Australia: Improving infrastructure planning and funding using UK-style City Deals

Clayton Utz Insights
Last Updated: 14 June 2016
Article by Owen Hayford and Larissa Di Mauro

Most Read Contributor in Australia, August 2016

Key Points:

The UK's "City Deals" provides powerful inspiration which could facilitate meaningful improvements to infrastructure planning and funding for our cities.

The Australian Government has recently released a "Smart Cities Plan", setting out its approach to drive a national reform agenda that aims to transform infrastructure planning for our cities by requiring all levels of government, the private sector and the community to work together to form "City Deals".

The Turnbull government recognises the importance of our major cities to our economic prosperity and social wellbeing. Our major cities are home to more than three quarters of our population, and almost 80% of Australia's economic activity occurs in our major cities.

The concept of a "City Deal" was born in the UK in 2011, and is aimed at creating economic growth by giving cities the powers and tools they need to undertake projects and initiatives that will boost their economy and stimulate local economic growth. The Smart Cities Plan embraces Infrastructure Australia's recent recommendation that the Federal Government should drive infrastructure reforms by making its funding for State infrastructure projects contingent on the relevant State delivering required reforms (for more detail, see Infrastructure reform ? he who pays the piper, calls the tune.)

A "City Deal" in Australia will be created where all three levels of government (and any other relevant stakeholders) collaborate to form a contractual partnership committing to identify and implement actions, reforms and governance arrangements that will create economic growth and prosperity for a specific city or region.

The Smart Cities plan also creates a vehicle that will enable value capture to be explored in a manner that may see it implemented in creative ways, rather than simply as another tax on property or development.

The theory is that each element of the deal will enhance the next, thereby having a greater impact and contributing to funding the wider package. For example: a new railway station funded by the State Government will increase house prices, changes to local zoning laws by Local Government will facilitate higher density development bringing greater population. All of these changes will increase tax generated through land rates, capital gains tax, land tax etc. The Federal Government may agree to a structure whereby the increase in Federal tax revenue generated because of these investments can be captured by State and Local Governments, so that they can reinvest that "value captured" into local projects to promote skills and business development to bring further prosperity. Implementing these changes as a package deal approach will create more pronounced growth than any one single program being introduced alone.

The Smart Cities Plan includes commitments from the Federal Government to establish:

  • a UK style "City Deals" approach to infrastructure and cities planning and funding; and
  • an Infrastructure Financing Unit, which will work with the private sector and government agencies to develop innovative financing solutions to fund key projects including private partnerships, value capture and balance sheet leveraging.

Will UK-style City Deals work in Australia?

City Deals will challenge the status quo of deeply entrenched structures and beliefs at all levels of government regarding decision making powers and control over managing the distribution of tax revenue.

But for the Smart Cities Plan to become a reality, and for City Deals to work in Australia, there will need to be major structural changes driven from the top down to promote the desired outcomes that can only be achieved through collaboration and commitment to mutual goals.

The success (or otherwise) of the UK City Deals approach won't provide an authoritative example to follow. Our political structures and approach to taxation are too different. But the UK example does provide powerful inspiration which could facilitate meaningful improvements to infrastructure planning and funding for our cities.

The Smart Cities Plan has the potential to break through roadblocks that have traditionally plagued holistic infrastructure planning and development in Australia, such as:

  1. poor co-ordination between government agencies responsible for planning, land-use, infrastructure and transport, both within and between each level of government;
  2. ad-hoc, unstructured decision-making on the prioritisation and funding of infrastructure projects; and
  3. the significance that swinging electoral seats have in infrastructure funding decisions.

What do UK City Deals look like?

The "City Deals" approach is not new, and originated in 2011 when the UK Government announced its plans to boost local economic growth objectives, and brokered "wave 1 UK City Deals" comprising eight deals in 2012, and "wave 2 UK City Deals" comprising a further 18 deals in 2013 and 2014.

To provide an example of the UK City Deal approach, here are some details regarding the structure of the Greater Manchester City Deal:

Scope: The Greater Manchester Combined Authority, comprising ten local authorities, was established to oversee the implementation of the City Deal.

Key players: Central Government, and a public and private partnership between the Combined Authority and the Greater Manchester Local Enterprise Partner, which represents local private interests.

Focus: Maximising local jobs and productivity through implementing transport-focused investment as well as programs focussed on skills, housing, investment/funding, low-carbon and business support. For more detail on specific targets and funding allocated to programs in these categories, see the Smart Cities Plan.

Investment strategies:

"Self-help" base funding generated from local authorities participating in the Greater Manchester City Deal

A single investment fund was created at the Combined Authority level.

Funding generated by local governments through tolls, levies, developer contributions, tax increment financing and local taxes was pooled into the Combined Authority investment fund, so that funding could be funnelled to those projects which would best promote the objectives of the Manchester City Deal.

