Malcolm’s Big Idea – VFT Infrastructure PM?

vft

Last week’s adventure in federalism by Prime Minister Malcolm Turnbull, in which he proposed fleetingly that the states be given back their own income taxing power including (after a transitional period) the ability to either raise or lower the tax rates, has attracted various descriptions from media pundits. They include “dithering” and “crazy/brave”. Peter “Mumble” Brent hypothesises that “he totally subjugated any public political considerations to the demands of the deal-making”.

Mumble also concludes:

Still, if we accept that last week’s clanger produced this week’s Newspoll, then this means that, if not for that error, the government would now be comfortably ahead in the polls. And because Turnbull has unloaded this policy, the long-term damage should be minimal and the Coalition remains almost as likely to win the next election as it did this time last week.

I think that’s probably correct, and we’ll soon know. However, Brent conditions his opinion on the necessity (as he sees it) for the Coalition to avoid proposing any new tax policies that Labor would inevitably demonise. I largely but not entirely agree with that proposition. I had a truncated Twitter conversation with him about it yesterday:

policy1

policy2

Quite apart from the fact that it’s rather rare for a government (as opposed to an opposition pursuing a “small target” strategy) to go to an election without the voters having any clear idea what the governing party is doing or what it stands for, Malcolm Turnbull has created high public expectations that his government will pursue an “Ideas Boom” comprising policies which are “agile”, “innovative” and “exciting”. Many voters, tired of the relentless negativity and empty three word slogans of Tony Abbott, took Turnbull at his word or at least hoped that we would see government with rather more substance. Apart from last week’s cock-up on state income taxing powers, the current unexpectedly close state of opinion polls can best be explained by the disappointment of these hopeful voters, who are beginning to think that Turnbull is just Tony Abbott with an expensive suit. For Turnbull to turn the current close contest into a strong election victory, he will need to come up with strong and exciting policies including a credible economic strategy, albeit one that strongly differentiates the Coalition from Labor’s “tax and spend” by avoiding any net increase in the “fiscal envelope”.

How might Turnbull go about achieving those seemingly tricky objectives? Here are my thoughts for what they’re worth.

Tax policies

The broad outline of the Coalition government’s intended tax and economic policy seems to be fairly clear, assuming that the leaks, hints and removal of ideas from the policy table we have been given are reasonably accurate. There won’t be a GST and there almost certainly won’t be any attempt to tackle either negative gearing or Capital Gains Tax (because that would undermine Turnbull’s fear campaign against the ALP’s policy announcements in that area). It appears likely that there will be some trimming of high income earner superannuation perks/concessions, and some increase in the rate of tobacco excise (although not as large as the one proposed by the ALP). It is said that this is aimed at raising around $10 billion per year, and suggested that this might be used to fund a reduction in company tax of around 1.5% with a foreshadowed path to further reduce the rate to 25% over time.

The problem with this is that, while corporate tax cuts are said to stimulate growth, such a package clearly doesn’t meet the test of Budget “fairness” set by Turnbull himself when he became Prime Minister, by which he clearly meant appropriate burden-sharing between rich and poor. Of course Turnbull’s self-imposed test was itself a thinly veiled condemnation of Abbott’s thwarted 2014 Budget, so it isn’t surprising that Abbott himself has sought to exact retribution and simultaneously box Turnbull in by christening removal of superannuation rorts as a “pensioners’ tax” and increases in tobacco excise as a “workers’ tax”.

Turnbull/Morrison will need also to propose measures that allow them to assert plausibly that the forthcoming Budget meets the fairness test. I suspect that, even before last Monday’s Four Corners program about the Panamanian fixers Mossack Fonseca, they probably already had in mind some sort of package of measures targeting major corporate tax avoidance and evasion using international tax havens. There are many votes to be gained and none to be lost by such a strategy. The Liberal Party’s major corporate backers might not be pleased, but they’re still not going to go out and begin campaigning for Labor. Depending on the measures proposed, they could plausibly claim that such measures would add up to $5 billion per year to government revenue. If I was Turnbull, I would be opting to apply that $5 billion to adjusting the income tax threshold for the 37% tax bracket. That rate currently cuts in on an annual income of $80,000 per year, and average weekly earnings are rapidly approaching that amount. Cracking down on the major corporate tax evaders and using the proceeds to give tax relief to average Australian workers would certainly allow Turnbull and Morrison to claim that their Budget meets the fairness test. I would be very surprised if they just deliver a corporate tax cut and don’t also include some measures giving tax relief to ordinary Australians. Turnbull may be an Eastern Suburbs toff, but he isn’t stupid.

