Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Standing Committee on Infrastructure, Transport and Cities
28/10/2016
Role of transport connectivity in stimulating development and economic activity

GRANT, Mr Jay, Head of Business Strategy, Newhaven Wealth

[12:12]

CHAIR: I now welcome a representative from Newhaven Wealth. Although the committee does not require you to give evidence under oath, I advise you that this hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I now invite you to make a brief opening statement, before we proceed to discussion.

Mr Grant : Because we have 10 minutes until lunch, I will try to keep this brief. I have given you a declaration pack, which I will have you read along with me if you do not mind. Thank you for having me here today. A bit of background on our firm: we are a boutique wealth management and private investment firm out of Melbourne, and it is good to see Mr Giles here for Victoria. We are here today to share with you what we learnt from our experience of being of a seed funder of Consolidated Land and Rail Australia, who I believe you heard from earlier this morning. We provided start-up capital for that venture and have since exited the business through a buyout, but we learnt a great deal, and we just came to share our lessons with you, and hope that assists you in the deliberations on the broader policy issues affecting transport connectivity and the financing of major infrastructure projects in this country, and, of course, land value capture and how it fits into that. This presentation is broken down into transport, value capture and then finance, and we are going to talk around a number of issues. If you need to ask a question at any time, please interrupt me and we will stop. That will probably make things quicker than me just rattling on. I thought we would start with a quote from an Australian prime minister:

Whatever benefits employees may secure through negotiation or arbitration will be immediately eroded by the costs of living in their cities …

Increasingly, a citizen's real standard of living … [is] determined not by his income, not by the hours he works, but by where he lives.

…   …   …

While land prices vary from city to city, and State to State, the leap in land prices in Sydney is an indication of what will happen in every Australian city if the national government fails to act. Spiralling land costs are depriving many young people of any opportunity to acquire their own home.

…   …   …

We shall co-operate with the States, local government and semi-government authorities in a major effort to reduce land and housing costs …

…   …   …

After land and housing, there is a third basic element of the city—its transport. Australia must overcome the tyranny of the motor car, or face the destruction of its major cities as decent centres of our culture, our community, our civilisation. The national government must now accept a share of responsibility for the public transport systems of Australian cities.

My question to the committee is: which Prime Minister said this and when?

Mr GILES: It was Gough, in about 1969.

Mr Grant : Very good, Mr Giles. It was Whitlam and it was in 1972. This is an extract from the 'Men and women of Australia' speech. The reason I raised it was to say that that speech was made 44 years ago. If the current Prime Minister were to speak along these lines tomorrow, I do not feel that his comments would be out of place. I am sure you agree. So for 44 years we have been tackling these problems. Firstly I say to the committee that five decades of successive parliaments have yet to solve this, so I do not want you to be too hard on yourselves. Give yourselves a break as you go through your policy work—but not too much of a break, because the window of opportunity to thoroughly and thoughtfully address these issues is now open. I think there is a great obligation on this parliament and the next parliament to start putting in place the building blocks to address these issues. I think we would all agree that 44 years is long enough for the nation to be waiting for answers to these issues.

I will move right along, to transport connectivity and the economy. The inquiry into the effect of transport connectivity on stimulating economic growth I think is a really important one. There is a good body of work on this. Page 5 demonstrates a long-run impact report was done by SGS Economics and Planning in Melbourne. This was commissioned by the Victorian department of transport. The report is from 2012, but it was only made public in 2014. SGS assessed the long-run economic impacts of the Western Ring Road, the CityLink project and the Melbourne City Loop, and also they looked at Box Hill as an activity centre.

The two that I have highlighted here are quite significant, because they show that when we get transportation right—and in this case it is two roads, but you can extrapolate this out to rail as well—it can have significant impacts on gross value add within an economy, on jobs and also on land prices. There has been a proven nexus through history showing that these impacts can be made. We can see the effect of just the CityLink and the Western Ring Road. The suburbs highlighted in the red box are where growth in jobs, land value and population really took place. For CityLink, the great benefits were in the inner eastern suburbs of Prahran and Hawthorn and Southbank in the city. The Western Ring Road obviously affected the areas of Whittlesea, Moonee Valley and Craigieburn the most. So there is a good body of work here the committee can tap into as to what drives the economy.

