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Standing Committee on Infrastructure, Transport and Cities
07/03/2016
Role of transport connectivity in stimulating development and economic activity

CARTLEDGE, Mr Jonathan, Director, Policy and Government Relations, Consult Australia

LANGLEY, Mr Joe, Technical Director, AECOM

[14:15]

CHAIR: Welcome. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a legal proceeding of parliament and therefore has the same standing as proceedings of the House. I invite you to make an opening statement, if you wish, before proceeding to discussion.

Mr Cartledge : Thank you, Chair. Consult Australia welcomes this inquiry to support a stronger evidence base for the development of policy across governments to facilitate new infrastructure investment and delivery. This infrastructure investment, supported by integrated strategic planning, will reduce the cost of doing business, increase the sustainability and amenity of our communities and boost productivity.

Consult Australia has been pleased to advance the public policy debate on a range of issues associated with infrastructure financing and funding in recent years. Better use of existing assets, user charges, asset recycling, debt financing and public-private partnerships all present great opportunities for policy reform and more innovative approaches that leverage new investment. Consistent with the inquiry's hearings to date, we have always stressed that there is no silver bullet for infrastructure financing.

What we advocate is a package of measures. These have been reflected in detail in recent inquiries by both the Productivity Commission and the House of Representatives committee on infrastructure and communications. These are required urgently to manage the growing infrastructure backlog. Our recommendations draw on the significant expertise of our member firms like AECOM. Our membership includes Australia's largest and leading multidisciplinary professional consulting businesses responsible for design, engineering, project management and delivery of the pipeline across all sectors.

The focus of this inquiry on value capture is particularly pleasing, given the significant opportunities we believe this presents to support new infrastructure investment and urban renewal. As part of our submission we were pleased to present to this inquiry our report, which was developed and published with our member firm AECOM and authored by Joe. Value capture roadmap was launched in June last year aiming to raise awareness and stimulate an informed discussion of value capture, both as an alternative infrastructure funding method and a decision-making tool. Following the release of this report in the second half of last year, we were pleased to host discussions across Australia advancing the road map representations with a broad cross-section of government, community and industry. The recommendations were really well received. It was interesting, I think, to observe the far greater interest in this subject in the last year when compared with our earlier advancement of value capture in 2012, when we published our first report Capturing value. I think our experience would mirror that of this committee, where the demand for investment in infrastructure across jurisdictions is now so high and the fiscal and political constraints at a state and territory level are so severe that the appetite for a new approach to financing is critical. Those recommendations are reflected in Value capture roadmap.

The further commentary in our submission relates to the relevance in this context of broader cost-benefit analysis and effective stakeholder engagement to inform successful initiatives. A case-by-case approach, we believe, supported by a strong evidence base and delivered in consultation with communities, is essential. But with the right policy settings we can capture value from the significant infrastructure investment required. To maintain our standard of living and continue economic prosperity, this infrastructure overall is essential. Joe, did you have any further comments?

Mr Langley : I will not add anything further other than thanking you for inviting us to speak before the committee. I just turn our attention to the submissions that AECOM has made to the committee, which went in last week, and the Value capture roadmap, which was referenced a couple of times by the previous speaker, Jonathan. I am happy to get into any questions you have. There are a couple of answers that I would like to give to some of the questions that were raised earlier, just to clarify where I think my position would be. The first thing I would say is that we need to get the definition of value capture right and then understand what the key principles are, and then it is easier to understand what the opportunities are. So, if you google it—you can google it—it is not called value sharing. Around the rest of the world it is called 'value capture', and the definition there is that value capture internalises the positive externalities of public investments, allowing public agencies to tax the direct beneficiaries of the investments. If we stick with that as a key principle, a lot of the other things become easier to deal with.

