Posted on December 10, 2020 by Lindsay Taylor 14

NSW Productivity Commission Publishes Final Report on Review of Infrastructure Contributions System

On 3 December 2020, the NSW Productivity Commission released its final report on its review of the infrastructure contributions system in NSW (Review), entitled Review of Infrastructure Contributions in New South Wales – Final Report (Final Report).

Following on from the State Government’s announcement of reforms to improve the planning system in November 2019, the impetus for the Review was a request made in April 2020 by the Minister for Planning and Public Spaces, the Hon. Rob Stokes MP, for the NSW Productivity Commissioner, Peter Achterstraat AM, to conduct a comprehensive review of the State’s infrastructure contributions system, and to report back with recommendations for reform.

The Review sets out a reformed infrastructure contributions system that is claimed to be simple, transparent, predictable and certain, efficient, consistent and fair.

For those who do not have the opportunity or time to read the Final Report (which is nearly 150 pages in length), we set out below an outline of the Review process, and the key findings and recommendations contained in the Final Report.

Review Process

The Review comprised 3 phases, being:

• the publication of an Issues Paper on 8 July 2020 identifying initial principles and key issues with the existing infrastructure contributions system, and inviting public submissions until 5 August 2020 (a total of 87 written submissions were received and are published on the NSW Productivity Commission’s website here),
• consultation with stakeholders and others about issues with the existing infrastructure contributions system  (stakeholders included State government agencies and Stated-owned corporations, local councils and representatives, industry groups, property development groups, community groups, environmental groups, individuals and academics), and
• the publication of the Final Report, including final recommendations, informed by feedback provided through the extensive public consultation process, and data and economic modelling of potential options for reform.

Terms of Reference

The Terms of Reference for the Review required the NSW Productivity Commissioner to:

• review the existing infrastructure contributions system to determine if it meets the objectives of certainty and efficiency while delivering the public infrastructure required to support development,
• make recommendations for reform aimed at delivering a principles-based system that delivers the infrastructure required to accompany growth, and
• identify legislative and regulatory changes necessary to implement the proposed reforms.

‘Development contributions’ under Division 7.1 of the Environmental Planning and Assessment Act 1979 (EPA Act) (local infrastructure contributions, special (State) infrastructure contributions and voluntary planning agreements) were the major focus of the Review. However, the Terms of Reference also provided that the Review should:

• consider the relationship to and impact of other charges and levies relating to the development process,
• be complementary to broader reforms to the planning system, and
• coincide with improvements led by the Department of Planning, Industry and Environment.

The Final Report recognised that, in placing additional stress on the State government’s budgetary position at present and moving forward, the Review was impacted by factors including the COVID-19 pandemic and the national recession.

In developing the proposed reforms, the Review also considered two recent local government reviews, including the NSW Auditor-General’s 2020 report examining 4 local councils’ management of local infrastructure contributions revenue in 2017-18 and 2018-19, and the 2016 review of the local government rating system by the Independent Pricing and Regulatory Tribunal (IPART).

Key Findings 

As an overall assessment of the existing NSW infrastructure contributions system, the Final Report stated :

‘…the current infrastructure contributions system is not fully enabling the State and councils to provide the infrastructure required to support development. Previous attempts at reform have resulted in a system that is overly complex, unpredictable, and imposes undue administration costs. Moreover, contributions collect only a small proportion of the required funding and fails [sic] to deliver services in a timely and coordinated way… Piecemeal changes to the contributions system, applied over many years, have resulted in a build-up of ad hoc measures. This has led to an opaque system with higher costs, less certainty, and weak price signals‘.

A summary of the key findings in the Final Report is set out below.

Funding for growth and the role of a reformed infrastructure contributions system 

The State of NSW will face a constrained budgetary position as the recovery from the COVID-19 pandemic progresses, asset recycling winds down, and pressures from a growing and ageing population increase. All levels of government will need to reconcile the need for fiscal repair with increasing demands for infrastructure.

A reformed infrastructure contributions system will improve productivity, heighten economic growth and increase living standards. However, in order to operate efficiently, it will need to be based on sound principles, namely the ‘impactor pays‘ (where those creating the need are charged) and the ‘beneficiary pays’ (where those benefitting from the service are charged) principles.

Local government rates 

The long-standing practice of rate pegging acts as a disincentive to development and growth as it impedes the fiscal sustainability, and constrains the fiscal flexibility, of local government. It therefore constrains the ability of local councils to service growing communities, including by way of discretionary funding.

The rate peg should be reformed to accommodate population growth so that general population costs can be removed from infrastructure contributions. IPART should also establish benchmark costs based on efficient delivery, and review the essential works list to ensure that only development-contingent items are funded by infrastructure contributions.

Local infrastructure 

Infrastructure needs and costs cannot act as a ‘price signal’ as they are generally unknown at the time development decisions are made, and the current infrastructure contributions system is too complex and ill-equipped to address high and rising land costs. The share of infrastructure costs levied on development has also been increasing, fuelled in part by rate pegging, which constrains local government discretionary funding.

Infrastructure contributions should be developed and identified upfront as part of the zoning process. A direct land contribution should also be introduced to make land funding more efficient and certain, and land contributions should be indexed to enhance the ability of the infrastructure contributions system to control land costs.

