ACCOMMODATING GROWTH DELIVERING INFRASTRUCTURE BUILDING BETTER COMMUNITIES
GROWTH AREA BONDS NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
PROPERTY COUNCIL OF AUSTRALIA – GROWTH AREA BONDS: NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
MATCHING INFRASTRUCTURE AND GROWTH Infrastructure is the lifeblood of our cities. It facilitates economic growth, ensures our cities function smoothly, and helps realise the full promise of our communities. There is an enormous task involved in providing the infrastructure that will support the inevitable growth of cities like Adelaide. We need to look to new financing solutions that help governments meet the future demand for infrastructure. Growth Area Bonds meet that challenge. They bridge the divide between infrastructure and land use – and in doing so, will gift us economic growth and sustainable communities.
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MEETING THE INFRASTRUCTURE CHALLENGE Growth is inevitable
The cost of congestion
Population projections in the 30-Year Plan for Greater Adelaide indicate that Adelaide is expected to grow by about 560,000 people over the next 30 Years.1
Congestion is a growing threat to the smooth functioning of our city. While Adelaide still enjoys less congestion than other capitals, time spent in traffic inhibits the time families spend together and carries an economic cost estimated to be $2.1 million each day for Adelaidians.3
This projected growth would result in demand for at least 258,000 new dwellings, as well as the development of new employment lands, industrial precincts and office accommodation. Adelaide needs to find room for 282,000 new jobs.2 The 30-Year Plan for Adelaide provides the planning framework for this projected growth, but effective forward planning and funding of infrastrucutre will be critical, given the challenge of delivering new housing, transport and social infrastructure.
At current projections the annual cost of congestion is set to rise from approximately $767 million in 2010 to more than $1 billion by 2020.4 We need better ways of financing infrastructure that are explicitly tied to land use decisions if we are going to reverse the current drift towards Adelaide becoming a choked city.
Current models cannot deliver While the State Government has substantially increased investment in infrastructure, with the support of additional funding from Infrastructure Australia, much greater levels of investment will be needed to meet the demands of growth projected in the 30-Year Plan for Greater Adelaide. This investment cannot simply be expected to come solely from Government coffers. Nor should new homebuyers be lumbered with the cost of critical infrastructure that benefits the entire commuity. Since improved infrastructure benefits every South Australian we must find new ways of delivering this community benefit equitably and efficiently.
Taxing times for expanding communities + stamp duty disincentive to multi-level residential developments + open space contributions + energy augmentation costs + affordable housing requirements + inequitable energy efficiency requirements + hidden council imposed costs
PROPERTY COUNCIL OF AUSTRALIA – GROWTH AREA BONDS: NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
A stagnant climate for finance The Global Financial Crisis and EuroZone debt crisis has exposed the limited options available to governments for funding essential infrastructure. While the State Government’s commitment to its Triple A credit rating is fiscally responsible, new methods of funding critical infrastructure must be found. If governments cannot or will not borrow up front to fund catalysing infrastructure, Growth Area Bonds provide a new off-balance-sheet means of funding these investments.
FOOTNOTES 1 SA Government, 30-Year Plan for Greater Adelaide, 2010, p3. 2 SA Government, 30-Year Plan for Greater Adelaide, 2010, p3. 3 BTRE Report 2007, Estimating urban traffic and congestion trends for Australian cities, 2007, p108. 4 BTRE Report 2007, Estimating urban traffic and congestion trends for Australian cities, 2007, p108.
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WHAT ARE THE OPPORTUNITIES? Alternate funding mechanisms can help facilitate infrastruture critical to the state’s inevitable housing and employment growth. >
POLICY INCONSISTENCY
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IDLE EMPLOYMENT LANDS The supply of new employment land has stalled. The Housing and Employment Land Supply Program Report has been released and highlights opportunities that could be created by increased infrastructure investment, if finance is made available through alternative measures.
Urban growth objectives are being undercut by the inability for the state to fund infrastructure delivery. To ensure the efficient rollout of proposed residential developments and jobs precincts required to support our growing economy and population, policy misalignments must be resolved. >
FALLING AFFORDABILITY The State Government has maintained its commitment to opposing Homebuyer Levies, and this must be maintained through the introduction of Growth Area Bonds. The Government must also force Councils and other authorities to stop imposing hidden costs on developments.
