28 April 2015
Submission from the New Economics Party to the Christchurch City Council on the Long Term Plan.
Who we are:
A group of people who believe in the public creation of money without interest and in the principle of sharing the values of the commons. Instead of taxing labour we advocate charging a rent for the exclusive use of any part of the commons including land. We want an economy that is organised the way nature organises – decisions made throughout the whole, no waste, use of local resources, complexity, feedback mechanisms. We favour giving more power to local authorities.
We have been organising loosely for three years and have made other submissions, statements and are about to have our first conference.
I myself am the author of a 2005 book Healthy Money Healthy Planet –Developing Sustainability through New Money Systems, which is relevant to section E of our submission. My colleague Phil Stevens chairs the Living Economies Educational Trust, a trust that has championed complementary currencies in New Zealand. Rex Verity is Environmental Manager & Sustainability Advocate at the Christchurch Polytechnic Institute of Technology.
Summary of our submission
We submit that Land Value Capture is an excellent mechanism to fund the building of infrastructure and we make the case for it.
We advocate establishing a Christchurch Public Bank along the lines of a Safe Bank.
We favour keeping public land in public hands and charging a full rental and sharing this with Government.
We advocate a return to rates based on land value rather than on capital value.
A Christchurch currency with a circulation incentive, spent into existence part-paying employees would save a lot of precious New Zealand dollars and stimulate business.
A The Case of Land Value Capture
A1. The role of infrastructure
To understand the role of infrastructure, one only has to go to a developing country and notice how long it takes to drive anywhere and do business. Rubbish builds up, water and electricity are spasmodic and it just takes an age to get things done. Infrastructure makes doing business easy.
Christchurch knows what it is like to be without a functioning CBD and basic infrastructure. When roads and below ground infrastructure has to be rebuilt, the sheer inconvenience of all the detours has been experienced long enough. The loss of the central entertainment, social and cultural infrastructure for an extended period of time has been painful. All residents will benefit from the re-build and the uplift in land values will be particularly noticeable in the inner city and the inner suburbs.
The plan to invest in so much infrastructure is exciting and inspiring.
Motu Economic and Public Policy Research says:
“A new settlement requires multiple types of infrastructure – roads, public transport networks, telecommunications, electricity supplies, water supply, sewerage, schools, health services, community facilities, etc. If any one of these infrastructures is lacking, the entire project may be rendered infeasible or lose significant value, but each investment project can only be evaluated in the context of all others also taking place.’
We are very conscious of the scope of your challenge. Reports have stated that Cameron Partners did its own financial analysis and estimates the total additional funds required could be between $783 million and $883 million by 2019. We understand this is the estimated amount of money needed between 2015 and 2025 to fix or replace earthquake-damaged community facilities, pay the Council’s share of the anchor projects, repair roading and drinking, waste and stormwater systems, and cover the cost of borrowing funds to do this work.
A2 Infrastructure makes Business more efficient
Simon Patten, economics Professor at Wharton University says infrastructure keeps operating costs down. In third world countries, water and waste problems are so inefficiently managed and traffic is a nightmare so you spend too much time just living. Good infrastructure keeps cost of doing business down.
Cities are the engine of economic growth – and infrastructure development is the fuel for that engine.
The World Economic Forum Positive Infrastructure Initiative says the world needs to invest $2 trillion in infrastructure. Infrastructure Australia shows how to do the benefit/cost ratio. You
need to make it fit with the needs of the city and the ability to pay. People have to buy on the outskirts of a city because there is no other option. Urban fringe still accommodates vast majority. When you add costs of transport into the housing costs, it costs a lot to live on the fringe. We need hubs as well as city centre.
Professor Peter Newman is the Professor of Sustainability at Curtin University, Perth. When interviewed by Karl Fitzgerald of Prosper Australia, he said..
“Infrastructure shapes the city. Markets can’t do everything, you need government. Markets don’t build infrastructure, it generally comes from government. Planning is required, so it requires an understand the role of infrastructure in a city. It builds a city. A new city requires a new and innovative way of financing infrastructure.”
