Submission to Parliamentary Inquiry into Value Capture

Submission to Parliamentary Inquiry: The role of transport connectivity on stimulating development and economic activity

Value Capture


Value capture has a powerful fundamental role shaping the future economic growth, transport and liveability of Australia. It requires strategic policy development and effective management of implementation to ensure beneficial outcomes for continuing Australian prosperity.

Value capture is usually associated with infrastructure and property development, though it has broader implications. Very large amounts of money are involved. This submission will centre on High Speed Rail (HSR) and Fast Freight Rail (FFR) as it is a joint project that probably has the largest single source of value capture in Australia.

The context in which value capture should be considered is the needs of the present population and the needs of the future population. Currently, there is a back-log of infrastructure spending amounting to many hundreds of millions of dollars aggregated over several decades. This relates to the inadequate service of the present population. The funds needed have been spent instead on greater welfare, more red-tape regulators, less than effective Federal/State relations and the GFC.

An under-lying assumption is that the future population will probably double in the coming decades. This would require much more infrastructure expenditure to service it adequately. The back-log plus new spending will be on large lump project funding, rather than catch-up incremental funding. This may require new approaches to finance. Policy decisions made today will have a very large impact on the long term development of Australia.

Unfortunately, the Government is not in a strong position to fund the much greater infrastructure expenditure required and also repair the budget. It entails constraining and reducing the calls on other budget expenditure, which is politically difficult. As a result, there has been a growing trend for fewer government infrastructure projects, more private and many more PPP projects. Governments are selling assets to fund new infrastructure. There are insufficient funds derived from “old” assets to meet the larger needs for new asset spending.

Lack of infrastructure in hampering domestic competition and holding back Australian international competitiveness.

The essential inter-acting issues for value capture today are the very high cost of transport in Australia, the threat to liveability of Australian cities from congestion and the means of financing the large amounts required for infrastructure.

These matters are germane to maintaining in the long term the great achievement of Australia’s position as one of the wealthiest, most prosperous and liveable countries in the world, with most liveable cities in the top 10 in the world, while doubling the population.

Value capture has a long history ever since trade and development began. The emergence of railways has illuminating and instructive insights for policy formulation and management today.

Meaning of value capture

It is useful to begin by clarifying the application of terminology. Value capture is often used as the softer, more acceptable term for capital gains. However, capital gain is usually regarded as the effect of inflation on asset price. Value capture is intended to apply to the value created in an asset by an entity, rather than economic system-wide inflation of the asset’s value later. The value to be captured is that incorporated at the origination of the particular asset and realised when it is sold. Capital gain is the increase in value accumulated later over time without the individual input. Capital gains are often taxed.


The negotiated price for the sale of an asset is made up of its cost, value capture and capital gain. To estimate value capture, cost is deducted from the price and backwards indexation of inflation from the present price, not from the cost, to the date of the origin is deducted, perhaps given a year for leeway (eg. 50% on from the date is 33.3% off the price). For example, an asset cost $100. It is priced for sale 10 years later at $200. Inflation indexation (capital gain) over 9 years on $200 is $60. Cost and inflation are deducted, giving remaining value capture of $40. If capital gain is calculated from price less cost, it erroneously includes value capture (eg. $200-$100=$100).

Value capture applies to operating value as well as capital value. It is an important distinction, as they are treated differently in accounting and are taxed separately.

Value added, also called productivity, is the source of value capture. Value added is classified as labour and capital productivity. It is the value of the creation of greater utility to customer newly incorporated in goods and services. Value added begins with questioning conventional wisdom, whether cultural, organisational or technical. It takes courage and curiosity, wonder and imagination. It stimulates inspiration. It leads to R&D, innovation, new products and services, new management arrangements, organisation and corporate reorganisation, all as contributions to increased value added (productivity improvement). Value added is built into lower costs and /or higher prices according to customers’ willingness to pay and assessment of value for money. Productivity improvement is driven by competitive pressures or incentives to serve customers better.

Operating value capture is realised by lease, rent, royalty, and sale of goods and services incorporating value added. Capital value capture is realised by sale of value adding assets.

