Australia: Value Creation and Capture Framework in Victoria: A first step in the right direction

The Victorian State Government has become the first Australian state¹ to issue a value capture and creation policy. The Value Creation and Capture (VCC) Framework issued on 21 March seeks to 'systematically harness' the potential of government investment to create additional value for the community. The Framework represents a solid beginning but a national framework and more detailed guidance is required.

VALUE CREATION V CAPTURE

Value Creation is the delivery of enhanced public value in economic, social or environmental outcomes above what would ordinarily be achieved as a direct consequence of the investment. Specific examples of value creation include improving productivity and accessibility, increasing asset value, protecting the environment, increasing social capital and unlocking commercial opportunities.

It could be said that most capital works delivered by government already 'create value' on the basis defined in the Framework. For example, improving productivity (by reducing congestion and transport costs) has always been both a fundamental driver of the Level Crossing Removal project and a rationale for the delivery. In this way, value creation is the direct consequence of the investment on this program of works. This is so for many transport projects.

Value Capture is the capture of a portion of the increased economic value created by the investment. This may generate a revenue stream or other financial value for government. Value capture targets those who benefit from the investment. Beneficiaries may be diverse (land owners, transport users, local businesses) and may obtain both direct (increased land value) and indirect (reduced operational costs due to reduced congestion) benefits.

Government already captures value in the form of various land and business taxes imposed in Victoria, which in theory return increased revenue over time. The Victorian planning system also has mechanisms, most notably the Growth Areas Infrastructure Contribution (GAIC) and more recently through Infrastructure Contribution Plans (ICP). Another form of value capture is road tolls. Additional examples provided in the Framework are sale of development rights and lease of retail or ad space. Some of these mechanisms can be implemented contractually, others generally require legislation.

Value Capture is not a silver bullet². It does not necessarily flow automatically from a project which creates value and further, it will never fully fund a major project³.

WHAT DOES THE FRAMEWORK DO?

The Framework:

• requires project sponsors to apply VCC principles to the policy objectives for the project or precinct;
• requires the preparation of a strategic or detailed VCC Plan if appropriate; and
• provides a menu of VCC mechanisms;

The Framework primarily applies to capital investment projects (including high value construction projects or programs valued at $100 million plus⁴), public land development and precinct projects. Although value capture is arguably better suited to certain types of projects (eg heavy rail), the Framework does not exclude any types of project or infrastructure.

The 'menu' of value creation mechanisms proposed include land creation, consolidation of land, imposition of planning conditions or scheme amendments, private finance and ownership and third party incentives (eg via a grants scheme). The value capture mechanisms discussed include development rights[5] (joint and otherwise), infrastructure levies and voluntary contributions by beneficiary businesses.

ANALYSIS OF THE FRAMEWORK

The Framework reflects the fact that value capture is already utilised by state agencies and provides detailed examples and case studies of mechanisms which have already been applied. To the extent that it formalises these tools, the Framework is a positive step and will ensure that VCC is assessed and planned for by agencies at the earliest possible stage. As a result, it should ensure better discipline in relation to project identification. The Framework does not expressly require that funds raised in value capture be hypothecated to the relevant investment, although this may be implied.

The relationship of the Framework with the State's Market-led Proposals Guidelines is unclear, although arguably it provides encouragement to a proponent who may have a proposal for government investment which provides a return based on a value capture mechanism.

The Framework largely relies on those value capture mechanisms which are agreed contractually. It does not explore in detail (or in some cases, at all) the value capture funding or financing tools which have been recently proposed⁶ such as:

• tax increment financing;
• betterment levies or taxes imposed on businesses or commercial land owners⁷;
• expansion of the GAIC or other contribution models such as an ICP⁸ to other areas (eg inner urban brownfields areas);
• a blanket flat tax on the uplift in value on unimproved land located in a specified area⁹; and
• municipal rate surcharges.

Considerable complexity arises in connection with these mechanisms, including that they may overlap with taxes, levies and rates already imposed and capturing value to some extent at all levels of government.

THE COMMONWEALTH HAS A ROLE TO PLAY

A key outcome of the Framework is enabling increased capacity to fund additional projects and services. For this to happen, more is required. Whether there is any potential for structural change, such as legislation of a standardized 'one size fits all' value capture framework¹⁰ or for an area specific levy, for example, is not clear.

The need for coordination on VCC at all three levels of government remains pressing, as does the need for more detailed guidance on VCC tools. The Framework itself points out that State agency sponsors should align their objectives with local governments as part of the stakeholder engagement process.

Later this year the Commonwealth, following review of industry submissions, will finalise its report on value capture¹¹.

The Commonwealth Parliament's Standing Committee on Infrastructure, Transport and Cities has recommended ¹² that the Commonwealth should take a leading role by:

• setting standards;
• developing an assessment tool (or tasking Infrastructure Australia to do this);
• developing a national framework and methodology to ensure consistency and assist with business cases; and
• tying Commonwealth funding to projects with a high potential to achieve VCC objectives[13].

The Framework's objective that VCC be at the forefront of strategy development, business planning and objective setting for all government projects and capital investments is a sound first step, but a multi-tier and cooperative approach to value capture across all levels of government is required.

At the very least, the Commonwealth should press for a consistent and harmonised policy framework to be implemented in each Australian state. This framework, which must include detailed tools and guidance, can then form part of a longer term approach to reform to infrastructure funding, which is likely to require legislation depending on the model or models adopted.

With special thanks to Georgia Westbrook, Law Graduate.

Footnotes

¹ It is noted that Queensland Government's State Infrastructure Plan March 2016 includes an implementation action of establishing a value capture policy. Other state governments including NSW have also expressed support for value capture.

²See speech by Minister for Urban Infrastructure, Hon Paul Fletcher MP given on 15 March 2017.

³ The example most commonly given is CrossRail in London, where the mixture of value capture tools are funding around 30% of the total cost.

⁴ The State retains the discretion to apply to project with lesser value if appropriate.

⁵ This mechanism is being used on Melbourne Metro and the Level Crossing Removal program.

⁶ Noting that some of these are not within the control of a State Government. See for example 'Value Capture Roadmap' by AECOM and Consult Australia June 2015, Submission from Property Council of Australia 'Value Capture Discussion Paper' to DIRD dated 24 February 2017.

⁷ These were used for both Sydney Harbour Bridge (1932) and Melbourne City Loop (1985). Such a charge can be imposed in a number of ways and at different points in time – as a % of unimproved land value, on rateable value or on a per square metre of floor space basis

⁸ Infrastructure Contribution Plans are established under Part 3AB of the Planning and Environment Act 1987 (Vic). In theory the Ministerial Direction could extend the definition of a development setting to brownfield environment.

⁹ Proposed by Grattan Institute, Marion Terrill 'What Price Value Capture?' March 2017

¹⁰ As has been suggested by the Grattan Institute, see note 9 above. The Institute says that the means of value capture should be the same each time. Projects would still need to be assessed on a case by case basis.

¹¹ See the Department of Infrastructure and Regional Development's Value Capture Discussion Paper dated November 2016.

¹² 'Inquiry into the Role of Transport Connectivity on Stimulating Development and Economic Activity' report tabled 6 December 2016.

¹³ Although it has been pointed out that Commonwealth funding is generally provided to projects which do not necessarily lend themselves to value capture.

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