A3 The Effect of Infrastructure on Land Values
When infrastructure is built, landowners gain a rise in the value of their land.
There is now extensive international experience of funding infrastructure, particularly transport infrastructure, by capturing part of this windfall.
As far back as 1865 John Stuart Mill (1865, Book 5, Chapter 2, as quoted by Arthur Grimes and Andrew Coleman) advocated a land tax levied on the increment to land values above those at a fixed point in time. He argued that that the increment in land values was due to general societal influences and this increment should form the basis for government revenues required for the upkeep of society.
So land values are “community created” — without the surrounding community land would have little value. When public infrastructure like railways, roads, sewerage and water pipes, hospitals and schools are built, the quality of life rises and more people want to live there, so land values rise. The community — not the individual land owner — should receive the benefits of publicly-financed projects.
Those who live or have their business in the central city and the inner city suburbs, by building and by running a business, raise the price of the land. All land owners know this. Real estate agents emphasise the benefits of buying with the slogan “Location, location, location”.
Commercial property in a CBD is far the most valuable land in any country. Earlier this year a trademe ad for apartments in Tuam Street included the words “Think about this: the founder of McDonalds wasn’t in the burger business, but in the business of owning well sited property paid for by burgers… “
A4 Quantifying the Uplift
Academia are providing studies quantifying the benefits of infrastructure provision. While most of the research appears to have been done on the effect of rapid transit on land values, there is some done on libraries and parks. In May 2014 the Victorian Policy Transport Policy Institute produced an annotated bibliography summarising more than 100 studies concerning the impact of transit service on nearby property values.of Value Capture papers round the world.
London’s Jubilee Line Extension was built during the 1990s and completed in 1999. It cost £3.5bn and produced a £13bn appreciation in commercial land values within 500m of the new station.
… [We] found that within 1/4 mile of one of Philadelphia’s 54 (library) branches, the value of a home rose by $9,630. Overall, Philadelphia’s public libraries added $698 million to home values—which in turn generated an additional $18.5 million in property taxes to the City and School District each year. That benefit alone recouped more than half of the city’s investment. (The Economic Value of The Free Library In Philadelphia, Fels Institute of Government, 2010, p8)
… Research into quantifying park quality continues; in the interim we have chosen to assign the conservative value of 5 percent as the amount that parkland adds to the assessed value of all dwellings within 500 feet of parks. (The preponderance of studies has revealed that excellent parks tend to add 15 percent to the value of a proximate dwelling). (Measuring the Economic Value of a City Park System, Harnik and Welle, 2009, p8)
A5. Land Value Capture
A land value capture mechanism can be designed so that the recovery of funds is linked to the actual increase in land values, which are objectively determined by an independent valuer. Under this approach, the investment decision maker needs to ensure that the investment will deliver the intended land value outcomes in order to ensure that the costs of the investment are recovered. A background paper prepared by Ernst and Young for the University College of London 2009-2010 on funding for the Warsaw Metro says:
“The literature suggests that investment in transportation infrastructure,economic
including highways, freeways, light rail, heavy rail, subways, and bus routes, results in
measurable increases in the surrounding property values (Ihlandfeld and Raper, 1990;
Dewees, 1976; Gatzlaff and Smith, 1993; Benjamin and Sirmans, 1996; Workman and Brod,
1997). Therefore, a land tax that captures some portion of the increased value of this
infrastructure might be an appropriate way of funding the investment.”
Windfall gains from infrastructure add up to several times the cost of the infrastructure to surrounding properties. We propose a sufficient contribution from this windfall be recycled back to the government so that other infrastructure projects can be funded without substantially burdening one generation over another.
A6 Methods of Funding and Financing of infrastructure
At present, land speculators baulk at paying barely 2% of the windfall gain to the community via government’s Land Tax and Council Rates. This is limiting government at all levels from funding infrastructure.
Please note, the Land Value Capture (LVC) rate can be set so that landowners still receive the majority of gains.
