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Article from The Australian, 15/4/16, p11 

Paul Cleary

Imagine living in a regional centre but being able to commute to the big smoke in less than an hour.

To get an up-close view of some of the busiest transport hubs in the world, you don’t have to go any farther than the departure and arrival gates at Sydney and Melbourne airports. For those living in the fast lane, flights arrive and depart every 15 minutes in peak hours. As many as 60 passenger jets depart from these airports every morning and evening.

The Melbourne-Sydney route was the fourth busiest in the world last year, ahead of Taipei-Hong Kong, Mumbai-Delhi and even Beijing-Shanghai, according to international transport agency OAG. Brisbane-Sydney is not far behind, ranking 13th busiest, ahead of Jakarta-Singapore.

As these jets take off steeply to reduce noise pollution for surrounding suburbs, they reach cruising altitude over regional centres that live very much in the slow lane. Planes heading south from Sydney are forced to bank sharply to the west to avoid the Lucas Heights nuclear facility, then head over a vast expanse of native forest towards the sleepy centre of Goulburn.

On the western edge of the Great Dividing Range 200km south of the CBD, Goulburn is less than 15 minutes from Sydney by plane. There, the cost of living bears no comparison to the big smoke. The median house price is $340,000 compared with $804,000 in Sydney. Land can be bought in surrounding farming districts for $10,000 a hectare.

Everything seems cheaper and more relaxed in Goulburn, population 21,000, notwithstanding its maximum security prison. Petrol sells there for about $1 a litre; atthe famous Trappers Bakery, a meat pie costs $3.90 and a croissant just $2.95. Goulburn is another world away from what is found in the big smoke. It’s much the same for many regional centres under the flight path between Sydney and Melbourne, and to a large extent the Sydney-Brisbane route.

But a very fast train could transform these centres. Indeed, funding such projects relies on such a transformation to make them viable. Imagine being able to live the Goulburn lifestyle but commute to Sydney in less than 45 minutes, or do the same from Shepparton to Melbourne, or from Grafton to Brisbane. You could build a house on land acquired for $1000 a block, with developers using the increased value of the land to fund some of the $120 billion-plus cost of a high-speed rail project.

The financing tool is known as value capture. It’s not new; it’s one the US used to build railways in the 19th century. The expansion of these regional centres with highspeed rail would relieve the acute population and cost pressure of the big cities and transform inland Australia at the same time.

As The Australian reported this week, government advisers are working on options to use value capture to pay for big-ticket infrastructure projects such as highspeed rail. Expect to hear more about it in the budget and during the election campaign.

Developers already are rushing to put ambitious plans to the federal government.

Central Japan Railway, which operates Japan’s bullet train, claims it can build the Melbourne to Sydney line in eight years. China’s Centurion Group has told a parliamentary committee it can build the service at no cost to government provided it can profit from the increased land value.

The newly created Consolidated Land and Rail Australia scored a meeting with Malcolm Turnbull last month, accompanied by a bipartisan delegation including former premiers Steve Bracks and Barry O’Farrell — this despite its website being nonexistent bar an “under construction” sign and its Melbourne office on answering machine when The Australian made contact.

The project still has the pie-inthe-sky feeling that characterised Sydney’s Badgerys Creek airport for 50 years before confirming the project two years ago. High-speed rail contains its own hurdles, not the least of which is cost. Labor’s transport spokesman Anthony Albanese is highly critical that value capture can fund it and says if the government is serious, it must reestablish a $54 million advisory group required to secure the land corridor it scrapped in 2014.

Another hurdle is industry. Our steel mills don’t produce the thermally hardened steel required for high-speed rail and the troubled Whyalla steelworks in South Australia would need a $50m upgrade to produce it.

The genesis of serious political interest in value capture goes back to a conversation that federal Liberal backbencher John Alexander had with former PM John Howard in 2010. Alexander had just wrestled back the Sydney seat of Bennelong from Labor’s Maxine McKew, who famously defeated Howard three years earlier. Alexander talked with his electoral predecessor about the challenges facing our major cities, compared with US cities in the 1970s.

Alexander, who lived in Atlanta back then, outlined in his first speech to parliament how 70s Atlanta, at the time a backwater, invested in infrastructure and drew businesses and people away from the overcrowded north. “The cost of living was skyrocketing … The deterioration of the quality of life in overcrowded and under-serviced cities brought with it the prevalence of crime. Does this sound familiar?”

Atlanta boomed as a result of investment in a new airport and other infrastructure, and went on to stage the 1996 Olympics, triggering the boom in the sunbelt from Florida to California.

Alexander asked the chamber: “Where is our Atlanta to trigger a broader, more sustainable, efficient and competitive plan for growth in Australia?” Now he can answer that question. He says high-speed rail can turn Goulburn, Shepparton, Grafton and similar centres into inland growth hubs for decades to come.

