Funding railway infrastructure when there is no magic money tree

Jason Chamberlain, Partner, Asset Finance at Berwin Leighton Paisner (BLP), provides insight into how local authorities in the UK might raise the necessary capital to fund the much-needed additions and improvements to rail infrastructure in the coming years.

LVC magic money tree

‘Nothing is easier than spending public money’

“[The] biggest investment in…rail since the Victorian era,” so said the UK Government in 2012. However, many years from now, upon researching when you look up ‘The Golden Age of Rail’, I doubt it will bring up ‘The Victorian Age, and 2012-2017’.

Five years later the message is very different. Enhancements aren’t even part of the government’s stated outputs for the railway for the next five years (the HLOS – High Level Output Specification for railway control) and Network Rail, the traditional avenue for infrastructure investment now has to compete somehow with third parties to upgrade the railway1, but do so with no money, not being allowed to borrow “from either government or other sources”2 until 2024 at the earliest.

The same day the government published its HLOS, it pulled the plug on big parts of the network electrification programme that made up a big part of that big investment, in favour of just running electric/diesel bi-mode trains. When viewed alongside government attempts to get us out of diesel cars, it’s an interesting political contortion. It seems what’s sauce for Crewe is not sauce for the Fiat Panda.

Evidently, as Prime Minister Theresa May said, there really isn’t a ‘magic money tree’ after all – let’s just pretend quantitative easing isn’t a thing, shall we? Just where then is the funding going to come from in the next few years for railway infrastructure? What about turning to the travelling public: You can just put fares up, can’t you? Nope. You know that much-heralded, big investment above; it is mostly funded from fare increases, not government largesse. And that’s on top of matter-of-course fare increases over the last 10 years to offset the pound-for-pound reduction in tax-payer contributions from around 50 per cent to 25 per cent of the cost of a ticket. It probably doesn’t feel to us UK rail passengers like our ticket is subsidised, but that’s a different matter.

Where else then? Many believe the benefits of railway infrastructure are felt beyond the passengers sat on a train; for example, through unlocking housing development, creating new employment and business opportunities, improving labour connectivity, reducing road congestion and pollution, and even bumping up the sale price/ rental income of your property.

How much would you pay for a free coffee?

The ‘Waitrose effect’ is the phenomenon by which the value of your home is increased because there is a Waitrose supermarket in your area. Other supermarkets do the same according to a July 2016 Lloyds survey, but living near a Waitrose will boost the value of your property the most – by as much as £40,000. Perhaps the effect is down to the ‘free’ coffee they offer while you shop.

The same appears to be true for railways. It stands to reason in a compressed world such as this one that people place a premium on minimising the time spent compressed in someone’s armpit travelling between work and home, including the time traipsing to/from the station. In fact, with smaller versions of the supermarkets cropping up in and around railway stations, the relationship between railways and convenience shopping has become symbiotic: work – train – frozen lasagne – home. Repeat3.

The time premium is paid when you buy a house or rent in an area that offers a shorter journey. Nationwide building society has regularly undertaken analysis based on mortgage data that demonstrates the premium on house prices attached to good transport links is going up. The phenomenon is most marked in London, where reliance on public services is acute, but it is also evident in Manchester and Glasgow.

With the Elizabeth line (neé Crossrail) set to be fully operational by 2019, we are yet to see its impact on house prices. However, it’s probable that a 50 per cent increase in density of new housing within 500m of future stations compared to other areas4 will have some bearing. Certainly, estate agents are currently blogging about the value still to be had4 of buying near an Elizabeth line station5. If the Jubilee line is any indication, the impact of the Elizabeth line on the distribution of London’s housing – and land values – could be huge. It has been said that private landowners around stations on the Jubilee line benefitted by approximately £13. 5 billion of the back of £3. 5 billion of public money6.

Land Value Capture – a magic money tree?

Those testimonies are interesting, but do no more than reinforce what we all probably understand instinctively; that improving transport links in an area will increase the amenity value of that area, and so likely increase its land values. So, if a side-effect of public money investment is the generation of unearned private money, is it not reasonable, particularly in difficult financial times, for the public sector to recover some of that unearned income? Some think so – the public sector certainly. How then can you capture some of this unearned income? The answer may be in Land Value Capture (LVC).

The more seasoned among you may be rolling your eyes, because LVC is not. It’s been talked about before. A lot. And you’d be right to point out that there are already property value capture schemes: stamp duty and business rates being the most obvious, but also the Business Rate Supplement (BRS) and Community Infrastructure Levy (CIL). However, the first two examples don’t overtly relate to specific infrastructure investment and while it could be said that the latter two do, they do so without a direct correlation between the amount levied and the value delivered.

Now, however, there is real political capital invested in developing a sophisticated LVC scheme that generates real actual capital. Within the context of a nationwide devolution push, the government wants Transport for London (TfL) to become more self-sufficient. The Greater London Authority (GLA) will take over TfL’s investment grant in return for a larger slice of business rates. TfL itself must explore alternative funding methods, including looking seriously at LVC.

For the less seasoned, what exactly is LVC? There are many definitions and forms, but for our purposes LVC is a mechanism for capturing some of the uplift in land values that arise because a transport scheme is built. In February 2017, TfL published its final LVC proposals, making recommendations for discussion, among others, in relation to pooling and auctioning development rights, changing compulsory purchase rules and increasing business rates3. We will focus here on the most challenging of its proposals: the introduction of what is commonly referred to as a betterment tax – hypothecated taxation of a transport scheme’s beneficiaries.

