The relevance and risks of 'value capture' and associated metro reforms

The NSW government is talking about taxing the increase in land values in areas which have residential and commercial densification and/or infrastructure projects. The areas are widespread, repeated in almost every government announcement. The national government is doing the same. It is the term du jour. Sydney and other Australian cities have a backlog of asset maintenance let alone a growing load associated with population growth and spatial changes. Added to this the NSW Government has high hopes for the Greater Sydney Commission which will have to rely on some form/s of value capture to perform.

This prospect is always politically and economically difficult but the timing could hardly be worse: warnings from IMF about the "derailment" of global growth, a slowdown in the Chinese economy with plummeting stocks in many countries, the Urban Task Force's monitoring of declines in local housing activity, and the first falls in Sydney rental costs in memory, due to increased supply of apartments. The Government is seeking big yields because the electricity privatisation bucket is over-spent and the promised infrastructure will be very expensive, indeed up to the order of $50,000,000,000 including the Connex roads, Metro trains and multiple tramlines. Big yields mean big taxes – at a time of economic stress?

The national Murray Financial System inquiry and Professor Parry's NSW report on financing options including betterment capture, a metropolitan improvement fund and improved context for PPPs, have come and gone and were seemingly not remembered by the authors of two industry reports which have achieved significant circulation. (There are multiple forms of taxes and levies.)

The Committee for Sydney asks Are we there yet? Value capture and the future of public transport in Sydney (December 2015) ; while Consult Australia (via AECOM) released Value Capture Roadmap (June 2015). Both seek to educate a wider audience, or as CfS said, "while this paper focusses on the Sydney context",

it also provides governments across Australia, including the Federal Government, with a potential new way forward towards funding public transport in our cities. Given the Federal Government is looking at its role in cities policy, public transport and the appraisal process for infrastructure, we would like it to consider the possible implications of this paper from a Commonwealth perspective. It may be appropriate for the Federal Government to decide that it will only contribute funding to strategically important city transport projects in jurisdictions that have appropriate value capture funding mechanisms in place.

New? The Feds denying funding to their State colleagues? As the NSW Planning Minister has reminded us, Those who do not understand history are bound to repeat its mistakes. We should make sure both documents are "fit for purpose", in the words of the Trade Practices Act. (The following extracts should be read in context of the reports.)

First, a little history. It is often said that betterment clauses were built into NSW railway Acts but the reality is that in 1904 they were found to be invalid – and were never applied, before or after. The wave of municipal reform thinking in Sydney from about 1898 identified the need to drive health and other reforms from local levels, the State government being reactionary, and a specific case was the widening of Oxford Street. The following quotes relate to the flowering of thought through and after the Improvement of Sydney Commission in 1908-09:

TheDaily Telegraph editorialised in February 1909 that:

Recalling civic experience, and remembering how difficult it is to identify betterment justly, there is plausibility in the misgivings of Ald. Hughes with regard to the proposed betterment tax. However, the estimates put the work so well inside of financial practicability that these are questions of detail and not vital ones.

Hughes was to become Sir Thomas, Sydney's first Lord Mayor. The attempt to impose a betterment tax on the southern side of Oxford Street eventually failed, with "strenuous claims" that the road-widening scheme had reduced land values rather than increased them (not surprisingly given the brutal scale of demolition). By that time the City Council had gained the income from land value taxation so the financial pressure had lessened. Former Lord Mayor Allen Taylorwas adamant in 1913 that

the Harbour Bridge was a municipal responsibility (it was held-up by country antagonism). The country would still have benefitted from a rake-off from the urban population as it does now (and Queensland etc under horizontal fiscal disequilibrium). Most fundamentally, only an urban parliament would have been successful in arguing for urban betterment taxes, the biggest issue of all. It would be wrong to assume that the size of the pie was fixed as the American States have shown. Sydney is an infrastructure-poor city and its local government needs better financial underpinning.

There was a municipal levy on CBD and northern suburbs LGAs from 1923 to 1938 to pay for the approaches to the Harbour Bridge. Labor's Lang implemented it and Bertie Stevens (Coalition) from 1932 reduced it then eliminated it because of retailers' objections. From 1970 the State Planning Authority imposed a 30 per cent levy on the value "uplift" on specific lands, primarily in the Macarthur area near Campbelltown (fully hypothecated). Political manoeuvring during the State election just three years later saw it dropped (by the Coalition) amidst claims it had increased land prices at a time of housing shortages. The Gold Coast Rapid Transit is underpinned by a levy in the broad betterment catchment.

