Financing Light Rail Projects—From Bidding to Value Capture

Introduction

Good morning ladies and gentlemen. It's a great pleasure to be here today to provide a national perspective on light rail and the role value capture can play in funding city shaping projects.

I would like to extend my thanks to CEO Danny Broad and the team at Informa for putting on this conference.

For those not familiar with what we do, Infrastructure Australia is a federal statutory body, established to provide independent research and advice on the projects and the reforms Australia needs to fill today's infrastructure gaps and meet the challenges of the future.

Part of our role is to support greater certainty in infrastructure investment by helping Australian governments make informed, evidence-based decisions to invest in projects that will best meet our future infrastructure needs.

We do this through the Infrastructure Priority List. The List is the point of reference of nationally significant infrastructure investments Australia needs over the next 15 years.

The List is a menu for governments to select priority investments, a transparent plan for the community, and a confidence document for the supply chain.

Before projects go on the List, we undertake a robust analysis to interrogate the strategic need, demand forecasting, commercial value, and the overall cost and benefit of a project and its delivery model.

This process provides confidence to investors that the projects and initiatives on the List have sufficient integrity and are backed by long-term thinking about the value contribution to the Australian economy.

In my speech this morning I would like talk is less about financing infrastructure and more about how we should put light rail and our available funding mechanisms in perspective.

Firstly, I would like to briefly canvas the urban congestion challenge ahead and the role light rail can play in our cities before examining how value capture should be considered within the broader infrastructure funding debate.

In particular, I will explain why high quality, detailed and long-term strategic planning is the foundation of effective value capture.

I will also explain why in the long-term, broadening the land tax system, and removing other inefficient charges such as stamp duties, could provide a fairer, more efficient way of capturing land value uplift and helping to pay for the infrastructure we need.

New urban congestion challenges

Australia's population growth is now one of the fastest in the OECD and easily outstrips the UK, Canada and the United States.

In the next 30 years, Australia will be home to 36 million people.

This rate of growth is equivalent to adding a new city, roughly the size of Canberra, each year for the next 30 years.

With 75% of this growth centred in our major capital cities we will see a significant uptick in congestion on our roads and public transport.

Without action in the near to medium term, the cost of congestion on urban roads could rise to more than $50 billion each year by 2031.

In Sydney alone, commuters are spending 200,000 hours every day struck in traffic jams across town in the morning rush hour.

By 2046, that will double to 400,000 hours.

Our Future Cities report, released last week, found that simply building more roads alone cannot accommodate this projected increase in demand and alleviate congestion at the same time.

With our roads becoming more and more congested, public transport, including light rail, will become an increasingly important component of the urban form and structure of our cities.

In cities across Europe and America, light rail projects have been used to help address poor connectivity, relieve congestion and catalyse development to make areas more accessible and lively places to live and work.

Light rail in perspective

The success of rail-based urban development overseas has made light rail projects an increasingly attractive transport mode here at home.

However, we need to be level headed about the role light rail can play in our cities.

We should not be caught up in the fashionable notion that light rail is the answer to all urban congestion issues—it is not a substitute for buses and mass transit metros.

It's certainly true that light rail has an important role to play, but as with all our choices, we need to ensure we don't elevate light rail projects above other modes of choice simply because of its urban activation appeal.

When it comes to infrastructure decision-making, our first task should always be to identify what problem we are trying to solve.

When we have a handle on the cost of the problem or indeed the opportunity presented by new infrastructure—be it urban congestion or urban activation—we can better understand what options are viable proposals.

Funding new infrastructure

State and territory governments should also be clear-eyed about the best way to fund new infrastructure investment in our cities.

Crucially, we must find a way to pay for infrastructure that has transformational benefits to a city—but it must be efficient and equitable.

A key principle in the Australian Infrastructure Plan is that we need to diversify the sources of funding available for infrastructure investment in Australia. Part of that is exploring innovative funding opportunities like value capture.

In December 2016, we released a paper on value capture, which showed that it can be a powerful tool for governments.

Value capture can help to stretch public funding for infrastructure further. It can also help to make the infrastructure funding mix more equitable, by seeking more from those who benefit most from new infrastructure, and reducing the burden on other taxpayers.

While governments can pay for infrastructure through taxes, this means that the vast majority of people and businesses who pay for a new or upgraded asset will rarely—if ever—use it or directly benefit from it.

Value capture can establish a fairer balance, where a portion of value uplift, previously captured by local beneficiaries, is used to reduce the call on taxpayer funds.