I think the other point that I would make is that the benefits of transport infrastructure are geographically based. They move in a downward direction as you move away from the source of the uplift. So, when you are designing a system to capture value, the first consideration, I believe, must be the uplift in land value. It is the area where you have got the greatest opportunity to capture value and it is also, I think, the simplest way to get a program started. As a matter of fact, we are already doing it. Burwood Council in Sydney has a value capture program that applies to the central area. They charge developers at the rate of $800 per square metre on any additional floor space up to 10 per cent within the district, and then that value that is collected goes into a special fund, a hypothecated fund, that is used for a set menu of improvements that the council makes. They have had this in operation for just over a year. The response from the development community has been very positive. They have generated about $3 million for this mechanism just in the central area, and it has been accepted because it gives some certainty in terms of both the dollar value that is going to be paid by the developers and also what it is going to be spent on. And that is a really good, simple model for us to start with.

I think the other point I would make is that this does, as a result of that, require a cocktail of funding sources because, while the first and most obvious change that is introduced by transport is an increase in land value, there are other things that happen that ripple out beyond that. We know from a lot of academic research that the benefit of uplift in value around transport extends about 1,000 metres and it decreases from the centre. Once you get beyond that it has very little direct property impact, but it does have wider economic benefits. That is why the business rate supplement on Crossrail, which is generating 26 per cent, not 10 per cent, of the value of that project—$7 billion out of $30 billion—is supported by the business community. So I would disagree that the commercial interests are being hard hit by this. This is a two per cent increase on non-residential properties over $100,000 in value, and the research that I have done indicates that the business community supports this. And why do they support it? It is because they have access to 1.5 million more workers because of Crossrail because they are able to produce higher value products and services. The gross value add to their services is higher, and that allows them to sell those services at a higher rate.

Those are just a couple of opening comments that I said I would not make, but they were on my mind after hearing some of the other discussion beforehand. I am happy to take any questions.

CHAIR: You were talking about Crossrail in London. Dr Tim Williams earlier today made the observation that they had totally underestimated the impact on residential property uplift and had not looked to capture any of that. Looking back with 2020 hindsight, that was seen as a mistake. I was also aware of the extraordinary uplift in value of properties from the station—and that whole region—where the high-speed rail leaves London to go to Paris, and that seemed to have escaped the opportunity of value capture. Would you agree with both those scenarios?

Mr Langley : Yes, and I think there is a way to capture that value which is fairly straightforward. It will not apply in all cases, but it is a method that is currently done across the world for other applications. It is to impose an overlay zoning on an area—not a new zoning; it is an overlay zoning. For example, if the current zoning is a two to one FSR and that zoning stays in place, that does a couple of things. In the first instance, you do not get your residents riled up because nothing is being taken away from them. Businesses can continue to operate under the zoning regime that they are operating under. The uplift that occurs from the new zoning could be captured by a regime that allowed developers and property owners to pierce that two to one in exchange for paying a fee and following certain principles. It would be very easy to do. That is what Burwood is doing on a smaller scale. That is a voluntary program.

I can say that that is something that is acceptable. We have been approached by private sector developers as a result of the work that we did on value-capture road map and other work. They have approached us to apply this model to projects in Sydney. One of those you will see shortly from one of the developers who uses value capture as a case study on a project in Sydney. It will demonstrate what the benefits would be and their willingness to enter into a program that actually captured some of that value through this mechanism.

It is my belief that if you had a mechanism like that in place that it represents somewhat of a contingent liability on the property. Taking the Cherrybrook example, if there was a zoning system in place that said there is an overlay zoning and you do not get that until you go through this overlay zone and apply to the government agency and follow the standards, there would be a contingent liability over what that property owner is going to get for the property. It is going to flatten and depress the value that he can take away from that property, other than the zoning that is currently in place. That is where we are getting the leakage because we do not have that initial control in place to dampen the expectations of the seller.

Then we can have a discussion with council, the community and the developer over what that uplift is based upon. In Burwood, they hired a land economist and they said, 'What is the value of that increment of space?' The land valuer came back and said, 'For each square metre of space that you grant above the current zoning, the value of that space is between $1,000 and $1,200 per square metre.' They are selling it to the developers for $800 a square metre. Why would they do that?

