Captured by value: Finding the funding for faster rail

To make fast and high speed rail possible in Australia, governments are looking for new methods of funding.

In the mid 1990s, the CSIRO was looking to sell its defunct McMaster Farm. The Commonwealth research agency no longer needed the animal research field station located on the outskirts of south-western Sydney. The federal government put the 350-hectare property on the market, and two brothers banded together to purchase the site, paying $3.5 million, about $10,000 per hectare. While reports at the time indicated the price was lower than the going price for agricultural land, the location’s heritage was continued and the site was used for farming.

Only two years later, the federal government came back to the site at Badgery’s Creek. This time buying a portion of the farm back off the brothers for $175m, 50 times the price per hectare. What had changed?

Head out to the former farm today and the fields, cross-crossed with creeks have been changed. Major pieces of equipment and machinery are turning over soil to build the foundations for the new Western Sydney Airport. The brothers bought the land next door. The rest of the land that wasn’t purchased back by the federal government has now been bought by property developers and the expected windfall for the brothers is rumoured to be half a billion dollars. For an investment on $3.5m, the brothers have made a return of over 140 times. Their last name? Medich.

Federal parliamentarian and chair of the Standing Committee on Infrastructure, Transport and Cities, John Alexander has been using this example into a recent parliamentary inquiry entitled Options for Financing Faster Rail. What frustrates him about this is that we’ve seen it all before, particularly with the construction of the North West Rail Link, now Sydney Metro North West.

“What we saw at Castle Hill where people sold their houses for 40 and 50 times their value that will be nothing compared to what will happen when previously rural lands are made into high rise development or urban development.”

Badgery’s Creek is where history is repeating itself. With not only the airport, but also the rail corridors confirmed, the NSW and federal governments are investing billions of dollars into infrastructure for the Aerotropolis and private landowners are reaping the benefits.

“With the last announcement of the government, which was surprising, $11.5bn going into bringing the Metro rail forward to St Mary’s and seven train stations, those landowners around those train stations will have the ultimate uplift and we have failed on our investment of our taxpayers money to get a fair share of that,” said Alexander.

There is no suggestion of anyone, landowner, developer or government, having committed any crimes.

What Alexander and the committee have set out to do, is find out what is the fair return for the increase in land value brought about by rail infrastructure.

“If you try to search what is fair when the taxpayer puts in $11.5bn into one project and someone puts in $3.5m and walks away with half a billion, of that $500m uplift what should have the taxpayer got as their fair share of that? That’s the question that we need to be answering.”

The current inquiry is the third of a series of inquiries into how the federal government can get a better return for the investment it makes in infrastructure. To do so, a method of value capture is needed, in order to tax the windfalls that private property owners gain from public infrastructure investment. This would then support the funding of infrastructure and communities.

“The prime goal is to provide a sustainable, affordable supply of housing for generations to come and to do that you’ve got to have a plan of infrastructure that facilitates that settlement,” said Alexander.

The committee’s first report, Harnessing value, delivering infrastructure found that all governments had not adequately planned for the future.

“Harnessing value, delivering infrastructure explored what needed to be done that had been absent, that had been overlooked by both sides of governments at all levels. There had been an absence of planning and an absence of capitalising when governments have invested taxpayers monies,” said Alexander.

Other observers have noted examples of this lack of planning not just in NSW. Cameron Murray is a Queensland-based economist who quantified the value returned to private landowners near the Gold Coast Light Rail line.

“I wanted to demonstrate that this occurs in general and put a number to it, because it’s very hard to get a good idea of the value to everybody in aggregate. You might think if we put a train station here and that shopping centre owner got some value, but everybody in the area gets a benefit and so looking at all these property sales data allowed me to add that all up.”

Murray found that the increase in property sales prices, as an indicator of change in land value, showed that the construction of the light rail line increased property values by $300m in the 1,324 plots of land within 400 metres of a light rail station. If this increase was captured, it would be equivalent to 25 per cent of the capital cost of the light rail line.

Taking these results and applying them to new rail lines, particularly faster and high speed rail, Alexander sees a way forward for debates over high speed rail in Australia.

“It’s a golden age for rail, faster rail and high-speed rail, and most people who discount high-speed rail and say it shouldn’t happen simply don’t know what the purpose of it is. It’s a simple equation, once you can say that the uplift in the value of the lands that will be created by high-speed rail can fund the additional cost that it takes to go from regular rail to high speed rail then it is a deal. It’s making money, you do it.”

Using the value uplift in land as the key commercial indicator, rather than the commercial operation of the service can make high speed rail a much more attractive proposition.

