Time to sharpen the funding tools

In line with the global demographic shift towards urbanisation, Auckland is bracing for an additional 700,000 people in the next 30 years, and is under pressure to plan and deliver the necessary infrastructure to address its high rate of growth.

Well-planned and functional public infrastructure is the foundation of modern society, contributing to productivity, quality of life and economic prosperity. But delivering smart infrastructure investment is challenging city leaders and governments across the globe. As a result, increasingly innovative funding methods are being sought.

Value Capture is an alternative funding method that allows public agencies to capture some portion of the increases in tax revenues and property value uplift from those directly benefiting from major public infrastructure investments and large-scale land zonings. Billions of taxpayer dollars are being put at risk by local authorities and governments who are failing to adopt these innovative funding models.

The unintended beneficiaries of these projects, such as property owners close to a new train station, receive a substantial unearned and untaxed financial windfall which is effectively subsidised by the public. If this funding was “captured”, it could repay loans or infrastructure bonds that have been used to fund the project.

The principle that beneficiaries, such as property owners and developers, contribute an equitable share of the value they receive from a public investment is an important attribute of value capture methods. In their most direct applications, value capture methods do not increase tax rates, although they are frequently combined with market value – base user charges. This allows policy makers to balance funding sources between unintended direct and indirect beneficiaries on the one hand, and the other stakeholders and users service by the investment on the other.

Value capture programmes have been widely used in North America for decades, and are now being adopted in Britain and Australia. In London, the $29.6 billion Crossrail project is utilising a two per cent business rate supplement on large commercial properties to finance $7.6 billion or 26 per cent of the overall project cost. Another successful application is the redevelopment of Denver Union Station in the US state of Colorado. This integrated urban renewal project transformed an abandoned passenger train station into a vibrant urban precinct on the edge of the central business district. Increases in property tax revenues and profits from land sales captured within the 16 hectare precinct contributed around 35 per cent of the project’s US$550 million cost.

In August, the Productivity Commission released a draft report examining New Zealand’s existing urban planning system and what it could look like in the future. The Better Urban Planning Draft Report provides the frame work for a public debate around value capture. Given value capture funding methods present a fair, equitable and efficient option to help pay for critical infrastructure, the draft report recommends that new value capture mechanisms should be considered. Value capture methods such as the sale of development rights, hypothecating incremental tax revenues and introducing more effective land tax measures will compensate the council and central government for infrastructure provision that cannot be met by existing measures.

Well-conceived and implemented public projects can increase land values by up to 50 per cent. The extent of the uplift depends on a number of factors; the nature of the infrastructure, the proximity of the property in question, accessibility and urban design amenities. As Auckland continues to invest in some of its most significant projects of the next two decades, it will also be delivering a financial windfall to property owners and speculators under current funding mechanisms. That just doesn’t make sense when there is a tried and tested way of leveraging this value to reduce the overall cost to the all taxpayers. Embracing value capture, as part of a range of innovative financing mechanisms, will enable Auckland to deliver infrastructure to make living, working and doing business easier.

Joe Langley is a Technical Director, Infrastructure Advisory for Aecom and is based in Sydney, Australia.