One of the problems we have in urban development is we never fully develop the full density that zoning allows. This would encourage developers to use every bit of that development space. The other thing is that it would encourage developers to apply for it because they make a margin on each square metre of space that they build.

So there are some things out there that are working that I think would represent a great case study. We are actually doing this sort of work for the private sector now. I think we are at a point where a committee hearing like this will stimulate further investigation and may come up with some really good ideas around this because we are close to coming up with some of those.

Mr ZIMMERMAN: I apologise that I have not had a chance to read your road map. You have given the Burwood example as a value-capture model. Do you think that has applicability at the state level or would you restructure it if you were doing it for a major project like, say, Sydney Metro or Parramatta light rail or something like that? Secondly, arising from that, the Burwood model strikes me as being suitable for existing developed areas. How would you structure a value-capture model for greenfield sites like, say, around Badgerys Creek or an area like that?

Mr Langley : This is what we have done with a couple of these examples. It is a precinct based starting point and that precinct is probably 1,000 metres around. That boundary is going to vary depending on the geography, the impediments and the particular land use—

Mr ZIMMERMAN: Precinct based in terms of designing the scheme?

Mr Langley : Correct. In terms of the land value-capture component.

Mr ZIMMERMAN: But, if you were building, say, the Sydney Metro, which is 33 kilometres long or something like that, are you saying you would have a multiplicity of value-capture schemes all along its route?

Mr Langley : Yes. You would have one around each precinct. Some of those schemes would be corridor based, although most of the examples that I can think of, with the exception of light rail, would generally be concentric around the station. You do have some uplift in value, to a lesser extent, along the corridor, but it is generally concentrated around the station itself. That could represent one mechanism that local government could apply now and maybe there is some sharing of that value between state and local government. As we know, there are a lot of taxes that are out there now. I guess, from a purist's standpoint, I would try to leave those mechanisms alone. Section 94 and VPAs are intended to deal with local infrastructure. Why don't we just leave those to do the job that they are currently doing and look at things like land value capture as providing the grunt of the revenue required for major infrastructure projects? That could be coordinated through a sharing mechanism between state and local government. At the present time, local government is the authority or the agency that would collect development approvals under a bonus floor space scheme, which is what I am describing.

Mr ZIMMERMAN: But a bonus floor space scheme works, almost, on a more micro level. If you were talking about a city-wide project where you might be rezoning from low density to high density overnight, it is not so much a bonus floor space scheme; it is a major urban redevelopment project as well.

Mr Langley : This is where I go back to the definition of value capture. Value capture attempts to identify the beneficiaries. We have a lot of confusion over what value capture actually is and how it is applied. In Queensland, for example, the term is used on some of the local infrastructure charges. For example, with Gold Coast Light Rail, there is a $110 charge on every residential property in the Gold Coast municipality for light rail. That applies to other things, but it was instituted mainly for light rail. That to me is not value capture. The guy who is 10 kilometres away from that rail line has just seen his property decline in value by $110, because there is no nexus between the imposition of the cost and the benefit that he is getting.

If we are going to have a levy and call it a value capture, let's contain it so that there is some nexus between the infrastructure investment and the charge. I think that is where we spooked the horses a little bit. Value capture seems to be this magic pudding; it is not. It is a fairly narrowly defined method. We need other types of funding mechanisms, like a levy that can be a metropolitan-wide levy. That is where you can have a much lower based and broadly based mechanism that would contribute to the extent that the rest of the community enjoys that benefit, but it should not be the major funding source, because, as I said, if it gets too high, what happens is what happened in New South Wales in 2005-06—Glenn was referring to this earlier—where levies reached over $100,000 for a dwelling and it killed the housing market. So we do not want to overuse any of these mechanisms. That is why I tend to move away from trying to retrofit some of the methods that we are using now to fund other types of things such as local infrastructure or other programs and stick with something that is more targeted towards the major infrastructure investment. I think it is going to be an easier sell to the community. I think it is going to really target the infrastructure better and it is not going to double dip on some of the charges that we now have.

