Client Update: Value capture for major transport infrastructure projects discussion paper
17 November 2016
In brief: The Federal Government has released the discussion paper foreshadowed in its Smart Cities Plan about how to use value capture to fund infrastructure projects in Australia. Infrastructure & Transport Sector Leader Leighton O'Brien (view CV), Government Sector Leader Paul Kenny (view CV), Special Finance Counsel Phillip Cornwell (view CV) together with Senior Associates Michael Zissis and Nick Beresford-Wylie take a look at the paper and highlight issues for stakeholders to consider when preparing their submissions.
The Federal Government yesterday released a discussion paper titled Using Value Capture to Help Deliver Major Land Transport Infrastructure and called for submissions on the use of value capture to help fund the delivery of major transport infrastructure in Australia.
The Discussion Paper acknowledges:
- the fiscal constraints currently faced by governments and how those constraints limit infrastructure funding options, particularly traditional funding methods (grants and subsidies) and user charges; and
- the potential to generate new funding streams via value capture mechanisms – that is, leveraging increases in value created for beneficiaries of infrastructure – to accelerate the delivery of planned and new (previously unfunded) infrastructure.
The Discussion Paper draws on international experiences in funding infrastructure projects using value capture, including the use of developer contributions in return for development and concession rights (as was used for the MTR in Hong Kong and London's Crossrail (which were explored in our recent event with the Committee for Sydney) and tax increment financing (as utilised in the USA for the Denver Union Station).
It also outlines a number of possible financing strategies that could be used to deliver infrastructure projects once revenue streams from value capture are factored into the funding model.
Key areas of interest flagged for consideration include:
- ensuring value capture is not an additional tax, but a fair allocation of benefits and costs;
- demonstrating a nexus between payments made to support new infrastructure and the benefits that infrastructure provides;
- identifying who will benefit from a project and collaborating with those beneficiaries early on to determine their willingness to pay and maximise the benefits of the project; and
- managing the mismatches in timing between the upfront financing requirements of the project, the associated uplift in vale (eg land and commercial values) and when beneficiaries materially gain from those uplifts.
The Discussion Paper also canvasses a range of options the Federal Government could take to stimulate the use of value capture as a funding mechanism, including:
- working with state, territory and local governments to promote leading practice;
- using the Federal Government’s funding and financing capacity to support value capture strategies;
- strengthening requirements on federal funding support – reiterating statements in the Smart Cities Plan; and
- stimulating market-led value capture proposals.
The Discussion Paper follows the release of the Federal Government's Smart Cities Plan earlier this year (see our article about the implications of the plan for traditional project finance – initially published in Project Finance International – on the Allens website).
The release of the Smart Cities Plan and the Discussion Paper is a signal to the transport, infrastructure and property sectors that value capture should not be discounted as a 'buzzword'; it demonstrates the Federal Government is continuing to investigate how it can encourage to use of value capture and maximise its returns on any future investment in infrastructure projects.
While the Federal Government is not a major player when it comes to direct infrastructure investment – with state and territory governments primarily responsible for the infrastructure spend – it nevertheless has the capacity to exert significant influence on infrastructure project investment through its decisions around commonwealth funding contributions, which so often make the difference between whether and when a project proceeds.
There are eight to 10 different value capture mechanisms that can generate value from surrounding property and commercial developments, or capture value from the broader beneficiaries of new infrastructure. … Whatever models the government uses, they should be formally defined in a clear policy framework. And this framework should be applied right at the beginning of the planning process, not when it comes to Treasury for funding.
– Partner Paul Kenny, extract from June edition of FinanceAsia.
Ideally, the Discussion Paper process will lead to the development of that 'missing' policy framework and provide a level of certainty about what value capture is for government, financiers and proponents alike (but avoid offering a 'one-size-fits-all' solution) and encourage its acceptance and uptake in the same way the release of the PPP framework did a decade or so ago.
Other potentially positive outcomes the Discussion Paper process could generate are:
Involvement from banks and lenders
If value capture is to be used as a funding mechanism, what certainty or level of comfort would investors and financiers need to support investment in/lending to:
- Projects where, for example, hypothecated tax revenue, developer contribution arrangements or other value capture mechanisms are designed to provide cost recovery funding; or
- Local government entities or structured finance vehicles established specifically to leverage improved values to provide upfront capital contributions to a project (eg additional credit support from government, legislated regimes etc.)?
Is there appetite in the local bank market to accommodate co-financings on terms similar to the Transportation Infrastructure Finance and Innovation Act (the TIFIA) loan structure in the United States?
The TIFIA credit program is designed to fill market gaps and leverage substantial private co-investment by providing supplemental and patient capital for major transport infrastructure projects. TIFIA loans are typically subordinated to senior bank debt in cashflow terms but equal ranking on enforcement of security.
Steps in this direction have been taken by the Federal Government already, notably the A$2 billion National Water Infrastructure Loan Facility announced as part of the 2016-17 Federal Budget, under which concessional loans will be available to finance water infrastructure projects.
Involvement of various levels of government
- How can existing regulatory mechanisms reform strategically aligned project specific planning, transport and social policy outcomes? During a recent roundtable involving NSW Treasurer Gladys Berejiklian, this strategic alignment was described as a pre-requisite for the successful implementation of value capture and how a lack of alignment can result in missed opportunities.
- How will the City Deals, such as to the one recently announced for Western Sydney as mooted in the Smart Cities Plan, help achieve that strategic alignment?
In New South Wales, there appears to be an opportunity to achieve alignment for the development industry through the strategic planning work being led by the Greater Sydney Commission and concurrent planning reform efforts of the Department of Planning (including, for example, proposed reforms to the VPA framework).
Involvement from the development and property industry
How can desirable development within an infrastructure corridor be encouraged? For example:
- Could such development, realised within a specific period after an infrastructure project is completed, give rise to greater contributions credits or some other planning relaxation or 'bonus'?
- When would it be attractive to buy development rights off the government for new infrastructure projects including integrated commercial development? When would a developer choose to bid as part of a project consortium?
- Why development contributions, imposed on new development, should not be viewed in isolation as a value capture mechanism available to fund infrastructure projects?
Submissions about the issues raised in the Discussion Paper can be made to the Department of Infrastructure and Regional Development until 3 February 2017.
Allens can assist in the development of submissions or provide general advice regarding the use and impact of value capture mechanisms.
- Paul KennyPartner, Sector Leader, Government,
Ph: +61 3 9613 8860
- Leighton O'BrienPartner,
Ph: +61 2 9230 4205
- Phillip CornwellSenior Finance Counsel,
Ph: +61 2 9230 4748
- Emma WarrenPractice Group Leader, Projects & Development,
Ph: +61 3 9613 8856
- David DonnellyPartner, Sector Leader, Infrastructure & Transport,
Ph: +61 3 9613 8112
- Nicholas NgPartner,
Ph: +61 7 3334 3139
- Kate ToweyPartner, Sector Leader, Real Estate,
Ph: +61 2 9230 5053
- David McLeishPartner,
Ph: +61 3 9613 8954
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