What did our authors say? The CfS – "we never needed to (look at betterment) in the past. As Sydney grew and expanded the existing 19th century transport network could simply and cheaply be expanded to accommodate new growth". Consult Aust – "Australian transport agencies have not adopted value capture". Both wrong.

Then there are the principles of taxation. Equity is one and Consult Aust rightly says that different methods "help reach the goal of sharing outcomes equitably with the public, investors and developers". However, equity needs to be defined more broadly and the swath of residential areas in built-up NSW paid no special levies, just normal rates and taxes. Equity then means why create two classes of taxpayers, the wealthy on the east and the housing-stressed elsewhere. After all, one of the Property Council's submissions to government talked of levies resulting in

infrastructure being 'drip fed' to an area, and (they) can fail to deliver infrastructure of a sufficient scale, on time and in a coordinated manner. There are also concerns that development levies add significantly to the upfront cost of development, and hence act to impede the rate of lot uptake in new residential areas and ultimately impact on housing affordability (as well as infrastructure provision itself). In fact, this negative relationship between housing affordability and development charges has recently been recognised by COAG.

Efficiency and cost-effectiveness in collection are also principles. The easiest tax to impose is through rate notices and raising debt. The Cumberland County Council helped Sydney Water in the 1960s to overcome its sewerage backlog that way. CfS says, "Land tax has had a chequered history in NSW, being imposed and repealed several times. A broad based land tax would capture the improvements in land value driven by new public transport". Unfortunately that report mistook the NSW form of land tax, which is rates and utility bills based on unimproved value, for wealth taxes, and completely confuses the situation. Rates were imposed from the 19th Century and never repealed. It goes on to misstate local government abilities to tax value increases.

Finally under principles, is the strength of the relationship between betterment and contribution. Parry and others looked at a broad "improvement fund" and there is merit in the idea of an "urban budget", on the basis that whole communities share in the costs of congestion, poor accessibility and economic stasis. US-style municipal bonds are generally small in scale and generally robust although with a significant level of unreported defaults (Moodys lists 77 long-term municipal defaults). Most importantly, the complexity of incremental recovery of value increases is exceptionally demanding the bigger the project scope. Infrastructure NSW recommended against broad catchment-based measures.

There is an interesting echo of the long-deceased Greater Sydney movement in Consult Australia's document (even though CfS mistakenly said it had inspired the "emergence of the first metropolitan coordination structure Sydney has seen in the form of the Greater Sydney Commission"), with such words as

A general transfer in responsibilities and powers from state agencies to geographically larger, financially stronger and better resourced local government councils for planning, decision-making , funding and delivery of urban infrastructure should be pursed as a mid to long-term policy objective.

This can be taken with CfS's

Capturing value is of no benefit unless you ensure it is delivering the right projects. New funding measures need to be partnered with a mode-neutral evaluation, appraisal of transport projects or investments…. Treasury will also need to challenge their own intellectual and ideological prejudices.

These statements are made in a city that features deliberately-capricious State decision-making (rejected by iAust and COAG) and avoidance of the accepted methodologies inherent to Treasury Guidelines and Audit Commission Reports; where councils and universities pursue mode-specific investments without even slight acknowledgement of logic, it seems. Consult Australia gives checklists of pre-conditions that need to be met if value capture is to succeed, and NSW appears to meet none of them.

There are fine sentiments and great hopes in the two documents, but no messiah signals nor reason to pay more than passing attention. The historical references need to be expunged. NSW has to grow in its acceptance of practical measures and not expect political parties, Treasuries and communities to abandon their positions easily. The importance of a valid, robust system of community, business and governmental funding, through taxes and debt, cannot be underestimated but more persuasive media are needed.

The "system" cannot be imposed on the whim of a passing politician or two. Two efforts in Sydney failed because of political cowardice. Various examples have been described where the expectation of property contributions was frustrated and greater municipal levies and debt occurred, most notably in the most carefully planned project, London's CrossRail 1. There is a real risk in Sydney that over-provision of high-rise residential properties will over-saturate the market, producing low returns and low "value uplifts". Poor routing of transport projects will see the cannibalisation of the city's greatest asset, its Bradfield-era rail network.

Reform sufficient to provide the basis for a robust system will have to encompass political capriciousness, public sector re-skilling, proper community engagement in line with ResPublica's Civic Limits, and proper separation of lobby groups and governments.