Infrastructure isn't everything but in the long term it is almost everything
The ultimate objective of urban planning is to improve the level and sustainability of a community's wellbeing. The living standards of a community are a function of its social, environmental and economic capital.
Infrastructure including both physical conveyance assets such as sewerage, water and transport (often called economic infrastructure) and specialised services such as schools and hospitals (often called social infrastructure), is critical to the social, environmental and economic capital of the community.
To channel Paul Krugman the Nobel winning economist, "Infrastructure isn't everything in urban planning but in the long run it is almost everything" (Krugman 1997:11).
Critically where the cost of development is high, it is largely because land prices are high and generally land prices are high when there is a shortage of well-located and serviced land (Low 2013).
Investment in infrastructure, in particular economic infrastructure, places downward pressure on land prices and ultimately the cost of development. When appropriately integrated with development through urban planning, infrastructure can therefore significantly improve productivity by promoting development at a lower cost.
This will be critically important especially in South East Queensland where it is estimated that the population will grow between 2012 and 2060 by some 2.3 million (up 110%) (PC 2013:51).
The planning and funding of infrastructure is therefore important, not only to drive productivity and economic growth in the short to medium term, but also to service our rapidly expanding cities and regions in the long term.
Bill introduced to parliament
It is against these challenges that the Queensland government's recent response to the funding of development infrastructure by local governments should be considered.
On 8 May 2014 the Queensland government introduced the Sustainable Planning (Infrastructure Charges) and Other Legislation Amendment Bill 2014 (Bill) and explanatory notes (Explanatory Notes) into the Queensland parliament. The Bill is expected to be passed, potentially with amendments, and implemented from 1 July 2014.
The Bill proposes an infrastructure planning and charging framework (proposed capped framework
) which differs from the current capped framework and the previous uncapped framework:
- Current capped framework – The current framework of maximum adopted infrastructure charges was introduced from 1 July 2011 (current capped framework) (Sustainable Planning Act 2009 (SPA): ch 8, pt 2, div 5A).
- Previous uncapped framework – The previous framework of uncapped infrastructure charges existed from 2003 to 30 June 2011 (previous uncapped framework) (Integrated Planning and Other Legislation Amendment Act 2003 No. 64 (IPOLA): section 22).
The Bill establishes a proposed capped framework for local governments by amendments to the SPA and for distributor-retailers by amendments to the South East Queensland Water (Distribution and Retail Restructuring) Act 2009
(SEQ Water Act
The proposed capped framework for local governments and distributor-retailers is materially the same, subject to any changes which may be required as a result of the implementation of the utility model for distributor-retailers. This paper focuses on the proposed capped framework from the perspective of a local government.
Themes of the paper
This paper has three themes:
- First, the key elements of the proposed capped framework are considered in the context of the current capped framework and previous uncapped framework, to identify the legal and practical implications for applicants and local governments.
- Second, the policy implications of the proposed capped framework are considered in the context of the current capped framework and previous uncapped framework.
- Finally, some concluding observations are offered for the legal, practical and policy implications of the proposed capped framework.
Legal and practical implications of the proposed capped framework
Key elements of the proposed capped framework
The proposed capped framework comprises the following key elements which are addressed in this paper:
- Infrastructure scope
- Identification of trunk and non-trunk infrastructure
- Infrastructure planning instrument
- State infrastructure charging instrument
- Local infrastructure charging instrument
- Infrastructure charge
- Development charge
- Provision of trunk and non-trunk infrastructure
- Offsets and refunds for trunk infrastructure and development charge
- State infrastructure provider powers
- Infrastructure agreements
The proposed capped framework is based on a definition of development infrastructure which is materially the same as the current capped framework and previous uncapped framework, other than for the deletion of the local function of state-controlled roads from the transport infrastructure component of development infrastructure (s627 Bill).
A more limited infrastructure scope identified as the Fair Value Essential Infrastructure List has been prepared by the Department of State Development, Infrastructure and Planning (DSDIP
) for the purpose of informing the calculation of a Fair Value Infrastructure Charges Schedule which, if adopted by a local government or distributor-retailer, may provide access to co-investment funding by the state government for catalyst infrastructure (Seeney 2014).
The details of the co-investment funding arrangements are yet to be determined but are intended to be focused on major developers due to the scale of their projects (Coutts 2014). Given the uncertainty associated with the co-investment funding by the state government, it is unlikely that local governments and distributor-retailers will adopt, at least in the short term, the Fair Value Infrastructure Charges Schedule.
Identification of trunk and non-trunk infrastructure
The proposed capped framework, like the current capped framework and previous uncapped framework, empowers a local government to identify development infrastructure as trunk infrastructure in a local government infrastructure plan (called an LGIP
); with development infrastructure not identified as trunk infrastructure in the LGIP considered to be non-trunk infrastructure (s627 Bill).
However under the proposed capped framework, if a local government has imposed a condition of a development approval requiring the provision of non-trunk infrastructure and the construction of the non-trunk infrastructure has not started, the applicant can make an application to the local government (called a conversion application
) to convert the non-trunk infrastructure to trunk infrastructure (ss658 and 659 Bill).