Mr VAN MANEN: This inquiry is looking at it from a federal perspective. The discussion we have just had goes back to the point I made earlier to Glenn, that the states and the councils already have, in my view, all the tools available to them to do this. I do not think any piece of legislation needs to be passed.

Mr Langley : I guess the other point I would make is that tax increment financing is a term of art. All it is is value capture. What it means is that you capture the uplift in value and you use that as a financing tool.

Mr VAN MANEN: Don't we do that already through capital gains taxes and increased land taxes?

Mr Langley : The difference is that tax increment financing, which is a mechanism that I have used in the United States on development projects, applies to precincts generally. It applies to a transport precinct or an urban renewal precinct, it has specific boundaries, and those boundaries are based on the nexus between the uplift in value and the increase in tax revenues. These things can be very discrete. They are used in small towns in regional areas. It would be perfect for something like high-speed rail—as a contributor to high-speed rail in regional areas—because it could be scaled to the right area and the monetary amount could reflect the land values in that area. So it is a chain of precincts on transport projects that we need to look at. Thankfully, I know that New South Wales Transport is looking into this, because I am working with them now on some of these measures and they are quite receptive. So I think we are moving in the right direction in looking at some of these measures.

Mr Cartledge : I will respond to that and pick up some of Glenn's comments. The nub of your question is really, 'Given the states can do this, what is the role of the federal government?' From our perspective, yes, absolutely the states can do this. But the sad reality is that they do not, and we reflect on the conversation that we have had in relation to this initiative over the last four or five years. There is an opportunity for the federal government, we believe, to deliver better value for money in the investments that it makes in major infrastructure projects in the states by incentivising this type of policy. So it is a 'value for money' question for the federal government, and perhaps a reflection on best practice policy at a state level, which is not always delivered, unfortunately.

Mr VAN MANEN: It goes back to the earlier discussion of why we are paying the state governments for stuff that they should already be doing.

Mr Cartledge : Absolutely.

Mr Langley : In our submission, we break down what we think the various roles are in response to one of the terms of reference. The document is a simple starting point; it is not the answer, but it sort of gets the concept across. It says, 'What is the role of state, federal and local government in a particular area of value-capture funding?' Then it gives some indications of what each should do. My personal feeling is that the state government should be involved in setting the policy and providing the incentives for states to follow those guidelines. I use an example that I have used before with you, Mr Chairman. When I was a younger lad and living in the United States, they changed the drinking age from 21 to 18 during the Vietnam War because they could not see themselves sending young men off to war without being able to have a beer at the end of it. They found that highway deaths in the United States rose sharply among young people. So the federal government said, 'We need to go back to 21.' Imagine having that conversation with the states! The states baulked at it. The federal government said: 'Okay, here's what we'll do. You can have whatever age you want for drinking in your individual states, but if it is under 21 you'll get no federal highway funds.' The drinking age in the United States is 21 now.

So that is an example of providing the monetary incentive to have the states do what the federal government might in some cases know is best and is willing to make the hard choices on. I think that is where the federal government can really provide some guidance at both the state and the local level. I know that there are some issues with federal funding on local projects, but I am sure that there are ways to get around that, for the federal government to set some very high standards and use that as the carrot to get the states to come along.

Mr VAN MANEN: In terms of the discussion around funding high-speed raid, in your earlier comments, you were effectively saying that you create a number of precincts along the corridor with uplift or value-capture in those—a bit like the Burwood model, to take a real life example—that the local governments in those areas set that model up and that the funds they raise through that become their contribution to the cost of building the high-speed rail, which they obviously get an economic benefit from. In some regards, it also allows those precincts to be a little bit competitive with each other, in terms of office to business and attracting business.

