Value Capture: how do we stop Value Escape?
Martin Locke, Emerge Capital Partners | 27 March 2017
There seems to be almost unanimous and vigorous agreement that the pursuit of value capture is a worthwhile initiative in helping us to augment scarce infrastructure funding. However, we seem to be engrossed in writing thought leadership, debating policy and gathering evidence rather than getting on with implementation.
At a time when we are moving forward with massive city building infrastructure projects procrastination is an exercise in value escape rather than value capture. Meanwhile there are countless examples where opportunist landholders or developers are making huge windfall profits.
Objections to value capture are categorised in a Trump-like fashion as “fake news”, however, we don’t have the courage to announce specific value capture instruments without more homework. Surely, it isn’t that hard. There appears to be general consensus in favour of betterment levies rather than tax increment financing or developer contributions. I note the support for broad-based land tax but we are not a nation that has a strong track record in being quick and nimble in the area of tax reform, so I leave that one for the futurists.
We have already used levies and are proposing a special infrastructure contribution of $200 a square metre on new residential property in the Parramatta Light Rail corridor, but why $200 and just on residential developments?
And why aren’t we announcing at least the intention to introduce a SIC for Sydney Metro West?
Value capture has been described as a funding solution in creating a stream of revenue that can be captured and used to pay for the cost of the up-front infrastructure. But isn’t it also a financing issue? Is not the stream of revenue associated with complex mixed-use property development necessarily long-term in nature and uncertain?
Developers look to progressively de-risk a site with staged development and gradual release to the market with an extended program designed to garner presales and pre-commitments. I have seen from my own experience that asking developers to pay up-front results in a hefty discount.
This leads the state to question whether it is achieving value for money. In theory, it is possible to contemplate the sale of development rights or the securitisation of prospective value capture revenue streams, but at what cost?
And on the rail entrepreneur model
Another concept that has raised my eyebrows is the notion of the rail entrepreneur model, whereby we bundle property and infrastructure developers together and ask them to revert to integrated solutions on developing infrastructure with property value capture.
I have been told that the Gold Coast Light Rail project came down to the wire on the assessment of commercial property solutions adjacent to the light rail.
But Department of Transport and Main Roads put it in the too hard basket and focused on the infrastructure. Nothing could be further from the truth. Investment in property is not the same as investment in infrastructure. They are different assets with different risk/return profiles and appeal to different investor classes.
I have found that convincing the state that they are being presented with property development proposals that represent value for money is challenging, whether it relates to integrated transport, health or education precincts. Both property and infrastructure investors continue to wrestle with this issue.
This links to the federal government’s Smart Cities Plan and the role of the Commonwealth. I have previously advocated the use of concessional loans to allow the Commonwealth to encourage the use of value capture and allow it to become a value-add financing source.
This is an example of market failure and the Commonwealth can intervene, address long term risk and uncertainty, ensure an integrated approach and obtain a return. Shouldn’t this be included in the job description for the newly created Infrastructure Financing Unit within the Department of Prime Minister and Cabinet?
For those who are interested in more information, Martin Locke is running three workshops on infrastructure finance in June and October. Details via this link.
Martin Locke is adjunct Professor, UNSW, a non-executive director at Emerge Capital Partners and a former Partner of PwC, where he led the consultancy’s Infrastructure Advisory practice. He has worked on some of Australia’s largest and most complex infrastructure projects including PPP, including the Lane Cove Tunnel, NSW Rollingstock, Royal North Shore Hospital Redevelopment, Gold Coast Rapid Transit and Perth Stadium.