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Standing Committee on Infrastructure , Transport and Cities
23/06/2020
Options for financing faster rail

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MARINOPOULOS, Mr John, Partner, Value Advisory Partners

MESIC, Mr Nic, Partner, Value Advisory Partners

Evidence was taken via teleconference—

[16:19]

CHAIR: We welcome representatives from Value Advisory Partners appearing for today's hearing. I remind you that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. I now invite you to make an opening statement.

Mr Marinopoulos : Thanks very much, Chair. We appreciate the time to speak to the committee. It has been a long day, no doubt, so we will try to keep these comments short. We begin by acknowledging the traditional owners of the land on which we meet, the Ngunawal and Ngambri people in Canberra and the Wurundjeri people of the Kulin Nation in Melbourne, and we pay our respects to their elders past and present.

This inquiry seeks to clarify an important issue in terms of financing faster rail. Financing plays a critical role. It is financing that locks in the timing benefit of capturing the value created by a project. The financing strategy for a project is essentially a task that facilitates the conversion of future project-specific revenue streams—that is, funding—into capital available today, which is finance, to deliver the faster rail project. We have seen that existing assessment approaches tend to be too narrowly focused in their assessment of project-specific revenue streams, biasing towards social and non-monetisable projects and projects located in high-density major urban centres over smaller regional centres. There has recently been a detailed analysis by the University of Cambridge in the UK of similar experiences within the UK across regional areas and also in the major urban centres, assessing this issue. We have provided a reference that paper in our written submission.

In almost all parts of Australia the current assessment approaches tend to provide only moderately recoverable revenue streams, which have a very high decay rate and a negative impact on investment ratings for the project finance. This is why there has been almost total reliance on government investment and funding. An exception is in Victoria, where a value creation capture framework was adopted in in 2016 and is actively seeking business cases to integrate monetisable benefits alongside traditional social, productivity, connectivity and system-wide benefits.

We believe that approaches are required that deliver revenue streams based on prioritising pecuniary or monetisable benefits. These revenue streams need to have a high expectation of reliability and recovery, which increases the investment grade so that they are much more appealing and ready for attracting investment from capital markets. This requires a broadening of benefits and beneficiaries, as in the case in the Victorian VCC framework, which directly identifies benefits that generate additional revenue streams.

Overall, the optimal financing solution for faster rail needs to provide the best value for money for the project. This assessment will be based upon analysis of the benefit to all beneficiaries; robustness of the financial, technical, operational and resilience risk of the project; and the quality of the underlying revenue streams for financing.

A national approach, applied equally across major urban centres and smaller regional centres, is required. A whole-of-project life cycle perspective is required, starting with the planning process, through to creating value for communities, capturing the value created and then integration with governance models, implementation strategies and the financing requirements and delivery models for faster rail.

We have provided a written submission to the inquiry that supports these views. This includes some international examples of funding and financing. We have multiple examples from Australia that we can share privately. In our written submission, we recommend that the Commonwealth government consider developing, promoting and implementing a national value-capture framework, designed to ensure national consistency and reduce any anomalies between different states and territories; that this framework be piloted alongside traditional cost-benefit and economic impact assessments for the faster rail projects and to ensure the broadest range of benefits is identified and assessed; that fast-rail project appraisals be required to consider alternative funding and financing options that link contributions from beneficiaries to the benefits that would be received from the delivery of the projects; and that the implementation of the fast-rail proposals should be integrated with any land rezonings or land use developments, to optimise the potential opportunities for value capture and minimise value escape.

Thanks for hearing our initial remarks. We would be very pleased to get your thoughts and any views you might have.

CHAIR: Thank you for your submission. It is excellent. And thank you for your opening statement. In discussing the notion of a national framework for value capture, could that have room or capacity to have variations for specific projects—so you have an overall framework but the opportunity of being able to tailor it to particular locations or situations?

