Business

Value capture, privatisation by stealth?

The Ministry of Transport has warned Phil Twyford that forms of value capture like the sale of Crown land could be unpalatable to the public, writes Thomas Coughlan

An announcement on value capture is still likely 18 months away, but documents obtained under the Official Information Act gives a glimpse of what form the Government’s new revenue source might take.

Until now, value capture has often been talked about as a form of charging homeowners and businesses for the increase in value that accrues to them as a result of having infrastructure built close to their properties.

But the documents show other forms of value capture are also being considered, including the potentially unpopular sale of Crown land to private developers.

The first paper, seen by Transport Minister Phil Twyford on November 24 last year, notes there were three projects being looked at as case studies and mooted different forms of value capture that could be used on a number of infrastructure projects.

But the document warns that some forms of value capture may be unpopular and difficult to implement.

Joint or co-development

One model discussed in the briefing mentions the possibility of joint or co-developments.

A joint development is essentially an enhanced public-private partnership which compels the private sector to contribute to funding infrastructure projects that will deliver benefits to businesses.

This involves a project negotiated between the government and private developers as it involves the “mutual recognition of the enhanced real estate development potential” of new transport infrastructure.

The government receives payment from the private sector developers in the form of lump-sum payments in return for the sale of state-owned land or development rights.

Other revenue sources include annual lease payments, financial contributions to construction costs or ‘connection fees’ from retailers who wish to operate out of where the value capture is being applied.

But the briefing paper notes that such projects are criticised for providing “excessive benefits to private developers at the expense of taxpayers”.

The more common alternative

The more commonly talked about alternative is some form of tax that calculates the extra value that accrues to properties from nearby development and then taxes some of that increase.

A form of value capture along these lines was being worked on by the previous government.

Then-Transport Minister Simon Bridges told Newsroom that officials began work on "value capture on commercial properties which benefitted from new infrastructure as a way to help fund it".

"This work was only at the very early stages of development," he said.

But the documents say targeted rates could be difficult to implement under the current legislative framework.

Even if an implementation mechanism existed, questions still remain over how an increase in value would be calculated and at what point it would be taxed. It could be collected on an ongoing basis or at the point when the gains were realised.

And even this is easier said than done. A more recent report from February 13 from NZTA noted there were risks to value capture, including disincentivising development and creating confusion between central and local government.

The November document notes that the Ministry of Transport likewise has misgivings about the practicability of value capture.

The briefing notes that work done by the Department of Internal Affairs said that applying targeted rates for value capture purposes might not be possible.

Simpson Grierson partner Josh Cairns told Newsroom the problem was likely down to the ways targeted rates were applied in New Zealand, which could not be set in relation to the increase in a property’s value.

“The thing you’re missing at the moment is setting a rate by reference to the value uplift,” Cairns said.

“You can set it by reference to the value, but that is the full value of the property,” he said.

Using targeted rates to tax an uplift in value would therefore require legislative change.

Perhaps a combination of the two

Subsequent briefings to Twyford show that a combination of value capture mechanisms are possible.

An aide memoire seen by Twyford on February 8 regarding value capture relating to Auckland's City Rail Link sketches out the value capture potential of developments that could be undertaken on Crown land close to rail link stations.

“It is useful to think of the opportunities associated with the station sites themselves, where the land is owned by Auckland Council, AT, or CRLL, as well as value capture opportunities in the surrounding areas”. “Publicly owned land (both Crown and Council) provides a direct pathway to redevelop and create value uplift opportunities around the stations,” the document said.

“We understand that there is Crown and Auckland Council land near the Mt Eden station. This could be worthy of investigation particularly in light of the proximity of the Mt Eden station to the planned light rail on Dominion Road,” it said.

It said value uplift could be generated in relation to “assets owned and/or acquired for the project and able to be disposed of after CRL [City Rail Link] project completion”.

It said the rail link could increase the number of dwellings feasible for development within station catchments by 41 percent, enhancing development potential.

This is unlikely to happen soon as City Rail Link Limited, which is tasked with building the link is unable to sell land relating to the project until 2023/24.

The documents make it seem like this is the more likely option.

A targeted rate on businesses was considered, but "Auckland Council considered that due to the amount of preparatory work and engagement with the business community that would be statutorily require, ti would not be practicable to implement a targeted rate to fund part of the CRL project in the relevant timeframe".

A popular option

Value capture remains popular, with support from Twyford and Finance Minister Grant Robertson as well as Auckland Mayor Phil Goff.

Twyford has indicated that value capture may eventually be used outside of Auckland too. Yesterday, his office noted that current work on value capture was still "high level" and final decisions were still some way off.