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UNRELIABLE INCOME STREAMS Current investment mechansisms rely on increasing state taxation income, and this sets up competition with other key priorities such as health and policing. As illustrated by the GFC, state taxation income can be a volatile. Alternative financing mechanisms allow the Government to invest for the long term with minimal risk to the Budget bottom line.
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STIFLING CITY CENTRE REVITALISATION Current budget constraints restrict the Government capacity to invest sufficiently in revitalising our city centre. New financial mechanisms must be adopted to free up finance for investments that help make Adelaide the best place in the nation to live, work and invest.
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INVESTOR UNCERTAINTY While the Government has identified a range of infrastructure projects that it intends to deliver through partnership finance models, the risk of state tax revenues falling suddenly and unexpectedly weighs heavily in private investment decisions. Alternative financing mechanisms create a guaranteed funding stream for infrastructure investment, providing greater investor certainty.
In October 2010, the SA Government released the first audit of land in the Greater Adelaide area. This report, the Housing and Employment Land Supply Program report, clearly identified areas for future housing and employment. In order to deliver all of this land to the market to cater for our growing economy and population, more infrastructure will be needed. Unless the Government considers increasing the state’s debt to Gross State Product ratio - imputing the likely loss of the coveted AAA Credit Rating - new infrastructure funding mechanisms must be adopted to ensure adequate infrastructure provision.
PROPERTY COUNCIL OF AUSTRALIA – GROWTH AREA BONDS: NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
NEW SOLUTIONS THAT WORK A new model called Growth Area Bonds will ensure fiscal certainty while also coorinating infrastructure and land use planning.
Growth Area Bonds discipline governments to guarantee the timely and rigorous provision of infrastructure.
A South Australian model for Grown Area Bonds would have five fundamental elements:
The model has been used in the United States for more than 50 years and is now widely activated to help cities and communities accelerate growth.
1 Enabling legislation to set up Growth Area Bond schemes passed by Parliament.
Growth Area Bonds can be tailored to suit development needs and governance arrangements here. It is time to apply them in South Australia.
2 Schemes must be initiated by a state government agency rather than local governments, which might not have the necessary expertise. 3 Bonds would be issued through the SA Financing Authority. 4 Tax revenues involved would be land tax and stamp duty but not council rates. 5 Schemes would be used to fund infrastructure in both greenfield areas and urban infill areas.
The advantages of Growth Area Bonds: + A transparent approach to infrastructure selection and provision + A sustained commitment to infrastructure provision which is not subject to the vagaries of the electoral cycle + The provision of infrastructure is appropriately timed + Market testing and added rigour around infrastructure selection to improve efficiency + Not a tax or levy – debt repaid through asset revaluation
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HOW DO GROWTH AREA BONDS WORK How Growth Area Bonds work: + Identify a suitable area (or GAB district) and establish a GAB authority + Prepare a growth plan for the area outlining its infrastructure needs and estimating the cost + Calculate the property tax revenues currently derived from the area
+ Repay the bonds from the incremental increase in property taxes (above the revenue previously collected) generated by the new infrastructure and development in the area + Once the bonds are repaid, all property tax revenue for the area returns to the Government.
+ Issue bonds to fund the infrastructure works for the area (bonds can be government-backed or not)
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PROPERTY COUNCIL OF AUSTRALIA â&#x20AC;&#x201C; GROWTH AREA BONDS: NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
A CASE STUDY BETTER INFRASTRUCTURE, BETTER COMMUNITIES The North West Growth Corridor is one of the first locations to be targeted for new growth in Adelaide in coming years. Spread across 4,650ha and two local government areas, the North West Growth Corridor faces huge infrastructure demands with 33,060 new dwellings and 40,500 net additional jobs to come over the next 30 years.5
This conservative model sees a Growth Area Bond financing 75% of the $2 billion invested in infrastructure in the growth corridor, with the State Government directly funding the remaining 25%. Modelling suggests that this could result in all bonded debt being repaid in approximately 30 years.
To support this corridor redevelopment, the Government has committed to extending the cityâ&#x20AC;&#x2122;s light rail system to the Port Adelaide area. Combined with the cost of delivering associated physical and social infrastructure, this project is expected to cost in the order of $2 billion.
It represents a solution that sees the North West Growth Corridor realised as a functional and connected community with its infrastructure provided in full.
