Getting value capture right
Launching a new value capture discussion paper at a Property Council breakfast in Victoria last week, Minister for Urban Infrastructure Paul Fletcher warned that ‘value sharing’ cannot be used as a ruse for tax increases.
The term ‘value capture’ describes ways that government can fund and finance new infrastructure by special taxes and charges that capture some of the economic uplift to property owners that the new infrastructure will create.
The discussion paper outlines a range of value capture approaches, and seeks feedback on how the Federal Government could use its policy and funding levers to stimulate the use of value capture in the development and delivery of transport infrastructure.
“In our approach to value capture we will be seeking to create a win-win proposition,” Fletcher told the audience. One in which “landowners contribute towards the cost of new infrastructure but in exchange receive an increase in value which greatly exceeds the amount of the contribution.”
The minister also acknowledged the “cautionary note raised by the Property Council – that value capture should not be code for increasing the cost of housing by placing an extra tax on landholders.”
Property Council of Australia chief executive Ken Morrison agrees.
“Everybody wants to see more infrastructure being built in our cities, but we have to be careful that we are not creating still more taxes which add to business costs and worsen housing affordability.”
While the Property Council welcomes many of the ideas in the discussion paper, governments must “firmly rule out new taxes under the cloak of value capture,” Morrison says.
The paper cites several international examples – including Hong Kong’s MTR and London’s Crossrail – where alternate funding mechanisms have been used to help deliver city-shaping infrastructure.
In Hong Kong, the sale of development rights around and over rail stations has meant MTR’s operating and capital costs are entirely self-funded through a combination of fares, commercial station retail rents and joint property developments.
In London, the $28 billion Crossrail project includes nine new stations and around 118 kilometres of new line, including a tunnel through central London. Value capture mechanisms – including a two per cent ‘business rate supplement’ on some commercial properties, an infrastructure levy and development application charges – will contribute more than one third of project costs.
In his speech, Fletcher the rationale behind these charges is that “properties and businesses located near the new rail line will obtain substantial economic benefit”.
“Indeed at least one of the new stations, Woolwich, is being funded almost entirely by the private sector landowner which sees the value of having improved access to its Royal Arsenal housing and retail development around the station.”
Morrison concurs that Australia will need a “raft of city shaping investments” over the coming decades, and value capture is being applied successful overseas.
“The reality is that our cities are still a long way from the densities of Hong Kong or London, and governments and communities still have a very cautious approach to creating compact cities.”
Pointing to a recent Infrastructure Victoria research paper, Morrison says the dangers of an “open-ended approach” to value capture are clear.
The paper modelled a range of value capture mechanisms, including the possibility of ‘betterment taxes’ on existing properties within one kilometre of the potential future Melbourne Metro Rail 2 project. The model flagged adding $840,000 each year for 30 years for a 40,000 sqm existing office building, on top of the land tax already paid for the asset.
“If governments adopted such a model, the end result would be greater costs for businesses and a perverse incentive not to use office accommodation close to public transport. In other words, a tax system that encouraged more people to drive cars.”
The Property Council’s Victorian executive director Sally Capp welcomed the “quality discussion” with the minister, but cautions policy makers to “remember that the uplift in value resulting from infrastructure development is already captured by existing taxes” – including land tax, rates, stamp duty, fire services, property and car parking levies.
“Almost all new taxes imposed on property to fund infrastructure are passed onto tenants. Consequently, Melbourne’s affordability and competitiveness is very much at stake if the design is not right,” Capp says.
Morrison says the property industry welcomes the federal government’s “old-fashioned methodological approach” that “tests arguments, identifies weaknesses, and consults with all affected.”
Meanwhile, Fletcher reminded those in the audience that the “demand for additional infrastructure continues to grow” and that there is a limit to what government can fund.
“There may well be projects which would deliver substantial benefits – and where the beneficiaries would be willing to contribute to the cost – which simply will not proceed if we do not look at other funding approaches.
The Australian Government is now seeking comment on the discussion paper until 3 February 2017. The Property Council will prepare a submission on behalf of members.