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.”