Let's turn to page 6 and what transport connectivity has done to our cities—and this is very Melbourne centric. You will forgive me, as a proud Victorian. The agglomeration, as economists call it, is the impact of our cities becoming more centric. Another great term for agglomeration, and I think a simpler one, is 'clustering'. Our cities have continued to cluster. What the break-out map on the right-hand side shows is the effective job density of Melbourne. That is the percentage of jobs that can be reached by car in 45 minutes. As you can see, the really dark red centre is where the jobs are, in the inner east. People living outside of that area have access to fewer and fewer jobs.

That is causing a split into a two-tier city. What it is also doing is driving, or continuing to drive, high-value knowledge and service based jobs into the centre of the city. You can see on the large map on page 6 the economic activity per working hour for each of these various statistical areas. Obviously Docklands is the highest, at $103, and somewhere like Dandenong, which used to be a great manufacturing hub in Melbourne, is now only at $44.

So the question that we ask ourselves when we are deliberating on these broader points for Australia is: why is this agglomeration or clustering taking place? This is despite set policies from the Victorian government trying to stop this from happening. You have to understand that the Victorian government had the Melbourne 2030 plan and the Melbourne @ 5 million plan and now has the Melbourne plan refresh that it is doing—Plan Melbourne, I should say. These plans stipulated that we would look to move activity centres and job centres out into the suburbs, like Box Hill, which is an activity centre, Coburg and other areas around Melbourne to disperse this agglomeration effect. It has not happened, so we can say that agglomeration is set, occurring, not slowing down and a trend that we need to work with. The real question is: is it a trend that can be repeated? That has been a large amount of the research that we have done.

On page 7 you will see that this clustering of wealth in the centre of the city has affected home ownership. I know, Mr Chairman, that that is another committee you have done a great lot of work on, and we do hope that that gets to continue over time in the parliament. But this chart really stuck out to me. On the left-hand side you have the dark areas that are areas where homes could be afforded by low- to moderate-income earners in 1981 and then, on the right-hand side, we have the same result for 2006. You can see there that all the home ownership—all the affordability—is pushing out to the fringes and that that high-value centre of the city is taking prominence. This is just as true in Sydney and it is just as true in Brisbane. The statistics here are for Melbourne, but it is happening in all of our capital cities and it is happening around the world. The problem with it is we are designing our cities to be highly unproductive—it is undermining productivity. To give you a statistic from a report called Stranded: youth and spatial disadvantage in Melbourne which SGS Economics and Planning did just this year, in 2031 over 40 per cent of youth—that is under 30s—will have access to only 10 per cent of the job market because of where they live. That is a problem that needs to be solved, and we believe that transport is the circuit-breaker.

Let's look at value capture and the role value capture has to play. What is 'value capture'? If you had 100 witnesses here, you would get 100 different answers. We believe value capture has three distinct criterion that have to be met, otherwise it is not value capture—we are on page 9 now. No. 1: it is infrastructure—it could be a road, it could be a rail or it could be a hospital—that increases the value in the surrounding area. No. 2: it is the capturing of the uplift from base values, so it is what happens from the base value of that land via tax levy charges or even profit. No. 3: you must hypothecate that captured value to finance the infrastructure cost. All of those boxes need to be ticked to have a true land value capture regime. Over the page we have a chart on page 10 which is from our friends at AECOM and it shows, typically, how value capture works in a rate-paying scenario. At box 1 you have the provision of infrastructure and at box 2 you see the uplift in incremental income that goes to a government authority—let's call it council rates—off the back of that increase in land values and, connecting back to No. 3, levying those higher rates above what existed before the infrastructure and using those to parlay into the funding of the infrastructure. So land value capture can play a role in funding infrastructure moving forward,=,

I just want to make one distinction here: there is a difference between the funding of infrastructure and financing of infrastructure. The funding of infrastructure is done by the community 100 per cent of the time either via user charges, such as a tollway or buying tickets, or by having taxpayers' money flowing into it. The financing of infrastructure is done in very many ways. In Australia it is mainly done via public-private partnerships where the government kicks in some money, the rest is provided by banks or super funds and then it is financed out in capital markets, which I will get to. We believe value capture can be a third leg on the funding stool, and we believe it can open up some interesting finance opportunities as well. What causes land value uplift? Again, the chart on page 11 tells us that the rezoning of land is one of the single greatest contributors to land value changing. It is a bit of a misnomer, really—it is pretty obvious. You can have all the infrastructure you like—you can have everything—but the greatest uplift occurs when there is a rezoning, which obviously comes down to state and local government. But we believe there is a role the federal government can assist in, which I will move to shortly.

