Submissions to the inquiry and the Commission’s review of the literature indicated concerns about infrastructure charges, covering:
whether they promote efficiency and equity;
whether councils have sufficient resources and capability to administer the charges;
the transparency of the process for setting charges;
the scope to challenge charges.
Do the charges promote efficiency?
Properly structured and administered infrastructure charges signal to developers the incremental costs of building infrastructure in different locations, encouraging them to factor these costs into decisions about when and where to build housing. The Development Contributions Working Group (DCWG), representing local government practitioners, argued that development contributions are economically efficient and equitable in purpose and effect, ensuring that the decision to develop and the cost of doing so are linked (sub. 22, p.4). It also pointed out that replacing development contributions with rates would lead to a “substantially less desirable situation” because “crystallisation of the costs-of-location at the point of the development or acquisition decision” would be lost (sub. DR123, p. 2). The Smart Growth Implementation Committee argues that “removing or reducing development contributions hides the true cost of
development” (sub. DR90, p. 12). Tasman District Council considers that development contributions are “a necessary response to a high marginal cost of the services given the large, dispersed settlement pattern, a legacy of services underinvestment, and rising government standards for such services” (sub. DR135, p. 2). Other inquiry participants and commentators, however, were not persuaded by these efficiency advantages, and suggested that charges may not be structured efficiently; may be applied to the wrong types of
infrastructure; may be inferior to other forms of charges; and do not diminish incentives to ‘gold-plate’ infrastructure.
The structure of development contributions
There is concern that development contributions are not based on additional (marginal) infrastructure costs, as is required under schedule 13 of the LGA. The Property Council, for example, argues that councils have “failed to adhere to fundamental rules about causal nexus and the need to limit the application of
contributions to the marginal cost of growth” (sub. 28, p. 13). LGFPCNZ, in a 2010 review of development and financial contributions, suggested that development and financial contributions often do not confront new and existing users with the marginal cost of supply. Reasons for this include:
misguided attempts to allocate common costs;
failure to discount expenditure for the time value of money or to take into account benefits that extend beyond the ten years of the LTCCP;
inappropriately using population or the number of households as a proxy for incremental demand omitting operating costs from calculations of financial and development contributions (LGFPCNZ 2010, pp. 43-44).
F8.1
It is difficult to draw a general conclusion about how much development contributionsincrease housing prices and reduce affordability: they vary considerably across New Zealand and the extent to which they are passed on probably also varies, although they are likely to be largely passed on to households in the long run.
The LGFPCNZ also points out that where a territorial local authority applies a uniform level of development contributions, they will not affect the location of developments within the relevant district (LGFPCNZ 2010, p. 45).
A related concern is that charges are being used to raise revenue rather than promote efficiency. If councils have a dominant position, they may be able to set charges for new infrastructure above costs, and use the extra revenue to fund discretionary spending in other areas or reduce property rates.
Councils are increasingly putting up the costs for (development and financial contributions) to reduce the cost on the ratepayer. A $10,000 fee is $25,000 once margin, holding costs, and GST are added. (Brady Nixon, sub. 26, p. 4)
Councils will be less able to behave in this way if developers (and home buyers) are mobile, and leave areas with excessive developer charges. However, this seems unlikely to happen where charges – even if
excessive – make up a small proportion of the cost of a house and land package, as Table 8.1 suggested may often be the case.
The type of infrastructure
Some submissions and commentators point out that the breadth of the benefits from infrastructure is a key determinant of when development contributions should be applied, and that councils are not always making the correct decisions about when to use them. The concern is that the costs of particular infrastructure assets may be recovered from the residents of a narrowly defined area, when many of the beneficiaries live outside the area. For example, Icon Concepts argued that the costs of providing services such as schools, parks and libraries should not be recovered through infrastructure charges applied within a particular district:
The whole community uses that infrastructure so the cost should be spread over the whole community. Infrastructure charges work on the assumption that any new development is a cost to the community whereas the reality is the opposite. (Icon Concepts, sub. 6, p. 7)
LGFPCNZ also considered the impact of the distribution of benefits, arguing that “genuine public goods such as neighbourhood parks, reserves, outdoor recreation facilities and stormwater systems that
exclusively or predominantly service or enhance a development and are located within a development” may be funded by requiring a developer to undertake the necessary works, make a monetary contribution, or grant land (LGFPCNZ, 2010, p. 50). This view is not necessarily at odds with that of Icon Concepts. The point at issue is the extent of diffusion of the benefits. If they can be identified as applying to a particular district, then the costs can be allocated to that district, but if the benefits are spread much more widely, then it seems neither equitable nor efficient to allocate them to an individual district.
Alternative approaches to charging
LGFPCNZ pointed out that development contributions sometimes fund capital spending in situations where councils could instead charge for supplying the related goods or services but do not do so. For example, councils could meter water use but either do not do so or, if they do, charge prices that do not approximate the marginal cost of supply. User charging would encourage, for example, water conservation, which might reduce the need for additional infrastructure. Prices could also be charged for using libraries, museums and art galleries (LGFPCNZ, 2010, pp. 49-50).
The New Zealand Chambers of Commerce considered that “wherever feasible, prices rather than
development contributions should be charged for local government goods and services (for example, for water supply) and the use of development contributions should be restricted to public goods” (sub. DR144, p. 2).
