Tracing the ways infrastructure in Australia has been funded. Annabelle Quince’s Rear Vision on Radio National – excerpt
Gary Bowditch: The way that that decision was taken was a very interesting one. It was interesting for one very important reason, and it’s one that we need to be reminding ourselves continually here in 2014, and that is that infrastructure, in this case a bridge, was connected to a broader system, a broader system of the community and in particular the land that it connected.
The decision to go ahead with the Sydney Harbour Bridge was done with some very clear governance frameworks in place, and that was that the decision to proceed with the bridge had to be balanced against the cost to the impact that that would have on the land values on the other side of the city. So while cost benefit analysis wasn’t in fact in place at that time, there was an underlying intuition that if you were to provide a piece of infrastructure, that there would be a cost and there should also be a return, and that social return was reflected in the attempt to say, well, how did land values increase as a result of the bridge? And to the credit of the planners and the decision-makers, that was put in place. And the uplift value that would have occurred on the north shore would have paid for the bridge several times over.
Annabelle Quince: So, in essence, because land values went up on the north shore, the people on the north shore in a sense paid through their land values something that went back to help pay for the bridge.
Gary Bowditch: There was a betterment tax that was associated with those increase in land values so that the government, who was paying for the bridge, were able to extract a part of that improved/ unimproved capital value to fund the bridge. So in fact there were two revenue sources for the bridge at the time. One was a fee for the use of trains that would run across it, which was a separate decision but one that was integrated into the broader decision, and the other was the betterment taxes.
Annabelle Quince: Many of the states’ major infrastructure projects were overseen by and funded by state infrastructure authorities, like the Melbourne and Metropolitan Board of Works and the New South Wales Roads and Traffic Authority.
Marcus Spiller: A statutory corporation called the Melbourne and Metropolitan Board of Works was something that was set up in fact prior to Federation, basically to deal with the sewage problem in Melbourne. It was a statutory authority, it was at arm’s length from government, it raised its own rates, it raised its own infrastructure bonds, and it built right through until the ’70s a very comprehensive sewer and sewage treatment system, one that was held up for decades as a world-leading example of engineering in that area.
They also built a magnificent metropolitan parks system where they looked at their drainage management responsibilities but interpreted it more broadly. They turned what would otherwise just be creeks for drainage purposes, they turned them into a wonderful metropolitan parks system. And in the latter days of their operations as a multipurpose infrastructure agency they built the Tullamarine Freeway here in Melbourne, which until fairly recently was a very effective way of conducting people from the airport to downtown, their jobs and homes and so forth. So the Boards of Works is probably a shining example of the way things used to be done.
Annabelle Quince: And you said they raised their own capital, so explain that. How did they get the money to do all that?
Marcus Spiller: Yes. Well, they were a metropolitan authority and people resident in the metropolitan area paid rates, both to their local council for local services, but they also paid rates to the Melbourne Metropolitan Board of Works which was in charge, as I mentioned before, of the water services, parks and recreation services at the metropolitan level, and they also did planning, metropolitan planning.
So the rates that the Board of Works raised on the back of the properties in the Melbourne metropolitan area, which was quite a large tax base, the revenue from those helped service bond raisings that the Board of Works used to issue from time to time. So from time to time they’d issue Melbourne Metropolitan Board of Works bonds. Mums and dads and indeed institutional investors used to buy up these bonds, which were quite secure, they were backed by revenues generated from property taxes which are highly secure, they are not as prone to economic cycles as various forms of income taxes. And so they were pretty effective at raising capital for their program.
In addition they received funding appropriations from the state government for projects that were of a scale that demanded it. So, for example, if they were building major dams in the catchments well beyond the confines of Melbourne, a project that had a major intergenerational benefit attached to it, the government of the day would also provide capital to the board. But the funds-raising on the back of their independent tax base was quite important.