Mr Marinopoulos : Absolutely it could. It actually should be tailored to specific situations. The reason is that there are many cases where you might find that, say, faster rail goes through an area like Albury which might be quite well served at the moment by a number of different rail options—maybe not faster rail, but they are rail options—and other areas where there may be no aspects or no connectivity, so they will get higher benefit in those areas. So these need to be very specific. I pointed out the Victorian framework, because we have had a lot to do with that framework. It is actually project specific, it is location specific and it should also be beneficiary specific in terms of who is going to achieve those benefits. Today we were listening to some of the earlier hearings and there was a very good point you made about the type of return that should be made. We are seeing some of those returns in Western Sydney, where there are super returns. This is where we also need to have mechanisms that are specific to the type of uplift, so that they can't just have a super return from those areas. The New South Wales urban renewal framework of 2015 specifically states that there has to be a market assessment of what that uplift should be and that it is agreed. I think that is where you have to make sure that you can get location-specific, beneficiary-specific and mechanism-specific outcomes.

CHAIR: So is it reasonable to commence work on a model that takes into account the quantum of investment of taxpayers' moneys and also the degree of uplift? I've categorised these super uplifts as something more than 10 times—and 10 times your initial investment is quite a nice return, I would imagine, for most people. But, when it gets beyond that, is there a model that could be developed to capture a higher percentage, because it is, in fact, the taxpayer who has entirely funded the uplift through their investment?

Mr Marinopoulos : Yes, there is, and there's been a lot of work done on that within Australia over the last 10 years. There are ways and means in which we can apply caveats onto titles in designated areas, on which we then say that, over and above a certain level of return, there has to be a clawback. But the question is going to be: is it on sale or is it on cash flow? The one thing about the mechanisms that can be used to extract the revenues from here is that they should be relevant to the actual funds flow that occurs. As you said, what if someone has a property for $2 million and they sell for $50 million? If they had a 50 per cent return, they should probably expect in five years to make $12 million on that. So, realistically, for the other $38 million—even though you have to look at capital gains tax, which comes into consolidated revenue—you can then say, 'Okay, that gain would not have occurred without the efforts of government being able to put that rail line in,' and therefore part of that super return should actually go back to fund the particular infrastructure» that we are talking about. We have seen many cases. If you think about the maximal capital gains tax of 50 per cent in this situation, you do have to leave some in the pocket of the individuals. We have a chart in our submission which shows the sort of value created, and value captured is a line underneath that. That line can be looked at by negotiation for those particular areas. So, yes, there are many ways in which you can do that. The key issue is whether it is a funds flow or a stock outcome—'stock' meaning it might be on sale, where 'flow' is usually things like council rates or other captures like that. In this situation, we advocate that they should be on sale and therefore part of that should go back to the actual «infrastructure» that's being developed.

CHAIR: In short, if the investment creates a capital uplift and the accompanying zoning maximises that, then sure enough, the government, on behalf of the taxpayer, should capture a proportionate share of the uplift—is that what you're saying?

Mr Marinopoulos : Yes, that's correct.

Mr TED O'BRIEN: Thanks very much for your presentation. I appreciate the detail in it. Something that I'm interested in, from listening to a lot of the people giving evidence today, is the existing value capture mechanisms that are in place through the three tiers of government. Have you done any modelling to break that down, based on a simple hypothetical—for example, that X amount is paid in stamp duty and X amount in rates, assuming a sale at a certain point of time—to understand which tier of government benefits relative to other tiers of government through the existing mechanisms and also the impact of the time when those benefits come to fruition? Have you done any of that sort of work?

Mr Marinopoulos : Absolutely we have. One of the most critical issues in all of this is, firstly, to break apart what's been created and what can be captured or realised. The reason we say that is that some beneficiaries should not be linked to actually having a capture coming from their particular constituencies. I will give you an example of that. In recent work that we undertook in regional Victoria the question became: what do we do with some of the Aboriginal corporations? If they are beneficiaries, should they be a participant? If you have a blunt instrument, where you aren't able to differentiate what's created and what's captured, then you find that there are a lot of people who are achieving disbenefits, where they're actually having to pay for benefits they might not be achieving, or they might have a previous claim on the benefits that are there.

In regard to looking at things such as consolidated revenue, such as stamp duty, land tax, payroll tax, capital gains tax, council rates and others, which go through the multitiers of different jurisdictions, we have looked at those with the actual beneficiary who is recouping those: who would be paying, the sort of rate card and what they would be, and how that would change over time. Importantly, the issue of time is critical in this situation, because there are many cases in which we find that the mechanisms change over time. When you actually undertake the analyses, one of the problems is that it is usually fixed and there's quite a quick decay of revenue streams. The key here is to be able to look at it and ask: how can we be flexible and how can we ensure there is a highest nexus of where the value is created and a mechanism of how we can capture that value?

