Description
Known in Brazil by the name Certificados de Potencial Adicional de Construção or CEPACs, this financial instrument was used by some municipalities in Brazil, asking developers to compensate the city for the cost of infrastructure needed to support new developments. The main idea of CEPAC is to create development rights for upzoning and then sell these rights to developers to raise funds to finance infrastructure construction. The municipality regulates the number of CEPACs and are auctioned by the Federal Bank of Brazil in a designated urban operation areas targeted for public investments by city governments. After a certain level of development, CEPACs are traded in the open market publicly to be purchased by investors or developers with the requirement of a portion of raised funds loop back into historic preservation, local employments or leveraging investments towards public goals.
Location
São Paulo, Brazil
Region
Latin America and the Caribbean
Instrument
Development-based land value capture (LVC)
Instrument category
Land value capture (LVC)
Secondary instruments
N/A
Project size (range)
> USD 200M
Project size (details)
Faria Lima and Água Espraiada UOs in São Paulo raised a large amount of money: about EUR 107.4 BN (USD 113.3BN) from 1995 to 2019, exceeding initial projections.
Implementer
Municipal governments and national banks in Brazil
Year of financial closure
Ongoing
Client
City governments, such as City of São Paulo. National Banks, such as Federal Bank of Brazil
Primary financer
Third-party vendors, Property developers and other investors.
Other co-financers
National Banks
Other contributors
Open market traders
Other transaction participants
N/A
Barriers addressed
Ability to access finance from the start of the construction process: CEPACs enable city governments to sell off building rights at the master planning stage, generating sufficient revenue to finance much of the required infrastructure to develop and service a site or district.
Ability to shape development policy via CEPAC financing conditions: Another barrier that can be overcome with CEPAC is the ability to incentivise urban developers to meet public goals such as cultural heritage preservation, a proportion of low-income housing or green space allocation. Although CEPAC is a neutral instrument, the social aspect of its outcome is dependant on the urban plan selected for implementation and financing.
Financing structure
The sale of CePACs allows the city to raise funds for upfront construction costs, long-term infrastructure maintenance and historic or cultural preservation. The revenue is captured in a separate fund aside from the general treasury and then dedicated to a particular urban plan. For instance, in Rio de Janeiro, the wholesale auction of CePAC to a single third-party vendors such as Caixa Economica Federal (CEF) to cover all public infrastructure improvement and future service costs for 20 years without requiring further public outlay. The CEF the placed CePACs on the open market, traded it publicly and sold it to investors or developers.
Suitability for cities in low-and-middle income countries (detail)
Somewhat. Several challenges may render a CePAC type system currently unfeasible for many LMICs. First, certificate holders may bear high financial and regulatory risks due to changes in the certificate prices and land use regulations. Second, a secondary market for trading certificates could take a long time to develop. Third, selling development rights can be lucrative only for cities whose property markets are buoyant. Fourth, considerable financial expertise is required to administer the system. Lastly, CePACs can compound existing inequalities in a city by prioritising gentrification.
Weblinks
References
[3] Interview with representatives of the LVC Compendium Team from OECD, Lincoln Institute and GIZ, conducted 10/09/2021
