What is value capture
Value capture is a means by which governments can recoup some of the costs of transport infrastructure. Value capture uses mechanisms to capture any uplift in value generated by new transport infrastructure.
The SMART Infrastructure Facility at the University of Wollongong provided the following definition of value capture:
The term ‘value capture’ or, more fully, ‘land value uplift capture’ describes the process of government ‘capturing’ (via taxation) a proportion of any increase in the unimproved value of privately-owned land caused by the construction of new (or improved) publicly-funded infrastructure.
According to AECOM and Consult Australia:
Value capture supports smart decision-making by focusing on self-supporting and synergistic infrastructure investment.
Infrastructure can be self-supporting by incorporating methods that capture some portion of the value it creates to help fund the investment.
Infrastructure investment can be synergistic by targeting and attracting other complementary public and private sector investments, thereby generating wider benefits to stakeholders and the surrounding community.
AECOM and Consult Australia explained the process of value capture:
[Value capture] allocates the uplift in benefits from public investments in ways that do not affect current or future tax rates. The ‘beneficiary pays’ principle lies at the heart of successful value capture programs. Importantly, these programs capture revenues that would not otherwise exist without the public investment, and can permanently increase the levels of revenue to the taxing authority.
Purpose of value capture
Value capture offers an alternative mechanism for funding infrastructure projects. In its submission, Consult Australia noted that:
A key challenge highlighted in the 2015 Australian Infrastructure Audit is the need to find new sources of funding for infrastructure, as state and federal budgets are increasingly constrained in their ability to fund projects.
In addition to the need for new sources of infrastructure funding, the SMART Infrastructure Facility stated that:
The theoretical justification (from a public policy perspective) for value capture is to address the inefficiency and inequality of a small number of private households or businesses enjoying a windfall gain from the provision of infrastructure that is funded by the whole taxpayer base.
The SMART Infrastructure Facility was of the view that the issue of value capture ‘should be considered primarily from an efficiency and equity, rather than a “financing”, perspective’.
A recent review of planning reform in South Australia suggested that value capture was valuable because:
Those who benefit most from infrastructure, including land owners and developers, should be required to fund a reasonable proportion of its costs.
Infrastructure funding should be calculated across the life of the asset, not overly weighted towards initial costs.
Mechanisms should enable different ways of attributing cost sharing, including value increase.
According to the Department of Infrastructure and Regional Development (DIRD):
When applied appropriately, value capture mechanisms can generate new partial funding streams by tapping into the value created for beneficiaries. In turn, this can allow governments to deliver new infrastructure with less impact on public finances, or to bring forward planned infrastructure ahead of its scheduled delivery. Delivering projects earlier also brings forward the benefits of those projects, both to the wider public and to those indirect beneficiaries who are contributing to the funding stream through the value capture mechanism. This can improve the fairness of an infrastructure investment programme by re-allocating part of the burden of funding from the general tax payer to those households and businesses which obtain financial benefits from the infrastructure services.
Additionally, DIRD noted:
Appropriately applied value capture mechanisms can encourage governments to better integrate infrastructure investments into wider planning decisions by linking payment for new infrastructure with those households and businesses which benefit from the new infrastructure. In addition, by more closely aligning funding sources with the benefits of infrastructure, value capture can encourage greater discipline in project selection, and thereby more efficient investment.
Urban Taskforce Australia was less supportive of value capture mechanisms that were applied at a per-square metre or flat rate charge on new housing developments within a specified distance of new transport infrastructure. It noted that:
Value capture or betterment taxes are extremely difficult to administer and sustain in a fair and equitable manner for any extended period of time. This is due to the generic nature of the tax, which does not take into account the fluctuating nature of the property market and the wide range of highly-volatile variables which impact upon the level of ‘value’ which can be sustainably ‘captured’ from the development of sites. The impact of value capture can also encourage unsustainable urban form and place an unfair financial burden upon particular sectors of society.
Urban Taskforce Australia also stated that ‘value capture taxes also deter key elements of sustainability which the investment in transport infrastructure is trying to encourage’:
For example, the state and federal governments may wish for people to live in areas well connected to the public transport network, to decrease congestion and traffic, improve air quality, and a range of other beneficial reasons. However, the use of value capture taxes risks providing an incentive for developers to provide homes in areas that are not affected by the tax, and hence not so well serviced by the improvement to the public transport network.
Additionally, Urban Taskforce Australia was sceptical of the idea that value capture can assist in inter-generational equity:
Established owners are excluded from contributing towards the cost of the new infrastructure (which they also benefit from), with the burden of the cost largely imposed on those trying to enter the market (such as first homebuyers) who are unfairly hit with a large lump payment.
Conversely, Dr Tim Williams, of the Committee for Sydney, raised an example of why value capture is a necessary component of infrastructure planning:
The North West Rail Link [in Sydney] is a big disappointment in terms of what could have been designed to make a payback to the public sector from a big investment. We know that the benefits have essentially been privatised. There has been a bit of a feeding frenzy along the line, and some of that could have been captured for the public benefit.
Furthermore, Dr Williams stated:
If the federal government is investing in major infrastructure… it is entirely reasonable for the federal government to require some structures or some mechanisms to be in place. They might like to see something around value capture so that state governments can come to them with projects that actually have some value capture elements attached to them. Indeed, there may be an element in the appraisal by the federal government on what they wish to invest in – that is, does it have a good value capture mechanism attached to it?
City of Port Phillip noted the benefits of value capture:
The application of value capture as a standard method of assessing wider economic benefits would allow for a transparent and evidence based approach to precinct planning to enable the best overall economic and accessibility outcome, and provide confidence to the private sector over the timing of delivery.
Limits of value capture
The Northern Territory Government told the Committee that value capture has some clear limitations, particularly in regard to regional areas:
While the Northern Territory supports Policy Principle 1 for larger urban areas, it is clear that value capture methods will not be appropriate for implementation in smaller regional areas especially for transport infrastructure projects. Many remote roads are not used with a high level of frequency and thus basing the allocation of funding for their maintenance on vehicle usage would not cover the cost of ensuring they are kept to an acceptable standard. The cost of road building and upkeep is also more costly in the Northern Territory when compared to other jurisdictions due to factors like remoteness and weather conditions. Additionally, the transport infrastructure base is of a lower standard than other jurisdictions and requires substantial capital input to upgrade to a reasonable standard to encourage economic growth. For example, 75% of the total road network is unsealed. The allocation of funds via road usage would not adequately reflect these issues.
Therefore, value-capture methods cannot achieve a reasonable level of cost recovery, particularly in regional and remote areas. Due to a lack of scale and limited congestion even in urban areas of the Territory, the benefits of value capture methods are questionable. As such, substantial community service obligations payments would still need to be made by all tiers of government to maintain basic road standards.
Similarly, the Government of South Australia noted the potential limitations of value capture in regional areas:
Value-capture is unlikely to be an effective funding mechanism for regional developments, particularly if those developments are restricted to transport infrastructure on its own. For value-capture to be a viable funding option, the development (or transport connectivity in its broadest definition) must stimulate the key drivers of property value, i.e. improved access to jobs and housing, more efficient and productive uses of land and infrastructure, and the ability of employers and employees to specialise in order to produce high value services and products (economies of agglomeration). The viability of value-capture (specifically property value-capture) is likely to diminish in line with population density and transit intensity.
The SMART Infrastructure Facility raised some practical issues that need to be considered when applying value capture methods to infrastructure developments, noting that:
It is difficult to accurately measure unimproved land value and so difficult to measure the increases in rents from an infrastructure project and so difficult to put on a non-distorting tax…
If the value capture charge is ex post (after the infrastructure is built), it will be difficult to measure the resulting increase in land values attributable to the new transport service. The Valuer-General in the relevant state applies methodologies to determine the uplift in value, but decomposing that uplift into an increment attributable to a specific transport project would be problematic.
Furthermore, the SMART Infrastructure Facility stated:
In a built-up urban area, most land changes hands only as part of a package that includes buildings as well as land. The same is true for rentals. Trying to separate out the value of land from the value of the rest of the package and then further separating that into the value relevant to proximity to schools, employment, recreation and transport is very difficult.
Strategic Intelligence Group similarly argued that ‘value capture requires models and methods that provide a robust estimate of a property’s value, and most importantly, explicitly isolate the components that make up the value of a property’. Strategic Intelligence Group noted that these methods or models ‘need to allow the change in value resulting from a change in any one component’ to be accurately estimated.
Strategic Intelligence Group put forward its Margin Optimisation and Value Enhancement Model (MOVE) as a potential means of providing governments with the highest level of confidence and certainty:
Strategic Intelligence Group’s MOVE Model is a predictive, forecasting tool (for up to 30 years) that models the direct value change (positive and negative) of infrastructure changes over a specified geographical area. The modelling can apply to multiple properties, and takes into account historical property values, regression modelling and ‘consumer value’, providing a (verified and validated) confidence level of up to 90 per cent and above in its calculations.
According to the Strategic Intelligence Group, MOVE works by understanding and measuring:
The dollar value consumers are willing to pay for their choices (including proximity, location and multiple other econometric variables) to determine the change in property values resulting from infrastructure changes. Relying on historic property values and regression analysis alone results in higher variation and broader ranges in price and/or value estimates. By including consumer value, the variation and range is significantly reduced, hence providing significantly more reliable estimates.
Importantly, the MOVE Model also isolates each attribute that is changing consumer value. By deconstructing the property/land development process into its constituent characteristics, the absolute and relative value of each of the attributes can be estimated. The model is also scalable to address both localised or site-specific opportunities as well as opportunities within projects of a larger scale, such as an urban precinct, municipality or metropolitan area.
