How the Entrepreneur Rail Model can spark public transport investment
Peter Newman, Evan Jones and Sebastian Davies-Slate, Curtin University | 16 February 2016
Following is the executive summary of a submission to the Senate Inquiry into “the role of transport connectivity on stimulating development and economic activity”, for which submissions closed on 12 February 2016.
Australian cities need and want new rail projects. The people cry out for it so they can go around, over and under those traffic lines. The planners want it as they need to create activity centres that are efficient at enabling local jobs and services; they know railways create the land value uplift that brings investment and developers. The politicians are hearing these pleas, but they don’t have the money anymore.
This paper seeks to solve the problem by tapping private investment for which there is no shortage, especially superannuation funds looking for good, safe investments. But how can you make money out of urban rail when governments have to subsidise them?
The answer is found in land development around stations. If enough land can be found to enable redevelopment by the private sector to sell and lease buildings around stations, or to redevelop jointly with private owners or government for mutual benefit, then they can create the capital to enable them to build the rail line, to own it and to operate it. This is the Entrepreneur Rail Model.
The result is not only to have a new rail line but to have strong local activity centres, which planners are trying so hard to enable, though they are finding them hard to do in reality. Transit-land use integration is hardly happening compared to problematic urban fringe development.
Integrating transit, land use and finance
The secret to achieving this is a new governance instrument that integrates transit, land use and finance in the Entrepreneur Rail Model. It reverses the traditional approach to transit planning of:
by turning the process on its head:
Instead of government planning the rail system, the private sector suggests the most important opportunities for creating viable redevelopment projects and therefore how much private investment can be attracted to build a rail line. This is how tram and train lines were first built and how they are now built in Japan and Hong Kong. It uses private sector development skills as cities are built by the private sector.
This paper sets out the evidence for how rail and land development add value to a city. Rail projects raise the value of land around stations substantially. The value of an entrepreneur rail project is outlined in some detail in the paper in terms of its:
- Travel time savings
- Increased land values
- Agglomeration economies in activity centres
- Land development efficiencies
- Environmental gains due to reduced automobile dependence
The results of studies in Perth show that a new rail line raised land values in station precincts by 42 per cent in five years, above the general value uplift, and for commercial land even higher values. Thus it demonstrates there is significant valuable redevelopment potential that is unlocked by new rail lines.
The sources of funding have been set out in a conceptual way below.
The paper then sets out how to deliver such a rail project. It suggests there are three approaches:
- Unsolicited bids – a consortium of land developer, train builder, train operator and financier, provide government with a bid that makes a rail project proceed to an evaluation phase.
- Government calls for bids – a general consensus that a particular corridor could have the required land development potential as well as fulfilling transport needs, means that government can request bids from consortia before evaluating the best one.
- Government controls internally – a new government agency (or revamped land agency) creates a rail project through land development in the same way that Hong Kong MTR does it. This could be a semi-private enterprise.
There are also three ways of funding and financing such projects:
- Totally private capital – Government’s role would be kept to in-kind activity to ensure land assembly and land acquisition, zoning and other transport planning integration is fully covered. This would depend on sufficient land being available to generate the capital and enabling whatever mechanisms are needed to generate private investment. It would mean that the project could be off balance sheet and hence would help with state government credit ratings.
- Substantial private and some public capital – Substantial private capital can be supplemented by some government capital. Government’s expected land value based tax flow-on could be hypothecated to cover their contribution. This approach would ensure that the rail project is still generating all the capital required though some is from public sources at the three levels of government.
- Some private and substantial public capital – This seeks help from private sources through land development, but primarily raises government capital through a mixture of sources such as parking levies, tolls on associated private traffic, developer contributions, an increase in registration fees or some other form of tax hypothecated to the rail project.
Governments can seek combinations of these approaches and funding/financing.
Our paper suggests that the preferred option should be to seek a process of government bids based on 100 per cent private capital as the goal of the Entrepreneur Rail Model.
If some small contribution from public capital is needed then this would be the next level to be sought. A federal government role could be to help fund bids for potential demonstration projects.
The importance of enabling private sector investment is the critical step in unleashing the new governance instrument. Without this the rail lines will not happen and the activity centres will not be built.
It is important that a government bidding process is controlled by Treasury as the central agency required to ensure private sector funds are attracted to achieve public-good goals. Treasury would ensure consortia are evaluated by financial criteria, land development criteria and transit criteria, in an integrated way. This cannot be done by a transit agency as their emphasis on choosing the routes in detail first will not optimise land development opportunities so the rail will not get built. A transit agency’s only task in our model is to ensure transit system compatibility with any new rail lines. The delivery process will require the powers of a redevelopment agency to provide government’s role in land acquisition, zoning and land assembly to unlock the latent value in land development around the stations.
It is therefore suggested that two new government roles are established. The first is a Transit Investment and Land Development Unit established in Treasury to oversee the bidding process for Entrepreneur Rail projects. State governments can immediately call for bids from consortia to establish a private rail system based on development of activity centres along a particular corridor. The criteria by which these will be evaluated would consist of:
- Financial – the project should aim to be self sufficient in capital and operating expenses based on land development, fares and other means such as parking levies and advertising.
- Land – the project should aim to utilise government land provided as part of the bidding process as well as private land that will need to be built into development partnerships or purchased as part of the project’s financing. Land acquisition, zoning and assembly will be assisted by government to achieve required activity centre goals as well as sufficient funding outcomes to enable the rail line to be built.
- Transit – the project should provide a high quality transit service that is linked into the rest of the system and generates its own patronage from the land development activity centres. The quality of the system should be high enough to unleash the potential for development of the activity centres.
After a private sector consortium has been chosen to lead the planning and delivery of the urban rail infrastructure and the development of available government and private lands, there will need to be another co-ordinating government entity. We are suggesting the formation of a new Entrepreneur Rail Delivery Agency to facilitate the planning and delivery process. The delivery agency would be similar to development corporations and authorities that have been created in Australia over the last two decades for undertaking the planning and development of urban renewal projects. It would not need new legislation to establish and could be made part of a current Redevelopment Authority.
The development authority model is a tested method by which redevelopment under the Entrepreneur Rail Model would work. By way of example, the function of the Western Australian Metropolitan Redevelopment Authority is “to plan, undertake, promote and coordinate the development of land in redevelopment areas in the metropolitan region”. Specific purposes of the planning scheme for Midland, as one of the Authority’s redevelopment areas, include providing sufficient certainty to enable location and investment decisions to be made with confidence and enabling the Authority to recover the costs of providing infrastructure within the redevelopment area. Thus sufficient powers are available to help unleash the new governance instrument inherent in the Entrepreneur Rail Model.
Urban rail projects across the world are now being owned and operated by private consortia (for example, new light rail in the Gold Coast, Canberra and Sydney, as well as Melbourne trams and trains). This is not unusual. What is unusual about the Entrepreneur Rail Model is how land development becomes the cornerstone of its funding, how the integration of private land development entrepreneurial skill unlocks access to private capital. The power of this model is that the unlocking of private development in new activity centres could not occur unless it was completely integrated with the amenity-creating, value-creating power of a new urban rail service.