The reason we bring that up is that there is a nice table on page 12 of our submission. It's a small extract out of Standard & Poor's, the ratings agency. You can see that one of the critical things has to be the recovery range, which is what the expectation of recovery is and what the reliability of that revenue stream is. The higher the recovery, the higher the reliability, the higher the investment break. You can see on the right where it talks about issue rating. They call it 'notches', which increase. The higher the increase, the closer it gets to the type of AAA credit rating we have in Australia.

So the closer we get to mechanisms that are reliable to the beneficiary and to the benefit they're receiving, and that people can actually understand the benefit they're receiving, that's where we find that there's a maximisation of the type of revenue streams that can be used for finance. The higher the investment rate, the lower the discount rate, the longer that revenue stream can go on for. So it's an excellent question, in that it really shows the bluntness of the instruments that are being used in multiple jurisdictions at the moment, which are essentially a top down approach of a broad levy and a broad assessment of what that is. A good example of that is something like a fire services levy in Victoria, an indiscriminate number that goes across the whole of Victoria but doesn't really affect everybody in terms of those areas. Some are affected more than others.

How do you make sure that you have a much more refined and critical assessment of each of the mechanisms to be able to see exactly who they're attributed for, what they're attributed to, how much is actually attributed to consolidated revenue that treasuries and governments in Australia, state, council and also Commonwealth, have all obtained value from, and how many will then go to support the type of revenue streams that will then support that particular «infrastructure» ? We look at those in terms of what is consolidated revenue and what is revenue attributable to the uplift that should occur.

To be able to support that, if you look at our submission on page 4, you will see a good chart that highlights what that would be. This is from the Victorian value creation capture framework. Realistically, the area we would be looking at in terms of the value capture is the VCC benefits. The important thing about this chart is that they have shown that there are elements that are not part of the current schema of what is currently being put to infrastructure's credit. New «infrastructure» will provide VCC benefits and, therefore, that is the area that's attributable for potential value capture.

Seeing this, by the way, is very important, because it's the first time we have seen in policy in Australia where a government has actually dictated that «infrastructure» provides new value, and new value is where that capture should come from. It goes back to the chair's long-held view—I use the term 'value escape'—this chart is specifically drawn like that for that purpose. If you don't have a framework and mechanisms to be able to recover that revenue, that revenue will escape. Therefore you need to make sure that you cover that off.

Mr TED O'BRIEN: Thank you. This is very valuable. As a follow-up to that, have you run the numbers on either a hypothetical or any actual deal? I'm thinking it would be helpful. I know there are nuances and so many permutations and every deal is different. I get all that, but it would be interesting to take a handful of deals and say: 'In this case, this one was in Victoria. This was transport «infrastructure» . These were the properties surrounding it. Based on the following assumptions, we believe that the federal government captured this dollar amount through capital gains tax from the sales of X, Y and Z, and the state, through stamp duties, received this amount.' Have you taken some of this theoretical material and actually run it through a spreadsheet that pumps out some numbers and shows the proportional gain, using the existing mechanisms, either for hypothetical or real deals?

Mr Marinopoulos : We have. We've done that over about 90 different types of projects. Most of the projects are under confidentiality. A very important component is that we undertake work prior to it becoming public. The reason we do that is that it does exactly what we were talking about earlier, which is that it allows government to put mechanisms in place to ensure we don't lose the value over that period of time by announcing where things would occur. You can see that with things like Western Sydney Aerotropolis at the moment and the Western Sydney Airport. The land value has been escalating two, three or four times over because there have been announcements of where train lines will go, announcements of where airports will go and announcements of where major «infrastructure» and jobs will be going. Therefore the revenues escalate, quite often because you see what we call proposed, planned and delivered escalations in terms of value. You have to understand and be able to manage those steps. We have certain projects. Currently we have web based deliverables where you can actually see the mechanism and understand what there will be in certain areas and exactly what the uplift will be, from consolidated and by jurisdiction, and also what the actual revenues would be in terms of what you can add to the project, by different levels. We can share those, probably not in a public setting but more in a private setting, if possible.

