial of finished products. It is therefore crucial
formula that assesses their feasibility in that the private sector feasibility assess-
To assess the financial feasibility of an order to earn the trust of public and pri- ment of a long-term urban development
urban plan, it is important to always ac- vate actors who are prepared to allocate project cover all of these stages.4
count for the unique circumstances of resources.
4 Also, as concerns income, the market usually offers

Figure 1: Complete land development and real estate development process sources of information regarding finished property products
(homes, offices, industrial buildings, etc.) for final demand. It is
much rarer to have price information for intermediate products
Planning Urban development and execution (particularly undeveloped but serviced land). The confidence
afforded by any financial analysis stems largely from confi-
dence in the available and accessible sources of information.
We thus recommend referencing, whenever possible, the prices
Master Land Permit Land development Private building and rents of real estate products intended for the final market,
Plan
Market (sale/rent) since this information is more reliable and more widely availa-
acquistion approvals Basic facilities community facilities
ble. From the perspective of investment costs, the market offers
different sources of construction cost information for both basic
development and the construction of buildings according to the
most common categories and uses or activities.
6
The different components of the urban ban development projects span one or of time is a key factor when evaluating
upgrading activities under analysis in- several generations. private sector feasibility.
clude land acquisition by government
or private entities; the period of time Based on this premise, time acquires To include this cost in the project, we
required for granting permits; the de- great significance for this type of pro- can ask what rate of return the inves-
velopment of the land and installation ject and, as we will see, time is another tor interested in carrying out this pro-
of basic infrastructure; the subsequent cost to take into account in any invest- ject would require in order to accept
construction according to the urban ment project. To explain this concept deferred payment. We can identify this
uses permitted in the plan, and the in simple terms, we refer to two fun- rate as the discount rate, or the oppor-
construction of the required commu- damental financial principles: 1) A dol- tunity cost of capital.
nity facilities; and, lastly, placing these lar today is worth more than a dollar
products on the market via various tomorrow, since a dollar today can be In the example given above, lets assume
channels (sale, rent, administrative invested and start earning interest im- an opportunity cost of capital of 7 per
concession, surface right, etc.). Various mediately, and 2) A safe dollar is worth cent which, when applied to the corre-
agents (e.g., public and private entities, more than a risky one, meaning that sponding years, gives us a net present
including companies providing services) most investors will avoid risk when it value of 205,400 (a 44,600 difference
will participate throughout this process; is possible to do so without sacrificing from the 250,000 initially calculated;
these participants will be addressed in profitability.5 the difference represents the application
more detail in a later section. The most of the time value of money).
important concept to emphasize at this The first principle can be easily illustrat-
point is that the time required to com- ed with a practical example. Imagine
plete this full process entails a cost, as an investment project that requires an
it does in any investment project. For initial capital contribution of 150,000,
urban development projects with long and in the following years the pro-
time horizons, the time value of mon- ject generates positive cash flows of
ey will be a key factor when assessing 100,000 and 300,000, respectively.
The most important
their financial feasibility. A first estimate of the projects financial concept to emphasize
returns would place the net balance of at this point is that
the cash flow generated by the project
2.1. Principles of real estate at 250,000.
the time required
feasibility metrics to complete this full
This static method of adding and sub- process entails a
tracting does not take into account the
Time and the cost of money cost of time, and in investments such as
cost, as it does in any
urban development projects, the cost investment project.
The preceding section briefly outlined
the various steps of urban development 5 R.A. Brealey and S.C. Myers, Principles of Corporate
Finance, 5th edition, McGraw-Hill/Interamericana de Espaa,
projects, and explained that many ur- SAU, 2001.
7
Figure 2: The time value of money as the first metric
This example, depicted in Figure 2, clearly ing proposal associated with the invest- the government (i.e., short- or long-term
illustrates the reason for factoring in a dis- ment project by applying a discount rate government bonds), and incorporating
count rate of capital when dealing with (or opportunity cost of capital) available rural land into urban areas will probably
investment periods that span long periods on the market to the investment projects be riskier than building within preestab-
of time. An investment projects cash flow balances as a reference indicator. lished urban areas.
timeline yields financial values in each unit
of time (years, six-month periods, etc.). It The second financial principle mentioned Thus, as a function of the risk involved
is obvious that the value of receiving an above leads us to the conclusion that with each investment project, it is nec-
amount of money in n years is not worth the discount rate (or opportunity cost of essary to add the corresponding risk pre-
the same as receiving the same amount capital) we apply to each project under mium to the correct opportunity cost of
today. Therefore, money is not a free re- analysis will be larger or smaller based capital for the project. This means we can
source, but rather has a cost that varies on the intrinsic risk of the project itself. correctly break down the discount rate of
based on the purpose of the investment Not all investments entail the same level an investment projects cash flows into
and on its timeframe. We can incorporate of risk. Building housing is, in principle, a risk-free rate and a risk premium (see
this cost of capital into a concrete fund- riskier than a public debt instrument from Figure 3).
8
the second metric

Figure 3: Risk as the second metric
ing sections
In thewe describe
following the we
sections main indicators
describe the generally
Net present accepted
valuefor making decisions
(NPV)
e private sector feasibilitygenerally
main indicators of urbanaccepted
development
for projects: net present value (NPV), internal
A project with a positive NPV means that:
(IRR), andmaking
discounted payback.
decisions regarding the private This is the indicator par excellence, and
sector feasibility of urban development its purpose is to update, at any given mo- 1. It has returned all capital invested.
value (NPV)
projects: net present value (NPV), internal ment, all cash flows generated by the in-
rate of return (IRR), and discounted pay- vestment project under analysis: 2. It has paid back the cost of all
ndicator par excellence, and its purpose is to
back. update, at any given moment, all cash flows resources used to fund it.
the investment project under analysis: 3. It has generated an additional
surplus equivalent to the volume
CF1 CF2 CFn indicated by the NPV in question.
VA.N = CF0 + + + ......... +
(1 + i )1 (1 + i )2 (1 + i )n NPV is the best indicator for the private
sector feasibility of any urban develop-
ment project since it is the only indicator,
Estimated cash flow for each time unit (year, six-month period, etc.)
along with the IRR, that takes into ac-
CF = Estimated cash flow for each time unit (year, six-month period, etc.) count the time value of money and that
Discount factor applied to each time unit is based solely on the inflow and outflow
i = Discount factor applied to each time unit of financial resources provided for in the
Number of time units estimated for the investment project (years, six-month periods, project, and on their opportunity cost.
etc.) n = Number of time units estimated for the investment project (years, six-month periods, etc.)
a positive NPV means that:

9
urned all capital invested.
The internal rate of return (IRR)
IRR is defined as the interest rate at which the NPV would be zero.
st indicatorPLANNED
for the CITY
private sector
EXTENSION ANDfeasibility of INFILL
PLANNED CITY any urban development project since it is the
along with the IRR, that takes into account the timeCF value of money
CF2 and that is basedCF solely
0 = CF
nd outflow of financial resources provided for 0in the project,
+ 1
+and on their
+ ......... n
opportunity cost. nThus, the IRR tells us the maximum discount rate
+
The internal rate of return (IRR) 1
(1 + i ) (1 + i ) 2
(1 + i ) that the investment project can incur to achieve an
ate of return (IRR)
IRR is defined as the interest rate at which the NPV would be zero. NPV equal to zero. Above this rate, the NPV will be
CF = Estimated cash flow for each time unit (year, six-month period, etc.)
negative. This implies that the higher the IRR, the
as the interest rate at which the NPV would be zero.
higher the chances of the project having a positive
i = Discount factor applied to each time unit
net present value with regard to the discount rate
CF1 CF2 CFn
n 0 = CF0= + 1
+ of time
Number + ......... + used. The IRR provides the criteria for us to choose
2 units estimated for nthe investment project (years, six-month periods,
( i
1 + etc.) 1+ i ) (
1+ i ) ( )
the investment projects that offer return rates high-
er than the opportunity cost of capital.
Estimated
Thus, cash theflow
IRRfortells
each
us time unit (year,discount
the maximum six-month rateperiod,
that theetc.)investment project can incur to achieve an NPV
equal to zero. Above this rate, the NPV will be negative.
CF = Estimated cash flow for each time unit (year, six-month period, etc.)
This implies that theThere higheris the
much debate about which indicators are
IRR, the higher
Discountthefactor applied
chances to each
of the projecttimehaving
unit a positive net present value with regard to the discount rate more efficient andused.
effective
The when assessing time
investment
rates projects. Manythe agents, both public
i IRR= provides theapplied
Discount factor criteria for us
to each timetounit
choose the investment projects that offer return higher than
Numberopportunity
of time units estimated
cost of capital. for the investment project (years, six-month periods, and private, prefer the criteria of the IRR to the
etc.) n = Number of time units estimated for the investment project (years, six-month periods, etc.) NPV. Although both criteria, when properly ap-
There is much debate about which indicators are more efficient and effective when assessing time plied, are formally equivalent, the IRR has some
tells us theinvestment
maximum discount
projects.rateMany thatagents,
the investment
both publicproject
andcan incur toprefer
private, achievethe an NPV
criteria of the IRR
weaknesses thattowe
themust
NPV.consider when using it
Above thisAlthough
rate, the both
NPVcriteria,
will be when
negative. This applied,
properly implies that
are the higher
formally the IRR, the IRR
equivalent, higherhasa benchmark:
as some weaknesses that
f the projectwehaving a positivewhen
must consider net present
using it value with regard to the discount rate used. The
as a benchmark:
the criteria for us to choose the investment projects that offer return rates higher than the
st of capital.1. If an investment project offers positive cash flows followed by negative cash flows, the NPV increases
1. If an investment project offers positive cash flows followed by negative cash flows, the NPV increases as the annual discount
as the annual discount rate increases. Therefore, we should accept this project if the resulting IRR is
h debate aboutrate increases.
which
less Therefore,
thanindicators
the opportunity we should
are morecost of accept
efficient
capital. andthiseffective
project ifwhen the resulting
assessingIRR istime
less than the opportunity cost of capital.
ojects. Many agents, both public and private, prefer the criteria of the IRR to the NPV.
criteria, when properly applied, are formally equivalent, the IRR has some weaknesses that
der when using itInvestment project A
as a benchmark: Net present value for Investment Project A by discount rate
Year 0 Year 1
300
Net Present Value
stment project offers positive cash flows-1,500

