Most Australian jurisdictions feature some form of government owned land development business.
These include Economic Development Queensland (EDQ), Development Victoria, Landcom, Development WA and Renewal SA. These can be sizeable enterprises. For example, Landcom, the NSW Government’s development company has racked up total sales exceeding $4 billion over the past decade.
Some of these organisations descend from the Whitlam land programs of the 1970s, when the Commonwealth Government offered the States large amounts of cash to get into residential land development. The hope was that competition from these state owned businesses would curb then rapidly escalating house prices.
The origins of other state land development corporations stretch back further to the slum clearance and public housing efforts pursued by some governments in the early post World War 2 years.
These organisations are variously equipped to compulsorily acquire land, capture value uplift and even grant themselves development approvals. Typically, but not always, they operate at arm’s length from executive government, through legally independent corporations directed by competency based boards.
The public policy case for State Governments having these corporations rests on three pillars reflecting different forms of ‘market failure’ in land development. Firstly, there is the suspicion that the housing market may be prone to oligopoly, especially in greenfield growth areas where relatively few developers are active. The now defunct South Australian Land Commission (subsequently called the SA Urban Land Trust – SAULT) provides the crowning example of deploying development corporations to remove market constraints on land supply for housing production. In the second half of the 70s, the SA Government used its Whitlam funds to purchase most of the then anticipated urban expansion land around Adelaide. The Commission proceeded to release land on a wholesale basis to bona fide developers who worked to what were then seen as nationally leading planning principles. The Commission and SAULT captured all of the planning uplift along the way and fed a lot of this back into enabling infrastructure and quicker provision of community facilities.
The second policy rationale for state development corporations is that they act as a kind of innovation lab for the industry as whole. Whereas regular developers in greenfield areas might be inclined to stick with tried and true business models and a conservative assessment of what the market wants, government sponsored developers may be mandated to experiment on issues like water sustainable design and integration of medium density and small lots into the housing mix. Having proven up the commercial feasibility of these innovations, they can then be taken up by wider industry providing more value for home buyers and the community at large.
The third market failure addressed by these corporations is that some areas designated for growth or regeneration are beyond the viable reach of private sector players. This could be due to excessive lot fragmentation, the presence of heavy contamination left by historical uses or the absence of essential connecting infrastructure like bridges, rail lines or trunk sewers. Melbourne’s Docklands Authority, now Development Victoria, had to resolve several of these barriers before the precinct could be opened up to private sector investment, which ultimately came in a rush.
The potential contribution of these corporations in shaping the sustainable growth of our cities is now more important than ever. All metropolitan strategies across the nation have a strong urban consolidation focus, seeking to limit the share of outward urban growth to well below 50% of future housing needs. But most of the low hanging fruit in brownfield sites and distributed infill development is gone. Meeting urban consolidation aspirations now requires comprehensive replanning of districts, with fragmented land ownership and major infrastructure gaps routinely presenting as key barriers to private sector investment.
Even in greenfield growth areas, orderly, sustainable and competitive development continues to be hampered by infrastructure discontinuities, small lots and unreasonable withholding of strategic parcels by rent-seekers.
Working in conjunction with planning authorities and local governments, State development corporations could be building ‘at scale’ pipelines of urban consolidation opportunities for housing developers to take on. And they can be clearing strategic blockages to well-planned and timely greenfield development to improve choice and value for home buyers in these areas.
Yet, these corporations are no longer front and centre as State Government pursue their urban planning visions. Urban Growth NSW – the Government’s specialist brownfield development broker – was abolished in 2019 with its project functions absorbed into Infrastructure NSW. Development Victoria’s business, as measured by revenue from land sales, is much the same size as it was a decade ago and a third smaller than it was in 2013/14. Similarly, Landcom’s total sales revenue in NSW has fallen below its 12 year average in 4 of the past 6 years.
Why are government development corporations not more prominent in reshaping our cities? One explanation is that they can be burdened with a confused and conflicted mandate. On the one hand they are expected to address market failures and de-risk projects so that private sector developers can get on with delivering housing in places designated for growth. On the other, they are expected to make money for their shareholder governments.
These need not be mutually exclusive objectives, especially if Governments are prepared to be patient and generate their returns from land value uplift accruing over time. However, many of these corporations inevitably come under pressure to deliver near term dividends and find themselves unable to play the long game while still keeping favour with their shareholder. Meanwhile, governments often fail to recognise the unrecoverable costs involved in remediating contamination, amalgamating fragmented lots and advancing trunk infrastructure to the sites and districts they want to see developed.
State development corporations can be left looking for profit maximising opportunities to ‘cross-subsidise’ the public policy mandates which Governments are reluctant to invest in. And this, in turn, earns the ire of the private development sector which cannot see why a government business should be directly competing with it. Perhaps as a result of such pressures, Development Victoria now has only a residual role in greenfield projects when one of its progenitors, the (Whitlam funded) Urban Land Authority was once a dominant market player in large scale community developments, especially in Melbourne’s northern growth corridor.
State development corporations have also been crowded out by a proliferation of precinct based corporations and bureaucracies over the past decade. State Governments have sought to counter their natural proclivity to work in silos by setting up special purpose vehicles to deliver place based solutions for many urban policy challenges which, in the past, might have been considered core business for public sector development corporations. Today, these corporations are frequently mere on-lookers while specially mandated organisations for particular precincts battle to assemble the skills and know how to catalyse urban development in line with government policy.
If State owned development corporations are to fulfill their potential as strategic agents in more sustainable, prosperous and inclusive cities some key governance principles need to be observed. Firstly they need mandates which clearly separate their policy functions – addressing market failures – from any commercial expectation. Going hand in hand with this is a preparedness on the part of owner governments to make the investments required to get otherwise problematic land and precincts development ready, rather than expecting this outcome to be necessarily self-funding. Ideally, a total value charter should be negotiated between the corporation and its owners for each major project, reflecting that much of the return to the community will be in the form of better places rather than cash.
Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd