Value capture: the magic pudding or poison pill?
Readers of Australia’s metropolitan newspapers must be wondering when the shroud covering value capture will be lifted and the mystery behind this magic-pudding funding method will finally be revealed by federal and state governments. Few ideas have received as much publicity and public endorsement over the past few months, yet remained so vague and misunderstood as value capture, an increasingly popular overseas infrastructure and urban regeneration funding method.
Prime Minister Malcolm Turnbull’s recently released Smart Cities Plan has placed value capture squarely on the national agenda as a possible funding requirement for future federal government grants. According to the Smart Cities Plan, “value capture can accelerate infrastructure investment alongside urban renewal, and deliver benefits for households, governments, businesses and developers”.
Former tennis ace and now Member of Parliament John Alexander is leading a federal government inquiry into value capture. Alexander believes it can help connect capital cities and regional centres by partially funding a high speed rail network along Australia’s east coast. High speed rail operators from China, Japan – and several private consortia – have recently approached federal and state transport ministers with similar proposals.
The Queensland government recently hosted a symposium of leading experts to shed some light on the obstacles and opportunities posed by value capture in the sunshine state’ “Exploring value sharing in Queensland” examined alternative and innovative funding options to deliver the state’s infrastructure. Obstacles to using value capture as a funding model identified during the symposium include a misunderstanding of how the model is applied and a general reluctance by federal and state treasuries to earmark (hypothecate) tax revenues for specific public projects. But the benefits, according to speakers at the symposium, far outweigh the costs.
Value capture defined
A clear definition of value capture is an important precondition to an informed discussion of its merits. Without this clarity, otherwise worthwhile projects run the risk of being rejected due to a misunderstanding of how they are being funded.
Value capture, according to Wikipedia, “internalises the positive externalities of public investments, allowing public agencies to tax the direct beneficiaries of their investments”. In practice, this means that some portion of public tax revenues and property values that directly increase as a result of the public’s investment in, say, a new railway station, are pledged or hypothecated to help pay off the station. This seems fair, reasonable and straightforward on the surface, but can quickly get complicated and difficult to understand in an Australian context, where tax policies are different from those in other countries where value capture is already a proven funding method.
As a result of the confusion, the introduction of value capture has been criticised by some in the property and infrastructure sectors. One major transport infrastructure chief recently described value capture as a ’fad’, a new tax, and likely to force landlords to build outside transport corridors. We need more tolls to reduce congestion, he said, without suggesting how those without the means to pay the tolls would get to work.
Hypothecation is a good thing if used wisely
A common objection to value capture as a public funding method is that it hypothecates taxes. Hypothecation involves the earmarking of a portion of tax revenues for a specific purpose, as opposed to directing those revenues to general revenue accounts.
Treasury representatives at federal and state levels argue that value capture programs don’t create additional tax revenues; they simply move economic activity from one location to another. Earmarking tax revenues generated in one location and spending it another, they say, simply distorts economic activity and restricts their ability to apply revenues on a strategic, long-term basis. This argument contrasts with the experiences of many successful overseas value capture programs, such as CrossRail, Europe’s largest transport project. Without hypothecation, several benefits of CrossRail would be missed.
Well-designed value capture programs have two important characteristics. First, they identify the beneficiaries and users of public infrastructure programs in order to establish an appropriate nexus between public investments and funding methods. For example, the most obvious beneficiaries of new metro train stations are surrounding landowners. Recent research from over 120 case studies from around the world show that the average increase in land value resulting from public transport projects is 12 percent, but can reach as high as150 percent of pre-announcement land values. Value capture programs are designed to capture an equitable portion of this uplift to help pay for the projects that cause the uplift.
Second, value capture methods can be powerful decision-making tools that help create uplift in property values when combined with integrated land use – transport planning, sometimes referred to as SMART Growth. Integrated land use – transport planning applies a number of principles that increase economic activity and can lead to productivity benefits.
For example, a recent study concluded that increases in land values between 2001 and 2031 within 400 metres of the Mandurah commuter rail stations in Perth would translate into increases of $506 million in Commonwealth, state and local government taxes, or roughly 30 per cent of the project’s capital expenditure. This figure would jump to $1.7 billion if integrated land use and transport planning would have been fully applied to reach the levels of density found within 400 metres of the Subiaco station. Unfortunately, no funding mechanism was in place to capture any of that increase to help pay for the Mandurah rail line.
Conclusions
The widening gap between Australia’s infrastructure aspirations and needs has rightly become a subject of debate at the national and state levels. Despite billions of dollars of investment, our roads remain congested, our public transport systems are slowing, and our urban centres are becoming less productive. New funding arrangements are needed to unblock our transport networks and unleash the productive potential of our cities.
Value capture, if done well, is not a magic pudding that will satisfy our hunger for more and better infrastructure, but it is also not a poison pill that will increase taxes and reduce housing affordability. It is one of a number of more efficient and equitable funding reforms we need to retool our cities for the 21st Century.