Incentives to choose least cost infrastructure options
Councils have monopoly power in providing infrastructure to service land, limited mainly by the capacity of developers to move between council areas. Access to development contributions may encourage councils to design projects that have higher initial capital expenditure, to limit the risk of future capacity shortfall, rather than later when development contributions cannot be charged. Councils may also be induced to favour a more capital-intensive investment option with lower operating costs, which are generally funded
from rates (LGFPCNZ 2010, pp. 5–6). If either of these happens, the efficiency benefits from development contributions would be undermined.
Do the charges promote equity?
A common view is that it is equitable that the benefits of expenditure on new or expanded infrastructure assets should be largely confined to those paying for them. This is, however, often difficult to achieve, as the comments of Icon Concepts and the LGFPCNZ above suggest. It requires application of the rational nexus test, which may require contestable assumptions about demand and the capacity to exclude others from the benefits of investment. Public facilities often exhibit significant benefit leakage. Indeed, many are characterised by implicit or explicit exchange between beneficiaries (for example, visiting teams to
recreational facilities). In addition, infrastructure is usually used by some groups more than others. For example, sports grounds may be used more by young people.
Habitat for Humanity proposes that development contributions should be waived or reduced for affordable housing provided by not-for-profit organisations (sub. DR107, p. 8). It is possible, however, that this could lead to an increase in the price of land in such developments, so that the full benefits would not flow through to home buyers.
Auckland City Council noted that it considers fast-tracking developments and/or mitigating development contributions and consent fees for developments that increase supply of a particular type of housing or ease overcrowding in targeted areas (sub. DR142, p. 17).
Do councils have adequate resources and capabilities?
There seems to be agreement that complexities in administering financial and particularly development contributions can test councils’ resources and capabilities.
The DCWG acknowledged concerns over administrative efficiency, but attributed them to inadequate resourcing among some local authorities “together with constant to occasional threats of litigation [having] increased costs from the legal and consulting professions” (sub. 22, p. 4). This submission points out that a simpler regime would lower complexity and costs.
Small (2007), in an analysis prepared for the Local Government Rates Inquiry, pointed to the practical difficulty councils have in developing formulae and executing implementation in a way that adheres to the underlying efficiency and equity criteria for development contributions. He believed these difficulties are caused by councils’ limited understanding of how these criteria might operate, and would be redressed as experience accumulates. He argued that radical reform was not needed, but that councils need additional support to ensure that their policies best serve the needs of their communities, and it would be cost- effective for this support to be provided centrally, through the Department of Internal Affairs or the Society of Local Government Managers (Small, 2007, p.18).
Is the process for setting charges transparent?
Transparent processes strengthen the accountability and hence incentives of those setting development and financial contributions to follow due process. Transparency increases the prospect that development contributions will be applied when appropriate and with regard to incremental costs. This in turn should boost the confidence in the system of those who pay these charges. There are different perspectives about how transparent are the processes for setting financial and development contributions, and some
submissions saw room for improvement.
Three submissions from local government pointed out that being transparent about a complicated system means providing details that may be difficult for some to comprehend. Tauranga City Council believes its development contributions policy is “completely transparent” given that it comprises “approximately 300 pages [containing] a full explanation of the methodology, assumptions, growth funded projects, cost allocations and cost estimates“. It points out, though, that “the downside of this type of complete transparency is complexity. It would be fair to say that Council’s Development Contributions Policy itself would not be easily understandable to the average person on the street, but it is well understood by the
development sector and advisors active in city development”(sub. 19, p. 23). Similarly, the Society of Local Government Managers (SOLGM) pointed out that:
From a normative perspective it would seem appropriate to put a significant burden of proof on local authorities to justify the charges they impose. This inevitably however drives the process in the direction of detail and complexity, and the production of documents that as a result seem opaque to the lay reader (although they are not of course designed for a lay audience). (sub. DR143, p. 4)
The DCWG also pointed to the difficulty of achieving transparency in a complex area, that is “difficult for lay-people to comprehend without assistance” (sub. 22, p. 3). It noted that “an over-emphasis on compliance with the letter of the law”, can lead to opaque documentation. This may be a reaction to the “willingness of some developers to litigate,” which the group suggests has led to “a climate of risk aversion that is now beginning to moderate” (sub. 22, p. 4).
The Registered Master Builders Federation (sub. 16) had a different view, calling for greater transparency with respect to where the funds raised are allocated (sub. 22, pp. 3–4). The LGFPCNZ argues that development and financial contributions lack transparency and that this weakens the accountability of elected representatives (LGFPCNZ 2010, p. vii).
Is there adequate scope for challenge?
Given the limited contestability between councils noted above, providing opportunities to challenge development contributions can fill a significant gap. As noted earlier, however, there is less scope to appeal councils’ decisions about development contributions than about financial contributions. The rationale for this difference is not evident.
Justice Potter (in Neil Construction Limited and Orrs v North Shore City Council) noted that the absence of rights of appeal on merit against development contributions adds to the importance of open, consultative processes:
[293] The enactment in the Act of Subpart 5 of Part 8, relating to Development Contributions provided councils with a valuable and economically efficient funding tool in addition to the traditional funding sources such as general rates. There is no right of appeal from councils’ determinations in relation to development contributions and the review process is limited (refer [95]). Any challenge by developers has to be mounted by way of judicial review. In exercise of their discretions, given the greater flexibility in decision-making conferred on councils by the Act, it is therefore necessary and important that councils carefully observe the purpose and principles of the Act and the role of local authorities, that they ensure both openness in their decision-making processes, and the ability of sectors of the community affected by their decisions, to participate in those processes.