In the case of government services, operating value added is not captured separately, nor taxed.  It goes to general revenue. Private enterprise operating value added is not distinguished, but is taxed as profit.

Value added on capital assets is the increase in productivity and advantages of new technology incorporated in new assets installed over and above those of “old” assets that they replace. The increase in operating value added is contributed during the year. It is captured in profit and is taxed. The asset is recorded at capital cost at the time it is created, rather than the accumulative value added that it will contribute in future. When sold, the asset is usually more valuable than it cost because it still has more to contribute. The asset price includes this capital value capture.   

Governments do not tax value capture or capital gains on sale of government assets. Governments do tax capital gains only on private assets of businesses with the purpose of engaging in sale of these assets, particularly shares, property and on sale of businesses.

Value capture is a major incentive to businesses to create value added. They are in the business of competitively creating added value, both operating and capital. Operating value is incorporated in profits of the assets installed to produce it. The assets are not generally for sale. They are for producing operating value added. Higher value added of this new asset helps to pay for the usually higher cost of the next new asset to replace it. Annual asset depreciation charges retain funds in a business to pay for future replacement cost of assets with higher value added. Capital goods produced by manufacturers that incorporate productivity improvement in new assets for sale and their value added in profits are taxed.

This is a matter of defining, distinguishing and classifying the purpose of businesses and their activities.

Purpose of business

Most businesses capture their value added through sale of their product, not their assets. Some, such as property developers, purposely create assets for sale incorporating their value capture.


These are taxed on profits distributed to shareholders. Other businesses, for example, HSR have the purpose of creating value added in their assets and selling some of them to recover capital costs and retaining value capture in order to reduce net investment. They do not distribute capital value capture to their shareholders as profits. This value capture should not be taxed.


Railways infrastructure are probably the biggest single example for the application of value capture policy in Australia. Railway development is held up by cost and funding. Value capture is the potential sword to cut the Gordian knot.

The main value capture issues are who will create the most value capture and whether it will be taxed: a matter of relative effectiveness and disincentive.

Governments tend to build railways these days though they are limited in Australia by lack of funds.  Generally, government railways are built to lowest cost and austere utility. Private railways are built to customer value, that is, with greater value added.

HSR is a particular example in Australia. The then Government’s 2013 HSR study envisaged extensive tunnelling into and out of the capital cities, which by definition is not available to property value capture above it. In the book, Peter J Knight High Speed Rail for Australia-Now, 2015, it is proposed that private HSR tracks would be in extensive trenches as entry and exit from major cities with property built above them. Large value added and capture would be created with the purpose of selling the property to offset the capital cost of the railway. The net investment would be lower, therefore the ROI higher and more attractive to financiers.

The HSR would create large value added and value capture on properties located above and adjacent to it, but little to direct tracks and stations. The property would be relatively low capital cost and could be sold for 100% or more than cost, yielding a large value capture. The railway and property businesses are separate markets with different customers, but combined within one private company. The value capture should not be taxed as it would be intended to reduce net investment, not to be distributed to shareholders as profit.

Government railway undertakings are unlikely to enter associated property development business because of the large extra initial additional (recoverable) fund requirements and the added risk. They forego much value capture. They must, therefore, find more funds for railway construction.

Large government projects run the risk of big budget and time over-runs. Examples are commonplace. Extreme examples are The Parliament House, The Opera House and the Victorian desalination plant. (It is understood that this government project cost five time what it should have cost.) These extra costs far outweigh the advantages of lower government interest rates. Private enterprise projects run more closely to budgets and deadlines, though at higher interest rates than government.

The proposed government HSR corridor in Victoria is from Albury in the north to Melbourne. It does not create as much value added and value capture as the proposed commercial private eastern route into Melbourne via Gippsland. The government ACT and Gold Coast HSR spur lines have similar outcomes. These corridors, therefore, cost government more in higher net investment and lower ROI terms. Also their benefit/cost ratio is less.

A private enterprise HSR has the potential to cost less, be built quicker and be more convenient and valuable to customers than a government project, thereby creating more value added and value capture, which would not be taxed in the hands of government and should not be taxed on private HSR. There is a trade-off in favour of private enterprise HSR over government in terms of value capture.


