Prosper Australia

Wednesday’s release of the much anticipated Eddington report has seen many questions asked on the viability of the road tunnel. Analysis of the cost-benefits report show that whilst the rail tunnel will return 1.20 for every dollar spent, the road tunnel will barely come out ahead. $18 billion is required to cover the Eddington plan. Struggles are expected to fund the East-West road link with the lack of exit ramps in the city. Kenneth Davidson commented on Wednesday’s Renegade Economists radio show that this is a typical ’salami strategy’ to diffuse criticism of the plan and then include the on/off ramps later.

Nowhere in the report was a discussion covered on the economic benefits infrastructure provides to land values. Those lucky enough to own land near an on/ off ramp (or a new train station/ improved services) will be delivered a windfall gain in land values. With the massive infrastructure deficit Victoria, Australia and the world are facing, one wonders how high tolls are to be an effective funding tool with examples such as Sydney’s Cross-City tunnel rendering new services unusable. As this letter by Gavin Putland points out, infrastructure models promoted by Macquarie Bank based on tolls must be reformed to include land value capture funding.

Check this extensive list compiled by the Scottish Government on how land value capture can in fact totally fund infrastructure provision. Minnesota has also recently announced a land value capture study. Make sure you read the Minnesota piece - top investigative journalism.
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Re. “Babcock bounces as Bear Stearns extracts more value” (March 25, item 17).

The Macquarie infrastructure model is dead, not because of any failure to “internalise management”, but because of a failure to tap the benefits of infrastructure in order to amortize the capital cost. The benefit of a new road, net of tolls, is manifested as an uplift in land values in locations serviced by the new road (or by other routes on which congestion is reduced by the new road). Hence, if the benefit exceeds the cost, the cost (net of tolls) can be defrayed by clawing back some fraction (less than 100%) of the uplift in land values. The rest of the uplift is a net windfall for the land owners — who therefore should enthusiastically support this financing method because it would finance projects that would not otherwise proceed, yielding windfalls that the owners would not otherwise get. But when a Public-Private Partnership builds a toll road, it doesn’t claw back any of the uplift in land values, but tries to finance the whole cost out of tolls. So the tolls are too high, patronage is too low, and the operators can’t pay their debts.

Gavin Putland