Is Australia Missing Billions in Infrastructure Funding?

Monday, July 13th, 2015
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The challenge facing Australia in terms of raising sufficient levels of financing in order to fund the degree of public sector construction projects needed to meet forward infrastructure requirements cannot be understated.

Despite what some commentators suggest is an ‘infrastructure deficit’ of up to $800 billion, fiscal constraints mean the ability of federal and state governments to use taxpayer financial resources for new projects is limited. While asset sales and private sector funding through instruments such as public private partnerships have been used in some states, such methods are running into obstacles. In Queensland, for example, a $37 billion privatisation program planned by the previous government has been abandoned by the new government in that state.

With all this going on, a new report set to be released this month says Australia is largely missing out on an innovative financing mechanism worth billions of dollars which is becoming increasingly popular overseas. In their Value Capture Roadmap report, architecture, construction and engineering services firm AECOM and built environment sector consulting firm industry association Consult Australia argue that Australia should embrace value capture.

The concept sees a portion of the uplift in value which private landowners whose properties are located near new taxpayer-funded infrastructure such as train stations or light rail derive from these investments ‘captured’ and returned to taxpayers. This is often done through modest increases in taxes or rates within a given ‘catchment area’ or by other measures such as the sale to developers of additional development rights above existing zoning allowances or the sale or lease of ‘air rights’ for commercial, retail or residential development above publicly owned land such as train stations.

In the United Kingdom, for example, around 27 per cent of cost of the 118-kilometre Crossrail project is being funded by a two per cent levy on commercial properties within a catchment area of the Crossrail stations. All funds from the levy are being used by the Greater London Authority to repay interest and principal of the loan which was taken out to finance the project. In the US, meanwhile, additional levies on retail sales taxes have been applied across a number of cities to pay for upgrades such as the building of new light rail networks.

In Australia, AECOM and Consult say the benefits could be significant. With carefully planned transport projects typically increasing land market values by as much as 50 per cent, well-designed value capture systems covering a clearly defined ‘improvement area’ could recover as much as 10 to 30 per cent of the cost of these projects, they say. They argue that in New South Wales alone – where the government is funding more than $60 billion worth of committee projects via the leasing of public assets – raising as little as 10 per cent of the cost of these projects through value capture methods would save taxpayers $6 billion.

In Victoria, meanwhile, the new state government has promised to investigate value capture options for its program of removing dangerous level crossings, and has charged Infrastructure Victoria – the state’s new infrastructure body – with the task of advising how best this could be done.

Joe Langley, technical director – infrastructure advisory at AECOM in Sydney says Australia is largely missing out on a significant opportunity.

“New stations for the planned Melbourne Metro and Sydney Metro will deliver significant financial windfalls to local property owners and businesses, but under current legislation they do not have to pay a cent towards them,” he said. “That just doesn’t make sense when there’s a tried and tested way of leveraging this value to reduce the overall cost to the taxpayer.”

Others agree. Simela Karasavidis, a Melbourne-based partner at international law firm Pinsent Masons who specialises in infrastructure and public private partnerships says where they are well designed, value capture methods represent an effective and equitable method of raising project finance.

“From my end, I do agree that it is an effective method of financing where there is public infrastructure investment and there is a positive effect on property values,” Karasavidis said. “I think it is one of the fairest and most efficient ways of financing infrastructure.”

Proponents of value capture argue that if well designed, such programs deliver important benefits. Whereas the majority Australia’s public funding commitments are made with a four to five-year time horizon, value capture programs can be devised to be in place for any set period of time, which is vital given that large infrastructure projects can take decades to complete. The tax increase for the Crossrail, program, for instance, will apply for 25 to 30 years. Such methods are also more equitable, proponents say, as they effectively allocate more of the cost of building new public assets toward those who benefit most from the infrastructure in question.

Still, there are challenges. Determining the amount of property value uplift which is likely to occur once new infrastructure is in place with any level of certainty prior to the project’s commencement is difficult. Local resistance to infrastructure projects, too, may increase where residents feel they are being charged ‘extra.’

To overcome these obstacles, Karasavidis says programs must be well designed with straightforward and clearly communicated methods of allocating charges, well drafted legislation, clearly defined catchment areas, good collection systems and preferably a decentralised and trusted authority to implement the system. It is also important to have a ‘political champion’ and to engage in genuine consultation to ensure local property owners understand that they will be getting a clear benefit from the infrastructure through the anticipated uplift in value of their properties, she says.

Langley, meanwhile, says a good example of how to gain public support can be seen in the US, where such arrangements are devised by public sector agencies rather than politicians and are put to a vote prior to being implemented. Where they understand the benefit they will derive from projects and how they are voting for an effective way of allocating contributions with benefits from worthwhile developments, he says, ‘people will vote to tax themselves.’

More broadly, Langley says Australia needs to change the way in which we view our cities. The nation’s comparatively low density urban environment may be incompatible with the modern world. We are competing for international business and education with countries that have relatively higher density cities and that are building infrastructure at much lower cost than what Australia – which is largely building within the existing urban footprint – is able to do.

“If we continue to build our cities the way that we have been building them in the past, with very low density, we are going to be competing against cities that are higher density and have a higher rate of productivity,” Langley said.

“And the way you invest today is over the next 20 to 30 years is going to impact our economic prosperity for generations, so we really need to get this right. We really need to innovate. We really need to look at overseas examples and see how they are doing it. That’s who we are competing against.”

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