“If you’re just going to charge the ticket retrieve the cost of the construction and operation from the traveller, that will not stack up commercially. If you look at what is the purpose of high-speed rail, other than moving people from A to B, from Sydney to Melbourne, but a position of creating megacities and having areas that would have been outside of a commutable time, when delivered by high speed rail, you bring places like Gosford and the Southern Highlands to within 15 minutes of the CBD of Sydney, Goulburn and Newcastle within 30 minutes, it is an absolute game changer.

“When you look at Melbourne the opportunities are even more vast. There’s five fast and high-speed rail lines going out of Melbourne that will create an incredible megatropolis and reduce road traffic into the city but produce a number of satellite cities that would be linked by faster and high speed rail and commutes of less than half an hour.”

In addition to the federal inquiry, the NSW Productivity Commission is also conducting an inquiry into infrastructure contributions. In response to questions, the Productivity Commission said that as it was in the phase of listening to stakeholders it would be premature to offer a position.

The Australasian Railway Association (ARA) has prepared a submission to the inquiry, and CEO Caroline Wilkie said that good planning processes can make the most of infrastructure investment and save governments billions of dollars.

“Australia’s increasing infrastructure needs will mean governments alone will not be able to deliver every project that is required to meet future demand. We support value capture mechanisms that allow governments to share in the benefits of significant land value increases that result from their investment in infrastructure. As with all things, it is important cost recovery is applied equally,” she said.

Private property owners close to major transport infrastructure have seen property values increase substantially. Image credit:

Murray has proposed two ways of implementing value capture, the first being a land tax.

“A land value tax that you revalue every year, that automatically raises money from every capital investment made by the government or raises more money when there’s a boom and less money when there’s a bust.”

Both NSW and Victoria have mooted switching from stamp duty to a broad land tax and have raised these ideas with the federal government. Another method, Murray suggests is to allow property owners to buy denser zonings.

“If you have a new rail station, and you say, ‘We’re going to densify this corridor.’ What you do is you charge landowners for the additional air rights to take advantage of that new zoning and density that you’ve facilitated.”

Alexander is instead proposing a form of capital gains tax on land that is impacted by infrastructure and rezoning. The tax would be triggered by a change in zoning. This would overcome the ad hoc nature of current developer contributions, raise a more significant amount than stamp duty, and create a fairer outcome.

“It shouldn’t be the developer that pays the outrageous price for the land, and then has to pay the developers contribution to develop it, it’s the person who makes the windfall through no effort of their own, simply by owning land that is now going to be rezoned and going to be the beneficiary of taxpayers funding.”

The tax would be collected by the federal government, which would create the master plans with state governments. State government would provide the infrastructure and local councils would determine local-level land use.

“The federal government collects the uplift, quarantines it and then hypothecates it to the state for distribution for the infrastructure.”

Currently, the National Faster Rail Agency (NFRA), which is developing business cases for fast rail to Melbourne, Brisbane, and Sydney with state governments and the private sector. As part of these business cases, the NFRA considers funding and financing options, such as private sector contributions and value capture opportunities.

“Matters such as funding and financing and opportunities for value capture from sources such as land value uplift to supplement project funding are considered in line with this framework,” said a spokesperson for the Department of Infrastructure, Transport, Regional Development and Communications.

The spokesperson however directed detailed questions regarding value capture mechanisms to the Infrastructure Project Financing Agency (IPFA). Formed in 2017, IPFA “supports the Australian government in making commercially astute decisions on nationally significant infrastructure projects and programs through the provision of independent, whole-of-government commercial and financial advisory services”.

After email inquiries to the publicly available email contact went unanswered, Chris Allen, managing director, transport and industry, responded to a LinkedIn message noting that “as there is not a consistent view on value capture and its implementation across the Commonwealth, we do not think that it’s appropriate for IPFA to provide its views or comments outside of government at this time”.

In its joint submission to the Options for Financing Faster Rail inquiry, the National Faster Rail Agency and IPFA wrote that “examples where value capture made major contributions to funding cost are defined by unique characteristics, such as significantly higher population densities than regional Australia”. The submission noted the case of transcontinental railroads in the United States in the late 19th century, and Hong Kong rail operator MTR’s Rail plus Property model.

In London, the extension of the Northern Line, a £2.5bn ($4.56bn) project, was entirely funded through a levy on development in the Nine Elms district and business rates revenue. Alexander also points to the Korean method of funding high-speed rail. There, the government owned corporation that constructs and operates the line provides half of the funding for the line. It can then take 100 per cent of the value uplift inside a determined development precinct next to the proposed stations. The national government, which provides 50 per cent of the funding, takes 50 per cent of the value uplift of land adjacent to the development precinct.

