Comparative Institutional Analysis “problems” does New Zealand’s current public policy deal with funding issues effectively, is there a better way moving forward.

Abstract

Recent media attention has drawn attention to the current structures of local government and subsequently Local governments funding sources.  A document produced by the Department of Internal Affairs, titled ” IMPROVING LOCAL GOVERNMENT TRANSPARENCY, ACCOUNTABILITY AND FINANCIAL MANAGEMENT – REGULATORY IMPACT STATEMENT” has framed the problem that New Zealand’s public policy relating to growth  is not working and  a recommendation of the removal of Financial and Development Contributions, with no suggestion of replacement, is recommended.   This report documents issues and options for funding under RMA 1991 and LGA 2002.  This report also analyses how Australia is funding growth and explores an alternative infrastructure funding method of Public Private Partnerships.

            The issue of infrastructure funding provides an opportunity to examine the role and effectiveness of current policy.  This report is intended to talk to local government asset managers, developers, economic policy writers, policy analysis, auditors and local government financial managers.

It will be displayed in this report that this work draws strong linkages with chapter 12 of the course readings, “Comparative institutional analysis is predicated on the view that effective policy responses to current problems are most likely to be struck on when policy design is closely informed by knowledge of actual working policy settings found elsewhere.  (Mintrom, M 2011 p242)

            This research project poses a question that is “important” in the real world. The topic is consequential for political, social and economic life, for understanding something that significantly affects many people’s lives, and for understanding and predicting events that might be harmful or beneficial.

1.0 Introduction

Currently New Zealand’s public policy tools for the funding of public infrastructure are within two public policies, the Resource Management Act 1991 and the Local government Act 2002.   Sections within these two documents empower Local authorities with tools to collect Financial and Development Contributions.   It is a common opinion within users of these documents that they are problematic, present uncertainly for local authorities and are constantly being tested by the development community as an unfair approach to funding growth.    Below is a brief summary of the current legislations purpose and a background of their existence.

Under the Local Government Act 2002, territorial local authorities may use development contributions as a tool to fund reserves(Parks), network infrastructure (major roads and truck pipe line) community infrastructure (library’s, pools) where there is a direct link between a growth related development which triggers the need for new city capital expenditure.  (LGA 2002)

Under the Resource Management Act 1991, financial contributions can be applied by councils to fund capital expenditure on similar activities to those which may be funded by development contributions where the spending is intended to mitigate the environmental effects of developments.

The Local Government Act 2002 introduced development contributions following lobbying by local government. The sector argued that financial contributions were too restrictive, and that they are subject to the appeal provisions contained in the Resource Management Act. There are no comparable rights of appeal for development contributions.

Almost all capital expenditure funded by development and financial contributions is spent upstream or downstream of the relevant subdivision or development. The landowner usually directly funds works undertaken within the subdivision or development.

Financial and development contributions have been growing rapidly. Development contributions were expected to yield $3.9 billion or 5.3 percent of the total revenue that all territorial authorities were projected to raise during 2006–16. They comprise up to 20 percent of the forecast revenue of certain local authorities whose population is growing rapidly.  (SPM Consultants Limited (2008a).

Development contributions are a large impost on some developments. Contributions of around $30,000 for each residential lot are common in certain districts and commercial projects are also subject to development and financial contributions. Local (Government Forum (2007)

2.0 New Zealand Infrastructure Funding Statutory Framework

The statutory authority for financial, development and reserve contributions was contained in the Local Government Act 1974 and some of its predecessor statutes. The statutory power to impose financial contributions, aside from certain transitional arrangements, was transferred by the RMA 1991 to that Act. The statutory provisions relating to financial contributions under the RMA 1991 were more limited than those that applied under the Local Government Act 1974 and are subject to appeal provisions that apply to district plans and decisions relating to resource consents.

Certain territorial authorities, including the North Shore City Council, subsequently lobbied the government to include an alternative funding tool to financial contributions in the LGA 2002. Development contributions were introduced in response.

The LGA 2002 states that a local authority must adopt certain funding and financial policies, including a revenue and financing policy, and a development or financial contributions policy, using the special consultative procedure. These policies must be included in the council’s LTCCP and can only be changed as an amendment to the LTCCP.

The information contained in a LTCCP in respect of assets (asset management plans) is used in computing financial and development contributions. LTCCPs or as they are now known as LCP long term community plans are set over a 10 year period and predict growth of district or cities and what new infrastructure need to come online as well as how much that infrastructures is likely to cost.  For example if a regional policy statement predicts a growth over 10 years of 50,000 people new parks, roads or stormwater trunk lines need to be in the LTP to service this growth. (Local Government KnowHow (2003)

 

2.1 Financial Contributions RMA 1991.

Financial contributions are imposed as a condition of resource consent under Section 108(10) of the RMA 1991 which states that a resource consent may include a condition requiring that a financial contribution, comprising of money, land, or a combination of both, be made.   In accordance with the principle and purposes of the RMA a condition of consent can only be imposed to mitigate an environmental effect of the development.