Earn-back funding contributed by Central Government

When the Manchester City Deal was first created, it included an earn-back structure by which the Combined Authority would be entitled to retain a portion of any additional Central Government tax revenue generated from local investment, which could then be reinvested in Greater Manchester. In practice, it was too difficult to quantify the impact of local investment on Central Government tax revenue.

The earn-back structure was later adjusted so that Central Government funding would be by made by way of a capital grant issued by Central Government every five years to Greater Manchester. This capital grant is dependent upon an independent panel established by Central Government evaluating the economic impact of local investment (so that Central Government could be assured that its capital grants reflect results in the Greater Manchester region).

Funding: Funding comprised:

  • funding generated from local authorities pooled into the Combined Authority Investment Fund;
  • Central Government contributions up to $1 billion (approx.) over 30 years representing (in the most part) those funds which would be generated through the earn-back/capital grant investment strategy set out above;
  • commitments from the Central Government's Department for Transport to fund major transport projects for 10 years; and
  • private sector contributions.

Investment framework: An investment framework was developed so that the Combined Authority and Greater Manchester Local Enterprise Partner could:

  • assess the costs and benefits of proposed infrastructure projects against objective criteria; and
  • prioritise and direct funding to those projects which would maximise the benefits for the region's economic growth.

Delegation of powers: Further powers were devolved to the Greater Manchester Combined Authority, giving it greater powers to direct funds to the local authorities in order to meet the objectives of the Greater Manchester City Deal.

Difficulties in applying UK City Deals in the Australian context

The progress of "wave 1 City Deals" in the UK has recently been examined by the UK National Audit Office who released a report titled "Devolving responsibilities to Cities in England: Wave 1 City Deals" on 9 July 2015.

Examining the findings of the UK Audit Report will provide invaluable lessons to kick-start Australian deals.

When critiquing the success of wave 1 City Deals in the UK and considering the application of the UK approach in Australia, there are two critical considerations:

Division of powers

Australia's Constitution establishes a federation, whereby power is divided between three levels of government (federal, state and local powers). Meanwhile, Britain is a unitary state, meaning that the British Parliament holds the central power and authority to make laws on all matters, and to delegate powers to local governments.

The British unitary system makes implementing City Deals a whole lot easier, simplifying (to some extent) negotiations between different levels of government, each with different limited powers to undertake and finance their own projects and often with competing political interests.

Australia's three tiered political structure could make it difficult to implement the regulatory and governance reforms needed for the Smart Cities Plan to be transformational. In addition, political affiliations to different parties could get in the way of deals being struck.

Taxation

Australia's tax system is highly complex, with each of the three levels of government having the ability to levy different taxes. Meanwhile, the UK's tax system is much more straightforward and "unusually centralised, with less than 5% of tax revenues raised locally" (Institute for Fiscal Studies, "A survey of the UK tax system" IFS Briefing Note BN09, November 2014).

Accordingly, implementing City Deals in Australia will require fresh thinking.

Lessons learnt from UK City Deals

The UK Audit Report also reveals some shortcomings in the UK approach. For example:

  • the monitoring and evaluation of the UK City Deals has been undertaken haphazardly. A more structured approach should be adopted in Australia;
  • evaluating the impacts which City Deals have had on local economic growth has been challenging, especially over the longer term, because it is hard to assess what would have happened without the deal. Our deals should try to agree up front the methodologies that will be used to measure key outcomes such as jobs created. Consistency of methodologies across different deals would also be desirable, so that performance can be compared; and
  • the rush to get the initial UK deals done meant that commitments were made by ministers before all relevant departmental officials were consulted. Some practical issues around funding and assurance were not considered until after the deals were signed. Our governments should allow sufficient time to do the necessary planning and consultation.

The Australian industry back-drop ? getting ready for the implementation of City Deals

The recent establishment of the Greater Sydney Commission aligns nicely with the Smart Cities Plan.

The Greater Sydney Commission has been established to lead the strategic thinking and decision-making in relation to metropolitan planning for the Greater Sydney Region. It aims to overcome the poor levels of collaboration between Sydney's many Local Councils, and between the State government Departments responsible for planning, transport and infrastructure. Its chair, Lucy Turnbull, has said "the Greater Sydney Commission has the great potential to be a transformational way of having a collaborative working model for state and local government which has often not been the case in metropolitan Sydney".

The establishment of the Greater Sydney Commission should assist in the brokering of City Deals for each of the six regions within the Greater Sydney Region.

As City Deals are on their way to Australia, stakeholders should position themselves for the opportunities that may arise by taking pre-emptive steps to:

  • analyse local objectives and development priorities and start forming conglomerates to analyse and prioritise local development strategies; and
  • learn from the UK experience and develop strategies for successfully creating and implementing City Deals in the Australian context.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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