The Transport Minister will advise Cabinet how to tax businesses and property owners’ gains to help fund mass transit projects in our biggest cities

If any developer is to see the benefits of Auckland’s tunnelled light rail, it should be John Dalzell – the big supermarket he’s building should get increased foot traffic from the nearest transit station; the residents in the 122 apartments above it will have faster access to the CBD and to the airport.

The $14.6 billion transit project is groundbreaking in every sense, and the targeted levies or rates on local property owners will provide a model for mass transit projects in Wellington and Christchurch. “Everyone will benefit,” Transport Minister Michael Wood has promised.

Yet Dalzell is sceptical: “I can well imagine why he’d be saying that. But the reality is, we’ve already got a rapid bus transit service in the area, providing a very good level of public transport and connectivity to the city. The benefits will be marginal.”

The tunnel is to run from the CBD down beneath Dalzell’s neighbourhoods of Dominion Rd and Sandringham Rd, into Wood’s electorate of Mt Roskill, before surfacing to continue out through Onehunga and Māngere to the airport.

“All of those businesses are hanging on by their fingertips,” Dalzell says.

Tommy Parker, the chief executive of Auckland Light Rail Ltd, the special purpose vehicle established last year to deliver the project, says he’s been talking to developers about how they might contribute – but Dalzell says he’s not been approached.

“We’re paying not only the standard Council contributions, but we’re also expected to upgrade infrastructure down there, which is actually below par,” Dalzell says. “So I’m not sure how you reconcile all of these things. It should be about understanding all of what people are contributing already, before determining what a value capture might look like.”

“I think the risk from a government perspective, is that they are looking down a one-way tunnel.”
– John Dalzell, developer

He warns that tunnelling will be “prohibitively expensive” – three to five times the cost of surface rail. And any benefits accrued by local businesses and property owners won’t cover even a tiny fraction of that.

Dalzell worries that the Government has prematurely narrowed its vision.

“I think the risk from a government perspective, is that they are looking down a one-way tunnel. If you’re living on Dominion Rd and jumping on light rail to travel a block to the supermarket, is it going to get you there any faster? Probably not.”

‘Fair and equitable’

Wood reveals that he hopes to begin preliminary earthworks on Auckland light rail next year. He is to take a paper to Cabinet on the best way to levy property and business owners, to capture some of the increased value that the light rail is expected to bring them. He previously told Newsroom he hoped to raise $2 to $3 billion from value capture.

Options include taxing their capital gains, or their increased revenues, or borrowing against anticipated increased corporate tax take from those businesses. The project’s indicative business case moots a $1000 levy or rate on property owners.

This week, in a statement to Newsroom, Wood says the Government’s upgrades to New Zealand’s transport infrastructure will future proof the system for generations to come, securing New Zealand’s economy and supporting towns and cities to thrive.

As part of a 30-year programme of transport investments, the Government is developing significant mass rapid transit programmes across New Zealand’s three biggest cities.

“We need to work out what is a rational and consistent and equitable way of the Crown supporting that investment across those different regions,” Wood says.

“Agencies are currently developing a consistent framework to fund these projects. This includes options such as value capture and other tools which can potentially provide the funding streams required and which complement the investments we’re making.”

The light rail route is intended to be tunneled beneath the neighbourhoods of Dominion and Sandringham roads. Image: Auckland Light Rail

Auckland Light Rail Ltd is promising to engage with communities to ensure a “fair and equitable” approach to funding is adopted. “We know that affordability and rent increases to cover any new rates or levies is a real concern for people.”

And for all those businesses and property owners who do benefit, there will be some who will lose. An estimated 167 properties may have to be compulsorily purchased under the Public Works Act.

At this week’s Building Nations infrastructure summit, Wood was challenged on the timeframe to complete Auckland light rail. “This project effectively kicked off at the beginning of this term,” he said.

“There’s significant momentum now. It has a high quality board led by Dame Fran Wilde, an outstanding chief executive in Tommy Parker, the company’s structure is established, the detailed design is underway with the project, and we expect to move forward with consenting strategy and also early works by next year. 

“I expect main construction to begin in approximately 2024-25. And the reality of these big projects, they do take some time, whatever the project is, whether it’s road, rail, light rail – you have to put the effort upfront, to get the planning right, to get the integration with other projects right like the alternative Waitematā Harbour crossing. But we’re working at pace, and I expect to see results in the coming years.”

“A lot of people are going to spend a lot of time and money and energy over the next year or so on it. And we are extremely sceptical about its benefits and about the cost of it.”
– Chris Bishop, National Party

Construction is predicted to take six to eight years – which would mean the light rail would open in 2030 at the earlier, but given the track record of infrastructure construction delays, likely closer to 2033. The Building Nations summit heard that delays on such projects could cost $100 million or more a year.