Annabelle Quince: So when does that start to change? When does that model that was clearly used in various parts of Australia, when does that stop being used and what was the model that was introduced?
Marcus Spiller: Yes, well, the model started to change from about the mid ’70s onwards, and there was quite a sharp change in sentiment. I spoke earlier about the post-war reconstruction fervour where we really wanted to build a new future and get to work building the sorts of infrastructures and cities that we needed to really give us a different direction compared to the misery of the war and the pre-war period.
And Keynesian economics ruled the day, that’s the period when people looked to government to invest and to make things happen. By about the mid ’70s, probably signposted by the election of the Thatcher government in the UK and subsequently the Reagan administration, there was a pretty extensive or global critique developing of that post-war model. By then people had started to say, look, government is really crowding out private sector activity, it’s really throttling enterprise and endeavour, it’s really crushing productivity, we’re stagnating, government really needs to get out of the way.
In our country this reform or this critique and the reform initiatives that flowed from it came under the title of microeconomic reform under the leadership of the Hawke/Keating government which started to look at the way we did infrastructure, the way we did regulation, the way we dealt with labour markets.
And the whole agenda became one of stripping away unnecessary interventions and looking at ways in which we can bring market disciplines into all facets of the economy and the community in order to get more efficiency, in order to get more dynamic resources, in order to grow the economy which had fallen into a bit of a funk by that stage.
And so whereas in the post-war period the engineers sort of ruled the roost, from about the early ’80s the sort of accountants and the MBAs took over in the infrastructure space. And whereas previously it was a question of building the best possible infrastructure you could with the resources you had, you now had a more businesslike attitude to the way infrastructure should be provided.
So we started to look at ways of ways of bringing user-pays into the way we fund infrastructure in a more overt way. Previously there was user-pays, but in a fairly indirect way. We wanted to bring user-pays into it so that the suppliers of infrastructure had some price signals about where and when to invest.
Whereas previously we built a lot of redundancy into our infrastructure because we had this eye to the long-term future, in this new period it was more about making the best possible use of scarce resources and investing as if you were investing in the private sector, you know, you must generate a decent rate of return on the investment within a reasonable period of time. We began to sweat our assets more, use the spare capacity that was in the infrastructure more, starting to make infrastructure investments just in time rather than ahead of time and with spare capacity. So it was very much a businesslike culture and discipline that was brought to infrastructure provision.
Annabelle Quince: From the 1980s onwards, private enterprise started to play an ever-increasing role, not only in building infrastructure but also in owning and managing our infrastructure.
8 thoughts on “HOW USER PAYS IDEOLOGUES DEFEATED INFRASTRUCTURE”
And Robert if we have a decent tax system (funded largely by the naturally rising value of the earth as defined by land prices), we could finance decent health and (female) education, which have a particular impact on birth rates.
For those interested in further Land Value Capture documentation, check the historical perspectives here & a literature review of key documentation.
Rapidly increasing population, restricted supply and zoning are often given as the main reasons for our high land prices, Robert, but, believe it or not, they are secondary considerations. Our enormous land prices largely reflect the grossly inadequate capture of the annual rental value of our sites, land prices simply being the capitalisation of privately-captured land rent. Were we to capture the greater part of our site rents for public purposed instead of taxes, there’d be less land rent to be capitalised into land prices despite population increasing. Certainly population increases do matter, but greater capture of site rents via rates and land taxes would reduce or at least keep the lid on land prices.
Thank you for the clarifications Bryan – very helpful.
I’m gradually being won over by the LVT. What troubles me though is that land values are ultimately driven by population growth, and ours is firing away on all cylinders thanks to immigration, which I don’t support and the government keeps doing without any reference to the electorate. Seems that property development is the main business here. Developers together with big corporations want the people to keep on flowing in while they watch their land values and businesses grow. Meanwhile infrastructure never has and never will keep up with needs. Our water supply is being shared amongst an ever increasing number of people. Traffic in Sydney is now so bad in peak hour it’s stifling productivity and making people ill (anger, frustration, pollution). Quality of life is falling, and the real measure of prosperity – real GDP per capita – is not created by population growth at all, but productivity.