1,000 followed by negative
150 cash flows, the NPV increases
nual discount rateDRincreases. Therefore, we 10% should accept-150

this
0
0% project
10% if the30%resulting
20% 40% IRR 60%
50% is 70% 80% 90% 100%
the opportunity cost
NPV
of capital. - 363.64
-300 Discount type
-450
IRR 50% -600
roject A Net present value for Investment Project A by discount rate

Year 0 Year 1
300
Net Present Value
1,000 -1,500 150

0
10% -150 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
-300 Discount type
- 363.64
-450
50% -600
10
!! ! AND PLANNED CITY INFILL
!
2.
2. If
2. there's
IfIf theres more
there'smore than
morethan
thanoneone reversal
onereversal
reversal in the
the cash
in cash
in the flowsflows
cash of theof
flows the
the project
ofprojectproject being
being evaluated,
evaluated,
being evaluated, the project
thecan
the project project can
can several IRR, most of
produce
produce
produce
which may several
several IRR,
IRR,
not have most
an most of which
of which
economic may not
may and
meaning, have
not also
havemayan economic
an not
economic
even havemeaning,
meaning, and also may not even
and also may not even
a real solution.
have
have aa real
real solution.
solution.
Investment Project B Net present value for Investment Project B by discount rate
Investment Project B Net present value for Investment Project B by discount rate
Year 0 -1,600
Year 0 -1,600
Year 1 10,000 2,000
Year 1 10,000 2,000
Value
Year 2 -10,000 1,000
Value
Year 2 -10,000 1,000
Present
0
DR 10%
Present
0 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 550% 600%
DR 10% -1,000 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 500% 550%type
600%
Discount
NetNet
NPV -773.55 -1,000 Discount type
NPV -773.55 -2,000
-2,000
IRR 25% / 50%
IRR 25% / 50%
3.
3. The
The criteria
criteria of
3. The criteria
of IRR
IRR may
of IRR may give give
may give the
the wrongwrong
the wrong classification
classification in
in mutually
mutually exclusive
classification in mutually
exclusive projects
projects that
exclusive projects that
that differ
differ in
differ in economic life or in the scale of
in
economic
requested life or in the
investments. scale of requested investments.
economic life or in the scale of requested investments.
Project C D Net present value of Projects C and D according to discount rate
Project C D Net present value of Projects C and D according to discount rate
Year 0 -9,000 -9,000
Year 0 -9,000 -9,000
Year 1 6,000 3,000 10,000
Year 1 6,000 3,000 C
Value
10,000
Year 2 5,000 3,000 C
Value
Year 2 5,000 3,000 8,000 D

Present
8,000 D
Year 3 4,000 3,000
Present
Year 3 4,000 3,000 6,000

6,000
Year 4 0 3,000
NetNet
Year 4 0 3,000 4,000

4,000
Year 5 0 3,000
Year 5 0 3,000 2,000
Year 6 0 3,000 2,000
Year 6 0 3,000 0
DR 10% 10% 0 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
DR 10% 10% -2,000 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
NPV 3,592 4,066 -2,000
NPV 3,592 4,066 -4,000 Discount type
IRR 33% 24% -4,000 Discount type
IRR 33% 24%
-6,000
-6,000
4.
4. ItIt is
is possible
possible toto make
make an an improper
improper assumption
assumption about
about thethe return
return rate
rate at
at which
which the
the project's
project's intermediate
intermediate
4. cash
cash flows
flows may
It is possible may be
be reinvested.
to make an improperIndeed,
reinvested. Indeed, the
the IRR
assumption IRR
aboutcalculates
calculates
the return aa theoretical
theoretical
rate at whichmaximum
maximum profitability
profitability
the projects since itit flows may be
sincecash
intermediate
assumes
assumes
reinvested.one one can reinvest
can reinvest
Indeed, intermediate
intermediate
the IRR calculates positive cash
positive maximum
a theoretical flows in alternative
cash flowsprofitability
in alternative projects
sinceprojects
it assumeswith the
withone
thecansame
same rate
rate intermediate
reinvest
of
of return as
as the
returncash
positive the current
current
flows project.
project. This
in alternative This behaviour
with theof
behaviour
projects the
the IRR
ofsame ratemay
IRR may be
be unrealistic
of return unrealistic in
in projects
as the current project.with
projects Thishigh
with high IRR. of the IRR may be
IRR.
behaviour
To
To resolveinthis
resolve
unrealistic
this problem
problem
projects
many
with many
analysts
analysts
high IRR.
usethis
use
To resolve
theproblem
the MIRR many
MIRR (modified
(modified internal
internal
analysts
rate
rateMIRR
use the
of
of return).
return).
(modified
That
That can
can rate of return). That
internal
distinguish
can
between
distinguish between
the interest
the
rate
interest rate
paid
paid
for
for
the
the
intermediate
intermediate
negative
negative
cash
distinguish between the interest rate paid for the intermediate negative cash flows and the interest
cash
flows
flows
and
and the
the interest
interest rate received for the
rate
rate received
received for the
for the reinvested positive
reinvested cash
positive intermediate cash
intermediate cash flows. flows.
reinvested positive intermediate flows.
While
While all
all four
four weaknesses
weaknesses cancan lead
lead to
to erroneous
erroneous selection
selection of
of projects
projects using
using the
the IRR,
IRR, itit is
is important
important to
to point
point
out that this is a highly respected and widely used financial evaluation criteria. Nevertheless,
out that this is a highly respected and widely used financial evaluation criteria. Nevertheless, these these 11
drawbacks are
drawbacks are worth
worth mentioning
mentioning precisely
precisely because
because IRR
IRR is
is such an important
such an financial indicator.
important financial indicator. Future
Future
technicians who undertake studies on private sector feasibility should take into account all these
While all four weaknesses can lead to 2) it is easy to calculate. ment and real estate development are two
erroneous selection of projects using the linked investment projects. Both of these
IRR, it is important to point out that this Discounted payback does not take into phases can be addressed by a private sec-
is a highly respected and widely used fi- consideration any of the cash flows gen- tor feasibility assessment. However, it is at
nancial evaluation criteria. Nevertheless, erated after the selected date, however; times beneficial to distinguish the results
these drawbacks are worth mentioning it should thus be used in conjunction with of development of rural land into urban
precisely because IRR is such an impor- other indicators to evaluate an invest- plots from the results of development of
tant financial indicator. Future technicians ment project. these urban plots into real estate products.
who undertake studies on private sector In any case, the costs in each of the two
feasibility should take into account all phases must be consistent with the final
these peculiarities.
2.2. Methodological price that can be commanded for each of
considerations of these assets.
fragmented analysis
Discounted payback This differentiation (depicted in Figure 4)
Previous sections have referred to the
shows us both the value of serviced land
Payback refers to a projects financial re- implementation of urban planning that
after infrastructure provision and the value
covery period. It is determined by counting covers both infrastructure provision and
of the built real estate products. Both values
the number of periods (years, semesters, construction of buildings. Land develop-
are crucial to the feasibility of an investment.
monthly payments, etc.) that
must pass before the accumula-
tion of the expected cash flows
Figure 4: Fragmented analysis of plan implementation
equals zero and starts to be posi-
tive in subsequent periods. Annuity 1 2 3 4 5 6 7 8 9 10 11 12
1 Land development process: Revenues and expenses
Land acquisition 1year
Permits and approvals 21 months
Land development/basic facilities 2 years
Revenues from the sale of lots 1year
However, it is crucial to also NPV [net present value]

