Value Capture – a historical perspective

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Historical insights into Value Capture (VC) financing of transport in Australia and Asia.

Public transport boosts land values, as areas become more liveable, accessible and productive and thereby more attractive to buyers.

Further reading
A literature review of twelve high profile reports supporting Value Capture.
More trains – here’s how A5 flyer
Our recent NSW Ipart submission full of topical issues. Particularly relevant to Sydney. Listen to the conservative agenda – the barrow has begun to remove public contributions to PT operations. If only the benefits to surrounding land owners were to replace the revenues, rather than a higher GST.

Land value capture involves collecting some of the windfall gains taxpayer-funded infrastructure gives to landowners in excess of the general rise in property prices. This value, collected over the course of the infrastructure’s life cycle, is then used to pay off the costs of infrastructure development initially financed through government bonds.

Examples
Value capture was used in the 1920s to finance the railroad extension from Darling to Glen Waverley. Called a Railway Betterment Rate, the charge of around four pounds and three shillings per quarter acre block p.a., depending on the value added by the works, was levied on properties within one mile from the train line. This modest contribution over five years was able to finance the losses made by government during construction and ultimately almost a third of the total costs of the project.

In the 1920s the Victorian Government also made plans to construct a Doncaster rail line, covering the operating loss through a seven-year value capture rate on areas served by the line. Though the project was abandoned with the onset of the Great Depression, the effectiveness of value capture to finance public works was recognised with betterment rates also levied by municipal councils at the time to cover the costs of tramway maintenance and development as well as the redevelopment of disused railways, such as the outer sections of the Upfield line.

Building a Doncaster rail line remains a public transport priority to this day, however a means of financing this project has proven elusive. We propose that with public transport constituting such a boon to property owners, this system of value capture be re-implemented to finance Melbourne’s essential infrastructure projects.

One third of the costs of the Sydney Harbour Bridge (1922-1932) were funded through a betterment tax on property owners who benefited from the harbour link. The levy itself was only 0.2 per cent on unimproved capital value of the lands, over a 15-year period. John Bradfield, the principle designer and engineer of the harbour bridge, also envisaged value capture being used much more extensively to finance a vast underground rail network in Sydney. His plans were only dropped because of the economic disruption caused by the Great Depression.

In 1970s NSW, the State Planning authority raised a 30 % betterment levy on land rezoned from rural to urban uses in the Sydney metropolitan region, in order to fund sewerage works and infrastructure.

In more recent history, up to 25% of the Melbourne City Loop was financed by a Benefited Area Levy in which CBD businesses and landholders who benefited from the accessibility created by the infrastructure contributed to the cost of the project. The use of value capture to fund the City Loop as recently as the 1980s begs the question why this viable and equitable funding mechanism is not being mooted by all parties as a means of financing the ambitious infrastructure projects they are taking to the election.

Western Australia has Australia’s longest running value capture mechanism with the Metropolitan Region Improvement Tax, in place since the 1950s. This ensures a 0.15% levy on the unimproved value of land in the Metropolitan region. This has been used to finance the public purchase of land for use as parks, transport corridors and infrastructure sites. Notable examples include the government buy back of the Swan River foreshores, and the purchase of land for the Graham Farmer Freeway, for a new underground station at 140 William Street, and for acquiring sections of land for the Mandurah rail corridor. Read the WA Planning Commission on the Case for the Metropolitan Regional Improvement Tax.

The Gold Coast Rapid Transit Light Rail Line, under current construction, is being partly financed by a $111 annual transport improvement levy from ratepayers owning property identified to benefit from the light rail.

Outside Australia

Asia
In Hong Kong, the Mass Transit Railway (MTR) Corporation, managing the island’s subway and bus systems, turns a profit of around $2 billion annually, with revenues covering 185% of operational costs – profits go into added luxuries like public computers and first class carriages.

This economic efficiency comes from a value capture system, where a percentage of benefited businesses profits or via property development fees in areas surrounding subway stations are received by MTR, who also profit from co-developing and selling residential and office high-rise and shopping malls around stations. Read the World Bank commentary.

MTR Corporation have majority ownership of Metro Trains in Melbourne. Unlike in HK, Metro is dependent on millions of dollars in taxpayer funded subsidies from the Victorian state government. The absence of the value capture mechanism that makes their operation so successful in Hong Kong sees public investment deliver private windfalls here.

In Tokyo, the private corporations that build and operate railways use a form of value capture themselves, much like in Hong Kong, by developing commercial and residential real estate around train lines, thereby financing much of the capital costs. This removes their dependence on government subsidies.

In Hyderabad India, the Public Private Partnership currently developing the city’s new metro rail system expects to raise at least 55% of the capital for the project in the initial years of construction from the development and sale of land they now own around the future stations.

Summary

Value Capture has been used extensively and successfully both in Australia and globally to finance urban infrastructure and boost urban liveability. With a property market that grows by 6% most years, and with enormous windfall gains going to property owners who stand to benefit from rezoning and infrastructure development, value capture is an innovative and efficient means of financing the public transport that our city needs, through harnessing the very value that it creates.

Transport upgrades and new projects throughout Melbourne, under the Melbourne Rail Link plan, have been put forward by both parties in recent elections, including proposed stations at Fisherman’s Bend, Domain, Parkville, Tarneit and Toolern and new city loop underground lines, alongside persistent calls from constituents for rail extensions to Doncaster and Mernda. There is ample opportunity, with this variety of planned infrastructure projects, to implement value capture to meet these commitments and to go beyond them, servicing Melbourne for many decades to come.

With so much historical evidence sitting alongside the economic efficiencies, value capture needs to be recognised as the best and most equitable way we can achieve our transport goals and priorities. This can enable the infrastructure to maintain and improve our nation’s renowned livability.

Further reading:
A literature review of twelve high profile reports supporting Value Capture.
More trains – here’s how A5 flyer
Our recent NSW Ipart submission full of topical issues. Particularly relevant to Sydney. Listen to the conservative agenda – the barrow has begun to remove public contributions to PT operations. If only the benefits to surrounding land owners were to replace the revenues, rather than a higher GST.

https://prosper.org.au/land-value-capture/value-capture-a-historical-perspective/