Show me the money

Our cities are slowing down. Traffic speeds have continued to slow in metropolitan cities over the past 10 years.

This affects mobility increases fuel use and vehicle emissions and makes road based public transport slower and more expensive to operate.

Professionals are facing significant challenges in the provision of mobility and access – a major challenge is insufficient funding for needed transport infrastructure and services.

Yes, we can make better use of the existing infrastructure, by reallocating road space and providing priority to higher value use like freight and public transport. And we can increase throughput by the use of intelligent transport systems technology, such as providing priority at traffic signals, or managing traffic flows by variable speed limits and ramp metering.

However, to be able to continue to move people and goods effectively, more effective funding and financing methods are required.

Sources of Transport Funding

Transport infrastructure is primarily funded by governments, except for private toll roads which operate as a concession and charge a toll to users. Public transport has a large ongoing operating cost as well and Australian systems generally recover only one quarter from fares.

All levels of government are struggling with declining funding, yet there is a political reluctance to increase taxes.

The three main sources of funding for transport are: (1) taxes, (2) user charges, such as fares and tolls, and (3) beneficiary charges, such as property taxes.

Additional charges, such as tolls for new high-quality motorway infrastructure, or capturing some of the property value uplift resulting from improved transport services, referred to as value capture or ‘value sharing’, are emerging areas of increased interest in alternative funding and financing options.

Road User Charging

Road user charging is currently generating a lot of interest worldwide, in addition to the classic examples of Singapore and London urban congestion charging schemes, there is a move to distance-based charges, such as the OReGO pilot in the US state of Oregon and the 11 states across western US who are collaborating to adapt best practices from other successful road usage charge efforts – these aim to offset and maybe even replace the falling gas tax receipts which have been the main funding source in past decades.

Toll roads are another means of funding transport infrastructure. Recent experience in Australian cities, however, has seen a number of toll road ‘failures’, which are due in my opinion to aggressive traffic prediction estimates by the proponents (optimistic or even unrealistic assumptions in the future demand estimates to ensure the project proceeds), political imperative to proceed with a promised project, and poor evaluation of proposals in terms of value for money and community outcomes.

In other cities where road user charging has been successfully implemented, such as Singapore and London (which raised £257 million or AU$500 million in 2014/15), some of the receipts are used to fund public transport.

An interesting development is the approach being used to build Sydney’s WestConnex project, predicated on a high proportion of the funding being sourced from user charges. Only one third of the $15 billion cost will come from national and state governments.

The first stage is being developed by the NSW government, taking all construction and initial patronage risk. Once initial patronage has been established, then the project will be taken to market, using the capital raised to fund the next stage and so on until the project is complete.

This will result in longer delivery timescales, but will manage the financial and commercial risk, deliver value for money and desired outcomes.

Value Sharing

Developers can make windfall profits from rising property values resulting from improved accessibility and mobility provided by new transport infrastructure and services, such as around new rail and bus stations which are serviced by high frequency services and interchanges on motorways.

Investment in transport results in improves accessibility and mobility, hence the value of the property increases, so the logic is that some of that value uplift (the effect) should go into funding the transport infrastructure and services that brought the improvement (the cause).

Capturing some of the value uplift is happening in a other cities around the world, such as the Denver Union Station redevelopment project in the US state of Colorado where 30% of its US$0.5 billion (AU$0.675b) capital cost is to be funded through value capture. A significant proportion of Hong Kong’s MTR transit system is funded by property development gains. London’s £7 billion (AU$14b) Cross Rail project aims to recover 28% of the construction cost from the annual increase in commercial property rates around the stations.

Making an assessment of who ultimately pays for, and benefits from, transport investments over the long-term, then sharing the property value uplift due to new infrastructure and services, is a viable additional source of funding.

Where next?

Governments across Australia are investigating alternative infrastructure funding and financing options, including the use of value capture, superannuation funds and infrastructure bonds.

Major public transport projects should consider embedding property development into the project, internalising value capture to offset governments having to fund large capital outlays and ongoing operating costs.

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