Methods of value capture
During the course of this inquiry, a wide range of potential value capture mechanisms were raised. These mechanisms relate to revenue raising methods utilised by all levels of government in Australia.
The SMART Infrastructure Facility argued that possible mechanisms of value capture could be split into two streams. The first are ‘relatively permanent taxes that act to capture value uplift’, and include:
Capital gains tax (although the main residence is exempt);
Stamp duty in property transactions;
Local government rates (including on the main residence), although subject to rates caps in some states, which limit the amount of value uplift captured;
Land tax (main residence is exempt), but only imposed in some states and territories or with relatively high unimproved value thresholds; and
Company tax, payroll tax and GST (in terms of increased economic activity in the neighbourhood of the new publicly funded infrastructure, or developer profits).
The second category of mechanisms relate to the application of ‘a temporary or project-specific tax or financing mechanism’, including:
‘Betterment’ levy or tax, whereby private landowners pay a temporary levy on the (ex ante) estimate increase in the unimproved value of their land.
Change of use charge, usually relating to a rezoning of land.
Tax Increment Finance (TIF), which is a form of public borrowing against the future uplift in revenue derived from existing property-related taxes (used in the United States but not in Australia).
Joint Development, whereby private contractors are granted public land in exchange for developing that land.
Land sales, where the relevant jurisdiction owns parcels of land.
Capital gains tax
The Australian Taxation Office defines capital gains tax (CGT) as a tax paid on any capital gains made from the sale of an asset. It is important to note that in Australia, the owner-occupied dwellings are currently exempt from CGT.
According to Consult Australia and AECOM:
Under current provisions, owner-occupiers of residential properties do not pay CGT upon the sale of their properties. A proposal has been put forward at the federal level to introduce CGT on owner-occupied properties experiencing a sharp increase in value as a result of a public infrastructure investment. The CGT would only apply to ‘super’ profits from property sales attributed to the public infrastructure investment.
The Planning Institute of Australia agreed that CGT is a useful value capture mechanism, stating that:
In suitable cases it is appropriate to design a suitable mechanism to ‘value capture’ some of the capital gains associated with planning decisions, on affordability and intergenerational equity grounds.
Mr Joseph Branigan, of the SMART Infrastructure Facility, warned against the unintended consequences of applying CGT to homes that are owner-occupied, even in cases where the home is being sold to an investor rather than another owner-occupier. Mr Branigan stated that ‘it may impact on how people choose to buy houses—whether they choose to be an owner-occupier or an investor.’
Similarly, Mr Bede Fraser, representing the Treasury, noted that applying capital gains tax as a value capture mechanism carried difficulties:
In relation to capital gains tax, as noted in the department’s submission, there are significant issues with using it as a tax base for value capture. You have mentioned the first one—that there is a CGT exemption for owner-occupied housing currently. The second major issue is around the fact that capital gains are generally paid on a realisation basis, so at the sale, which might be unlikely to align with the timing of the infrastructure funding requirements. The third major issue is around the practical difficulties in determining the value of the uplift and the range of other factors. In Re:think, the discussion paper that the government issued in March, it did talk about capital gains tax and noted that, given the central importance of the home for Australian families, there is a strong consensus that it would not be appropriate to tax owner-occupied housing for capital gains benefits.
DIRD further noted that, at present, CGT acts as an automatic value capture point for the Commonwealth government:
For example, if property becomes more valuable because of nearby infrastructure investment, this will be reflected in the sale price and flow through to increased stamp duty revenue upon sale. For investment properties, additional capital gains will be generally subject to CGT and result in increased revenue.
Hypothecating revenue from property uplift that is gained via CGT can be problematic under the current CGT arrangements. Mr Fraser told the Committee that:
If the existing homeowners are owner occupiers and they decide to stay, we will not realise any capital gains tax until they sell on to an investor who then sells.
This potential outcome raises risks that government needs to consider. According to DIRD, the extent to which governments rely on CGT for hypothecated revenue:
Depends on how much risk the Commonwealth or the relevant government wants to take on in regards to realising that uplift. That would be a key issue. There would be nothing stopping you saying, ‘We are prepared to wait until that house is onsold to be able to get to a capital gain,’ but in the meantime you have to say, ‘I think the infrastructure is going to cost this amount of money to build and therefore I am taking on the risk that I am going to make that money at a later date.’ That is a risk for government that it actually has to balance.
AECOM was supportive of using CGT as a value capture mechanism, stating that it is possible to take legislative or administrative action to ‘hypothecate an equitable share of capital gains “super profit” from property value uplift cause by a public infrastructure investment’, and then ‘use this as a funding source for the infrastructure.’
Land taxes/stamp duties
The SMART Infrastructure Facility noted the benefits of land taxes as a form of value capture, stating that:
There is substantial literature on the economics of taxation that demonstrates the relative efficiency of broad-based land taxes compared to taxes on capital, labour or transactions. Land taxes are relatively efficient because land is in fixed supply, is immobile and cannot be hidden. If land taxes are accurately set, they do not distort people’s choices and, therefore, do not create any efficiency losses. Land taxes are, therefore, an efficient method for capturing any windfall gains in land value that might accrue to private landowners from the construction of taxpayer-funded infrastructure.
There are a variety of land tax mechanisms that could be applied as value capture mechanisms. For example, AECOM and Consult Australia outlined three:
Transfer (stamp) duties. Stamp duty is applied to all property transfers and some other transactions in NSW. In 2014-15, stamp duty is expected to generate $7.2 billion (31 per cent) of NSW tax revenue. Changes in legislation would be required to use this source in a value capture program.
Property taxes. Property taxes are the most commonly used source of value capture programs in North America and are typically based upon the combined value of land and improvements on a given parcel of land. In NSW, land tax does not apply to principal place of residence. In some jurisdictions, including NSW, unimproved land value only is used in calculating land tax. Land tax is expected to contribute $2.7 billion of the state’s tax revenue in 2014-15. Legislative changes would necessarily be required to use land tax as a value capture mechanism.
Council rates. In NSW, council rates generally apply uniformly throughout a local government area (LGA), as opposed to a specific benefitted area within the LGA, which is a characteristic of value capture programs overseas. Council rates are set and strictly controlled by the NSW Government based on the cost of administering the LGA. Local councils have little control over this revenue source as annual rate increases are capped and any increase in rates requires state government approval. Council rates are therefore not well suited to value capture methods without approval of the NSW Government and changes to current legislation.
The Committee for Sydney was very supportive of the use of land taxes as a value capture mechanism:
Being near a light rail line or within walking distance of a train station is highly valued and land prices around these nodes reflects this. A broad based land tax would capture the improvements in land value driven by new public transport. They also help resolve some of the spatial inequalities which affect NSW. Our existing public transport network is not comprehensive and many neighbourhoods have little or no access to it. A land tax would mean that those neighbourhoods with good access to public transport would pay more for public transport, because their land is more valuable than those with no public transport access.
Mr Eamon Waterford, of the Committee for Sydney, suggested that land taxes could assist in capturing residential property value uplift:
What you would essentially do is similar to the way that council rates are collected. You would add an additional rate on to that person’s property that would be either over a 30-year period or in perpetuity to essentially collect a small amount from each property owner over a long period of time.
The Committee for Sydney expressed the view that, while difficult, reforming land tax to better capture the value of transport infrastructure is nonetheless possible:
In spite of its perceived economic and social benefits it is a very difficult political task to sell. Land taxes are often seen as a tax on wealth, and every major political party in NSW has promised to never tax the family home. Yet these political barriers can be overcome. If it was hypothecated to a service the community supported, they might just vote for it. The Australian Capital Territory recently introduced a new land tax, phasing it in gradually over the next decade. Similarly, the South Australian government has started a conversation with their citizens about introducing a state wide land tax and has flagged their intention of introducing it next year. Hard doesn’t mean impossible. Unpalatable doesn’t mean indigestible.
Conversely, Urban Taskforce Australia argued against a per-square metre or flat rate charge on new housing developments within a specified distance of new transport infrastructure as a means of capturing the value of transport infrastructure. In its submission, Urban Taskforce Australia stated:
Value capture tax increases the underlying cost of development, which in turn has a flow-on effect on housing affordability. During the ‘boom’ period, the cost of housing will rise as a result of the tax. This is due to the high demand for housing which allows the market to absorb the costs. Alternatively, if there is a downturn in the property market, the additional cost of the tax can undermine project viability, reduce housing supply, reduce employment in the property development, building and construction industries and reduce the industry’s contribution to the economy. In practice, land owners will delay development until the tax can be absorbed or passed on.
South Australia already has legislation under consideration to effect value capture via a levy on property rates:
The legislation currently before the South Australian Parliament—the Planning, Development and Infrastructure Bill 2015—expressly allows for value-capture by way of a levy on property rates, as a mechanism for harvesting value uplift associated that results from rezoning to increase development potential or infrastructure that contributes to property amenity.
Broad-based and benefitted area levies
According to DIRD, broad-based levies and benefitted area levies:
Involve applying additional changes on property owners, either as increases to existing rates of property taxation or as a special charge collecting some of the increases in property values. The revenue from these additional charges are earmarked to cover the costs of new or upgraded infrastructure, often by paying down financing used to deliver the original infrastructure project over time. This approach generates real revenue streams for local and state governments that can support financing for major infrastructure. Levies can be used to finance specific projects or can be used to support wide-scale infrastructure programs. In the latter case, broad-based levies are particularly suited to network-based projects.
For example, a broad-based levy is used by the Gold Coast Regional Council. DIRD explained:
The City Transport Improvement Charge established by the Gold Coast Regional Council is an example of a successful broad-based levy which is used to help fund Council cabs, bus stops, bicycle and pedestrian pathways, rapid transport and improvements to local roads, and expanded bus services across the city.
