The benefits of value capture

The benefits of value capture

As an urban society evolves, the challenge to provide an incremental amount of urban transport infrastructure (trains, tunnels or overpasses) increases in its complexity. Consequently, this requires an increasing amount of capital required for construction, with higher operating and maintenance costs to sustain that infrastructure.

The financial capacity of various State Governments to fund the capital, operating and maintenance costs of the urban transport infrastructure is increasingly under strain. Furthermore, there are other equally urgent demands from our aging population that requires attention and funding.

To maintain the liveability, environmental sustainability and economic competiveness of Australia’s major capital cities; the governments (both State and Federal) increasingly need to explore other innovative and equitable avenues to raise finances to fund the delivery of these projects.

Value Capture is the concept increasingly touted as one avenue to raise project funding amongst the portfolio of alternative funding mechanisms. These funding mechanisms can potentially assist in tapping into the previously unexplored funding opportunities for urban transport infrastructure.

Public works, especially urban transport infrastructure, has increased the value of the land the corridor services. Thus, its construction generates an unearned value (the increases in land value which provides the land owners a cost-free benefit). This increase in value may be explicitly ‘captured’ by converting part of them into a public revenue stream via value capture mechanisms.

What is it?
Value capture monetises the benefits of public investments in infrastructure allowing the sponsors of these projects (usually public authorities) to tap into the monetary benefits of their investment, enhancing the robustness of its business case.

How it is implemented?
The mechanisms of value capture can be applied to developers or the public authorities functioning as landowners. The typical mechanisms for value capture can be categorised as:

  1. Taxation and levy – Land tax, tax-increment financing (used in North America), special levy on properties, infrastructure impact fee.
  2. Equity in joint venture (usually development rights with the public authority contributing the land at or adjacent to the station as equity).
  3. Air rights – the public authority either contributing the air space above a proposed station as equity or granting a concession to developers in a lease hold.

The local context
How can we implement a value capture scheme in a Western Australian context? Joe Langley outlined, in his paper in 2013, the ten criteria for success in the implementation of a value capture scheme.

These ten criteria are:

  1. Develop a comprehensive, long-term plan
  2. Embrace genuine and robust stakeholder consultation
  3. Carefully select the improvement district
  4. Create a shared vision
  5. Establish a clear and balanced governance framework
  6. Understand the risks and rewards for all stakeholders
  7. Use incentives to attract private investment and better design
  8. Secure consistent and coordinated leadership
  9. Secure the ability to influence outcomes
  10. Build trust as a core value

The above guidelines encompasses elements of a top-down approach in developing the value capture framework. The leaders also need to generate a boarder understanding of the concepts of value capture with a parallel bottoms-up approach where the community and wider stakeholders are informed and have an opportunity to provide input into the formulation of the policy.

The leaders’ skills are to fuse and blend the elements derived from the two approaches into an integrated framework encompassing:

  • Technical elements:
    • Technical leadership
    • Economics – macro (if it is a large project in scale), micro
    • Urban planning and design
    • Transport-planning: – movement networks for pedestrian, bicycles, transit, cars freight vehicles, service vehicles and emergency vehicles
    • Sustainability – social, environmental
    • Finance – bankability, business case
  • Social/Political elements:
    • Creating a vision
      • Define the outcomes in those perspectives
        • Social – inclusion and equity
        • Economics
        • Environmental
    • Leadership – governance, engagement, managing and resolving competing demands of stakeholders
    • Community engagement
    • Community involvement – empowerment, inclusion
    • Building a high-trust working relationship amongst all stakeholders

As this is a change management process, consideration needs to be given to engage, inform and work with various stakeholders on the journey to delivering the vision.

Joe Langley AECOM (formerly of SKM (Jacobs)), 2013 ‘Capturing Value: Realising new funding for infrastructure and urban renewal’

Tax-increment financing (TIF) is a form of project financing in North America where a geographically define area is earmarked for redevelopment or urban regeneration. Usually the local authority is empowered to hypothecate the tax revenue gain it is projected to receive as a results of the redevelopment projects from that area. American local authorities has ability to issue municipal bonds and a large and liquid municipal bonds market.

In Australia, due to the lack of constitutional recognition of Local Government entities, they do not have the ability to issue bonds. Only State and Commonwealth Governments have the authority to issue bonds. TIF requires additional governance structures and legal frameworks to enunciate its obligations, responsibility and governance. This may provide constraints on future financing of the government entity’s operations, as circumstances (internal and external) evolve.