We spend, you win, you pay
Karl Fitzgerald was interviewed yesterday on ABC morning radio with Jon Faine. The hot topic was PM Turnbull’s innovative push to utilise value capture for infrastructure financing. We have long advocated this reform.
JF: One way of funding infrastructure without putting taxes up is to try to be creative and look at future value and putting a present value, a present dollar figure on future value and how it changes because of infrastructure investment. Better explained by my next guest, Karl Fitzgerald is the project director of Prosper Australia and this is a field in which he works… Good morning Karl.
JF: Can you explain how you raise money today, for infrastructure without raising taxes, based on the future value infrastructure creates.
KF: You simply sell bonds to the market, and repay those bondholders by the rising value of the land. Its that simple.
JF: Well it sounds simple, explain how it works… Let’s take for instance Footscray station, a project thats been underway for 10 years its just about finished, use that as an example. Explain it to us, if we’d funded it this way.
K2: In Perth they have a system called the metropolitan regional improvement tax, that’s a 0.015% addition to land taxes paid within the region, now some say that we should broaden the tax base and place it via the council rating system, so its either through land taxes or the council rating system that you can repay those bond holders.
JF: So, lets using Footscray station as an example, you take an area thats fairly downtrodden and depressed but by overhauling the infrastructure, you actually create a very desirable and attractive place for people to live in, so over a decade the property values significantly increase and you collect some of that future value through land tax or rates or whatever else reflects the improved value of the land.
KF: Thats right. We spend, you win, you pay. That pretty much sums up the system that occurs and the bondholders can see government will guarantee those payments, so they’re very confident they will be repaid, so the interest charged on those bonds is very low. A lot lower than what you can receive by going through the private market, borrowing off the banking system, so its the least cost option for financing infrastructure and it has a whole pile of positive spin offs, including encouraging urban density and land use rather than land speculation and thats what we see; as so many people will be commuting today past a train station, and there’ll often be an empty shop or vacant block of land and thats a sign that property speculators are sitting there rubbing there hands thinking, rather thanking everyone for not recognising how great these windfall gains are. So, I wish we had some up to date data on these huge property gains that are happening through Footscray, but they have been immense, with a whole pile of property sales along Dynon Rd, not too far away from there, and also surrounding the station – but in England, the classic example is the Jubilee train line that cost three and a half billion pounds to build, but along the length of that train line, the value of land rose in value by close to twelve billion pounds, so nearly four times the cost of the project.
JF: So what that means is, that you’re going to have whoever was receiving that tax, a government or local council through rates, they get a percent less, or half a percent less as you capture that for the infrastructure bond?
KF: As per the Perth example, its actually an addition to the tax, so there is a small increase in the tax but its spread over twenty years, so its not a big upfront hit on the ratepayer or property owner and its spread over time. In Bentleigh, where the Andrews government has announced three level crossings removed at a cost of a hundred and thirty one million dollars each in this marginal seat, something like 87% of the windfall gain would be kept by the landowner, but just 13% would be repaid by the landowner, so Lucy Turnbull herself said look – you couldn’t argue that’s not a fair proposition. And that’s the strength of this argument, that it is fair. That landowners still receive the majority of the windfall, but the public gets to close the loop on the financing gap. Then we can altogether speed up the process of infrastructure delivery.
JF: And then there’s – just finally, a risk involved, and the market rewards risk – that’s why you get a return because of risk. The risk is that something goes wrong, either globally, locally or with the actual project and there is no increase in value. What happens then?
KF: Well, that would reveal the infrastructure project really wasn’t needed. There have been some examples where that has occurred, but because the state has to guarantee these projects, that ensures a higher level of cost benefit analysis and really drives the fact that the infrastructure is implemented according to the priorities decided by groups like Infrastructure Australia and so forth.
JF: Thank you indeed for your explanations this morning. Karl Fitzgerald from Prosper Australia.