The identification of trunk and non-trunk infrastructure under the proposed capped framework is therefore the same as the current capped framework and previous uncapped framework, but for the significant policy change of an applicant being able to make a conversion application.
Infrastructure planning instrument
The proposed capped framework, like the current capped framework and previous uncapped framework, requires a local government to prepare an LGIP (ss94A(1) and 117(2) Bill); with existing local government priority infrastructure plans (PIP
) and the infrastructure planning components of adopted infrastructure charges resolutions (called saved provisions
) prepared under the current capped framework being transitioned as a deemed LGIP (ss982 and 979(7) Bill).
The LGIP forms part of the planning scheme and does any or all of the following (s627 Bill):
- Priority infrastructure area – It identifies the priority infrastructure area (PIA) being the area which (s627 Bill):
- is used or approved for use for purposes other than rural or rural residential purposes (defined as non-rural purposes) (s627 Bill);
- is serviced or intended to be serviced with development infrastructure networks; and
- will accommodate between 10-15 years of growth for non-rural purposes.
- Planning assumptions – It states the assumptions about population and employment growth and the type, scale, location and timing of future development.
- Plans for trunk infrastructure – It contains the plans for trunk infrastructure the local government intends to provide or for which it intends to give infrastructure charges notices.
The plans for trunk infrastructure will identify the trunk infrastructure items to be provided by the local government including the establishment cost of the trunk infrastructure.
- Desired standard of service – It states the desired standard of service for development infrastructure.
The LGIP under the proposed capped framework is similar to the PIP under the current capped framework and previous uncapped framework.
State infrastructure charging instrument
The proposed capped framework, like the current capped framework, empowers the Minister to prepare a State Planning Regulatory Provision (called an SPRP (adopted charges)
) (s629(1) Bill; cf s648B SPA).
The existing State Planning Regulatory Provision (adopted charges) dated July 2012 (existing SPRP
) made under the current capped framework is deemed to be the SPRP (adopted charges) (s983(1) Bill).
The SPRP (adopted charges) may do the following:
- Maximum adopted charge – It may state a maximum amount for an adopted charge (s629(1) Bill). This may subsequently be changed by the Minister by a gazette notice, but cannot be increased by more than the 3 year moving average annual percentage increase in the PPI index for the preceding 3 years (ss629(2) and (3) Bill).
- Charges breakup – It may state the proportion of the maximum adopted charge between a local government and distributor-retailer (s629(4)(a) Bill) (called the charges breakup) (s627 Bill).
- Permitted development – It may state development for which there may be an adopted charge (s629(4)(b) Bill).
- Method for working out the cost of infrastructure for an offset and refund – It may state the parameters for the method for working out the cost of infrastructure for an offset and refund (s629(4)(c) Bill).
The SPRP (adopted charges) will be similar to the existing SPRP under the current capped framework other than for the inclusion of permitted development which may be subject to an adopted charge and the method for working out the cost of infrastructure for an offset and refund.
Local infrastructure charging instrument
The proposed capped framework, like the current capped framework, empowers a local government to adopt a resolution (called acharges resolution
) which must state the following (s630(1) Bill; cf s648D SPA):
- Effective date – The charges resolution must state the date when an adopted charge under the resolution takes effect (s630(3) Bill). The charges under the charges resolution take effect (s634(2) Bill):
- if it is uploaded to the local government's website before the beginning of the identified date, on the identified date; or
- if it is uploaded to the local government's website after the beginning of the identified date, on the day it is uploaded.
- Adopted charges – The charges resolution may state a charge for providing trunk infrastructure for development (called anadopted charge) (s630(1) Bill) which must be consistent with the SPRP (adopted charges) in the following respects (s631(1) Bill):
- Permitted development – The adopted charge must be for development for which an adopted charge is permitted.
- Maximum adopted charge – The adopted charge must be for no more than the maximum adopted charge.
- Automatic increase provision – The charges resolution may provide for increases in a levied charge from the date it is levied to the date it is paid (called an automatic increase provision) (ss631(3) to (6) Bill). This cannot provide for an increase in the levied charge that is greater than the maximum adopted charge or the 3 yearly PPI index average (ss631(5) to (6) Bill).
- Charges breakup – The charges resolution must state the charges breakup between the local government and distributor-retailer for all adopted charges (s632(4) Bill).
- Applicable area – The charges resolution may declare the part of the local government area to which the adopted charges are to apply (s631(3)(a) Bill).
- Method for the working out of the cost of infrastructure for an offset and refund – The resolution must include a method for working out the cost of infrastructure the subject of an offset or refund being the trunk infrastructure identified in the LGIP or non-trunk infrastructure which is converted to trunk infrastructure by a conversion application (s633(1) Bill). The method must be consistent with the parameters in the SPRP (adopted charges) or a Ministerial guideline prescribed by a regulation (s633(2) Bill).
In essence the charges resolution under the proposed capped framework is similar to the adopted infrastructure charges resolution under the current capped framework other than for the inclusion of the method for the working out of the cost of infrastructure for an offset and refund.
The proposed capped framework, like the current capped framework, empowers a local government to give an applicant an infrastructure charges notice (called an ICN
) (ss635(1) and (2) Bill) which levies a charge in accordance with the adopted charge (called a levied charge
) (s627 Bill).
