Australia: Construction & infrastructure

Government Bulletin summer edition – year in review
Last Updated: 17 January 2016
Article by Scott Alden

Government favours new ways of funding projects – a new model for 2016

The Government has an ever-expanding list of projects that are acknowledged by all as "essential", "important", and "nation building". This will continue into 2016 and beyond and, as it does, the reality is that central funds (Treasury) will not be sufficient to pay for everything, and so projects need to be prioritised. One way that this is going to be addressed in 2016 and beyond will be exploring new ways of project funding including social investment bonds and Taxation Incentive Funding (this has also been called "value capture").

This model of funding effectively looks at all of the direct and indirect benefits that a project may bring to an area, and identifies ways in which these benefits can be identified, captured, valued and returned to the project, such that this value can be used to pay down some, or all, of the initial capital cost of that project.

For example, it is widely accepted that good development is positive for surrounding properties and thereby should increase the values of those properties. The often very fortunate non-contributing beneficiaries of some developments include, not only the property owner, but also the State Government through the flow on increases in stamp duty payments and land tax payments, the Commonwealth Government through increases in Capital Gains Tax payments, the Local Government through increases in rates and rateable values, surrounding businesses due to more people spending money in the immediate economy, the local population through higher employment etc.

Value capture looks at ways of using this increasing value or cash flow to fund the project through investment vehicles or direct payments. This new form of funding is heavily supported by our new Prime Minister who last month openly said that "direct gains were not the way the federal government can or should support infrastructure. In the future, we want to look at more innovative approaches: we want to look at arrangements where we can partner the state governments or city governments as shareholders, as investors. We also have to look creatively at how we capture the value that arises from the increase in property values and the improvement in the utility of adjacent land from the building of infrastructure like this." (referring to the Gold Coast Rapid Transit).

One model under consideration at the moment (one of a number) is one where a project is funded by Government bond investment with the investors being repaid due to the windfall gains delivered back to Government through increased revenue from existing (not new) taxes.

It is clear that there is a strong political will to invest in sensible projects. There is currently broad Government support for finding solutions to issues of funding these projects, and this will be done in the near future through various forms of value capture and we expect to see a lot more of this in 2016 and beyond.

Some legal issues to consider are how the project agreements may need to be amended to reflect new funding models, the bond and other finance documents, the methodologies around the true value that has been captured and how much of it can (and should) therefore be returned, and what happens where this goes wrong (ie liability for those recommending structures or investments or those involved in developing the documents).

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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Scott Alden
 
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