According to section 108(10), a consent authority must not require a financial contribution to be made unless it is imposed in accordance with the purposes specified in a district plan or proposed plan including the purpose of ensuring the contribution must also be determined in the manner described in the plan or proposed plan. (RMA 1991 s108)

As with any resource consent condition a consent holder may appeal to the Environment Court against the whole, or any part of a decision of a consent authority on an application for a resource consent or a change of consent conditions, or on a review of consent conditions.

The maximum amount for financial contributions may be specified in a council’s

district plan. This method, which is commonly used for the contribution of land for

reserves, has the advantages of being simple, transparent and predictable.

2.2 Development Contributions LGA 2002

The statutory provisions that relate to development contributions are contained in Part 8, subpart 5, of the LGA 2002.  Development contributions may be used to fund reserves, network infrastructure or community infrastructure that arises from a development.  A territorial local authority may only impose a development contribution in accordance with the development contribution policy adopted by the authority. The policy must contain the required contents of such a policy.

Development contributions may be required in relation to developments if the effect of the development   is to require capital expenditure for reserves, network infrastructure or community infrastructure.  Such spending may be required for new or additional assets, or to acquire assets with an increased capacity. A territorial local authority may also require a development contribution for capital expenditure incurred in anticipation of a development. The capital expenditure required is often said to be caused by growth.

Once it has been determined that certain capital expenditure may be funded by a

development contribution under section 199, a development contribution becomes a

funding source available to the council along with other sources authorised by the LGA

2002. A council must determine the appropriate sources to meet its funding needs after

examining the five factors identified in section 101(3)(a). The council must then satisfy

itself as to the overall impact of each funding source determination on the four wellbeings,

as part of its broad role and purpose in promoting those well-beings (sections 10

and 101(3)(b)).62

A development contribution means a contribution provided for in a development

contribution policy included in the LTCCP of a territorial local authority and calculated in accordance with the methodology set out in Schedule 13 of the LGA 2002.

Development contributions are payable in particular geographical areas of the district. Parts of districts are commonly referred to as ‘catchments’ although this terminology is not contained in the LGA 2002.  (Local Government Act 2002, s197-209

Summary

 

These two public policy documents on a basic level have the same purpose however there are slight differences in technical details which for clarification are outlined below.

  • • Only territorial local authorities may apply development contributions. Regional councils and territorial authorities may apply financial contributions.
  • • A council must adopt a policy on development or financial contributions.
  • • Financial contributions can only be applied if a policy on them has been adopted as part of a territorial authority’s LTCCP and if provision is made for them in its district plan. Financial contributions are imposed as a condition of a resource consent.
  • • A development contribution may be applied where there is a development (as defined by the LGA 2002) that either alone or jointly with other developments, requires expenditure on certain infrastructure or reserves and is provided for in the council’s development contributions policy.
  • • Development contributions focus on funding infrastructure that is due to growth.  In contrast, financial contributions relate to the actual environmental effects (that is, on-site or localised effects) that a subdivision or development creates.
  • • Financial contributions may reflect past and current expenditure only whereas  development contributions may take account of future spending arising from the subdivision or development.

A development may be subject to a financial or development contribution but a territorial local authority cannot apply both to a particular subdivision or development for the same purpose.

A council’s proposal to include financial contributions in its district plan or to alter its policy on such contributions may be subject to submissions to the council and objections to the Environment Court. Furthermore, the application of the policy in granting resource consents can be appealed to the Environment Court. There are no comparable rights of appeal relating to development contributions. A council’s decision to apply financial or development contributions could  be subject to judicial review if, for instance, the council failed to follow proper process or otherwise acted unlawfully.

(Brady, K. (2007)

3.0 The Australian developer contributions model.

Planning legislation in New South Wales and Victoria generally allows local government to impose charges to fund the capital costs of certain infrastructure. Comparable provisions in Queensland, Western Australia, South Australia, Tasmania and the Northern Territory are generally more restrictive in scope than that of other states.

The Australian Capital Territory cannot impose developer contributions but it can impose ‘change of use’ charges for any variation of a Crown lease that increases the value of the lease, and developers may be required to provide infrastructure as a condition of the initial release of land under a Crown lease.

Developer contributions cannot generally be levied for maintenance or operating costs.  Local governments may not be permitted to require greater developer contributions than those permitted under a development plan. Development contribution systems are open to legal challenge.

The New South Wales, Vitoria and Queensland systems are similar to those in the

United States and United Kingdom in that development contribution must satisfy explicit criteria.  Each system requires formal development plans that meet standards of reasonableness and accountability.

The principle of reasonableness reflects notions of fairness, equity, sound judgment and moderation.  An aspect of reasonableness requires councils to establish a connection between the development and the demand for public infrastructure. The connection might be causal (where the development creates a need for, or increases demand for, public infrastructure), spatial (where the infrastructure funded by the contributions is likely to serve the needs of the development making the contribution) or temporal (where the public infrastructure is provided within a timeframe that will benefit those who contributed towards its cost).