Value added, value capture and tax may be the determining factors about whether HSR will be built in Australia.

Historical railway value capture

The original passenger and freight railway was inaugurated in 1830 in England on the 30 miles between Liverpool and Manchester. There was a big operational value capture in competition with higher cost and slower, inconvenient canal freight and stage coaches. There does not appear to have been significant capital value capture initially. Railways development rapidly and underwrote the Industrial Revolution. They were all built by private enterprise. Later, fares and freight rates were squeezed by motor cars, trucks and planes. Private railways made losses, lost value added and were nationalised. Government railways incurred deficits through subsidising fares. In more recent times, railway operations have been privatised allowing fares and freight rate to increase to commercial rates and profits.

In America, railways were originally built privately in competition with wagon trains. They also gained capital value capture through owning and building towns and property around railway stations. They succumbed eventually to road and air competition. They had defined their business narrowly as railways, not as passenger and freight carriers including road and air. They became government owned for many years and were starved of development funds. In 1980 they were privatised. Some $US450 billion was invested in freight lines which increased value added. They are regarded now as the most efficient, lowest cost freight system in the world. They became profitable and captured operational value at commercial rates, so much so that Warren Buffett bought one of the biggest US railway companies.

There has been some property development near stations around the world in recent times, but none on the scale envisaged for the proposed private Australian HSR project. Value capture in Australia would be very large.

High Speed Rail value added

The railway between Melbourne and Dandenong, an outer suburban hub, is an example of the envisaged value added and value capture by private HSR. It would be applicable also in Sydney and Brisbane. Entry of HSR to Melbourne would be from the east via Dandenong where there would be a HSR station. The distance to Melbourne is 30km.

A trench would be cut next to the existing suburban railway and new higher capacity suburban tracks and stations built in it without disturbing train operations. It would remove 10 railway level crossing. When complete, trains would be diverted to the new tracks. Then a new trench would be cut for HSR under the old suburban rail tracks.

Low rise housing would be built above the tracks. Higher rise commercial building would be constructed above stations. At Dandenong and Melbourne terminal high rise hotels, apartments and offices would be built plus car parks, supermarkets and adjacent housing.

There would be a 30km roof level walking and cycling track and gardens between Melbourne and Dandenong like the “High Line” on disused elevated railway tracks in New York. This would give ready access to inner suburbs stations, urban facilities and particularly to jobs by public transport. The value added would be substantial and desirable to home buyers. It would attract people to live where government services have already been provided, rather than in the new, higher cost, poorly serviced, more remote outer fringe suburbs.

With HSR in the east and extended west via Tullamarine 30km towards Geelong in trenches, some 900,000 of the projected 4,000,000 increase in population in Melbourne in coming decades may be housed conveniently in inner suburbs.


It is envisaged that substantial new inner-city land would be created by the railways. For each entry to a capital city there would be a 30km trench by 100m wide. This would make 3 square km of new land. There would be another 3 square km for exit, making 6 square km in each city. For three cities there would be 18 square km of new land, plus some 3 square km of other land, a total of 21 square km of new inner-city land. All would be built over by low, medium and high rise property for sale. This would be extremely valuable.

HSR company’s railway would create the value added in the cities and sale of internal property development would capture the value for HSR. It would not be distributed to shareholders and should not be taxed.

New HSR stations would be built in regional areas between Melbourne, Sydney and Brisbane. They would be in trenches to enhance the value added to property above and around stations as the focal point of new cities. Extensive land would be bought as the core for, say, six new cities with populations eventually growing to 1 million people. It is envisaged that more than 2 million people would be living in two new cities on either side of Melbourne, Sydney and Brisbane, all connected by HSR, thereby reducing major city population growth and congestion.

New cities would be built up to 2-300km from major cities and commuters would be able to travel by HSR to CBDs in less than 60 minutes. Road and air cannot provide this redistribution of population, reduction of congestion and maintenance of liveability value added.

Land for six new regional cities and 10 new stations would be acquired and the centres built over for further value added.  City and regional value capture has a real foundation.

Many new regional cities would substantially increase the capital value capture of the private HSR company. It would mean that the beneficiaries of the value added would pay for a large part of HSR construction.

