The need to enable Enabling Infrastructure

During May 2022 we distributed a survey to 44 local councils in NSW asking them a range of questions related to infrastructure contributions in NSW. The intention of the survey was to obtain direct responses from those responsible for the management of infrastructure contributions within council on how they are dealing with issues under the following broad categories:

1. NSW Government's reforms to infrastructure contributions
2. Challenges in forward funding enabling infrastructure
3. Council's administration of infrastructure contributions

 
The survey covered Councils in a range of growth settings and locations; we heard from metropolitan high growth Councils in both infill and greenfield settings, high growth regional Councils, as well as regional Councils that face a different set of challenges due to low population growth.
 
Our last article (here) looked at Council’s responses to questions related to the proposed infrastructure contributions reforms. Even though the reforms have been watered down by changes to the essential works list being placed in limbo and the wasted potential of the LVC, our survey showed they will still have a high impact on most Councils and require significant resources to implement. There are also signs that some Councils are delaying projects until they have certainty around the reforms.
 
This article is part 2 in our series reviewing results of the survey and will look at the ‘enabling infrastructure’ section. 

---

 
Providing lead-in, or enabling infrastructure (roads, basins), early in new release areas with fragmented land ownership patterns serves a crucial purpose in kickstarting development and unlocking new housing supply. Meanwhile, in an infill setting where a Council has an adopted contributions plan to provide new social infrastructure to accommodate population growth, quite a bit of angst can arise if Council does not acquire land to deliver the facilities on time.

A key concern in these situations is ensuring there is forward funding available to Council to complete the required land acquisitions. This has been a problem for Councils in NSW and it is not something Councils think will be solved by the reforms.

​With the reforms not helping faster delivery of enabling infrastructure, here is what the Councils believe are the barriers to forward funding infrastructure under the current system. 

It has long been a well-accepted fact amongst contributions practitioners that what a contributions plan collects for a project and what it costs to actually put the project on the ground are two very different numbers. This shouldn’t be the case but a multitude of reasons like inept indexation methods for works, and inaccurate land values which don’t represent actual costs have been a fixture of contributions plans for a long time.
 
What is actually needed to fix the forward funding problems, (or to enable enabling infrastructure)? A very high-level breakdown should look something like this:

1. Get sufficient contributions, early.
2. If contributions cannot be collected early, borrow.
3. To not spend significantly more than the anticipated land acquisition cost.

 
Get sufficient contributions, early
 
The Productivity Commissioner set out to help Councils in getting the contributions early by proposing a new Land Value Contribution (LVC) which would get the land to Councils at the time of sale or development (getting the land to Councils early) and any monetary contribution would be based on the sale price of the land or a bespoke valuation (to provide Councils adequate funding).
 
However, the model for LVC that was eventually exhibited was inadequate, which meant the PC’s intention is not going to be fulfilled. This way, the primary mechanism in the reforms for allowing faster delivery of enabling infrastructure has been bought to ground. Although there were a few things off with the LVC proposal (for e.g. heritage and constrained land that wouldn’t be making a contribution being counted as part of the contributions area), in my opinion, the major issues were the 20% cap on contributions and using the Valuer General’s land values as a method for calculating the contributions.
 
How can this be fixed?
 
It is imperative that the state government rework the proposed LVC model. The 20% cap on LVC should be removed; if planning authorities have approved a higher than 20% proportion of public land in a rezoning area that demonstrates efficient design, why should the land contribution be capped at 20%?
 
The other important change to the LVC would be to use a land valuation source other than the Value General’s land valuations, which are well known to be off the mark, as a method to value land in the land value contribution area. A more sensible proposition would be to use the following:

1. The sale price, if the contribution is paid at sale of the land, or
2. In all other cases, a precinct specific valuation of the land, prepared by a suitably qualified land valuer at the time of the rezoning and indexed at regular intervals using a custom land value index prepared for the area by a suitably qualified consultant.

 
There may be some valuations differences between englobo land valuations and market values once development has significantly progressed, however, these are not pertinent to our setting of early land acquisitions for enabling infrastructure.
 