Infrastructure charges notice
An ICN under the proposed capped framework is materially the same as the current capped framework and previous uncapped framework other than for the following:
- Local government development approval – An ICN can only be given for a development approval given by a local government such that an ICN cannot be given for a development approval of a private certifier for self assessable development under a local government's planning scheme (s635(1)(a) Bill).
- Form of the ICN – The ICN must state the following matters in addition to those provided for under the current capped framework:
- Information notice – The ICN must state the reasons for the decision and details of the appeal rights (s637(2) Bill).
- Details of the calculation of the levied charge – The ICN must state how the amount of the levied charge has been worked out (s637(1)(b) Bill).
- Details of an offset or refund – The ICN must state whether an offset or refund applies and if so, the details of the offset or refund (s637(1)(f) Bill). In order to identify the offset and refund it will be necessary to work out the cost of the trunk infrastructure. This will require reference to the establishment cost of infrastructure in the schedule of works in the plans for trunk infrastructure in the LGIP (although this is by no means clear).
It is important to note that the definition of establishment cost under the proposed capped framework is materially different to the definition of establishment cost under the current capped framework in the following respects (s627 Bill):
- Existing infrastructure – The value of works is that which is reflected in the local government's asset register whilst the value of land is its "current value" which will be interpreted to mean market value.
- Future infrastructure – The local government's financing costs are excluded.
This has a number of practical consequences:
- Operational issue – The effect of this is that the cost of infrastructure stated in a PIP under the current capped framework, which is a deemed LGIP under the proposed capped framework, is not the establishment cost of infrastructure for the purpose of determining an offset and refund under the proposed capped framework.
- Policy issue – Given that the establishment cost of trunk infrastructure is not used to calculate a charge, as was the case with the previous uncapped framework, and is only used to work out an offset and refund, the exclusion of a local government's financing costs to fund the provision of trunk infrastructure is appropriate, otherwise those costs which are not met by an applicant would inflate an offset and refund.
The proposed capped framework for a levied charge is similar to the current capped framework other than for the following:
- Additional demand – A levied charge may only be for additional demand placed upon the trunk infrastructure which will be generated by the development (s636(1) Bill). A levied charge must therefore exclude demand from an existing lawful use or a future use to be carried out under a further development permit (s636(2) Bill). As discussed earlier, the additional demand of future self assessable development can also not be included.
- Levied charge attaches to the land – A levied charge is payable by the applicant including any person in whom the development approval vests, such as an owner of the subject premises to which a development approval applies.
Furthermore a levied charge attaches to the land such that it can be recovered from owners and their successors in title in the same way as a condition of a development approval requiring the payment of infrastructure charges under the previous uncapped framework could also be recovered from owners of land (ss635(6)(b) and (c) Bill; Montrose).
Infrastructure charge versus development charge
A levied charge under the proposed capped framework, like an adopted infrastructure charge under the current capped framework, has the following important characteristics:
- Infrastructure charge is not a development charge – A levied charge is an infrastructure charge which has the primary goal of recovering the cost of trunk infrastructure to be provided by a local government to service development (PC 2011:198).
A levied charge is different to a development charge which is a charge designed to internalise the marginal external costs that are imposed by development and which has the primary goal of influencing the location and nature of development (PC 2011:198).
- Average cost approach not marginal cost approach – The maximum adopted charges in the SPRP (adopted charges) are calculated by reference to an average cost State-wide approach; whilst the adopted charges in a charges resolution upon which a levied charge in an ICN is based are calculated by reference to an average cost municipality-wide approach (Clinch and O'Neill 2010:2152).
The average cost approach whilst favoured by State and local governments for administrative simplicity and public acceptability, is generally not favoured by most smaller developers who prefer a marginal cost site-specific approach where an infrastructure charge reflects the cost of increasing the capacity of the infrastructure to serve an additional unit of demand (Clinch and O'Neill 2010:2152). This marginal cost approach is also recommended by the Productivity Commission, as is discussed later in this paper.
Importantly, levied charges under the proposed capped framework, like the current capped framework, are based on an average cost approach and are capped. As such, levied charges in some cases do not achieve full cost recovery whilst in other cases results in over-recovery or a tax; policy positions which were intended to be avoided as was the case with infrastructure charges under the previous uncapped framework. As discussed later, the economic distortions resulting from under-recovery and over-recovery are likely to have significant public policy implications.
The proposed capped framework, like the current capped framework and previous uncapped framework, empowers a local government to impose a condition on a development approval requiring the payment of additional trunk infrastructure costs for development inconsistent with the LGIP (called an additional payment condition
) (s650 Bill).
The additional trunk infrastructure costs required by an additional payment condition is a development charge which is intended to internalise a local government's marginal external costs imposed by development that is inconsistent with the LGIP.
An additional payment condition is therefore intended to influence the location and nature of development. This is unlike a levied charge, the primary purpose of which is cost recovery; albeit under the proposed capped framework and the current capped framework full cost recovery is far from being achieved.