Health and education

Last week’s state income taxing powers fiasco has helped to clarify the Coalition’s intended approach in these key areas. They are giving the States just on $3 billion over the next couple of years to help them with health spending, but otherwise demanding that they “live within their means”. Turnbull isn’t going to attempt to find a way of funding any significant part of Julia Gillard’s “fantasy” $80 billion, which was disavowed by the Abbott government in 2014 and the lion’s share of which had been intended to assist the states to cope with an expected blowout in health and hospital costs after 2020.

One clear positive to emerge from last week’s apparent fiasco was that a couple of the state premiers conceded that they really didn’t have a budgetary problem until after 2020 (most presently have budgets that are in surplus, in contrast to the Commonwealth). Accordingly there is time to sort out a workable solution to the expected blowout in health costs after 2020, preferably through a cooperative approach between the Commonwealth and States. One such approach may well involve cracking down on unnecessary surgical and diagnostic procedures, which a Four Corners program last year estimated costs taxpayers something like $46 billion per year. Even the Federal Treasury apparently estimates waste in these areas at around $15 billion per year. Accordingly, any sort of serious crackdown should by itself be enough to allow the states to cope with the post-2020 health cost blowout without any need for either the Commonwealth or the states to increase taxes. If Turnbull and Abbott make it clear that this is the approach they will be taking, anticipated health cost blowouts may not end up being the problem for the Coalition that many pundits are imagining. Instead, it could even become an electoral advantage, emphasising both the government’s superior economic management credentials and the ALP’s wasteful “tax and spend” approach.

On education, Turnbull isn’t going to make any decisions about further assistance to the states until after the election. In other words, he isn’t going to match Labor’s promise to fund the last two years of Gonski (estimated to cost $4.5 billion). That might provide some electoral advantage to the ALP, but not necessarily very much. At least for any voters who are not completely disengaged from current events, it must now be abundantly clear that the states COULD raise the funds to pay for Gonski themselves but are choosing not to do so. Moreover, that actually remains true even without reinstating their power to raise their own income taxes. The states have always been able to levy a range of taxes and charges including a broad-based land tax, mineral royalties, payroll tax, road congestion charges, death and estate duties, and taxes on any services (although not on goods – although services now comprise a significant majority of the economy and so the states’ inability to impose taxes on goods is not as large an impediment as it once was).

Nevertheless, although all of this would be good sound basic economic management, it certainly isn’t sexy and couldn’t be sold as “agile”, “innovative” or “exciting” let alone part of an “ideas boom”. Turnbull still needs a signature Big Idea to convert a shaky position into a strong election victory.

Turnbull’s Big Idea – major infrastructure funded by “value-capture”

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As an article in the Australian Financial Review late last year noted:

A modern-day equivalent of a little-known economic concept that everyone seems to be talking about is “value-capture”, where the private sector contributes to the costs of public infrastructure. It was kicked along this week when the federal government announced that its ambitious Victorian large projects agenda would feature this unique funding mechanism. It is also a cornerstone of Bill Shorten’s Infrastructure Australia reform package. …

Essentially, developers – and their eventual customers – share the benefit of increased land values and densities that flow from the provision of rail lines past their planned apartment block, from raised dam walls that allow flood-prone property rezonings or from new power stations that make factories more productive. …

Done properly, value capture is the magic bullet that might allow us to build the economic and social infrastructure we need for a sustainable path forward – but we need the safeguards to make such a taxation revolution sustainable.

I strongly suspect that Turnbull and Morrison intend announcing in the Budget on 3 May a visionary programme of building major public infrastructure funded by value-capture. Moreover, I fearlessly predict that they will also announce that the first project to be built in this way will be a Melbourne to Sydney (via Canberra) Very Fast Train line, with the northern section out of Sydney going via Liverpool, the new Badgerys Creek airport, and Campbelltown.