A more attractive LVC could also be used as a carrot for Councils to put an adequate land acquisition program into place for a new release areas. Would it be too harsh if the LVC is only made available to Councils who have prepared and/or exhibited such a land acquisitions program?
 
If contributions cannot be collected early, borrow
 
The LVC is only proposed to be adopted for new release areas, which still leaves a fair amount of greenfield land that needs to be acquired by Councils under the current contributions arrangements.
 
Given all the challenges Councils face in forward funding infrastructure, it is hard to justify their response to our next question:

For those not familiar with the initiative, the NSW government offers low interest loans to Councils, with the option to recoup interest costs via Contributions Plans, where applicable. Councils are able to use the loan to fund enabling infrastructure in areas where sufficient contributions have not been collected.
 
The application process for the loans is managed by Treasury and it can be intensive. Furthermore, the methodology to recoup interest needs to be approved by IPART where the plan collects contributions above the applicable cap in the area. Nevertheless, it is fair to say that the importance of providing enabling infrastructure in rezoning areas, particularly areas with fragmented land ownership, means these low-cost loans should be a more widely used tool for Councils.
 
Furthermore, the state government should not be releasing Growth Areas until there is a comprehensive plan, endorsed by all levels of government and the industry, to fully fund, stage and sequence the delivery of infrastructure and utilities to support growth.

However, this process is more complicated than we can afford to explore in this article. For e.g. Councils can only borrow funds for the infrastructure land but they maybe forced to acquire larger parcels that contain the land. We will take an in-depth look into this issue in a future article. 
​
How can this be fixed?
 
Councils in rezoning areas, particularly those with significant portions of fragmented land ownership, should be required to provide an ‘enabling infrastructure delivery program’ prior to the rezoning. This program should be backed by a cashflow analysis prepared by Council with consideration to the development staging, works in kind opportunities and Council’s infrastructure delivery timeline.
 
Councils should be encouraged to fund any shortfalls identified during this process with low-cost loans from the state government.
 
To not spend significantly more than the anticipated land acquisition cost
 
Even if a new, well-functioning, LVC has been adopted, the Council has prepared a program of land acquisition, and borrowed to fund the gap between contributions income and acquisitions costs, the reality is that many Councils will not be able to complete acquisitions efficiently.
 
Why? Just Terms Compensation Act 1991.
​
A major factor contributing to the under collection of contributions for the purposes of land acquisition is the significant additional costs encountered when an acquisition must be completed via the Just terms Act. Although most Councils will collect an allowance for Just Terms acquisitions as a percentage of the total land costs in the plan, it is of no use in the early stages when enabling infrastructure needs to be delivered, because little to no contributions have been collected under the plan.
 
Notwithstanding, the allowances IPART has approved for Just Terms acquisitions in contributions plans significantly underrepresent what the additional cost can be in fragmented ownership release areas.
 
The importance of landowners having a recourse to avoid unfair acquisition practices from governments should not be understated. However, it appears, at present the Just terms mechanism is unduly biased towards the landowners in the case of contributions plans acquisitions.
 
Only 9% of the Councils we surveyed were against any modification to the Just Terms Act, although most were unsure of what these modifications might be (hence the high ‘other’ response).

Is it too unreasonable to ask why the Just Terms Compensation Act even applies to contributions plans acquisitions? Is it not enough that the contributions plan has been prepared in accordance with legislation, has been exhibited to future landowners and developers, and then been scrutinised and approved by IPART?
 
But that could be a very hard political sell.
 
How can this be fixed?
 
A more sensible approach to resolving disagreements between governments and landowners over the value of the land identified for acquisition under a contributions plan would be to scale back the Valuer Generals’ involvement to the following simple steps:

1. In case of a complaint to the VG by a landowner or a Council, the VG will appoint a land valuer to conduct an independent valuation of the subject property.
2. Council will be required to pay the landowners cost where the independent valuation is closer to the valuation presented by the landowner.

 
More to come
 
We have still got more responses to present from our survey to Councils. The next piece in the series will look at more problems with infrastructure contributions in NSW and just how severe they are for Councils.
 
If you have a question about our survey or some feedback on the discussion in this article, please feel free to get in touch with me.
 
Suyash Pareek (0452030400)
Director, NXS Planning
[email protected]