'Value capture models maximise returns for infrastructure projects' by Grant Bowery, Director, Turner & Townsend
Federal and State government, as well as the private sector have a unique opportunity to leverage opportunities associated with Australia’s $70 billion infrastructure spend over the next decade (Federal budget paper 2017). The Federal government budget this year outlined additional funding for new projects including $9.3 billion - Inland Rail, $3.5 billion allocated for roads of strategic importance and expenditure of $5 -$6 billion towards smaller road projects.
Value capture models have been implemented in the UK and other countries demonstrating significant returns for government authorities, investors and tax payers. As Australia’s major multi-billion dollar infrastructure program continues to roll-out, the public and investors will seek tangible returns on their investment. The most effective way to optimize this opportunity is to incorporate value capture programs.
Well planned infrastructure projects are critical
Infrastructure investment is recognised as a tool to increase productivity, facilitate trade and industry as well as effectively address demographic and behavioural changes in society. However, achieving optimum value for the money invested can be challenging. Engagement with industry is essential to generate opportunities to maximise returns, which can be achieved through holistic design driven by active value, high-quality procurement and delivery management. However, the ability of the public sector to fund infrastructure requirements are limited and therefore alternative funding models are imperative, including public private partnerships and asset recycling.
Beneficiary pays - value capture mechanism
Value capture is based around the concept of ‘beneficiary pays’ rather than the traditional ‘user pays’, spreading the contributions to those that realise the greatest benefits. Investment in infrastructure can create advantages for businesses and communities within a sphere of influence from the project. Value capture is the mechanism by which those benefits are identified, assessed, quantified and retrieved by governments and the private sector to fund the infrastructure investment. The purpose is to more equitably fund projects, taking into account the full range of benefits attributable to those investments.
How does value capture work?
A simple example is the additional value that can be achieved if government owns land adjacent to an infrastructure investment and sells it with an increased value based on proximity to it. In most circumstances, urban rail projects usually do not return dividends, however they do lead to increases in land value. If the government purchased strategic land parcels, subject to demonstrating their relevance to the project, in greenfield or brownfield areas adjacent to future stations on urban rail projects, it could provide significant returns in the long-term. Active value capture occurs when the project is driven to generate additional revenue, for example the development of land around a rail station that would not have actively been developed had the project not gone ahead.
Benefits must be directly attributable to the investment for it to be legitimate. This link must be clearly shown and accurately measured. It is also important to ensure advantages are long-term and sustainable, similar to funding models for infrastructure investment.
Creating additional revenue streams
Implementing value capture models enables the creation of revenue streams that allow the leveraging of greater finance capability and therefore, funding for more infrastructure projects. It could take the form of securitising revenue against a specific project or sale of revenue rights to developers/funders which could be used to offset the initial funding requirements. Investment in a new airport link - Melbourne airport to the city and the new Inland Rail line from Melbourne to Brisbane will create direct benefits to those that use it through time saving, better travel experiences, companies operating it – increased fare and patronage generating revenue and surrounding areas where jobs will be created and taxes generated.
In addition, associated gains will also be achieved in the surrounding communities by land owners (increased land values), occupiers (increased transport links, convenience and travel experience), businesses (increased revenue through traffic and market increases) and the wider community (productivity, increased liveability and amenity).
Design considerations and multi-modal impacts
Good design will maximise the opportunities in value increases if considered in a holistic manner. Aspects that need to be considered include walkability, accessibility, aesthetics, connectivity, trees and vegetation, transparency and security. Multi-modal impacts also need to be factored into the design integrating transport planning, integrated land use and transport outcomes to maximise positive results.
Gains derived directly from the infrastructure investment need to be isolated from other factors which may influence value, and not be double counted through other influences, such as a newly built university campus adjacent to the site. The realisation of benefits and the capture of associated value will need to be proportional. For instance, a tax levy on business rates must not influence the market so that the tenancy rates fall. Communities, businesses and developers need to amicably discuss a solution to advantage all parties that is fair and equitable.
Precinct pilot projects
Planning investments around precinct testing models allows investors, developers and residents to concentrate on specific infrastructure needs, develop solutions, clearly identify beneficiaries and better define funding options. Pilot projects with well-conceived funding guidelines and objectives are excellent ways of testing and improving concepts and techniques before full program roll-outs occurs.
The location and boundaries of value capture precincts should be carefully selected to include existing and potentially new complimentary commercial and public activities, in addition to investments that can leverage major infrastructure. Typically, these precincts are contained within a kilometre radius from transport hubs that need improvements.
Value capture models are working
Crossrail, one of Europe’s largest infrastructure projects, is a 118 kilometre railway line under development in London. It utilises two funding mechanisms – a Business Rates Supplement (BRS) and the Mayoral Community Infrastructure Levy (CIL). Both value capture models are working well with all stakeholder groups benefiting from the new infrastructure.
The BRS is added to all non-domestic rates across London for over 30 years and is collected by the local authorities. It will raise 15 per cent of the funding requirements over its duration. The levy applied across the whole of London works on the basis that the entire city is achieving some benefit from the project. To ensure small business are not penalised, only the top 20 per cent of high earning businesses are eligible. The CIL is applied to all new developments in London on a per square metre basis. The latest Crossrail Business Case Update describes the benefit cost ratio of 2.59 across the UK for the project i.e. for each dollar invested, a return of $2.59 is received, without taking into account the wider economic benefits.
Crossrail will increase London’s transport capacity by 10 percent. It will bring an additional 1.5 million people to within 45 minutes of central London and link London’s key employment, leisure and business districts – Heathrow, West End, the City and Docklands.
Maximising infrastructure spend opportunities
Several private organisations and government authorities are making substantial investments into infrastructure both now and well into the future. These significant investments are one-off opportunities that need to be capitalised on to maximise returns for investors and tax payers. Value capture offers a mechanism to realise the greatest returns and also encourages high quality, holistic design that will significantly benefits all stakeholders and should be considered as part of a balanced portfolio of funding options.
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About the author – Grant Bowery
Grant is a Director and Infrastructure Sector leader in NSW at Turner & Townsend. He has spent the last 20 years delivering urban infrastructure and property developments in UK, Australia and internationally. He brings a unique perspective on the relationships in delivery of transport infrastructure and urban regeneration projects, founded on a background in project management and real estate investment in developed and emerging markets. Having delivered numerous sustainable award-winning projects working closely with private developers, investors, local authorities and transport bodies, Grant has a sophisticated appreciation for the interrelationships between design excellence, the public realm, transportation requirements and the funding and delivery of successful real estate development.
About Turner & Townsend
Turner & Townsend is an independent professional services company specialising in program management, project management, cost management and consulting across the property, infrastructure and natural resources sectors. With 108 offices in 45 countries and over 5,200 employees, we draw on our extensive global and industry experience to manage risk while maximising value and performance during the construction and operation of our clients’ assets. www.turnerandtownsend.com.au