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Capturing value: an option for funding the future By the Hon Mark Birrell
Capturing value: an option for funding the future
By Mark Birrell, Chairman, Infrastructure Partnerships Australia
Australia’s transport infrastructure is straining under the pressure of mounting demand, imposing substantial costs from congestion and delays across the economy. But funding the new projects needed to deal effectively with Australia’s growth will require fresh thinking from policymakers and industry about how we can break the back of the transport funding challenge.
Capturing value: an option for funding the future
Funding for major transport projects is extremely tight. On current arrangements, all of Australia’s state and territory governments are up against their debt ceilings. That means that there will be insufficient funding to support many projects, unless governments can increase their revenues and decrease their costs.
Understandably, policy-makers are cautious about new broad-based taxation changes – but there are creative funding options. One interesting opportunity revolves around sharing some of the substantial private property value created when taxpayers fund a major new transport project. Creating new structures that see both project beneficiaries and taxpayers share in this value needs to be at the forefront of the public infrastructure debate.
A high premium is placed on proximity and access to efficient and reliable transport infrastructure, meaning when a project is completed, the land surrounding the new infrastructure will increase in value. For example, when taxpayers invest in a new rail line, a bus rapid transit or motorway spine, they unlock substantial land value increases.
David Singleton Arup’s Global Planning Leader and Chairman of AGIC
Project: Nowra CBD Masterplan, NSW
Nowra Masterplan © Arup
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Capturing value: an option for funding the future
Currently, the wider community benefits through faster travel times and improved functionality across the broader network; and a small group of landowners adjacent to the asset will receive a disproportionate financial benefit resulting from the broader public investment.
‘Value capture’ models allow taxpayers to access a proportion of this new value, in turn creating a new source of revenue to be dedicated to bridging the transport infrastructure funding gap.
Value capture is not a silver bullet. But this concept is an important part of the suite of options that Australia’s governments need to consider if we are going to increase the capacity of all governments to renew and expand Australia’s transport infrastructure base.
Value capture mechanisms
Value capture is an umbrella term covering an array of policy options, all of which are designed to capture a portion of the property uplift created by new infrastructure. While there are scores of different models, the three most commonly applied are Joint Development; Benefit Assessment Districts (BAD); and Tax Increment Financing (TIF).
Of the three, Joint Development is the simplest model. Essentially, Joint Development models are applied where the public sector already holds (or can acquire at pre-infrastructure prices) substantial property around a planned project. The public sector is then able to sell, lease or grant development rights to capitalise on the increased value resulting from the new project.
Where the public sector does not retain large landholdings, then consideration should be given to targeted taxation measures to realise a fair share of the uplift. TIF and BAD are both taxation measures.
TIF is a partial financing mechanism that allows governments to take tax revenues derived from future increases in property values within a prescribed geographic precinct, and use those ‘incremental’ tax revenue increases to access the financing required to fund the transport infrastructure projects that will lead to (or at least significantly contribute to) this property value appreciation.
In contrast, a BAD is a geographically discrete area in which a tax is levied on landowners who will derive windfall property value increases from a taxpayer investment to enhance the transport infrastructure in their area.
The incentive for adopting these mechanisms during the planning and delivery stages of infrastructure projects is clear – value capture can substantially increase the capacity of governments to fund transport infrastructure.
Lessons from international best practice
The use of value capture is by no means a new innovation in bridging the funding challenge. Early forms of value capture were used in the 1600s to develop New York’s utility infrastructure, and today they are routinely applied across the globe.
Hong Kong’s Mass Transit Corporation (MTR) is an oft-cited case study of where Joint Development has delivered a substantial dividend. Property development rights at train stations along the network have been used as the principal funding stream for the development of the network. Between 2001 and 2005, property development, investment and management, principally in the land around and above MTRC train stations, accounted for 62 per cent of MTR’s revenue.
Through their continued use of Joint Development, MTR has developed a best-practice template – the rail and property (R+P) model. Under this model, MTR does not receive direct subsidies from government to build and operate the city’s train network. Instead, the Hong Kong Government grants the company exclusive development rights for the land above and adjacent to its stations.
Timing is crucial in terms of the return delivered by these development rights. MTR receives the continued on page 36
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Capturing value: an option for funding the future
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development rights from the Hong Kong Government at a ‘before rail’ price and sells them at an ‘after rail’ price. The difference between these two stages is substantial, often enabling MTRC to cover the costs of their initial investment in the station around which the development is built.
The MTR case study is an extraordinary example, driven by the very high land value in Hong Kong. While it is not likely that a similar model applied in Australia would deliver returns to the same degree, it nonetheless serves as a useful example for Australian governments of how the development of land around transport infrastructure could be used as a funding mechanism.
The Washington Metropolitan Area Transportation Authority (WMATA) offers another case study for the use of value capture mechanisms. The WMATA is unusual among United States and Australian transport agencies, because it does not have a reliable funding stream beyond its farebox. In 2007, government funding comprised just 37 per cent of the agency’s revenues, in effect forcing WMATA to look to innovative funding streams to operate, maintain and expand its network.
Recently, the WMATA has utilised BADs to help fund the Dulles Corridor Metrorail Project. This 37-kilometre project will service two of Virginia’s largest employment centres, and provide a direct connection from Dulles Airport to central Washington.
The project, which is being completed in two phases, has been budgeted to cost US$5.2 billion – and roughly 16 per cent of the project’s funding is coming from the creation of a BAD in Fairfax County. The BAD, known as the Transportation Improvement District, has been levied on commercial and industrial properties in close proximity to the proposed metro extension; all owners of commercial or industrial property are charged 22 cents out of every $100 of assessed value increases in their properties annually until the 16 per cent of project cost target is achieved.
Global learning, domestic opportunity
To date, value capture mechanisms have remained largely unused in Australia, presenting policy-makers with an unexploited funding resource for transport infrastructure projects. A 2012 report by Infrastructure Partnerships Australia, regarding the use of value capture strategies in the land surrounding New South Wales’s rail corridors, outlined the significant opportunity for the implementation of joint development models at New South Wales’s train stations.
The IPA report found that Sydney’s high passenger traffic train stations (those on the City Circle loop) present a clear opportunity for joint development within the CBD.
Redfern, Central, Town Hall, Martin Place and Circular Quay stations are all key interchange nodes that experience high customer throughput every day. Many of these stations are in poor condition, with a sub-optimal legacy design, and have not experienced wholesale renovation for many decades.
The high level of patronage means the station concourse, airspace and adjacent land – if planned for, designed and delivered in a suitable way – is potentially a very valuable commercial real estate holding for the government, and would enable the redevelopment of Sydney’s legacy CBD rail stations at a measurably lower cost to the taxpayer.
Value capture opportunities exist in Australia’s major cities – the challenge is to articulate the case for these kinds of reforms, and develop workable, local models to allow their application.
With substantial funding constraints frustrating governments and commuters alike, the time is right for a much more informed public debate about how Australia can fund its forward infrastructure task. Models like value capture are only part of the solution, but they are a relevant development and need to take their place alongside the suite of reform and revenue measures that policymakers explore.
Value capture represents a significant opportunity for governments to increase the funding for critical updates to Australia’s transport infrastructure.
