Will Cash Strapped Gov’ts Trade Floor Space for Infrastructure Funding?

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Tuesday, July 12th, 2016
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Just imagine a new version of Private Public Partnerships in a few decades’ time, where developers are asked to provide schools, health centres, parks and key infrastructure within precinct wide developments from the profits of residential and commercial development.

The developer will be able to nominate the heights and amount of floor space required to provide the infrastructure that used to be delivered by governments now unable to pay for these. The planning system would be reversed such that the approval body listed the required contributions and the private developer outlined the planning envelopes needed to supply the public outcomes. Entire communities or small precincts could be planned and developed this way, minimising cost to government and turning the tables of approval and evaluation of planning controls over to developers.

For a few centuries, Australian communities have been accustomed to governments providing the public infrastructure for cities. In recent decades, the Private Public Partnership approach began delegating new expressways, airports, new rail lines and ferries to the private sector based on continual incomes from users.

There are now signals from all levels of cash strapped governments that even more infrastructure and functions will be flowing to the private sector. With government income from taxes and user charges not keeping up with costs, a new funding stream is emerging where development rights are traded for the delivery of infrastructure and services.

If we extrapolate these trends a generation ahead, through the lens of the NSW Intergenerational Report, we find a fiscal gap between expenditure and income of $17 billion in 2056 mainly driven by a diminishing proportion of income earning workers who pay tax compared to retirees who are costing more through the health system.

The numbers are pretty frightening. In 1976, there were seven taxpaying workers for each older person. Currently this has dropped to four, and by 2056, there will only be 2.4 taxpayers for each older person requiring a disproportionate amount of the growing health budget.

Deputy Secretary of NSW Premiers and Cabinet, Simon Draper, said at a recent Western Sydney conference that the way forward will be to grow the third stream of income generation for the state government after taxes and users charges. The third stream is value capture, where governments use the planning system to trade development rights for funds for infrastructure or ultimately the provision of services. Hidden in the NSW Budget Papers was the announcement of a new approach to outsourcing with the establishment of the Commissioning and Contestability Unit in Treasury. The unit is to champion the concept that the market “should provide services where it can achieve better outcomes and value for money for the people of NSW.”

First out of the blocks is the transitional council for Parramatta City with a report on Parramatta CBD Infrastructure. The council conveniently discovered a hole in its Section 94A funding for infrastructure of between $512 and $628 million. The council’s answer has been to dramatically lift heights from the previous 20 storeys up to 80 storeys and to charge developers of these sites an additional tax at the rate of $375 a square metre for the difference.

A new term emerges in the Parramatta report to council of “value sharing” where the developer hopefully still has a viable project and the community gets significant financial contributions to help with much needed infrastructure. The Parramatta example has occurred at the top of the market, but as the property market begins to slide downward, the financial ability of the private sector to pay will diminish. The answer may be to allow even higher buildings, but then the whole trading approach to planning may get out of control.

The current rules in NSW actually work against the growing trend toward value capture. The Department of Planning issued a Practice Note in July 2005 on planning agreements that specifically states “Planning benefits should never be through planning agreements as a form of taxation on development.” It would appear that this practice note needs to be changed to acknowledge the new form of taxation that is now coming from value capture.

The shift toward private sector developer funding of essential infrastructure and services comes with an additional shift in power – if governments want to move toward demanding more and more cash from developers, developers should have more say in what they can and can’t build. It is only fair and reasonable that both parties, which are dependent upon the cooperation of the other to deliver good quality urban outcomes for the public, can negotiate from an equal starting point.

The NSW opposition is one step ahead of the government in understanding the move toward a trading system of floor space for cash. The shadow minister for Planning and Infrastructure also has the Gaming portfolio. It is likely that this trend will spread around Australia with Ministers of Planning, Infrastructure and Gaming becoming the norm.

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