- See more at: http://www.prosper.org.au/land-value-capture/#sthash.iwtnK8lq.dpuf
Importantly, these windfalls are captured over the life-cycle of the infrastructure, such that one generation is not hit with the total infrastructure costs (i.e. as per the current preference for Developer Charges). - See more at: http://www.prosper.org.au/land-value-capture/#sthash.iwtnK8lq.dpufBanks
A7 Where Land Value Capture has been used for partial funding
In the 1800’s streets in the District of Columbia were mostly unpaved. In dry and wet weather, dust, dirt and manure sullied homes and businesses and roads were difficult to navigate. Paving streets and footpaths presented a tremendous advance, but it was expensive. Congress enacted laws beginning in 1894 requiring adjacent properties to contribute 50% of the cost of first time paving of streets, gutters, curbs and footpaths.
Hong Kong’s Mass Transit Railway (MTR), has returned dividends for the last decade, dispelling the myth that PT can never be profitable. They make considerable profit because of their ability to use land value rises to finance it. Also their Massive Transit Pass pays for a variety of other goods and services
Japanese Railway East – the efficiencies of LVC have enhanced profitability such that ticket prices have remained at 1987 prices. See Wheels of Fortune.
We should take stock of how past generations financed public transport:
Glen Waverley Station (Vic): How did they do it?
Residents were asked and agreed to donate £30,000 worth of land (1925) to build the train station and rail line. Additionally, they were asked to pay a Betterment Levy of £10,000 per annum for the first five years. The Railways Standing Committee presented to the State Parliament in its’ 36th general report:
“It is calculated that there are 6,000 acres within one mile of the new line… It is not intended that a uniform rate shall be charged on each property, but that the rate should be varied according to the distance from the line.”
Sydney Harbour Bridge (NSW): 30% financed by council rates on the land only component.
Melbourne City Loop: 25% financed by a value capture mechanism (via council rates) over 32 years.
- See more at: http://www.prosper.org.au/land-value-capture/#sthash.iwtnK8lq.dpuf
Portland, Oregon new tram line increased land values, so land owners in the area funded it.
Gold Coast Light Rail. Rapid increases in land value occur around new railway stations. Chinese came in because they saw a good deal. They put down a land levy, everyone loves it. No revolt against the big new tax.
For a full annotated bibliography of Financing Transit Systems through Value Capture published 22 May 2014, and published on the website of the Victoria Transport Policy Institute, see http://www.vtpi.org/smith.pdf This cites over 100 references to cities where a similar method of funding infrastructure was implemented and describes the results briefly.
A8 Has Land Value Capture been used in New Zealand?
Yes. Up till the the end of the Town and Country Planning Act in 1956 it was frequently used to build roads and other infrastructure.
All sorts of targeted rates are being charged by councils as the legislation is very broad in this category.
Though there don’t appear to be any examples where there are targeted rates levied on the INCREASE in land value, this probably quite legal. Wellington City Council has or has had targeted rates for water, sewerage, stormwater, commercial sector, residential sector, downtown levy, Tawa driveways and Marsden Village.
Most rural District Councils or Regional Councils use them for flood control, many use them for retro-fitting homes. (If they have received financial assistance for installation of clean heat or insulation, the council charges interest and bills them like a table mortgage. )
Tasman DC. Kaiteriteri has an extra refuse rate in the summer. Hamana Road Sealing targeted rate is $659 a year if they haven't made a capital contribution. Wai-iti Valley Community dam sets a rate of $356/ha on all water permits unless they pay a lump sum.
As most councils now base their rates on capital value except one council I found, there are only a few targeted rates based on land value.
Waikato has an urban transport targeted rate on capital value on all properties within the Hamilton City Council boundary with rating units within 800 m of public transport.
A9 What revenue would it bring in and how – some rough calculations
There is no problem in councils getting low interest loans so they can pay the capital value of the work. But recouping it to pay off the loan is the issue.
A targeted rate should be charged on a percentage of the uplift in land value (presuming it is within the 2002 Local Govt Act)
In the case of Christchurch there are currently 163,832 rating units.
