Public Sector

Development Contributions Review and Allocative Efficiency

Government is reviewing the regime for development contributions and now is the time to have your say.

The recently released Development Contributions Review: Discussion Paper from the Department of Internal Affairs uses the intriguing term, "allocative efficiency". The Paper, which calls for feedback by 15 March 2013, defines the term as:

"Employing the least cost combination of inputs for a given level of output. Optimal allocative efficiency is sometimes referred to as the point where no one could benefit further without someone else being worse off."

Minister's Comments

The definition neatly illustrates what an efficient and fair development contribution regime might hope to achieve in relation to the funding of capital infrastructure. In his introduction to the paper the latest Minister of Local Government, the Hon. Chris Tremain, asserts:

"New Zealanders rightly expect that good quality infrastructure such as water, sewerage, drainage, roading, and reserves will be available from the day they move into their new house or business premises."

Apparently inevitably, he then goes on to link infrastructure costs to housing affordability. The Paper draws on the Productivity Commission Housing Affordability Inquiry from March last year, the suggestion being that the development contribution regime is contributing to housing costs being greater than otherwise necessary. This nicely balances the oft repeated refrain of developers that it is the tight planning controls on making land available for residential development that is driving house prices upwards. No doubt there is some truth to both statements, but it is worth noting that development contributions contribute 4% of the cost of building a 145m2 dwelling in Auckland according to the Discussion Paper.

The Minister goes on to say:

"In my view the current development contributions regime is complex, difficult to understand, and has been applied inconsistently. It is high time for a review."

No argument there. He goes on:

"The purpose of this review is to ensure that the way we finance infrastructure is appropriate to meet future demands and does not have undue impact on growth or housing affordability."

Whatever the reasons for the review, there is little doubt that the development contributions regime in the Local Government Act 2002 (LGA'02) has been a source of frustration to both territorial authorities and developers. The review is welcome. However, those involved in development on both sides of the fence will need to examine this Paper carefully and to contribute their own ideas if they want the current, rather muddled, application of the legislation to improve.

Themes and Issues

The Paper examines five general themes and ten related issues.

1. The impact on housing affordability:

  • Issue 1: High development contribution charges can raise the purchase price of land and housing;
  • Issue 2: The timing of development contribution payments can increase the price of sections and houses; and
  • Issue 3: Lack of incentives within the current development contribution system for smaller or more affordable housing.

2. Variability and inconsistency:

  • Issue 4: Variability and inconsistency in the use of development contributions means charges are unpredictable and raises questions around fairness and transparency;
  • Issue 5: An unclear purpose, fragmented structure and unclear wording, combined with a lack of up to date guidance may be contributing to variable and inconsistent territorial authority use of development contributions; and
  • Issue 6: The ability to use development contributions to help recoup costs of meeting increased demands on infrastructure is not consistent across all providers of infrastructure.

3. Fairness and equity:

  • Issue 7: The types of infrastructure for which development contributions are charged, and the way in which charges are apportioned can be unfair and create inequities through not properly recognising benefits to the wider community; and
  • Issue 8: Aggregation of developments of different sizes, characteristics and locations in development contribution policies does not reflect the actual demand on services and can result in inequities through under or over charging.

4. Complexity and efficiency:

  • Issue 9: The amount of detail and effort put into development contribution policies can result in increased complexity and reduced transparency without a commensurate increase in accuracy and fairness of outcome.

5. Dispute resolution:

  • Issue 10: Current challenge and dispute resolution mechanisms are expensive and time consuming, or lack transparency.
  • Those responding to the Discussion Paper need not necessarily accept the premises behind each of the issues. It may also be that not all themes and issues have been addressed.

There is, for example, discussion around the impact on housing affordability, but insufficient recognition of the fact that as long as infrastructure is required it has to be paid for, and that ultimately it is always the end user who will pay, whether through rates, section costs, or other mechanisms. In a sense, endeavouring to shift the initial burden of infrastructure cost is a bit like rearranging the deckchairs on the Titanic.

Another issue not sufficiently addressed is, who acts as banker? Whilst the issue of timing of development contributions is discussed, with particular reference to providing relief to developers, there is no recognition of the fact that as long as development contributions (or for that matter any other form of development levy) remain unpaid, it is the territorial authorities who bankroll development. Despite the LGA'02 providing for a development contribution to be levied when resource consent is granted, in the case of subdivisions the most common scenario is that developers do not pay until such time as a section 224(c) certificate is required. In extreme cases this can be up to eight years after the date of consent.

Possible Solutions

As well as addressing the themes and issues of part of the Paper, submitters will no doubt want to comment on the solutions on offer. Some of these are indisputably useful. There are others submitters may not find acceptable. The following 14 options are addressed in the paper as solutions to address the issues discussed above:

  1. Updated and improved guidance for territorial authorities..
  2. Consolidation and clarification of development contribution provisions.
  3. Explicit discounts enabled for housing of a type and location that creates less demand for services.
  4. New purpose and principles provisions for development contributions.
  5. Facilitating increased private provision of infrastructure through enhanced developer agreements.
  6. Tightening the range of infrastructure that can be funded from development contributions.
  7. Changing the timing as to when development contributions can be charged.
  8. Capping of development contributions at a set dollar amount.
  9. Independent dispute resolution hearings.
  10. Reinstatement of appeals to the Environment Court.
  11. Regulations to promote greater consistency in development contribution approaches.
  12. Percentage based infrastructure levy as a financing tool.
  13. Abolition of development contributions as a financing tool.
  14. Infrastructure bonds as an alternative financing mechanism.

Each of these options is addressed in the Discussion Paper, with examples of current use. As you go down the list it reflects an increasing degree of deviation from the current regime. Although we suspect everyone would support improved guidance on, and consolidation and clarification of the legislation, the other options will be problematic to some degree. This will of course depend on whether they are considered from the point of view of a territorial authority, a developer, or someone who aspires to own a new home.

Tempting though it is to enter into the debate about the proposed solutions, as a practitioner in the area we will refrain from doing so. However, we will wholeheartedly support any moves to clarify and streamline the application of the current legislation.

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Public Sector, Environment & Resources

The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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