Local governments throughout the world are facing fiscal constraints. At the same time, they face strong opposition to tax increases from their residents, who demand an increasingly higher quality of public infrastructure and services. The situation is further exacerbated in rapidly urbanizing developing countries that need to provide urban infrastructure at a fast pace. Such a situation has led many countries to actively seek new sources of local non-tax-based revenue such as the sale of development rights.

This paper analyzes the sale of development rights to fund Bus Rapid Transit (BRT) project in Rajkot, India; highlights the key success factors; suggests reforms that would increase the tools' effectiveness; and identifies the lessons learned from Rajkot's experience. Specific lessons include the following: the sale of development rights must be calibrated to the existing or planned capacity of infrastructure and services; the majority of revenues from such a sale are likely to accrue after the infrastructure project has been developed, while funds are needed beforehand to develop the project, therefore, this revenue-expenditure mismatch needs to be addressed; and the development rights' sale price must be indexed to inflation.