DIRD also discussed the use of a broad-based levy in Perth:
Western Australia has taken an alternative approach using a broad-based levy to support a range of works. The Metropolitan Regional Improvement Tax has been in place since 1959 to help fund the cost of land for roads, public spaces and other public facilities in greater Perth.
The Committee for Sydney raised an example of a levy from Sydney:
In the 1990s South Sydney Council asked businesses along King Street, Newtown to agree to a ‘special’ increased rate to improve the struggling shopping precinct. The street had been struggling for a number of years and was in need of some significant improvements which the Council could ill afford. The business owners agreed and a three year ‘special’ rate was imposed. The money raised was hypothecated to improving the street scape, removing ugly overhead power lines, widening footpaths, and improved seating and lighting. Money was also dedicated to supporting the local arts community and promoting the precinct as a creative hub. The levy lasted only three years but had a dramatic impact. By the early 2000s, King Street had become the best performing, non-CBD shopping precinct in Australia, employing thousands of people and became a major tourist attraction and shopping and dining precinct.
Another example of a levy is drawn from the Crossrail project in London, United Kingdom. AECOM told the Committee that:
Crossrail is an eight station, 21 kilometre addition to the metropolitan area’s underground commuter rail network currently under construction. Working with UK transport agencies and local businesses, the City of London introduced innovative funding methods to capture its benefits to help pay for the project, a Business Rate Supplement (BRS). The BRS collects two per cent of the value of non-domestic properties in the project’s catchment having a rateable value of over $102,950. These funds will be collected over 30 years and used to fund $7.6 billion (26 per cent) of the $29.6 billion project.
KPMG also raised an example from the UK, where Greater Manchester made an arrangement with the UK Treasury to establish the Greater Manchester Infrastructure Fund and City Deal:
The arrangement means that a number of financial resources are pooled to provide for transport investment in the region. This combines locally raised funds through an annual levy on the 10 local authorities that make up Greater Manchester, a Department for Transport grants that is devolved to the authorities, committed funding through the City Deal arrangements and an Earn Back agreement (which is the payment by results part of the funding). The overall funding is worth £2.75 billion with the value capture approach in the form of Earn Back accounting for around 11 per cent of the funding arrangement.
The Business Council of Australia was sceptical of using betterment levies:
Betterment levies can be poorly targeted and imposed on individuals or businesses who will not derive genuine benefit—or sufficient benefit to justify the levy—from the project.
Without widespread support from those being levied, it can represent an arbitrary tax increase and detract from the economic benefits of the infrastructure project in the first place. This ultimately detracts from the jobs, income and services the community would otherwise derive from the infrastructure.
Mr Eamon Waterford, of the Committee for Sydney, was supportive of the use of a residential area levy as a potential value capture mechanism:
At a very simplistic level you draw a circle around a new transport station or an existing transport station 400 meters out, which is roughly five minutes’ walk from the station, and you apply a levy to the people who live within that circle; you might draw an additional circle 800 meters out, which is 10 minutes’ walk from the station, and apply a smaller levy to people there. Essentially, this is to capture ongoing, over time, some of the value these people collect as a result of living near a train station. That value includes property uplift values, so the value of their property might increase significantly because a train station has all of a sudden opened up opportunities to access jobs and community and culture. It might also be the less obvious value that all of a sudden they have a shopping centre down the street from them or they have a whole bunch of cafes and communities that get developed because the density increases. All of those things bring value to people and while it is not appropriate for us to tax all of that value, there is a very good argument to say that we should be collecting some of the value to pay for the public contribution that has given them that value.
The Committee for Sydney suggested that a mechanism similar to broad-based levies could be applied in association with the collection of rates by councils:
An alternative to a broad-based land tax could be a metropolitan transport levy. A flat $100 levy on every Council rate notice in the Greater Sydney Area would raise approximately $180 million per annum. This could also be varied and increased for those properties and neighbourhoods which are better serviced by public transport.
Alternatively it could be expressed as percentage surcharge on each existing rate notice. Council rates in Sydney are generally much lower than other Australian cities because they have been ‘capped’ since 1976. A ten or twenty per cent surcharge on each rate, and hypothecated to public transport, would still leave our Council rates below the national average. This is politically difficult but the community might be prepared to pay if they know for sure it would be hypothecated to a service they want and need.
Furthermore, Mr Waterford argued that levies are a more accurate reflection of the value generated by transport infrastructure than some other value capture mechanisms:
A lot of the value is not just in that initial sale of the property. Certainly there is a lot of speculation when someone gets 16 times their property value, but the person who then lives in that property gets a lot of benefit from living next to a train station forever, whether they bought the property for $400,000 and sold it for $16 million or whether they bought it for $16 million and sold it for $17 million. That person continues to benefit day-in day-out because they can access jobs, because they live five minutes’ walk from the train station, because they have a coffee shop downstairs—because they have a bunch of things that they would otherwise not have received, which are in large part due to the public purse investing in their local area.
Mr Chris Johnson, of Urban Taskforce Australia, was also supportive of the use of levies as a value capture mechanism. He told the Committee that ‘when you slug a particular issue like selling a house with a tax… it is a regressive tax that does not help the sale of houses and increases the price’.
Mr Johnson was of the view that the beneficiaries of new transport infrastructure ‘are in fact much broader than just the new residents coming into place. The beneficiaries are everybody in an area’ where new transport infrastructure is built.
As such, Urban Taskforce Australia made three suggestions for levy-based value capture methods, the first of which is a broad based levy across a metropolitan area:
The approach here is that the whole city gets a benefit from new infrastructure so a small contribution from all residents and businesses on an annual basis for a fixed number of years will raise significant funds over time. The collection mechanism would be either through an extra levy (a ‘Sydney Metropolitan Transport Levy’) on council rates for say 20 years or through a land tax. The Crossrail project in London is raising funds through a levy on all business rates for 30 years. An alternative metropolitan wide collection method could be through an increase in Land Tax and applying this to all properties over a fixed period of time. The rate of land tax levy could be increased in some areas closest to new infrastructure.
Urban Taskforce Australia’s second suggested method was a regional/district infrastructure fund. It used an example from the Sydney region to illustrate:
Sydney’s metropolitan area is divided into six districts or regions. Some regions/districts may need to raise more or less revenue for infrastructure, depending on growth in population size and the level of infrastructure needed to service the population. The regional/district infrastructure levy would be a small contribution from all new development approvals in the region, similar to local government contributions levied under section 94 of the Environment Planning & Assessment Act 1979 [discussed below], but would be used for regional infrastructure. The income to the funds would vary depending on market conditions but over time significant funds could be raised.
Finally, Urban Taskforce Australia outlined the third suggested levy designed to capture the uplift in value generated by new transport infrastructure—individual site and precinct levies:
The developer and the approval authority would agree on a density uplift that related to an Infrastructure Contribution through a Voluntary Planning Agreement (VPA). This would be a one off payment that would be allocated to a District Infrastructure Fund to be expended on specific transport infrastructure projects. The VPA payments would be separate from Section 94 contributions for local infrastructure or public domain improvements. It is important that the contribution/levy be at a local level that did not threaten the viability of the project. The amount raised will therefore be variable related to location, site conditions, extent of uplift and current market conditions.
The Government of the Northern Territory was supportive of the application of betterment levies, but cautioned that such levies need to be carefully planned and implemented:
In terms of potential value capture tools suitable for the Northern Territory, betterment levies may be appropriate if the project offers diffuse benefits on land values or business efficiencies, and has substantial and quantifiable benefits.
However, one of the major risks with a betterment levy is the potential for political pressure resulting in its removal before cost recovery is achieved. This is particularly the case when the levy is applied arbitrarily to an area, even though the benefits are not equally shared. In addition, the compulsory nature of the levy means it could also be applied even if the benefits are insignificant.
Tax increment financing
According to the SMART Infrastructure Facility, tax increment financing (TIF) is:
A form of public borrowing against the future uplift in revenue derived from existing property-related taxes (used in the United States but not Australia).
Strategic Intelligence Group provided an example of the way that TIF can be used:
An example [of TIF] is a government agency issuing infrastructure bonds based on the expected increase in property tax revenue (the increment) that will be generated by the project.
The Moving Australia report discussed the use of TIF in the United States:
TIF has been used for 50 years in the US to fund a range of infrastructure and development projects, with almost every US state having passed relevant enabling legislation. Bonds are usually issued to provide the necessary upfront funds for infrastructure/urban renewal initiatives, additional annual local tax revenues being used to meet interest and principal repayments. TIF is particularly suited to an urban renewal context.
While TIF is generally used by local governments, the Moving Australia report noted that:
TIF might also be relevant at state level, where the incremental revenues could be state property related taxes (primarily land tax and stamp duty). This revenue would be used mainly to fund infrastructure otherwise funded by state governments.
However, the Business Council of Australia (BCA) urged caution in adopting TIF, as it ‘carries the risk that the increases in property tax may not eventuate, or that the overall cost of borrowing may be higher than other types of debt.’
Similarly, the Moving Australia report noted that:
A key issue in relation to TIF as a possible funding source is the extent to which the infrastructure programs being financed lead to a net increase in the development related revenues to the sponsoring government, as distinct from simply diverting revenue from one area to another (even within the same municipality).
DIRD related this potential issue to the relative risks incurred by the parties involved:
TIF involves hypothecation of future revenue with limits future governments’ flexibility to invest in alternative policy objectives, and creates a risk imbalance, where government carries the downside risks associated with changes to tax revenue due to events unrelated to the project or poor benefit forecasting by the project deliverer.
The Shopping Centre Council of Australia raised another potential issue with the use of TIF, noting that its appropriateness in the Australia context was ‘questionable’, as it ‘could result in considerable administration and cost demands being placed on Governments and the private sector stakeholders involved.’
