Let’s create virtuous circles in transport funding

In advance of tomorrow's UK Transport Infrastructure Summit, experts from KPMG set the scene by looking at key issues.

After decades of underinvestment, the UK has grasped the importance of infrastructure investment to our economic future. This government has big plans to expand our road and rail networks, and the new National Infrastructure Commission consultation proposes setting a target for the proportion of GDP invested in infrastructure. But while our ambitions on transport capital spending are growing, our ability to pay for them is not.

In some cases, major transport investments can be funded by a small levy on the tax bills paid by millions of people and businesses: the estimated £33bn cost of Crossrail 2, for example, could be met in part by a supplement on the business rates, council taxes, and planning gain charges paid by London's businesses and residents. But doing so would exhaust these sources of funds for a generation – and the city is growing at a rate of knots, with the London Infrastructure Plan identifying the need for £200bn of transport investment by 2050.
So how can the UK fund important investments, such as improved transport links between the cities of the "northern powerhouse"? In our view, the government must get better at producing returns from big, publicly-funded infrastructure schemes, collecting money to repay investments and support future projects.

In some cases, this means looking for opportunities to generate revenue from planned transport projects. New roads can include conduits carrying cables or pipes for communications firms and utilities; roundabouts and junctions often make good sites for phone transmitter masts. And as driverless cars become common over the next 20 years, the data they share will enable local services and retailers to make highly targeted use of roadside advertising hoardings.

Sometimes, the government will have to alter its transport strategies to make the room for investment. Today's train franchises are too short to encourage operators to make big investments in stations. But if the system was reformed to pair operating franchises with longer-term property leases, money could be attracted into retail, commercial and residential developments – producing extra funds for reinvestment in transport.
There's also a need to spread the financial benefits of new transport links. Because the government typically sets out its proposed route long before a scheme gets under way, nearby property owners receive an unearned windfall as the forthcoming investment boosts land values. The public sector can issue safeguarding orders banning new construction along a proposed route at the very beginning of the planning process, but is effectively barred from taking action to minimise net development costs until after the scheme has statutory consent. And by then, of course, it's too late.

In some cases, innovative public officials find a way to turn the system on its head. At Battersea power station, public bodies and the site's developers agreed a package that captures the increase in land value to contribute £250m to the Northern Line extension. The Government has put the cash up, but it will be repaid as the developer sells homes. So the extension will be part-funded out of the value created by the planning consent, the developer's investment, and the new transport links themselves.

In the case of Crossrail, the benefits are so broad and the beneficiaries so numerous that a system of small, far-reaching levies can provide part of the cash. And in Battersea, the developer's need for transport links and the scheme's huge value produced a single cash-rich funder. But it should also be possible to capture more of the value created when schemes fall between those two stools – when thousands of nearby businesses and property owners see their incomes and assets rise, but the benefits are not truly city-wide.

Here, the Government, cities and infrastructure managers must think creatively. We could, for example, assess land values before proposed investments have boosted values, then levy a stamp duty supplement on property sales close to new transport hubs. Values would be assessed as the safeguarding order is laid, then the variation in the increase in value between these zones and properties outside them would be tracked, so that the value created by public investment is shared between property owners and the taxpayers who funded it.
This approach would be controversial; people would, no doubt, call it expropriation. But it avoids taxing earned income or land ownership, making sure that people could afford to pay, and protecting businesses that make their money out of goods, services or research rather than speculative property investments.

The public sector doesn't invest to enrich a few nearby property owners; it invests to support the wider community's economic development and quality of life. Given our ever-growing need for infrastructure, it must find the money to keep on investing.

There are many ways in which the public sector could make better use of the business opportunities and increases in value created by its transport investments. Currently, too much public capital takes a one-way trip into the pockets of speculators and lucky property owners. It's time to bite the bullet, and find ways of turning that linear flow into a cycle of reinvestment.

Reference: Transport Times, April 2016 Issue

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