London’s Crossrail Has Lessons for Aussie Infrastructure Funding 3

By
Wednesday, March 16th, 2016
liked this article
Embed
Autodesk – 300 X 250 (expire December 31)
advertisement
crossrail
FavoriteLoadingsave article

With debates raging across Australia about how to fund infrastructure, the phrase that keeps coming up is “value capture.”

It’s like the discovery of gold in earlier times in Australia, with some commentators seeing it as our salvation. “It is called Value Capture, and it can be used big time” a recent opinion piece in a Sydney newspaper enthused. A new religion seems to have been born, driven by the true believers in value capture. What makes governments warm to this new funding method is that the tax is not collected by politicians but by that nasty group called “developers.”

But everyone has a different interpretation of just what this Robin Hood-like term means. The most popular definition has been for government to “capture” the uplift in value that comes with new infrastructure being planned nearby. Many commentators say if London can have value capture with its massive Crossrail project, then Australian cities should follow the example of our founding city.

The Australian debate is escalating with a federal government committee called the Standing Committee on Infrastructure, Transport and Cities, chaired by Sydney Member for Bennelong , John Alexander, calling for submissions on “The role of transport connectivity on stimulating development and economic activity.” The terms of reference list the detailed issues and six of the seven terms use the catch phrase value capture.

The Urban Taskforce has been very critical of the simplistic approach to value capture that seems to be focussed on adding $20,000 to the cost of new apartments near new transport infrastructure. There are better ways to raise funds that have far less impact on the cost of urban housing and the Crossrail project demonstrates a way forward.

The best source of data on Crossrail comes from a 120-page report by PwC’s UK office, titled CROSSRAIL 2 Funding and financing study. This report examines in detail how Crossrail 1 has been financed and just how successful to date this has been. This data then informs proposals and options for the funding of the next stage titled Crossrail 2.

Crossrail 1 has two main funding streams, a Business Rates Supplement (BRS) and the Mayoral Community Infrastructure Levy (CIL). The BRS is a compulsory charge added to all non-domestic rates across all of London over 30 years collected by the London Boroughs on behalf of the Greater London Authority. The levy only applies to the top 20 per cent of businesses which lowers its effectiveness. Despite this, the BRS raises more than 15 per cent of the funding requirements for Crossrail 1. Its big advantage is that a consistent flow of funds over 30 years services a large loan of 3.5 billion pounds (and 600 million pounds of construction) and that as rates increase, the loan can be paid off earlier.

The Mayoral Community Infrastructure Levy is a compulsory levy on all new development in London, measured by square metre of development. The aim is to raise 300 million pounds over six or seven years, with higher rates for boroughs closer to the Crossrail. The London Mayor has also allocated a further 300 million pounds from Section 106 charges mainly focussed on commercial developments in Central London. Due to the volatility of the CIL and the S106 charges, they do not support a loan. The PwC report is very concerned about the Mayoral CIL approach as it can affect the viability of projects.

“Applying even a very low Mayoral CIL rate will make certain marginal developments unviable; there is a risk that, by setting a rate too high, a significant number of development proposals may be unviable, damaging economic growth in London to an unacceptable degree,” it reads.

In Australia’s flirtation with the new value capture religion as a way to mine the perceived profits of developments to fund infrastructure, we must be careful to not damage the economic growth of Australia’s cities to an unacceptable degree.

The failure of the Australian Government’s Mining Tax is worth remembering. In that case, a ‘super profit tax’ was applied just as the mining industry was slowing down and the mining tax certainly hastened the demise. In a similar way, housing approvals are slowing down in Australia and to tax each new dwelling near new infrastructure $20,000 on top of current infrastructure contributions, sales tax and GST will mean nearly a quarter of the cost of a new apartment will be from taxes.

There are better ways to help fund infrastructure in Australian cities and the example of Crossrail gives some pointers. Like the London model, the best option is to raise small amounts across much larger areas on a continuous base for a period of say 30 years. The first option is to follow London’s Business Rate approach by adding a charge to all rates across a metropolitan area or to gather rates from a land tax across the same area.

A second option is to have a small levy on all development in a particular metropolitan region or district related to a specific list of infrastructure projects with the levy varying between regions. The third option is to have a planning agreement on individual sites where a developer may agree to contribute infrastructure funds for increased floor space above that allowed.

The value capture debate is just beginning in Australia and serious modelling of the impact on the viability of development projects must be undertaken. We need to learn from international projects like London’s Crossrail and we need to be careful to not rush into a new tax that could kill the goose that lays the golden egg.

Embed
FavoriteLoadingsave article

Comments

 characters available
*Please refer to our comment policy before submitting
Discussions
3
  1. David Chandler

    Chris, you have not mentioned the ACT's betterment tax, not dissimilar to the "Value capture model". This has worked well for years and does not seem to attract the wrath of a healthy development industry there? The problem with the betterment tax is it is called a tax and if you say tax to a Pollie often enough you win the scare campaign. The value capture model is not unreasonable. The potential for concentrated development comes as a result of this public investment, not otherwise.
    Yes some developments are more marginal than others, but that opens up other questions. And more density is not always the answer. But there will always be a developer margin. Profit is a good thing, but not if the fundamentals are incautious.
    The recent developer momentum to drive up land prices is not constrained. It is more about constantly testing the market's appetite to pay more for the end retail product. Alas that is now well over $10,000/m2 with much on its way to +$15,000/m2.
    For a $800,000 apartment that could determine a dwelling ranging from 53.3m2 to 80m2. In both cases the developer profit will be +20% or about $160,000 per unit after land acquisition, construction, all finance and transaction costs and taxes. The reality is that on these fundamentals the current development surge is running out of steam. The retail prices are hyper inflated. There is huge potential to reduce these costs by more efficient construction and the avoidance of risks that are manageable by the developer including quality control and defects. Build at any cost with any builder is unsustainable. The public has had enough the banks are waking up to it, and even a 10% correction won't be all that bad. Sorry mate its not the 'value capture tax".

  2. Chris Johnson

    David, I will look into the ACT version…..With the increasing cost of infrastructure the politicians are keen to capture value although they are now preferring a less confrontational term called "Value Sharing".

  3. Charles Litho

    Taxes and more Taxes on houses.
    Too much money is being paid in taxes already by every owner of land and buildings.
    Small business cannot function when it cannot get a roof over its head.
    Anyone heard of taxing income?
    Tax on travelling and the dirty disease of the times, " Tourism".