“I think it’s a structure that’s not far off the mark,” said Andrews.

There is another model, however, that is closer to home. In the ACT, where all land is owned by the government, 75 per cent of the increase in the value of leasehold land is captured by the territory government.

“Imagine if you got 75 per cent of the uplift of that $500m,” said Alexander. “That would’ve left $375m that would have gone towards the cost of the infrastructure, and the investor, for only putting in $3.5m, would have made $125m. Not doing too badly at all.”

Murray has done the sums on how much more money governments around Australia would raise if they followed the ACT example.

“If you scale that to the relative prices and quantities of new dwellings that are built in NSW, Victoria, and Queensland you get roughly $19bn per year in revenue, if they had the ACT system.”

With a number of faster rail projects at the business case stage and future projects in the pipeline, there is a need for governments to come up with a solution.

“Before the project is announced, before the zoning is announced, you’ve got to have your value capture legislation through Parliament,” said Alexander.

“We talk about, ‘We’re all in it together.’ That means everybody who is the beneficiary pays and it’s to the benefit of the taxpayer because you can then literally look at all infrastructure being funded in this way, relieving our general revenues, simplifying our taxes, simplifying the role of developers, and making our growth sustainable and creating affordable housing for all.”

NSW government seeks project managers for first fast rail routes

The NSW government has released two tenders for project management services for fast rail, suggesting that the first two routes for the state will be Sydney to Canberra and Sydney to Newcastle.

The tenders, available via the NSW eTendering site, outline that successful tenders will conduct the scoping phase investigation and deliver the final business case for the fast rail program.

“The NSW government’s commitment to develop a blueprint for the delivery of a fast rail network is a major piece of state-shaping work,” said a NSW government spokesperson. “This transformative vision will seek to link regional centres to each other and Sydney.”

In previous documents outlining the scope of the NSW government’s fast rail strategy, four routes had been identified; Sydney to Newcastle, Sydney to Canberra, Sydney to Nowra via Wollongong, and Sydney to Orange. The current tenders are the first fast rail tenders released publicly, indicating that the NSW government my be prioritising the routes to Canberra and Newcastle.

Each project will undergo the Infrastructure NSW Health Check, which requires demonstration of evidence of confidence in a project’s development. The scoping phase also includes an interim project definition report which will define the project’s interim ‘reference case’ based on the needs assessment, options development, and options assessment through the strategic business case.

The second phase of the tender covers the final business case of the project. This will involve delivery of a final business case that builds on the findings from the strategic business cases and scoping phase investigations. Tender documents outline that “a new approach will be needed” for the final business case to meet NSW Treasury requirements and Fast Rail Program objectives.

“Central to the success of the Final Business Cases will be the consideration of wider economic and social impacts, alongside traditional transport benefits.”

The release of these tenders highlights that fast rail projects in Australia are moving forward. At a national level, the National Faster Rail Agency has put forward 50:50 funding for fast rail businesses cases with state governments and the private sector, including the Sydney to Newcastle business case. Funding has already been committed to faster rail between Melbourne and Geelong.

Improving connectivity between Newcastle and Sydney was also a priority initiative added to Infrastructure Australia’s Infrastructure Priority List in 2016.

The NSW government has also launched the ‘A fast rail future for NSW’ strategy, with a plan to be delivered by Andrew McNaughton and an expert panel. The plan is reportedly complete, but has not yet been released.

Australia’s faster rail future

Faster rail forms part of the federal government’s strategy to deal with population growth and congestion. The National Faster Rail Agency’s acting CEO Malcolm Southwell discusses his agency’s work at AusRAIL Plus 2019.

Australia’s major cities are a key driver of the nation’s economic success and support the majority of the population in employment and economic growth. They are also growing, exponentially.

“Our population is expected to reach 33 million people by 2040, and most of those 6.6 new Australians will settle in our major capital cities,” acting CEO of the National Faster Rail Agency (NFRA), Malcolm Southwell, said at the AusRAIL Plus 2019 event held in Sydney.

“Around 64 per cent of us live in cities and we’re one of the most urbanised nations in the world. As such, we have issues with congestion, housing supply and affordability.”

Congestion costs are also expected to rise. According to Infrastructure Australia’s estimates, road and public transport congestion in the major cities will cost almost $40 billion by 2031, more than doubling from around $19bn in 2016.

Over 80 per cent of the estimated $21bn increase will occur in Greater Sydney, Greater Melbourne and south east Queensland.

