A Taxing Way to Pay for Infrastructure

A prominent character in the urban development industry recounts that in the early 1980’s, the then Planning Minister, Robert Webster attended a board meeting of a development industry group. The board asked the Minister to introduce an infrastructure contributions system to enable the lead developers to recover infrastructure costs from subsequent and adjacent developers. That was the genesis of NSW’s infrastructure contributions system. It is a far cry away from that today and the latest reports from the Productivity Commission and their consultants characterise the system as a mechanism for governments to recover infrastructure costs. 

Whether you agree or not, the infrastructure contributions system in New South Wales is a key determinant of housing delivery outcomes. Councils require sufficient funds to deliver local infrastructure, the State Government needs are similar for State infrastructure and developers need infrastructure to create vibrant communities. Get the financing of these needs out of balance and housing either becomes unaffordable or governments don’t zone and service enough land because they do not have the capital expenditure to support infrastructure. 

The latest NSW Productivity Commission report has received much fanfare with 29 recommendations for reforming the system. While there are some good elements (such as deferral of payment of contributions to the issuing of an occupation certificate), there are some approaches that were orphaned in the 2010’s that have suddenly found a new home in 2021. 

Let’s start with the UDP (Urban Development Program or Monitor). Just after the GFC, the program was tying housing delivery up in knots. The Government were claiming that there was sufficient land supply according to program and the industry was saying that the bulk of the supply was not zoned and serviced. Regardless of who was correct, land production in Sydney reached the heady heights of land production Adelaide (a city with 20% of the Sydney population) under the UDP. There were significant issues with servicing of land especially in growth corridors that required small licks of transformative infrastructure for release not major trunk infrastructure that was contemplated in the UDP. By eliminating the UDP, along with introducing the HAF, transformative infrastructure was provided where needed and the Sydney experienced a significant growth in land production. While infrastructure planning is important, experience would suggest the UDP is not an efficient way of achieving it. 

Onto the structure of the “new” regime. There appears to be a Special Infrastructure Contribution (SIC), Sydney Water Development Servicing Payments, Biodiversity Offsets along with the possibility of value capture in a new transport infrastructure levy. More than a decade ago Sydney Water, DSP’s were scrapped and replaced by a general rise in water rates to fund the removal. DSP’s were difficult to apply (with some developers charged significantly more than others) and were an administrative nightmare. Removing them made very good public policy sense as Sydney Water would generate income of the completed infrastructure in perpetuity which provided economic returns to the entire network. Why it would be reintroduced is bewildering. Using a value capture mechanism to pay for transport infrastructure will also be particularly problematic knowing where to the draw the boundary lines and getting perverse development outcomes. Another big issue is that New South Wales is one of the only jurisdictions in the world to try to capture value upfront and not amortize the payments through land value improvements. Biodiversity offsets are already part of the infrastructure charging framework, but it looks like they have moved from being offsets to a charge. There is also SIC already in existence, but its new application is a little unclear from the papers. 

Probably, the most welcome news is that rate capping is being reviewed as part of the reforms. Infrastructure brings new revenue to Councils and State Governments – more rates from new households, more water consumption, energy and general taxes. Ratepayers partially supplementing the delivery of new infrastructure makes good public policy sense. After all, increasing the rate base gives Councils more rate revenue.  The critical infrastructure list promises to not make a difference as policy makers will soon find out that different Councils have a different critical infrastructure list. The 7.12 changes will allow Councils to potentially charge more, the changes to Voluntary Planning Agreements and Inclusionary Zoning seem reasonable. 

There has been a great deal of engagement and economic analysis on the reforms. Infrastructure contributions is such a niche area of expertise, it is debatable how useful engagement and analysis has been. The whole reform should be re-evaluated through a different public policy lens. There is no doubt that the government should receive monies to support the building of new infrastructure. Councils also need to be sufficiently funded to deliver infrastructure. Utilities also need funds in their capital works plans to deliver infrastructure. Homebuyers need affordable housing. The art to making good policy changes is to ensure that no one group is worse off as part of the reforms. This was a chance to be innovative not reintroduce approaches that have failed everyone in the past. 

Perhaps a three-tiered system of Local, Regional and State Infrastructure contributions supported by a coordinated infrastructure plan could be considered? There seems to be a sense of urgency to rush through legislation by July, so don’t expect any major changes to what has been proposed. Potentially, there will be many stakeholders that, if not unhappy now, will be when they realise what they signed up for.