The Committee for Sydney was of the view that TIF would not work in an Australian context, because it would require an approach similar to that in the US where property is taxed, rather than land, the current approach in Australia. As a result, the Committee for Sydney argued that the use of TIF would require radical change.
The Queensland Government was generally supportive of the TIF approach, noting that:
‘Financing’ addresses the problem of a timing mismatch between funding streams and expenditure outlays. There is typically a mismatch between the early investment expenditure required for large infrastructure projects and longer terms funding sources. Financing has a key role to play in leveraging future revenues to raise capital that can be applied to construction costs today. In short, financing brings the benefit of future funding forward to support upfront spending obligations.
In this regard, the Queensland Government is currently in the process of bringing together a ‘dedicated value capture unit’ to ‘determine and implement frameworks to secure innovative project funding and financing’. One of its intended key functions will be consideration of TIF as an option for securing funding for key infrastructure projects.
Conversely, the Government of the Northern Territory did not believe that TIF was suitable for the Northern Territory:
Tax increment financing (TIF) is unlikely to be suitable for the Territory, at least in the short term. TIF is based on the premise that new infrastructure increases the value of properties thus increasing the revenue collected from existing property taxes.
Given the small population and the limited growth potential, there is some concern that infrastructure projects could generate a smaller increase in tax revenue than what is required to service the debt. The price of borrowing may also be higher unless government guarantees a return on the project’s finance. In addition, hypothecating part of the future revenue to a specific project can add complexity and may not be more efficient than relying on consolidated revenue.
Development rights sales
DIRD informed the Committee that the sale of development rights was another potential mechanism for capturing value:
The sale of development rights to land adjacent to, or above, public transport developments is another common mechanism used in Australia and internationally to assist in funding transport infrastructure and has been demonstrated to create new value when appropriately applied. Governments generate newly valuable property (both land and airspace) by putting in place improved infrastructure services. In turn, governments can sell or rent this property to return an immediate revenue source that can help construct the new infrastructure. Development rights are frequently accompanied by amendments to land use planning regulations, which support increased density or commercial land use around key transport nodes.
Similarly, Consult Australia and AECOM noted the use of the sale of air rights:
Government agencies frequently sell or lease air rights above publicly-owned land, such as for development over road reservations and railway corridors. The St Leonards railway station on Sydney’s north shore is a good example of air rights development. This method is widely used in Hong Kong, Japan, the US, France and the UK to fund metropolitan transport systems.
Additionally, AECOM and Consult Australia noted that the sale of development rights to surplus public land is a potential source of value capture:
The sale or lease of surplus public land has been frequently recommended as a source of revenue for infrastructure and desirable policy reform by the Productivity Commission, Infrastructure Australia and the NSW Parliament. UrbanGrowth NSW is pursuing this option in a number of instances. However, government agencies and community groups often resist the sale of government assets, delaying or preventing projects from proceeding.
DIRD discussed the advantages of this mechanism:
The sale of development rights has the advantage that the revenue from value capture is realised upfront at the same time as capital costs are incurred. However, to maximise the value of development rights and to ensure that developments do not result in adverse policy outcomes, it is desirable for development rights approaches to be incorporated as part of regional or city strategic plans. Providing industry and the community with a clear, forward-looking strategic plan for land use around the public infrastructure will help increase the value of the surrounding property to longer-term commercial investors and will also lead to better transport and land use planning outcomes.
The Entrepreneur Rail Model
One detailed proposal received by the Committee was developed by Professor Peter Newman at the Curtin University Sustainability Policy Institute. Professor Newman calls this potential approach to utilising the value created by infrastructure the Entrepreneur Rail Model, and he characterises the idea as ‘a new governance instrument that integrates transit, land use and finance’ which ‘reverses the traditional approach to transit planning’.
In essence, the Entrepreneur Rail Model seeks to harness the entrepreneurial skills of the private sector to both develop and fund sites for new public transport infrastructure. It does this by seeking input from the private sector to identify opportunities for urban redevelopment and determine how much private financing is available for the development of new urban public transport infrastructure. After redevelopment occurs, the model proposes allowing the private sector to own and operate the infrastructure. Professor Newman notes that this is the way that much of Australia’s existing tram and train networks were originally built.
According to Professor Newman, the model:
Starts by predicting how much land can be developed as the fundamental source of the funding. Under the new model, land development is planned as the basis of financing, then an estimate of the potential transit patronage can be produced to match a fit-for-purpose infrastructure design.
The role of government in this process is significantly different to more traditional value capture methods, and is essentially:
Land acquisition and assembly;
Network coherency and integration;
Zoning land use changes, so as not to prohibit redevelopment; and
Urban design and building standards.
Professor Newman elaborated on the role of government in land acquisition and assembly:
In order to link together land development opportunities along a potential rail corridor it may be necessary for government to compulsorily acquire some land parcels to enable the station precincts to be large enough for transit-oriented developments to be built, as well as some land for the rail lines.
Land assembly is also needed to enable development to occur. Private sector proposals can suggest how best to do land assembly to make the most out of a site.
Professor Newman also discussed the role of government in relation to network coherency and integration, noting that it would involve:
Ensuring an integrated ticketing system. This would require a process for sharing revenue between lines when passengers transfer;
Regulating fares, ideally by a statutory or judicial body, rather than through a political process; and
Potentially facilitating negotiations between different proponents whose lines should interconnect, or otherwise interact with each other. Also, ensuring that these interchanges run smoothly and are well maintained.
Given that this model ‘relies on land use change to capture the potential benefits of rail infrastructure’, Professor Newman stated that:
Government’s role in relation to zoning is to ensure that projects are not prevented from going ahead due to land use planning restrictions and will need to engage the public in detailed design discussions as well as showing the advantages of the new rail line and activity centre.
Finally, in regard to urban design and building standards, Professor Newman argued:
A high quality public realm and enduring urban design are vital to ensuring public acceptance of rail-based redevelopment. Such high quality is usually in the immediate commercial interests of developers as well and redevelopment agencies are experienced in ensuring there are detailed design guidelines. These can include a proportion of social housing, to ensure access to such quality living is not just for the wealthy…
According to Professor Newman, there are three ways this model can commence:
Unsolicited bids—a consortium of land developer, train builder, train operator and financier, provide government with a bid that makes a rail project proceed to an evaluation phase;
Government calls for bids—a general consensus that a particular corridor could have the required land development potential as well as fulfilling transport needs, means that government can request bids from consortia before evaluating the best one; and
Government controls internally—a new government agency (or revamped land agency) creates a rail project through land development in the same way that Hong Kong MTR does it. This could be a semi-private enterprise.
Professor Newman also discussed the three potential funding and financing methods available under this model:
Totally private capital. Government’s role would be kept to in-kind activity to ensure land assembly and land acquisition, zoning and other transport integration is fully covered. This would depend on sufficient land being available to generate the capital and enabling whatever mechanisms are needed to generate private investment. It would mean that the project could be off balance sheet and hence would help with State Government credit ratings;
Substantial private and some public capital. Substantial private capital can be supplemented by some government capital. Government’s expected land value based tax flow on could be hypothecated to cover their contribution. This approach would ensure that the rail project is still generating all the capital required though some is from public sources at the three levels of government.
Some private and substantial public capital. This seeks help from private sources through land development, but primarily raises government capital through a mixture of sources such as parking levies, tolls on associated private traffic, developer contributions, and increase in registration fees or some other form of tax hypothecated to the rail project.
Professor Newman further noted the need for a new government agency to facilitate this process:
It is not a process that would be managed by a transport agency. Transport agencies do not know how to do this. We are suggesting that it should be managed through a Treasury or redevelopment agency—preferably a redevelopment agency. It is a land-orientated process that needs clever abilities to purchase and reassemble and redevelop land in ways that benefit the whole system and the whole city, but also enables a rail project to be built.
In this regard, Professor Newman suggested:
The formation of a new Entrepreneur Rail Delivery Agency to facilitate the planning and delivery process. The delivery agency would be similar to development corporations and authorities that have been created in Australia over the last two decades for undertaking the planning and development of urban renewal projects.
In terms of Commonwealth Government involvement, the best role was considered to be helping ‘fund bids for potential demonstration projects’.
The criteria for evaluating potential projects was also set out by Professor Newman:
Financial—the project should aim to be self-sufficient in capital and operating expenses based on land development, fares and other means such as advertising;
Land—the project should aim to utilise government land provided as part of the bidding process as well as private land that will need to be built into development partnerships or purchased as part of the project’s financing. Land acquisition, zoning and assembly will be assisted by government to achieve required activity centre goals as well as sufficient funding outcomes to enable the rail line to be built; and
Transit—the project should provide a high quality transit service that is linked into the rest of the system and generates its own patronage from the land development activity centres. The quality of the system should be high enough to unleash the potential for development of the activity centres.
In addition to those criteria, Professor Newman told the Committee that population density was also necessary:
It will not work unless you are going to get density around the line. If you are just building for the sake of transport alone—in some areas of outer suburbs that are still developing it would be hard to get private sector commitment to build around stations if that was the case—then you are still on the welfare model, where clearly governments need to do that.
The value-uplift model
Consolidated Land and Rail Australia (CLARA) proposed a private sector-led financing model for the proposed high speed rail network on Australia’s east coast. As discussed in Chapter 2, CLARA’s proposed high speed rail network is planned to include the building of eight new greenfield cities between Sydney and Melbourne, ultimately accommodating up to 3.2 million people over the 35 to 50 years it would take to build the rail infrastructure.
Mr Nicholas Cleary, Chairman of CLARA, told the Committee that CLARA seeks ‘no capital from state or federal governments or from our cities’ to build the rail, instead relying entirely on what Mr Cleary characterised as a ‘value-uplift model’.
