Both in Australia and abroad, State and Territory governments are showing increasing interest in making greater use of value capture mechanisms. These mechanisms are a means of sharing the cost of public transport infrastructure projects with those members of the public who will benefit from the projects the most.
Value capture is almost universally heralded as an innovative solution to the dual challenges facing governments in the public transport space:
- having to recurrently fund high levels of public transport services; and
- financing the development of new major transport assets at the same time.
The Commonwealth Government in particular has championed the greater application of value capture mechanisms in project funding.
As a result of this leadership, value capture is now firmly on the Australian project funding agenda alongside other traditional funding sources. Furthermore, it is likely that the implementation of a value capture mechanism by State or local governments will be a pre-requisite to receiving Commonwealth co-funding for infrastructure projects.
Notwithstanding these positive initiatives, the identification of a preferred value capture regime for State and Territory governments has proved elusive. Is there a model available to State governments that is sufficiently remunerative but also politically acceptable?
Key value capture mechanisms: an introduction
There are several value capture mechanisms available to each of the separate tiers of Australian governments.
Below, we address how developer contributions and betterment levies can be better utilised to subsidise the funding of public transport projects. However, there are various other mechanisms, such as funding from property development rights, contributions from beneficiaries and certain charges which can be levied by the governments.
A developer contribution refers to a payment imposed on a prospective developer as a precondition for receiving development approval, or for the re-zoning of land. Local and State governments generally bear the responsibility of collecting developer contributions, pursuant to planning legislation in each state.
Unlike some other forms of value capture mechanisms, developer contributions do not provide an ongoing and regular revenue stream. While it has the benefit of enabling funds to be provided at an earlier stage, it is likely that a system of collecting developer contributions will not provide a substantial source of ongoing funding for a project into the future. However, it can be considered to be a relatively equitable method, as it shares the cost of the project with the party who generates the need for (and is most likely to benefit from) the project on the basis of enhanced land value.
In general terms, a betterment levy involves the imposition of a special compulsory payment by a government over a defined area of land.
The levy assumes an increase in land value, which benefits from its proximity to the new public asset. The levy ‘captures value’ on the assumption that there is an increase in land value which accrues due to the land’s proximity to the infrastructure asset. The funds from the levy can then be used to fund existing and future projects.
Examples in Australia include:
- in New South Wales, the levy of a ‘betterment tax’ on local landowners and CBD businesses in addition to road tolls to fund the Sydney Harbour Bridge during the 1920’s and 1930’s;
- in Western Australia, the Metropolitan Region Improvement Tax which is payable on land located in the metropolitan area (as well as land tax); and
- in Victoria, a betterment levy imposed as a source of funding for the Melbourne City Loop project from 1963 to 1995.
What are the future options for a betterment levy?
We believe there is merit in considering the implementation of a broad based betterment levy by State and Territory Governments to assist in the funding of public transport infrastructure in Australia.
Footprint of a betterment levy
Such a levy could apply to a defined area of which the proposed public transport infrastructure is expected to benefit.
Further, the betterment levy could be applied more widely if the project’s benefits extended across a wide network and city-scape and across multiple community objectives, such as reducing congestion, increasing commuter efficiency and assisting tourism objectives. For major public transport projects, such criteria would likely be met.
The extent of the ‘footprint’ of the levy is perhaps one of the most important areas for consideration by Government when investigating the imposition of a betterment levy.
The issue has both economic and political dimensions to it. For example, a larger footprint is likely to result in increased collected revenue, but if the levy is imposed on land too remote from the project then it may break the nexus between the perceived benefit of the project and the improved value of the land.
Legislative framework for betterment levy
The levy will require an appropriate statutory instrument enabling the levy to be implemented. For example, for a transport project in Queensland, the Transport Infrastructure Act 1994 may be considered to be the appropriate legislation because of that Act’s objectives towards planning and managing the transport system. The Act would need to be amended to facilitate the implementation of the levy.
Ideally, the levy should be implemented as part of the overall long-term policy of transport delivery in the State, rather than in response to individual projects. This will ensure that the levy remains consistent and not subject to changing political environments.
Who pays the levy and how much should it be?
The way in which the levy will be applied, and the method of valuation of the levy, are important considerations.
Ideally, the levy should apply on the improved value of the land to ensure that enhanced land values are consistently captured.
Further, the levy is more likely to be acceptable to landowners if it is calculated and administered in a way which enables landowners to understand that the benefit in the public transport project outweighs the cost of the levy.
It would also be beneficial for the levy not to be perceived by affected parties or the public as being a ‘new’ tax. One option available to government would be to include the levy as an additional limb to an existing tax or impost. For example, it could form part of the existing land tax assessment undertaken annually by the Valuer General in each State or Territory.
It is also important to ensure that the imposition of the levy does not result in any perceived ‘double taxation’ of landowners where other taxes and levies apply to the same land. This will require co-ordination between Government entities, particularly as between the State governments and local government.
Finally, it is possible that there is likely to be increased landowner resistance to a betterment levy if the construction of the project interferes with their enjoyment of the land. An appropriate claims and compensation framework would need to be considered in the planning process for a betterment levy.
As governments explore innovative ways of project funding, the use of value capture mechanisms is likely to continue increasing in Australia and overseas.
The question of how existing mechanisms can be adjusted to suit particular infrastructure types should continue to be considered.
If the perception of affected landowners is that the combined financial impact of the public transport project and the levy result in the landowner being better off, then the concept is more likely to receive support among affected parties and members of the public more broadly.
 The principles described in this article are, for example, likely to be relevant to public transport projects in New Zealand.
 Recommendation 5.10 of the Australian Infrastructure Plan: “Governments should routinely consider value capture opportunities in all future public infrastructure investments. Opportunities for value capture should be identified and implemented early in planning processes, before specific options are developed, to maximise benefits to taxpayers.” (February 2016).
 Property development rights refers to a means of capturing value by selling property development rights to land which is benefited (and enhanced in value) from a project. The enhanced development potential of the land (by virtue of its benefit from the project) means property development rights command a premium sale price. An example of a project using this mechanism is Hong Kong’s Metro Railway.
 Contributions from beneficiaries refers to contributions from third parties who will gain significant benefits (financial or otherwise) from a project. An example may be a citizen who benefits from the use of a road and is required to pay tolls for using the road.
 For example, in Queensland, the Economic Development Act 2012 enables a “special charge” or rate to be levied by the Minister of Economic Development Queensland in an area declared to be a “Priority Development Area”. This charge or rate must be for a service or facility provided by the Minister or by a local Government.
 Such an approach is similar to the calculation of land tax. It is different to stamp duty, which is subject to the fluctuations in the sale price of land.
This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.