Well-planned and maintained public infrastructure is the foundation of modern society. It supports productive enterprises, enhances quality-of-life and underpins economic prosperity.
New stations for the planned Melbourne Metro and Sydney Metro will deliver significant financial windfalls to surrounding property owners and businesses, but under current legislation they will not have to pay a cent towards them.
That just doesn’t make sense when there’s a tried and tested way of capturing this value so as to reduce the overall cost of infrastructure to the taxpayer.
Urban transport infrastructure is a key enabler of “smart” urban development – often referred to as “integrated land use and transport planning” – and has the potential to help fund infrastructure investment and achieve other complementary public benefits.
Value capture funding methods identify and collect an equitable portion of the value released through new zoning and other public improvements so the communities that pay for them can share in the value created.
There are a number of examples both in Australia and overseas that demonstrate value capture’s potential as an alternative funding model. Funds collected are deposited into dedicated accounts for a set time period and contribute to the cost of infrastructure and other improvements to the civic realm.
What is value capture?
International experience demonstrates that well planned public transport can increase land market values by up to 50 per cent. Value capture programs hypothecate a portion of this value to help pay for the infrastructure. The extent of value uplift varies depending upon the nature of the infrastructure, the distance of property from the infrastructure, accessibility and urban design amenities, and other factors. The sources of revenue used in overseas value capture programs include:
- Retail sales taxes (GST)
- Property taxes
- Voluntary planning agreements
- Sale / lease of air rights
- Hotel taxes
- Transfer (stamp) duty
- Council rates
- Special rates
- Sale / lease of development sites
- Capital gains taxes
- Payroll taxes
- Development contributions
- Sale of bonus gross floor area
- Parking levies
- Property development
Value capture programs can make significant contribution to transport and urban renewal programs. For example, approximately 27 per cent of London’s Crossrail project and over 30 per cent of Denver Union Station’s redevelopment are being funded with these methods.
Value capture is not a new tax. In its purest form, it allocates the uplift in benefits from public investments in ways that do not affect current or future tax rates. The “beneficiaries pay” 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 authorities.
Why we must consider value capture now
There are a number of compelling reasons why value capture funding methods should be considered now. Fundamental changes are occurring in global and domestic economies that will influence Australian society well into the future. These include:
- A steady decline in Australia’s traditional sources of export revenue and jobs, particularly manufacturing and mining.
- A significant forecast increase in worldwide demand for natural gas, tourism, agriculture, healthcare, international education and wealth management. Australia holds competitive advantages in each of these sectors.
- Urbanisation, with the fastest growth in cities occurring among Australia’s Asian trading partners. Asian cities will increasingly compete with Australian cities as providers of high value products and services, eroding our historic competitive advantages.
- Australia’s infrastructure funding gap exceeds the capacity of traditional funding sources. We need to adopt new funding methods to fill this gap.
- Demographic trends, including an aging workforce and increasing dependency ratios, will become an increasing drag on the economy. These challenges can be addressed by making our cities more competitive and our workforce more productive.
- In order to offset these trends, Australia must make its cities more competitive on a global scale. Infrastructure funding and delivery reforms can play important supporting roles in these efforts.
Recommendations
The Commonwealth Government should establish a Minister for Cities and Urban Development in recognition of the key role that cities play in the national economy. The ministry should work with state planning and infrastructure agencies to set national standards and guidelines, support research on national urban policy issues, and develop model legislation for state, territory and local governments.
Commonwealth and state governments should undertake practical research into value capture methods as a funding supplement for transport infrastructure and urban renewal projects. This could be accomplished in part by establishing pilot programs in conjunction with state agencies, local councils, professional associations, research institutions and the private sector. The aims of the pilot program should be to:
- Provide a consistent approach and common guidelines for considering and evaluating value capture and related funding and financing reforms;
- Develop a national forum and database for sharing research and information on urban funding and financing reforms; and
- Develop model-enabling legislation to assist state and local governments, urban renewal authorities and other stakeholders considering value capture methods.
Commonwealth and state treasuries should redouble efforts to implement infrastructure funding and financing reforms recommended by the Productivity Commission in its 2014 Public Infrastructure Report and by Infrastructure Australia in its 2013 National Infrastructure Plan to maintain Australia’s global competitiveness and reduce our growing infrastructure backlog.
Joe Langley is AECOM technical director. This is an excerpt from the AECOM/Consult Australia Value Capture Roadmap he authored. The full Value Capture Roadmap will be launched on 23 July in Sydney. Contact Consult Australia NSW to register for the event or request a copy of the report.