The ability of the infrastructure contributions system to fund appropriate local infrastructure can be improved by realigning s7.11 local infrastructure contributions to deliver development-contingent infrastructure only, increasing the maximum rate for s7.12 fixed development consent levies to 3% of capital cost for residential development (calculated on a per-dwelling basis), maintaining the rate for non-residential development at the equivalent of 1% of capital cost (calculated on a reformed per square metre of gross floor area basis), and ensuring that planning agreements are only used for direct delivery and innovative infrastructure outcomes.

The Environmental Planning and Assessment (Local Infrastructure Contributions – Timing of Payments) Direction 2020, which was introduced as a temporary measure in response to the COVID-19 pandemic, should also be extended permanently so as to permanently defer the payment of s7.11 local infrastructure contributions to the occupation certificate stage of development.

Lastly, affordable housing should be considered separately to the infrastructure contributions system, and it is questionable whether an affordable housing contribution mechanism should sit within Part 7 of the EPA Act.

State and regional infrastructure funding 

The current approach to State and regional infrastructure funding is not effective, and the lack of an efficient approach to infrastructure cost recovery has caused significant land value uplift around major projects. Biodiversity offsets are also acknowledged as development costs that are currently being part-funded by ratepayers although they would be more appropriately funded through developer contributions. Customers of Sydney Water and Hunter Water are also bearing infrastructure costs that would be more appropriately funded through developer contributions, particularly as there is a clear nexus between water infrastructure and development.

State contributions plans should be introduced for 4 regions of NSW, including Greater Sydney, Hunter, Central Coast, and Illawarra and Shoalhaven. An additional transport contributions plan for major transport projects should also be adopted by Transport for NSW to deliver transport services more efficiently and equitably.

A new contribution category for biodiversity offsets should be created under Part 7 of the EPA Act, and a biodiversity contribution should be adopted for areas subject to biodiversity certification in addition to proposed regional contributions.

Lastly, water infrastructure can be funded more efficiently through cost-reflective developer water charges, which would also help to contain growth in household water bills. Such water connection charges should be phased-in over time, and a temporary exemption should apply to developments completed prior to 1 July 2026. The State Government should also develop a service level agreement for Sydney Water and Hunter Water regarding the expenditure of developer water charges funding.

Further issues in infrastructure contributions 

The Review identified several other issues relating to the existing infrastructure contributions system, including:

• works-in-kind agreements currently lack standards or consistency,
• the current exemptions framework is complex, inconsistent, and can place an undue cost burden on local councils,
• infrastructure contributions are poorly integrated with strategic infrastructure planning and delivery,
• high land costs and an under-provision of funds increase the difficulty of delivering open space, and
• ad hoc policy changes, and complex and outdated tools and advice have exacerbated the complexity and uncertainty of the existing infrastructure contributions system.

The Review found that a digital tool should be introduced to make the infrastructure contributions system more transparent, improve certainty for developers and landowners, and enhance administrative efficiency. Guidance materials should also be developed to make the infrastructure contributions system easier to navigate, and to support the consistency and transparency of works-in-kind agreements. A simple, clear and centralised exemptions policy should also be introduced. The local infrastructure contributions system should be embedded into the local council integrated planning and reporting framework, and the efficiency of open space delivery can be enhanced through performance-based standards for open space planning and the requirement that planning proposals demonstrate that land is being used efficiently for this purpose.

Priority Reforms

The Final Report includes a total of 29 recommendations that aim to deliver an efficient infrastructure contributions system that is principles-based, transparent, easy to understand, consistent in its application, and which provides greater certainty to market participants.

The priority reforms outlined in the Final Report include:

• removing the disincentive for local councils to accept development and growth by allowing for the local government rate peg to reflect population growth,
• ensuring charges can be properly factored into feasibility studies by requiring contributions plans to be developed prior to rezoning,
• introducing a direct land contribution obligation for landowners following rezoning to provide early and adequate funding for land,
• managing the costs and complexity of s7.11 local contributions plans by using benchmark costs and focusing the role of IPART in reviewing such plans,
• removing barriers to construction and improving project feasibility by deferring payment of local contributions to the occupation certificate stage of development,
• providing a simpler option for local councils by increasing the maximum rate of s7.12 fixed development consent levies in certain circumstances,
• limiting the use of state and local planning agreements to direct delivery of works and supporting infrastructure for ‘out of sequence’ developments,
• addressing insufficient and ad hoc s7.24 special infrastructure contributions through the implementation of modest and simple broad-based regional charges,
• ensuring the beneficiaries of major transport investments contribute to costs by implementing an additional state contribution for rezoned properties within station service catchments,
• taking pressure off household water bills by transitioning to cost-reflective developer charges for water connections,
• making the infrastructure contributions system easier to navigate and comply with by providing and maintaining clear and rationalised guidance and comprehensive digital tools, and
• being more transparent in reporting on how much money is collected and where it is spent.

Implementation Plan for Reforms

If accepted by the State government, the recommended reforms in the Final Report will need to be implemented through a combination of legislative changes, the development of a comprehensive suite of digital tools, and the review and consolidation of various policy materials. An Implementation Steering Committee will also be established to oversee the implementation of the reforms.

The State government is currently reviewing the recommendations and will consider the views of stakeholders in developing a roadmap to start to implement some of the reforms by early 2021.

The reforms are not expected to be implemented in full until early 2023.

The Final Report can be viewed here.

To discuss this blog please contact Dr Lindsay Taylor on 02 8235 9701 or Sophia Urlich on 02 8235 9708.