Establishing a realistic role for Value Capture in the infrastructure funding mix

15 March 2017, Sydney

Good morning ladies and gentlemen. I would like to begin by acknowledging our distinguished guests, including the Minister for Urban Infrastructure, the honourable Paul Fletcher and John Alexander, the Member for Bennelong and Chairman of the Standing Committee on Infrastructure, Transport and Cities. And extend my thanks to PWC for sponsoring today's event.

It is very timely to be here this morning to talk about the potential for value capture to fund the infrastructure Australia needs.

As I'm sure many of you know, Infrastructure Australia recently released the first paper in our infrastructure Reform Series on this very topic–a paper entitled Capturing value: Advice on making value capture work in Australia.

What that paper found is that value capture can work in Australia and it should be regularly considered for all public infrastructure projects, but it is important to be realistic about the role it can play.

15-year Australian Infrastructure Plan

First, let me tell you how this paper came about. As an independent advisor to governments and the community, a key part of our role is to provide leadership and analysis on the range of investment priorities and policy reform options across Australia's infrastructure sectors.

That is why, we released the 15-year Australian Infrastructure Plan in February 2016, which set the nation's long-term infrastructure policy agenda. This landmark report provided a top-down view of infrastructure challenges, and made 78 recommendations to government on how our nation's infrastructure markets can and should be reformed.

A key focus of the Plan is how we can support Australia's growing population and changing economy, and how these drivers of demand will require a transformation in how governments deliver infrastructure.

In particular, the Plan emphasised that we need to ensure the infrastructure networks and services in our cities and regions can meet the changing needs of the community, and support national productivity and growth.

Australia's national infrastructure priorities

We recently released a revised version of our Infrastructure Priority List–identifying 100 projects and initiatives as national priorities. This is a consensus list of the infrastructure Australia needs over the next 15 years to boost our quality of life and grow our economy

This includes transformational plans like: Melbourne's Metro Tunnel; Sydney's 66km Metro rail; Brisbane's Cross River Rail project; and the redevelopment of Sydney's Central Station.

If we are to meet our future growth challenges, Australia's largest cities need ‘turn up and go’ public transport services–similar to New York, London and Berlin–and these projects can make that idea a reality.

And to ensure that our cities remain great places to live and work, we need a focus on long-term, integrated land use planning that actively anticipates shifts in demand, and is supported by a network or system approach to infrastructure planning.

One of the new High Priority Projects identified in our revised Priority List is additional public transport capacity between Parramatta and the Sydney CBD–where demand for transport services will increase by 50% between 2011 and 2031.

The List also highlights investments that will support access to and growth in our regions, such as Inland Rail and the progressive upgrade of Queensland's Bruce Highway.

But of course these kinds of large-scale, transformational infrastructure projects, and indeed any investments in optimising the services form existing assets or new infrastructure, will require more funding.

And the funding task extends beyond the substantial capital investments associated with building new infrastructure. We also need to factor in the costs of operation and maintenance. The investments we need are multi-decade in nature, meaning we need to prepare to fund assets throughout their whole lifecycle which includes maintenance, and renewal.

Funding the infrastructure we need

Crucially, we must find a way to pay for this infrastructure transformation, and 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 the Plan, we recommended that more work be done to better define value capture and determine how it can be applied in the Australian context. And we've done that through our report on value capture, and we welcome the opportunity to contribute to the discussions today.

This morning, I want to begin by outlining how value capture can make a valuable contribution when it comes to funding infrastructure investment in Australia, before going into greater detail on some of our recommendations around value capture and its implementation in Australia.

In particular, I will explain why high quality, detailed and long-term strategic planning is the foundation of effective value capture, and the importance of meaningful engagement with the community from the outset.

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.

Two ways to pay to public infrastructure

Value capture is a powerful tool for governments. It 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.

A mechanism for capturing value

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 and a commitment to engaging with the community are 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.

Engaging with communities and businesses

As we also highlighted in our report, project proponents must also make a meaningful attempt to communicate the benefits of infrastructure investments to local stakeholders.

Establishing a transparent and robust governance structure is essential, and receiving meaningful feedback from the community throughout the development process will help to identify and address issues as they emerge.

An important part of this process is making sure that value capture mechanisms are well-explained. Beneficiaries must therefore be clear on how much they will pay, and how this charge is calculated.

Where beneficiaries are required to contribute to a project, governments should ensure these stakeholders are still better off than if no project had been built, and that all charges are communicated clearly at the project's outset.

London's Cross Rail Project, which is regularly cited in discussions on value capture, including by the Minister this morning, was successful precisely because it got both elements right–the planning and the community engagement. Even though 40 years of planning is extreme.

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.

Concluding remarks

Before I conclude today, 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.

Many of today's presentations will explore the concept of value capture in detail, and this is a great chance to delve deeper into the opportunities value capture brings for funding Australia's infrastructure needs.

But discussion on value capture 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 for your contributions and deliberations today.