Discount rate/IRR %
consider the cost of time. Dis-
counted payback is thus a more
accurate indicator because it 2 Building process: Revenues and expenses
Building Process 4 years

considers the cash flows adjust-
Marketing and sales process
ed to the relevant discount rate. Private housing 5.5 years
Social and affordable housing 2.5 years
Moreover, this indicator has two
Retail/tertiary 4 years
important advantages over the
NPV [net present value]
other indicators: 1) it provides
Discount rate/IRR %
an intuitive idea of the risk, and
12
In addition, each plan implementation has these products. However, it excludes one been recorded in the private sectors pro
enough peculiarities to require differenti- cost: developed land. forma, this amount will constitute the po-
ated profiles of developers. The private tential revenue of the land development
party that transforms the land must have The NPV quantifies the volume of sur- process.) This process contains as expend-
a liability structure adequate for very long- plus resources of an investment project, iture flows the total expenditure needed
term investments, while those purchasing considering some inflows, some expendi- to transform the gross land into devel-
already-developed plots face shorter-term ture flows, and the discount rate of these oped land (e.g., the costs of planning,
investments (i.e., building on a plot), and flows. If the matrix categories of income managing, and implementation). In the
therefore incur less risk. Therefore, frag- and expenses are accounted for in full same manner as in the building phase, it
mentation of the plan implementation al- (including the acquisition cost of the is necessary to consider in the pro forma
lows individualized discount rates, which serviced land), the NPV equals the prof- whether the purchase of gross land has
are among the key factors in a private it from the transaction. But if the matrix been accounted for. If not, this cost will
sector feasibility assessment. does not include, for example, the cost be the unknown factor of the equation.
of acquiring this urbanized land, then the
It would also be entirely permissible to NPV expresses the maximum value that In this latter scenario, it is important to
apply different risk premiums in each ur- could be paid for the serviced land. If 100 determine what gross land cost the pro-
ban development stage. In any event, the per cent of the NPV is assigned to cover ject could support at the time the urban
methodology to be applied throughout the costs of the urbanized land, the freed- plan is drafted. This cost must be com-
implementation must be the same. It is up additional resources of the investment patible with the discount rate applied to
also important to adjust the financial pa- project would be zero. In other words, if the anticipated inflows and expenses in
rameters of land development and build- the NPV is fully assigned to remunerate the planning and implementation phas-
ing activity to the specific circumstances the acquisition of serviced land, the in- es. The feasibility assessment allows the
of the financial market, and to the cir- vestment project of the real estate sector freed discounted project resources to be
cumstances of the market for final prod- will be compatible with the assigned dis- determined at the beginning of the devel-
ucts (e.g., housing, industrial buildings, count rate (i.e., the project will cover the opment activity using the NPV.
offices, and commercial buildings). opportunity cost and risk premium), but
the projects added benefit will be null. If allocating the total NPV to cover the
costs of the unknown factor of the equa-
2.3. Financial analysis tion (for example, the cost of the gross
methodology of real 2.4. Financial analysis land area), any downward deviation from
estate development methodology of the land the urban plan (for example, unexpected
development process increases in costs or interest rates) will
The real estate pro forma first reflects result in a negative NPV. Likewise, any
the proceeds of the sale of all real estate The matrix of income and expenses for upward deviation (for example, reduced
products for final demand (e.g., housing, the provision of infrastructure has as the real costs of basic facilities, or reduced
offices, hotels, industrial buildings, and income flow the portion of the NPV esti- time spent planning) will result in a pos-
commercial buildings). It also includes the mated as the residual value of urban land. itive NPV.
costs of construction and promotion of (If the purchase of developed land has
13
03 Delimitation of areas and determining planned land uses
The private sector feasibility assessment Table 2: Minimum planned land uses necessary to carry out a private sector feasibility assessment
pertains to a precise geographical area Total surface area of the sector under evaluation Land (Ha. / M2) - -
within which urban development will Total surface of infrastructure
occur. Determining this territorial scope Land (Ha. / M2) - -
(Roads, streets, pedestrian walkways, etc.)
is not only necessary to physically delimit
Total surface of green areas
the investment that occurs within it, but Land (Ha. / M2) - -
(Urban parks, protected open spaces, etc.)
also to delimit the foreign investment cor-
Total surface area of public facilities
responding to the network connections Land (Ha. / M2) Total units (N) Built area (M2)
(Hospitals, schools, administrative buildings, etc.)
to their immediate environment and the
Total surface area for private urban uses Land (Ha. / M2) Buildable ratio Built area (M2)
foreign investment generated by the pos-
Total surface area to use for private housing (low
sible jump of scale that comes with PCE. Land (M2) Buildable ratio Built area (M2)
density, medium density, and high density)
Total surface area for social housing (low density,
Land (M2) Buildable ratio Built area (M2)
The first step is to estimate the minimum medium density, and high density)
urban planned land uses necessary for a Total surface area for industrial use Land (M2) Buildable ratio Built area (M2)
feasibility assessment. Urban legislation Total surface area for office use Land (M2) Buildable ratio Built area (M2)
varies enormously around the world and Total surface area for commercial use Land (M )
2
Buildable ratio Built area (M2)
is characterized by myriad particularities Land (M2) Buildable ratio Built area (M2)
and legal imperatives. In fact, many de-
veloping countries lack a coherent legal Density No. houses / Ha Total housing -
framework pertaining to urban areas. Low density residential No. houses / Ha Total housing -
Thus, in many projects under evaluation, Medium density residential No. houses / Ha Total housing -
it is extraordinarily difficult to determine High density residential No. houses / Ha Total housing -
these land uses.
Total housing by type Total housing - -
Table 2 summarizes the minimum planned Private housing Total housing - -
land uses necessary for a feasibility assess- Low density residential Total housing - -
ment. Medium density residential Total housing - -
High density residential Total housing - -
Social housing Total housing - -
Low density residential Total housing - -
Medium density residential Total housing - -
High density residential Total housing - -
14
04 Breakdown of plan implementation costs: Concepts and sources

of information
This chapter breaks down the costs re- gimes within which urban development only that the project is unviable, but also
sulting from implementing an urban plan. is carried out. Nevertheless, the following that it was not possible to allocate any
These costs will gradually surface accord- sections aim to facilitate discussion of the funds for the purchase of land.
ing to a specific timetable and eventually concepts that must be considered, and at
together will determine the cost flow of which point in the plan implementation Addressing analysis of land value involves,
the urban development under evaluation. process they should be evaluated. implicitly, acknowledging the increase in
value of land once it has been developed.
A complication typically encountered If land gains value due to urban planning,
when analyzing an urban development 4.1. The purchase of land this gain may be attributed to the entity
plan is that these plans often lack the with competence in urban planning: the
technical documentation necessary to ful- The essential gross materialin other government. Consequently, this gain may
ly evaluate certain costs, such as the total words, the first component of the land be returned to the citizens whose gov-
costs of required infrastructure invest- development activitiesis the land itself. ernment carried out the planning. In the
ments (e.g., sewers, sewage treatment, The acquisition cost of the land (when event that this gain accrues to a private
and power generation) and possible costs this asset operates in market conditions) landowner, the community can capture
incurred due to pre-existing factors not is not always known, due to the lack of the value added by the plan implementa-
anticipated by the plan. transparency that usually governs the tion through taxation or other processes
market and the oligopolistic nature of this available for this purpose (for example, a
Given this limitation, to determine wheth- particular market. land value tax, or tax increment financing).
er the urban development plan is feasible,
it is necessary to estimate the magnitude Consequently, many feasibility assess- This option is common when the initiative
of costs involved in the plan. ments opt not to include this cost as one for plan implementation lies in the private
more unknown variable. When the acqui- sector. The price of land is defined by a
Toward this end, the following sections sition value of land is already an unknown market that is not perfectly competitive.
discuss the cost concepts that must be factor and is not introduced as a cost flow As such, there is no cost of land repre-
considered when conducting a private in an analysis, the volume of inflows that sentative of all the landowners included
sector feasibility assessment. It is impor- can be expected from plan implemen- in the planned area. Each owner can hold
tant to note that this discussion cannot tation must be sufficient to pay for the property for different reasons and at dif-
possibly encompass every scenario en- purchase of land and allow for a balance ferent points in time, resulting in widely
countered when evaluating a planned between the implementations negative varying land costs, even within the same
extension or infill, given the diversity of and positive flows. When the feasibility sector or area. Even the same owner may
societies, cultures, and governance re- assessment is negative, it will mean not
15
have very different costs depending on Consequently, in those investment pro- the only cost component not introduced
the point in time and the reason for tak- jects that choose not to include this cost in the analysis: the land).
ing ownership of different plots within component, and in which this variable is
the same sector under evaluation. the dependent variable of the flow anal- This method of assessing the feasibility of
ysis, it will be precisely the value of the an urban development can change accord-
Moreover, when assessing the feasibili- resulting land that allows for a determina- ing to the manner in which the initiative
ty of an investment based on a specific tion of whether or not a project is viable. is public. When the urban intervention is
cost of land when it is a private initiative, It will also help arrive at a determination a public initiative through the land expro-
the cost to be applied to the gross land of whether the project can at least be priation system, the government may have
must be in line with the profitability that attractive from the private sectors point representative data on land acquisition
a given development project can gener- of view, or whether the initiative should prices in expropriation processes. Depend-
ate (subject to the applicable urban legal instead be made public because it would ing on the availability of these data, the
framework). Therefore, the value of the be in the publics interest to do so (but cost of the acquisition of land may be in-
land is often a function of the prevailing not because of the financial benefit it corporated as one more cost in the feasibil-
legal framework. generates, which is insufficient to cover ity analysis. Table 3 provides an example of
land expropriation costs in Rwanda.
Figure 5: The acquisition cost of land as an unknown factor of the feasibility assessment
Annuity 1 2 3 4 5 6 7 8 9 10 11 12
Land acquisition [residual value] ?