Over to page 12 we believe the notion of regional development via land value capture offers a very interesting opportunity for discussion. On page 12—this is Victorian land prices—you can see the major difference between residential and rural land. If we can provide, through mass transit that is perhaps rapid, a fast train or one of the other technologies that you have heard about today, we can compress the time and space between rural and residential, between a city outside of a tier 1 city and the CBD of a tier 1 city where we have seen that a majority of the economic activity is taking place. In doing so we can arbitrage or leverage from this difference in the land values. That is the uplift that really you can capture.

The example I will give you here—and you should know this area pretty well, Mr Giles—is an area called Rockbank, in the west of Melbourne. This example, over pages 13 and 14, is a real example. This is a true subdivision site, and it is based on sworn valuations from market valuers. This area is interesting, because it has only just been released. It is outside of Caroline Springs. It is the next suburb along, to the west of Melbourne. It has just been released by the state government through a series of Precinct Structure Plans, which are the master plans. It is 32 kilometres from the CBD. Outside of peak hour it is still half an hour into the city and in peak hour probably double that. There is no rail connection. There is no public transport. And we are talking about a 12.6 hectare lot that will yield around 180 dwellings. Now, what is the journey of this land value?

Over on page 14 we see that this property was purchased in 1999 for $315,000, so its base value or its origin value is $1,750 per lot. As it moves through the announcement of the Precinct Structure Plan in 2011, the completion of the Precinct Structure Plan in 2014, the value—and this is before it touched the ground—raises from $1,750 per lot up to $31,500 per lot. That is typically where the developer will buy the land from the farmer. That origin value capture, as I have termed it—that is my term; it is not technical—is captured only through the stamp duty on the turnover of the sale, through the GAIC in Victoria and also through capital gains tax federally. But it does not capture the whole amount of the value that is available to you to provide things such as infrastructure and services. The developer then goes on and does civil works and the end value of these lots came out at around $220,000 per lot.

So, if we back out at around $80,000 per lot for the civil works, we had a total profit, if this remained in the one entity's control, from start to finish, from farm to housing lot, of around $140,000 in this example—the profit available in each housing lot. Our contention is that if you do this on a large enough scale there is around $30,000 to $50,000 per lot that can be hypothecated towards major infrastructure, be it rail or other transport systems. This is the system that we would use. This is half an hour outside of Melbourne. If you are going out even further, this could provide a very good funding and financing opportunity for the development of connectivity through major transport infrastructure. As we can see there, the uplift is 7,900 per cent. They are ridiculously high numbers. But, as I said, this is a real case, if the land is controlled from beginning to end.

Over the page, on page 16: we believe this then opens up an opportunity for our second-tier cities. As you can see on the chart there, the average second-tier city value between 1992 and 2004 grew from around $100,000 a home to just under $400,000 a home, or just over, by the end. And when I say 'second-tier cities', we are talking about Newcastle, Townsville, Wollongong, Cairns, Geelong, the Gold Coast, the Sunshine Coast, Toowoomba, Launceston and Albury-Wodonga. I note for the record that Albury-Wodonga, which is on the high-speed rail corridor set by the 2013 study, has the cheapest home prices of the second-tier cities in Australia. The three that really jumped, though—and this is the interesting point—are the Gold Coast, the Sunshine Coast and Wollongong. The question is, why? Some research done by the OECD says that a city is being redefined as what they call a 'functional urban area'. That takes into account the whole catchment for a city, where people can access the jobs market. We would contend that Wollongong has grown so much because of its connectivity back to Sydney. Wingecarribee and Wollongong shires send about 15 per cent of their workforce back into Sydney every day. That is the commute rate. Also the Sunshine Coast and the Gold Coast are taken into that functional area of Brisbane. That is why we have seen the jump in their prices.

