Radical steps needed in transport funding

A revolution is needed in the finance of transport projects if ambitions to rebalance regional growth in the UK economy are to be met. That was the verdict of KPMG partner Lewis Atter, speaking at last Friday’s Transport Knowledge Hub round table event.

The organisation’s first national seminar, Funding Transport Investment, focused particularly on the question of land value capture. Transport projects routinely increase the value of property and developments nearby: how can this be quantified, and can transport projects tap into it as a source of funding for the project itself or to plough back into future programmes?

The round table attracted over 40 senior delegates – from government departments including the DfT and the Treasury, Local Enterprise Partnerships, local authorities, transport operators and business organisations.

Mr Atter, a partner in KPMG’s global infrastructure and projects group, has played a leading role in developing a range of infrastructure funding mechanisms, including the City Deals programme and the ground-breaking Greater Manchester Infrastructure Fund.

In a presentation entitled “Moving the Dial – Land Value Capture in context”, he began by offering delegates “a hefty dose of reality” – what it would take to rebalance the economy, how far status quo levels of funding would contribute to this, and “the truth about the tax dividend argument.”

He concluded that “if we want to invest at the scale necessary to rebalance the economy and meet our potential, investment-led growth needs to generate significantly more revenue for the Exchequer than ‘normal’ growth, and to do so faster and with greater certainty – while not pricing off that growth.”

Considering the Northern Powerhouse, the Treasury had estimated that rebalancing the economy of the north of England to bring its economic growth in line with the forecast average rate for the UK as a whole would be worth an extra £44bn in real terms to the northern economy by 2030.

The Northern Independent Economic Review, commissioned by Transport for the North, identified a 15% shortfall in gross value added per capita compared to the UK average, even after excluding London. This was forecast to rise under a “business as usual” scenario to 33% by 2050, equivalent to a GVA gap or shortfall of £100bn annually.

What would it take to close this gap?

Looking at the role of infrastructure, there was a growing recognition of a relationship between connectivity and productivity, but researchers’ estimates of the scale of the relationship varied.

In 2014 the Transport Investment and Economics Report commissioned by the DfT reported that an increase in connectivity of 1% resulted in a rise of up to 0.25% in local or regional private sector productivity.

Research by the Science and Engineering Research Council suggested a 100% increase in connectivity via rail, other public transport and road would translate into a 19% increase in private sector productivity. A 200% increase might boost productivity by 32%. Allowing for the split between public and private sector, Mr Atter said that to get halfway to the Northern Powerhouse target of closing the 33% productivity gap by 2050 might require a 300% increase in connectivity.

SERC had looked at the effect of reducing the rail journey time between London and Manchester, a key aim of Transport for the North’s strategy, he continued. It found that a 20-minute reduction equated to an improvement in connectivity of less than 10%, over what amounts to around half the Northern Powerhouse economy. Dynamic economic effects might double this, but it would still make only “a dent in what the most optimistic analysis says is necessary”, he said.

Turning to city-regions, there was growing evidence of what optimised city-region investment programmes might achieve. Pioneered in Greater Manchester, such programmes aim to maximise the overall economic gain per pound spent. Analysis focuses on the net impact of whole investment programmes at the city region level, in contrast to the conventional, narrow project by project analysis. Projects can then be prioritised according to their impact on GVA.

The most sophisticated programmes involve a blend of transport, regeneration, and housing and business support investment, and include rules designed to balance the generation of employment opportunities across the region, Mr Atter said. Research suggested that £1 invested over 15 years in such a programme resulted in a rise of £1.30 to £2 in annual GVA for the city region.

This implied that investment in city region programmes of £31-50bn above the “business as usual’ average would be required to close the Northern Powerhouse productivity gap by a quarter. This level of investment is equivalent to between 10% and 16% of the Northern Powerhouse economy.

But, Mr Atter pointed out, base city region infrastructure investment is typically around 0.1% of annual GVA. 11 growth fund and devolution deals have approximately doubled this, adding another 0.1% for 30 years. In Greater Manchester, where 40% of its transport fund is locally funded, the 10-year total was increased to 0.5% annually, so far the highest outside London.

The new £3.2bn housing infrastructure fund will add around 0.05% to GVA annually for five years or so. Extending Highways England’s programme to regional schemes in the concept of the major road network is expected to add annual investment of a similar amount.

