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Value Capture – a historical perspective

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

Summary

Land Value Capture (LVC) is an innovative and efficient means of funding the infrastructure that our cities need, by harnessing the very value that same infrastructure creates. LVC has been used both in Australia and around the world to fund urban infrastructure and boost urban livability.

Over the last century, Australian land values have risen ~5% (after inflation) on average per annum. Recently (between 1998-2018) this growth accelerated to 7%, with enormous gains to the property market. As land prices surge, housing affordability has deteriorated. To boost supply, state and local governments have rezoned extensively for new greenfields developments, denser city centres, and renewal of former industrial areas. At the same time, public investment in rail and other critical infrastructure has failed to keep pace with population growth in major cities. Despite a number of federal inquiries, we have not seen any investment in regional high speed rail.

LVC mechanisms must be integrated into the project planning and decision-making process in order to be operationalised. Appraisal of benefits and beneficiaries must happen at the outset, well before project announcement, integrated cleanly into land-use and transport strategies. This ensures that value is not dissipated, and that projects can be refined to improve the value creation process. Placing value capture funding strategies at the apex of infrastructure planning enables governments to deliver reliable, ongoing urban development.

With so much historical evidence demonstrating the economic efficiencies, value capture must be recognised as a natural and necessary evolution in mass transit planning, policy and delivery. Getting the infrastructure we need when we need it (and not two decades too late) is a surefire means to more productive and livable cities and regions.

Historical precedents of Land Value Capture funding of transport in Australia and Asia
Betterment levies

Perth (WA):

Western Australia has Australia’s longest running value capture mechanism with the Metropolitan Region Improvement Tax, in place since the 1950s. This constitutes a 0.14% land tax surcharge in the Metropolitan region (currently not levied on owner-occupiers). Revenue from the levy has been used to fund 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.

The levy however is undermined by excluding owner-occupier land and still being subject to a $300k threshold, in addition to its low rate.

Gold Coast (QLD):

The Gold Coast Rapid Transit Light Rail Line was partly funded by a flat $123 annual transport improvement levy from ratepayers within the City of Gold Coast area. This does not really constitute value capture and is more equivalent to a hypothecated municipal charge, and is highly inequitable. The levy falls on all landholders in the municipality equally and does not link to any received land value uplift from the project. The levy has only been identified for ~1% of properties, primarily within 400m of the stops. Land value uplift for the project delivered over $300m in uncaptured windfalls, or 25% of the project cost.

Sydney Harbour Bridge (NSW):

One third of the costs of the Sydney Harbour Bridge (1922-1932) were to be funded through a betterment tax (via council rates) on landholders who benefited from the harbour link. The levy was set at 0.2% of the unimproved land value. John Bradfield, the principle designer and engineer of the harbour bridge, also envisaged value capture being used much more extensively to fund a vast underground rail network in Sydney. However when the depression hit, the levy became politically difficult to maintain. It was reduced to 0.14% in 1932, and eventually repealed in 1937. Despite cost overruns and premature termination, the levy still managed to raise 16% of the total cost.

Sydney sewerage and water works (NSW):

From 1970-75, the NSW State Planning authority raised a 30% land value increment betterment levy on land rezoned from rural to urban uses in the Sydney metropolitan region. This funded sewerage and infrastructure works.

Glen Waverley Station (VIC):

Value capture was used in the 1920s to fund the railroad extension from Darling to Glen Waverley. Residents were asked and agreed to donate £30k worth of land (1925) to build the train station and rail line. Additionally, they were asked to pay a Betterment Levy of £10k per annum for the first five years. 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. The Railways Standing Committee presented to the State Parliament in its’ 36th general report:

“It is calculated that there are 6,000 acres within one mile of the new line… It is not intended that a uniform rate shall be charged on each property, but that the rate should be varied according to the distance from the line.”

This modest contribution was able to fund the losses made by government during construction. The Betterment Levy alone covered 23% of the total £218k cost, not counting the £30k in land donated. Combined these equate to about a third of project costs.

Melbourne City Loop (VIC):

Up to 25% of the Melbourne City Loop was expected to be funded by a Benefited Area Levy (via Melbourne City Council rates) over 53 years. CBD businesses and non-residential landholders who benefited from the accessibility created by the infrastructure, contributed to the cost of the project. The levy managed to raise the intended contribution sum of $20m in just 32 years. However due to massive cost overruns, this diluted the amount to 3% of the final project cost. The levy was scrapped 21 years early due to political pressure.

Other examples:

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 fund 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.

Transit-Oriented Development (TOD) and Direct Property

Hong Kong

In Hong Kong, the Mass Transit Railway (MTR) Corporation, managing the island’s subway and bus systems, operates as a profitable publicly listed company. Revenues covering 185% of operational costs provide the means for added luxuries like public computers and first class carriages.

Operational revenues from ticket fares are larger due to significant density and limited personal car usage on the island. However the major backbone of MTR’s business comes from value capture through its property operations, with more than 50% of operating profits coming from property related income. MTR receives implicit government subsidies through retained rezoning windfalls and land grants, which then fund the infrastructure and return to the government via its majority stake in MTR.

Additionally, MTR receives a percentage of benefited businesses profits and property development fees in areas surrounding subway stations. Profits from co-developing and selling residential and office high-rise and shopping malls around stations are also harnessed. 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 direct 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 gains here.

Japan

In Tokyo, the private corporations that build and operate railways use a form of land value capture themselves. Similar to Hong Kong, they develop commercial and residential real estate around train lines, thereby funding much of the capital costs. This removes their dependence on government subsidies.

India

In Hyderabad India, a Public Private Partnership developed the city’s new metro rail system and collects approximately 20% of its revenue from “non-fare box” (value capture) sources. It was mandated by the government to fund a minimum of 7% of the capital project cost from value capture via direct property. Municipal betterment levies also collect a notable amount of revenue to contribute towards the project.