A time to change: major development contributions planning reform

Summary

In this briefing, SGS Economics & Planning’s Luke Nicholls provides an outline of the key changes to the development contributions system in NSW as a result of the State government accepting all 29 recommendations for significant reforms to the infrastructure contributions system made by the NSW Productivity Commissioner.
This briefing is intended as a high-level overview for local government on key areas of reform being pursued by the NSW Government. These reforms are important for local governments and their ability to manage growth, and provide infrastructure and facilities, which are the foundation for creating livable communities.
In general, governments have introduced a number of value capture-style levies to assist in funding State government infrastructure and transport provision, as well as simplifying the user-pays approaches for local contributions, particularly through revision to the s.7.12 flat rate levy. However, there is also a narrowing of the use of contributions by the wider application of the essential works list, limiting what s.7.11 contributions can be used for, and further restrictions on local council flexibility in the use of voluntary planning agreements.
The use of development contributions for social infrastructure (such as affordable housing) has also been left hanging, with a further review being proposed.
Overall, the reforms provide opportunities for local governments through greater simplicity and certainty through flat-rate charges, and integration with the IP&R framework under the NSW Local Government Act. However, there is less of a focus on achieving economic efficiency through using contributions as a price signal that influences the location of development.
This briefing is important for local government leaders and policymakers, not just those professional officers involved directly in development contributions planning, financial management and delivery. It is also relevant for local councils around Australia as an example of contemporary planning-system reforms around the use of development contributions to fund infrastructure.
LGiU Australia will be preparing a series of briefings on this topic, including more technically-focused briefings on the opportunities and challenges for local government in implementation of the Productivity Commissioner’s recommendations.

Briefing in full

The NSW Government has accepted all 29 recommendations for significant reforms to the infrastructure contributions system made by the NSW Productivity Commission in a report late last year.

“Solving the uncertainty of infrastructure contributions was one of four pillars of our Planning Reform Action Plan. That’s why we’re adopting the Productivity Commission’s recommendations in full to build a more timely, transparent and certain planning system”, announced the NSW Planning Minister

The 29 recommendations address many areas of the contributions planning system in NSW, affecting both State and Local Government funding from growth and development towards the provision of infrastructure and facilities.

Previous LGiU Australia briefings on this topic include:

Overview of key recommendations accepted by NSW Government

Key reforms that should be emphasized as being of particular interest to local government include the following:

Introduction of a direct land contribution mechanism to improve both efficiency and certainty for funding land acquisition – amendments to legislation are proposed to introduce a direct land contribution mechanism to apply a statutory charge on the land at the time of rezoning that requires land contribution be made. This contribution is to be paid on sale of the land, or subdivision development application (whichever comes first).
Limiting contributions plans to ‘essential works’ for development-contingent costs only – this will apply the essential works list (currently applicable to contributions plan that exceed the cap, to all section 7.11 contributions plans. The Government proposes that IPART review the current essential works list and work with DPIE to provide further advice on the best approach to considering efficient infrastructure design and application of nexus.
Encouraging councils to forward fund infrastructure, through borrowing and pooling of funds – this will involve amending legislation to allow the pooling of contributions funds as the default option, and that interest costs associated with borrowing for infrastructure to be collected through a contributions plan. Councils will be incentivised to borrow to forward fund infrastructure, including by the Treasury Corporation reviewing their lending criteria to consider allowing capital grants and contributions (including infrastructure contributions) to be included in debt serviceability calculations, and establishing a program to provide an additional financial incentive when councils borrow to build infrastructure.
Increasing the maximum allowable rate for section 7.12 fixed development consent levies – through amending the maximum rate for section 7.12 contributions to be $10,000 per additional dwelling for houses (detached, semidetached, and townhouses), $8,000 per additional dwelling for all other residential accommodation, $35 per square metre of additional gross floor area (GFA) for commercial uses, $25 per square metre of additional GFA for retail uses, $13 per square metre of additional GFA for industrial uses. The final rates subject to confirmation and indexing the contribution rates will be quarterly using the Producer Price Index (Road and Bridge Construction – NSW).
Restrict planning agreement use to be consistent with identified principles – this will embed the principles into the contributions system so that planning agreements are restricted to use for the delivery of infrastructure to support development that is out-of-sequence or unexpected, or to facilitate the direct delivery of development-contingent infrastructure or impact mitigation works.
Adopt regional (state) infrastructure contributions – involving the preparation and implementation of State contributions for Greater Sydney, Central Coast, Hunter, and Illawarra-Shoalhaven regions. The Greater Sydney region charges are proposed as $12,000 per dwelling for houses (detached, semi-detached, and townhouses), $10,000 per dwelling for all other residential accommodation, $10 to $15 per square metre for industrial, $20 to $30 per square metre for commercial, $30 to $40 per square metre for mixed uses. For the Central Coast, Hunter and Illawarra-Shoalhaven regions charges are proposed as $10,000 per dwelling for houses (detached, semi-detached, and townhouses, $8,000 per dwelling for all other residential accommodation, $10 to $15 per square metre for industrial, $20 to $30 per square metre for commercial, $30 to $40 per square metre for mixed uses. These contributions will be subject to no substantial impacts on feasibility.
Adopt a new transport contribution for major projects – a transport contribution for major projects will be prepared that is in addition to regional infrastructure contributions and applies to properties within a service catchment that has additional development capacity created as a result of that transport investment. DPIE and Transport for NSW will undertake further work to determine the level of the charge to be levied on future rezoning of land, having regard to development capacity, feasibility, and cumulative impact of development contributions. A minimum charge of $5,000 per dwelling is envisaged.
Creating a new category in a contributions plan specific to biodiversity – this will create a new contribution category under the EP&A Act for biodiversity offsets.
Allowing Councils’ general income to increase with population – subject to review by the Independent Pricing and Regulatory Tribunal, it is proposed to reform the local government rate peg to allow Councils’ general income to increase with population.
Incorporate the local infrastructure contributions system into the Integrated and Performance Reporting Framework – by updating the Integrated and Performance Reporting guidelines to require local governments to include infrastructure contribution plans in their reporting,, to review their infrastructure contributions plans by 1 July 2024 (and every four years thereafter), and to align with their delivery program.