“This is not getting remotely close to what is required,” said Mr Atter.

Could a longer-term view of how the returns from investment translate into additional tax revenue give rise to a more strategic view about affordability? There is a 15-year time lag before the returns appear, he said. The returns are uncertain, and the additional growth does not help address fiscal pressures such as those arising from an ageing population.

In short, he concluded, “If we want to invest in infrastructure at anything like scale, we need a fundamentally different approach.”

Possible approaches based on land value capture were addressed by the following speakers. Julian Ware, Transport for London head of major project funding, has worked on innovative funding and financing for a number of transport projects in London, including Crossrail, the Northern Line extension to Battersea/Nine Elms and the plans for Crossrail 2.

He referred to work undertaken over the last year or so with KPMG on land value capture, investigating the mechanism of increases in land value around transport projects in London and how it could be captured, and asking whether similar increases could be expected and captured in other parts of the country. A report had been published earlier this year as a supporting document to the report of the London Finance Commission (led by round table chair Prof Tony Travers). The London mayor had published the report for discussion, but it had not so far been endorsed by the mayor or the Government.

Considering the causes, Mr Ware said that in London, housing demand had grown faster than supply; the population was growing; and people were using public transport more. There was increasing demand for housing and associated infrastructure as well as for public transport, and congestion was increasing. Significant transport investment was required but funding sources were scarce. “Without alternative funding sources it will be difficult to fund network upgrades and extensions which catalyse housing development,” he said. More pressure to fund projects would fall on business and developers.

The question came back to how transport upgrades should be paid for: through national taxation, local landowners, or by passengers?

Currently, he said, “The majority of the benefit from public sector investment in transport projects flows untaxed to private landowners.”

This arose through two market failures and a tax failure: fares for using public transport do not represent what it costs to provide; people are prepared to pay more to locate nearer to transport links; additional value is capitalised into land and property values near the source, which are untaxed.

It was estimated that a number of potential future TfL projects costing a combined £36bn would add £87bn to property values nearby. This could be broken down into £75bn from residential properties and £12bn from commercial, or £63bn from existing stock and £12bn for new. So far, schemes which have set out to capture a proportion of this gain have focused on new properties. For the future, he said, “You cannot ignore residential or existing property”.

How could this value be captured in order to fund new transport and regeneration? First, said Mr Ware, “Land value capture depends on having a good project – or people will not want to live near it.”

Possible capture mechanisms identified in the TfL report included introducing a new taxation measure or “Transport premium charge” in a “zone of influence” (say 1.5km) around a station. This would be a new residential charge based on the property value premium arising from being located near a transport investment project. It would apply to a property at the time it was sold. Existing residents would be exempt. It is estimated this could raise around £8bn for Crossrail 2 and £2.5bn for the Bakerloo Line extension to Lewisham.

Under a second mechanism, business rates revaluation growth retention, the increase in business rates linked to a new transport project, measured by regular revaluations, would accrue to the project. This could raise £4.8bn for Crossrail 2.

A new development-led mechanism, the development rights auction model, could be introduced. Following development of a master plan, development rights would be auctioned. This could raise £2bn for Crossrail 2 and £500m for the Bakerloo Line.

Finally, growth in stamp duty in the zone of influence resulting from transport investment (measured against a control zone) would be assigned to the transport project; this could raise an estimated £4.3bn for Crossrail 2 and £900m for the Bakerloo Line.

Rory Brooke, head of economics in Savills’ planning division, summarised research into the increase in land values. In a comprehensive study, the Savills team reviewed previous work and researched and modelled increases in land value around eight proposed developments. It reviewed previous studies and Land Registry transaction data as well as historical case studies including the Jubilee Line extension and the Docklands Light Railway extension to Woolwich.

There are two main components in local increases in land value around transport projects, he said: increases in the volume and density of development over what would be achieved without the project; and increases in the value of existing and new stock over what would be achieved without the project.

The study analysed the growth in residential value around stations as part of its case studies. It looked at the increase in value up to 500m away from the stations, where the effects should be greatest, compared with 1-2km away (just outside the zone of influence). It also compared this with the borough and inner/outer London averages as a control.