I’ve just completed may tax return and I cannot believe the absurdly complex web of rules – especially for Medicare. How much simpler to have a single LVT and RT. I want to quit this system, move to the country and subsist. Under the Georgist model I’d have to make enough to pay my LVT, or have it booked against my estate when it’s sold or bequeathed. But then under the Georgist model I might have an incentive to start a business.
Good questions. (i) What you’re really asking here is that people who are currently living under the same roof in NSW are currently paying a total of $18,000 in State taxes now, so how can they continue to do so under LVT? In respect of your average–which currently falls disproportionately on workers and businesses–it’s worth noting that the wealthy own the most valuable properties AND more of them, so they would certainly be paying more realistically for the benefits and privileges they are receiving (at long last?) Mind you, they may then have to rationalise their landholdings, and they’ll certainly protest at having to do so – as did the 0.1% when the Rudd mining tax was proposed. (ii) This particular corruption applies NOW, Robert, and would be vastly reduced by an all-in single-rate land tax. In fact, those speculating in broadacres on the urban fringe currently receive an array of dispensations from land tax which promotes speculation on the urban fringe! No more! (iii) SV rating used to be UCV (unimproved capital value) which demanded the land be valued in its virgin state, viz, if it was originally timbered, etc. With the passing of time, it was decided that this was an unrealistic requirement and that any structural site improvements including draining made more than 15 years ago (which is a more reasonable proposition to assess) are now deemed to have merged with the land. In the case you mention, therefore, the superior improvements making the one property better are currently ignored under SV rating. There is no real issue from a valuer’s viewpoint with rural land.
I know this is too brief, but I trust it may have been of help, Robert?
Rick’s article very clearly explains the concept of land value capture, as well as outlining the pros and cons of user based fees. With regard to a single LVT, is it the ‘silver bullet’ some claim it to be? Some practical points:
(i) In NSW total land value was recently reported by the Daily Telegraph to have reached $1 trillion. In the 2012-13 budget, NSW government revenue and expenditure was on the order of $60 billion. This means a 6% LVT would be required to meet state needs. With a residential lot value in Sydney around $300K, $18k land tax per year seems very hefty, bearing in mind federal income tax and GST would still have to be paid. A combination of user based fees and LVT may be best.
(ii) If a LVT were introduced, how would it prevent corruption in local government by property developer/speculators? For example, council suddenly rezones land for a more valuable use, which is subsequently sold for a windfall before a revised land value is determined, and before the owner’s LVT is due.
(iii) Farmland would be difficult to value. For example, there are two neighbouring farms: same soils, same rainfall – the same in terms of all ‘natural’ attributes. But the first farmer fertilises regularly and keeps his pasture free of weeds. The second farmer doesn’t do either, so his pasture lacks vigour and is covered in weeds. Clearly the first farm is more productive and will command a higher price, but only through the efforts of the owner. It would be unreasonable to ask the first farmer to pay a higher LVT than the second. But it is reasonable to ask the second farmer to pay at least the same LVT as the first, because he’s failed in his stewardship. The question is how can one fairly discriminate land improvements made by owners versus those supplied by nature?
Agree entirely, Rick, and I recommend readers acquaint themselves with your paper if they want to understand value capture. Top stuff!
From my perspective, the “user pay ideology” should be the “beneficiary pay ideology.” Beneficiaries include users — but also include landowners who may never drive on a road or ride a transit vehicle, but whose land appreciates in value because of these infrastructure investments.
A discussion about achieving the right balance between “user fees” and “value capture” can be found in “Funding Infrastructure for Growth, Sustainability and Equity” at http://media.wix.com/ugd/ddda66_d46304b5437c178e2f092319a6f30364.pdf