Maximising the Impact of Development Contributions in New Zealand

New Zealand Infrastructure Commission, Te Waihanga recently published its November briefing to the incoming minister (BIM).? It’s a comprehensive snapshot of the infrastructure issues facing towns and cities across Aotearoa, many of which will be facing double-digit rates rises this year.? Councils will be looking at all ways they can ease this pain including raising more revenue through user charges. The BIM Te Waihanga (page 17) highlight the increasingly strategic role that Development Contributions (DCs) can play under the heading “Enabling competitive urban land markets to lower land costs for infrastructure” – and it’s well worth a read.

Two-thirds of our district and unitary authorities have DCs as part of their revenue and financing policies and Morrison Low have provided financial and strategic advice on a number of these.?

As part of a funding toolkit, DCs can

1) divert costs away from ratepayers,

2) enable councils to proactively plan for increased land supply, and

3) use price signalling to shape urban form in the long term.

The thing is, DCs are probably not used as broadly or strategically as they could be.? While they are neat as a concept, they can be complex to calculate and operate, and face constant downward pressure as councils compete for growth with their neighbours. The BIM suggests that a standardised approach to DCs across the country could be a good investment – and here’s why we agree:

1. User pays at the point of profit – charging for new infrastructure at the time of development via DCs is an established and broadly applicable ‘value capture’ way to divvy up the costs of infrastructure that is nicely aligned with a back-to-basics approach.? At the same time, councils will be looking to ensure that rates are used to maintain and improve infrastructure for existing residents first and foremost. A standard approach to DCs would sit well with other initiatives to standardise pricing of traffic congestion or water supply across the country.

2. Competitive land markets – a growing, competitive urban land market needs a steady supply of land, achieved by increasing land use intensity or through urban expansion. This can be hampered by a lack of appropriate infrastructure.? As pointed out in the briefing, land can increasingly be a major cost of urban infrastructure projects that make cities denser and more desirable as places to live.? Ring-fenced funding for growth enables councils to proactively plan what to spend and where, providing more certainty for development over a longer time frame, which will over time increase the availability of land reducing prices.? The investment plan (LTP) that forms the basis of a DC policy are best developed alongside developers as well as the broader community.

3. Compact urban form –? Te Waihanga points to the way DC policies set up by Hamilton City Council and Auckland Council encourage private investment in areas with lower servicing costs.? In contrast to ‘flat’ revenue policies, a finer-grained approach to charges can ensure that the cost to develop truly reflects what the Council needs to spend for any given new home.? An Australian study cited in the BIM shows that stimulating development in better-serviced areas could save up to A$59,000 in infrastructure expenses for every new home, and a more granular approach to passing on such lower costs to developers could make a big difference in where they choose to develop over time. This would support commonly accepted community and economic benefits of more intensive land use at the same time.

Te Waihanga signalled its readiness to advise the Minister ‘on standardising development contributions methods, to provide more granular and efficient infrastructure pricing signals’.?? We agree that doing so could capture the strategic opportunities offered by DCs to reduce the burden of growth on rates, free up more land for development, and shape your city or town to be sustainable in the long term.

It is good to see that Te Waihanga is offering practical and useful thinking on how to work through the challenges that all local authorities face.

Development Contributions may not be a silver bullet, but a more standardised approach to their use, building on lessons learned, should enable them to be more actively used as part of your toolkit.

Alastair Upton [email protected] ?