Speech to the Australian Property Council

I am delighted to have the opportunity to speak to members and supporters of the Property Council here in Brisbane.

And thank you very much, Ken and Chris, for inviting me – this is a timely occasion to meet.

The Property Council of Australia is a strong and authoritative advocate for developing Australian cities which are liveable and productive.  The Turnbull Government very much shares that enthusiasm.

Today I want to speak firstly about the Turnbull Government’s strong interest in cities – and the role of transport infrastructure as part of that.

Secondly, I want to discuss the Australian Government’s role in funding major transport infrastructure – and some of the challenges we face.

Thirdly, I want to talk about value capture.  I well recognise that the property sector has some concerns that this could mean increased taxes on property development.  What I hope to do is explain why the Turnbull Government has a strong focus on value capture – and why we think we can respond to some of the concerns that your sector has expressed.

Cities – and Transport Infrastructure

Let me talk firstly about the interest of the Turnbull Government in cities.

My colleague Angus Taylor has been appointed as Assistant Minister to the Prime Minister for Cities–and I am working closely with him given the part transport plays in shaping cities.

Policies to improve our cities are policies which affect just about every Australian.  We are one of the most urbanised nations in the world.  89% of Australians live in cities.[1]

The transformation of our economy over the last one hundred years has seen a shift in our economic centre of gravity, from the bush to the city.  This has been associated with the continuing rise of the services sector.

In 2010-11 services comprised 77.6 per cent of industry output.[2] This compares with the mining sector at 10.3 per cent and the manufacturing sector at 9.1 per cent.[3]

Services have been steadily increasing their importance for many years; sixty years ago the services sector’s share stood at around 43 per cent.[4]

Today a key force in the Australian economy is the growth of knowledge-intensive businesses – increasingly concentrated in central business districts.

The data suggests that the economic value generated in a geographic area is correlated to the density of people working there.  According to the Grattan Institute, the Sydney CBD produced $100 in value for every hour worked there in 2011-12; Parramatta, effectively the second CBD in the Sydney conurbation, produced $68 for each hour worked.[5] 

When we look at the layout and design of Australian cities, there are some issues we need to tackle if we are to optimise their performance as generators of economic value – and as pleasant and lively places to live.

As John Daley of the Grattan Institute has pointed out, most new jobs are created within 10 kilometres of our central business districts, but much of our new housing stock is being built more than 20 km away. This cycle aggravates urban sprawl and germinates a transport infrastructure problem.[6]

Another significant issue we need to consider is the way that Australia is dominated by a handful of cities which are very large in relation to our total national population – and likely to grow even larger.

In its infrastructure audit issued last year, Infrastructure Australia pointed out that Sydney, Melbourne, Brisbane and Perth, together with their extended metropolitan areas, are expected to make up more than two thirds of Australia’s population by 2031.[7]

This will present us with some significant challenges if we are to maintain and improve the productivity and liveability of our cities. 

One such challenge – where the work of your members is so critical – expanding the stock of high quality housing in our cities. The Infrastructure Audit found that each of these cities will need to deliver about 500,000 to 700,000 additional dwellings over the next 15 to 20 years.[8]

But another equally big challenge is expanding the transport networks in our cities to deal with the ever growing requirements.

The data shows that ridership on trains in Australian cities is increasing strongly.  Across Australia the ‘annual passenger task’ has more than doubled for heavy rail since 1980. 

According to the publicly released business case for the Melbourne Metro project, patronage on the Melbourne network will continue to increase over the next two decades - and average weekday boardings on metropolitan trains is forecast to double from 2011 levels to 1.5 million by 2031.

We face a growing problem of congestion on our transport networks.  The Bureau of Infrastructure and Transport Economics estimates that this cost us $12.8 billion in 2010 and could rise to around $37.7 billion in 2031 if we do not take action.[9]

In our biggest cities there are pressures in several ways.  On the one hand we need to expand system capacity to deal with growing demand; on the other hand new routes are needed to support new metropolitan areas.

In Sydney for example the NSW Government is building the Sydney Metro-City and Southwest, which will include a new rapid transit rail line under Sydney Harbour, through the CBD and to Bankstown.  This project is receiving significant funding from the Turnbull Government under the $4.2 billion Asset Recycling Initiative. 

The new Sydney Metro is partly directed at delivering extra capacity across the network – particularly through a second rail crossing of Sydney Harbour.  That will help deliver almost 200 trains an hour into the Sydney CBD from all across Sydney in the busy morning peak – that’s 60 per cent more than now. 

