Constructing Melbourne's underground rail loop

Constructing Melbourne’s underground rail loop

Victorian taxpayers were kicked in the teeth yesterday by Public Transport Minister Jacinta Allen, who announced city landholders would not have to contribute to the $10.9 billion Metro Rail project, though they will enjoy substantial and certain land prices rises from its construction without lifting a finger.

Improving access and speed to the city for heavy rail users benefits both ends of the equation – while one is highly dispersed and the other quite concentrated.

City-side agglomeration increases incomes through greater specialisation and firm-level networking effects and the overall demand for goods and services. Further, increasing productive capacity lifts the trajectory of an economy.

The economics of this are well known, as Terry Rawnsley of SGS Economics and Planning points out:

Agglomeration generates economic benefits by facilitating the sharing of knowledge, infrastructure, and labour. These help to unlock both economies of scope (e.g. specialisation) and economies of scale (e.g. mass production), both of which lead to improvements in productivity and profitability, and subsequently increase the economic capacity of the city.

Major infrastructure projects can re-sculpt the pattern of urban development. Substantial shifts in accessibility will change the location choices of firms and households, setting in place a new geography of land values. The outcome is a shift in urban structure and form with an increase in economic activity.

There are very good studies that prove the merit of land value capture. In London, the recent Jubilee rail line delivered £13 billion in windfall gains to landowners within 1000 yards of the eleven new rail stations. Construction costs were just £3.5 billion.

The rise in land values directly attributable to this civic improvement was enough to pay for the rail link nearly 4 times over.

The Victorian government decision to grant land holders a free carry has such significant national implications it drew comment from Prime Minister Malcolm Turnbull.

In April Mr Turnbull described Victoria’s business case for Melbourne Metro as “underdone”, insisting the state government needed to demonstrate how it would generate economic benefits from increased property prices generated by the new tunnel project.
“What is underdone in that business plan is the way [governments] are able to capture some of the very considerable value that will be created in property values by the construction of that infrastructure,” Mr Turnbull said at the time.

The Prime Minister’s initiative was applauded for recognising civic infrastructure investment, notably transport links, become embedded in land prices to the great benefit of neighboring landholders.

There is a clear precedent for value capture right here in Melbourne that should have informed this foolish decision.

The Melbourne Underground Rail Loop Authority (1971-1983) that built the city loop was 40 per cent funded by a special levy on land values in City of Melbourne rates from 1963 – explicitly recognising the significant financial benefit to city landholders.

In the end, the MURLA loans were paid off early as property price rises lifted the rates base and levy. Landholders still enjoyed their windfall gains while Melbourne got its underground.

The ALP referred directly to land value capture mechanisms to fund the removal of level crossings in its Project 10,000 manifesto for the 2014 election – which it won. This approach is economically sound, fair to taxpayers and, in practice, drives powerful infrastructure improvement by recycling investment funds.

Why has the Andrews government flicked away good public policy?

Are their eyes on the bitter fight between the Greens and the ALP for the hard left HoR seat of Melbourne in the federal election? If this decision is designed to curry favor with inner-urban landholders, then we will pay a staggering price for this political opportunism.