Mr Langley : What I would advocate is that the federal government work with the state governments to come up with standards on how these principles would be applied around those precincts. In North America they are called 'model ordinances'. There is a model ordinance that can be adapted to each particular local situation, but it has some basic boundaries and standards that have to be applied in an area. The quantum of value that comes out of something like a high-speed rail station is enormous.

We looked at studies on the increase in value around transport interchanges. One public study looked at 122 examples, around the world, of various types of heavy rail, commuter rail, metro, light rail and bus-rapid transit, BRT. The average increase in land values around transit is 12 per cent, from these studies, but the range is plus-150 per cent to minus-21 per cent. Why does that happen? It goes back to what you said earlier, Chair: it is land-use planning. If you do effective integrated land-use planning around these points of connection you can get closer to the 150 end—and even greater—if the conditions are right and the planning is done properly. If you do not do it properly you can end up losing money.

There need to be some really clear standards and guidelines developed and promulgated, by the states, with the help of the federal government. Then, there could be awards, grants and other types of funding for different types of projects that followed that type of model. You could use this for feasibility studies. You could use it for pilot studies. There could be money that the federal government and the state government would make available to—even the private sector—do some of these preliminary studies, following the guidelines.

CHAIR: In your comment regarding section 94, that contributions should be left alone, the Property Council had concerns over the multitude of taxes on a lot of projects, that the cost—the nickel and diming—stops development from happening. One of the suggestions that has come up, time and again, during our hearings has been that federal funding should come with some strings.

In this area, federal funding might be coming to fund a rail system within a city, and the state is going to initiate it. They are going to pay for it, and the councils will engage with the state. Would it be a better system that while that 94 contribution is considered—it is not charged separately—and recognised that this is what the local council will get from this development, there is a one-stop shop of federal revenues from value capture and capital gains tax that are quarantined and hypothecated, and stamp duties from the state government are quarantined and hypothecated, as are, likewise, any revenues from the local council? The consideration for the need—what normally would have come from a council, out of section 94, or what normally would have come from the state, and, then, it is their cost of building the infrastructure—is simplified, greatly, for the development. Does that make sense, as one of the conditions for federal funding?

Mr Langley : Yes, it does. The only distinction I would make, there, is that section 94 contributions are meant to be local infrastructure contributions. They are based on things like increased demand for parks and roads and all that sort of thing. Those demands are going to be quite different from, in some cases, the impact from high-speed rail, for example, or from a big piece of transport. So, there is some commonality, I think, in the section 94 contribution and a major transport project in terms of making sure that there is no friction between the users of the rail—in that case the rail station—and the station itself. That is a legitimate expense. But I think enough value is created from well-planned transport interchanges to make the contribution that is necessary to unlock that type of project.

Again, I go back to what I said earlier: there are mechanisms that are funding things now that are double dipping. Section 94 is probably one of them. The VPA I have a real problem with, for the reasons Glenn Byres just gave. You put whatever you want in that sort of thing, and if you are dealing with a smart enough lawyer and a weak enough counsel then you can get whatever you want into it, one way or the other. It is a voluntary agreement, and it is negotiated, and that, to me, is a recipe for all sorts of problems. But if you use the current methods and try to contain them for the purposes they were meant for, and then use something like the value capture for a specific program—that might have not just land value but some other things in it as well that legitimately capture the nexus between value uplift and increase in tax revenues and the cost of the project—then I think that would be fine, too.

CHAIR: In regard to high-speed rail, and the Sydney-Melbourne corridor, a few weeks ago when we had a group presenting in Canberra, in that particular month it was the second busiest air corridor in the world. Generally it is somewhere around third in terms of flights and fourth in terms of passengers. And it is the busiest air corridor overland—that is, it could be complemented with high-speed rail. Given that Sydney has the second highest cost of real estate and Melbourne the fourth highest in the world, and that the land between, in this corridor that would be serviced by high-speed rail, surrounding our various townships, is extraordinarily low, doesn't this conspire to create a perfect storm of opportunity for value capture and patronage that would make the Sydney-Melbourne high-speed rail project the most desirable, or the best opportunity for high-speed rail, anywhere in the world?