Why do I say that? Well there have been some pretty clear hints that that is the way the government’s thinking is running, at least for those paying attention. Only days after announcing his retirement from politics in late February, Trade Minister Andrew Robb strongly advocated building the Melbourne-Sydney VFT immediately:

Australia should grab the opportunity of very low interest rates to build the very fast train now along the east coast, according to former trade minister Andrew Robb.

“We have to do it … we should do it now whilst the world is awash with cheap money,” he said.

A couple of days later, an international expert made exactly the same point to a Parliamentary committee:

An international expert in high speed rail says the “stars are aligning” for Australia to make a decision on building a line to link Sydney, Melbourne and Canberra.

Torkel? Patterson, vice-chairman of the International High Speed Rail Association, will tell a parliamentary committee in Canberra on Tuesday “it’s time” for Australia to act.

“Australia’s flirted with it for a long time, I think this is the time to make a decision on this,” he told Fairfax Media before his appearance before the House of Representatives standing committee on infrastructure, transport and cities.

And at around the same time Prime Minister Turnbull himself advocated the building of a rail line to Badgerys Creek, if possible by the time the airport is finished in 2026. Moreover, he expressly linked the idea to value-capture funding approaches:

“We are already setting aside space for rail, including station boxes and approaches at the airport during construction so that the rail link can be established whether at the time the airport opens, which would be preferable, or later,” he said.

He said, under his leadership, the Federal Government was looking at other funding options for projects including asking the private sector to partly fund public infrastructure projects.

“What the Federal Government has done in the past is to be essentially a passive ATM and just provide grants for this project or that project,” Mr Turnbull said.

“The approach that we will take is one of being much more engaged. We’re not going to tell states or cities how to plan their cities but we want to do is be collaborative or part of the solution.

“Let’s ask ourselves how do we improve our city, how do we increase the value of our city and its amenity? Then having done that with this piece of rail infrastructure, how do we then capture some of that to support its construction?”

Of course, I could be completely wrong about this, but I reckon something along these lines is going to be announced in the Budget. Turnbull isn’t going to allow himself to be a political rabbit caught in the electoral headlights, or a Tony Abbott clone in a top hat. A project like this would certainly qualify as “agile”, “innovative” and “exciting”.  Requiring any VFT tenderer to maximise the involvement of Australian industry in providing the rails, engines, rolling stock and components would also help to redevelop our national industrial capacity in a similar way to some of the proposals Turnbull inserted into the recently announced defence policy.

Moreover, building the sector from Sydney CBD to Campbelltown via Badgerys Creek as a first or pilot project would fit well with the excellent recommendations of the recent Shergold Inquiry on management of future public infrastructure programs. I’ll wager that Turnbull has read and absorbed Shergold’s recommendations.

Value-capture may also provide a financially viable means for old Everald Compton’s long-touted Melbourne to Brisbane inland rail freight line to be built, possibly along the same corridor as the VFT line between Melbourne and around Goulburn before swinging inland. Compton’s Big Idea has copped a lot of ridicule over the years, but I for one have always thought it’s a great concept that should be built in the national interest.

Tony Abbott labelled himself the “Infrastructure Prime Minister”, but infrastructure spending actually fell on his watch.  I’ll be looking forward to Turnbull rubbing Abbott’s nose in this failure by noting that under HIS prime ministership Australia is building the “infrastructure of the 21st century”

In any event we will soon know. It may just be an exciting time to be an Australian railways aficionado.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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John walker
5 years ago

It would certainly transform the region I live in, expect that the southern highlands would become a satellite city of , both sydney and Canberra. And the Canberra airport would love it( interestingly Singapore airlines recently started direct flights to Canbe)

paul frijters
paul frijters
5 years ago

in stead of having Infrastructure Australia say what is cost-effective, we are now taking our cue from the “vice-chairman of the International High Speed Rail Association”? Jeez, Ken. Sounds classic white-elephant to me.

It reminds me of the proposed high-speed rail between Brisbane and Sydney (http://economics.com.au/2013/04/22/stop-the-gravy-trains-the-high-speed-rail-study-and-consultants/ ). This seems like a re-run of that.