Provision of trunk and non-trunk infrastructure
Legislative requirements for conditions
The proposed capped framework, like the current capped framework and previous uncapped framework, empowers a local government to impose a condition requiring the provision of trunk and non-trunk infrastructure if two statutory criteria are satisfied:
Conversion application for non-trunk infrastructure
- Head of power – The condition must expressly identify one of the following heads of power for the imposition of the condition (s335(1)(e) Bill):
- Necessary infrastructure condition – A condition can be imposed requiring the provision of trunk infrastructure if the trunk infrastructure is necessary to service the subject premises and has not been provided or has been provided but is inadequate (ss645, 646 and 647 Bill).
- Non-trunk infrastructure condition – A condition can be imposed requiring the provision of non-trunk infrastructure for the following limited purposes (s665 Bill):
- Internal network – A network or part of a network internal to the premises.
- Connection to external network – The connection of the premises to an external infrastructure network.
- Safety or efficiency of network – The protection or maintenance of the safety or efficiency of the infrastructure network of which the non-trunk infrastructure is a component.
- Relevant and reasonable requirement – The condition must also satisfy the relevant and reasonable requirement of the SPA (ss345 and 406 SPA) which in the case of a necessary infrastructure condition is deemed to be met if the following are satisfied (s648 Bill):
- Necessary to service subject premises – The infrastructure is necessary to service the subject premises.
- Efficient and cost effective solution – The infrastructure is the most efficient and cost effective solution for servicing other premises in the general area of the subject premises.
- Infrastructure on the subject premises – The infrastructure, if provided on the subject premises, is not an unreasonable imposition on the development or the use of the subject premises as a consequence of the development.
The proposed capped framework, unlike the current capped framework and previous uncapped framework, empowers an applicant to make a conversion application to the local government to convert the non-trunk infrastructure imposed in a development approval condition to trunk infrastructure, if the construction of the non-trunk infrastructure has not commenced (ss658 and 659 Bill).
The local government is required to take the following action for the conversion application:
- Decision criteria – A regulation may prescribe criteria relevant to a decision about the conversion application (s660(2) Bill). No draft decision criteria have been provided during public consultation.
- Information requirement – The local government may, within 30 business days, require the applicant to give, within 10 business days, the information it reasonably needs to decide the application (ss660(3) and (4) Bill).
- Determination of application – The local government must decide the application within 30 business days of the making of the application or the applicant complying with the information requirement (ss650(1) and (6) Bill).
- Notice of decision – The local government must give a notice as soon as practicable of the making of its decision (s661(1) Bill) which must state the following:
- If approved – whether an offset or refund applies and if so the details of the offset or refund (s661(2) Bill);
- If refused – the reasons for the refusal and the details of the appeal rights (s661(3) Bill).
- Amendment of approval conditions – The local government may, within 20 business days of converting non-trunk infrastructure to trunk infrastructure, amend the development approval in the following respects (s662(3) Bill):
- remove the non-trunk infrastructure condition which no longer has effect (s662(2) Bill);
- impose a necessary infrastructure condition for the trunk infrastructure (s662(3) Bill).
- Infrastructure charges notice – The local government must, within 10 business days of the imposition of a necessary infrastructure condition, give an ICN or amend an existing ICN to reflect whether an offset or refund applies and if so, the details of the offset or refund (s662(4) Bill).
The conversion application process raises the following issues:
- Development approval – The conversion application can only be lodged after a development approval takes effect. It cannot be commenced whilst an appeal is on foot for the development approval; presumably on the basis that any issue in respect of the status of the infrastructure will be resolved as part of the appeal.
- Decision criteria – If there is an interim period in which a regulation has not prescribed decision criteria relevant to a decision about a conversion application, consideration may need to be given to determining interim criteria to determine conversion applications.
Offsets and refunds for trunk infrastructure and development charge
Necessary infrastructure condition
The proposed capped framework requires a local government which has imposed a necessary infrastructure condition requiring the provision of trunk infrastructure, to take the following actions:
Additional payment condition
- Identification of an offset and refund – Unlike the current capped framework and previous uncapped framework, the local government must identify in the ICN the following:
- whether an offset or refund applies and if so the details of the offset or refund (s637(1)(f) Bill) which is to be calculated by reference to the establishment cost of the trunk infrastructure stated in the LGIP (s657(1)(b) Bill);
- the reasons for the decision (s637(2) Bill).
- Recalculation of the establishment cost for trunk infrastructure – Unlike the current capped framework and previous uncapped framework, the local government, where requested by an applicant, must recalculate the establishment cost of the trunk infrastructure using the method for working out the cost of the infrastructure in the charges resolution and amend the ICN accordingly (s657 Bill).
- Offset – The local government must offset the cost of the infrastructure against the amount worked out by applying the adopted charge (ss649(1) and (2) Bill).
- Refund – The local government must, if the cost of the infrastructure exceeds the amount worked out by applying the adopted charge, provide a refund to the applicant the timing of which is to be agreed with the local government (ss649(1) and (3) to (4) Bill).
The proposed capped framework also requires a local government which has imposed an additional payment condition requiring the payment of additional trunk infrastructure costs for development completely in the priority infrastructure area, to provide to the applicant a refund, the timing of which is to be agreed with the local government (s654 Bill).
