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Value sharing in infrastructure

While COVID-19 resulted in huge commitments by both state and federal governments to invest in infrastructure, Australia was in the midst of an infrastructure boom long before coronavirus hit our shores.

While it’s widely acknowledged that different funding strategies and sources are needed to continue the pace of development, value sharing – sometimes known as value capture – is not an option that we turn to regularly.

But why? Value sharing is an approach that allows governments to supplement the cost of delivering infrastructure by asking those who will benefit from it to contribute. When done right, governments, businesses and community beneficiaries become ‘co-investors’ in assets that yield diversified returns for the collective. Returns that can come in the form of land value uplift, higher commercial and rental returns, land use optimisation, liveability and more.

When value sharing is successfully implemented, the overall cost to government of a project can be significantly reduced, while the community and industry become more involved in making it a reality.

Not only is value sharing a strategy for funding, it’s a mechanism for shaping assets that respond to local needs and aspirations, and a way to ensure projects facilitate broader benefits for citizens.

Despite all of these potential benefits, value sharing is seen as a hard sell. The problem is that all too often our conversations about it don’t start with a compelling value proposition. No investor will part with their money when the proposition is all cost and no benefit. And when you start the discussion with words like ‘tax’ it can be hard for local residents and the business community to see the positive end beyond the negative means.

So how do we start a more successful dialogue about co-investment in infrastructure? We need to start talking not just about the cost of infrastructure, but the value propositions that can be created through it – for industry, local residents, landowners, businesses and government.

Here are some co-investment conversation starters that could help put value sharing and infrastructure on a better track.

Conversation starter: who are the potential beneficiaries of an infrastructure project?

Each community has unique opportunities, challenges, aspirations and interdependencies. It’s important to know what value can be created in that context, and for who. Identifying value propositions is the very first step. This needs to be an open conversation based on:

• Who owns or does what in the corridor proposed for infrastructure development?
• What do local residents, landowners, industry and businesses want and value?
• Who would benefit most and how?
• What commercial opportunities could be generated?

Looking at the example of a proposed rail line below, we can see a number of different stakeholder types, local opportunities and constraints.

Discussion point: visualising value together

By better understanding the nature of a corridor and needs of the local communities along it, a clearer picture of value begins to emerge. Now is the time to talk to key beneficiaries about whether assumptions about value are correct, and what changes can be made to a project to enhance it even further.

Through early consultation with people on what they value, infrastructure proponents can ensure that project development processes contribute to, rather than hinder value creation. These insights help ensure opportunities are realised through the development phase as projects move towards an investment decision by government.

This step is all about working with potential beneficiaries to better understand what can be achieved through infrastructure and sparking desire to realise these benefits. In some instances, stakeholders won’t see value, and this reveals important insights and opportunities, too.

Looking at our rail corridor now, we can start to formulate value sharing options and proposals.

Residents in the middle ring suburb (number 3) see that increased transit amenity will enhance mobility in the area through faster travel times, more transit choices and reduced congestion. This will make their suburb a more desirable place to live and increase the value of homes in turn.

Local businesses recognise that rail development can help their customer base grow while giving them access to a broader range of potential employees. Such improvements will increase the value and profitability of their businesses. Commercial property owners will also enjoy benefits via increased rental returns as their property will be a better place to do business from.

As the capacity of the local transport network is increased, property developers will see additional development opportunities and government can benefit from the sale of valuable ‘air rights’ to developers who want to build above stations.

Looking further down the corridor to the former industrial site (number 4), increased transit amenity may allow the site to be redeveloped for a better, higher-value use, such as a mixed-use development or a residential precinct.

By contrast, the residents of our inner-city suburb (number 2) see very little value, as they already have ample transport options and are concerned about construction impacts.

Potential benefits breakdown

• Local residents will enjoy increased property values. They will also benefit from having access to a greater range of employment opportunities (and hence may earn more money).

• Local businesses will enjoy increased profitability.

• Commercial property owners will enjoy increased property values and rents.

• Property developers will enjoy increased property development opportunities and profits.

• Government will enjoy the creation of valuable air space rights above stations.

• Government will gain the ability to use the new asset to earn revenue (eg public transport fares and/or advertising rights in trains or at stations).

• Government will enjoy increased economic activity and productivity taxes (eg payroll tax, income tax) and ad valorem taxes (eg stamp duty, capital gains tax).

Discussion point: now we can see value, how can we share it?

Now that we better understand what the community and industry values, we can engage with them on how they’d prefer to invest in creation of the project. Involving these groups in the development of value sharing options will help to address public interest issues and find ways in which they would like to invest

With little perceived value for residents in our inner-urban residential suburb (number 2) we could consider adjusting the project’s scope to remove the station altogether – a significant cost saving and aligned with stakeholder feedback about what they want, value and need.

In our middle ring suburb (number 3), where members of the business and residential community see high value, we could discuss with the shopping centre owner the opportunity to in invest in the project via a direct contribution. Similarly, property developers and owners could be engaged on how they think they could best invest, perhaps through a local area levy on property development or ownership which would be in place for a limited time period or perhaps an additional user-pays charge, such as a higher public transport fare.

In our publicly owned health precinct (number 5) the government landowner could seek to redevelop the precinct to a higher and more valuable use through partnership with private health care providers. The value this creates could then be used to provide additional health services or defray the cost of the station.

If the project owner is a state government, it may seek a contribution from the Australian Government in the recognition of the project’s capacity to address national priorities and/or to increase federal tax revenues.

Discussion point: commercialising co-investment options

With value identified and options agreed, the investment proposition for government is improved as is the social licence to implement the funding and finance strategy. But can value sharing pay for the whole initiative? Well, it depends on the project.

Some infrastructure initiatives have well-established value sharing and funding mechanisms that allow for a significant funding contribution or can pay for a project in full—usually when customers pay directly to use the facility.

These include toll road projects such as Brisbane’s Gateway, Logan, Clem 7, Airport Link, Go-Between and Legacy Way bridges, motorways and tunnels which were either fully, or largely paid for by the tolls that drivers pay to use these roads.

Other initiatives require funding from a number of sources to commercialise the project adequately. Value sharing can help get this funding mix right.

One of the better-known international examples is Crossrail in the UK. This project included funding from various public and non-government sources including multiple tiers of government, property owners, developers and the business community. Around a third of this project was funded through value sharing arrangements.

An Australian example is Gold Coast Light Rail. This initiative’s funding and finance strategy included contributions from three tiers of government, together with private finance via a public private partnership (PPP) arrangement. The Gold Coast City Council funded its 12% contribution through a transport levy which it put in place to fund a range of transport projects throughout the region.

Why was value sharing successful in these cases? Because of the genuine investment made in community and industry engagement. In the case of Crossrail, this resulted in a number of value sharing mechanisms being realised, while on the Gold Coast, a broader levy was used to help fund projects that make the city better.

So, what now for value sharing?

Of course, the rail corridor example used above is just that—an example. By no means are these conversations simple in the real world. Nor are they limited to transport. The principles can also be applied to other infrastructure projects such as water and electricity transmission.

Sharing value involves change and concession. The point to remember is that value sharing will never be possible without conversations about what is valuable. At the end of the day, infrastructure development involves people with diverse interests. It is for people who have different wants and needs.

If we involve stakeholders in conversations about the value that can be created through infrastructure and use this feedback to shape compelling value propositions that encourage co-investment, we can create a more compelling and affordable case for government to invest in projects and feel assured that communities are along for the ride.