Ultimately though, funding for public infrastructure is available from only these two sources: beneficiaries and taxpayers. So while value capture is an important tool for governments in the infrastructure funding mix, it is important to keep its potential role in perspective.

Beneficiary pays cannot fund all the infrastructure Australia needs. Even if governments could collect the full value uplift from beneficiaries, this would still not cover the full cost of building and maintaining new infrastructure in most cases.

And in addition to being realistic about the role value capture can play, we need to acknowledge that the specific impact of infrastructure investment will vary in each case depending on local factors, the form of infrastructure and how it is delivered.

We need to avoid poorly designed or implemented value capture which run the risk of taking more than a fair share, unnecessarily increasing project financing and administration costs, or introducing inefficiencies in the housing, employment and investment markets.

Capturing value uplift

In terms of how we actually capture value uplift then, there are a few key options —mechanisms based on proximity, mechanisms based on property prices, and mechanisms based on transactions. Each of these has its own limitations.

Our paper found that mechanisms based on proximity to new infrastructure run the risk of being inaccurate. This is because proximity to infrastructure does not necessarily deliver residential property value uplift.

For example, in communities that are already well-served by multiple transport options, or otherwise have high levels of accessibility to jobs and services, new investments may deliver little improvement to accessibility and, consequently, little value uplift.

In other cases, local physical features can also prevent some properties that are close to a new transport link from enjoying an increase in their accessibility.

Mechanisms based on transactions, such as stamp duties are also problematic as they can be economically inefficient.

These kinds of taxes deter households from moving as their needs change and may have negative impacts on housing affordability by adding to the upfront costs of home ownership.

Finally, mechanisms based on property prices are subject to volatile market forces, which make it difficult to predict how much revenue would be raised at the project development stage and how a project would impact a given community.

Capturing value using property prices could lead governments to take more or less than is fair or efficient from properties around an infrastructure investment.

Clearly, there are a range of value capture mechanisms that can provide separate solutions to the infrastructure funding challenges faced for each publicly-funded infrastructure project, and each of these comes with its own risks and rewards.

While there are clear challenges when implementing value capture, these are not reasons to shy away from the use of value capture. It can be done, provided long-term infrastructure planning is in place. Discussions such as today's can help that.

Long-term, integrated land use planning

A key finding of our report is that opportunities for value capture must be identified and implemented early in planning process to maximise benefits to taxpayers. It is simply too late if construction workers are already on the ground in hard hats and hi-vis vests.

This requires a renewed commitment to long-term, integrated land use planning, which is of course a central theme in the Australian Infrastructure Plan.

Where infrastructure solutions are developed outside of a detailed planning process, opportunities to capture value uplift are typically reduced or lost entirely.

Taking a long-term view of our future infrastructure needs can help governments to identify and support the value a future project can create.

Similarly, governments can use a combination of long-term planning and value capture to reduce the cost of strategic future investments through corridor preservation.

Broadening the land tax system

In the long-term, moving towards a broad-based land-tax represents the most efficient approach to capturing value and funding the infrastructure our cities and regions need.

Each state and territory currently has some form of land tax in place, with the exception of the Northern Territory. However, there are significant exemptions, including on owner-occupied properties. This exemption alone reduces the total value of the land tax base by around 60%.

Broadening the land tax system, while removing other inefficient charges such as stamp duties, could provide a fairer, more efficient way of capturing land value uplift. It could provide governments with a reliable stream of funding that efficiently and fairly reflects the productive value of land.

Of course, Infrastructure Australia is not the first to recommend this. Land tax reform has been supported by the Bureau of Infrastructure, Transport and Regional Economics, and the Henry Tax Review.

While this reform comes with its own challenges, Australia's governments need only to look the ACT for leadership, where land tax reform is well underway.

In 2012, the ACT Government commenced a 20-year period of phasing out residential property transaction taxes, while phasing in a broad-based land tax.

The effect of this reform process has been to reduce the volatility of government revenues from duties to a more reliable and stable land tax revenue stream, which in turn supports better infrastructure service delivery and better outcomes for infrastructure users.

Conclusion

I want to make the final and important point that government decisions should be guided by what is in the best long-term interests of Australian taxpayers and infrastructure users.

As I highlighted earlier, light rail projects present exciting opportunities to help shape and revitalise our cities, but they shouldn't be prioritised over more valuable investments that may better solve the problems at hand.

Indeed, light rail projects need to be considered within a broader network context. And this is also the case for value capture.

Value capture mechanisms shouldn't just be about getting specific projects off the ground.

Rather, the question is how we can use value capture to make our infrastructure funding mix fairer and more sustainable, and to deliver better infrastructure for all Australians.

Thank you.