For the Jubilee Line extension, the study found that values adjacent to stations grew faster than areas further away, especially after construction was completed. The DLR Woolwich extension was a smaller-scale project with only one new station. The picture was more variable but there was still evidence of growth after the extension opened. In addition, the number of transactions close to the new Woolwich Arsenal station had grown substantially faster than the surrounding area since the extension opened.

The third case study looked at stations on the North London Line (from Stratford to Richmond), which underwent improvements and upgrades after the line became part of the London Overground. Again, there was some evidence of growth in value around stations after completion of the programme.

A fourth study, of Crossrail, found little increase in property sale value to date (prior to the line’s opening), but there has been an increase in land prices and an acceleration in the rate of development.

Overall, the average increase in residential values attributed to the projects was around 50% for the Jubilee Line, 20% for the DLR extension, and 5-6% for the North London Line.

Mr Brooke looked at the development potential associated with High Speed 2 around Manchester Piccadilly station. HS2 and Northern Powerhouse Rail will provide a once in a generation opportunity “of unprecedented scale” for the city and the North West region, he said.

He pointed out the parallels with King’s Cross in London. “There is a lot of derelict land and industrial units on the doorstep of the station. It’s crying out for transformation.” The area that could benefit extended to between 1-1.5km around the station. An even larger area stood to benefit around Manchester Airport’s proposed HS2 station.

Summarising the study’s conclusions, he said there was evidence of a significant effect on land and property values from transport projects. Land values and commercial values rise first, with residential sale values mainly increasing after construction. Prerequisites are an economic environment in which supply is constrained; the existence of brownfield or other development land near stations, and attractive local assets as a starting point. Development frameworks and new policy should be developed where appropriate.

Chairing the discussion following the presentations, Prof Tony Travers, director of the LSE London research centre at the London School of Economics, asked whether any attempt at land value capture was “doomed”: The basis of capturing value was that “you have to face householders with the direct consequence that their homes rise in value if these programmes happen” but that “to owners of homes the rise in the value is seen as a human right.” Politicians were still too traumatised by the poll tax to contemplate increasing property taxes on individual householders, he suggested.

Mr Atter responded that this would be difficult under a business as usual approach. “But if we have a deal at the whole city level, with a baseline funding agreement and an understanding that if the city can improve on that baseline, with match funding from government for every pound raised through value capture… the Manchester Transport Fund, where the local contribution is largely council tax, got to a point where they could justify that via a 10-year funding deal.”

Prof Travers said that alternatively city region mayors might seek to sell a proposition which might include an increase in council tax but as part of their vision for the future development of the city, with the Government underwriting it.

From the floor, Mike Waters, Transport for West Midlands head of policy and strategy, suggested that although the West Midlands had some areas of high opportunity, land value capture could be analogous to road user charging by proving politically impossible to implement. Mr Atter suggested a starting point for discussions should be projects it might be possible to fund in that way that would otherwise not be possible. Mr Ware said that a political process of stakeholder engagement was part of the solution: “The Crossrail business rate supplement had to be worked through over a number of years before it went through.”

Prof Travers suggested that if homeowners could not be faced with taxation on some of the increase in the value of their property, “you will end up with a series of mini-Hong Kongs”. Mr Ware said that 70% of the cost of the Northern Line extension is being paid for by commercial development, a figure which does not reflect the commercial/residential split of the developments it facilitates.

Prof Travers suggested that the proposed Oxford-Milton Keynes-Cambridge expressway wa a project which, in theory, could generate funding through land value capture, but planning constraints could limit the opportunities for development along the route. Would it be possible to persuade the Government to ease planning restrictions? The panel agreed this would depend on political will and clarity around the project. Mr Atter said: “The scale of reform and architecture around these things is quite big.”

Hilary Chipping, SEMLEP deputy chief executive, reminded delegates that the development of Milton Keynes provided a good example of a model of using land value capture to contribute to the provision of infrastructure.

Prof Travers added: “I think that if you can make something look and sound like a new town with its own rules, that does move you a step forward.”

Concluding, Mr Ware said there was a need to keep moving forward with land value capture even if the steps were slow. “The fact that there aren’t many other ways of paying for these things will bring people back to land value capture and at that point we have to have done the experiments and pilots to enable people to move forward.”

Mr Atter added: “Never forget the reality of the scale to which we have got to intervene to move the dial. There’s a lot that can be improved at the margin, but if you want the revolution in outcomes, then you need a revolution in funding.”

Image: Matt Buck