The TfL scheme is challenging because it taxes residents (BRS and CIL already tax businesses and development landowners). For now, it is not proposed that the scheme will tax as a matter of course, as with council tax. Instead the proposed tax becomes payable when a property is sold, or at the end of each year of a lease. It is yet to be decided who pays – sellers/landlords or buyers/tenants. Economically, it probably doesn’t matter. Optically, it may matter a great deal. It works by levying a charge on property sales and new rentals in the ‘zone of influence’ around new or significantly upgraded transport facilities in London – being an area over which land value increases are perceived to occur as a result of the new/upgraded facility. The zone (and therefore the charge) is banded based on distance from those facilities. Essentially, the charge is a product of proximity, floor space and the chosen tax rate.

LVC looks like a magic money tree, which is why the idea never quite goes away. It offers a tantalising source of funding, and constitutes in tax form (if there can ever be such a thing) a tax that feels instinctively fair – those who benefit from public spending, pay for it. And TfL’s LVC modelling does tantalise: for eight future projects it has lined up (including Crossrail 2, the Bakerloo line extension and the Docklands Light Railway (DLR) extension) priced at approximately £36 billion, the scheme could generate land value uplifts of around £87 billion. Not to be sniffed at then.

‘I like to pay taxes. With them, I buy civilisation’

However, instinctive fairness won’t be enough to convince an Englishman about a new tax predicated on sacrificing/paying extra for a bit of his castle. The rationale, valuations and rates will require some selling – not least because of the difficulty in quantifying the financial benefits from infrastructure improvements. Property value is a function of many different things besides access to public transport. However, with the rise of big data as well as sophisticated analytic techniques, it’s believed that you can isolate transport scheme benefits and so get close to true value.

But whatever way you look at it, boundaries are going to be a problem. Someone will fall the wrong side of one and proximity doesn’t always mean best access, so simply drawing concentric circles around stations won’t necessarily produce virtuous ones. Although show me a tax that isn’t arbitrary in some way. Yet LVC will not solve the financing problem. Typically, the capture isn’t made until after the construction phase, which in the case of large projects such as Crossrail 2, will be a long time. Until then, TfL must finance the construction, which will mean borrowing from somewhere, which brings you back to the cheapest funding source – government. Not exactly the immediate self-sufficiency that today’s politicians would like.

There is more than folding currency at stake here; political currency is on the line too. There is some risk in pinning future income to volatile property markets. If TfL gets the scheme itself wrong, it could face a public outcry that could kill not only the scheme, but its future transport plans and even aspects of the London property market. This is perhaps why TfL has already limited its ambitions by proposing existing residents are exempt – one for the ‘too difficult’ pile perhaps.

Despite these challenges, LVC looks worth pursuing. Assuming the sums are even close to right, the immediate prize is significant. There is also the prospect of institutionalising a source of future funding that would not just serve TfL, but would also offer up a model of future funding for other local authorities.

TfL’s proposals are currently out for consultation within government. Assuming the regime successfully passes that stage, it will then face the court of public opinion. The public jury might acquit, so to speak, if, most obviously, the TfL scheme funds infrastructure projects that demonstrably make commuters’ lives better. So, pick the right transport projects, of course, but also ensure the scheme is well explained and applies fairly and proportionately and, I would argue, ring-fence the funds – clearly showing the ‘bang for your buck’ is surely the best form of advocacy.

Most importantly, an LVC scheme that extracts value from our properties to pay for the railway will only have a chance if we the public accept the principles at its core; namely that: (1) the railway benefits us all as individuals even if we don’t use it much ourselves, and (2) there is a correlation between a better railway and land values.

Until now, public money has been sporadically available to upgrade the railways. And, until now, people have probably profited when public money has been spent on upgrading the railway in their area, without them doing a thing, or at most, that one thing being to buy in anticipation of that spend. Good for them. But from now on, if public money isn’t available even sporadically anymore and we want a better railway, we might, however reluctantly, just have to pay for it. Like we do everything else that is supposedly free in this world – internet deliveries, banking, lunch, that second item in a 2-for-1 deal, complimentary anything at a hotel and, it must be said, coffee in aisle three.


  1. The Times, 12 October 2017.
  2. High Level Output Specification, July 2017.
  3. Network Rail reported in September 2017 that retail sales at the stations it directly manages have grown for 21 consecutive quarters – in the last quarter almost double the growth in the wider retail sector.
  4. Land Value Capture – Final report, Transport for London (TfL), February 2017.
  6. Taken for a ride: taxpayers, trains and HM Treasury, Don Riley, 2001.


Jason Chamberlain is a Partner in BLP’s Asset Finance practice. Jason has over 20 years’ experience in the rail industry including a number of years working in the public sector. In that time, he has been involved in the privatisation, franchising and concessioning of passenger services, rolling stock procurement and leasing, and regulatory, access and infrastructure matters. Jason’s experience includes work advising on London Overground and Crossrail concessions, the sale of Eurostar, the Intercity Express Programme, the Thameslink Rolling Stock Project, and the refinancing of High Speed 1.


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