The proposed capped framework, unlike the current capped framework and previous uncapped framework, provides that the amount of the refund is to be the proportion of the establishment cost of the infrastructure that (s649(3) Bill; cf s654(2)):
- Apportionment – may be apportioned reasonably to users of premises other than the subject premises; and
- Subject to levied charge – has been, is or is to be the subject of a levied charge.
The refund provisions for a necessary infrastructure condition and an additional payment condition raise a number of issues:
- Inconsistency – There are subtle differences in the drafting between the provisions the significance of which is hard to distinguish.
- Apportionment – The requirement to apportion the establishment cost between users and non-users of the subject premises, presents significant methodological difficulties and an additional administrative burden for local governments, given that the refund amount is to be stated in the ICN.
- Infrastructure subject to levied charge – The requirement for a refund to relate to infrastructure that has been, is or is to be the subject of a levied charge by the local government, would appear to limit a refund to only trunk infrastructure in the LGIP and not trunk infrastructure identified by a conversion application. However it is far from certain whether this was intended.
State infrastructure provider powers
A State infrastructure provider may impose a condition on a development approval (called a State-related condition
) for infrastructure or works to protect the operation of infrastructure associated with State-controlled road infrastructure, public passenger transport infrastructure, railways, ports and airports (s666 Bill).
A State-related condition cannot be lawfully imposed by a State infrastructure provider for any other State infrastructure such as education and emergency services. A local government also has no power to impose a condition for State infrastructure.
Local government reimbursement
A State infrastructure provider which has imposed a State-related condition may require a local government to reimburse the State infrastructure provider for levied charges for local government infrastructure which has been replaced by the State infrastructure the subject of the State-related condition (s669 Bill).
The proposed capped framework provides for arrangements for infrastructure agreements which are materially the same as the current capped framework and previous uncapped framework other than for the following changes:
- Public sector entity – A distributor-retailer is declared not to be a public sector entity (s627 Bill) with the following consequences:
- a distributor-retailer cannot enter into an infrastructure agreement under the SPA other than where a local government or other public sector entity is a party (s677 Bill);
- a distributor-retailer is not required to give a water infrastructure agreement it enters into under the SEQ Water Act to a local government (s673 Bill).
- Obligation to negotiate in good faith – A local government, other public sector entities, applicants and other entities have a non-justiciable obligation, where an infrastructure agreement is proposed, to negotiate the infrastructure agreement in good faith (s671 Bill).
The proposed capped framework provides for appeals to the Planning and Environment Court and a Building and Development Committee, which are materially the same as the current capped framework other than for the following matters:
- Infrastructure charges notices errors – An appeal is provided for in respect of the following errors in an ICN (ss478(2)(b), (c) and (3) and 535(2)(a), (b) and (3) Bill):
- the application of the adopted charge but not the adopted charge itself;
- the working out of additional demand for a development;
- a decision about an offset and refund but not the establishment cost of trunk infrastructure in the LGIP or the value of the infrastructure recalculated in accordance with the method in the charges resolution.
- Conversion application – An appeal is provided for in respect of a refusal or deemed refusal of a conversion application to convert non-trunk infrastructure to trunk infrastructure (ss478A and 535A Bill).
Policy implications of the proposed capped framework
Changed policy objectives
The policy objectives of the Bill are to:
establish a long-term local infrastructure planning and charging framework that is certain, consistent and transparent and which supports local government sustainability and development feasibility in Queensland.
The policy objectives of the Bill are substantially different to the following policy objectives of the current capped framework and previous uncapped framework (s625 SPA):
(a) to seek to integrate land use and infrastructure plans; and
(b) to establish an infrastructure planning benchmark as a basis for an infrastructure funding framework; and
(c) to establish an infrastructure funding framework that is equitable and accountable; and
(d) to integrate State infrastructure providers into the framework.
A comparison of the policy objectives of the proposed capped framework with the current capped framework and previous uncapped framework indicate the following:
- Accountability – The policy objectives of certainty, consistency and transparency of the proposed capped framework are encompassed within the broader accountability objective of the current capped framework and previous uncapped framework.
- Integration and equity – The policy objectives of local government sustainability and development feasibility of the proposed capped framework do not encompass the broader policy objectives of integration and equity of the current capped framework and previous uncapped framework and indeed relate only to the interests of local governments and developers without consideration of the interests of other stakeholders such as landowners.
- Economic efficiency – The policy objectives of the proposed capped framework, current capped framework and previous uncapped framework do not purport to address the broader policy objective of economic efficiency.
The proposed capped framework is likely to have significant public policy implications given that it does not adequately address the broader policy objectives of integration, equity and economic efficiency.
The proposed capped framework, like the current capped framework and previous uncapped framework, integrates land use and infrastructure planning reasonably well with the LGIP included in a local government planning scheme, being required to identify the following (s627 Bill):
- Priority infrastructure area (PIA) – The PIA within which 10-15 years of land for future growth for non-rural purposes is to be serviced by trunk infrastructure.
- Planning assumptions – The planning assumptions for residential and non-residential growth in the PIA.
- Plans for trunk infrastructure – The plans for trunk infrastructure which identify the establishment cost and indicative delivery timeframes for trunk infrastructure to service the PIA.
