An Infrastructure Revolution By Any Other Name

By Christopher Brown AM, Chair WSLD

Published Australian Financial Review

22 October 2015 

In the 1980’s, then-Treasurer Paul Keating famously said that “every mug in the pub is talking about micro economic reform” while few really knew what it meant.

A modern day equivalent of a little known economic concept which everyone seems to be talking about is “value-capture”, where the private sector contributes to the costs of public infrastructure.  It was kicked along this week when the Federal Government announced that its ambitious Victorian major projects agenda would feature this unique funding mechanism.  It is also a cornerstone of Bill Shorten’s Infrastructure Australia reform package.

Value capture goes by different names in different jurisdictions.  American State governments are pioneers and use the term ‘tax increment financing’ while their municipal counterparts prefer ‘impact fees’. 

Former NSW Treasurer, Andrew Constance has been a local champion of a shift in infrastructure financing policy.  He broke down his former agency’s 50 year obsession against ‘hypothecation’, allowing State developer levies to be quarantined for use in specific projects, and not dumped into Treasury’s consolidated revenue.

He is now the State’s Transport Minister and is promoting the scheme to fund his own projects, but the politically-savvy Constance prefers the softer descriptive term of ‘value-sharing’.  Meanwhile, Labor’s Federal infrastructure spokesman, and urban transport advocate, Anthony Albanese is a fan of ‘value uplift’.

Of course, while Federal and State Governments in Australia are recent converts to this partnership approach, local councils have been doing it for years under the banner of ‘Section 94 contributions’. Other community projects have utilised ‘voluntary planning agreements’ to fund development.

Despite the disparity in names and models, the concept is a sound one.  Essentially, developers (and their eventual customers) share the benefit of increased land values and densities that flow from the provision of rail lines past their planned apartment block, from raised dam walls that allow flood-prone property rezonings or from new power stations that make factories more productive.

Capturing and taxing the increased value of private land that follows the provision of new infrastructure is the best chance that cash-strapped governments and rapacious communities have in financing the backlog of infrastructure this country demands.

Now that cities are back in national political vogue it is more important consideration.  Using Sydney as an example, there are two major growth precincts where economic, social and environmental potential will only be fully realised if value capture is employed.

The enterprise zone outside Badgerys Creek Airport is a huge tract of undeveloped land that requires high speed Metro Rail to link it to the boom city of Liverpool and the Sydney CBD.  The value uplift that would flow to local landowners (including the Federal Government itself) in this ‘aerotropolis’ as a result of new transport links should be shared with the taxpayers that fund those same links.

The Olympic Corridor between Strathfield and Parramatta is currently the subject of intense government review about a light rail route through its core, which would justify a huge increase in residential, commercial and retail density - adding and extra 70,000 residents and support 100,000 jobs to the local area.

This potential windfall to local developers was quantified in a recent Deloitte report for the WestLine Partnership landowner consortium.  It calculated that local rezonings and developer levies could generate $3 billion to help defray the cost of rail lines and remediation of the old industrial sites.

On the surface the Olympic Corridor light rail project is a win-win-win for government, the private sector and local communities, but as with other projects, questions remain as to how an equitable value-sharing model can be developed.

Will levies be a once-off tax at sale time to cover the cost of development of the rail lines and dam walls, or would the private sector also be up for the cost of remediation and ongoing maintenance?  Would tenants or landlords benefiting from public transport projects be charged an annual levy to subsidise the fare box and operational costs?

There is also the issue of retrospectivity so existing residents don’t get an invoice for the new tram that now runs past your front door.  Equity demands that all new infrastructure attracts a value capture model and not only those built in safe seats.

If governments want to ensure private sector and community acceptance of this novel taxation scheme then they need to prove the infrastructure has gone through a rigorous planning regime and that those footing the bill will have some say in the way in which their money is spent by contractors and public servants.

Done properly, value capture is the magic bullet that might allow us to build the economic and social infrastructure we need for a sustainable path forward – but we need the safeguards to make such a taxation revolution sustainable.