The reform implementation will be based on a roadmap for rollout, captured in the graphic below:

Source: Infrastructure Contributions Reform Roadmap – March 2021 (nsw.gov.au)

Discussion of the key reforms to development contributions system

From a State infrastructure contributions perspective there are several proposed major reforms, particularly the introduction of value capture mechanisms.

The first of these is the establishment of a mechanism to capture part of the uplift in land value resulting from transport investment and rezoning, with a transport infrastructure charge to be identified for development in a service catchment where major transport infrastructure investment and increased development capacity is proposed.

The other reforms for State government contributions are in the development of Regional Contributions (including Greater Sydney Region) that would allow for more consistent application than the current Special Infrastructure Contributions (SICs), and that are variously applied to specific areas. These will be at a flat rate for each identified Region. The direct land contribution mechanism has also been established, introducing a statutory charge when land is rezoned, which may also assist in ensuring that land is provided for transport corridors and open space in greenfield areas.

From a local contribution perspective, a key issue will likely be the restriction of the types of infrastructure and facilities that feature on the ‘essential works’ list (to be reviewed by IPART), and the resulting limiting of the use of development contributions. More positively, the changes to the application of the flat rate s.7.12 levy (which is administratively simple to apply and manage) may lead to an improved funding environment for infrastructure and facilities, to support infill development in urban established and low-growth areas. While the retention and increase of the s.7.12 levy (in essence a development licence fee) is positive, the flat-rate application allows for simplicity but leads to a less equitable application than the percent-rate application on the value of development approach.

The restriction in flexibility for the use of Voluntary Planning Agreements will also potentially have an impact on their use by local governments – for example, they will not be able to be used in negotiating an affordable housing contribution based on a council’s affordable housing policies.

The potential changes to the rate-pegging approach to allow Council’s general income to increase with population growth, will be important to consider in greater detail, as will be the encouragement of the use of forward funding of growth infrastructure and use of debt financing (which may promote greater intergenerational equity but may lead to concerns due to the risks associated with predicting rates of development-related income). Linking the EP&A Act development contributions system into the Local Government Act IP&R approach will lead to better integration overall in what can be a disconnect currently between management of growth infrastructure and contributions funding from strategic asset management and resourcing planning.

Finally, the reforms leave the position of affordable housing contributions from development in NSW (with schemes under SEPP 70) hanging, with plans to “undertake a future evaluation of section 7.32 affordable housing contribution programs to determine their effectiveness and efficiency”.

The reforms have implications for broader local government financial sustainability. There will also be an important policy question of balancing ‘who pays’ for growth infrastructure, and whether local governments support greater expectations on ratepayers and local communities to pay more, over time, for growth infrastructure – as opposed to more-upfront approaches where developers fund infrastructure as a cost on development.

A number of these topics will be the subject of more detailed analysis in future briefings.

Comment

The reforms endorsed by the NSW Government go well beyond regulatory tinkering or evolving the current development contributions planning system, and include some major initiatives for funding local and state infrastructure and facilities, pursuing value capture, as well as greater simplicity using flat-rate charges.

However, at the same time there are elements (such as the wider application of the essential works list from IPART, and the narrowing of the use of voluntary planning agreements) that will constrain local government budgets further than what can currently be funded by development contributions.

Notwithstanding, there are many opportunities for local governments in the reforms – including elements that will simplify the use of contributions using flat rate charges, achieving better integration with local council IP&R frameworks under the Local Government Act, as well as engaging with longstanding issues around rate-pegging impacts on local council financial sustainability and the use of debt finance for forward funding growth infrastructure.

Related Australia briefings include:

For more information on this briefing contact LGiU Australia by emailing mzierke@sgsep.com.au