Permits and approvals 2 years
Land development and basic facilities 2 years
Building process 5 years
Marketing and sales process
Private housing 7 years
Social housing 3 years
Affordable housing 3 years
Retail/tertiary 4 years
CASH FLOW CF1 CF2 CF3 CF4 CF5 CF6 CF7 CF8 CF9 CF10 CF11 CF12
16
Table 3: References of land price in Rwanda for expropriation (in RWF)

Land price Land price Tourist
District Plan area Cell per m2 attraction per m2
1 Karongi Bwishyura Burunga 337 345
1 Karongi Bwishyura Kibuye 582 596
1 Karongi Bwishyura Nyarusazi 153 157
2 Nogororero Bwira Bungwe 92 94
2 Nogororero Gatumba Gatsibo 92 94
2 Ngororero Gatumba Rusumo 138 141
3 Nyabihu Jomba Nyamitanzi 168 173
3 Nyabihu Kabatwa Gihorwe 245 251
3 Nyabihu Mukamira Rugeshi 260 267
Source: Official Gazette n19 of 10/05/2010: Ministerial Order N002/16.01 of 26/04/2010 determining
the reference land price outside the Kigali City
4.2. The costs of infrastructure provision
In an ideal scenario, the feasibility assessment would incorporate the

full cost of the infrastructure called for by the urban plan. Often, in
the process of drafting the urban plan, the available documentation
does not include detailed costs of infrastructure. This is why in this
preliminary phase it is usually only possible to incorporate a first esti-
mate of these costs.
Usually it is customary to structure infrastructure costs according to

the planned land uses of the area (e.g., roads, parks), with an initial
estimate derived from the proposed plan, from a measurement of
existing infrastructure, and from a unit price work unit for each net-
work or service. See Table 4 for an example.
17
Table 4: Concepts to consider when estimating infrastructure costs known technical factors that may occur
Item Unit of Unit price Plan area Total Data
during the physical development.
measurement work unit1 needs cost source
Demolition and ground excavation M3 USD / M3 M3 USD Utility The budget for the servicing of land is
companies obtained from the measurements of the
Roads and pedestrian paths M / Ml
2
USD /M 2
M / Ml
2
USD
- Ml work elements required for the physical
Sewage system treatment M2 / Ml USD /M2 M2 / Ml USD development of the land, and the unit
- Ml
price list for these inputs.
Sewage system collection M2 / Ml USD /M2 M2 / Ml USD
- Ml
Apart from the provision of infrastructure
Water supply system N USD N USD
there may be other cost items that are
Interior water network M2 / Ml USD /M2 M2 / Ml USD
- Ml not strictly physical work, but can consti-
Electricity (high, medium, and low voltage) N USD N USD tute development costs for the planned
Street lighting M2 / Ml USD /M2 M2 / Ml USD
land. Table 5 presents an illustrative list
- Ml of some items that, depending upon the
Telecommunications (Internet, telephone, etc.) N USD N USD relevant legal framework, could consti-
Parks and public spaces N USD N USD tute a land development cost.
Land decontamination M2 USD / M2 M2 USD
Drainage and flood risk management M2 USD / M2 M2 USD
USD
Table 5: Concepts to consider when estimating
Contingency % total
planned land development costs
1 The unit prices list often varies between countries. For example, in Spain unit prices of urban work tend to be formulated in terms
of MEB (material execution budget), which is the concept of price performance of work units. Six per cent of industrial profit and 13 Item Total cost Data sources
per cent of overhead is added to this MEB, from which the contract operation budget is obtained. Each country will have its particular Infrastructure USD Companies
methodology for calculating unit prices. It is important to incorporate the final total unit price in the analysis of financial feasibility
with all the included concepts. provision specializing in
pre-valuation
Expropriation of USD Benchmarking
land comparable
Clearly each plan area will require a dif- estimated as part of the infrastructure experiences
ferent intervention. The list in Table 4 provision costs. Management and % of total
is only intended to illustrate the most implementation
costs of land
common components; there may be When it is not possible to estimate the development
other factors with a high or low finan- cost for a particular aspect of a land de-
cial impact (such as soil decontamina- velopment project, it is recommended to
tion, corrective measures for flood risk, incorporate within the estimated infra-
The planned land usually accommodates
etc.). The existing territory is often not structure provision costs a contingency
activities (either purely agricultural or spe-
free of infrastructure and services, and cost that in each case will be assessed
cific to urban areas) that are incompatible
the damages that may be caused by the according to the characteristics of the
with the proposed plan and should be re-
new approved planning should also be planned land and the difficulties and un-
18
placed by elements of the new plan. The free-market housing; or industrial estates into construction costs (work and
owners of preexisting assets should be either with adjacent warehouses in rows materials necessary for completing the
compensated according to the prevailing on small plots, or large industrial plots of building) and finishing costs (electrical
legal framework (however, this is not in- 10,000 m2, 25,000 m2, etc.). and mechanical equipment, etc.).
compatible with the fact that, as owners
of the land, they can participate in the ur- The level of detail depends on each urban General expenses and the developers
ban rights that define the PCE). This com- tradition, the law in every country, and a profit: From the budget for the materi-
pensation should be a component of the countrys ability to fill in the blanks in als and execution obtained above, it is
costs of urban development. an urban plan. As such, a more definitive possible to calculate the final construc-
urban plan is not necessarily better than a tion budget by applying a percent-
Over time, compensation costs increase less definitive one. age for general construction costs
(especially in areas of renovation and ur- that will be incurred by the contract,
ban rehabilitation). A pre-assessment of Because every country (and even differ-
plus a percentage for the profit of
possible compensation that must be allo- ent regions within the same country) has
the contractor. These percentages are
cated to the area according to the current its own real estate production process, it
different in every country, and their
legal framework would allow for a more is essential to garner market knowledge
and experience before preparing a feasi- application will depend on the case in
thorough feasibility assessment.
bility study. It is advisable to take into ac- question.
count the following building costs: Promotional and management costs:
4.3. Building costs
Also known as soft costs, these
Hard construction costs: These are the
Building costs are one of the main cost include a variety of costs necessary
costs of the tangible materials needed
components to be taken into account to complete the construction project.
for construction. They are directly quan-
throughout the plan implementation pro- They include the fees of professionals
tifiable by calculating the number of
cess. Based on the urban uses and planned involved in the project, management
products by their unit price. As shown
land uses envisaged in the planning, build- expenses, taxes and duties, insurance,
ing costs should be allocated for each of in Table 6, they can be broken down
and administrative costs.
them in terms of built floor area (in the
relevant currency in each case).
Table 6: Components to consider when calculating construction costs

There are numerous possible building
Component Total cost Data sources
usesfor example, residential, commer-
Hard construction cost USD/m2 built area Public administration publications (Ministries)
cial, industrial, and officeand each
Structure USD/m2 built area
of these uses can be divided into dif-
Finishes USD/m2 built area Specialist trade journals
ferent types (e.g., low-, medium-, and
high-density housing; single houses, General expenses and developers profit % of total
Promotional and management costs Real estate developers
semi-detached houses, terraced houses, Itemized components as %
of the total
or apartment blocks; social housing or
19
an be broken down into construction costs (work and materials necessary for completing the
g) and finishing costs (electrical and mechanical equipment, etc.).
al expenses and the developers
PLANNED profit: AND
CITY EXTENSION FromPLANNED
the budget
CITY for the materials and execution
INFILL
d above, it is possible to calculate the final construction budget by applying a percentage for
l construction costs that will be incurred by the contract, plus a percentage for the profit of the
tor. These percentages are different in every country, and their application will depend on the
question. 4.4. The cost of capital When an investment project falls within a company (whether public or private), the
company will adopt a financing plan based on internal and external resources. Equity
ional and management
Section 2.1costs:introduced
Also known as soft costs, these
mathematical cal-includewill
a variety
have of costs in terms of the commitments taken on with shareholders, employers,
a cost
ary to complete the construction project. They include the fees of professionals involved in the
management culations thatand
expenses, taxes account for the cost
duties, insurance, of time costs.
and administrative consortium members, and the like (depending on the type of actor in each case), and
in investment projects. As mentioned ear- borrowing will have a financial cost and repayment terms that the company has agreed
lier, accurately determining the financial upon with the relevant financial institutions.
onents to consider when calculating construction costs
cost of projects with long-term Total cost invest- Data sources
on cost ments is extremely important USD/m2 for guaran-
built area Public administration publications (Ministries)
Structure
teeing the private sector USD/m2 built area
feasibility of any Specialist trade journals
Finishes USD/m2 built area Figure 6: Conceptual diagram of the cost of capital of an investment project
urban
es and developers profit
development project. % of total Real estate developers
d management costs Itemized components as % of the total
The cost of capital is the expected return on a portfolio of all the companys existing securities
The discount rate that should be used to
discount flows (and thus incorporate the
st of capital Companys balance sheet
cost of time) will be the weighted average Cost of capital
introduced mathematical calculations
cost of capital (alsothat account
known asforWACC).
the cost of
Thetime in investment projects.
ed earlier, accurately determining the financial cost of projects with long-term investments is
WACC is estimated according to the bor-
mportant for guaranteeing the private sector feasibility of any urban development project.
rowing costs, the opportunity cost of the Dividend
nt rate that should be used to discount flows (and thus
equity, and the proportions (in terms of incorporate the cost of time) will be the EQUITY (%)
verage cost of capital (also known as WACC). The WACC is estimated according to the ka
market
osts, the opportunity costvalue) of both
of the equity, andtypes of resources:
the proportions (in terms of market value) of both
ources:
ASSET
Interest rate
= ! + 1
+ + DEBT (%)
Ka
where:
= Opportunity cost of equity
= Overall cost of the debt
= Ke =
Tax rate Opportunity cost of equity
Market value equity ratio6
Market value
Kd debt
= ratio Overall cost of the debt
INVESTMENT FINANCING
t = Tax rate