You could probably leave out Akaroa and the peninsula and this might reduce the rating units to say 150,000.
Suppose you need half of $1.2 billion because you are going to raise the rest by sale of assets and other methods. That's $600 m to find.
If it was paid off in 20 years then that is $4000 each ratepayer on average, or $200 a year. If it is paid off over 30 years it would be only $133 on average. The median value would be different as it is very skewed. Those nearer the city would pay proportionately more while those in outlying suburbs would pay considerabley less.
What would be the uplift in land value? A great deal more than $4000! And it would be very much skewed in favour of a big uplift for central properties, so their extra rates would be justified.
Land value in city is currently surprisingly low despite the fact that the government bought up much of the east and south frame property to keep land values up.Trademe has a couple of 500 sq m sections going for $300,000, just a little over the price you would pay for the same area in Linwood. They are those requiring deep foundations but not deepest. St Andrews Hill has a slightly bigger section for $289k. It's about what you pay for a section in Wigram. So it is reasonable to assume that land values in the city centre will rise a great deal more over the next ten years.
As of January 2015 in Merivale a 900 sq metre section was advertised for $900k. And that is double what you would have paid in Huntsbury Hill or Scarborough at the time. 1020 sq m sections in Styx golf resort were on the market for $650k plus.
The difference between any of the current targeted rates and the ones we propose are two:
1. It is levied on uplift not the value.
2. It is levied on the uplift in Land Value not Capital Value
Both of these mean it is those nearest the city and amenities get hit the hardest while those on the periphery only pay a little, which is quite fair and logical.
A10 Methods of Funding and Financing Infrastructure
The NZTA recently commissioned a research paper on this very topic.
Method 1 Development contributions have been our main way of funding infrastructure, particularly with new subdivisions. Development contributions are traditionally used for subdivisions on the outskirts of a city or town with the argument being that developers require land to be serviced with below ground pipes so need to contribute to this in order to make the land saleable.
A review of these was done by Department of Internal Affairs in 2013 and says “Development contributions can discourage inefficient or poor integration and coordination between land use and infrastructure by reflecting the true cost of extending infrastructure to developments that have leapfrogged over as yet undeveloped (but serviced) land. Leapfrogging of this nature can impose additional or unexpected costs as it creates infrastructure demands that are out of sequence (in terms or location or timing) with previously agreed infrastructure provision priorities and funding.” In other words, if done properly it prevents leapfrogging development and encourages a compact city.
The review made the point that Tauranga City Council used the law to impose two forms of development contributions, one local and one covering the larger area. As a result their development contributions were their third largest source of revenue.
However development contributions are a one-off method and, apart from the first year, this method would almost certainly produce insufficient funds to fund a significant portion of the Christchurch infrastructure re-building. This review shows that the total development contributions for the whole country in 2013 was forecast to be $3.589 billion of which $1.6 billion was from Auckland. Income was ‘approximately four percent of capital expenditure nationwide, but for some individual councils that can be between 20 percent and 50 percent.’ About half was on new capital expenditure.
When infrastructure proposal announced there are windfall gains for nearby landowners.
A11. Land Value Capture is a Remedy to Sprawl – an added advantage
While we have proposed this method as a method of partial funding of infrastructure, there is another major advantage. It prevents sprawl. Nothing probably saves a territorial authority more than the prevention of sprawl because the publicly funded infrastructure serves more properties and makes the city more liveable.
Rick Rybeck, formerly Deputy Associate Director for Transportation Policy and Planning at the District of Columbia Department of Transportation, attorney with a Masters degree in Urban Planning and Real Estate says landowners can wait for population growth, wage increases, or public infrastructure improvements to impart value to their site, which they can appropriate through a higher rent or sale price.
“The opportunity to profit from other people’s work, without expending any significant effort or funds on their own account, combined with the knowledge that land values typically rise over time due to increases in population, wages and infrastructure improvements, makes some landowners reluctant to make land available at current market prices. After all, why should I sell my land at market value today if I have good reason to believe that it will be worth even more in the future?