Mr Cleary elaborated on how this model differs from a value capture model:
The value capture that has been referenced up until now has certainly been value capture in which the government puts in place the infrastructure and the development gets the up-side. Tax revenue is increased and the government has to find a mechanism to capture that. Our value-uplift model is about [purchasing] vacant farmland and turning it into residential allotments, getting a significant uplift from those residential allotments which… is adequate enough to provide for the civil infrastructure, the major infrastructure and the high speed rail infrastructure, as well as giving a commercial return back to CLARA and its investors.
Mr Jay Grant, Head of Business Strategy at private investment firm Newhaven Wealth, discussed Newhaven’s experience as a seed funder and provider of start-up capital to CLARA with the Committee. Mr Grant noted that in Australia, infrastructure is mainly funded via public-private partnerships, where governments provide some money, while the rest is provided by banks or superannuation funds, and then financed in capital markets. However, Mr Grant stated that capturing land value uplift can ‘open up some interesting finance opportunities’.
Specifically, Mr Grant argued that the greatest land value uplift occurs where there is rezoning. To illustrate this point, Mr Grant raised the comparative total land values of residential and rural land in Victoria. While the total value of residential land in Victoria was more than $800 billion in 2012, the total value of rural land in Victoria was less than $100 million. According to Mr Grant:
If we can provide, through mass transit that is perhaps rapid, a fast train or one of the other technologies that you have heard about today, we can compress the time and space between rural and residential, between a city outside of a tier one city and the CBD of a tier one city where we have seen that a majority of the economic activity is taking place. In doing so we can arbitrage or leverage from this difference in the land values. That is an uplift that you can really capture.
To illustrate the process, Mr Grant used the example of an area called Rockbank in Melbourne’s west. At 32 kilometres from Melbourne’s CBD, with no public transport or rail connection, it was rezoned for residential use and released for development by the Victorian state government in 1999 and a 12.6 hectare lot was bought for $315,000, making its base value $1,750 per lot after subdivision into 180 residential lots. After the necessary civil infrastructure was in place at an approximate cost of $80,000 per lot, these lots were valued at $220,000 each. Of the 7,900 per cent uplift that was observed in this case, the available profit on each lot would have yielded a profit of $140,000 had the land been controlled by a single entity throughout the shift from farmland to residential land.
To support the financing of the sort of long term projects that are necessary to realise the value-uplift model of infrastructure funding, Mr Grant noted that there are three steps that federal government could take. Firstly, according to Mr Grant, the first is to ‘look at tax regimes and superannuation’.
According to Mr Grant:
58 per cent of infrastructure investment in this country comes from superannuation funds. Superannuation is a bit of a contentious issue around infrastructure, because the highest contribution of any Australian fund at the moment is AustralianSuper, with nine per cent of its funds under management devoted to infrastructure. I break out there the example of the Canadians. The top ten Canadian pension funds have average allocations of 32 per cent to infrastructure. Another thing the Canadians do really well is own, operate and manage their infrastructure assets within their pension funds. The question is, why? The reason is not that there is anything wrong with AustralianSuper funds or the managers of AustralianSuper funds; the issue is the way that AustralianSuper funds are structured. We run what we call defined contribution funds; they run defined benefit funds.
Mr Grant argued that this leads superannuation funds to be less likely to invest in major greenfield infrastructure projects:
Super funds look to take over brownfields sites that are mature infrastructure, and they are happy to buy those. We just saw a number of groups, including the Future Fund, take over the port of Melbourne on a 50 year lease, with good income coming in, which matches their liabilities, and it works. The problem is that the greenfields infrastructure investments is much, much lower. It is less than half what it is in brownfield infrastructure investment. The issue with that is that if no one is putting in the early money then these greenfields projects do not move ahead, and they move ahead only where the government puts in the money.
Mr Grant used the case of the East West Link in Melbourne to illustrate the effects of the current approach to superannuation:
The state government had to throw in a large amount of money – it was going to be up to $5 billion, I believe – to cover the funding gap, because given the length of the concession on the road and the way that the deal had been financed there was never going to be enough money from tolling drivers on that road to recover the capital costs of building the road. That is the high-risk early money that governments have always put into these projects, and that is why PPPs in Australia have worked and been the norm, as opposed to other places in the world. We do not have access to the pools of capital that they have in North America and Europe. That is something we can change, and it is something that the federal government has purview over.
Mr Grant explained the steps that the federal government would need to take to support greater involvement of superannuation fund in infrastructure financing:
If you want to get super into the game, some of the measures you can look at are how to encourage allocated pensions and retirement income streams within superannuation that start to align superannuation liabilities with long term project bonds. This is one thing that can be done. The other things that can be done is that the government, in supporting My Choice, can provide a liquidity backstop for superannuation funds to encourage them to invest in longer term infrastructure assets, without have to worry about having money to turn over and roll over funds of members when they exit the fund. This issue on super is only going to get more compounded due to the ageing of the population and due to more retirees entering the pension phase. If we want a system that has capital adequacy and allows for a replacement rate of income, we have really got to look at the pre-2007 scenario when we had reasonable benefit limits: if you took your money out as a pension, you got a tax free income; whereas if you took out a lump sum, you were taxed at various rates. I understand why the government took that off in 2007, but there are now ramifications from that decision that affect these types of issues in how funds can manage their money and invest.
Secondly, Mr Grant argued that the federal government could support greenfields projects is in credit enhancement:
There is a great spread between risky products which are rated BBB and below – that is where greenfield infrastructure starts – and A, AA and AAA rated corporate bonds. The cost of finance can be the difference between the viability or not of a project. More importantly, it can also dictate where money is brought into a project from, and on what terms. The one the federal government can looks at, I believe, is credit enhancement. Credit enhancement is a method whereby a company attempts to improve its debt or credit worthiness. With a credit enhancement, the lender is provided with reassurance that the borrower will honour the obligation through additional collateral.
By offering credit enhancement, Mr Grant noted that the ‘rating on a greenfield bond up from BBB to AA, which the market will then take’. Mr Grant discussed how the federal government could achieve this:
Credit enhancement is provided around the world in different ways. The US have a system called TIFIA and in Europe they have a system called the Project Bond Credit Enhancement Fund, which provides money. The benefits of credit enhancement, and the Australian government looking at credit enhancement to assist major projects, is that it will give projects access to a greater variety of funding markets and to deeper funding markets.
Finally, Mr Grant suggested that the federal government can take steps to improve the uptake of long terms finance for major infrastructure projects:
What you see from 2009 onwards, since the Global Financial Crisis hit, is that major funding for infrastructure projects and PPP projects has come through short term bank finance. That may not sound like a big issue, but here is why it is: between 2014 and 2018 there will be $8 billion of debt to be refinanced in infrastructure. When you take a 30 year loan for an infrastructure project – and most of these are 20 to 30 year projects, be it a power station, a rail line or a desalination plant – you can lock in on a 30 year debt piece your interest repayments for that period of time. You have complete certainty about what your cash flows need to be to meet your finance obligations. When you are refinancing every five, seven or ten years you are obviously onboarding a great deal of risk into your project. Whilst the project looks great up front for the first ten years, you then have to go back to markets. What you are really doing is betting against interest rates going up. I would say, in this day and age, in the current economic environment with interest rates the lowest they have been in history you would have to be a fairly brave man to suggest that you are not going to be facing higher interest rates at some point in the future.
Mr Grant raised an example from Europe to show how this can be achieved:
In looking at the Europeans, there are two ways that they participate in these programs. When I hear politicians saying that we need to be smarter with our money, I think infrastructure offers a very clear way to do that. You can as a government participate with a very small amount of money that can make a huge difference to the financing of major infrastructure programs. One of them is a funded mechanism which is taking what we call subordinated debt, or the first-loss position in a project. That may only be for 10 or 20 per cent of the total project cost. With that sitting in there, that alone can help de-risk the project sufficiently that capital markets can then participate.
The second way that it can be done is unfunded, which is the provision of a guarantee of money that the federal government provides to a particular project. That serves the same purpose. You do not have to front up with the money, but it says ‘if there is trouble, we will guarantee that first-loss position’. Again, it is to a maximum of 20 per cent. So you do not have to guarantee the whole project. You do not have to fund the whole project. By having that insertion of smart capital in the right place in the capital stack, you can de-risk the project and allow the project to get cheaper finance from the private markets and longer-term finance from the private markets. That could be the difference between the viability of a number of greenfield projects that are currently under consideration.
A range of other methods which can potentially act to capture the value of transport infrastructure were raised during the course of the inquiry. For example, AECOM and Consult Australia noted that retail sales taxes can be a value capture mechanism:
Modest increases or partitioning of retail sales taxes, similar to GST, are frequently used in overseas value capture programs at the local government level for a variety of public purposes, including for light rail projects and general revenue. These often require voter approval via a public referendum.
Additionally, AECOM and Consult Australia raised developer contributions that are made under specific legislation in some jurisdictions. An example of this is Section 94 development contributions in NSW:
Councils in NSW have the ability to levy developers for contributions towards local infrastructure under Section 94 or Section 94A of the Environment and Planning Assessment Act. Section 94 contributions plans must identify specific public improvements and their costs, and the funds collected must be held in a separate account and applied only to those public improvements.
Similarly, in Victoria developers can contribute to infrastructure under Part 3AB and Part 9B of the Planning and Environment Act 1987, via developer contributions and the Growth Area Infrastructure Contribution (GAIC). This is ‘a charge designed to contribute to the funding of essential State infrastructure in Melbourne’s growth areas’, and according to the Victorian Department of Environment, Land, Water and Planning:
An entity liable to pay a Growth Areas Infrastructure Contribution can, by agreement with the government, offset part or all of its liability by providing land or infrastructure works to the State, or a combination of land and works. This is known as Work-in-Kind.