But it is also directed at serving the rapidly expanding north-west growth corridor of Sydney.  At its northern end it runs from Epping to Rouse Hill – an area which today does not have a heavy rail connection.

Similarly the Melbourne Metro project is designed to provide additional capacity across that city’s rail network.  It will do this through providing extra tracks through the centre of the city and thus relieving capacity on the city loop and consequently, throughout the rest of the network city circle.

The very same issue arises here in Brisbane with the Cross River Rail project which is designed to provide additional capacity in the core of the network – and hence improve the entire operation of the network.

Decisions about major pieces of infrastructure such as heavy and light rail, and motorways such as Sydney’s WestConnex or the current upgrade of the Gateway Motorway in Brisbane, will have impacts on the shape of the cities they serve for many, many years.

We can see in the geography of our cities today the influence of transport infrastructure decisions taken fifty, a hundred or even two hundred years ago.  When a railway line is built, development follows. 

One good example is seen in my electorate of Bradfield on Sydney’s Upper North Shore.  What is now known as the North Shore Line was built in the eighteen nineties; within the next thirty years a region which had been largely orchards and agricultural land became solidly suburban. 

As the population grew, development became denser, particularly around stations.  Today, stations like Chatswood, St Leonards and North Sydney are the hub of districts with multiple commercial and residential tower buildings.

Here in Brisbane, we can expect that the Moreton Bay Rail Link will, similarly, shape local development for many years to come.

But as our cities continue to grow, there is continuing demand for infrastructure investments – and this presents significant challenges.

To take two examples, the Victorian Government and Queensland Government are seeking funding from the Commonwealth for Melbourne Metro and Cross River Rail respectively.

Australian Government’s role in funding infrastructure

This is a good point at which to turn to the issue of how the Commonwealth can most effectively fund and finance infrastructure.

The Turnbull Government has a $50 billion infrastructure investment programme over the period to 2019-20.

In 2016-17 we will invest $10 billion in infrastructure all around the country.  This is a record.

We have some 90 projects under construction around the country (of which 22 are election commitments) and another 83 in pre-construction stage.

Here in Queensland, the Commonwealth is funding 80 per cent of a massive upgrade to the Bruce Highway, for work valued at $8.5 billion.  There are six major projects underway right now.

Work is under way on the $1.162 billion Gateway Upgrade North in Brisbane, 80 per cent funded by the Commonwealth, and on the $1.137 billion Toowoomba Second Range Crossing, also 80 per cent funded by the Commonwealth.

The $988 million Moreton Bay Rail Link, with $583 million of Commonwealth funding, is due to be completed this year.

As I have pointed out, however, the growth of our population and big cities means strong demand for further infrastructure investment.

All Australian governments are facing challenges in meeting the demand for infrastructure, particularly in the face of competing budget pressures.

The New South Wales Government has taken the lead with a vigorous program to withdraw public capital from mature infrastructure assets such as electricity distribution network and ports, to reinvest in new infrastructure.  Any state or territory government which takes such an approach can receive a further financial contribution towards the new assets it builds under the Commonwealth Government’s Asset Recycling Initiative.

Unfortunately the Palaszczuk Government in Queensland has chosen not to take such an approach – even though the Newman Government had been well advanced down such a path when it lost office.  The result is less money available to spend on infrastructure in Queensland.

At a federal level we have been open to new funding and financing models—such as our $5 billion concessional loan facility for Northern Australia.

We are also working on choosing the right priorities – so taxpayers’ money goes into the projects that will deliver the greatest benefits.

Recently Infrastructure Australia issued its 15 Year Australian Infrastructure Plan.  This included the Infrastructure Priority List - 93 potential projects across the nation which Infrastructure Australia assesses as addressing major problems or constituting opportunities of national significance.  It was developed following extensive consultation with states and territories and with other stakeholders.

This List is an important step towards better national coordination.  Our collective challenge is to prioritise projects that improve productivity, stimulate growth and productive and liveable cities and regions. 

The Turnbull Government has also reformed our approach to selecting projects for funding. These include considering projects in the context of their overall planning arrangements, using more robust project selection processes and placing greater emphasis on technology solutions.

Last month, I released a set of funding and financing principles that we intend to follow.  These are designed, firstly, to support the Government in making high priority, high quality transport investments that represent value for money, improve productivity, and secure good urban policy outcomes.

Secondly, they aim to share the cost of funding transport projects fairly between those who benefit most from them and the broader community, with a focus on value sharing and moving towards cost-reflective pricing.

