The application of development contributions to fund a share of the costs of infrastructure is a hot topic in every state and territory, however in NSW, the policy and practice has attracted prolonged attention and extensive review.
PLANNERS RESPONSE TO REFORM OPPORTUNITIES
Concurrent Productivity Commission and Department of Planning Infrastructure and Environment (DPIE) inquiries in 2020, and the exhibition of Place Infrastructure Compacts in Central and Western Sydney presented a convergence of reviews on the role of development contributions in funding and delivering infrastructure in support of growing communities in NSW.
Through the Planning Institute of Australia, planners remain engaged and committed to holistic reform of development contributions – as well as land value capture – to help fund the place outcomes sought in NSW’s regional and local plans over the next 30 years. Integrated, place-based planning and funding improves the return on investment from infrastructure expenditure because it can match the costs with the stream of benefits.
The reviews showed that communities expect their plans to be supported by an acceptable standard of infrastructure alongside population growth and change. The funding of this infrastructure must be balanced between public and private sectors and between upfront contributions and ongoing sources.
The NSW Government has now adopted all 29 of the recommendations of the Productivity Commission review into development contributions. Having now taken stock of the reforms, it is clear what reforms are positive, where opportunities have been lost and where more work is required.
Upfront Infrastructure contributions plans as part of rezoning process
Infrastructure needs and costs should inform decisions to rezone to ensure the most cost-efficient development path is followed. This means infrastructure items, costs and contributions should be known prior to rezoning to ensure that contributions are not arbitrary but offer a clear market signal on the price of land. The recommendation for upfront exhibition of contributions plans reinforces the value of integrated land use and infrastructure planning and strengthens the nexus between the infrastructure demand generated by proposed development and the contributions to pay for it.
Direct land dedication mechanism
Direct land contributions have the potential to result in better value than monetary contributions alone – so long as the dedicated land is consistent with a plan and not just left-over parcels.
Early direct contributions address the issue of subsequent land cost inflation. By looking at the Victorian experience (5% land requirement) it is clear further measures should be pursued to address land valuation escalation and equity that have been addressed through recommendations for new guidelines and indexing.
Central digital tool
It is a common sense reform to make contributions calculations simpler and more transparent by having a single source of information on the amount payable through a digital tool accessible via the planning portal. This initiative is also expected to be useful in tracking payments and infrastructure expenditure.
The development of this tool is a major project by itself – and if done well it could make any contributions system appears simple! However, the risks of not meeting expectations are high and the project will require resourcing and ongoing oversight.
Increase to s7.12 maximum contributions rate
Fixed rate contributions plans trade off the achievement of nexus and fair apportionment against simplicity and cost effectiveness. This is warranted where development is sporadic in existing urban areas. An increase in the maximum rate and an indexed schedule for different development types is a positive step. It is noted that an increase from 1% to around 3% will not be seen as significant by many councils, but it will reduce the need for complex applications to IPART.
Standard charges for State infrastructure (regional Infrastructure contributions)
The review challenged the consistency of infrastructure charges levied by the State for regional infrastructure contributions (SICs). It is good to see the NSW Government make attempts to improve the consistency and predictability through the adoption of set infrastructure rates for dwellings and commercial / industrial floor space relevant to Greater Sydney, Hunter and Illawarra-Shoalhaven, but is concerned that they will not give developers and the community a price signal on where is most desirable to develop. High cost and high impact locations should have higher infrastructure needs and contributions
Recognition of local infrastructure funding distortions from rate-pegging
The imposition of the rate peg has motivated councils to increase reliance on development contributions. While here at PIA, we argued for the removal of the rate peg, we support the recommendation to enable rate increases in line with population growth as an improvement. Over reliance on the rate base for funding development contingent infrastructure is also undesirable due to equity impacts on the broader rate base.
Transport contributions for major projects is a form of ‘betterment’ charge
Because the development in the catchment of major transport nodes benefits from increased land value, there is a compelling case to partially fund the transport infrastructure from this value uplift. This recommended class of contributions is distinct from other ‘development contingent’ infrastructure needs – and seems to contradict the approach taken by the Government in rejecting ‘value capture’ opportunities in relation to planning agreements.
No single plan for a growth area
Reform recommendations include measures to align timing of elements of planning and contributions policy and may enable calculation of a single State and Local contribution amount. However, the reforms fall short of full integration of local and state infrastructure planning in a single contributions plan. Without a single integrated infrastructure funding and delivery plan for each major new rezoned area the funding mix (between State/local/developer) will stay a mystery.
The current operation of the (State – s7.24) Special Infrastructure Contributions (SIC) regime has resulted in a highly siloed approach to infrastructure funding in precincts being planned by the State. Fundamentally, what is required is a single system for funding infrastructure which adequately considers both state and local infrastructure contributions. This system should result in a comprehensive infrastructure and delivery plan for each state precinct or growth area prepared and adopted as part of the rezoning process – as has previously been pursued for the Growth Centres Commission There is no reason why the State contributions regime should have less accountability than that required and expected of local contributions plans prepared under S7.11. Further there is a distinct benefit in requiring the integration of local and State contributions within the framework of a S7.11 plan.