Express HSR trains would connect Melbourne, Sydney and Brisbane passengers in 3 hours. Operating value capture would be commercial and competitive at lower cost directly into CBDs in competition with road and air. Services would be more reliable, unaffected by weather, more convenient and in greater comfortable.

The private HSR consortium company would define its business more widely than “railways”. It would include property, freight and airline companies as members.

Fast Freight rail value added

In Australia, what interstate freight that should be carried by sea is carried by rail. What should be carried by rail is carried at excessively high cost by road. Sea freight is constrained by industrial matters. Rail is constrained by out of date, antiquated infrastructure that needs modernising. The interstate freight market on the east coast is dominated by road freight.

It is envisaged that new, dedicated, dual freight tracks would be built next to and at the same time as HSR tracks between Melbourne, Sydney and Brisbane. This would provide fast freight travelling at an average speed of 125-150km/h, compared to 350km/h for HSR and 70km/h for road freight. General freight trains cannot use HSR tracks and are kept apart. However, the cost of construction of both together would be less than if built separately. FFR capital cost would be less. There would be relatively little capital value capture by FFR compared with the high capture by HSR.

Each driverless, electric, fast freight train would carry the equivalent of 150 interstate semi-trailers. It is estimated that FFR would cut interstate freight cost and delivery time in half. It would create very large added value. It would be competitive with road and would gain a big share of the market


at commercial freight rates, including adequate operational value capture. With cost halved, the other half of value added would be capture by freight customers, rather than remain in the hands of road freight. Some of this lower cost may be passed on in lower prices for food and other goods to end consumers. Halved costs would mean that the isolation of industry from interstate competition in the major cities caused by very high road freight costs would be ended. This would increase competition within Australia and under-write the international competitiveness of Australia.

Since HSR and FFR would be one company covering the different businesses, the benefits of value added giving high capital value capture of HSR and strong commercial operational value capture of FFR would be combined for the company’s owners. Company profitability and ROI would be high.

The fundamental direct source of value added by the railway’s businesses is greater, more effective connectivity: connectivity of people and of goods.

Indirect value added of HSR and FFR

The outstanding benefits of HSR to Australia is the redistribution of population increase and the lessening of exponential growth of congestion of the major cities. The outstanding benefit of FFR to Australia is the lowering of high freight cost (and consumer costs), and the increase in competition leading to greater innovation and productivity.

Construction of the railways would increase non-mining investment on the east coast, stimulate economic growth and create many more jobs. Higher growth would ease the adjustments necessary for budget repair.

These indirect increases in value added created by the railways are captured in the hands of the people, businesses and government (through taxes on higher income). The benefits lie outside the railway company. Indeed, value capture is not really a railway issue. It is a future of Australian prosperity and liveability issue within the context of a doubling of the population. Railways are a means to an end.

Transfer of value added

The increase in cost of rising road congestion and consequent declining liveability could be moderated by government imposing a charge to reflect the destruction of value added involved and give a cost transfer incentive to increase efficiency of road use. It would also give a level playing field for rail and road. It would provide funds for roads in new regional cities, rather than outer suburbs.

Many more people would live in the inner suburbs above the tracks instead of in the dispersed outer suburbs. Saving of government funds not needed for high cost services in these fringe suburbs would be transferred to government services for more economical, lower cost, compact new regional cities and towns at HSR stations.

Commuter services are not usually economic for railways. They can be made so by transfer of some of the value added created in the cities where congestion is reduced and liveability maintained. It would be done by a small government charge on many city people, through land tax for example, employed as an effective rail fare subsidy for a relatively few commuters. It would be a serious incentive to live in the regions.

Similarly, customers in new cities located near power generation facilities, for example in the Latrobe Valley, would have cheaper electricity than in distant major cities.

Governments would move departments to regional cities easily accessible to CBDs by HSR. They would build universities there to serve students living in regions instead of in outer suburbs. They would build R&D facilities. These would attract more people to a good life in new cities near the sea in regions away from the big cities.


Government in effect would capture value from beneficiaries and transfer it as incentives to others to create more value added.


