Paul Low, KPMG, at BEMP 2014.

The Property Council of Australia has been quietly working with professional services firm KPMG on an alternative funding model for urban infrastructure that has the potential to align economic, social and environmental outcomes for cities.

The model – City Deals – isn’t anything new, PCA Queensland deputy executive director Chris Mountford told the Built Environment Meets Parliament conference this week. In fact, former PCA chief executive Peter Verwer learnt about the UK government’s use of City Deals some 18 months ago, and ever since the PCA has been looking at how this innovative strategy could function in the Australian context.

Simply put, City Deals are mutually beneficial contracts forged between a central government and an economic region – say a collection of councils in a city – that set economic performance benchmarks and generally operate for long-term periods of 10 years or more. The goal of the deals is to direct government spending on cities strategically to projects that will deliver the most impact on productivity, employment and economic growth, with cities exceeding set benchmarks being rewarded financially.

Getting rid of narrow cost–benefit analyses

A key theme of BEMP 2014 was the problematic nature of cost–benefit analyses when funding infrastructure. When infrastructure in prioritised on a project-by-project cost–benefit analysis basis, it can lead to an environment of lobbying and political tension, KPMG partner Paul Low said. It also creates an incentive to award contracts to projects with the least rigorous cost–benefit analyses – ones that overestimate benefits and underestimate costs – leading to the worst infrastructure getting built.

The tendency to “game” the evaluation process is something City Deals could help to dampen, through added transparency and a long-term strategic outlook, Mr Low said.

City Deals move away from cost–benefit analyses to a Gross Value Added measure – a sort of local GDP. This method “aligns the methodologies for selecting infrastructure investment priorities to a methodology for rewarding the performance of City Deal partners”, a PCA and KPMG document stated.

This represented a “major paradigm shift”,  where project priorities would be assessed in terms of growth in jobs and productivity, with a goal of increasing the regional GDP.

Rather than short-term ad-hoc infrastructure allocations, City Deal partners receive baseline funding from the central government – providing long-term certainty about infrastructure budgets.

Local partners are encouraged to enter into innovative financing arrangements, including public–private partnerships. They can also earn back the contributions they make themselves through a share of additional tax revenue generated by faster economic development – analogous to competition payments under the National Competition Policy model. This excess can then be ploughed back into new infrastructure or used to reduce debt obligations.

Joining the economic, social and sustainability dots

Complementary social and environmental programs relevant to a region can be incorporated into City Deals.

In the Manchester City Deal – the most mature example currently available – there is the inclusion of a carbon reduction funding model, a housing creation program and a skills development program – all of which add to the economic development of the region.

“In other words, City Deals foster a mutually reinforcing set of public policy programs,” the BEMP audience was told.

The Australian context

Work on how City Deals could operate in the Australian context is still undergoing for PCA and KPMG.

There are some key differences between the UK and Australia that could lead to difficulties.

One is leadership. In the UK, Prime Minister David Cameron has been a vocal supporter of the City Deal model. In Australia, support for a cities agenda is sorely lacking. While Australia’s Prime Minister Tony Abbott has said he sees himself as an “infrastructure prime minister”, there has yet been little to qualify this other than the funding of major roads projects. With Environment Minister Greg Hunt’s announcement at BEMP that he wanted to see long-term 30 and 50-year strategic blueprints for cities, there is hope in the industry that cities could soon find themselves back on the government’s agenda.

Another challenge is the relationship between levels of governments. In the UK, the distance between local and federal outcomes is much smaller than in Australia, Mr Low told the audience, making the City Deal process smoother. In Australia there is also a need to have an alignment between local, state and federal governments.

An example of three levels of government engaging in a City Deal could soon be seen in Scotland. On 4 July, a City Deal heads of terms agreement was struck between the UK government and Glasgow, Scotland. The Scottish government is now being asked to match the UK’s £500 million investment in the region, with Glasgow and surrounding regions adding £130 million.

PCA is currently working with government and industry stakeholders, including the Australian Sustainable Built Environment Council and the Urban Coalition, to adapt the City Deal model to the Australian context. Watch this space.

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