This report provides a model for how innovative funding models can contribute to funding the capital cost of new public transport infrastructure in Australian cities. It draws on a wide range of case studies globally and in Australia.
The key barriers to improving public transport infrastructure in Australia’s cities are the high upfront cost of construction combined with farebox revenue which does not cover operating costs. This places enormous budgetary pressure on government when investment in public transport infrastructure is considered. Instead of a debate about how to create the best public transport system for our cities, it becomes a debate about the next individual piece of public transport infrastructure we can afford. Alternatively, toll roads have become more prominent in our cities simply because they create limited budget obligations on government because they are a user pays structure financed, built and operated by the private sector with risks defined and limited.
This mismatch in transport infrastructure investment in Australia has distorted the shape and pattern of our cities. Integrated toll road networks are being created while public transport infrastructure remains slow and cannot achieve a critical mass of network integration and patronage to justify the large scale capital investment required to deliver high service levels and cost efficiencies.
This situation must change as Australian cities – like the rest of the developed world - evolve towards a more compact urban form with jobs in the knowledge economy. Australia’s major capital cities are the economic powerhouses of the nation and our gateway to the global economy. They are home to key economic infrastructure which is critical to the prosperity of industries and sectors across Australia. They will become more important over the twenty-first century.
Public transport infrastructure provides vital economic, social and sustainability benefits which are well understood by the Australian people. The evidence is clear that continuously increasing the scale and capacity of our road networks alone will not enable our cities to cope with forecast urban densification.
It is critical that comprehensive mass transit public transport systems are planned, funded, built and successfully operated in all major Australian cities.
Innovative funding models need to be introduced to fund new public transport infrastructure. Fortunately, there are proven global models that can be amended to suit Australian conditions. They are generally gathered under the title of value capture.
Value capture is based on the premise that government has a right to capture a reasonable portion of the additional economic and property value generated from new public transport infrastructure to fund these enhancements. The concept of value capture is not new, with countries such as the United Kingdom and Canada having used various value capture mechanisms to finance public transport infrastructure for more than a century.
A clear prerequisite for a value capture strategy is that there must be value to be captured. Uplift in property values from new public transport infrastructure is the core principle behind value capture. There is clear evidence that new public transport infrastructure does, under the right circumstances, create high uplifts in property values as the examples in Section 4 of this report demonstrate. Value capture is likely to be most successful in key capital cities such as Sydney, Melbourne, Brisbane and Perth where demographics trends and economic growth outlook are strongest to support long term property value appreciation.
There is a wide range of land value capture mechanisms which can be employed to generate funds to help fund new public transport infrastructure. The best value capture strategies put in place a complementary range of mechanisms. This distributes the impact of value capture equitably.
It is the prohibitive upfront capital cost of building new public transport infrastructure in Australia which is the most critical problem that can be improved by value capture.
Two principal forms of value capture which could be considered for Australian conditions are:
- Tax Increment Financing (TIF) combined with bond issuances
- Business Rates Supplement (BRS).
TIF enables governments to raise bond finance against the future additional tax revenue generated in a designated zone. It is a way of pulling forward funds to the construction stage with a bond issuance and then repaying bond finance with additional tax revenue that flows from the developed area. TIF has been used successfully in the US for over 50 years and has now been introduced in Canada and the UK. The report uses examples from Chicago and New York (Hudson Yards) to show how TIF works in practice.
BRS is a targeted levy on larger non-domestic properties that will benefit from the construction of London’s Crossrail project. It will fund approximately 25-30% of the UKP14.8 billion project.
Value capture does not usually cover 100% of project development costs in most countries. There are exceptions such as Hong Kong and Japan. Hong King’s MRT is a highly profitable business that has expanded globally including to Melbourne and Sydney in Australia. Its vertically-integrated business model, known as “Rail + Property,” is seen as global best practice. Its farebox revenue is approximately 85% above system costs and it generates high profits from property ownership, leasing and development.
The specific urban attributes and histories of densely populated cities in Asia like Hong Kong are transferrable to major Australian cities. It could be argued that Government should be capturing a high percentage of the uplift from the value of their infrastructure investments, as this value would not be happening without them. In fact, these could be permanent fees as the network availability and amenity is permanent. There is no reason to discard them once debt is paid. They could then be used for ongoing improvements to service levels and further network enhancements. This, in turn, would generate new value capture opportunities as the network expanded – similar to Hong Kong and Singapore. Other relevant value capture models can be found in major cities such as London, New York and Chicago. These cities are all undertaking large scale transit oriented development in urban renewal areas to respond to changing economic and job patterns. They are all utilising value capture to fund public transport infrastructure improvements.
Value capture should become a normal part of public transport project funding in Australia. A value capture framework could be incorporated into the business case for all public transport infrastructure proposals. The framework would assess value capture opportunities, select the best mix of appropriate value capture mechanisms, quantify the amount of funds to be generated and put in place a governance structure to deliver funding.
Public infrastructure investment should not create windfall profits for landholders who are fortunate enough to be in control of strategic real estate holdings. Value capture is highly desirable from a social equity perspective, in that taxpayers who are funding the cost of development of transformative infrastructure projects, get to share proportionally in the economic benefits that are created.
Government development policy and individual business case analysis should include project and network corridor preservation as well as property acquisition strategies that maximize value capture outcomes.
There is clear evidence that the weight of capital seeking to invest in Australia would respond positively to innovative funding models that support public transport infrastructure. This applies to domestic superannuation funds, broader managed funds and overseas investors. Australia is a developed country with a Triple AAA credit rating. It has low levels of risk. Value capture mechanisms such as TIF-related bonds could become an integral part of the Australian investment market generating high levels of funding for new public transport infrastructure to be constructed in major urban centres across Australia.
In conclusion, Australian governments should:
- Maximize returns by not only advocating a broad based use of value capture mechanisms, but they should also take a substantial proportion of the uplift in valuation that occurs in closely proximate areas to the infrastructure development (on a sliding scale in terms of distance from the new station box)
- Focus on preserving development corridors and land assembly activities on a strategic level that will maximize value capture outcomes
- Use infrastructure development and service improvement to have a discussion with the public about creating a more sustainable level of operating cost recovery for transit systems.
- Expanding public transport networks when each expansion increases the levels of total network operating losses is a big impediment to network investment. Cities such as Sydney, Melbourne and Brisbane should use this strategy to develop a list of projects where value capture could be employed and demonstrate how PPP and value capture could intersect. These projects would include Sydney Metro, Melbourne Metro, Bays Precinct, Central to Eveleigh, Brisbane Cross River Rail.