The interesting point the OECD study gave us is that (1) agglomeration can be duplicated in areas outside of tier 1 cities and (2) it enhances the productivity of tier 1 cities to have close connectivity with another major populace. An example they gave was London. London has some other cities close by that feed into and enhance the productivity of London—places like Bracknell, Guildford and High Wycombe, amongst others, where there are these supercommuters interplaying. So, agglomeration actually works between cities as well as within cities. This is very good news for Australia, because it opens up the conversation around regional development and decentralisation—as I know you are a very big supporter of, Chair—and we can open up second-tier cities in Queensland, New South Wales and Victoria particularly and allow those cities to exist in pretty peaceful economic harmony with the tier 1 cities. It does not have to be an all or nothing approach.

Moving along to the actual financing of infrastructure—and this is the final stanza of my presentation—the federal government can do things right now that will enhance the types of projects that you are hearing about over the course of these hearings and hitherto. What the federal government can do immediately is look at tax regimes and superannuation and also its participation as a financial contributor to major projects. They are the three things you can do straightaway. Everything else that you would be looking to do around land value capture and transport infrastructure will involve a level of cohesion with the state governments and so will obviously have its own trials and tribulations. But right now the government can get involved in these issues.

As page 18 shows us, 58 per cent of infrastructure investment in this country comes from superannuation funds. Superannuation is a bit of a contentious issue around infrastructure, because the highest contribution of any Australian fund at the moment, as you can see, is AustralianSuper, with nine per cent of its funds under management devoted to infrastructure. I break out there the example of the Canadians. The top 10 Canadian pension funds have average allocations of 32 per cent to infrastructure. Another thing the Canadians do really well is own, operate and manage their infrastructure assets within their pension funds. The question is, why? The reason is not that there is anything wrong with Australian super funds or the managers of Australian super funds; the issue is the way that Australian super funds are structured. We run what we call defined contribution funds; they run defined benefit funds.

So, their pension funds are looking for long-term investments to help them meet their long-term pension liabilities. Members of parliament had defined benefit schemes up until a few years ago. State members and public servants still have them. They are well known. Our funds are mainly accumulation funds. The issue with our funds being accumulation funds is twofold. One, we have allowed since 2007 retirees to grab their super tax-free as a lump sum, pay off the house, go on a holiday and then line up at the pension office. Two, we have put super in a position where, via portability—which is a good thing, and the My Choice program was a good thing, but the problem with My Choice is that it raised the spectre of super funds having minimum liquidity provisions so that they could allow the money to move around the sector and around the industries more efficiently—that liquidity provision has minimised the amount of long-term capital that our super funds could put to work.

So the issue becomes this: super funds look to take over brownfield sites that are mature infrastructure, and they are happy to buy those. We just saw a number of groups, including the Future Fund, take over the port of Melbourne on a 50-year lease, with good income coming in, which matches their liabilities, and it works. The problem is, as we see on page 19, that the greenfield infrastructure investment is much, much lower. It is less than half what it is in brownfield infrastructure investment. The issue with that is that if no-one is putting in the early money then these greenfields projects do not move ahead, and they move ahead only where the government puts in the money.

If you look on the left-hand side of page 19, that is the funding gap chart that was put together for the East West Link in Melbourne, which was a new toll road. As you can see there, the state government had to throw in a large amount of money—it was going to be up to $5 billion, I believe—to cover the funding gap, because given the length of the concession on the road and the way that the deal had been financed there was never going to be enough money from tolling drivers on that road to recover the capital costs of building the road. That is the high-risk early money that governments have always put into these projects, and that is why PPPs in Australia have worked and been the norm, as opposed to other places in the world. We do not have access to the pools of capital that they have in North America and in Europe. This is something we can change, and it is something that the federal government has purview over. It is important to consider.

Page 20 basically talks about the cost of money. What can we do to make greenfield infrastructure more palatable for capital markets? As we see there on page 20, there is a great spread between risky products which are rated BBB and below—that is where greenfield infrastructure starts—and A, AA and AAA rated corporate bonds. The cost of the finance can be the difference between the viability or not of a project. More importantly, it can also dictate where money is brought into a project from, and on what terms. The one thing the federal government should look at, I believe, is credit enhancement. Credit enhancement is a method whereby a company attempts to improve its debt or credit worthiness. With a credit enhancement, the lender is provided with reassurance that the borrower will honour the obligation through additional collateral. I am assuming you all have kids. One day, your kids will all want to buy a house and they will say, 'Mum and dad, help me out.' You will go along to the bank with your kid and you will say, 'Right, to help them buy this house we'll put our house up as equity.' Or you will say, 'He or she does not have an income that supports the loan repayments,' so we will step in as a servicing guarantor. That is a credit enhancement you are providing for your child to buy that house. It is the same thing.

