The editorial for the Australian Financial Review summed up Malcolm Turnbull’s push for value capture so well we had to share it with you:

Malcolm Turnbull doesn’t just ride on trains, he understands that they are the arteries of a modern city. This insight is clearly what drove two important infrastructure moves over the weekend – $95 million in federal funding for Gold Coast light rail and, more importantly, the announcement the government would consider a ‘‘land value capture’’ regime to help fund new public transport.

The Turnbull plan, reported exclusively in The Australian Financial Review on Monday, is widely used in the United States and now Britain.d Under this proposal the government takes a share of capital gains from rising property prices near new train stations and motorways. It is in effect a new tax. Mr Turnbull then proposes this be securitised and sold as part of the income stream paid to infrastructure bond holders. This proposal should be welcomed for debate.

It signals an end to the Abbott government’s policy of federal funding only of roads, even if the economics of rail transit projects makes them equally worthwhile. The Abbott government, rightly, didn’t want to reward states like Queensland for failing to privatise assets to invest in new infrastructure. But in terms of integration, an end of the roads-only regime is good policy.

Securitising this new income stream into financial instruments would immediately give price signals about which projects were the most worthwhile and which were not. It would help create a market for financing projects, making projects subject to market discipline rather than the whims of administrative procurement, as they are now. It would also price better the wider ‘‘network effects’’ of such projects – how they plug into other infrastructure, and boost local economies.

The current toll road study by Transurban in Melbourne is another piece of this puzzle: getting better price signals byknowing how people use the roads and charging accordingly. Mr Turnbull’s comments are just suggestions at this stage, but Australia is slow to the game of using value uplift as a new revenue stream. When Sydney’s M7 motorway was built a decade ago, Macquarie was well ahead of the NSW state government in capitalising on land value increases next to the road. The corridor next to the motorway, once empty fields, is testament to the value of the land, as large numbers of new warehouses and logistics facilities open along its length.

London’s Crossrail, the largest infrastructure project in Europe, is using this funding model. It is championed by the global infrastructure giant AECOM, Consult Australia, and the Property Council of Australia. There are drawbacks. It is a transfer of what is currently private wealth, captured by private property owners, to the state. On the other hand, the increase in value would not have come about without state-bestowed planning changes. There is also a risk of arbitrage by those looking to capitalise by buying or developing just outside new transport corridors.

Labor proposed last week that Infrastructure Australia also become a development fund. However, it is not clear why in a world of ultra-low interest rates the government needs a new fund to pay for infrastructure. If anything, in the current huntfor-yield environment, a rush to approve projects of marginal benefit could lead to an infrastructure bubble. That makes it more imperative to have a market mechanism that helps pick the best projects. Nor does it seem desirable to combine the oversight body with a funder of new infrastructure.

It was clear at the AFR National Infrastructure Summit in June that Australia doesn’t just need big new projects, but also better price signals and more active markets to determine which projects are worth doing, and to reveal how much end users value them. It would help to create a market for financing projects, making projects subject to market disciplines.