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Considerations in financing

Posted: 31 March 2006 | Jeremy Gardner, Director, Faber Maunsell | No comments yet

The way in which a new urban mass transit system is financed can be a crucial factor in deciding whether it is actually built or not. Recently a number of proposed schemes have failed due to disputes over funding – despite the many advantages they seemed to offer.

Good public transport is seen as the key to making our urban centres attractive to investors, developers and residents. It is key in reducing the dependence on the car, improving social inclusion and bringing about urban regeneration. Of public transport options mass transit systems from trams through light rail to full metro are considered necessary to bring the investment and provide the prestige sought by the cities and communities they serve. The problem is finding the funding necessary to finance these expensive schemes as has been the case in England, where tram based LRT schemes in several cities have failed for lack of funds.

The way in which a new urban mass transit system is financed can be a crucial factor in deciding whether it is actually built or not. Recently a number of proposed schemes have failed due to disputes over funding – despite the many advantages they seemed to offer. Good public transport is seen as the key to making our urban centres attractive to investors, developers and residents. It is key in reducing the dependence on the car, improving social inclusion and bringing about urban regeneration. Of public transport options mass transit systems from trams through light rail to full metro are considered necessary to bring the investment and provide the prestige sought by the cities and communities they serve. The problem is finding the funding necessary to finance these expensive schemes as has been the case in England, where tram based LRT schemes in several cities have failed for lack of funds.

The way in which a new urban mass transit system is financed can be a crucial factor in deciding whether it is actually built or not. Recently a number of proposed schemes have failed due to disputes over funding – despite the many advantages they seemed to offer.

Good public transport is seen as the key to making our urban centres attractive to investors, developers and residents. It is key in reducing the dependence on the car, improving social inclusion and bringing about urban regeneration. Of public transport options mass transit systems from trams through light rail to full metro are considered necessary to bring the investment and provide the prestige sought by the cities and communities they serve. The problem is finding the funding necessary to finance these expensive schemes as has been the case in England, where tram based LRT schemes in several cities have failed for lack of funds.

There is a fundamental problem in building new mass transit infrastructures in that the costs are never recovered from operations. In practically all cases the construction of the infrastructure has to be financed by the tax payer and in some cases transit systems also require a subsidy to cover the operating costs. The case for building a scheme has to be justified on the value of the benefits arising from it significantly outweighing the costs. In the UK the funds are provided by central government and even where schemes show a high benefit to cost ratio it is proving difficult for cities other than London to demonstrate that their proposals are providing value for money.

One of the traditional methods of raising the capital to fund the construction of mass transit infrastructure has been through the sale of land owned by the development company served by the new system. This was the process for funding the Metropolitan Line early last century. More recently, the cost of the early sections of the Docklands Light Railway were similarly recovered, and the Copenhagen Metro has been funded by the sale of underdeveloped land connected to the city centre by the new metro. In the case of the Copenhagen Metro, land was transferred to the ørestad Development Corporation by the Danish Government for this purpose and significant new development has since been attracted to ørestad. A further example would be in Hong Kong where the increase in land values resulting from metro construction is realised by the state as it owns the lease on all land and recovers the increased value of the land on the resale of the leases.

Most promoters and developers of new mass transit schemes do not have this method of funding available to them as they are not land owners. In England therefore, where mass transit schemes require funding from central government raised through general taxation, a great deal of scrutiny is given to every scheme. The resulting pressure is to build the cheapest scheme that delivers the service, the best ‘value for money’. In Leeds for example this has resulted in the withdrawal of funding for a tram based LRT scheme and the suggestion from the Department for Transport that the city promotes an alternative bus based scheme. Though a bus based transit scheme may be able to provide the transport needs of the local population there is a debate about whether it can ever bring the benefits of a rail based system. In Leeds a bus based scheme will not meet the aspirations of the city in providing it with an obviously permanent mass transit system that will encourage further investment, reduce the reliance on the private car and raise the image of the city.