Credit enhancement is provided around the world in different ways. The US have a system called TIFIA and in Europe they have a system called the Project Bond Credit Enhancement fund, which provides money. Looking at page 22, the benefit of credit enhancement, and the Australian government looking at credit enhancement to assist major projects, is that it will give projects access to a greater variety of funding markets and to deeper funding markets. On the left hand side of the chart on page 22, you can see that the Australian medium term note market is under $2 billion in size. It is not a deep enough market to fund all of the projects that we have on. In fact, just this week Plenary Group floated $450 million of paper. It was a 24-year bond attached to the Victorian Comprehensive Cancer Centre. All of that script was filled overseas—it was all done in North America. So the appetite for long-term funding—more than seven years worth—in Australia is very, very low. That has an impact on where these projects can get money and the term for which they can get money.

An insurance company can provide a credit enhancement via insurance—I will look to borrow money from the market, and they will stand beside me and say, 'Right, if he defaults I will step in and pay you.' That can get a rating on a greenfield bond up from BBB to AA, which the market will then take. That provides me, as the borrower, with cheaper money and it provides me with a longer term tenor, particularly if I am going overseas. That is a product that is known as wrapping. It is called bond wrapping. Unfortunately, the market for bond wrapping fell through in Australia in 2007, just before the global financial crisis really bit, because the insurance companies that were providing the wrapping services were hit by their exposure to all the credit default swaps in the GFC housing market, and they all lost their ratings. As their ratings fell the wrapping industry fell away, but it has since returned. Assured Guaranty are now the sole survivor in Australia, but bond wrapping has re-emerged in North America and Europe in a big way. It is something we need to look at here in this country.

There is a reason we need to look at it. If you look at page 23 of the chart, the right-hand side shows the availability of public-private partnership debt from 2000 to 2013. What you see from 2009 onwards, since the GFC hit, is that the major funding for infrastructure projects and PPP projects has come through short-term bank finance. That may not sound like a big issue, but here is why it is: between 2014 and 2018 there will be $8 billion of debt to be refinanced in infrastructure. When you take a 30-year loan for an infrastructure project—and most of these are 20 to 30 year projects, be it a power station, a rail line or a desalination plant—you can lock in on a 30-year debt piece your interest repayments for that period of time. You have complete certainty about what your cash flows need to be to meet your finance obligations. When you are refinancing every five, seven or 10 years you are obviously onboarding a great deal of risk into your project. Whilst the project looks great up-front for the first 10 years, you then have to go back to market. What you are really doing is betting against interest rates going up. I would say, in this day and age, in the current economic environment with interest rates the lowest they have been in history you would be a fairly brave man to suggest that you are not going to be facing high interest rates at some point in the future.

Over 30 years, will rates go back up? The answer is going to be 'yes'. You might be writing debt on a greenfield site at the moment at threes and fours and then, in 10 years time, they are back up to sixes. And 10 years after that, if we are rocking and rolling again, you could be in double figures. This is the risk that gets onboarded into these projects. Credit enhancement, allowing for access to longer term debt, starts to de-risk these projects over the long term. That is significantly important. Another major factor into that is that the government has been floating longer term bonds. These are really important for the market as well because they set the pricing benchmark of which these other bonds are priced. So it is extremely important.

Lastly, on how these work, I will just touch on Europe. I think this is a really great example. I think it is something that the Australian government should look at doing. I will say, by the way, nothing I am saying here today in terms of recommendations is new. This is all old hat. It has been around a long time. Infrastructure Australia did a report back in 2014 on the debt capital markets and infrastructure finance. A lot of this information is also raised in the Productivity Commission infrastructure report and the various submissions that were made to it. So all of this is a matter of public record; it is just a matter now of making the decisions.

In looking at the Europeans—on pages 24 and 25—there are two ways that they participate in these programs. When I hear politicians saying that we need to be smarter with our money, I think infrastructure offers a very clear way to do that. You can as a government participate with a very small amount of money that can make a huge difference to the financing of major infrastructure programs. One of them is a funded mechanism which is taking what we call subordinated debt, or the first-loss position in a project. That may only be for 10 to 20 per cent of the total project cost. With that sitting in there, that alone can help de-risk the project sufficiently that capital markets can then participate.