The Greens oppose tunneled light rail: they say the massive quantities of embedded carbon in the concrete would have too much impact on New Zealand’s greenhouse gas emissions. “We’d prefer to look at surface light rail,” says spokesperson Julie Anne Genter. “It’s easier to implement, much lower carbon, we could extend more lines faster, and then see if we need tunnels later in the future. You know, we might not. And it’s more important to deliver those benefits earlier.”

And at Building Nations, construction sector delegates asked National Party infrastructure spokesperson Chris Bishop whether a National-led Government would cancel the project.

There was nothing to cancel, he retorted. After first being proposed in 2017, it had still barely got off the ground. “A lot of people are going to spend a lot of time and money and energy over the next year or so on it. And we are extremely sceptical about its benefits and about the cost of it. So it’s not about canceling a project – the project has barely started, it’s barely off the drawing board.”

That may come as some surprise to the 200-plus staff and contractors now employed by Auckland Light Rail Ltd, which has already been funded $16 million in operating costs to scale up rapidly. An Arup-Aurecon Alliance has been named the preferred bidder to plan and design the 18-station, 24-kilometre light rail network.

Auckland Light Rail chief executive Tommy Parker, who resigned from the Auckland Transport board last month to focus on the big new role, tells Newsroom his organisation is now working at pace.

Realising benefits

If one needs any evidence of the political tensions over Auckland Light Rail, just look at the press release issued by Auckland’s new mayor Wayne Brown, who had called for the resignation of the entire Auckland Transport board. Parker, he said, had “done the right thing” by resigning. “It speaks well of Tommy’s integrity that he has decided to focus on his role at Auckland Light Rail Ltd.”

That was similar to the language he used when Auckland Transport’s chair, Adrienne Young-Cooper, resigned immediately upon declaration of the mayoral election results. But in an interview this week, Parker insists he wasn’t driven out by the new mayor: he’s been considering resigning for some months, and would have done so regardless of who was elected mayor.

That’s as may be, but Brown campaigned against light rail, saying it was the epitome of a directive central Government telling local communities what they need, instead of the other way around. “The question I would ask for light rail is, no one has been able to explain what problem it is fixing. Until they can come up with a good reason for it, it’s not a good idea.”

So, especially heading into election year, Parker and the Labour Government will have to work aggressively to communicate the project’s benefits, as they see it. An experienced communications team has been recruited, headed by former Waka Kotahi transport agency senior manager Sarah Azam, with the assistance of well-known ex-TVNZ business journalist Ewart Barnsley.

Certainly, property owners won’t yet be seeing any additional capital gain attributable to the light rail proposal – but it’s early days yet. For instance, the the Arup-Aurecon Alliance is yet to decide the exact route and where the three stops will be in the neighbourhood of Dominion and Sandringham roads.

Charlie Tudehope, who is a capital markets and consultancy analyst at Bayleys Real Estate, has crunched the sales numbers for Newsroom. The 67 transactions along Dominion Rd during the 2021 and 2022 calendar years show, at this stage, no value uplift to reflect the light rail proposal.

“Based on a brief discussion with some of our brokers that operate in that area, I don’t think that the market has ‘priced in’ or ascribed any value benefit to this proposal,” he says. “This is primarily due to the timing and location uncertainty attached to the project and therefore, investors are unlikely to pay a premium for a characteristic or attribute that isn’t tangible and still preliminary in nature.

“Once the specific route and stops are identified in 2023, I would imagine investors will start considering this as future or notional value.”

In an interview with Newsroom, Tommy Parker describes four ways in which the benefits to local businesses and property owners might be measured, and captured – but he emphasises that no decisions have been made, and the list is not comprehensive.

Options include:

► a targeted rate on the additional revenues earned by local businesses, similar to a tool used in the new Crossrail development in London, UK. For instance, that might take a cut of increased sales at the supermarket that Dalzell is developing;

► partnering with developers to construct, for instance, transit stations that include retail, offices and apartments – then sharing those revenues;

► borrowing against taxes anticipated to be paid in the future on local companies’ increased profits;

► taxing bumper capital gains on residential or commercial property sales.

Taxes on capital gains are always the most controversial in New Zealand, but are also the option that Michael Wood has spoken the most about. “The main focus is on those who might come in and make windfall gains from this project,” he told Newsroom earlier this year. “Some of the international schemes focus on realised gains on sale.”

It echoed the language used by fellow Cabinet ministers like Grant Robertson in widening the brightline test on “property speculators” last year, and removing the exemption for interest payments. 

An important question raised by any capital gains tax is, what is the start point?

Newsroom has asked both Wood and Parker whether investors who swoop in and buy property along the light rail route now might find that settlement date used retrospectively to measure their future realised capital gains against. Or would it only target property purchasers who purchase lands and businesses after the details of the levy are confirmed? Thus far, they have no answer to that.

