Transport infrastructure: where next for funding?
The old ways of paying for infrastructure no longer cut it, says KPMG’s Ben Carlton-Jones. So is it time to reconsider reforms that have previously been seen as just too hard?
Paying for expensive infrastructure was a challenge even before the pandemic. Today, some might say, it is harder than ever. Delivery authorities are struggling to meet operating costs let alone invest in new assets, government funding is in high demand, and old business cases no longer stack up. At the same time, of course, costs are going up.
But might the new environment also present opportunities?
It has certainly brought into sharper focus the fact that the old ways of paying for infrastructure will no longer cut it.
There is no shortage of analysis of alternative funding and financing tools, but the challenges of implementing them too often meant they fell at the first hurdle. Community and political acceptance was simply not there.
But the last two years have shown that nothing is off the table – and so perhaps now is the time to reconsider reforms that have previously been seen as just too hard.
We know that changes to travel patterns and transport technology present an unclear future for conventional revenue sources such as motoring taxes. Road charging of some form seems inevitable, but we need to cast the net wider than this.
Business cases for transport schemes today need to reflect the changed world in which we live and work
Business cases for transport schemes today need to reflect the changed world in which we live and work. This means not only addressing connectivity and capacity issues, but promoting and maintaining economic development, increasing the supply of homes, supporting the transition to net zero and improving quality of life and social inclusion.
The Exchequer will benefit from the broader fiscal impacts of these outcomes – which is one of the reasons why it will remain appropriate for taxpayer funding to support investment in transport networks. But the tangible benefits for a wider range of beneficiaries – in terms of productivity, employment, income levels, environmental impacts, quality of place, and land and property values – need to be better acknowledged in delivery strategies.
The next question is whether there is a feasible way to elicit a fair and proportionate contribution from this full spectrum of beneficiaries. Without doubt, this will require new and innovative tools, as our tax system was not set up for this purpose. This is especially relevant if an attempt is to be made to tap into the potential increase in value for existing residential property. For urban schemes this asset class has been demonstrated to be the single largest beneficiary from transport investment (indeed, detailed analysis in London indicated that an investment programme of major TfL projects could be almost self-funding in the longer term if London was able to capture one third of the estimated land value uplift, subject to addressing shorter term financing challenges).
Coordination of investment decisions to align policy objectives – transport and housing being a prime example – should also be encouraged
But how do we get over the ‘first-mover’ challenge? And how do we design a regime that is so intelligent that it only ever captures a reasonable share of those specific gains actually created incrementally by a project?
Every now and then there are interesting examples from elsewhere. New Zealand, for instance, has recently introduced an infrastructure charge whereby homeowners in a specified zone fund an infrastructure delivery special purpose vehicle or SPV via an annual charge that has both a fixed element (to support bankability) and a variable one (which is responsive to uplift in value). We should watch this with interest.
The further coordination of investment decisions to align policy objectives (transport and housing being a prime example) should also be encouraged, alongside the recycling of some of the ensuing economic value back into broader-based spending programmes. This, in theory, can create a virtuous cycle of investment and growth, to the benefit of many.
Identifying the entry point into this cycle is the hard bit. But if the pipeline of infrastructure delivery slows down as a result of funding issues, in turn jeopardising the realisation of our ambitions for growth and decarbonisation, then finding one will become a necessity.
Ben Carlton-Jones is an associate in KPMG’s Infrastructure Strategy Advisory team. He is an experienced strategy advisor working with Government departments and agencies, public authorities and the private sector on the development and execution of strategy, governance, procurement and funding for major investment programmes. He has a track record of delivering large and high-profile public and private sector investments in complex policy and stakeholder environments providing technical insight and commercial acumen, with an ability to distil complex information into clear messages and narratives.