Value capture no path to infrastructure utopia

Doing more infrastructure sooner is enormously appealing to politicians, and getting someone else to pay is simply utopian. The difficult fiscal setting of this year's federal budget will see a renewed focus on squeezing new and old funding sources. Exploiting land value capture to fund big transport projects appears to be back in fashion, but is it a panacea?

For the uninitiated, value capture is where taxes harvest the unimproved land value capital gain derived from enhanced infrastructure amenity in a defined geography. These taxes can be relatively efficient, provided they do not overreach.

But of course this is more easily said than done.

The extent of land value uplift attributable to new infrastructure like a rail line is rarely uniform and never straightforward to capture, as each development project is different. Recognition of this is critical for policymakers contemplating value capture, otherwise unintended consequences can result.

For example, just like any other tax it has the potential to change incentives and behaviours. Without case-by-case analysis of each project where value capture is to be applied, the risks are skewed to doing more harm than good.

The low-hanging fruit for developing major sites in many capital cities are now scarcer than ever. In the future more developments will be on complex brownfield sites in highly congested, difficult access areas, with escalating construction, geotechnical and political risk to name a few.

In this environment, the possibility of unintended consequences abound. A value capture tax could tip the balance of risk relative to return, causing abandonment of the project, or the more subtle shifting of development further away from transport facilities to avoid particular geographic boundaries where these taxes apply. A further watch point is when developers squeeze in even more people with unreasonable living density, sacrificing green space to help offset the impost of value capture taxes.

Many public transport projects lack clear boundaries of geographic impact, making it difficult to estimate agglomeration benefits. Australia's history suggests that value capture regimes supporting Melbourne Rail Loop and Sydney Harbour Bridge are difficult to sustain because vested interests dismantle them well before their time.

The Right Projects

Nonetheless, done selectively, value capture could be a legitimate means of funding infrastructure. However, it should never dictate how infrastructure projects are selected and prioritised by government. Funding of infrastructure is secondary to choosing the right project based on transparent and independent assessment of expected costs and benefits.

Like many of its G20 peers, Australia remains weak with its infrastructure governance. It is from this perspective that the community should be "eyes wide open" when politicians champion value capture.

Without fundamental reform towards better transparency and rigorous project selection and prioritisation, value capture risks sponsoring another generation of inferior and oversized projects built at the wrong time and place.

The appeal for the federal government to pursue value capture is strong because it means changing state government tax arrangements more than their own. Most states already have value capture mechanisms in place through stamp duty, taxes and levies. Whether value capture increases overall tax revenue compared with the present arrangements is a moot point, and so too is its desirability.

What is certain, however, is a value capture tax will pledge money to more infrastructure projects. Known as hypothecation, the upshot is state governments could easily face additional conditionality from the Commonwealth in the way their revenue is spent compared with current tax arrangements that feed consolidated revenue.

It should be remembered the most important infrastructure project confronting Australia is building a functional federation. Beggar bowl politics between Commonwealth and states has not served the nation well. Taxation changes that erode the states' general-purpose revenue pool will further reduce their ability to govern responsibly, risking more dysfunctionality and blame-shifting.

Another option involves no taxes at all, just astute long-term integrated transport and land use planning. Knowing where basic transport corridors will be in the future, governments can strategically land bank adjacent land until value uplift is realised. While the costs to the government's balance sheet can be high in terms of holding dormant assets, in certain circumstances the future benefits may be justified.

Next week the Turnbull budget should not overly rely on value capture as it is no panacea. Inviting more private sector expertise and innovation over the long life cycle of infrastructure could help. But that depends on governments around the country knowing what are their objectives and being clear about problems they seek to solve. It is this that will nudge Australia closer to an infrastructure utopia well before any value capture tax.

Garry Bowditch is executive director of the Better Infrastructure Initiative at the John Grill Centre for Project Leadership at the University of Sydney. First published on 29 April 2016 in the Australian Financial Review.