Growth Area Bonds represent a better way to fund the schools, hospitals, public transport and open space that we all want when we seek to create stronger, revitalised communities.
FOOTNOTES 5 SA Government, 30-Year Plan for Greater Adelaide, 2010, p158. 6. PriceWaterhouseCoopers, Tax Increment Financing to Fund Infrastructure in Australia, http://www.infrastructureaustralia.gov.au/public_submissions/published/files/486_ propertycouncilofaustralia_SUB2.pdf
Using a Growth Area Bond modelled by PricewaterhouseCoopers6 we would see: + The North West Growth Corridor defined as a Growth Area Bonds district + The Bond used to help deliver approximately $2 billion in state infrastructure + Development and revenue would be slower at first, pick up after the initial phase, and then slow again in the final years of the development term + Infrastructure costs will be higher at first before tapering away Under the model, it is assumed that: + The tax subject to the Bond is stamp duty due to the comparative reliability of forward estimates + Inflation is assumed to be 3%, the interest rate for debt at 8% and the rate of income at 6% + Debt would be staged given the scope of the infrastructure investment
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THE ACTION PLAN FOR FUNDING INFRASTRUCTURE 1
State action
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Integrate infrastructure delivery into the 30-Year Plan
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Better infrastructure selection
4 Better governance \6
Delivering the level of infrastructure investment South Australiaâ&#x20AC;&#x2122;s growth will necessitate better institutional arrangements. The creation of a Metropolitan Authority (see Action Plan item 4) to drive urban renewal projects will give stronger focus to the integration of land use planning. Similarly, the 30-Year Plan for Greater Adelaide and the State Strategic Infrastructure Plan must be integrated into one document.
Once the 30-Year Plan for Greater Adelaide and the State Strategic Infrastructure Plan are folded into one document, policy makers will be better positioned to clearly identify priority areas for growth. Priority growth areas can represent a mix of greenfields development tied to new infrastructure links, using expanded transport capacity to drive urban renewal, or activating employment lands.
Restoring rigour and discipline to the selection of infrastructure priorities will improve its delivery. Clear criteria which benchmark projects for cost-benefit analysis and reflect the priorities of the Council of Australian Governments will gift us a legacy of timely infrastructure provision. Importantly, the criteria should be transparent and the results of project assessments and rankings should be published to better inform the public on why particular projects are being advanced ahead of others.
Recognising the specialised nature of urban renewal projects, a dedicated implementation body is required to drive and oversee masterplanning, statutory documentation, site amalgamation, infrastructure planning and delivery and community amenity. A state-level Metropolitan Authority should be established to this end.
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PROPERTY COUNCIL OF AUSTRALIA â&#x20AC;&#x201C; GROWTH AREA BONDS: NEW SOLUTIONS FOR FUNDING INFRASTRUCTURE
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A legislative framework
Enabling legislation would be passed by South Australian Parliament to allow for the formation of Growth Area Bond districts, and to define the State rather than local councils as the relevant tier of government to initiate the Metropolitan Authority for each district. This legislation could also define the assumptions which would underpin the Bonds, such as the criteria for assessing baseline revenue in a Growth Area Bond district and the taxes which could be used to collect the revenue generated from increased property values.
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Pilot schemes
Reforming taxes
Based on areas identified by the South Australian Government or Metropolitan Authority as priority targets for growth, a pilot scheme should be commenced as soon as possible. As discussed in the case study, an ideal pilot scheme would be the urban renewal project along the North West Corridor.
The Henry Review of Australiaâ&#x20AC;&#x2122;s future tax system offers a unique opportunity to transform the tax system by removing complexity and inefficiency, rewarding productivity and delivering a fair and competitive tax system. The use of Growth Area Bonds must be matched by a commitment from all tiers of government to act swiftly on recommendations arising from the Henry Review that give life to a fairer tax system for investors, commercial property owners and homeowners alike.
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A pathway to growth
The State Government must maintain its opposition to the introduction of homebuyer levies to ensure the efficient and economic rollout of the 30-Year Plan, Transit Oriented Developments and Corridor Renewal projects.
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Property Council of Australia Limited ABN 13008 474 422 142 Gawler Place Adelaide SA 5000 Telephone: 08 8236 0900 Facsimile: 08 8223 6451 Email: sa@propertyoz.com.au Web: www.propertyoz.com.au
Copyright 2010