And of course the argument about low international interest rates is rubbish. These things take so long to build and approve that the situation is completely different by the time we start.

John walker
5 years ago
Reply to  paul frijters

Paul
What if there was a levy on property , subdivisions etc within cooee of main stations like Bowral – there would be a fair bit of increased land value if the area was about one hour by VFT to Sydney( and Canberra ) might that make a difference ??

There is already a lot of travel on the Canberra Sydney route, the two main bus lines each run a large bus ( often really full) both ways every hour and ,from my experience , about half get off-on at Mascot international. The route is much busier than it was 12 years ago.

derrida derider
derrida derider
5 years ago

“.. of course the argument about low international interest rates is rubbish. These things take so long to build and approve that the situation is completely different by the time we start.”

But long bond prices are almost as high as short ones – it is clear that markets are confident (or rather fearful) that low borrowing rates will be with us for a very long time. And even if those markets are wrong governments can exploit their error by issuing the appropriate 30-year infrastructure bonds as soon as they commit to the project. The risk of future interest rate rises is really only a problem for the government if they get the private sector to fund, as well as build, the project.

rog
rog
5 years ago

Any Turnbull Grand Plan will be judged on his handling of the NBN, which is another Grand Plan that got too hard.

Jim
Jim
5 years ago

I get the feeling that ‘value capture’ and ‘city deals’ are really just the latest attempt by governments in conjunction with merchant bankers to generate a new source of tax (or rates) without calling them that. I’m sure the merchant bankers get a hefty fee for their part in the unnecessarily complicated transaction.

And isn’t ‘value capture’ a blatant case of double dipping?

The theory goes that ‘value capture’ works as the investment (e.g. better public transport services) enhances specific attributes of private property. These enhanced property attributes are then reflected in higher market values for property. But land taxes (in jurisdictions where they apply) and local government rates are already charged based on land valuations. They already ‘value capture’. So isn’t a new ‘value capture’ initiative really just double dipping?

conrad
conrad
5 years ago

In terms of very fast trains, I don’t know why they don’t go for smaller but far more useful targets. If you put fast trains between, say, Sydney, Wollongong, and Newcastle, or Melbourne, Geelong, and Ballarat, it would be vastly cheaper and on routes which could potentially have high traffic (and hence be less loss making). Indeed, it would be faster for many people to live in these Satellite cities than commute from the burbs (the trip would take about 15-20 minutes), and at least for the ones around Melbourne, the ground is more or less dead flat and it would stop Geelong’s slow death, so you get other advantages too.

john Walker
john Walker
5 years ago
Reply to  conrad

Conrad
Agree, have long thought that the Sydney Canberra corridor is also one of the few places where a fast train could make sence.

Jim
Jim
5 years ago
Reply to  conrad

If you put fast trains between, say, Sydney, Wollongong, and Newcastle, or Melbourne, Geelong, and Ballarat, it would be vastly cheaper and on routes which could potentially have high traffic (and hence be less loss making).

The man speaks common sense here. And no need for the fancy ‘value capture’ approach to fund it….

derrida derider
derrida derider
5 years ago
Reply to  Jim

Nope – the biggest cost in a VFT is the new corridor needed through the suburbs. The next biggest cost is going over or under mountains; the geology for a new Syd-Newcastle or (especially) Syd-Wollongong line are both horrible – heavily dissected sandstone plateaux.

Extending a new line through open farmland is relatively very cheap; once you’ve driven your line out of the suburbs and the Sydney basin you may as well keep going. So Syd-Mlb or Syd-Can are probably more viable than Syd-Wol or Syd-Ncl. Mlb-Geelong and the like I dunno about – the geology is good but those suburbs will be a problem.

Jim
Jim
5 years ago

I was talking about the fact there might actually be some demand for the service. Sorry. I should have been clearer.

john Walker
john Walker
5 years ago

Not sure but it might be possible after about Picton to use a side of the M5 and Federal HWY corridor , I’d guess that it has already extra land for possible widening. (And VFTs can cope with a bit higher gradients than heavy freight can.)
The costly bit could be – how they would connect it from Badgeries to the city , or from Ingleburn junction to Mascot via East Hills.

conrad
conrad
5 years ago

Melbourne to Geelong is as flat as a tack, and Melbourne to Ballarat is only slightly more undulating. I also don’t see why they couldn’t use largely existing lines for very expensive sections (TGVs work on both conventional and normal tracks). This way they could be (slow) express on parts of the suburban lines, as many country trains already do (and indeed, many of the trains on the suburban lines also), and then hammer most of the distance on proper tracks. This would still be very quick.