The second way that it can be done is unfunded, which is the provision of a guarantee of money that the federal government provides to a particular project. That serves the same purpose. You do not have to front up with the money, but it says, 'If there is trouble, we will guarantee that first-loss position.' Again, it is to a maximum of 20 per cent. So you do not have to guarantee the whole project. You do not have to fund the whole project. By having that insertion of smart capital in the right place in the capital stack, you can de-risk the project and allow the project to get cheaper finance from the private markets and longer-term finance from the private markets. That could be the difference between the viability of a number of greenfield projects that are currently under consideration. So that is something that can be done today. The EIB example is a very, very good one, and one that I encourage you to have a look at.

In America they provide a similar scheme—mainly for roads. They provide direct loans of up to 35 years. Again, look at the term of the loans. They cover 49 per cent of the cost. They also provide loan guarantees and also standby lines of credit. So they are, basically, like mum and dad going down with your son and daughter to say to the bank, 'Look, you can trust us. Let's get them into a house. We'll be here to look after them if things go south.' The government can play the same role. But, again, its exposure could be much, much less than being the full and final funder of these projects. The American system is running about $1 billion a year through the TIFIA. It is playing an important role in the American highway system, amongst other things.

In conclusion—I am trying to wrap all of this together; I know it is a fairly ranging topic—agglomeration is real and it is happening. The costs of the trends are high. Lost productivity, housing affordability, poorer health outcomes and a decline in material living standards—those are the costs of our cities continually dealing with urban sprawl and congestion. Transport connectivity can provide economic development on a large scale for cities and regions. Funding of all infrastructure, as I said, is by the community. Land value capture is now a way that we can provide a third leg on the funding stool. So getting property into the equation, controlling that uplift and capturing that value is very, very important. Whether that is by major projects taking on value capture as a property play around transport hubs, whether it is state governments or local governments levying uplift in value, whether it is the Commonwealth government having a special provision on capital gains tax for certain zones, I will leave this to you to consider. But they are all options that are on the table.

What the government can do right now is obviously direct injection of capital or land in return for project equity—that is an option. There is also credit enhancement by way of subdebt, which we spoke about, or loan guarantee. For transport infrastructure, federal governments can look to joint ventures with the states in carrying the patronage risk. The patronage risk is the major risk that stops major transport infrastructure moving forward. Are the people going to ride it? Are they going to pay for their tickets? Who is going to cover the cost if they do not? The government can mandate value capture schemes for appropriate projects where federal grants are paid. This can be done. This can be a discussion with the states to say: show us your value capture opportunities around us granting you money for this particular piece of infrastructure. Another option is accelerate the tax loss incentive scheme to allow year-on-year tax rebates to projects during ramp-up. At the moment, if you are running an infrastructure project, as we saw with the East West Link example, a lot of money gets spent upfront. At the moment, you can run a tax loss and add to it a percentage at the 10-year government bond rate, if IA sign off on it. What we are saying is: why not look at offering some of those tax losses back to companies as rebates to help them with their cash flow, because their early cash flow can be quite lumpy and they could smooth that out a little bit.

There are superannuation measures. If you want to get super into the game, some of the measures you can look at are how to encourage allocated pensions and retirement income streams within superannuation that start to align superannuation fund liabilities with long-term project bonds. This is one thing that can be done. The other thing that can be done is that the government, in supporting My Choice, can provide a liquidity backstop for superannuation funds to encourage them to invest in longer term infrastructure assets, without having to worry about having money to turn over and roll over funds of members when they exit the fund. This issue on super is only going to get more compounded due to the ageing of the population and due to more retirees entering the pension phase. If we want a system that has capital adequacy and allows for a replacement rate of income, we have really got to look at the pre-2007 scenario when we had reasonable benefit limits: if you took your money out as a pension, you got a tax-free income; whereas, if you took out a lump sum, you were taxed at various rates. I understand why the government took that off in 2007, but there are now ramifications from that decision that affect these types of issues in how funds can manage their money and invest.

Tax preferred status on long-dated bonds has been around a long time. I believe TNT asked for this when they put up the Very Fast Train proposal in 1989, but, again, I think it is something that can be done once the budget is back on a proper footing or, even beforehand, if the government so chooses to use some tax deferment for these investment vehicles to allow for investment in parts the economy that will provide increased and productive capacity. I think there is a growth story there that would be a great pay-off for the deferment of taxes. Lastly, is assistance with the streamlining of state and Commonwealth environmental protection and planning processes.

