Value Capture (VC)
Value Capture refers to a number of financing strategies which are based on "capturing" the economic value created by investing in transport projects.
There are four conventional mechanisms for implementing VC:
- One-time Development Impact Fees;
- TIF: Tax Increment Financing;
- Joint Development through land allocation;
- Income/Payroll Based Tax in the project's service area.
The applicability of the VC tool as a financing source varies according to the rate of change in the value of real estate. This change depends on an array of variables, including the quality and frequency of public transport services, the real estate market situation, the range of land uses in the vicinity of the public transport station and the level of incentives inherent in the transition from private to public transport.
Most of the recent investment-intensive transport projects have been financed in varying degrees by the VC mechanism. Among these are the Crossrail in London (32%), the Grand Paris Express (80%) and more.
The main advantages of the VC model are:
- It taxes the specific group benefiting from the project;
- It has the potential to finance a significant share of the project;
- It creates a cash flow which can be securitized.
Project Bonds are long-term bonds for financing construction of public infrastructure projects. Project Bonds can either be targeted for a specific project or can be unspecific, tradable or allotted to institutional investors. They are usually accompanied by a credit rating. The source of repayment for the bond is the cash flow associated with the project.
A prominent example of unspecific Project Bonds is the United States’ federal Build America Bonds. Depending on the program, the issuer of Build America Bonds is local, either a state administration or a metropolitan or municipal authority, and the value is usually based on cash flow arising from Value Capture. The federal support is expressed by an exemption from the 35% capital gains tax on the coupon. The program recruited a total of $180 billion, and the United States Department of the Treasury estimates that the present value of savings to local administrations stands at about $20 billion.
The ADALYA analysis above has been presented to senior officials involved in establishing a mass transit system in the Tel Aviv metropolitan area and serves as a basis for a review of strategic alternatives for financing future transportation lines.