According to Professor Matthew Burke, the GAIC ‘charges effectively claim part of the windfall gains that rural landholders obtain when their land is designated as part of the urban footprint and uses them for transport infrastructure’, and ‘highly commended’ such models.
The City of Greater Geelong was supportive of the GAIC, stating:
It provides a mechanism to capture a ‘contribution’ to these future State projects (estimated at around 8 per cent of the total infrastructure need for Melbourne growth areas), while recognising the obligation of the broader community to fund the balance via taxation or other State income sources.
The City of Greater Geelong noted that the GAIC does not apply to brownfield development areas, ‘only Greenfield growth areas where a strong nexus can be established with need for future infrastructure’. Furthermore, the GAIC revenue ‘can only be spent within Melbourne greenfield growth areas’.
Furthermore, the Committee for Geelong stated that developer contributions made under Part 3AB could have negative consequences:
The Development Contribution scheme has limited ability to fund public transport infrastructure. Increasingly, there is concern that Development Contributions are negatively impacting on housing affordability.
In NSW, it is possible to use voluntary planning agreements (VPA) as an alternative to Section 94 development contributions. AECOM and Consult Australia stated:
A VPA is an agreement entered into by council and a developer during council’s consideration of a rezoning application (planning proposal) or development application. VPAs can either be in lieu of or in addition to a development contribution payment. This is negotiated as part of the VPA.
Similarly, Section 6 of the Northern Territory’s Planning Act provides for developer contributions to infrastructure funding:
Under Part 6 of the Territory’s Planning Act, developers can be charged contributions, as specified in a contribution plan, for provision of infrastructure or public car parking. However, the definition of infrastructure only includes motor vehicle carriageways and stormwater drains. Where the owner of land constructs the infrastructure themselves, the amount of money spent in constructing that infrastructure is offset against the contribution amount payable.
The Government of the Northern Territory noted that while developer contributions had been considered an appropriate tool in the Northern Territory in the past, they needed to reflect the benefits derived from the infrastructure:
While developer contributions have been used in Australia and other developed countries for many decades, there are however, a number of limitations to this mechanism. Developer contributions can be complex and difficult to administer especially when the benefits from the infrastructure are not equally shared. Developers could also be required to contribute to infrastructure that benefits more than the developed properties. For example, if an electricity network is upgraded to cope with the additional demand being placed on it from the development, both the developed properties and the existing properties will benefit.
Additionally, the Government of the Northern Territory argued that developer contributions could act to distort housing markets:
Another issue is that setting developer contributions that are higher than the cost of the infrastructure can potentially lead to adverse implications for housing affordability and supply. The impact of levying developer contributions on a developer’s cash flows also needs to be considered, as the requirement to make these payments could place pressure on the developer’s capacity to undertake and deliver the required works.
Finally, local councils in NSW have the ability to sell bonus gross floor area (GFA). According to AECOM and Consult Australia:
Some local government councils in NSW enter into VPAs under which additional development rights above existing zoning are sold to developers and the proceeds used to fund community infrastructure. The sale of GFA is a common funding mechanism overseas and is a logical source of additional infrastructure funds where transport and other infrastructure capacities exist to support the additional demand for services. However, there are examples in NSW where state and local authorities have lifted development rights without additional services capacity being available, leaving infrastructure providers with no means of augmenting services to meet the increase in demand. The most evident result of the mismatch between approved development and lack of infrastructure capacity is traffic congestion.
It is clear that, as government budgets become increasingly constrained, and as the infrastructure needs of the Australian community grow with the population, the current infrastructure funding deficit will continue to increase. This is likely to worsen should the Government decide to go ahead with necessary nation-building infrastructure projects such as high speed rail or fast freight rail.
It is also clear that new and innovative funding methods are needed if this deficit is to be filled in the long term. Indeed, it may well be the case that the nation-building infrastructure like high speed rail will not go ahead without these new funding methods.
As many submitters to this inquiry have noted, value capture is key to finding these new methods of infrastructure funding. While it is not a new method—with small examples of value capture schemes being pursued at state level in various jurisdictions—a more consistent approach to capturing the value uplift provided by new transport infrastructure is necessary.
In cases where property nearby to new transport infrastructure is sold at a massive profit as a result of, say, a new train station being built, a large portion of the value generated by the public spending on the infrastructure is currently ‘escaping’, and going directly into private hands. This ‘value escape’ is caused by public spending leading to private benefit. It is fundamentally unfair.
The Committee sees a need for action to prevent value escape. The federal government’s options are constrained by current taxation arrangements within Australia. One of the key mechanisms at the disposal of the federal government in this regard is CGT.
Under current CGT arrangements, the family home is exempt from CGT when it is being sold as a home. Nonetheless, the Committee sees potential for a considerable amount of value to be captured passively through current CGT arrangements, particularly in cases where rezoning is conducted at the same time as new transport infrastructure is built. Given the evidence received from the private sector about the accuracy of gauging the extent and source of value uplift, it is possible to accurately assess the amount of value that will be able to be captured.
Value uplift that is captured through existing CGT arrangements should be quarantined and hypothecated back into a dedicated infrastructure fund, which can then be used to provide capital for future infrastructure projects.
The Committee sees a need for a new value capture mechanism to be established at the federal level. With a master planning approach being applied to transport infrastructure, it is likely that the building of new transport infrastructure will be accompanied by rezoning in some form. As a result of this rezoning, it will be possible for the federal government to capture a portion of the uplift in property values as existing zoning shifts to other uses, and as subdivision and private sector investors take advantage of both the potential for property value uplift and the new opportunities raised by rezoning.
The Committee recommends that the Australian Government seek a memorandum of understanding to establish value capture mechanisms for individual transport infrastructure projects as a condition of federal funding which applies to property value uplift that results from a combination of rezoning and new transport infrastructure. In doing so, the Government should:
define specific geographic areas nearby to new transport infrastructure where this mechanism will apply to properties;
set a threshold of value uplift for property which will incur the new value capture mechanism;
establish an offset mechanism, whereby commercial properties whose value uplift is partially captured by this mechanism can be offset against their capital gains tax liability; and
hypothecate any revenue that results from this mechanism into a dedicated infrastructure fund.
The Committee understands that it is not simply those living 400-800 meters from new transport infrastructure who benefit from that infrastructure. When a new train line is built in a major metropolitan centre, it is not only those who live along the train line who benefit, but also those using the roads which will see a reduction in traffic and the businesses in the area which will see an uplift in business due to more pedestrian traffic. It is the Committee’s view that the benefits of new transport infrastructure are spread across a much wider geographic area than simply the areas within walking distance.
It is necessary to look beyond simply capturing the uplift in property values caused by new transport infrastructure. Indeed, governments at all levels in Australia have important roles to play in preventing value escape, and thereby providing increased funding for future transport infrastructure.
During the course of this inquiry, the Committee received a range of proposals for potential mechanisms for value capture, some of which have been used in Australia in the past, and some of which had only been applied in other countries. The Committee sees value in all of the potential mechanisms raised, and would like to see them developed by the federal government into a toolkit of value capture mechanisms.
This toolkit can be applied with flexibility. Different value capture mechanisms will be more appropriate than others, depending on a range of factors, the specific place where the infrastructure is located, or the type of infrastructure being built.
The Committee recommends that the Department of Infrastructure and Regional Development, in conjunction with state and territory governments, develop a toolkit of value capture mechanisms that can be applied by all levels of government, taking into account the different conditions in the various states, territories and local council areas. The use of the mechanisms in the toolkit should be a requirement in cases where the federal government is to contribute funding towards major infrastructure projects that will generate an uplift in property values or increased economic activity.
Coordinating value capture
As can be seen from the preceding discussion of possible value capture mechanisms, the mechanisms include methods of revenue raising available to all three levels of government, local, state and federal.
Many submitters to this inquiry were of the view that a mix of different methods of value capture is the best means of capturing the uplift produced by transport infrastructure. For example, Dr Williams of the Committee For Sydney stated:
The phrase that comes to mind from the Crossrail experience—and it is a great phrase—is that it was a ‘cocktail of funding’. Crossrail has three or four devices. It has developer contributions, which are top sliced from across London through the London mayor, because every Londoner benefits from Crossrail. All London ratepayers are effectively paying something to Crossrail. At the same time, there was a form of TIF for business rates where essentially the private sector—along the alignment that it was business that was going to benefit—would have some of its rates corralled for this project.
Similarly, Mr John Marinopoulos of the Strategic Intelligence Group argued:
The key thing is to think of it like a cocktail of mechanisms. Crossrail have three, but you might be looking at seven, eight, nine or ten different ways. What you have got to try to do is think of it like a pill. You have got to cut it so small that it is easy to swallow.
KPMG raised an example from the US of what can be achieved when cooperation across multiple levels of government is effectively coordinated:
The transport-led regeneration of the Transbay Redevelopment consists of replacing the Transbay Terminal with a new Transbay Transit Centre and the extension of the California High Speed Rail underground to the new Transit Centre. The cost of the project is US$4.4 billion in nominal terms. The funding of the new project’s capital cost is through a number of local, state and federal instruments. The value capture mechanisms used include a tax-increment financing package that is expected to raise US$1.4 billion over its life, land sales worth US$570 million and joint development opportunities that are expected to generate US$400 million.
Cooperation across levels of government
The range of possible value capture mechanisms discussed above is spread across all three tiers of government in Australia. As such, close cooperation between the federal, state and local governments of Australia will be necessary to effectively capture value uplift produced by new transport infrastructure.