uity and D is debt.
E/(E+D) = Market value equity ratio6
This method of dealing with the cost of capital in an investment project is difficult to
D/(E+D) = Market value debt ratio apply in a private sector feasibility assessment. This is because an assessment is not un-
book for financing planned city extension 19
dertaken from the perspective of a particular company. Rather, it is undertaken from the
perspective of the area of the PCE as a whole. This necessitates finding the minimum
cost of capital that might be reasonably applicable to the urban development.
6 Where E is equity and D is debt.
20
It is therefore necessary to find an alternative way to evaluate the cost of capital appli-
cable to the area under analysis. This alternative is known as the opportunity cost of
capital and is the same as the expected rate of return the investors might receive from
alternative investmentsfor example, a risk-free investment in government debt (bonds
and notes).
Bear in mind that when applying an indicator such as the interest rate of the debt issued
by the United States, this rate could be regarded as free from risk. Therefore, it must be
adjusted by a risk premium equivalent to the risk of the project whose financial feasibility
is being assessed (see section 2.1).
! !
Graph
Graph 1: Local currency
1: Local currencydebt
debt(government
(governmentaverage
averageissue yield
issue of of
yield treasury bonds)
treasury bonds)
25
20
15
10
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Ghana Uganda Kenya Algeria
Source: African Financial Markets Initiative (African Development Bank)
Source: African Financial Markets Initiative (African Development Bank)
21
05 Market prices and revenue flows
The implementation of urban plans en- mediate prices must be compatible with ties), secondary information published
compasses both the land development, the market price for the end product, online, advertisements in the press,
and the construction process and release which is what determines the feasibility and sector-specific surveys carried out
on to the market of finished products. It is of infrastructure provision and real estate by national and international agencies.
worth reiterating this point, as often urban development. However, generally speaking, there are
development, planning, and management
far fewer sources of information on
are only associated with the process of de- The need for prudence when formulat-
the price of land, which makes it very
veloping the land. As a result, many feasi- ing the private sector feasibility assess-
difficult to illustrate the market prices
bility analyses are limited to demonstrating ment requires using the feasibility of the
of intermediate products such as devel-
the feasibility of the investment in land, ig- full plan implementation as a bench-
noring both whether there is demand and oped land and plots, or even of gross
mark. Therefore, this feasibility cannot
the prices that could be commanded. land pending urban development. The
be justified only by certain market prices
diversity of sources of information on
for developed land. Rather, it needs to be
Investment in urban development works finished products and their level of terri-
justified in terms of both infrastructure
results in the developed land and plots torial disaggregation allows estimates to
provision and the construction process.
suitable for building purposes. Meanwhile, be made by products and regions, which
It is thus necessary to demonstrate
the construction process itself gives rise is not the case when seeking informa-
to real estate products aimed at the final compatibility between the market prices
tion on land prices.
demand sector. In all cases, both the plots of the intermediate products and the
for building on and the finished properties market prices of the end products. General construction products (housing,
(houses, commercial premises, offices, in- business premises, offices, industrial
The market offers various sources for the
dustrial warehouses, etc.) are intended to warehouses, etc.) have a supply and
prices of finished real estate products
command particular prices. demand market. As previously noted,
(housing, business premises, indus-
it is possible to use secondary sources
trial warehouses, etc.). These include
These prices allow for an estimation of the for prices or, if these are not available,
expected income from an investment pro- the price statistics published by certain
to conduct specific fieldwork and talk
ject. Some methodological observations: national and international public bodies
to developers in the region in question
(public administrations, ministries of
The process of urban development to obtain information on this variable.
housing, ministries of infrastructure and
generates intermediate products (i.e., However, when a plan includes unique
public works, regional governments,
serviced land) with certain market productssuch as hotels (with all
supra-municipal authorities, and some
prices. However, each of these inter- their different formats, categories, and
municipal and metropolitan authori-
22
markets), shopping centres (as opposed Finally, there is also the principle of prudence, which counsels evaluating the investment and
to shops on the ground floor of blocks the income relating to the use that has the biggest marketor, to put it another way, one
destined for other uses), indivisible plots that is less exclusive, more transparent in terms of the information available and, therefore,
or ones with exceptional dimensions, more reliable.
service stations, etc.it is then necessary
to adapt the methodology and the search Table 7: Market prices of completed real estate products in Kigali (Rwanda)
for prices to each specific case. Concept Category / typology Year Price Unit Data sources
HOUSE Four-bed executive house 2015 1,737,500 Rwf rent / month Government
Sometimes a generic definition of a publications
Social 2013 1,549,155 Rwf household (avg. sale
particular built area allows a wide range price) Publications
by real estate
of possible final uses. Normally, when the Affordable 2013 3,453,455 Rwf household (avg. sale agencies
price)
urban plan leaves these options wide open,
Mid-range 2013 41,796,605 Rwf household (avg. sale
it is because there are insufficient justifica- price)
tions for earmarking it for a specific use, INDUSTRY US$/SqM/month - % Yield
and it is left to time to decide upon the
best use.7 In these cases, a series of prin- 6 4 30%
ciples should be applied that will help to 4 20%
2 12% 10%
clarify which uses should be borne in mind
0 0%
among all the possible future options. The 2009 2011 2013 2015
first is the principle of greater and better
use, which seeks the most economical- OFFICES US$/SqM/month - % Yield
ly advantageous option among all those
30 25 15%
available. There is also the principle of 10%
20
probability, which would make it advisable 5%
10
to opt for the most likely outcome.
0 2009 2011 2013 2015 -5%
7 With regard to the predictability of urban planning, its pre-

