Value Uplift Capture
In the summer of 1975, newly elected Tory opposition leader Margaret Thatcher "reached into her briefcase and took out a book…'This', she said sternly, 'is what we believe', and banged Hayek down on the table". In that same book, Friedrich August von Hayek wrote of town planning:
The market has, on the whole, guided the evolution of cities more successfully, though imperfectly, than is commonly realised and … most of the proposals to improve upon this … by superimposing a system of central direction, show little awareness of what such a system would have to accomplish, even to equal the market in effectiveness.
The book goes on to propose a system of financial intervention which would involve taxing the benefits accruing from positive impacts of planning, such as rising property prices – which we call value uplift capture or ‘betterment’ – as well as compensation for negative impacts. Hayek’s position is remarkable, because betterment is commonly opposed by those associated with the politics of ‘the right’, not to mention land owners and the development industry. The Iron Lady would have been horrified if she had known what she had endorsed; ten years later she repealed Labour’s second attempt to levy betterment. One can imagine her haranguing its defenders as naïve and irresponsible.
Fast forward to 2012, and a government of similar complexion initiated the creation of an enlarged CBD for Melbourne, by rezoning the area of low value commercial uses known as Fishermans Bend. The government labelled the scheme ‘Australia’s largest urban renewal precinct’. Land values immediately sky-rocketed; there was no provision to siphon a portion of the value uplift into the provision of infrastructure.
The plan for the area, released two years later, states that “…urban renewal has rarely been of such a scale that so many new facilities are required.” Its proposals for tram lines, schools and other social infrastructure are unfunded and unrealisable in the absence of a massive injection of public funds, irrespective of the provisions of a future development contributions scheme. The infrastructure is needed to enable the new developments to function; the lack of infrastructure funding appears to have been no barrier to the land owners realising massive windfall profits, before even a sod was turned. It is difficult to avoid concluding that the absence of a proper value uplift capture scheme in Fishermans Bend is naïve and irresponsible.
A Planning Fundamental
Capturing the uplift in value resulting from the granting of a permit or a rezoning, or from public investment in infrastructure, was once a fundamental tenet of town planning. The rationale is twofold: to recognise that the uplift in land value arose from the community conferring the right to develop; and to help pay for infrastructure and other community benefits, such as affordable housing. Why should proponents (particularly speculators) pocket windfall gains for doing nothing more than submitting a successful permit or rezoning application? Why should the general tax payer subsequently have to pick up the tab for the infrastructure needed to service the development?
In the UK, general betterment schemes have been implemented, only to be withdrawn, several times since 1947. Planning Acts in Victoria, NSW and WA at one time included enabling provisions for betterment collection. In the ACT, with its leasehold land tenure system, they collect 40 per cent of the value uplift by charging a kind of development licence fee, an approach that could be adapted to other jurisdictions.
Value Capture by Land Purchase
Government acquisition of land at undeveloped value, prior to the conferring of development rights, has been another fundamental of planning practice. Development corporations are a common mechanism. Canberra and Albury-Wodonga were developed by this means, providing jobs and good quality, affordable housing for the masses.
Development corporations can manage development of publicly owned land or renewal areas that include substantial areas of government land; they may also buy land and manage land banks. They can provide a way of achieving development outcomes not normally provided by the market (eg the former VicUrban), or facilitate change that may be beyond development industry capacity (eg Docklands Authority).
Depending on their remit, development corporations can be very effective at capturing land value uplift and using it to fund infrastructure and returns to the public purse (as occurred with the British new towns), as well as delivering the right kind of development.
Levies, Charges, Conditions & Agreements
In a sense, discussion of betterment is difficult to separate from the multitude of mechanisms available to planners to fund community benefits and mitigate development impacts. Local examples include payments for infrastructure required to service a development, such as Development Contributions and Section 173 Agreements. Open space contributions, Special Rates and the Parking Overlay are rather more tax-like. Conditions on a permit deal with mitigation of some impacts. The Growth Areas Infrastructure Contribution comes closest to a general betterment tax; a Land Tax, if introduced, could perform a similar function throughout the State.
In the UK, increasing reliance is placed on Planning Agreements, which either place restrictions on development, or oblige the proponent to provide or pay for something – for example, a specified proportion of affordable or social housing. In the US, Inclusionary Zoning is sometimes used for similar ends.
These mechanisms all play their part, but in comparison with a general betterment charge, they can only go so far. In Victoria, for example:
- Insufficient funds are being raised – for example, high quality public transport services in urban growth areas are apparently unaffordable.
- The wrong housing is being delivered – affordable housing, even the right housing quality and mix, appears to be beyond the scope of existing mechanisms.
- Other significant gaps exist – for example, the complete absence of value uplift capture in urban renewal areas like Fishermans Bend, and the windfall gains for speculative high-rise proposals in Melbourne’s CBD.
Peter Hall’s book Good Cities, Better Lives (2014) laments the failure of UK town planning to match the best practice urban renewal and greenfield projects in places like Freiburg, Amersfoort, Strasbourg, Copenhagen and Malmo. His critique has relevance to Australian cities and to this discussion in terms of land supply, and financing of infrastructure. On page 299 of his book, Hall writes
It is evident almost at first sight that virtually all of the best-practice case study places have enjoyed heavy investment in infrastructure… In particular … top-quality public transport investment has taken place well in advance of demand, thus long before it would be justified in a conventional cost-benefit analysis. This, clearly, has been an article of policy for these cities. It represents a radically different approach from the narrow economic calculations employed in the UK and some other countries.
If you think about it, effective public agency planning demands that a link exists between the granting of the development right and the value of the land. Hall refers to this as without doubt, the single most important conclusion from his Grand Tour:
In every successful case, the detailed case studies show that from the start the public agency took the lead: it drew up a master plan, usually in considerable detail as to layout of streets and buildings and open spaces – even down to the height and massing of individual building blocks – before inviting private or communal agencies to make their proposals for detailed development of individual elements. (p305)
Hall advocates what he calls the Dutch principle (p304): the local authority assumes control of developable land, and offers packages of land with full planning permission at auction, on land already master planned. Alternatively it develops the land itself or in partnership with a selected developer, on terms reached by agreement. Developers would continue to make reasonable profits from the development process, but not from land speculation
From the mid-1940s to the early 1990s, there was a core of UK planners and designers at the forefront of designing and developing the massive urban renewal projects and new towns arising from slum clearance and war damage. They understood land economics and developer spreadsheets. Since then, “Planning and planners have been residualized into a purely passive role”, asserts Peter Hall. Sounds familiar?
Value uplift capture is a difficult policy area, but one that cannot be ignored. Until it forms a more accepted part of the Australian planning system, city planning will continue to fall short of society’s expectations. Without it, planners and planning will remain marginalised, and we will never be able to afford the public transit systems needed to make our urban renewal and greenfield areas truly sustainable.
 Ranelagh, J, 1992, Thatcher's People: An Insider's Account of the Politics, the Power, and the Personalities (Fontana), quoted in Wikipedia.
 Hayek, FA, 1960: The Constitution of Liberty, London, Routledge & Kegan Paul, pp341-2, quoted in Taylor, N, 1998, Urban Planning Theory since 1945 (SAGE) p134