As more landowners withhold their land from the market, based on expectations of higher values in the future, an artificial scarcity of developable land is created that results in real increases in land rents and prices. Thus, land speculation can become somewhat of a self-fulfilling prophecy... This value-capture technique creates economic incentives to develop land adjacent to public infrastructure and amenities while reducing development pressures at sites farther away.”
You might ask why development doesn’t move to the suburbs with Land Value Capture hitting the inner city landowners. Surely land is cheaper on the outskirts of the town and inner city people would move out there? In practice this doesn’t happen. The premium that property owners place on location always trumps the pay less but in rates but commute further. In practice property owners in the inner suburbs and city usually find some way they can draw more income from their property by building up, adding a flat, or subdividing. Or they can improve their rental property and charge more rent accordingly. Proximity to services is always more desirable. The only exception is the elderly person alone on a big property with premium land who doesn’t want to move. In that case the rates can accumulate and be paid from the estate when they die.
A12: Land Value Capture is easy for the public to understand
Strangely enough when it is proposed that those who own the land that benefits from the building of infrastructure should help finance its building, and when the cost is spread over a generation, there is no rebellion to deal with. Development Contributions which are similar have been understood and accepted since they were first introduced and value capture has a long history of success. Politically it is easier to accept than Capital Gains Tax or land tax. It should be implemented.
B. We advocate the establishment of a Christchurch Public Bank designed along the lines of a Safe Bank
In these days of Open Bank Resolution, where a failing bank can freeze your deposits overnight and take an unknown portion of your deposit as happened in Cyprus in early 2011, a bank designed along the lines of that recommended in the Chicago Plan Revisited. All deposits in such a bank would be safe as the bank would be safe. A one page summary of what these IMF economists recommended is at http://neweconomics.net.nz/wp-content/uploads/2013/02/The-Chicago-Plan-Revisited-summary.pdf.
Ellen Brown in her 2013 book The Public Bank Solution wrote; “Two banking models have competed for dominance for thousands of years –public and private. In the public model, interest and profits belong to the community, and they are returned to the community...Usury banking dominates in Western countries today, but 40 percent of banks globally are publicly owned. These are largely in the BRIC countries – Brazil, Russia, India and China.” She said with massive populations that needed to be fed and housed, they could not afford to support a parasitic financial elite. “Banking and credit become public utilities, sustaining the economy rather than mining it for private gain.”
Only Kiwibank, SBS and TSB remain as the three public banks in New Zealand. However none of these are designed along the safe bank model as proposed by Michael Kumhof and Jaromir Benes of the IMF.
The bank could be marketed through its unique safeness in the light of Open Bank Resolution.
C. We favour keeping public land in public hands and charging a full rental and sharing this with Government. Nobody should make or lose money from the buying and selling of land. When government buys land it is effectively taken out of the market place. Government should charge a full land rental value, best set by auction, and this revenue should be shared with all levels of government. Losing public land is like losing revenue generating income.
D. We urge a return to rates set on land values not on capital value.We favour keeping public land in public hands and charging a full rental and sharing this with Government.
We believe in the principle “location, location, location”. Where there is a location that gives access to more services like: infrastructure, organisations, commerce or nature, it is the land that rises in value not the building. Because we should pay for what we hold, we should pay for our exclusive use of the land.
While this is essential to encourage building without penalty, the alternative form Land Value Capture may be both more attainable and more easily understood by the public.
a. It is a progressive tax. Rating on land value alone means rates are lower for more ratepayers. Hence where a poll has been taken – a situation that existed for decades – the public has has always chosen land value rating.
b. It discourages sprawl and saves public money. Since sprawl leads to a demand for building infrastructure it is essential financially to have a rating system based on land values. When this happens, landowners will either sell underused sites or use them appropriately. Capital value rating results in cities with holes in as development often “leapfrogs” outwards in search of cheap land. Christchurch should develop further in a compact form.
c. There should be public ownership of infrastructure. The larger council should own and coordinate the infrastructure – the natural monopolies of water, main roads, rails, pipes, wires, ports and airports.
d. It discourages speculation because those who do not use valuable land properly are penalised.
e. Land value rating encourages building and improvement of properties, whereas capital value rating discourages it by penalising it.