Mr Langley : I would not want to rank it, because I do not know enough about it, but it certainly would have tremendous uplift in value. I worked on the high-speed rail study and did the value capture study for that, which is a public document that the Department of Infrastructure and Regional Development produced. There is a case study around Sydney's Central station and what would happen to land values there and what the potential capture was—and we were talking billions of dollars over a 20- to 25-year period for that.

Mr VAN MANEN: Is that the table you have in your submission here—in the value capture road map document? You have a table on page 11 of that.

Mr Langley : There should be a reference in the back of it to the report, which was a federal government report, and it is public.

Mr VAN MANEN: Yes, it has a reference to the report.

Mr Langley : That is probably it then. But the benefits there were enormous. Back to your question, Chair: we found in the modelling for the high-speed rail—I believe I am correct, but I would stand to be corrected—about a 50 per cent capture of the air passenger volume by high-speed rail. From recollection, that was enough to cover the operating costs of the project—not the capital costs, but the operating costs. We have seen from our friends from Japan and China that the value uplift around stations, if it is done well, can make a major contribution to the capital cost. There are some out in the public arena that say you can pay for all of it that way. I would be cautious about that. You can certainly make a significant contribution, but it all depends on how effectively you can plan around the corridors and the stations. Certainly a significant contribution has been proven in the Crossrail example. Where I am from, in Denver, Colorado, 36 per cent of a major transport project was funded by this. So we have seen lots of examples around the world where there are significant contributions made to these projects.

CHAIR: How many people live in Denver?

Mr Langley : About 2½ million people.

CHAIR: And in Atlanta?

Mr Langley : Atlanta is about six million, I believe.

CHAIR: So not hugely different to Sydney and Melbourne. With both those projects that you have been involved in, which were in part funded by value capture, is it safe to say they would not have happened without value capture? Value capture played a vital—

Mr Langley : It was a major contributor. I do not know how else they would have come up with the money. We are talking 36 per cent in the case of Union Station in Denver. The project there was around a 16-hectare site, so that was the size of the precinct, and it was all redeveloped in conjunction with the railway. That was light rail, heavy rail and BRT. I do not know how they would have funded it any other way.

CHAIR: Just latching onto that—you do not know how it could have been funded any other way—would it be fair to then say that our non-development of infrastructure in Sydney and Melbourne is because we do not know any other way and we have not explored this way?

Mr Langley : Absolutely. I have been pushing this, as Glenn said, since 2005, when I worked with the Property Council on developing the tax increment financing paper. I wrote the terms for that and was on the committee that ran it. So we—the Property Council, Consult Australia and others—have been pushing for a number of years to open up this funding opportunity.

CHAIR: Which will bring us to a tipping point for any number of infrastructure projects when we add this to the cocktail of funding.

Mr Langley : I think what we have found internationally—and we looked at a lot of cases of high-speed rail overseas, in Europe, Taiwan and Japan, when we did the initial study a couple of years ago—was that it unlocks the potential of projects that would not otherwise pass. The other thing in that same area is that in Australia we have a very conservative approach to these types of projects, whereas in Britain, France and other countries they look at the wider economic benefits of these projects. We look at it here, but we do not take them into consideration when we actually fund projects, and we do not look at things like the gross value add and the more efficient productivity benefits of projects. We certainly do not look at the value capture. So we are missing some of the major components that our competitors overseas are using to keep ahead of technology and economic development.

CHAIR: Thank you very much. Do you have anything else to add? Thank you very much for an invaluable contribution.

Mr Langley : May I leave these with you.

CHAIR: Please do. The secretariat will send you a draft transcript of proceedings so requests can be made to correct any errors of transcription. Thank you again for attending today.

Mr Langley : Thank you.