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Funding Light Rail

 

One of the issues that light rail supporters will get pressed hardest on is how light rail will be funded. One of the current regional councillors has said:

This page documents funding options that were discussed among a range of people, including several candidates for Greater Wellington Regional Council who support light rail.

We concluded that our position is that the citizens of Wellington are asking for no special favours in regards to the funding of this project. It is absolutely our intention that this essential light rail development for Wellington will be funded in the same way as the City, Regional and Central Government intended to fund the second Mt Victoria Tunnel and the proposed 4 lane motorway to the airport.

Government has a policy of fully funding State Highway projects — the extra tunnels and highway to the airport will be part of SH1 — but not other transport projects. Auckland had a three year battle before Prime Minister Key finally agreed that Government would share funding of the City Rail Link, which is likely to be 50%. Under current policy, Government could not transfer funding from the RoNS account into light rail.

Wellingtonians nevertheless expect the project will be funded in the same way as the light rail, and city rail projects are being funded in Auckland. The first tranche of Matangi trains for the Wellington region were funded 90% by Government. However, public transport funding for capital projects reduced from 60% to 50% in 2013 (we understand funding is being reduced in 1% steps each year).

Our position in detail:

1. We have advocated for a robust, low cost ‘no frills’ light rail solution.
2. We have demonstrated that light rail would deliver three times the capacity of two Mt Victoria tunnels (12,000 people per hour versus 4,000 people per hour), at half the $1bn price for the NZTA proposal of extra tunnels and a 4-lane highway to the airport.
3. Therefore, there would be a substantial net benefit to the nation if the money was transferred from the RoNS account to fund light rail from the railway station to the airport.
4. If the Government is not prepared to agree to that transfer of funding from the RoNS account, it would still be expected that the Government would pay 50% of the capital cost (in the same way that the government has agreed to fund other major transport projects that are not state highways, e.g. Auckland City Rail Link.
5. The remaining 50% of the capital cost would have to come from innovative funding sources and council borrowing (i.e. rate-payers for debt servicing).
6. Possible innovative finding sources for capital cost include:
   • Infrastructure bonds, where community investors are prepared to accept a lower interest rate because the benefits flow back to the community. Pension funds are often cornerstone investors, for example in the Montréal light rail project scheduled to start construction in 2017.
   • Value Uplift Capture (sometimes called “Tax Increment Financing”) — this approach is used commonly overseas in places like UK and USA. When a new piece of infrastructure like a light rail line or a subway line is constructed, the property values in the vicinity of the line and especially the stations go up dramatically. This represents a substantial windfall gain to the adjacent property owners. ‘Value Uplift Capture’ is a method (like targeted rates) of capturing some of that uplift in value and reinvesting it in the infrastructure. In London, new subway lines and Cross Rail have been wholly or partly funded by this method.
   • Australia has proposed charging motorists for their road use and using the money to fund urban rapid transit projects.
7. There would need to be an early conversation involving the three partner organisations (GWRC, WCC and NZTA) with Government about these and other innovative funding mechanisms. It is of interest that the Mt Victoria Bus tunnel was totally funded by developers in Hataitai, and there have been a number of seminars over recent years on tax increment financing.
8. The experience overseas is that light rail brings such a dramatic increase in the quality of PT service that, when it becomes operational, PT patronage increases significantly and substantial farebox recovery will help fund ongoing operating costs.
9. Recognising the pressure on ratepayers, the objective would be to minimise the impact of light rail on rates, while maintaining affordable fares. Autonomous (self-driving) light rail systems generally operate with no operating subsidy. We expect that in-street autonomous operation will be feasible by the time light rail comes to fruition in Wellington.

A source of substantial government revenue for infrastructure projects of this nature could be a universal tax on land. There is much historical precedent for this. William the Conqueror funded his Kingdom out of land rent and set the basis for taxation during the feudal era. In 1776, Adam Smith argued that in the enterprise economy public revenues and services would best be served by a tax on land. He identified the concept of Economic Rent (the difference between the cost of production and the revenue derived from a value-adding enterprise) as a source of revenue that would not distort people’s incentive to work, save and invest. Forty years later, David Ricardo another prominent economic thinker of his day, pointed out that landowners, with little or no effort on their own part, happily enjoyed all the economic benefit of capital gain resulting from public investment in infrastructure. A strong argument could be made to tax some of this gain to fund light rail along the key corridor.

Glossary

GWRC

Greater Wellington Regional Council

NZTA

New Zealand Transport Agency

PT

Public Transport

RoNS

Roads of National Significance

SH1

State Highway 1

WCC

Wellington City Council

Glossary →