The City of Port Phillip argued that the federal government could play a key role in setting standards and coordinating value capture mechanisms at a national level:
A consistent and transparent approach to infrastructure funding through value capture is required. As a key administrative action, standard methods of assessing value capture should be introduced to cost benefit analysis guidelines at the national level (e.g. Infrastructure Australia), to enable consistent methodology to be applied in all jurisdictions. This consistency is particularly important given the ongoing role that Infrastructure Australia will play in the assessment and funding of major infrastructure projects.
DIRD stated that making the most of value capture requires an integrated approach to land use and infrastructure planning:
The greatest opportunities for value capture are likely to occur where the provision of new transport infrastructure is coordinated with changes to land use and zoning. A number of international case studies demonstrate how changes that enable higher residential densities and mixed use commercial developments in areas surrounding public transport nodes can generate significant increases in value. For example, Transit-Orientated Development (TOD) programmes which form part of the Bay Area Rapid Transit (BART) investment model in the United States are designed to increase transit ridership, enhance quality of life around stations, stabilise BART’s financial base, provide investment opportunities for the private sector and support regional and local priorities.
The Committee for Sydney argued that all levels of government need to be involved in coordinating value capture:
While it is certainly possible for individual levels of government to legislate to give themselves the powers to both collect funds through value capture and deliver infrastructure, it is the Committee’s perspective that there is benefit to all levels being involved from the start of a project. This is in order to avoid conflict or opposition from governments not involved in the process, given that public transport projects often result in disruption to the public during their construction. The temptation for governments who are not partners in a public transport project but represent those affected by the construction of public transport will be to oppose it for political purposes, or to request unreasonable concessions part way through a project. Having all levels of government involved from the start as partners in a project avoids this risk.
Further to this point, KPMG argued that the framework for this type of cooperation already exists in Australia:
There are existing arrangements in Australia over how taxation revenues are shared, how grants funding is allocated, how borrowing is arranged at different levels of government, and ultimately how risks are allocated. What this means is that starting work from these parameters can provide the framework for some of these approaches to actually materialise. It is no doubt difficult but not impossible to achieve.
Specifically, KPMG stated that Australia already has some experience in value capture methods that may usefully contribute to the process:
Australia has already had experience with local and city-wide value capture methods. The role of the Commonwealth government here is to encourage State and Local government to explore all these types of funding arrangements to be explored fully when funding applications from the Commonwealth are sought so that the burden is reduced and that the best projects are brought forward.
DIRD made a similar point on the level of government best placed to implement value capture:
State governments have revenue bases that could be more suited for value capture purposes. For example, through a reform of state land taxes to capture and quarantine additional revenue associated with new infrastructure projects.
The Government of South Australia agreed that state and local governments are well placed for implementing value capture:
It would be most appropriate for State and Local Governments to establish appropriate value-capture mechanisms for transport funding if there is a case for its implementation. These levels of government have legislative control over development, and already administer property-related taxes and charges.
Furthermore, the Government of South Australia noted that the federal government also has a role to play:
Federal Government principally invests in nationally significant infrastructure, which leads to increases in Australia’s productive capacity. It already captures some of the benefit resulting from this investment through personal income and company taxes.
Strategic Intelligence Group argued that all levels of government in Australia need to play a role in implementing a well-designed value capture scheme. Specifically, they discussed their view of the Commonwealth Government’s role:
The Commonwealth Government has a critical role in identifying, prioritising and evaluating major transport needs for Australia; and this should be reflected in its infrastructure appraisal process including its means for allocating funding. Going forward, the Commonwealth Government should consider developing, promoting and implementing a national value capture framework, designed to ensure national consistency and reduce any anomalies between different states and territories, especially in relation to the development of infrastructure business cases and in the timing of funding generation and/or distribution. Furthermore, a consistent national ‘value capture framework’ would assist to create a level of clarity and certainty for potential private sector partners and/or financiers.
Strategic Intelligence Group went on to outline a proposal for state government involvement in this national coordination process:
State governments play a vital role in the planning, delivery and oversight of transport systems, infrastructure and services. This includes determining the timing, project scope and procurement of new transport infrastructure. These responsibilities, combined with their regulatory powers relating to land, ensures that states and territories are well placed to establish and implement a range of value capture mechanisms to contribute to funding transport infrastructure.
Additionally, Strategic Intelligence Group noted that local government also has a role to play:
Local governments work closely with their communities. Where transport development opportunities straddle multiple councils, councils could partner with other local councils and with State and Commonwealth governments to optimise the benefits to their communities. Councils could also have additional roles as project partners and to collect captured revenue.
Mrs Claire Ferres Miles, of the City of Port Phillip, was supportive of the idea of coordinating across the three levels of government in regard to value capture:
Council supports the principle of value capture to deliver infrastructure for our growing city and supports the development of consistent guidelines to calculate the likely property value uplift. We believe there is significant merit in the application of a consistent framework for value capture across all levels of government. The Australian government is well placed to lead this given the role of Infrastructure Australia in prioritising and funding infrastructure nationally.
In light of the role federal government plays in funding transport infrastructure built by state and local governments, the Metropolitan Transport Forum noted that it would like to see the federal government establish:
A requirement that cities/states have a transport plan so that federally funded transport infrastructure contributes to the overall well being of the city.
Urban Taskforce Australia characterised the current system of ‘identifying the necessary infrastructure and the collection of revenue and allocation of funds’ for infrastructure delivery as ‘dysfunctional’, and in ‘clear need of urgent reform’. Urban Taskforce Australia stated:
The issue of infrastructure funding should be made part of an inter-governmental debate, addressing the jurisdictional, economic and legislative reforms required to develop an equitable, efficient and effective method for raising revenue across all levels of government and applying these to agreed infrastructure projects. The Council of Australian Governments (COAG) provides an appropriate forum for these discussions.
Mr Justin Madden, representing Arup, was of the view that, in order to achieve this type of partnership between governments in Australia ‘some sort of compact and some sort of agreement’ is needed, so that agreement is achieved on the respective roles of each tier of government and commitments made on where the captured revenues would go within the business model that is developed.
KPMG agreed that some sort of agreement between the tiers of government is necessary, and noted that:
The issue that is often flagged in an Australian context is that the three-tiered level of governance makes some of the approaches to value capture too difficult to implement. While this is true to a certain extent, it is also true that other jurisdictions had their own governance difficulties. Stepping over these hurdles may in certain instances require new legislation, such as in the case of city-wide levying powers, or different arrangements between these government tiers, such as in the case is UK City Deals.
In the UK, a cross-jurisdictional approach to capturing value uplift has been formalised via the various City Deals that are either in place or being negotiated. The core goal of City Deals is ‘to direct infrastructure spending to projects that boost productivity, employment and economic growth’, and there are currently at least 20 in place, with more likely to eventuate.
City Deals were defined by KPMG and the Property Council of Australia as a process whereby:
Central and local government in the UK have collectively developed and implemented a new model for infrastructure funding and delivery. This City Deal model has provided a foundation for a growing number of city regions in the UK to overcome infrastructure deficits, reduce funding shortfalls and grow local economic activity.
A range of factors drove the development of the UK City Deals approach:
realisation that what cities were asking for (total of project-by-project bids in the pipeline) was (even pre Global Financial Crisis) heading for 20 times the available budget, turning investment decisions into a huge source of tension and conflict between central and local government, with DfT [Department for Transport] having to use a long, drawn out appraisal challenge process as a means of managing demand;
recognition that a combination of project-by-project traditional BCRs [benefit-cost ratios] and lobbying was a very costly and inefficient allocation mechanism, particularly against the background of central government’s balanced growth objectives and cities’ ambitions to grow their economies;
recognition (sparked by the London Crossrail project) of the role of transport infrastructure in driving economic performance, leading to fundamental questions about traditional (economy fixed i.e. jobs, population and incomes are fixed) BCR approaches to project appraisal; and
increasing interest in alternative funding mechanisms (value capture etc) and (with Crossrail acting as a case study) questions about how to maximise incentives to develop and deploy these.
According to KPMG and the Property Council of Australia, City Deals offer:
a net measure of economic growth at a sufficiently large level of geography … such that most of the displacement effects of individual schemes are netted out;
a program which robustly prioritises net increases in jobs and productivity at the appropriate level of geography;
a commitment to reinvest all money earned back in further GVA [gross value added]-prioritised schemes—this provides a rolling investment fund that can target sustained economic growth, rather than a one-off step change; and
up-front money over and above central government funding that earns the right to the fiscal gain share—the point being that this self-help generated tax is genuinely additional for the Exchequer (Treasury).
KPMG and the Property Council of Australia characterised City Deals as reflecting ‘a shift in accepted transport assessment methodologies in the UK’, in that:
The growth benefits associated with infrastructure investment become the central focus for the value for money assessment. In practice, this also means focusing on the outcomes that generate the tax revenues that pay for publicly funded investment, an inherently more commercial and entrepreneurial approach than is generated by more traditional appraisal methods. This has helped to capture the employment growth that can be attracted and incentivised through improved connectivity and sound infrastructure investment.
KPMG and the Property Council of Australia explained the negotiation process under City Deals:
All projects within the scope of the deal are effectively ranked on the basis of their capacity to deliver productivity and employment outcomes. The onus is then placed back on stakeholders to determine how far down the list they are willing to fund. Ultimately, this has resulted in a much more rational approach to investment decision making. It makes it harder to argue for investment programs that generate fewer jobs and less growth, which is what reordering of projects prioritised on the basis of maximum impact of funds invested would mean.
City Deals have several aspects, only one of which is infrastructure funding:
City Deals are heavily reliant on the establishment of a transparent and quantifiable measure of success. The determination of this measure is entirely dependent on the region and overall goal for implementing the City Deal; however, it needs to reflect a strong link to the type of infrastructure being prioritised, and the funding streams from government (i.e. taxation) that could ultimately benefit from the investment.