A faster rail solution will go some way to alleviating population pressure in the cities. In comparison to other countries around the world, Australia has a relatively large land mass but low population density. While Australia has 3.2 persons per square kilometre, the US has 36. The UK has 275 persons per square kilometre, and Japan has 347.

“We’re not just about building fast rail in the hopes that it works, we’re taking an evidence-based approach,” Southwell said.

“Professor Andrew McNaughton of the UK, who is working with the NSW government on their faster rail plans, has publicly noted that reducing transit times to one hour or less is a particular sweet spot for improved access to higher paying jobs in capital city CBDs and increased economic development in regional centres.”

The Faster Rail Plan, which the NFRA is tasked with delivering, intends to better align future population growth by linking major cities and growing regional cities in order to take pressure off the cities and strengthen economic ties with regional areas.

With the December 2019 appointment of Barry Broe as inaugural chief executive officer of the NFRA, the agency is expected to ramp up its operations this year.

Southwell was acting CEO from the agency’s creation in July 2019 until January 2020. He spoke at AusRAIL to update the rail industry on the NFRA’s work to date and what to expect in the future.

So far, eight faster rail corridors have been identified, including: Sydney to Newcastle, Sydney to Wollongong, Sydney to Parkes (via Bathurst and Orange), Melbourne to Greater Shepparton, Melbourne to Albury-Wodonga, Melbourne to Taralgon, Brisbane to the Gold Coast, and Brisbane to the Sunshine Coast.

The NFRA will work in partnership with state and territory governments and private industry to develop the rail infrastructure necessary to accommodate a faster rail solution between major cities and key regional centres. It will develop proposals, examine routes and begin the process of corridor planning, acquisition and protection.

“We’ve started a conversation with states on the east coast about interoperability and standards of faster rail projects to avoid a repeat of issues around passenger services between jurisdictions,” Southwell said.

An expert panel will provide advice to government on faster rail related matters including existing business cases, new potential faster rail corridors, future developments across networks and infrastructure requirements and priorities. The panel will advise on staging and delivery options.

The NSW government has appointed Professor Andrew McNaughton to lead the panel. He has more than 45 years’ experience working on rail infrastructure projects, including the UK’s High Speed project.

The first three of the overall eight faster rail business cases have now been completed, the agency confirmed in January. The business cases for Sydney to Newcastle, Melbourne to Greater Shepparton and Brisbane to the regions of Moreton Bay and the Sunshine Coast are now being reviewed by the agency. NFRA will provide advice to government on the findings and its recommendations for next steps in the coming months.

These corridors and the remaining five, which are “progressing well” according to the agency, were identified based on the intention to support growing population movements.

For example, the agency’s first priority, to deliver faster rail between Geelong and Melbourne, will have major benefits for those living along the corridor, including quicker access to work and services in both locations, as well as greater choice around housing and less congestion.

“Geelong is one of the fastest growing regions, growing at a rate of around 2.7 per annum,” Southwell said.

“Transport connectivity between Melbourne and Geelong is constrained by existing infrastructure and rail investment has not kept up with population growth. These constraints have a range of flow on effects, including hampering regional development and increasing road congestion.

The agency acknowledges, however, that better connectivity could, in some circumstances, result in regional towns becoming dormitory suburbs for larger cities.

“We’re very much aware of these concerns and as part of our work we’ll look for the opportunities where faster rail can actually work for the economy and job markets in these regional towns. We’re actively talking to regional centres about the challenges and opportunities faster rail will bring to their economy.”

Southwell is adamant that faster rail will resolve population pressures if regional centres are made attractive.

“For example, lowering operating costs for enterprises in regional towns will attract businesses to the area. Faster rail will provide these businesses will labour markets in the capital cities and provide opportunities for economic development in regional towns.

“That effect is evidenced here in Australia. In Geelong, rail was instrumental in maintaining the attractiveness of the city following the large and sudden downturn in the manufacturing sector. Research and modelling work have shown that the emergence of strong employment centres has been able to attract service jobs, and that was greatly facilitated by an increase in efficient rail services.”

Faster rail services are capable of reducing travel time in the corridor even further, from an hour to closer to half an hour, and thus enable more commuters to travel along the rail corridor.

Another challenge the agency will need to soon resolve is cost.

“Studies conducted between 2010 and 2013 on a high-speed rail between Melbourne and Canberra, Sydney and Brisbane found that it would have an estimated construction cost of around $114bn in 2012-dollar terms.

“Noting current construction market pressures and inflation impacts, this figure will increase significantly in today’s terms and could be as high as $150 to $200bn.

