Top Nav

Submission to the National Infrastructure Cabinet Committee

Submission to the National Infrastructure Cabinet Committee

‘Value Capture’

Prepared by the Coalition Backbench Policy Committee on Infrastructure & Regional Development

Chair: John Alexander MP                               Secretary: Karen McNamara MP              Approved: 17 March 2015

Key Points

  • Value Capture policies are in use in a wide range of comparative countries, offering government a sustainable funding model for small and large infrastructure projects;
  • Federal contributions are based on the quantifiable increase to tax revenue that directly result from property value increases around the new infrastructure;
  • Increases in the federal tax pool (Capital Gains Tax, GST) are complemented by similar increases in the states’ tax pool (stamp duty);
  • The self-generating nature of this cyclical funding model provides sufficient guarantees to attract the large pool of private capital currently available in a risk-averse marketplace;
  • Large public transport projects are proven to deliver a new stimulus to the economy resulting in net productivity benefits and net long-term revenue increases to government; and
  • To maximise the available benefits, consideration will need to be given to project-specific rezoning, localised tax treatment and complementary skilled migration policies.

Submission Request

The Backbench Policy Committee is requesting approval for the establishment of a working group for the development of a detailed business case on the use of value capture-based funding models for one greenfield and one brownfield transport infrastructure project.

This working group will comprise selected Committee members and senior representatives from both Treasury and the Department of Infrastructure & Regional Development. It will have continued and regular engagement with the Committee, and direct transparency with the Office of the Minister for Infrastructure & Regional Development.

Background

On 10th February 2015, the Backbench Policy Committee on Infrastructure & Regional Development hosted a special policy discussion on value capture as an innovative infrastructure funding mechanism.

Guest presenters:

Nigel Lake, CEO, Pottinger

Joe Langley, Technical Director, Infrastructure Advisory – AECOM

Greg Murtough, A/g Assistant Commissioner – Productivity Commission

Steve Parbery, Chairman – PPB Advisory

Geoff Brunsdon, Executive Chair – ICS Advisory; Chairman – Sims Metal Management Ltd, MetLife Insurance Ltd, ING Private Equity Access Ltd, APN Funds Management Ltd and Redkite

Each presenter focussed on a different area of the opportunities available from the application of value capture as a funding mechanism for both small and large infrastructure projects. These positions are detailed in the appendices.

A central component of each presentation was the net increase in economic productivity that results from innovative financing models like value capture. This makes for a powerful argument when combined with the unique opportunity currently available to government to attract private capital investment and/or to self-fund utilising record low interest rates.

Value Creation

Domestic and international experiences repeatedly expose a direct correlation between the construction of transport infrastructure and increases in the value of properties located in close proximity.

The quarantining of increases in public revenue that occur as a direct result of the construction, and the hypothecation of these revenues to offset the costs of that infrastructure, presents an opportunity for a sustainable public funding model in a tight economic environment.

Developing a mechanism to capture this value uplift in a manner that is fair to private owners, profitable for developers, and facilitates the societal benefits brought by transport connectivity, is a complex yet worthy public policy aspiration.

To fulfil the real potential of a value capture funding model the infrastructure must be designed to maximise the value creation of the surrounding properties. An untargeted approach as used in the Gold Coast Light Rail betterment levy does not provide a sufficient opportunity to quantify the revenue creation potential of this funding model.

Value Capture

Value capture is an effective tool to create a reliable beneficiary-pays system of infrastructure funding through an engineered rise in property value. Value capture relies on establishing a revenue benchmark prior to program commencement that can be monitored against specific planned investments in transport infrastructure and urban renewal.

The establishment of this benchmark allows government to correlate property value increases above that benchmark to the effect of the infrastructure construction. As a result, the capture of tax revenues received from that uplift can create a funding loop by hypothecating it to the repayment of financing instruments that underwrote the construction. This provides an equitable means of reinvesting a portion of the benefits created by urban renewal and transport infrastructure programs.

Tax revenues that result from property values below the established benchmark should continue to flow into consolidated revenue, thereby proving that the public contribution to the infrastructure is sourced from newly created income and thus has a negligible impact on the government’s fiscal position. In many cases value capture is applied to guarantee the public contribution towards a public-private partnership arrangement to deliver the infrastructure.

Hypothecation

The concept of hypothecation is not new to government policy. The Asset Recycling Fund Bill 2014 proposes the hypothecation of revenue raised through asset privatisation to fund the Government’s Infrastructure Investment Program.

Similarly, the Excise Tariff Amendment (Fuel Indexation) Bill 2014 proposes to hypothecate extra revenue raised from the indexation of fuel excise to a special account dedicated to spending on road infrastructure maintenance and construction.

Forms of Value Capture

A wide variety of value capture mechanisms exist both in Australia and internationally. All share a central focus on the creation of a sustainable cyclical funding system that harnesses the uplift in property values in a region that has resulted from infrastructure construction to help fund that specific piece or a future piece of infrastructure.