Next, parties to the City Deal set the scope of the infrastructure being considered, and prioritise individual projects:
The scope of infrastructure is specifically linked to the set objectives of the City Deal and region more broadly. Following the determination of scope, the prioritisation of infrastructure projects is critical to implementing a City Deal in any established region. The priority list of infrastructure projects determines the order in which they are funded by the government through the City Deal model. It is important that prioritisation is undertaken using the set objectives and minima determined for each specific region in which a tailored City Deal is being implemented. The primary aim of prioritisation is to avoid attempts in the ‘end game’ to redefine the criteria in order to change priority rankings, and subsequent alterations to the funding schedule for infrastructure projects.
Once priorities have been effectively set, the parties to a City Deal establish metrics for monitoring performance:
The monitoring of performance based on the set objectives and minima of the City Deal within a region is critical to the realisation of long-term benefits. Metrics are developed to both measure success and determine the scale of benefit realisation for all stakeholders involved in a certain City Deal...
The program minima are the metrics that the program as a whole has to address, not each and every scheme. The benefits associated with infrastructure investment, and their relative linkage to the lead metric of economic (GVA) growth, are summarised in the diagram below.
City Deals also incorporate considerations of geography:
The City Deal model is based on the identification of a functional geography, usually a number of smaller local regions that collaborate to better deliver infrastructure and achieve the set objective of the deal.
The geographic boundaries of deals generally align with either the metropolitan area or a broader, pre-defined regional geography. Alignment of City Deal geographies to the boundaries of existing governance entities simplifies any concerns about local authorities opting in or opting out of the City Deal.
In addition to geography, governance structures are a necessary consideration in negotiating City Deals:
The governance structures employed to implement a deal are just as important as the mechanical details of the deal itself. It is important to establish a suitable structure for the specified geography, to ensure that all stakeholders are held accountable to responsibilities and that benefits from the deal are realised and shared across the combined region.
Finally, funding arrangements are negotiated between stakeholders to the City Deal:
The delivery of infrastructure, no matter the focus, is dependent on funding. Funding for the delivery of infrastructure under the City Deal model generally comprises baseline funding and earn-back funding. Baseline funding is funds contributed to a centralised funding pool by government and other stakeholders initially. Baseline funding provides certainty around future funding streams. Earn-back funds are generated through the implementation of the City Deal in a particular region and extend beyond the initial baseline funding commitments made by stakeholders.
Funding can also be generated through contributions beyond baseline funding from key stakeholders—this is termed ‘self-help funding’. Self-help funding determines how far down the prioritisation list the City Deal will be able to fund.
KPMG and the Property Council of Australia believed that the City Deals process had ‘resulted in increased certainty for the development sector and clarity on the likely pipeline of infrastructure projects that the government will commit to delivering’:
This certainty has encouraged investment and associated economic growth in precincts surrounding nominated infrastructure priorities. The increased certainty from prioritisation also benefits government by providing clarity on forward financial projections and the sequential roll-out of spatial planning for development.
Dr Williams, of the Committee for Sydney, argued that the City Deals approach would assist with overcoming one of the key problems with the current approach to infrastructure investment in Australia:
Our appraisal process at the moment does not really ask of those people proposing a road how many extra homes will be created as a result of that investment, or how much extra value. It does not really ask that. It just asks ‘How much time will we cut off the travel time on this particular road?’ So we do not really have, in my view, an appraisal process which lends itself to the city outcomes discussion that we need to have which is mode neutral. In a mode-neutral appraisal process you have to show as a city or as a state government that there are value capture mechanisms in place to maximise the investment by the public sector.
The Council of Mayors (SEQ) commissioned a study into the applicability of the City Deals model to southeast Queensland:
This work showed the strength of Local, State and Federal Governments, working together with industry to resolve the challenges of funding the ongoing growth of both the South East Queensland region, and ultimately the whole of the state.
Furthermore, the Council of Mayors (SEQ) believed that the model developed would assist in overcoming some of the key challenges for infrastructure funding in the region:
Importantly, such a funding model may respond well to two serious issues within this policy area: the insufficiency of funding available for infrastructure at the state and local level in Queensland, and the current impasse between the Queensland and Federal Governments regarding the funding of major infrastructure.
The model of collaboration (developed by KPMG) proposed an Economic Growth Partnership Model (EGPM) for infrastructure funding. According to the report:
The model has been built upon a foundation of a partnership approach to governance between state and local government and the participation of the development sector. This foundation enables negotiation around infrastructure investment and prioritisation at a broader scope and geography than would have traditionally been considered. It enables the partners within geographical settings to approach infrastructure prioritisation around consistent metrics (including a proposed lead metric of Gross Value Added) and agree to a new approach to funding that will ultimately grow revenues and economic activity across the state.
According to the report, EGPM:
Surmises that in each year, local government, the state government and the private sector will contribute both financial and non-financial resources towards a pooled growth fund (GIF); which will in turn be utilised to progress an agreed program of sub-regional enabling infrastructure. This infrastructure investment will generate incremental increases in both local and state revenue streams, which will be partially reinvested back into the GIF through a payment by results scheme, should the infrastructure investment deliver agreed growth benchmarks.
Should the infrastructure investment yield real economic growth dividends as expected, the reinvested funding from growing revenue streams will grow the size of the GIF, and decrease traditional year-to-year funding contributions from stakeholders out of consolidated revenue. Accordingly, the model seeks to maximise economic growth outcomes and address current ongoing challenges around sub-regional infrastructure funding constraints.
EGPM splits the process into three distinct phases. Phase one is focused on refining the scope of agreements, wherein the parties conduct any supplementary analysis of proposed infrastructure projects, conduct targeted engagement with stakeholders, and reach in-principle agreement on the infrastructure projects that will be pursued. Phase two involves the negotiation of agreed metrics for performance, the final selection of infrastructure projects to be pursued, and the prioritisation and optimisation of these projects. The third and final phase involves the finalisation of any necessary agreements, the prioritisation and optimisation of any funding agreements, and the negotiation and finalisation of payments by results.
The Committee finds significant merit in the City Deals approach. While the model would require adjustment to fit with Australia’s three tiered system, as opposed to the UK’s two tiered system, it provides many potential benefits.
One of these benefits is that it helps the various levels of government move away from a project-by-project approach to building new transport infrastructure. Rather than considering the benefits and costs of one piece of infrastructure in relative isolation, the City Deals approach encourages planners to consider the wider benefits that infrastructure can bring to a region, and very much encourages a master planning approach, rather than one that is designed to fix a particular gap in the existing infrastructure.
Additionally, it assists in thinking of infrastructure in terms of how it will grow the economy of a region or a city. This results in a focus on adding economic value and a move away from thinking of infrastructure as solving a particular transport issue in a region or city.
Another key advantage of the City Deals approach is that it sets quantifiable metrics for performance, and results in a written agreement where the funding to be provided by each party is clearly agreed and set out. This allows for certainty both for the governments that are funding and building the infrastructure, and the private sector investors who may seek to take advantage of the increased economic activity and value uplift that is caused by the transport infrastructure.
Given that federal funding plays a role in most major infrastructure projects at state level, it seems reasonable for the federal government to seek to make agreements with state and local governments along the lines of the City Deals model. The Committee commends the work commissioned by the Council of Mayors (SEQ) and conducted by KPMG on adapting the City Deals model to southeast Queensland.
As part of the negotiations for establishing these agreements between the three tiers of government, consideration should be given to the relative priority of proposed infrastructure projects, the increases in value and economic activity that each project will generate, the specific value capture mechanisms that will be applied in the geographic areas that will benefit from the infrastructure, and the quantum of funding that will come from each tier of government.
Additionally, it is possible that collecting certain types of revenue, for example stamp duty and other land taxes, may hamper efforts to capture value using other revenue sources. As a result, it will be necessary for all levels of government involved in these negotiations to consider forgoing certain types of revenue in specific cases, so that the greatest possible value can be generated by the agreement, thus increasing the overall amount of value that can be captured by all parties to the agreement.
The agreements should also establish metrics for performance, with gross value added as the lead metric, so that governments have certainty about future funding streams and developers have certainty on the timing of future infrastructure being built.
The Committee supports the roll-out by the Australian Government of City Deal-type agreements with the various state, territory and local governments. These agreements should:
involve federal, state and territory, local governments, local communities, landholders and developers and other community stakeholders in the prioritisation and negotiation processes;
consider the building of new infrastructure from a state-wide or regional master plan perspective, rather than on a project-by-project basis;
establish priorities for infrastructure projects based, in part, on the uplift in value that will result;
drawing on the proposed value capture toolkit, define the value capture mechanisms that will be applied, and determine the amount of this uplift that can be captured by the three tiers of government involved in the agreement;
in the negotiation process, the different levels of government should be prepared to consider forgoing certain types of revenue in order for the greatest possible level of value capture to be achieved overall;
clearly define the amount of funding that will be provided by the governments and councils that are party to the deal, as well as the funding that is expected to come from the application of value capture mechanisms;
establish metrics for performance, using gross value added as the lead metric; and
culminate in a written agreement that clearly defines the roles of each tier of government involved in the agreement.
The Committee recommends that the Australian Government should develop value capture models that can be applied to major infrastructure projects (such as high speed rail) and seek to negotiate with the states and territories a consistent and coordinated approach to the application of value capture for such projects. In so doing, the Australian Government should be prepared to act as the single point for the collection of value capture revenues.
The Committee recommends that the Australian Government develop value capture models that can be applied to major infrastructure projects (such as high speed rail) and seek to negotiate with the states and territories a consistent and coordinated approach to the application of value capture for such projects. In so doing, the Australian Government should be prepared to act as the single point for the collection of value capture revenues.
John Alexander OAM MP
29 November 2016