dictive limits must be considered when it comes to addressing an in-
RETAIL US$/SqM/month - % Yield
creasingly diffuse and changing demand over time (in terms of both
the demand for residential use and for land for business activities). 30 25 15%
The definition of urban planning that adapts to certain requirements
of demand that almost certainly will have little or no validity 15 20 9%
or 20 years after the planning period allows urban planning to be 5%
addressed under the criteria of future opportunity and adaptability 10
over time. See A. Jover and M. Morell, Study on the Report Compe- 0 2009 2011 2013 2015 -5%
tition Problems in the Land Market in Spain, Issued by the National
Competition Commission, Working Group on Urban Planning and
Land Management, General Council of Economists of Spain, 2014.
Available from http://www.economistas.org/Contenido/Consejo/
Urbanismo/MemoriaGTUrbanismoSobreMercadoSueloCNC.pdf).
Source: Knight Frank Research, African Report 2015
23
06 Future economic and financial scenarios, and the ability to
anticipate macro- and micro-economic behaviour
The information relating to any cost or inflation that allow an analysis of the fi- When defining a future scenario as part
unit price refers to a particular moment nancial feasibility of an investment to be of a feasibility analysis, the expert in in-
or period in time and a specific region or made, and that allow for evaluation of vestment analyses works with market
market. Forecasting price trends over the the investments capacity to withstand information and also with the long-term
years planned for the implementation of variations in costs, prices, and time. It is macroeconomic forecasts of the country
the approved project entails making an an exercise to establish whether a project or region in question (when these are
analysis of market conditions at the time is reasonably practicable and has staying available).
corresponding to the cost and price infor- power. Future scenarios are not formu-
mation. lated to be met, but rather as an initial With regard to the future scenarios of real
step to see how they will behave under estate market prices, certain restrictions
Urban development projects are long- reasonable and different assumptions that might determine future forecasts
term projects; hence, future scenarios will of costs, prices, and time. But the confi- should be taken into account:
always be in the long term. Consequent- dence factor of any prediction only makes
ly, it is necessary to forecast a supply and sense to the extent that the person who Land management and planning: The
demand scenario for real estate products. formulates it is involved in its outcome. adoption and implementation of terri-
The first impression the reader will have In this respect, the forecast is not a theo- torial plans (structural plans at state,
is incredulity when talking about a future retical exercise but rather a road map for regional, or supra-municipal levels)
scenario that is often 10, 15, or 20 years the entrepreneur who assumes the risk include determinations that, in many
away. in leading the process, whether public or
cases, aim to fundamentally alter resi-
private.
dential and demographic growth, the
Nevertheless, this component is an inte-
gral part of any investment project; risk is scale of operations, and the mix of real
Economic literature, like literature in
a cost that, as explained in previous sec- many other social science disciplines, is estate products. Consequently, the
tions, needs to be incorporated in order accustomed to considering the future new realities arising from this new terri-
to attract resources to an urban planning in terms of behaviour patterns observed torial strategy can change the rules of
project. in the past. This obviously has two ma- the game that were established when
jor shortcomings: On the one hand, the the country did not have a proactive
Making forecasts does not mean that re- non-inclusion of the process of globali- territorial model in place and when
ality will follow long-term predictions to zation, with all its consequences, and on growth was messy, scattered, and
the letter. Making long-term forecasts the other, the difficulty of incorporating segregated. These large-scale territo-
means formulating reasonable hypothe- unknown future developments into these rial operations that dramatically trans-
ses of cost behaviour, income rates, and forecasts.
24
form some cities tend to be supported torial scale. The intention of PCE is to products: Assessing the markets
by the strengthening of transport and provide adequate supply of serviced, capacity to absorb the real estate
communication networks. It is impor- buildable plots and units to prevent products proposed by the plan under
tant that the economic activity enabled the rapid rise in the price of formal real analysis is crucial to estimating the
by these transformations justifies estate and therefore prevent slums annual amounts dedicated to market-
these large infrastructure investments. and informal settlements. However, a ing the different products. To obtain
All these more ambitious operations well-planned, serviced, and connected sound arguments for the accrual/
anticipate investments in infrastruc- area with good public spaces may be deferral of potential revenue, it is
ture and the extension of deadlines considered prime real estate. There- necessary to address the following
by which the market can absorb these fore, it is difficult to predict how these concepts and market parameters: rate
major operations, with important forces (increased supply and demand of construction and prices of finished
impacts for both the public and the for serviced real estate) will balance. housing in the municipality and/or
private sector. This is what is meant surrounding area (real estate supply
The time taken by the market to
when referring to the new realities in capacity); rate of housing transac-
absorb the volume of new real estate
urban planning operations on a terri- tions and prices in the municipality
A market in Chichicastenango, Guatemala Wikipedia
25
and/or surrounding area (demand circumstantial reasons (buyers inabil- tial offering is affordable to the local
absorption capacity); demographic ity to find financing, high unemploy- populace and whether the real estate
forecasts; and property stock pending ment rates, lack of credit available for products proposed in the planning
placement on the market (alternative property developers, etc.), or overval- will be in demand with this particu-
options to those offered by the sector, ued due to a process of real estate lar market and population segment.
potential of housing in developed expansion that reflects the formation This may reveal the need to produce
sectors pending consolidation, etc.). of a property bubble. Every possible social housing for certain population
To estimate the period of time for the piece of information must be extract- segments, which population segments
absorption of the real estate products ed from the different sources availa- are the targets, what resources they
proposed in the sector under assess- ble. There are public and private insti- have to buy property, and what the
ment, it is necessary to position the tutional sources that publish statistical maximum sale or rental prices are.
planning in relation to its surroundings data on the phases of the real estate
One of the most serious problems when
and potential competition. cycle in numerous cities and coun- it comes to determining the effort of
tries. The market is very diverse in families is that there is no disaggregated
Phase in the real estate cycle: Real
terms of building types, surface areas, regional information on family income
estate cycles have a direct relationship
urban zones, and new or second-hand and its distribution. This makes it very dif-
with economic cycles, with the chance
housing. Depending on the profile of ficult to reasonably establish the point(s)
that property bubbles may form during
each operation, it is necessary to try of equilibrium in pricing between supply
the expansive phases of these cycles. It
to extract the statistical indicators of and demand.
is therefore possible to divide the real
interest.
estate cycle into four distinct phases: Once the above determining factors have
1) recovery, 2) expansion, 3) contrac- Families homebuying efforts: From the been noted, it is possible to correctly di-
tion, and 4) recession. To be able point of view of demand, it is essen- agnose the current situation and to es-
to forecast future performance, it is tial to identify the effort that families tablish reasonable price forecasting crite-
essential to identify, in each territory need to make when it comes to buying ria aligned with demand. This change in
under analysis, the phase of the cycle a home in the area under analysis. It mentality is very difficult to instill due to
it has reached, and whether todays is not enough just to know the sales the inertia that generally prevails in these
prices reflect a balance between supply prices on the market; it is essen- types of projects.
and demand, or if they are lower for tial to identify whether this poten-
26
07 Inflation: The feasibility analysis in nominal or real terms
A prior discussion touched on the pre-

cursors and forecasts of both costs and where:
revenue. Historical series tend to be ex-
RDR = real discount rate
pressed in nominal prices, i.e., without
deducting inflation. For example, consid- NDR = nominal discount rate
er an increase of 15 per cent in the final
price of a real estate product over a year,
a period in which inflation rose from 0
!
per cent to 10 per cent. That product will Graph 2: Long-term government bond yields: 10-year and CPI for South Africa
have had a nominal price increase of 15
18
per cent, and a real (inflation-adjusted)
increase of 5 per cent. In countries with 16
high and very volatile rates of inflation it

14
is always advisable to work in real terms
and isolate the inflationary effect. Even in 12
countries with more stable inflation rates

10
it is also suggested in some cases to work
in real terms, so as to account for the in- 8
flationary effect of a project that already 6

incorporates multiple variables and uncer-
4
tainties.
2
Nevertheless, when working with nomi-
0
nal or real series, in terms of both cost and
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
revenue flows, future forecasts should be -2
formulated in nominal and real terms and
CPI 10y Bond
should use a decided-upon discount rate
appropriate to the analysis. For exam- Source: African Financial Markets Initiative (African Development Bank)
ple, if the analyst decides to conduct the
quantitative analysis in real terms, then
the inflation rate must be incorporated
into the discount rate:
27
These considerations could open the door to a

range of reflections about measures of inflation,
explanatory factors of the behaviour of costs
and prices, etc. This guide does not intend to
provide a comprehensive overview of this topic,
but rather aims to help resolve the usual chal-
lenges faced by the analyst when looking at an
investment project.
Because the consumer price index (CPI) is a

well-regarded and widely used deflator, analyses
of revenue and cost flows almost always refer-
ence nominal or real values in terms of the CPI.
However, efforts have been made to analyse the

different behaviour of real revenue and costs
based on different deflators (for example, using
CPI for potential revenue and specific indicators
for building or civil works costs). In any case, it
is essential to ensure consistency between the
nominal or real nature of the discount rate and
the nature of the deflator. When forecasting real
estate sales prices based on a past trend, it is
essential to consider inflation over the same pe-
riod. That way forecasted nominal prices can re-
flect both real market trends and inflation. The
trouble is that many times inflation forecasts are
not reliable or not available. All this is to say, its
better to work with real figures.
Above all, analyses must maintain consistency

between cash flows and discount rates. If work-
ing with nominal cash flows, nominal discount
rates must be used; conversely, if working with
real cash flows, real discount rates must be
used. Properly applied, the end result will be ex-
actly the same. A view of Bogota, Colombia Flickr
28
08 Differences between feasibility assessment for an individual

landowner and for an entire plan area
There are important differences between The cost flow includes all the urban land at a high price. Also, anyone who has
a feasibility assessment for an individual development charges envisaged in the a low capital cost will have more flexibil-
landowner and for an entire plan area. plan, without assessing the balance, ity than someone operating with higher
for example, between the companys capital costs. Consequently, the feasibili-
The feasibility of a landowner investment ty and the profitability of an investment
internal value of the assets and rights
is conditional upon when the land was have nothing to do with the feasibility
that are incompatible with the plan,
bought and how much it cost, the cost of and profitability analysis that each individ-
and the cost of compensation.
pre-existing factors subject to compensa- ual landowner might carry out (whether
tion, the value of this compensation, and The cost of capital is not defined in public or private).
the particular cost of capital of the opera- terms of the capital costs of each
tor (whether or not it is the owner of the individual landowner, but by general Demonstrating feasibility entails showing
land) and its tax status. market criteria. that the set of investments that plan im-
plementation requires will generate suf-
On the other hand, analyses of the feasi- The financial resources released in a ficient financial resources to guarantee
bility of an area start from the following project are evaluated before tax, since the appropriate discount rate, and if the
assumptions: taxation on the outcome will vary purchase price of the land has not been
depending on the legal status of each introduced as another component in the
The land is valued by the dynamic landowner. cost breakdown, to remunerate the pur-
residual method and relates to the chase of land equal to or higher than the
In general, anyone who has bought land
start of the process of drawing up the market values that have been identified
pending development at a good price will
plan. based on fieldwork and secondary sourc-
have more leeway to implement the ur-
es of information.
ban plan than someone who bought the
29
09 The financial impact on public finances
As previously noted, the public sector Every urban plan will have a financial im- As shown in Figure 7, the minimum urban
feasibility assessment is not the same as pact on the public finances of the enti- planned land uses that should be taken
its private sector counterpart. While ob- ty that has to manage and maintain the into account are:
viously related, they have different objec- model once it has been consolidated
tives. In contrast to the latter, the former (usually the town or city council). Public The total number of new homes and
considers the plans impact on the public sector feasibility as applied to urban plan- the potential increase in population
finances of the government entity respon- ning helps to define, among other things, resulting from implementing the plan
sible for the implementation and mainte- the fiscal balance that the proposed plan (as compared with the population at
nance of the required infrastructure, and will engender, the role that the govern- the time the plan was drafted).
for the implementation and provision of ment can play in meeting the challenges
the urban services necessary to guarantee resulting from the urban plan (through The growth envisaged in the plan for
the ordinary operation of the new city housing policies that address a particular urban parks and open spaces, new
proposed in the planning (these public volume of demand, support infrastruc- public facilities, and new thorough-
administrations may include city councils, ture for business activities and/or citizens, fares (streets, roads, etc.).
regional bodies, the state government, etc.), and the production of agendas,
Investments in transport and commu-
etc., depending on the responsibilities plans, and schedules based on financial
nication networks resulting from the
reserved for each entity in the country in criteria.
territorial scale change stemming from
question).
the transformation of the given area.
In other words, a public sector feasibility 9.1. Parameterization and In addition, any urban plan should include
assessment answers the following ques- urban costs of the PCE a series of capital investments that must
tions: Can the relevant government entity be taken into consideration when assess-
handle the public investments called for To successfully carry out a public sector
ing the plans public sector feasibility. As
by the plan? At which point can it do so? feasibility assessment, it is necessary to
noted previously, these include public in-
Can the local municipality maintain the know the overall planned land uses, and
vestments in infrastructure, equipment,
new city proposed by the plan once it has the costs of implementing the plan (this
and social housing. There must be suffi-
been established and is running at full ca- refers to transportation infrastructure,
cient information to assign each of the
pacity? public facilities, urban parks, service
planned investments to the relevant body
networks, etc.). Based on this data, it is
(see Table 8, which provides examples
When drafting an urban plan, it is neces- possible to estimate the plans financial
from Rwanda). It is essential to identify
sary to factor in the financial health of its impact on the budgets of the govern-
major stakeholders and the costs that
main guarantor: the government. ment entities involved.
each will be expected to bear.
30
Figure 7: Urban planning parameters of the PCE for analysing public sector feasibility
Expected growth in urban planning (m2 of land) Land for development: new city proposed by the urban plan (m2 of land)
786,300.00 294,565.59
257,792.61
353,985.00 127,843.90
239,443.80
Planned city infill 1 Planned city infill 2 Planned city extension Green spaces Community facilities Road and street network
Planned city Infill