That is the suite. It is a comprehensive agenda. I think it is one that both the government and the opposition as well as stakeholders have a stake in. I think it is one that has the ability, as you put your report together, to really lay a burning platform for this country to start reforms in a number of areas to increase our productive capacity. The country cannot continue to rely on our terms of trade to get us out of trouble every time there are shock waves around the world in the global economy. We need to start looking inwards at what we are doing inside Australia to generate economic growth internally. This is a puzzle that I believe, once put together, has a 50 to 60 year prosperity dividend for the country. Thank you for your time.

CHAIR: Thank you so much, Jay, for your contribution. Andrew, you have to leave so would you like to kick off the questions?

Mr GILES: I think it has been a terrific presentation. It is one that I will certainly have regard to in making a contribution to our deliberations. I am not sure, chair, if we are going to have any time for questions if we are going to keep the hearing going.

CHAIR: I thought it was next Tuesday and we were off to the races. That was a brilliant presentation.

Mr Grant : My details are there, so contact me if you have any further follow-up questions. I would be happy to provide you with the information.

CHAIR: One of the things that we have established and, in some ways, is what you have put here, and that is: if we are going to look at value capture, we need to attach infrastructure with land use, which too often has been separated. To do that, we have to align the three levels of government and have them work together as foundation building blocks to effect these more sophisticated strategies. It really is a valuable document. I am very pleased to have it as our evidence.

In taking this work into consideration and looking historically at our lack of planning of infrastructure and settlement we seem to be at a crossroad, would you agree? If we choose not to do anything then we will be on a track of constricting growth, productivity, and competitiveness because we will be limited by our major cities. Therefore it is timely and maybe opportunistic in that what we might see as unfortunate in the very high cost of housing in Sydney and Melbourne actually provides a perfect storm of opportunity with relative low cost.

Mr Grant : I love the Whitlam quote. Love him or hate him, the quote is great. I took it out because it gave away the timing of the quote at the start. It said:

Sydney land prices are spiralling out of control, housing is costing between $22,000 and $30,000 a lot.

I giggled when I read that because now you look at the million-dollar housing in Sydney. We know for a fact these issues only get worse if they are left alone. We know what history teaches us. We know what the do-nothing scenario looks like and that is self-evident. What we should know though is that history also teaches us that we can use these tools, we can lever the economy and change the country in meaningful ways.

If you are a student of the Depression, there was a book by Alexander Field, a professor at Santa Clara University, that reset the conventional wisdom about what happened in America during the Great Depression. It said that the major transport infrastructure spending that was done by the two governments either side of the depression, before and during, via the federal highway program, opened up the economy of the United States that set up the golden age that they had right the way through into the 70s.

Looking at the inter-war years, Field said major infrastructure investment by the government that was strategic and pointed via the highway program—and the highway program was written in 1916 so it was not done just because they were in depression; it was already in the works and we have a lot of projects like that—and coupled with the amazing research and development took place during the roaring 20s that carried over into the 30s and then into the inter-war years. So you do not have to be a believer to accept that we can use transport infrastructure and innovation to bolster our economy and set ourselves up for a long-term gain in material living standards. You have to be a student of history because it has happened before and we can do it again. We could do it in this country.

George Megalogenis goes on about how Melbourne was the centre of the universe in the late 1800s. We were the fastest-growing city in the world, we had a material standard of living that was growing at a rate quadrupling that of the United States and we were booming. People were coming here at an amazing rate and then we turned the tap off and what happened? Australia knows periods of great economic growth and reform. The issue at the moment is all the political discourse is around going back to the microeconomic reform of the 80s and 90s in order to have the total factor productivity uplift that we are looking for. We need go back further. We need to be looking at the Chifley and the Menzies eras, where our spending was and where our nation building programs were. They are what we should be repeating now, not just the microeconomic. This is front and centre.

I think this is the next big game because we have dug everything up and sold it to China, and we are building houses and apartments at a great rate. Great, we proved we can do those two things but can we actually pull the whole show together? Can we actually, by resetting where we live on this continent, unleash a major economic program that involves private, public works and also provides greater living standards for our citizens—new and coming?