In this regard it is relevant to note that the Productivity Commission has previously recognised for the previous uncapped framework that in Australia "only Queensland's longer term indicative infrastructure delivery timeframes provide insights for town planners looking to make longer term planning decisions.
" (PC 2011:193)
The proposed capped framework, like the current capped framework, does not achieve the primary goal of an infrastructure charge; namely to ensure cost recovery for the provision of infrastructure by a local government.
The Local Government Association of Queensland has stated that under the current capped framework there is an estimated shortfall between infrastructure charges and the cost of providing infrastructure to new development of around $480 million annually (LGAQ 2013:ii).
The proposed capped framework, like the current capped framework, by imposing capped infrastructure charges, has in essence, prioritised accountability (in particular certainty) over cost recovery.
However no cost benefit analysis has been released by DSDIP to establish that the benefits arising from certainty exceed the $480 million annual costs for foregone infrastructure charges as well as the unquantified costs of social inequity and economic inefficiency associated with the proposed capped framework.
The proposed capped framework, like the current capped framework, therefore does not integrate infrastructure and land use planning with infrastructure funding as was the case with the previous uncapped framework; which admittedly also imposed additional costs arising from the uncertainty of that framework.
In this regard it is also relevant to note that the Productivity Commission has previously recognised, in relation to the previous uncapped framework, that "Brisbane/South-East Queensland was found to have the strongest links between budget funded initiatives and priorities outlined in their metropolitan and infrastructure plans.
" (PC 2011:192)
Basic policy objective
The basic policy objective of any infrastructure planning and charging framework must be to ensure the integration of land use, infrastructure and funding such that infrastructure is funded so that it can be constructed prior to or current with development to ensure that existing infrastructure networks are not overwhelmed by new demand.
The proposed capped framework and current capped framework are therefore unlikely to encourage this basic policy objective, given the lack of integration between infrastructure and land use planning and infrastructure funding.
The proposed capped framework also does not expressly or impliedly encourage the provision of infrastructure and serviced land in a manner which encourages equity.
In particular the proposed capped framework does not encourage the following:
- Horizontal equity – Those persons that benefit from infrastructure should be the persons that pay for the infrastructure (benefits principle). This clearly is not the case given that capped charges are calculated by means of an average cost approach.
- Vertical equity – Those persons that have the greater ability to pay should contribute more towards the cost of providing infrastructure than do those who have a lesser ability to pay (liability-to-pay principle).
In particular the proposed capped framework, like the current capped framework, encourages the following inequities:
- Inequity between developers – The developers of low cost development fronts (generally infill development undertaken by smaller entrepreneurial developers) will subsidise the higher cost development fronts (generally greenfield or brownfield development undertaken by larger institutional developers).
- Inequity between landowners – The landowners of lower cost development fronts (generally in infill locations) will subsidise the landowners of higher cost development fronts (generally in greenfield or brownfield locations).
The proposed capped framework, encouraging as it does horizontal and vertical inequities, is therefore likely to give rise to further issues of political unacceptability from landowners, smaller entrepreneurial developers and local governments in the short to medium term.
Economic efficiency issues
The proposed capped framework, to the extent that it does not provide for full cost recovery, does not encourage the economically efficient provision of infrastructure and serviced land.
In particular the proposed capped framework does not encourage economic efficiency in the following respects (IC 1993:102):
- Productive efficiency – The total average cost for infrastructure and serviced land should be minimised by developing land where the total environmental, social and financial cost of providing additional infrastructure and serviced land is the lowest. In general terms this is likely to be in locations near serviced land.
- Allocative efficiency – The price for infrastructure and serviced land should accordingly reflect the costs incurred in its provision and should not be distorted by taxes, subsidies or other measures. The price for infrastructure should therefore reflect its marginal cost; that is the cost of increasing the capacity of infrastructure to produce one more unit of service to satisfy demand, rather than its average cost.
- Dynamic efficiency – The infrastructure and serviced land to be provided in the short term should also impose over the long term, the least infrastructure cost, whilst providing the maximum amount of choice for development.
The proposed capped framework encourages non-rural settlement patterns which are not economically efficient and are likely to result in dead weight losses that will impose long term financial costs on State and local governments, smaller entrepreneurial developers and some landowners.
Productivity Commission assessments
The Discussion Paper which preceded the Bill for the proposed capped framework (DSDIP 2013) and the Report of the Infrastructure Charges Taskforce (ICT 2011) whose recommendations were implemented in the current capped framework, do not refer to or expressly consider the analysis of developer contributions undertaken by the Productivity Commission or the Henry Tax Review.
It is a concern that the public policy recommendations of the Productivity Commission and the Henry Tax Review have not been implemented in relation to the proposed capped framework and the current capped framework. The following recommendations of the Productivity Commission and the Henry Tax Review are relevant:
Recommendation 7.1 –
- 1993 Report on Taxation and Financial Policy Impacts on Urban Settlement:
- Charges should, wherever possible, reflect any significant locational differences in the costs of providing urban infrastructure. Where they cannot do so, they should at least seek to avoid systematic locational bias (ch B3, s3.4 IC 1993).
- While it is necessary to charge explicitly for costs that are common to all developments to transmit efficient location incentives within cities, cost recovery is desirable for reasons of efficient resource management and decision making in relation to the provision of new infrastructure (ch B3, s3.5 IC 1993).