Urban land 58% 43% 17%
Planned city Current
extension Current Current
urban community road
Undeveloped land green spaces and street
facilities
network
New planned m2 floor expected in urban plan Total number of new homes and potential population increase
405,970 9,308
170,686 3,723
Economic activity Residential New homes New population
Private Social and

housing affordable housing Current park Current
Economic activity 30%
70% 67% 33% of homes population
Residential 22%
41%
New homes
Population increase
31
Table 8: Allocation of investments in services and basic urban planning, by stakeholder
BASIC FACILITIES (TOTAL INVESTMENTS) STAKEHOLDER ALLOCATION (%)
(x1,000 Rwf)
(x1,000 Rwf)
government
City council
Investment
developer
Unit price
Needs for
extension
Total cost
Regional
Private
district
Others
Needs
State
Units
Streets
Paved Public 1 Km 14
Unpaved Public 1 Km 4
Street Public 1 Km 27,750

upgrading
P 1A Total roads Public 1 Km 4 462,253 1,849,012 100%
P 1B Total roads Public 1 Km 4 462,314 1,849,257 100%
P 1C Total roads Public 1 Km 4 398,531 1,594,124 100%
Electricity 10 Kw/HH/day
Power station Public / private Not included Not included 0 50% 50%
Network 1 Km 54,245 66 3,588,603 100%
Water 9.5 m3/Ha/day
Plant Public 1 - 1,070,000 1 1,070,000 100%
Network Public 1 Km 17,308 66 1,144,989 100%
Potable WAP Public Within 250 m 1 - Not included Not included 0 100%
Sewerage Public 1 ERU 10,635 9,476 100,782,870 100%
Public lighting Public Lamppost 1 Post 1,095 0 0 100%
Internet Public 1 GbE Not included Not included 0 100%
SWF Public 1 446,707 1 446,707 100%
Cemetery Public / private 1 Not included Not included 0 100%
Study fees 6% 6,739,534 100%
Miscellaneous 10% 11,232,556 100%
TOTAL 130,297,652
32
9.2. Financial impact of public funding
Once the planned growth is realized, on the state and/or regional

new expenditure and revenue scenarios government and not on municipal
will arise for the affected government authorities.
entities, particularly the city councils
and their local treasuries. Thus, when Future borrowing capacity to
evaluating public sector feasibility, it is enable new investments, or the
necessary to thoroughly examine the need for subsidies or specific
following aspects of budgets and pay- grants from national or interna-
ments: tional bodies to fund the invest-
ments defined in the plan.
The municipal financial situation,
Based on the past performance of the
based on an analysis of current
public treasury responsible for fund-
revenue and expenditure, as well ing the urban services required by the
as the citys capacity to generate plan, it is possible to extrapolate future
gross current savings to increase
Based on the past performance and estimate the impact
its capacity to self-finance. the new plan might have on the future
performance of operating revenue and expenditure of
The municipal financial situation,
the public treasury the municipality in question. When it
based on an analysis of the citys
responsible for funding financial accounts, its capacity
comes to calculating this future impact,
it is advisable to limit the revenues to
the urban services for internal financing, or its need
sources such as taxes and duties, and
required by the plan, it is for external financing to fund the to circumscribe current expenditure to
possible to extrapolate capital investments required by the maintenance directly associated with
plan.
future performance and the plan under analysis. Table 9 shows
that current revenue centres on fixed
estimate the impact the The investment effort of the
assets, taxes on land concessions, etc.
municipal treasury in the last few
new plan might have Each country has its own municipal fis-
years. It should be noted that each
on the future operating cultural, administrative, economic,
cal structure, and depending on where
the analysis is undertaken, there will
revenue and expenditure and political situation is different, be different tax structures and recur-
of the municipality in and that in some countries the rent expenditures to consider.
question. investment efforts will fall mainly
33
Table 9: Estimate of the impact of an urban plan on current municipal revenue and expenditure
I. District own revenues
I.1. District taxes
I.1.1. Fixed asset tax
Value of non-exempt properties Owner occupancy rate Share of properties with Collection rate Self assessment as Revenue Perpetuity
freehold share of value
1,254,664,133,850.00 50% 50% 33% 50% 103,509,791.04 5,750,543,946.70
I.1.3. Rental income tax
Units non exempt properties Rate Properties below Rwf Renter occupancy Collection rate Revenue Perpetuity
180,000
21,447.00 10% 50% 90% 30% 121,604,490.00 6,755,805,000.00
I.2.1. Fees charged by district
I.2.1. Market fees
Current markets Current revenues from markets Revenue Perpetuity
6 217,770,000.00 108,885,000.00 6,049,166,666.67
I.2.6. Fees on land lease
Sq. M of non-exempt properties Owner occupancy rate Share of properties Collection rate Revenue Perpetuity
without freehold
4,725,351.00 50% 50% 33% 54,577,804.05 3,032,100,225.00
I.2.9. Fees on public cleaning services
Sq. M of commercial establishments Commercial Monthly fee Collection rate Revenue Perpetuity
establishments
1,404,702 14,047 5,000 100% 842,820,000 46,823,333,333.33
I.2.11 Fees charged on provision of land and plot related services
Permits and approvals 423,920,310 423,920,310
Land registration 16,536 16,536
Other fees charged by the district 103,946,398 5,775,799,869
I. District current expenditures
Max unit price Avg unit price Land use area (SqM) Floor area (SqM) Revenue Perpetuity
I.2. Goods and services (BF 6,120,713,392 340,039,665,086
maintenance and operating
expenses)
Streets (Rwf/SqM/year) 0 0 69,970,847 3,887,269,292
Public lighting (Rwf/SqM/year) 0 0 0 0 0
Sewage (Rwf/SqM/year) 0 0 9,476 0 0
Urban center park/neighbourhood 0 0 0 0
park (Rwf/SqM/year)
Solid waste facility ($/SqM/year) 0 0 0 0
Other maintenance operating 0 0 6,050,743,124 336,152,395,794
expenses
Total operating balance (operating revenues and maintenance costs) -4,361,415,643 -265,428,979,200
Grants and transfers (from central government, agencies and donor funds) 8,173,619,078 454,089,948,761
34
Apart from this current fiscal balance the required investments. It thus enables public sector feasibility of these
taken from the current operations of the the development of a financial plan that developments will require greater
newly constructed city, it is necessary addresses issues such as: management capacity to generate
to analyze the financial capacity of the ordinary fiscal revenues to finance
stakeholders responsible for assuming the Prioritization: In most cases, public current expenses.
capital investments under the plan. Gen- entities will have to prioritize invest-
erally, the capital investments required to ments in order to implement realis- Public and private participation in
implement a PCE are very high. Relating tic and feasible development plans. urban development: The private
these investments to the financial capac- sector feasibility assessment allows
ity of the relevant public agents will en- Public taxation: The PCE in devel- private developers to see how they
able a determination of the feasibility of oping countries will need, in can benefit from certain actions
the plan under analysis. many cases, to be accompanied called for by the plan. This kind of
by progress on tax matters linked participation can contribute to the
The public sector feasibility analysis al- to increased value generation in plans public sector feasibility by
lows for an assessment of the relevant areas of urban development. Future value capture processes.
government entitys ability to implement
A view of Rocinha settlement Wikipedia
35
Glossary
Cost components capital, or the hurdle rate above which nance, etc.), the potential revenues from
Cost components allow us to know the a project is a good financial investment. taxes and fees to be generated, and other
determinants of the cost of any good. budgetary resources, such as transfers,
Types of urban development costs include Financial feasibility which can be used for plan implemen-
planning costs, permits and approvals, When considering private sector real es- tation. Thus, financial feasibility refers
basic infrastructure and community fa- tate investments, financial feasibility re- to the degree of budgetary balance or
cilities, building costs, entry costs of final fers to the ability of a given planned area imbalance that the ordinary costs of the
products in the market, and time costs. It to generate a financial balance between plan may cause in public budgets once
is very important to have a complete list the urban responsibilities and costs in- implemented, and any potential (mainly
of these costs. curred, and future income that may po- tax) income, plus the ability to assume
tentially generate final property products any planned financing of capital invest-
Moreover, the urban development of as a return on investment (in terms of ments.
a given territorial area generates some profitability). Assessments of private sec-
costs that involve cash movement, and tor financial feasibility focus on the pro- General urban planning
others that do not but that nonetheless posed investment by potential developers In the present guide, general urban plan-
need to be accounted for. The former in- during the process of urban development, ning is understood as the structural and
clude the payment of taxes, the payment limiting their analysis to the components functional organization of a municipal or
of building costs, and the payment of of implementation borne by the develop- regional territory, the rules of its possible
fees for professional services. The latter ers in question, which may include infra- development and use, the responsibilities
include the free transfers of land to the structure provision in addition to building of the public and the private actors, and
government (streets, green parks, etc.) construction. the future preservation of undeveloped
if applicable, possible subsidies and tax and public land. Urban planning tends to
abatements, etc. Financial feasibility from the public sec- be an operational tool for the short and
tor perspective analyzes the role of pub- medium term and must develop territorial
For the sake of transparency, the financial lic entities in the plan under assessment, planning guidelines.
feasibility analysis should acknowledge all and the impact of their actions on their
costs of urban development. public finances, in terms of the invest- Intermediate and final demand
ment incurred, the future maintenance of The urban planning and urban develop-
Discount rate infrastructure and the provision of urban ment process must aim to make availa-
The rate of return expected by real estate amenities for citizens (street cleaning, ble to the market products and services
developers for comparable projects. This maintenance and management of facili- that citizens and businesses need for their
can be seen as the opportunity cost of ties, waste collection, urban park mainte- social development. Housing, industrial
36
buildings, offices, and public services are tial investments and compensate for Urban development
designed to meet final demand. risk inherent in the investment. The IRR The urban planning process spans the
is the discount rate that makes a given physical, legal, and functional transfor-
Final demand refers to the citizens, busi- projects net present value equal to zero. mation of the territory. Urban develop-
nesses, and governments that need prod- ment is usually broken down into the
ucts and services of an urban environ- Net present value (NPV) planning phase, the land servicing phase,
ment in which they can meet their needs. When considering an investment that the building and marketing phase, and
may have varying costs and revenues over the maintenance phase.
Producing goods and services for final de- time, the NPV is the value of the invest-
mand necessitates a complex production ment in present day terms, factoring in The final effects of urban development in-
process in urban areas, a process that in- the cost of time. clude houses for citizens, industrial build-
volves numerous specialized actors. These ings and offices where people can work
include professional services for designing Planned land uses and produce, shops and retail establish-
real estate projects, project management ments where citizens can provide them-
Land use refers to classification of ac-
services, financial services, procurement selves with goods, community facilities
tivities taking place on the land, and
and coordination for civil works, build- providing urban services, and transporta-
sometimes the density of floor space.
ing contractors, marketing services, and tion networks. These effects are a basic
Classifications typically include resi-
maintenance companies, among others. condition for urban well-being and also
dential, commercial, office, industrial,
Throughout this process, assets are trans- a basic condition for the generation of
public space, and many more specific
mitted in the production process. There- wealth within a country. Urban develop-
categories.
fore, the demand operating in between ment is thus the whole process of trans-
stages of the production process is called formation of a given territory.
There are many ways to formulate urban
intermediate demand.
plans. A plan that assumes implementa-
tion exactly as prescribed requires many Urban planning and the role of public
Demand for lots, for example, is an inter- and private actors
specific quantities regarding planned
mediate demand, as lots are transformed
land uses. In contrast, an urban plan An enormous variety of cultures and tradi-
into final real estate products. Urban
that simply seeks to avoid the dysfunc- tions shape how public and private actors
planning does not seek to generate lots,
tions of urbanism probably will not operate in the realm of urban planning.
but seeks to generate final real estate
prescribe land uses in as much detail. This guide explores the case of a large pri-
products.
Finally, other urban plans entrust their vate developer that will develop multiple
implementation to a process of dialogue units at once and then lease or sell them.
Internal rate of return (IRR)
among the various stakeholders. When Such private real estate development may
IRR refers to the percentage gains an assessing feasibility of a given plan, it is or may not include servicing the land with
investor can expect to receive based often necessary to estimate the quan- basic infrastructure.
on expenditures and revenues over tities of floor space and building types
time. The IRR of a project must be high that will likely be developed. In reality, there are many models with
enough to compete with similar poten- public and private sector actors dividing
37
the roles within the development process tends to match supply and demand. De-
differently. In some cases, the public sec- termining this requires conducting field
tor provides infrastructure and the private work and/or analyzing market data avail-
sector constructs the buildings. Other able for different products and uses, usu-
times, the public sector may construct ally from statistics of quantities and pric-
the buildings, particularly in the case of es of the final products (houses, offices,
social housing. In other cases, there are retail buildings, industrial buildings, etc.).
no large developers and instead individ- All of these sources allow for a statistical
uals and households construct their own approach to express probable market val-
units. These roles should be determined ues.
with consideration of administrative
competencies, shared costs, shared prof- The price, however, is the monetary val-
its, impact in terms of conservation and ue of a particular transaction. While there
maintenance of the environment, shared are many possible market values, there is
land capital gains, value capture process- only one possible price (and only if the
es, etc. transaction comes to effect).
Value and price The reasons why a potential buyer may be