Thirdly, we seek to optimise the impact of public investment in transport infrastructure through private sector partnerships and innovative financing.The Principles have been published on the Department of Infrastructure and Regional Development’s website and I encourage members of the Property Council to review them.

Value Capture

In the Principles the Turnbull Government has signalled a strong interest in value capture. In particular, we state that in our consideration of future joint projects, we will expect a greater level of disclosure from the States on potential value capture revenue streams.

Now I acknowledge the Property Council has raised some concerns about value capture.  Earlier this year your Chief Executive Ken Morrison said your industry was waiting to see more details, and he observed:

Property owners already pay stamp duty, land tax and capital gains tax, and we are wary of government adding a value capture tax on top of them.  The danger for the government is that it might end up with its own version of a VCT – very cross taxpayers.[10]

I certainly understand these concerns.  If value capture simply ends up as the justification for more up front charges being levied on a lot – when there is no discernible benefit derived in exchange – then we will not have acheived very much when it comes to stimulating the provision of the infrastructure our country needs.

Today though I want to argue three propositions.  The first is that well designed and located transport infrastructure can sharply increase land values.

The second is that by taking the right approach to value capture we can create a win-win proposition – in which landowners contribute towards the cost of new infrastructure but in exchange receive an increase in value which greatly exceeds the amount of the contribution.

My third proposition is that a great deal, therefore, comes down to the design of the value capture mechanism – and that is where we need the help and input of your sector.

Let me start with the first proposition: the impact of transport infrastructure on land values.

Take the Sydney Orbital Network and Melbourne’s freeway network – which are estimated to contribute about $2 billion a year to the economy.[11] Melbourne’s CityLink freeway is estimated to have created land value improvements of nearly $30 billion.

Consider the Perth Freight Link project, a new expressway presently being planned for the southern suburbs of Perth.  Analysis by Matusik Property estimated that this project could boost property values by 20 per cent with above ground road improvements – and 50 per cent if the project pursues a tunnel option that diverts traffic away from residential streets.[12]

Or look at a recent study in the Journal of Transport and Land Use on the value of being close to a ferry terminal here in Brisbane: for every kilometre closer to a terminal there is an expected 4% increase in the value of the property.

Another local example is the Moreton Bay Region where the new rail line is stimulating new property development projects.  This include a large-scale residential development adjacent to the Moreton Bay rail line at Kallangur and Rothwell; the Sunshine Coast University at Petrie; and the expansion of Westfield North Lakes. 

 The economic reality that transport infrastructure can drive up property values therefore creates the opportunity for a win-win proposition.  Owners of property, in areas which are underdeveloped, will secure substantial economic gains if new transport infrastructure is built there.

Let me give you one example.  The Turnbull Government has committed to build the Western Sydney Airport at Badgery’s Creek.  We have also announced, jointly with the New South Wales Government, a scoping study into the rail needs of Western Sydney and Western Sydney airport: what route should a rail connection take, when should it be built, and how should it be funded?

If you own land in Western Sydney, the value of that land will be greatly enhanced if there is a railway station close to your land.  It will be enhanced even more if the land around the railway station is zoned to permit, for example, multi-story apartment blocks, commercial shopping areas and the like.

A mechanism under which land owners can contribute to the cost of a railway line and station, in this situation, could be a win-win outcome.   This is not just a theoretical proposition: I know that people who own land around the airport are thinking this way because they have come to see me and other Ministers.

Labor Infrastructure Spokesman Anthony Albanese this week has indicated his belief in the potential of value capture to support the funding of a potential rail line to Western Sydney Airport.  In a press release he called it a ‘golden opportunity to utilize value capture.’[13]

I hasten to add that he went on to offer some vigorous criticism of a speech I recently gave – so usual political hostilities were quickly resumed, just in case you are worried!

Interestingly, it is not just those who own land near the new airport who are thinking this way.  Recently executives from a major property fund came to see me.  The fund owns own a significant parcel in an area of one of our big cities which is presently industrial.

Their proposal was that a levy should be imposed on the land they own – and on other landowners – to fund a new light rail connection.  They want to see this happen as part of the land being rezoned to permit a mix of residential and commercial development. 

This would serve their commercial interest, naturally, because it would increase the value of the land they own.  But it would also offer a public benefit.  On the figures they took me through, a significant proportion of the likely cost of a light rail project could be met through the levy.

Now I hasten to add that these are early and indicative discussions.  There is a lot of work to determine specific mechanisms – and then test whether private landowners see value in contributing under those mechanisms.

Which brings me to my third proposition: much comes down to the design of the specific value capture mechanism.