But what is clear is that this new value capture proposal turns previous funding models on its head. In the past, governments and councils have determined the cost of a project, then worked backwards to determine how much of that can be raised from developers and other beneficiaries of the new infrastructure.

The value capture plan reverses that: For Auckland Light Rail and subsequent urban mass transit projects, the Government will start by quantifying the benefit to business and property owners (as best it can) and then on the basis of that, determine how much they should contribute.

600 year legacy

“Land value capture is one of the most enduring questions in urban development.”

That’s according to Jonathan Manns, who is head of strategic consultancy for JLL NZ.  

As early as 1427, commissioners in England were given the power to impose a levy based on increased land value arising from flood defence works. Today’s discussions trace their roots back to the late 19th century when land reform was the dominant political topic.

Fergus O’Connor’s Chartist Land Plan, John Stuart Mill’s Land Reform Tenure Association and Alfred Russell Wallace’s Land Nationalisation Society put taxation and land nationalisation at the heart of debate about the British Empire.
“The basic idea is that when the community creates value, through investment into infrastructure, it should get something back,” Manns says. 

Those funds could be used to pay for that infrastructure, deliver public services, improve or maintain the environment, provide affordable housing, and so forth.

In practice, there are two distinct aspects. The first, which is not all that controversial, is to secure some of the increase in the value of land when it is developed, so that it can be ploughed back in infrastructure or benefits such as affordable housing.

The second, which is potentially much more important, but harder to achieve, is to tap some of the value that arises from properties that benefit from an upgrade in infrastructure, such as a new road or railway station.

“With reduced public spending budgets, slow economic growth and rising land values, the question of how to capture ‘the unearned increment’ has risen to prominence again around the world,” he says.

Examples around the world include Hong Kong, which is well-known for funding its extensive metro system from the uplift in land values through the Rail Plus Property Programme.

Copenhagen opened its first rapid transit system for service in 2002 and is unique in being funded entirely through value capture and the redevelopment of publicly owned lands through state-owned, but privately managed, corporations.  In France and the Netherlands, public investment banks lend money to finance infrastructure investment.

Across the United States, bonds are raised to fund improvements to local infrastructure through what is known as Tax Increment Financing. This model enables authorities to invest in infrastructure by borrowing against anticipated future receipts over 20 to 25 years.

And most recently, the Mayor of London’s targeted Crossrail Levy raised £18 billion (NZ$35b) for the east-west Elizabeth Line rail link that opened in May this year.  

“The key challenge is the gap between when the money is required and when it is possible to pay any tax or levy on owners and occupiers,” Manns explains. 

“New development will often require infrastructure to function but the cashflow of developers is restricted during construction and until units have been either let or sold. The onus often therefore lies on public authorities to raise capital and undertake works with a view to recouping the cost at a later stage.”

Groundbreaking, or breaking ground?

At the start of this year, Michael Wood told Newsroom that the Auckland light rail value capture funding would be a significant first for this country.

He described taxing property gains, a small targeted rate on property owners along the route who benefit, or potentially other more sophisticated mechanisms.

“It hasn’t been done in New Zealand,” he said. “But it’s relatively commonplace and big infrastructure projects of this kind offshore, where the investments that you’re making – particularly transit – will significantly increase the value of land in the surrounding corridor.

“The initial high level estimates are that approximately $2 to $3 billion can potentially come through this vendor capture scheme.”

Some focus around effectively a small targeted rate that might apply to properties along there who benefit. Some have more sophisticated mechanisms.

“One thing I’ll just guarantee now: No one be worse off as a result of this. Everyone will benefit, including people who own property.”

Gary Holmes hopes that still stands. As manager of the Dominion Rd business association, his 350 members are watching and waiting nervously, he says. They are hoping to see a station opened at the heart of their retail area, near the junction of Dominion and Balmoral roads.

“Where you’ve got mass transit, you can get transit-oriented development, in high rise apartment buildings and that sort of thing. Definitely those sorts of properties and developments should be charged.”

But he’s not convinced that “everyone” will benefit. “As an example, a number of businesses in the Balmoral section are in historic buildings. They cannot be changed, they can’t be pulled down, they can’t be added to – you can’t go 20 or 30 metres high. So you have to also work out exactly which properties or which businesses you would be applying that rate to – that will be the tricky thing.”

“In other parts of the world, it certainly does work. But you know, every country, every situation is unique. A lot of our businesses are just mum-and-dad-owned restaurants and service industry . businesses. They don’t have bottomless pockets to fund this.

“It all comes down to the timing, and what the benefits are, and when those benefits accrue. So it wouldn’t be fair to start applying a targeted rate now for something that isn’t going to be in place for another 15 years.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

Leave a comment