To analyze the financial feasibility of an willing to offer a certain price may have
urban plan, it is necessary to assign values nothing to do with the market value and
to final real estate products that generate much to other factors. To gain more con-
income, that is, assets aimed at effective fidence in a financial feasibility analysis,
final demand. In this context, value refers representative market parameters should
to the likely value at which the market be used.
38
39
HS Number: HS/072/16E
United Nations Human Settlements Programme (UN-Habitat)

P.O. Box 30030, Nairobi 00100, KENYA
Telephone: +254-20-7623120, Fax: +254-20-7624266/7
Email: infohabitat@unhabitat.org
www.unhabitat.org
40

FINAL - Technical Guidebook For Financing - Planned City Extension & Planned City Infill

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FINAL - Technical Guidebook For Financing - Planned City Extension & Planned City Infill

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TECHNICAL GUIDEBOOK FOR FINANCING

PLANNED CITY EXTENSION AND PLANNED CITY INFILL

All rights reserved

Coordinator: Marco Kamiya

Editor: Michael McCarthy

Cover Photo: Canary Wharf Station: London Docklands vFlickr/Loco Steve

Design and layout: Eric Omaya

Purpose of this guide.................................................................................................................................................................... 1

2. Implementing urban plans involves long-term investments................................................................................................. 6

3. Delimitation of areas and determining planned land uses................................................................................................. 14

4. Breakdown of plan implementation costs: Concepts and sources of information............................................................. 15

5. Market prices and revenue flows........................................................................................................................................ 22

7. Inflation: The feasibility analysis in nominal or real terms................................................................................................. 27

9. The financial impact on public finances.............................................................................................................................. 30

Purpose of this guide

the distribution of the benefits of urban

There are countries where the right of

Obviously, the private sector feasibility

Finally, it should be noted that this doc-

The rapid assessment is programmatic in nature, meaning it establishes priorities and

4 Also, as concerns income, the market usually offers

Figure 2: The time value of money as the first metric

the second metric

a positive NPV means that:

stment project offers positive cash flows-1,500

nual discount rateDRincreases. Therefore, we 10% should accept-150

roject A Net present value for Investment Project A by discount rate

1,000 -1,500 150

Year 2 5,000 3,000 8,000 D

Year 3 4,000 3,000 6,000

Year 4 0 3,000 4,000

However, it is crucial to also NPV [net present value]

Building Process 4 years

04 Breakdown of plan implementation costs: Concepts and sources

Land acquisition [residual value] ?

Table 3: References of land price in Rwanda for expropriation (in RWF)

4.2. The costs of infrastructure provision

In an ideal scenario, the feasibility assessment would incorporate the

Usually it is customary to structure infrastructure costs according to

Table 6: Components to consider when calculating construction costs

Ghana Uganda Kenya Algeria

Source: African Financial Markets Initiative (African Development Bank)

Source: African Financial Markets Initiative (African Development Bank)

7 With regard to the predictability of urban planning, its pre-

A market in Chichicastenango, Guatemala Wikipedia

07 Inflation: The feasibility analysis in nominal or real terms

A prior discussion touched on the pre-

high and very volatile rates of inflation it

countries with more stable inflation rates

flationary effect of a project that already 6

These considerations could open the door to a

Because the consumer price index (CPI) is a

However, efforts have been made to analyse the

Above all, analyses must maintain consistency

08 Differences between feasibility assessment for an individual

Planned city Infill

Economic activity Residential New homes New population

Private Social and

Table 8: Allocation of investments in services and basic urban planning, by stakeholder

BASIC FACILITIES (TOTAL INVESTMENTS) STAKEHOLDER ALLOCATION (%)

Street Public 1 Km 27,750

P 1A Total roads Public 1 Km 4 462,253 1,849,012 100%

P 1B Total roads Public 1 Km 4 462,314 1,849,257 100%