CHAIR: So, essentially, spending money—if it is in an investment that pays dividends—is money well spent. For instance, value capture was the initial funding method for the Sydney Harbour Bridge, which was a visionary piece of infrastructure. If we had been value-capturing land north of the harbour that has been enhanced in value because of that piece of infrastructure, it would have paid and would still be paying the most incredible dividends.

Mr Grant : You can see this. People say, 'If value capture worked, state governments would have been doing it for years, because they control transport, infrastructure and housing.' But state governments have been doing it for years. It is called VicUrban and it is called Landcom here in New South Wales. They have been cutting up land, rezoning it and selling it off. Just two years ago, Housing NSW sold a block of flats that it owned on the north side of the bridge at Milsons Point for a huge amount of money. It has been happening, but the issue is that it has not been pulled together; it has not been part of a broader show. There has not been this overarching policy narrative around it. It has been happening in sporadic and siloed environments that have affected single stakeholders without being part of a bigger picture. The history is there and the numbers do not lie, but, as I say, it is now about pulling a whole show together and doing it going forward in a targeted fashion for a targeted outcome.

You are absolutely right, Chair: if you can use government money to increase the productive capacity of the nation, you will have government for the next hundred years—easy done. The Australian people know what a good investment is; they vote with their feet and they are a lot smarter than they sometimes get credit for. They are a productive and flexible people. They are dealing with all of these issues in our cities and we are still getting economic growth, which I think is amazing. They would adapt to a new plan and, frankly, I think they would appreciate a new plan.

CHAIR: That is the most extraordinary gap in logic: state governments, for a very long time, have been investing in infrastructure—they also control the zoning and the planning—which creates enormous uplift, and the federal government has been running off with the value capture from capital gains taxes. I do not think we have said, 'Thank you very to much,' to all those states, but we should. It is about joining that together and stopping the value escape that we have seen so much in Sydney recently regarding homeowners around the Castle Hill train station. One group of 90 gathered together to sell their properties for a total of $400 million, with no tax paid, all because of a rail system and station being built at Castle Hill. There are many other examples. It is time to analyse the history and bring this together to align the three levels of government to effect a comprehensive value-capture package so that the federal government can possibly influence planning of infrastructure and make sure that that is coupled with land use.

Mr Grant : Transport and urban planning need to come together. Victoria is a very good case: it is actually a stated goal in statute for Victoria to become a state of cities, and there is an act in Victoria called the Transport Integration Act which calls for urban planning and transport planning to be done together. This is within the same state government and they are having a hard time getting together. Then, interposing that with local and federal governments, you can imagine the task that is there.

But where the federal government has a rare role to play, if it wants, is that it controls a large sum of money. There is a big bucket of money there. It can start attaching conditions to the spending and the granting of that money to deliver outcomes at a national policy level and work with the states to do that, or it can divorce itself from the issue altogether. That is another option. There is no 'have to' here. The federal government could say: 'We will leave all of this to the states. Here is your grant money for every year; you guys work it out. And here are some best-practice principles. We have Infrastructure Australia helping line up the priorities as we go.' I guess it is a matter of determining at a federal level whether the best value is in your participation and intervention into these matters or whether you are best to leave it to the states and, indeed, the markets.

Mr LLEW O'BRIEN: I appreciate what you have put together here. It is very informative. I come from an electorate where we have not got a housing affordability problem. Quite a lot of the houses are under $150,000. That is house and land—everything. If this conversation was had there, as in many parts of Australia, people would be saying: 'Why? Just move out to the regional areas.'

CHAIR: I think the whole argument is about rebalancing our settlement and uplifting that to calm the—

Mr LLEW O'BRIEN: I agree, but I do not think this does not apply to what we already have. We have heard a lot about building new cities, all of the greenfield sites and what have you, but I think much of what you are talking about here and what is in this document is relevant to what we already have and leveraging off that. I will be having a good read of it. Thanks for your contribution.

Mr Grant : Thanks for your time. Sorry to take so much of it!

CHAIR: Thank you so much for your contribution and attendance here today. If you have been asked to provide any additional information, would you please forward it to the secretary by 3 November. You will be sent a copy of the transcript of your evidence and will have an opportunity to request corrections to transcription errors. Thank you again.

Proceedings suspended from 13 : 01 to 13 : 20