This is good for business. It is no good arguing that Christchurch economy is not flourishing and then putting in a rating system that discourages economic activity.
E. A Christchurch Currency spent into existence to part pay employees and issued with a circulation incentive would greatly help save precious NZ dollars.
A complementary currency could help Christchurch to:
Facilitate community management of city facilities, as outlined in Section 5 (page 46) of the LTP consultation document.
Deliver services and projects for Christchurch communities that are otherwise unaffordable.
Strengthen communities while delivering services and projects more efficiently - by connecting local needs with under-utilised resources that are available in the community
Reduce the Council’s funding gap, by meeting the cost of some projects and services without requiring additional New Zealand dollars. This could help to reduce the borrowing and asset sales proposed in the draft LTP.
Improve the city's long-term economic resilience by establishing a robust local means of exchange
Make Christchurch a world-leader in economic resilience and sustainability.
The most effective way to develop a sustainable complementary currency in Christchurch would be if it is established by CCC and can be used to pay rates and Council fees. As such, introducing a complementary currency should be an action included in the Long Term Plan. A complementary currency should be included in Volume 2 of the LTP as an ‘Available Funding Mechanism'.
While developing a complementary currency is a great opportunity for Christchurch, it needs to be approached carefully. A successful currency will need a foundation of:
- clear objectives that are based on a sound assessment of where resources and needs in the community could best be connected with a complementary currency
- a robust evaluation of potential currency models that could work in Christchurch, based on those being used or developed internationally
- an honest assessment of the challenges facing implementation of a complementary currency in Christchurch.
CCC initially needs to commit to a project that builds this foundation - the goal of this first stage should be to develop a strong business case and implementation plan for developing a complementary currency.
Many have pointed out that after the Global Financial Crisis the big banks have grown even bigger and more powerful. There could easily be a second and far greater crisis.
The Reserve Bank has already prepared for a banking crisis by having in place a system called Open Bank Resolution whereby depositors, rather than the Government would bail out a bank. There is little awareness of this provision in place since 2012.
As we collectively head blindly into a period of deflation of unknown length and pain, we must pay attention to the writings of Silvio Gesell, a far thinking German businessman in Argentina. He lived during the Depression of the 1880s. His book The Natural Economic Order has been translated and put online for all to read. Of him Keynes said "The world will owe more to Gesell than it does to Marx".
Gesell realised that a businessman with goods is at a disadvantage from those holding money. While the goods decayed, rotted and generally went out of date as they waited for someone to buy them, the money retained its value. Those in possession of money were better off than those who had goods. He famously wrote: "Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether."
After decades of having loyal followers but no example of how it worked, during the 1930's depression, Gesell's theory was finally put into practice, but only briefly because the banks managed to persuade the government to stop it. It was in the small town of Wōrgl, Austria 1932 that the Mayor put aside 20,000 schillings and used them as backing for notes called Work Certificates. They paid their employees partly in Work Certificates and persuaded the businesspeople of the town to accept the notes as payment. Each note had 12 spaces on the back and a stamp had to be stuck on every month to validate the note. To avoid paying for the stamp people spent the Work Certificates quickly. The currency was successful at reducing unemployment, so much so that people came from miles around to witness the Miracle of Wōrgl. It was in place 15 months before the government made it illegal and they went back to unemployment.
This could be easily emulated by Christchurch, especially now that currency is digital and we wouldn’t need the cumbersome sticking on of stamps.
Christchurch would effectively have two currencies. The local work certificates would save the Council precious NZ dollars.
There are naturally other complementary currencies, all with different designs and purposes, than the Wørgl work certificates.
What complementary currencies have in common is that they thrive in economic downturns. However wherever they exist they save a country or a city precious national dollars and keep trade local.