“Whatever the amount, this is a significant cost, and obviously needs to be considered against all the other projects making up a core share of taxpayer’s funds.”

The Australasian Rail Association says that it supports the utilisation of innovative financing and funding mechanisms such as “value capture” development opportunities along rail corridors to help fund faster rail infrastructure.

“It will be critical that the Agency, under Mr Broe’s leadership, recognises the need to invest in existing and new lines to stretch government dollars and provide a faster rail service offering that meets the needs of the Australian population,” ARA chair Danny Broad said.

“In addition to supporting the establishment of new fast rail lines as a means to decentralise Australia’s population and support regional development, the
ARA highlights that optimising our existing networks cannot be overlooked,” the ARA’s Annual Report 2019 said.

“Faster rail can be achieved through upgrades and modifications to existing rail infrastructure, such as passing loops, new signalling systems and level crossing removals.”

Meanwhile, the NSW government says it will examine a range of funding options and smart staging, as part of the Fast Rail Network Strategy, to ensure the fast rail network provides value for money.

Each funding option considered as part of the strategy will be assessed based on the estimated cost of the project in light of economic and other benefits to the community, and complementary revenue- generating opportunities.

The state government says that international experience shows that fast rail networks can be delivered in stages, with each stage delivering immediate benefits.

NSW’s short- to medium-term focus will be on upgrades and the optimisation of existing rail routes, with dedicated track improvements such as junction rearrangements, curve easing, deviations, passing loops and level crossing removals on existing routes.

Its longer-term focus will be on a dedicated and purpose-built rail line, with new lines and routes, as well as new rolling stock.

According to Southwell, the national agency is cognisant that its work will affect the future of how people live.

“This is no simple task and requires debate and dialogue from all sides of the equation. We’re still very new but through ongoing conversations with our key stakeholders, including those in regional communities, we acknowledge that consideration needs to extend well beyond just building a new rail line and a train station,” Southwell said.

Inaugural National Faster Rail Agency CEO appointed

The inaugural chief executive officer for the National Faster Rail Agency (NFRA) has been appointed, the minister for population, cities and urban infrastructure, Alan Tudge, announced on Monday.

Barry Broe will commence at NFRA on January 6 and will serve as CEO for an initial five-year term. Broe will be coming into the role after seven years as coordinator-general for the Queensland government.

“Broe has spent over 40 years in major project, transport and public sector infrastructure delivery including over 17 years at executive or CEO level. He has direct local and international experience in rail and planning,” according to a government spokesperson.

He has held senior roles across government agencies, including with Brisbane City Council as divisional manager Brisbane Infrastructure, with Transport for London as director of transport planning and policy, and with Queensland Transport as director transport planning South East Queensland, according to his LinkedIn page.

Broe’s role as Queensland’s coordinator-general involved assessing and approving major infrastructure projects, oversight over projects in designated “state development areas” to promote economic growth, and ensuring that communities near large resource projects benefited from the construction and operation of those projects.

The NFRA was created five months ago, in July this year, to support the delivery of the government’s 20-year Faster Rail Plan, which includes $2 billion for faster rail between Melbourne and Geelong and eight regional to capital city business cases along the eastern seaboard.

“Faster rail networks are crucial to easing congestion pressures in our cities and shaping Australia’s future as our population grows,” Tudge said.

“Investing in faster rail will create jobs and bust congestion, giving time back to commuters and enabling more people to live in our regions while working in our cities.”

The NFRA will work in partnership with state and territory governments and private industry to develop the rail infrastructure between major cities and key regional centres necessary to for the project. The agency will have an Expert Panel to provide advice on faster rail related matters including existing faster rail project business cases, new potential faster rail corridors, future developments across networks and infrastructure requirements and priorities.

The Australasian Railway Association (ARA) congratulated Broe on the appointment.

“Mr Broe has a strong reputation of achievement and we welcome his appointment to deliver faster rail in Australia,” ARA chairman and acting CEO Danny Broad said.

“It will be critical that the Agency, under Mr Broe’s leadership, recognises the need to invest in existing and new lines to stretch Government dollars and provide a faster rail service offering that meets the needs of the Australian population.”

The ARA, however, pointed out that not all faster rail projects require brand new rail lines.

“Faster rail can be achieved through upgrades and modifications to existing rail infrastructure, such as passing loops, new signalling systems and level crossing removals.”

The industry association said that its member companies have identified a number of smaller projects that can deliver faster rail solutions without the expense of investing in new rail lines and trains.

“The ARA also looks forward to discussions with the Agency about long term plans to acquire the corridor for Brisbane to Melbourne High Speed Rail,” Broad said.