28 March 2017

Vic Government framework: integrate value creation and capture mechanisms into major projects

This article was written by Mark Beaufoy, Chris Dynon and Jessica Kaczmarek.

On 21 March 2017, the Victorian Government released the Value Creation and Capture Framework (Framework). The Framework builds upon the recent policy paper prepared by Infrastructure Victoria on the options, challenges and opportunities to implement value capture in Victoria.

The purpose of the Framework is to encourage Government sponsors and delivery partners to consider broader opportunities to enhance public value beyond the existing mechanisms of taxes, levies, development contributions and the Growth Areas Infrastructure Contribution.

The Framework requires government departments and agencies to prepare a Value Creation and Capture Plan (VCC Plan) for particular projects with a total investment of at least $100 million.

The Framework represents the first clear policy guidance from the Victorian Government that value capture and creation initiatives are expected to be integrated into future major projects and capital investments. While these initiatives will be Government-led, private sector bids for Government projects will be made more attractive if creative value capture and creation initiatives are incorporated into tender responses.

Defining value creation and capture (VCC)

For the purposes of the Framework, value creation refers to delivering enhanced public value in terms of economic, social and environmental outcomes, above and beyond what would ordinarily be achieved as a consequence of government investment. Types of value creation mechanisms contemplated by the Framework include:

  • strategic land use assessments providing advice on the optimal use for a state-owned site;
  • creating new land such as decking over rail tracks;
  • land consolidation, acquisition and reservation to enable development and infrastructure opportunities;
  • structure planning and planning scheme amendments;
  • using planning permit conditions to achieve policy outcomes such as affordable housing, open space and energy efficiency;
  • using financial or planning incentives to third parties to deliver development outcomes;
  • procurement conditions for urban development or infrastructure such as placing conditions on relevant contracts to achieve policy objectives;
  • using private and finance ownership models to finance construction and improve efficiency; or
  • using the Victorian Government Architect’s Design Review Panel to improve designs.

Value capture refers to the government capturing a portion of the incremental economic value created by government investments and activities which could assist in funding those investments and activities. Types of value creation mechanisms contemplated by the Framework include:

  • granting property development rights to offset the cost of delivering infrastructure including land, air rights and joint venture rights;
  • creating commercial opportunities for public infrastructure to deliver revenue
  • infrastructure levies on development;
  • road tolls;
  • recovering private asset manager user charges uplifts;
  • recovering private asset manager efficiency dividends; or
  • negotiating funding contributions from key business beneficiaries.

Who should use the Framework?

The Framework is intended to be used by Victorian Government departments and agencies with responsibility to plan and develop capital investment projects and public land. However, it also serves as an important guide to private delivery partners on the type of VCC that the Victorian Government expects to be incorporated into future Government projects.

What projects does the Framework apply to?

The Framework applies to the following high value projects with a total estimated investment of at least $100 million (excluding maintenance and operational costs):

  • Project Precincts and development of public land – precincts or sites identified by government as having potential for significant VCC opportunities including, projects within the Major Projects portfolio or projects proposed for delivery by Development Victoria; and
  • Capital investments – high value construction projects or other capital investments assessed by government as having potential for significant VCC opportunities.

What is a VCC Plan?

The Framework contemplates two types of plans:

  • Strategic VCC Plans – outlining VCC opportunities for a project early in the business case development process, including indicative values.
  • Detailed VCC Plans – to be prepared under the full business case and may cross reference a Strategic VCC. Detailed VCC Plans will not be required for precinct projects but public land development and capital investment within a precinct may require their own VCC Plan.

What does the Framework mean for developers and investors?

The Framework represents a clear policy directive from the Victorian Government that VCC mechanisms should be applied to major Victorian projects and capital investments.

As no regulatory changes or more direct policy guidance is being proposed to implement the Framework, the VCC outcomes which could be achieved will be highly discretionary and subject to negotiation with the Victorian government and relevant agencies. While this may create uncertainty regarding the government expectations for VCC, it does provide an opportunity for innovation and for developers and investors to be on the front foot regarding the types of VCC which might achieve the best policy and economic outcomes.

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