- 2004 Inquiry Report on First Home Ownership:
Developer charges (and charging for infrastructure generally) should be:
Recommendation 7.2 –
- necessary — with the need for the services concerned clearly demonstrated;
- efficient — justified on a whole-of-life cost basis and consistent with maintaining financial disciplines on service providers by precluding over-recovery of costs; and
- equitable — with a clear nexus between benefits and costs, and only implemented after industry and public input(PC 2004:177).
Investments in items of social or economic infrastructure that provide benefits in common across the wider community should desirably be funded out of borrowings and serviced through rates, taxes or usage charges.
Charges are more likely to satisfy the above principles if the processes for establishing and applying them are sound and transparent. Further, efficiency would be enhanced if charging regimes provide developers with some flexibility in the timing of developments and the design of the infrastructure (PC 2004:177).
Recommendation 7.3 –
Authorities and utilities imposing developer contributions and charges should:
The Commission recognises that these principles and practices ostensibly apply already to much existing charging for housing-related infrastructure. There is also substantial regulatory oversight of the charging practices of utilities. However, especially at the local government level, current practice provides scope for improvement (PC 2004:177).
- follow guidelines based on principles set out in recommendations 7.1 and 7.2 and be subject to independent regulatory scrutiny;
- provide for ‘out of sequence’ development if developers are prepared to meet the cost consequences;
- be open to proposals for alternative infrastructure arrangements that meet the needs of the households concerned;
- allow appeals on the amounts charged, or their coverage; and
- be accountable for how money raised from charges is spent.
Recommendation 70 –
- 2009 Australian Future Tax System (Henry Tax Review):
COAG should review infrastructure charges (sometimes called developer charges) to ensure they appropriately price infrastructure provided in housing developments. In particular, the review should establish practical means to ensure that these charges are set appropriately to reflect the avoidable costs of development, necessary steps to improve the transparency of charging and any consequential reductions in regulations.
Broadly, the appropriate allocation of capital costs hinges on the extent to which infrastructure provides services to those in a particular location relative to the community more widely. The Commission has previously enumerated the following principles:
- 2011 Performance Benchmarking of Australian Business Regulation: Planning Zoning and Development Assessments:
- use upfront charging to finance major shared infrastructure, such as trunk infrastructure, for new developments where the incremental costs associated with each development can be well established and where such increments are likely to vary across developments. This would also accommodate ‘out of sequence’ development
- infill development where system-wide components need upgrading or augmentation that provide comparable benefits to incumbents, this should be funded out of borrowings and recovered through rates or taxes (or the fixed element in periodic utility charges)
- for local roads, paving and drainage it is efficient for developers to construct them, dedicate them to local government and pass the full costs on to residents (through higher land purchase prices) on the principle of beneficiary pays
- for social infrastructure which satisfies an identifiable demand related to a particular development (such as a neighbourhood park) the costs should be allocated to that development with upfront developer charges an appropriate financing mechanism
- for social infrastructure where the services are dispersed more broadly, accurate cost allocation is difficult if not impossible and should be funded with general revenue unless direct user charges (such as for an excludable service like a community swimming pool) are possible (PC 2011).
- 2014 Public Infrastructure Draft Report:
- Developer contributions are up-front contributions that property developers are required to make to infrastructure associated with the land they develop. … This has been a contentious issue because many infrastructure costs previously recovered over time from home owners through utility charges and council rates are now recovered up-front from developers. However, such a shift can be justified on economic grounds. It gives developers an incentive to take account of a wider range of infrastructure costs when deciding where and how to develop land, which could facilitate more efficient provision of housing and associated infrastructure (Henry et al. 2009; PC 2004) … (PC 2014:147-148).
- In principle, developer contributions should only be made to the extent that infrastructure is attributable to the properties being developed. This is straightforward for infrastructure that is clearly related to a developed property, such as that linking a property to a local network. It is less straightforward for networked infrastructure shared with other developments, such as water mains. Ideally, the incremental cost attributable to each property would be reflected in developer charges. For social infrastructure that provides broad-based benefits to the community, such as a library, government funding from a broad-based revenue source can be more appropriate than developer contributions. The principle of apportioning only attributable costs to developers has been embodied in legislative arrangements in New South Wales, Queensland, Western Australia and Tasmania (PC 2014:147-148).
The state government's proposed capped framework also does not take into account the recommendations of the Commonwealth Commission of Audit in relation to the financing of infrastructure or the fiscal strategy of the 2014 Commonwealth Budget released on 13 May 2014.
The Commission of Audit provides the following recommendations in relation to the role of government, in particular the Commonwealth government, in financing infrastructure:
The Commission’s Phase One recommendations on addressing the degree of vertical fiscal imbalance within the Federation propose that the States have access to the personal income tax system so they are in a better position to fund their own priorities including infrastructure. In this situation, the need for separate tied funding from the Commonwealth for infrastructure will diminish.