The idea of using land value to fund infrastructure emerged as a concept worth investigating when Andrew Robb made Alexander chairman of Vision 2020 and explained that the federal government would not go into debt to fund large-scale infrastructure projects. Alexander now chairs a parliamentary inquiry that examines “transport connectivity in stimulating development and economic activity”.

The Prime Minister,fond of our cities, clearly likes the concept of producing huge infrastructure projects at potentially little or no cost to the government. As he said this week: “You have got to look at rail, whether it is between cities or indeed within cities, and ask yourself how is this changing the value of land,” he said. “How is it promoting opportunities for development for greater amenity, and how can we capture some of that value to finance the infrastructure so that the taxpayer gets a better deal and citizens get better infrastructure sooner?”

Alexander sees value capture as a way to address the deadweight on the economy of the high-cost capital cities. He has had several lengthy conversations with Turnbull and says the Prime Minister “sees the need to rebalance our settlements, which rebalances our economy”. He adds that Australia has “the most expensive housing” and this makes the nation a “high wage, high cost of living economy”. Alexander expects the plan will feature prominently in the election, if not in the budget next month as well.

“We are working very seriously to develop the best value-capture system that we can, as a federal funding mechanism,” he says. Such a model would “effect a plan of settlement and decentralisation”. “We will find this is a discussion point during the campaign, a mature and responsible way to rebuild out cities and address our biggest problem: the imbalance of settlement, the extra cost of living in our major cities in a permanent way.”

But the projects will generate extra costs, no matter what the funding model. Value capture must involve new levies, such as higher council rates, or stamp duty and capital gains tax that is hypothecated to compensate the developer. It will be difficult for the government to refute claims that it is introducing a new tax.

Marion Terrill, transport program director of the Grattan Institute, says any new imposts invariably would have consequences. “Just because you can impose such a tax on a landowner doesn’t mean you should. All of these taxes come with consequences,” Terrill says.

“Governments would implement value capture by introducing an annual levy through council rates, or through capital gains tax or stamp duty when the land is sold,” she says.

Alternatively, they could implement a system known as tax increment financing, which designates a particular geographic zone for collecting the additional property taxes in a separate fund across 20 years.

Any of these solutions would be administratively complex as they would require drawing up boundaries that would deliver costs and benefits for those inside or outside the designated area.

Like any new tax, there would be the risk of unintended consequences. “One risk is that you don’t create value but displace it from somewhere else,” Terrill says. High-speed rail could reduce the value of Sydney and Melbourne airports.

There also is some risk of decline in regional centres. Local residents could seek high-value services in the big cities. It happened in Europe, where some people took advantage of high-speed rail to see law and accounting professionals in major cities instead of the local services previously used.

There is also a wide variation in the impact on land value. While the average uplift value when heavy rail is introduced is about 7 per cent, in reality there is wide variation, with estimates ranging from a 40 per cent loss to a 40 per cent gain.

“It depends on what you do around the infrastructure,” Terrill says. “If you don’t do effective development around the railway or other new infrastructure, the downsides — loss of public space, noise, crime and so on — will outweigh the benefits of greater connectivity.”

Alexander contends that any “reasonable person” won’t have a problem with paying any new tax because they will already feel as though they have won the lottery.

With this funding model, there’s no guarantee that its total cost can be financed by increased land value. A study last year by AECOM, which also produced the 2012 plan for Labor’s high-speed rail, said that 10 per cent to 30 per cent of the development cost of projects could be funded by adopting the same method as Britain’s Crossrail project and the Hong Kong metro. Alexander, however, contends that these projects levied businesses only.

Martin Albrecht, an engineer who heads the private sector group National Trunk Rail, says value capture had the greatest potential in densely populated areas that were established, whereas the model requires a longer-term horizon to deliver value.

Albrecht’s group is another consortium lobbying the federal government. But it has a different dream: to build a dedicated inland freight line between Melbourne and Brisbane. While the government’s Australian Rail Track Corporation is developing its own plan, National Trunk Rail proposes a model that is straighter, flatter and more efficient, involving building a tunnel under Brisbane.

Rather than a $100bn pipeline, it could be a shortcut to the future. Supporters say inland rail costs one-tenth as much as high-speed rail and it takes hundreds of trucks off roads, reduces the cost of consumer goods and removes freight trains from metropolitan networks.

“Farmers are very frustrated about the lack of infrastructure to get product to market. Our freight lines really are third rate,” says Albrecht. “We could get every freight train out of metropolitan Brisbane in four years. That adds massively to productivity.” Despite the benefits, inland rail is a project that barely gets mentioned by the government and it certainly hasn’t been part of the recent burst of discussion about new rail infrastructure.

As with any government program, it’s unlikely that any of these developments will go ahead without a cost to taxpayers, notwithstanding the promises made by developers. Turnbull no doubt thinks he has discovered a magic pudding that can fund the future for decades to come, but the so-called sweeteners for developers can prove costly indeed.