photo Karl Fitzgerald

Wyndham train station

The new Liberal Federal government has boldly declared themselves the ‘infrastructure government’. This infers they have a method to finance the backlog of infrastructure demanded. Tapping superannuation as the source of cheap finance has been the proposed path forward. We doubt superannuation managers be willing to take over from the badly burnt investors in unsuccessful tollways (such as Brisbane’s Clem Jones Tunnel and Airport Link).

There is no underlying variance in the funding model proposed. ‘User pays’ cannot cover the immense fixed costs required, as evidenced by Sydney’s Cross City Tunnel recently entering bankruptcy for the second time.

We hope the new Minister for Infrastructure Warren Truss takes a policy tip from UK conservative governments. They are using an innovative funding model for the London Crossrail, a project many thought would take 20 years to get off the ground. The Age’s Adam Carey wrote about it in Time to Unearth London Secrets:

A study commissioned by Crossrail found property values would increase by 20 to 25 per cent near its nine new stations. But Crossrail’s agglomerative benefits have not just been a boon for already wealthy property owners. The travel time savings, jobs creation and property development around stations is forecast to generate £42 billion ($A72 billion) in economic value to the British economy.
”This is a very positive business case,” Wolstenholme said. Crucially, businesses that will benefit most, and who can afford to, are helping to fund the immense cost that stalled the project for so many years.

The biggest 20 per cent of commercial real estate owners in central London are being charged a 2 per cent levy that will contribute £4.1 billion to Crossrail. Passengers will also pay a levy through fares. In total, more than 60 per cent of Crossrail’s funding comes from Londoners and London businesses, with Britain’s government contributing just £2.3 billion.

The 2% property levy is called the Community Infrastructure Levy. It is calculated on a simplistic rate varying from £20 – 50 per square metre in three zoned areas surrounding the Crossrail. Payments are to be made in one or two lump sum installments.

A levy based on actual land valuations would be fairer. This delivers greater accuracy in benefits received and reduces legal debates over such zoning. However, the City of London has an ineffective valuation system and this method appears to be a smart way to sidestep the issue quickly.

Another improvement is the need to spread the CIL out over a number of years, not just a one off hit as calculated. This would suit local business cash flows. The initial cash needed for building could be raised via the selling of Crossrail bonds to the market. The CIL could repay bondholders over the coming years, so that the burden of new infrastructure is spread across beneficiaries in proceeding years.

Our preferred system is spelt out in detail in this Land Vale Capture primer.

The Financial Times reminds us of the value of location in this excellent article:

What gives a piece of land its value? Why is a 500 sq ft spot in London worth more than 500 acres of land in Angus? The answer is obviously its location. The value of a bit of land is not in the land itself but in the location of that land. And what gives the location value? That comes down to what is going on around it. Think good transport links, good schools (a house in the UK by a good school is worth anything from 5 to 20 per cent more than one near a bad school), hospitals and the infrastructure to provide jobs.

This brings us to the key question. Who facilitates the provision of all these services? The answer to that, of course, is the taxpayer via the state. But, if it is the state that gives land some of its value … why is it that all of that value generally accrues to individual landowners, rather than to the state?

That, in a nutshell, is the argument for land or location value tax (LVT).