Using voluntary contributions to create and capture value from public infrastructure
First published 24 April 2017
Australian governments, at all levels, are keen to use value capture as a mechanism to help fund infrastructure. The concept is inherently fair - those who receive windfall financial benefits from taxpayer-funded infrastructure should share the windfall with the government that paid for the infrastructure that created the windfall.
Last September I shared my thoughts on how government could make value capture work in Australia. I suggested that government could impose a new value capture tax that requires the owners of properties that go up in value as a result of publicly funded infrastructure to pay a percentage of the incremental value created to the government, to help pay for the infrastructure that created the value uplift.
Since then various government bodies have progressed their thinking on value capture. Discussion papers, advices and policies have been released by Infrastructure Australia, Infrastructure Victoria, the Commonwealth Department of Infrastructure and Regional Development and the Victorian Department of Premier and Cabinet. And other thought leaders including the Grattan Institute have contributed to the discussion.
The concept of a new value capture tax (sometimes referred to as a betterment levy) has received considerable support. As has the concept of a broad based land tax on the unimproved value of all land, including owner occupied land. Indeed, Infrastructure Australia has suggested that the Commonwealth should use City Deals and its broader infrastructure-funding role to incentivise the states to implement these tax reforms.
Other value capture mechanisms, including developer charges and selling development rights over adjacent government land, have also received much attention and support. However, one mechanism that has not yet received the same level of attention is that of voluntary contributions.
How do voluntary contributions work?
If a person stands to benefit from the provision of public infrastructure, that person may be prepared to voluntarily contribute to the funding of the infrastructure to make it happen sooner, or to obtain greater input into decisions on how it is developed.
By way of example, a trucking business that would benefit from a better road link between its depot and the freeway will happily fund the road improvements if the cost of doing so is less than financial benefit which it will derive from the improvements being delivered earlier than would occur without its funding contribution.
Similarly, an owner of land close to a proposed new rail line may be prepared to make a voluntary contribution to the funding of a station if doing so would result in the station being closer and more accessible to its block of land than would otherwise be the case. I understand that it was this sort of scenario that influenced the NSW Government’s decision when choosing between Sydney University and Waterloo as the location for a new Sydney Metro Station.
Want to buy a Metro station near you?
A station at Sydney University would have financially benefitted the University, as better accessibility to its campus would have made its courses more attractive to potential fee paying students. A station at Waterloo, on the other hand, would result in a windfall financial benefit to the owners of land near the station due to the improved accessibility of that land. Much of the land in Waterloo is owned by the NSW Government and used for public housing, so it is the NSW Government that will financially benefit from this uplift in land value (if and when it eventually sells the land).
There is almost no public information on the process that the NSW Government used to make the decision between the two stations, but I understand a competitive process (of sorts) was adopted. I imagine the NSW Government asked Sydney University what it would be prepared to contribute towards the funding of a station at Sydney University and then compared this amount to the forecast uplift in the value of the government owned land in Waterloo, if the station was located there. No doubt there were other factors such as the difference in the cost to tax payers of building each station, and the impact that the decision would have on the Government’s re-election prospects, but it probably boiled down to which of the two locations would deliver the better long term financial outcome for taxpayers – and there’s nothing wrong with that!
But people won’t pay if they don’t have to?
Few, if any, rational people will voluntarily pay for a benefit that they will otherwise get for free. They will only contribute if the incremental value they obtain as a result of the contribution exceeds the cost. So, if a government wishes to elicit voluntary contributions towards the cost of public infrastructure, it will need to design a procurement process that allows potential beneficiaries to reveal their willingness to pay before the government commits itself to particular decisions
How to get potential beneficiaries to reveal their willingness to pay?
One possible approach would be for government to:
announce that it is considering the construction of a new railway station in an area where it wants surrounding land to be developed - but that any decision to proceed will be influenced by the relevant community's willingness to contribute towards the cost through a value capture mechanism; and then
invite community members to demonstrate their willingness to contribute.
Alternatively, if the government has already announced that it will deliver the project, it could design a market engagement process that enables decisions on certain design aspects of the proposed infrastructure (such as the route of linear infrastructure, or the location of railway stations) to be influenced by the willingness of people or organisations that will benefit from a particular route or station location to pay for that outcome.
Potential routes and station locations could be presented to potential beneficiaries, and opportunities for developers, industry groups or other private organisations to 'bid' for particular route choices or station locations, by reference to the contribution that they would be willing to make to the project, in return for greater involvement or influence in decisions regarding the design and location of the route or stations, could be created.
Perhaps it was this sort of thinking that led to the ‘fuzzy blue line’ in the diagram below that showed the potential route (and some, but not all, stations) for the Parramatta Light Rail project at the time of the initial industry briefing?
But we don’t want the tail to wag the dog
Of course, in designing any such process, it will be important to ensure that the influence that value capture objectives have on the design of a project do not unduly compromise other, more important, objectives. First and foremost, infrastructure solutions should be designed to best deliver the service outcome that the community needs, rather than maximising the funding that can be generated from beneficiaries. That said, if there are two potential station locations that will both deliver the fundamental service outcome that government wants to achieve, why shouldn't the one favoured by beneficiaries that are willing to contribute be preferred over the other favoured by beneficiaries that aren't, all other things being equal. Of course, all other things are rarely equal, which will complicate these decisions.
Any such process would need also to be carefully interfaced and coordinated with the procurement processes for other aspects of the project, to ensure all processes are fair and appropriately transparent.
Conclusion
Implementing value capture mechanisms is the right thing for governments to do, to make the funding split fairer between the direct beneficiaries of the infrastructure investment and broader taxpayers, and to increase the funding available for infrastructure. Whilst a broad-based land tax - accompanied by the removal of inefficient taxes such as stamp duty - appears to be the most efficient way of implementing value capture in Australia, the prospects of the states engaging in this level of tax reform, without significant incentives from the Commonwealth Government to do so, is remote. In the meantime, state governments will wish to implement other value capture strategies. Strategies to elicit voluntary contributions from beneficiaries should be included in the mix.