Mr TED O'BRIEN: That would be terrific. Respecting your need for commercial confidentiality, and you obviously don't want any leak of your own IP about how you do these things, but it would be nice to have some general rules of thumb of how the existing value-capture mechanisms work and how much is captured by the three tiers of government, even though it would be within a band and with a bunch of various assumptions around it. A lot of our conversations are at almost theoretical level. It would be nice to be able to say: based on X numbers of deals, your advice is that somewhere between X and Y per cent is usually captured and, within that band, the councils usually capture this, as do the states and the feds, over this sort of time horizon. That allows us to start understanding how the current mechanisms work and then take into account the importance of time. That would be great—whatever you can provide.

Mr Marinopoulos : Absolutely. As I said, if it's possible next week, we'll be able to potentially have a more private meeting where we can share some log-in instructions, look at some of these things directly and ascertain what they would be. We can then share that discussion together and see the particular mechanisms, the uplift and the types of outcomes that we are looking at there.

Mr TED O'BRIEN: That would be great; thank you. Thank you, Chair.

CHAIR: I am concerned that there was an announcement a week or so ago to bring forward an investment of $11.5 billion in a metro rail system from the Badgerys Creek airport to St Marys, with seven stations. Those lucky landowners had an uplift when the airport was announced, they had another uplift when there was a rezoning, and now, where they have land near the stations and there's consequent rezoning for greater density, they will get the trifecta on the back of taxpayers' investment and rezoning. Is there any way that we could somehow put in some measures to capture these most extraordinary uplifts that will be in the range of 200 times plus? Is there any way of doing that or has the horse bolted?

Mr Marinopoulos : In some of these situations, the horse has bolted. If people have been making transactions post announcements, then the question becomes: how much of the knowledge of what will actually occur in those areas came from circulation compared to how much came from the announcements of where stations would potentially be or where potential alignments would be? This is the reason why I said that a lot of the time we do work it is confidential. It is to be able to put those mechanisms in place before announcement. That way, there are no implications of stations in certain areas. Suburban Rail Loop in Melbourne is a good example of announcing where stations would be and then seeing change in value occurring in certain areas. Government said, 'We're going to put it into these areas,' and most of the people essentially put a dot roughly where they thought the station would be. That can have a significant effect in terms of uplift. We saw that straightaway. People start speculating and buying properties. They build apartments and «infrastructure» through there and see what the outcomes can be. We have to be careful about announcements being made too early, because, without the appropriate mechanisms in place, they can actually diminish the ability of governments and other groups to recover the revenues and make sure they recover the outcomes. We have other ones. It's not just faster rail. We're currently doing a lot of work with CSIRO on resilient «infrastructure» for national disaster risk. In that specific area, you've actually seen that the impact of being able to undertake that provides greater certainty for people within certain communities, such as rural areas and other areas. That's an important component, but we have to make sure that those revenues can be recovered. Some have got to stay with the actual beneficiaries and some will come back in terms of the type of realisation that's going to occur as well. But, yes, sometimes the horse has bolted, as you say: $11.5 billion, and there's a station going from St Marys to the airport. I think a lot of people could actually go back and draw a line. There are pretty easy rules of thumb: draw a straight line, don't cross any roads—they'll put a bridge over them—try and make sure there's two kilometres between each station, and you'll know where most of your stations are going to be. So that's why the horse has bolted there.

CHAIR: This is another very costly lesson in value escape. So, if the horse has bolted here, should we seek to have a moratorium on all announcements of «infrastructure» and rezoning until we develop a value-capture mechanism to stop this value escape and stop the waste of our taxpayers' investment through them not getting a fair return for their precious dollars?

Mr Marinopoulos : I think what we've got to do is think of this over a three- to four-year period. Essentially, we can start building ways in which you can look at each of the types of mechanisms that can be put in place to then start recovering. To be able to now say, 'We're going to put the legislation in place,' or, 'We're going to put a moratorium in place'—it may take a year or two years. You don't want to withhold all «infrastructure» announcements before then. I think what happens is that there's a graduated level of escape that has to be diminished over time to make sure this national framework is in place to go and recover.

This is also with things like city deals at the moment. The department of «infrastructure» and many other names—

CHAIR: Yes, that's right.