Recognising that reforms to the Federation will take time to develop and implement, the Commission recommends in the interim that existing infrastructure funding arrangements between the Commonwealth and the States be consolidated, with:
a. a single funding pool to be set aside and available for allocation to the States on a formulaic basis, including appropriate funding for maintenance and disaster mitigation with the Commonwealth having no involvement in project selection;
b. eligibility for access to the funding pool would be conditional on each State having in place robust project evaluation and governance processes including cost benefit analyses that meet relevant criteria set by the Commonwealth;
c. Financial Assistance Grants paid to local governments for local roads and made through the States should be included in this arrangement; and
d. as part of the consolidation, the Government should reconsider whether the Nation-building Funds should be maintained in their current form or instead rolled into the single funding pool.
As envisaged by the Commission of Audit, the 2014 Commonwealth Budget sets the groundwork for a renegotiation of Commonwealth and State financial arrangements in relation to the funding of economic and social infrastructure.
Whilst most attention has focused on the impact on individual incomes of short term fiscal measures to reduce welfare entitlements and increase taxes, it is the medium term fiscal strategy that will ultimately determine long term incomes.
The medium term strategy involves redirecting existing spending from entitlements and future expenditure on social infrastructure, in particular schools and hospitals, to economic infrastructure, in particular, transport infrastructure.
Relevantly, the Budget is intended to deliver $50 billion of expenditure on economic infrastructure, comprising some $40 billion of already committed funding together with a $11.6 billion Infrastructure Growth Package, which is estimated to contribute to $125 billion of additional infrastructure adding approximately 1% to gross domestic product (Cth Budget 2014).
However, the investment in economic infrastructure of National interest has been at the expense of Commonwealth grants for social infrastructure to Queensland state and local governments. In particular:
- Federal Assistance Grants – The Commonwealth has reduced the Federal Assistance Grants to Queensland local government by some $182 million by removing the indexation of the grants to take account of inflation and population increases (LGAQ 2014).
- State government grants – The Commonwealth has also significantly reduced grants to the State government for health and education by cancelling some existing arrangements and limiting the indexation of grants to the consumer price index rather than medical inflation costs which are generally about two to three times higher than normal inflation rates (Nicholls 2014).
The reduction in grants for social infrastructure to Queensland State and local governments will inevitably result in a reduction of the funding and delivery of economic infrastructure by State and local governments. This raises further policy concerns as to the appropriateness of the proposed capped framework which will further constrain the funding and delivery of development infrastructure by local governments.
Reforms similar to current capped framework
The proposed capped framework is not significantly different to the current capped framework.
The proposed capped framework seeks to improve the current capped framework by introducing reforms principally for the administration of offsets and refunds for the provision of work and financial contributions for trunk infrastructure.
In particular the proposed capped framework introduces the following reforms:
- Identified offsets and refunds – A local government must identify an offset and refund in an ICN.
- Recalculation of the cost of infrastructure – A local government which is requested by an applicant, must recalculate the establishment cost of trunk infrastructure in accordance with the method for working out the cost of trunk infrastructure in its charges resolution consistent with the parameters identified by the Minister.
- Conversion of non-trunk infrastructure – A local government which receives a conversion application must consider whether to convert a non-trunk infrastructure contribution to trunk infrastructure.
- Appeals – An applicant is given appeal rights to review a local government decision in respect of an offset and refund (other than a recalculation decision) and a conversion application.
Impact of proposed capped framework
The proposed capped framework will impose the following additional financial costs on local governments:
- Administrative costs – The cost of the determination of ICNs, recalculation requests, conversion applications and appeals; albeit these costs can be recovered by a local government through a review of its cost-recovery fee schedule.
- Reduced levied charges – The cost of the reduction of levied charges from higher offset and refund values; estimated by the LGAQ as being in the vicinity of $480 million annually.
That said, the proposed capped framework does provide greater certainty for developers. It will reduce the cost of the administration of an offset and refund for developers and, on balance, is likely to be less costly to administer than the current capped framework.
Enduring policy issues remain
Whilst the proposed capped framework does provide a net improvement on the current capped framework, it has not addressed the more fundamental and enduring public policy issues of lack of integration, inequity and economic inefficiency associated with the current capped framework and which the previous uncapped framework had purported to address, consistent with the recommendations of the Productivity Commission.
It is therefore unlikely that the benefits of the proposed capped framework in terms of increased certainty will be outweighed by the financial cost of some $480 million of under-recovered infrastructure charges and the unquantified costs of likely social inequity and economically inefficient settlement patterns. This is especially the case given the further annual reduction of $182 million in grants to local governments and the much more significant reductions in grants to the Queensland government resulting from the 2014 Commonwealth Budget.
Furthermore the financial impacts on local governments, landowners and entrepreneurial developers is likely to give rise to further political unacceptability in the short to medium term.
Further policy review inevitable
In conclusion, whilst the Queensland government is to be congratulated for improving the current capped framework, the proposed capped framework is clearly inconsistent with the policy principles for developer contributions recommended by the Productivity Commission and does not take account of the proposals for reform of Commonwealth and State financial arrangements for infrastructure outlined in the Commission of Audit and the fiscal constraints imposed on Queensland state and local governments by the 2014 Commonwealth Budget.
It is therefore very unlikely that we have heard the end of infrastructure charges reform in Queensland with the result that future reform in the short term is inevitable.
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