Betterment Levy is a fee or tax that is charged to private land owners located within a ring-fenced geographical boundary. It is a transparent method of the state recouping some of the value of the uplift from those that directly benefit from the infrastructure. Also called a Benefit (or Special) Assessment District scheme, betterment levies can be charged to commercial operators in lieu of improved customer access as a result of transport connectivity.

The £14.8 billion 118km London Cross Rail Project currently under construction is majority funded by targeted betterment levies charged at proportional rates to business profitability.

Tax Increment Financing (TIF) programs require a district to be designated as ‘blighted’ to become the recipient of urban renewal projects which in turn attract further investment and affect an increase in property values. Government authorities capture the resultant incremental increase in property tax revenues for a pre-determined period as a contribution towards the funding of the urban renewal infrastructure.

Revenue raised through a TIF program often serves as a crucial filler between project costs and both public and private appetites for investment. A 2008 study by Price Waterhouse Coopers tested the applicability of a TIF program on two scheduled infrastructure projects in Sydney. It found that TIF would repay 75% of the construction and associated infrastructure upgrade costs for a metro rail station in the inner north suburb of Gladesville over an 18 year period, and 75% of the infrastructure requirement costs in the South Western Growth Centre over 19 years.

TIF is the most widely used local government program for financing economic development in the United States, with active policies in 49 of the 50 states and in Canada. The Vauxhall / Nine Elms / Battersea Opportunity Area on the Thames River in London is proposed to create 16,000 new homes and extend the Northern Line on the London Underground through a TIF scheme.

Split-rate Property Tax is an alternative value capture mechanism that taxes unimproved land value at a higher rate compared to the tax rate on buildings. This has the potential to stimulate urban renewal by encouraging owners of vacant land to build and develop, therefore facilitating a higher density development area, particularly around new transport connectivity, to increase values without greater tax obligations. This also leads to a better outcome of reduced urban sprawl and therefore protection of the supply of larger suburban and rural lifestyles.

Joint Property Development is a form of public-private partnership that includes negotiation of an agreement between government and private infrastructure developers to share the costs of construction of an infrastructure asset or service.

The concept is based on an understanding that the new infrastructure will create uplift in value of an associated development project managed by the private developer. A joint development will therefore decrease the costs incurred by government for the construction of public infrastructure. This is essentially a real-estate transaction which can utilise public land or air rights above that land for a private development.

Existing Taxes

The key Commonwealth tax applicable to value capture is Capital Gains Tax (CGT), which is calculated purely on the uplift in property value during ownership. Applying a land valuation at the commencement of construction and then capturing the CGT revenues that are earned as a direct result of the uplift when the property is next sold allows government to hypothecate this revenue back to the infrastructure costs, and/or guarantee the forward projection of these costs to form the basis of a debt guarantee.

Properties in a ring-fenced region expected to have sharp value increases as a direct result of the infrastructure development may require a modification to the existing CGT-free status for owner-occupiers. An option could be given to the owner to sell CGT-free at current value, or contribute the block into an investment parcel and consequently pay CGT solely on the uplift above the current value.

This policy change could be applied through the use of the Income Tax Assessment (Infrastructure Project Designation) Rule 2013, which established processes for an Infrastructure Priority List of designated projects, as determined by Infrastructure Australia.

State-based Stamp Duty also represents an ongoing source of government revenue that is directly influenced by property values, and therefore by infrastructure improvement. States that are recipients of new federal funds through CGT capture could be required to similarly hypothecate the extra stamp duty revenue that results from the same project.

The infrastructure construction would also lead to a direct increase in Goods & Service Tax (GST) receipts which could be captured and hypothecated back to the participating state to offset costs.

Conclusion

Across many jurisdictions and over many years a large volume of evidence has developed to support value capture as an effective tool to provide a fair and sustainable means of funding infrastructure. Value capture delivers a new source of public funding that can fill the gaps that usually require unpopular user charges or expenditure from broad based unrelated revenue streams.

Value capture requires the clear identification of the immediate beneficiaries of a piece of infrastructure construction, and the establishment of a base property value rate prior to the announcement of the infrastructure in order to ensure the maximum value uplift is captured. The efficiency of a construction project is maximised if this is delivered as a public contribution to a privately managed construction. The value uplift productivity of a development site is greatly enhanced if the property is planned for a mixed use of residential, commercial and transportation; with each stimulating growth for the other.

Australia’s legislative environment does not present major obstacles to the implementation of value capture mechanisms by the Commonwealth for infrastructure funding. Capital Gains Tax and Stamp Duty represent the key property value-based taxes that could bring value capture to effect within the existing tax structure.

Inter-jurisdictional cooperation is crucial to the success of this form of funding. The collegiality exemplified in the recent National Partnership Agreement highlights the logistical opportunities for cooperative federalism to be utilised to bring these policies to effect.

Value capture provides a policy opportunity that could help to fund the infrastructure projects that will assist in dealing with some of the long-term concerns raised in the 2015 Inter-Generational Report.

[ENDS]