The emerging Place Infrastructure Contributions framework provides a model for the broader integration of local and State infrastructure and contributions planning in a wide variety of growth and renewal precincts. It also provides a framework for establishing the infrastructure funding mix upfront.
Limited opportunity for value capture through planning agreements
The recommended adoption of a ‘principle-based approach’ reduces the scope of planning agreements to capture value of a rezoning for community benefit – however it would continue to enable contributions for ‘development contingent’ infrastructure or ‘impact mitigation’.
Planning Agreements perform an important role for site specific determination of infrastructure contributions and are particularly useful in the context of large developments undertaken by a single developer. They typically apply where the default contributions plan does not anticipate (or is unable to respond rapidly) to the nature of proposed development on a specific site. Planning agreements provide an opportunity to tailor infrastructure delivery to the needs of a site and enable best value especially in the delivery of works-in-kind and the dedication of land by the developer.
Because they are usually established at the time of upzoning, they also provide the opportunity for the community to capture a portion of the uplift associated with change of use (or increase in development permissible under the standards) enabled by public infrastructure delivery. This opportunity would now be limited by to collecting a contribution to fund infrastructure needs (or impacts) directly linked to the development. In the continuing absence of any form of betterment tax, there is reduced opportunity to share that portion of the value created by rezoning to fund other public purposes.
Limited treatment of affordable housing
Contributions for affordable housing (as social infrastructure) are a fundamental requirement of development in our major cities – a ‘licence to operate’. Over time, their cost would be reflected in the price of land. The current round of reforms did not integrate affordable housing contributions with broader infrastructure contributions – their treatment was limited to expenditure accountability measures.
More accountability needed for infrastructure delivery by State and Local Government
The reforms have an overriding emphasis on extra revenue and little action with teeth that would have made a real difference to timely delivery of infrastructure. Recommendations include welcome but vague measures around training staff, incentivising councils to borrow, aligning state and local planning and incorporating local contributions in the Integrated and Performance Reporting Framework.
A specific set of commitments to oversee timely delivery and measures that ensure councils and the State spend money efficiently would have been a valuable inclusion. Here at PIA, we continue to support the preparation of infrastructure delivery plans – to which all parties are accountable.
REFORMS TO KEEP WATCH ON
Regional Infrastructure Contributions (RIC) governance arrangements
Developing accountability and transparency arrangements around the massive extra funding that is forecast to come to the government by the RIC (potentially about $16 billion more than baseline over 20 years) will be major challenge. There needs to be prioritised works lists developed to guide agency planning and works in-kind offers. This approach has precedent under the Growth Centres Commission. There is a risk that the RIC could become a slush fund without sound governance arrangements.
Overall implementation schedule and timeframe
The adoption of all 29 recommendations and commitment to deliver against an ambitious implementation timeframe carries substantial risks to quality or the availability of capacity in Government to resource the program delivery. The need for further regulatory reform may also arise.
Implementing s7.11 local infrastructure contributions reforms
Major reform is being initiated on many of the details surrounding the new s7.11 process – essential works list, benchmark costs, ‘by exception’ IPART involvement and the direct land contribution initiative. This will require detailed attention and ongoing oversight to ensure that the reforms ultimately achieve their intent – and result in a clearer nexus, fair apportionment and a simpler and more cost-effective system.
The NSW Government’s adoption of the recommendations has created expectations that new guidelines, unit rates, indexation and other practice will be ready. Transitional arrangements will need to be set out to apply to investment decisions made prior to the reforms being bedded down.
Deferred contributions payment to occupation stage
This measure was a temporary proposal arising in 2020 as a viability / stimulatory measure during Covid. It is recommended by Productivity Commission to be extended permanently but will also have financial implications for the accrual of contributions funds with Councils. This impact needs to be quantified and monitored. It heightens the possibility that the charge will indeed be passed to the purchaser rather than the cost being factored into the developer’s feasibility and project funding – and ultimately passed back to the prior property owner by a reduction in the developer’s acquisition cost.
The implementation of each of the reforms have resourcing implications as well as demanding new and skills and capacity across the development, planning and infrastructure industry. Through our education and training work, PIA is alert to the need for training, professional development and the availability of appropriate education and qualifications.
Given the broad scope and tight timeframe for implementation industry capacity will be stretched – and the intent of infrastructure contribution reforms may be diluted. NSW Government have established an expert oversight group to provide independent advice to Government on the roll out of the program and planners will be represented on this Group via PIA and other expert members. Despite these specific improvements to the development contributions regime, there remains a strong need for broader reform, including infrastructure funding streams linked to land value uplift.
 For more detail on PIA’s contributions to the infrastructure funding and planning debate, refer to the PIA National and PIA NSW Policy Positions.