Nicholas Gruen
Admin
5 years ago

Not nearly as many suburbs as in the Eastern suburbs DD.

john Walker
john Walker
5 years ago

Conrad agree about Melbourne’s flatness:-)
Badgeries line could run across to the M7 then down to about Ingleburn junction and if the bridge over the river at East hills was duplicated and some extra ‘passing lanes’ were added between riverwood to Bexley it could be a goer .

The big engineering cost problem would be the lake George escarpment, its unstable , lifts several centimeters a year…

Nicholas Gruen
Admin
5 years ago
Reply to  conrad

Conrad, as you probably know, a fast train between Melbourne and its satellite cities – certainly Ballarat and Bendigo and perhaps Geelong as well – was the policy on which Bracks got to power. They managed to provide fast(ish) trains and they’re probably fast enough to provoke a fair bit of train commuting, so not sure what the marginal benefit is.

Is Geelong slowly dying? I hadn’t noticed, but I only go down there from time to time.

conrad
conrad
5 years ago
Reply to  Nicholas Gruen

Yes I know, but it was very poorly done — so it still isn’t practical to live in Ballarat and commute to Melbourne each day (station to station it is about 1 hour 20 mins, and Geelong to Melbourne is about 1 hour). As a random guess, I think you need times within about 30 minutes before lots of people might consider moving cities for cheaper housing and other lifestyle reasons, since you still have to get to the station and your work. You also need nice trains so you can work and do stuff (not just nice seats). This is just based on my observations from France, where people have got sick of living in Paris due to crowding, expense, and general dodginess, and start living in cities wherever there are good train lines that don’t stop at the crappy outer suburbs (this often means TGVs that go from the centre of the city and miss them).

My comment about Geelong is just based on a friend that lives down there (I haven’t been there for ages) and the fact that government reported youth unemployment is 21% (overall unemployment is only 7%). Of course, unemployment is only so low because so many people move to Melbourne.

I also think Geelong could be a really nice place given the beach and surroundings if it became a Melbourne spill-over suburb (like Newcastle, Woolongong, and Gosford have for Sydney).

David Walker
5 years ago
Reply to  conrad

A few points here:
* Victorian recently spent $3.65 billion on its regional rail network, taking speeds up to as high as 160 km/h. Not true high-speed rail, but enough that you might start to see some sort of effect. Do we see an effect? Sadly, I’m not sure we have any reliable information; the Victorian Auditor-General has lamented the lack of project assessment in parts of the project.
* Standing at Southern Cross station of an evening looking at platforms 15 and 16, I don’t get the impression that Victoria’s existing fast regional rail is overwhelmed by demand.
* As DD points out below, when you’re going over flattish country, the biggest cost of these high-speed rail projects is at the ends. For this reason alone, I doubt we can make Melbourne-Geelong stand up as a standalone high-speed rail project.
* There is little inherent merit that I can see in making Geelong or Ballarat into suburbs of Melbourne. You’d probably be better to build out existing suburban areas like South Morang, which are better connected to the entire (mostly road-based) Melbourne transport network. Decentralisation should not be an end in itself, since it imposes substantial costs and limited benefits.

john Walker
john Walker
5 years ago
Reply to  David Walker

David
The old 308 pacific class steamers could (and did at times )do 100 mph, raising ‘top ‘speed to 160 kph is not a increase , what is the average speed ??

David Walker
5 years ago

Value capture is a perfectly viable concept for making private rail projects stack up. But you may have more difficulty capturing value if the trains stop at places which are not already heavily developed. A Canberra VFT station would probably attract extra development if the stations were placed in the CBDs (as most people presume they would be). But Melbourne, Sydney or Brisbane maybe not so much. I’m open to being argued out of this musing.

As for places like Bowral, once you start stopping at such destinations, your VFT very quickly become uncompetitive with air travel. At that point, the economics of the program turn even uglier than they would otherwise be.

john Walker
john Walker
5 years ago
Reply to  David Walker

David I would be suprised if a VFT would ever be built. Do think that a fast enough service to the southern highlands and Canberra, might be viable. Total distance is about 270 km so an average speed of around 180 to 200 would probably be enough.

Nicholas Gruen
Admin
5 years ago
Reply to  john Walker

Value capture is in principle a very good idea. However it does lead to some nasty political dilemmas. Because invariably you end up capturing value from people who either do, or pretend to disagree with you about the value you’ve generated. And they can point to all those other people who have good infrastructure who didn’t have to pay for it through value capture – rather in the way Westies in Sydney rightly complain that they have to pay for their infrastructure whereas most of it is subsidised for those in the leafy suburbs.

David Walker
5 years ago
Reply to  Nicholas Gruen

Sorry, misprint above. I meant to write “you may have more difficulty capturing value if the trains stop at places which are already heavily developed”. This is mainly for the political reasons Nick mentions.

Value capture worked after a fashion in Melbourne in the 1800s on greenfields sites, which is why so many of the private rail lines were built by real estate developers.

john Walker
john Walker
5 years ago
Reply to  john Walker

Nicholas
I think that something like this applies to properties within cooee of the inner west light rail corridor. No idea as to how the locals have reacted , do you know?

john Walker
john Walker
5 years ago
Reply to  Ken Parish

Ken
A big cost would be electrifying the while line.

The Sydney end specific costs would be in the section from about Canbelltown to central mascot, via East Hills ( which is intrinsicaly about one third of the distance of via Strathfield ).
Going south the next big costs would be in the Mittagong to roughly Goulburn section: that would need a virtually total rebuild – current route is very curved and crosses a lot of reactive, unstable, soil areas.

Once the line gets to about Yass it is already pretty good for miles( it’d the area that the old Pacific class used to sit on 100) . Think the run on into Melbourne would be mostly only be about real estate rather than engineering.

Would it be worth it?, don’t know.

john Walker
john Walker
5 years ago
Reply to  john Walker

Sorry about the typos..

A cost benefit question for any VFT proposal would be :do you upgrade and electrify all of the existing line for ,all traffic?
or do you build a new passenger specific line?

conrad
conrad
5 years ago

“I’m not sure about Conrad’s idea for using existing tracks through the burbs to cut cost”

I’m just extrapolating what happens in France to here, although I agree that a cost-benefit analysis would be needed and all the parameters worked out. In addition, the extent to which you use suburban tracks is most important for the routes I like the thought of (i.e., short routes connecting satellite cities that would facilitate their development), and least important for ones where 20 minutes won’t make any difference to most people, like Sydney to Melbourne, but I don’t think building these in one hit is realistic based on figures bandied around.

That being said, if you want a good example that is similar to this latter route, then the distance is actually similar to the one I’ve travelled on the most, Paris to Marseille (about 800ks). The first TGV line they put in there had the trains travelling on lines they couldn’t go really fast on and it took about 3 and a half hours. That was enough to seriously dint air traffic, since even a one hour air time translates into something very much larger once you add waiting around, getting to the airport, going through security etc., and trains are far more reliable and you can work on them. They then fixed the tracks up and now it is only about 3 hours (depending on the stops). But clearly even 30 minutes of messing around doesn’t matter so much for a journey like that (the trains seemed to always have high occupancy rate, and still do).

Out of curiosity I looked up how long it takes to get to fairly friendly territory for TGV trains lines around Melbourne, and you can go from Melbourne to Sunshine (Melton line) in 14 minutes (you could probably stick in TGV tracks before Sunshine too). That leaves about 100ks to Ballarat, or 20 minutes, so it would take 34 minutes even assuming you could not speed up the journey to Sunshine (plus, say, 5 minutes for Ballarat messing around). In terms of Geelong, you can go from Melbourne to Newport in 15 minutes. That probably leaves about 60ks, which would take 12 minutes, plus, say, 5 for Geelong. So even with time lost on suburban tracks, the journey times are still very reasonable and quite comparable to other journeys from the burbs in Melbourne on normal trains.