In his media release which I quoted earlier, Opposition Spokesman Albanese proposed one particular mechanism for Western Sydney Airport.  He wants to include the cost of the line in the capital cost of the airport and recover the cost through leasing out airport land to users at elevated lease prices which reflect the value generated by the rail line.

I am rather sceptical of this particular mechanism for a range of reasons, including that the Commonwealth owned land at the site is likely to be needed to a very large extent for aviation related activities rather than being available to lease to other businesses.  But it does illustrate the point: the principle of value capture can be given effect to by a wide range of mechanisms.

Indeed some years ago the Property Council issued a very informative paper about the potential use of ‘tax increment financing’ as a value capture mechanism.[14]  This approach, widely used in the US, involves designating a particular geographic zone which is seen to benefit from new infrastructure investment, determining the current aggregate property tax receipts across the zone, and then hypothecating any increase in those receipts, over a period of say twenty years, to a seperate fund.  That fund is then typically used to pay interest, and repay principal, on a loan taken out to pay for those infrastructure improvements.

In coming weeks we will issue a discussion paper calling for comment on how the Commonwealth could best encourage value capture as a means of contributing towards the cost of infrastructure projects.  We need to move from the principle to a discussion of particular mechanisms. 

Typically it will be state and territory, or local, governments which are the ones using a value capture mechanism.  Different governments may use different mechanisms.  But the Commonwealth has an important role in encouraging the use of value capture – and indeed in requiring it to be used as a condition of us providing funding for projects.

We recognise that value capture typically contributes only a portion of the total capital costs – around 32 per cent in the case of London’s CrossRail project, for instance.[15] However, there are other reasons to use value capture. These include improving the transparency of the benefits and costs of infrastructure to the general public, and to help leverage planning reform and urban regeneration.

The ultimate test for a value capture mechanism is its success in sharing value among all the parties with a stake in infrastructure projects – including communities as a whole and the direct beneficiaries of these projects.

Conclusion

Let me conclude by reiterating the critical linkage between transport infrastructure; the social and economic value of property; and the success of our cities. 

The Turnbull Government wants our big cities to be productive economic centres – and very pleasant places to live.

That is why we are engaged in a national dialogue with stakeholders about urban issues, and the decisions, planning and investment needed to ensure that our cities thrive into the future. 

I welcome the Property Council’s strong interest in these issues – and look forward to your continued constructive and well-informed input.

[1] http://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS

[2] Australian system of national accounts, 2010-11, cat. no. 5204.0

[3] Australian system of national accounts, 2010-11, cat. no. 5204.0

[4] Business Council of Australia (2007), “Why Australia’s Services Economy Deserves More Attention” p.3

[5] J –F Kelly and P Donergan, op cit, p. 1. 

[6] http://www.smh.com.au/federal-politics/political-news/cabinet-reshuffle-malcolm-turnbull-appoints-jamie-briggs-minister-for-cities-20150920-gjqzk2.html

[7] Australian Infrastructure Audit, Executive Summary, p 6, http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australian-Infrastructure-Audit-Executive-Summary.pdf

[8] Australian Infrastructure Audit, Vol. 1, p. 22. http://infrastructureaustralia.gov.au/policy-publications/publications/files/Australian-Infrastructure-Audit-Volume-1.pdf

[9] BITRE, Traffic and congestion cost trends for Australian capital cities, Information Sheet No. 74, p.1.

[10] ‘Value capture funding may be yet another property tax, warn lobby groups’, Australian Financial Review, Jan 29 2016

[11] Sydney Orbital network estimated economic contribution sourced from: Infrastructure Partnerships Australia 2010, ‘Submission: M5 Corridor Upgrade’, March 2010, (p. 5). Melbourne CityLink land value improvement estimate sourced from: SGS Economics & Planning 2012, ‘Long run economic and land use impacts of major infrastructure projects’ Final Report for Victorian Department of Transport, July 2012. See Table 15, p. 69.  

[12] Matsuik Property Insights, Perth Freight Link – Potential Urban Outcomes: Section Two Road Options, October 2015, p.2.

[13] http://anthonyalbanese.com.au/government-confirms-new-airport-will-have-no-rail-link, 7/3/16

[14] PriceWaterhouseCoopers, New Thinking on Infrastructure Financing: Tax Increment Financing to Fund Public Urban Infrastructure in Australia, For the Property Council of Australia, November 2008

[15] D Salon, Location Value Capture for Urban Public Transport Finance, May 2014, p. 3. http://library.rpa.org/pdf/TLS-2014-Research-Paper-Value-Capture.pdf