In Liverpool, the first line of a new tram based LRT network for the city came close to being funded, however it failed due to an unwillingness of central government to take the risk of cost overruns in scheme implementation. The Department for Transport wanted the local authorities in Merseyside to carry this risk. Again this is a scheme that has failed to go forward, not due to a shortfall in the benefits it will deliver but due to an issue of affordability.

In planning transport schemes in England local transport authorities have to follow a prescribed process to access various options available. Recently a further guide in evaluating schemes has been prepared by the Commission for Integrated Transport (CfIT) to help select the best option, avoiding some of the recent problems experienced in Leeds and other cities. Whether the decision on the mode would have been different if the CfIT guide had been applied during the planning phase of the Leeds scheme is debatable. The development of LRT schemes does show benefits in the long term. In the UK, schemes are still relatively young, and the results of the various schemes are mixed, however generally patronage is rising, the schemes have brought about redevelopment and regeneration, they have improved social inclusion and they have had an impact on car usage by encouraging model shift. It is being suggested that many of these benefits can be realised through bus based mass transit schemes, particularly if more tram like buses are used. This may be the case but there are still issues of ride quality and on street guidance that need to be resolved or proven. Ride quality is one of the factors that influences the attractiveness of the mode and therefore the levels of patronage. The guidance systems for bus based transit need to work in on-street sections where routes are shared with other vehicles or pedestrians to enable the same level of penetration of town centres possible with trams. Where the patronage forecasts and scheme appraisal show an LRT scheme is justified, they provide the image and permanence sought to raise a community’s prestige and encourage investment and development. The problem is that because of the way these schemes are funded, essentially from central government, local transport authorities do not have control over the decision on funding of infrastructure and may not receive backing for their schemes even where they meet the criteria requirements.

To overcome these problems we need to look at new ways to fund urban mass transit schemes. Local transport authorities should be given more flexibility to raise capital to fund schemes themselves, subject to the schemes meeting the required appraisal criteria. The difficulty is in finding methods of raising the necessary funds. Currently some funding for schemes in England can be raised by agreements with developers along the route where under the planning legislation contributions can be levied. This generally only realises relatively small contributions to the total cost. Another alternative is congestion charging as now operating in London where cars are charged for entering the city centre. This has not raised as much revenue as expected due to the costs of operating the scheme and its success in deterring traffic. Even it if had realised its full potential it would still only provide for a fraction of London’s transport investment needs. In Edinburgh, city centre congestion charging was put to the vote and rejected by the city’s population resulting in the development of Tram Line 3 being halted. Now, as the development of Trams Lines 1 and 2 move forward, they have also had to be truncated due to the shortfall in available funding.

This brings us back to funding of new mass transit schemes through the value of the land they serve. It has been estimated that the Jubilee Line Extension in London added over £10 billion to the value of property through improved accessibility. Only £180 million of the £3.5 billion that the line cost was contributed by developers, from Canary Wharf. All the remainder of the gain has been realised by the landowners with no contribution to the scheme. Not only does this seem inequitable as the scheme has been paid for from general taxation, it demonstrates that the best way of realising the financial benefits of new urban transport and paying for it is through the increased land values. Some way of sharing these land value gains with property owners needs to be devised. In the UK this could be through reassessing the land values regularly. Where property values have increased by more than the general level of property inflation a share of the additional increase could be taken through the annual rates. This principle could be applied to both commercial and domestic property. The Jubilee Line Extension would have generated sufficient annual returns from this form of taxation to service most or all of the debt taken to build the line. Not all new mass transit schemes generate such levels of land value increase. A study of property values on completion of the Croydon Tramlink scheme showed increases, but the differential between these increases and general property inflation in the area were not so clear. However, significant contributions to the costs of transport infrastructure can and should be made in this way.

Other means of realising the increases in property values are for the promoter to take ownership of any derelict land made accessible by the scheme. The full increase in the land values can then be realised by the promoter on selling the land served by the new mass transit system for development. As described earlier, this was the situation with the London Docklands Development Corporation at the time the first phases of the Docklands Light Railway were built and most recently was the way the first phases of the Copenhagen Metro were funded. Both these schemes have brought huge benefits to the communities they serve and are popular with travelling public.