Mr Marinopoulos : Yes. That's a good example, in that with the city deals that are occurring in places like Western Sydney, Adelaide and other places, which are quite significant, they make the announcements in terms of the type of «infrastructure» and they have significant uplift occurring. Prior to those announcements, they would have been in it from the start and then been able to make sure the appropriate mechanisms were in place. As part of the City Deals framework there's a nice little graphic of five wheels—the details are in our submission as well; it's on the bottom of page 10—that is directly out of the Department of the Prime Minister and Cabinet, which actually says 'innovative financing and value capture'. So there is an imprimatur to make sure that there is a moratorium on those city deals now, as a first stage, to see how that works. That could be a good test, because they are quite significant in terms of the expenditure: half a billion dollars in South Australia and $200 million in Geelong in Victoria. We know there are many others that they are looking at putting in place as well. With those city deals, I think, it would be worthwhile to make sure they have actually put the positions in place to look at where the uplift will occur and what the benefit will be.

As to things like faster rail through the whole of Australia, given the fact that a lot of these routes have not been finalised it would be good to start looking at how they could be put in place, even in a small sense to begin with and then seeing how they can start increasing to enable even more faster rail projects to occur. So it would be seeing how it could be built on a scaled basis over the next three years or so.

Mr Mesic : Could I add a comment? Chair, I think your comment around the mechanisms and timing is a critical one. It may well be that the mechanisms presently exist but the way we go about planning and designing our «infrastructure» projects and investigating opportunities for alternative funding occurs too late in the process, whereby decision-makers and proponents don't have the information at hand in a timely way while projects are in their conceptualisation and design phase.

We have an approach that talks about planning for value before you talk about capturing it, whereas historically a lot of value capture has tended to focus on cost recovery as part of the business case processes. But by the time you've got to a business case you've largely designed your locked-in projects and the market has already been signalled as to the likely location and, in the case of transport, alignments and routes. We advocate a more integrated approach to value and benefits notification, which allows you, in an early round, to understand where value is occurring and how proponents can plan to maximise value. Knowing what mechanisms and beneficiaries are involved at that point allows government and other stakeholders to get ahead of the curve and take action as part of the planning process, rather than in the post-business-case process, where your ability to make change and take action is very limited. Would you agree with that, John?

Mr Marinopoulos : Yes, absolutely.

CHAIR: And hence my question: should there be a moratorium, until we put our plan of value capture in place, to stop any further value escape from projects that we're getting ready to announce? A second thought: if we've announced this project but maybe we haven't announced, or finalised, the zoning around these proposed stations, could we withhold that zoning until we come to terms with the landowners and at least get a healthy developer contribution that might be based, somewhat, on the uplift of the land that they have gained as a result of the «infrastructure and, now, the attachment of planning?

Mr Marinopoulos : I'll come to the issue of moratoriums in a second. The first issue, in terms of time, is really important. That was a question earlier on: can the actual mechanisms change over time to make sure that they're achieving the maximum amount of uplift that we can look at? They can, and that's a very important component.

In regard to a moratorium, we can't influence the political decisions of the day, but what we would say is that it would be important to start thinking about how certain areas—something like the city deals, as I was highlighting—need to have these things in place before they start or, we think, before they're announced. That would be a very important component. How would that go with larger scale rail projects? Let's say—for argument's sake and in a truly hypothetical sense only today—a high-speed rail line connecting Melbourne, Sydney and Brisbane. If that were on the cards today and there were work being done on that within the government, I would strongly argue that there should be a moratorium before any of that is announced, to be able to make sure that all the different mechanisms were in place way before that, because otherwise the escape would be substantial. I think that we can look at a step change over the next three years as these policies are in place, similar to what happened in Victoria. Now every project must have a value creation capture framework. It needs to be in place, it needs to start looking at things at the planning stage, and it has to be implemented as part of the project. One of the key things in this case is that we have to look at how much value is being created to know what really has escaped. That goes back to what Nic was saying: that when we're putting the mechanisms in place we need to make sure there is a clear understanding of what the maximal amount of value that could be achieved through these projects is.

CHAIR: Thank you both so much for your submission and your evidence today. It was powerful and very informative. I know you have both worked very hard in this area with a fair measure of success. Thank you for appearing before the committee today. The committee secretariat will be in touch with you in relation to any matters arising out of today's hearing. You will be sent a copy of the transcript of your evidence to which you can make corrections of grammar and fact.

Committee adjourned at 16:54