Construction of a large railway system would stimulate the economic growth rate at a time when the economy has been operating for some years at less than its historic average. This means more jobs being create, more government revenue generated as incomes rise and the adjustment of budget repair being less painful at higher growth and incomes. It would also forestall or modify the effect of the next inevitable recession, if undertaken soon.


Clearly, governments have been reluctant to fund such big projects as HSR/FFR. It would add substantially to government debt at a time when this is undesirable. It contains serious over-run risks.

HSR profitability and ROI has been regarded as marginal. This is not the case when the new private HSR value capture and the FFR concepts are included. The project would be highly profitable, with above average ROI. It would be better managed, financeable and bankable as a private project. Untaxed value capture and capital gains would make the difference in promoting private company participation and implementation.

It is envisaged that the Government would guarantee private finance for the HSR/FFR project at lower interest rates. The project would later be refinanced by Superfunds. Ultimately, much of the capital cost would be paid for by beneficiaries through railway company value capture.

The advantages to government of guaranteeing private finance is that it would not negatively affect the budget, nor add to government debt. A guarantee is a contingent liability that only becomes debt if the venture fails. There is great incentive to ensure that it is successful and does not subsequently become a government burden. The private project is designed for greater profitability and ROI than the average investments and much more value added than other railways. It is designed to relieve government from liability through refinancing by Superfunds and eventually be paid for mainly by the beneficiaries.


There is a case for not taxing value capture by the private railway company as it would not be taxed if it were a government project. To tax it would be a disincentive to private enterprise. The key consideration would be that the private value capture would not be distributed to shareholders. The combined funds from the value capture of the two businesses in the one railway company would be retained. The purpose would be to reduce and repay loans for the capital cost of the project, thereby lowering the net investment to more manageable levels and raising ROI.  This would be a significant incentive for financing the private project.

The HSR/FFR project has a long term horizon that fits the gradual doubling of the population over 4-50 years. The land created and purchased now by the railway company may be released over a long period to suit the needs of population increase at the time. There is a case for not taxing the capital gains of these property sales in the hands of the railway company. The funds would be retained and not distributed to shareholders. They would be employed in reducing net investment. The project would be more financially viable and eventually it would be part of the beneficiaries’ way of paying for the railway.


The purpose of the railway company and the taxation arrangements may be formalised in enabling legislation.

If the project did not go ahead, the Government would not receive tax from the railway activities anyway. If it does go ahead, the Government still would not receive the tax allowed to the project. It would, however, gain higher income tax from greater economic growth that the project would stimulate. In addition, the community would receive the enormous non-taxable benefits above cost derived from the project’s value added.


The private HSR/FFR project is designed with a focus on innovation to create more direct value added than any other railway before it. It is also designed to create more indirect value added in the form of economic benefits for Australia that far outweighing the costs. A substantial part of the direct value added would reside in property development. This is solidly, soundly and realistically based on practical innovative approaches. It would generate substantial value capture for the project. It is intended that this provide the means for the beneficiaries of the railway to pay for much of its construction cost.

HSR would create a huge capital value capture and FFR would generate a vast operating value capture. It would not be surprising, if together value capture would probably exceed $100 billion in scale. This would be assessed in a private enterprise feasibility study into project viability.

The value capture by the HSR/FFR company should not be taxed. If it were, the project may not go ahead.

The profitability and ROI of the project are likely to be well above average. It would be largely self-funding through value capture once given a positive start. The project would be viable in its own right.

There are far greater benefits than costs of the railway project for Australia in terms of lower costs, and increased competition, liveability and growth. They mean greater on-going prosperity overall.

Value capture and capital gains would be a major incentive to private enterprise to undertake this big project. It would need the cooperation of government, unions and business to ensure its success.

The ultimate decision of the Government is whether to tax value capture and capital gains and to use the funds for further redistribution of income to welfare while risking the railway not going ahead. Or to leave value capture and capital gains untaxed in the hands of the private railway company in order to stimulate the economy and entrepreneurship for further innovation and value added, and to gain the desired benefits for the community.

Finally, it is a question of confidently backing more growth, or accepting less growth.

Creating prosperity comes before redistributing.

PJK ©8.1.16

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