The theory of value capture (source: via Prosper Australia)
The theory of value capture (source: via Prosper Australia)

Wherever you look these days, someone’s promoting “value capture” or “betterment taxes” as the way to fund expensive new infrastructure projects. Last week the Prime Minister was telling us how the Commonwealth, in responding to funding requests from the States, is “looking to see how they can capture value from the increase in value in land, derived from a new piece of infrastructure”.

Here’s my current favourite; last month the Centurion Group reportedly said it could build a 150 km high speed rail (HSR) line from Campelltown to Newcastle via Sydney CBD for $24 Billion. How would the capital cost be paid for?

Centurion says the line could be funded by “value capturing” –that is developing in areas around new stations

Fantastic! Thanks to the wonder of value capture, travellers get a one hour journey between Newcastle and Sydney CBDs purportedly at no cost to government. (1)

Unfortunately, it’s too good to be true. Trouble is the land in CBDs that might be redeveloped isn’t owned by Centurion Group; it’s almost entirely owned by others and already developed. They might get a benefit from HSR, but not Centurion.

This is just another one of the long list of purportedly private infrastructure proposals that, despite what the proponents say, only works if governments effectively guarantee them an income stream.

The only way this proposal might work is if government were to tax property owners who benefit from Newcastle-Sydney-Campbelltown HSR and give the proceeds to Centurion in return for stumping up the capital.

That’s a huge sum though; the revenue stream required could be in the order of $1.5 – 2 Billion per annum over decades, the bulk of it necessarily coming from properties in Sydney CBD rather than from those around other stations. To provide some perspective, the City of Sydney’s total annual rate revenue is circa $300 million p.a. from across the entire 25 sq km municipality. (2)

There’s a host of other practical difficulties with value capture too, for example:

  • By how much would a faster connection to Newcastle and Campbelltown increase CBD values, especially in Sydney?
  • How would the increase, whatever it might be, be identified separately from the multitude of other forces affecting land values such as zoning, other transport projects, macroeconomic forces?
  • What proportion of the increase would it be feasible and reasonable to take off property owners? Is it in addition to developer contributions?
  • To what extent would the tax depress the desirability of a CBD location and perhaps suppress value increases?
  • What would be the geographical limit of taxable benefit around HSR stations and the “decay rate”?
  • If it were going to impose a tax, why would government give Newcastle-Sydney-Campbelltown HSR priority over other ways the revenue might be used? Can multiple taxes be applied for multiple projects?

The practical problems with value capture are recognised by the Independent public inquiry into a long term public transport plan for Sydney. The Inquiry rejects it as a means of generating revenue to fund its ambitious public transport proposals.

The Inquiry’s suite of proposed measures include transport levies on households and businesses, parking levies, congestion charges, higher fares and Commonwealth funding. But it passes on value capture because, it says:

  • In practice it is difficult to discern the change in property values associated with the infrastructure improvements. Indeed, it is not a simple exercise to identify and accurately quantify the benefits attributable to new infrastructure, both geographically and over time, and define a “benefit area”. It is especially problematic if the benefits accrue quite widely.
  • Most land value capture levies distort the efficient allocation of resources. The difficulty mentioned above tends to make most measures arbitrary and not cost-reflective.
  • These types of levies can discourage the very type of behaviour that the Inquiry is trying to encourage: for people to live in areas well connected to the public transport network. The use of land capture value levies risks providing an incentive for people to move to areas that are not levied, and hence not so well serviced by the improvements to the public transport network.
  • Land value capture levies have equity effects that are generally regressive, because developers generally pass these changes on to customers…
  • Land value capture levies often involve a high level of disputation, because they tend not to be “transparent” and there is considerable scope for arbitrary, ad hoc administrative decision-making. This adds significantly to uncertainty about outcomes and commercial risk, and ultimately raises the cost of capital to the underlying industry.

The Inquiry concludes:

In view of the risks and uncertainties associated with this type of financing instrument, the Inquiry’s illustrative funding plan has not included this mechanism as a source of revenue.

Infrastructure Australia is more hopeful about value capture, but recognises it is likely to be only a small funding source:

Value capture is a potentially useful source of incremental funding alongside conventional user charges and taxpayer allocations. Even a small percentage of total project cost recovered from beneficial land holders can make a marked difference to the funding case for an investment.

Value capture is a long way from being a silver bullet; indeed, its potential is modest. It might be best implemented as a straightforward area improvement tax on land value (like an improvement rate) that doesn’t try to draw a tight connection between cause and effect.

For example, Melbourne’s CBD rail loop is an oft-cited example of value capture because it was partly funded by two rate levies. But the connection to betterment was very broad; one levy applied across the entire metropolitan area and the other to all properties within the 36 sq km City of Melbourne municipality.

____________

  1. The report in the Newcastle Herald does go on to say the Centurion Group “first wants the state government to redesign it’s $7 billion Sydney harbour tunnel crossing to accommodate a high-speed rail line. It says it would only cost $250 million extra to make the tunnel large enough to fit the line”.
  2. For convenience, I’ll assume fare revenue covers operating costs, as per the assumption made by the Commonwealth’s East Coast HSR study.