Councils are also required to take into account the reasonableness of the amount and timing of contributions on the one hand and recovery of anticipated future costs on the

other.  The principle of apportionment encapsulates the proposition that the share of new infrastructure costs recovered through contributions should be proportional to the impact on infrastructure of the new development. These criteria of reasonableness are linked with the economic concept of user charges where the contribution reflects the private benefit that the owners of individual developments obtain from the infrastructure provided.

In New South Wales councils can grant consent for developments conditional upon a developer contributing land free of cost or making a monetary contribution or both,

under section 94 of the Environmental Planning and Assessment Act 1979 (New South

Wales). Developer contributions may be levied for economic and social infrastructure (for example, trunk roads within the development and land for parks and education) and are imposed in accordance with a development contribution plan.

Alternatively, local governments may require a levy on all new development set at the maximum percentage of the cost of the proposed development prescribed by the state

government. Generally, the maximum percentage prescribed is 1 percent of the cost of

development, although in regional cities the limit may be as high as 3 percent. Moreover, local governments and developers may agree to an alternative contribution amount as part of a voluntary planning agreement in addition to, or in substitution for contributions determined under other provisions of the Act.  (EPAA 1979 s94)

The New South Wales government administers special contributions areas fund from which payments can be made to public authorities for the provision of infrastructure.

It may levy or direct consent authorities to levy special infrastructure contributions in

areas deemed to be ‘special contributions areas’.

Development contributions were made more consistent, certain and transparent in

2007. Contributions were explicitly restricted to infrastructure and land requirements to support land developments rather than infrastructure requirements driven by population growth.  (EPAA 1979 s94)

4.0 Comparative institutional analysis

        It is common practice for policy writers to borrow policy ideas from other similar policies to address problems.  It is particularly relevant for this report to take a comparative view on other policies dealing with infrastructure funding locally, nationally and internationally.  This type of analysis is useful for this report as it explore policies which have a common intention and by comparing these two policies we can examine how different formal rules produce different outcomes.  (Mintrom, M. 2011)

My comments on the comparisons between the three policies I have compared being financial contributions under the RMA 1991, development Contributions LGA 2002 and Environmental Planning and Assessment Act 1979 are the following.

4.1 Resource Management Act 1991

This document is useful in that it is linked to developments and the effects they will have on the environment, which therefore fits into the principles and purposes of the Act.

There are clear benefits with the Act as it is linked to individual developments there is no need to link it to the LCP (10 years council asset plan) therefore it is easier to pay for infrastructure when it is needed instead of having to guess when it will be required.

The main problem from a council’s point of view is that a financial contribution is easily appealed to the environment court which has impacts the fluidity of revenue to council.

This Act seems to be similar to the Australian model as it is not linked to any long term council plan it is linked ”loosely” to an environmental effect, however it lacks the flexibility is evident in the Australian model.

My recommendation is that RMA 1991 financial contributions only be used for the provisions of parks reserves as there are clear links between developments and the loss of open space, Financial contributions to do with stormwater or roading are to easily challenged due to weak methodology around linking development to effects on stormwater or roads.

4.2 Local Government Act 2002

Developments Contributions are directly linked to developments which create growth.  Development contributions generate a significant amount of revenues for councils.   The methodology of collecting development contributions is not comparable to EPAA 1979 or the RMA 1991.   Development Contributions contain complex methodology and different councils apply a variety of methodology to calculate development contributions.  Therefore development contributions are not transparent and conflict with the principles of TAFM.

My recommendation is that a document is produced which required all councils to follow the same methodology of calculating development contributions so they become transparent and comparable to other councils in a “best practice” direction.  Development Contributions are capped so that councils can accurately understand revenues and budget LTPs around a realistic income.

4.3 Environmental Planning and Assessment Act 1979

            The EPAA 1979 has a different purpose to both the RMA 1991 and LGA 2002 have fundamentally different purpose the EPAA is to provided land and infrastructure for developments, not to mitigate environmental effects or for population growth.  This policy purpose implied to me that local government in Australia is more facilitating towards developers and development than New Zealand.  This assumption is feasible as Australia has lower environmental standards than New Zealand.

The Austrian model is challengeable like to the RMA 1991 and it is about to be challenged in a similar court system to the NZ environment court.   This is challengeable because the regulations for development contributions are within environmental legislation the same as under the RMA 1991.  In addition to this similarity the RMA 1991 uses a percentage approach to calculate financial contributions like the EPAA, also since the purpose of the EPAA is to provide land and infrastructure for developments it can be linked to the purposes of the RMA 1991 which is to mitigate environmental effects.

I believe the EPAA 1979 shares similar aspects to the RMA 1991 however it is more flexible and equitable towards developers.

5.0 Private Public Partnerships

 

          Over the last decade private sector financing through public-private partnerships (PPPs) have become increasingly popular as a way local authorities obtaining public infrastructure for growth.  This was most commonly seen in post war America where governments looked to private sector finance and invited the private sector to enter into long-term contractual agreements of construction and management of these public assets.

Public private partnership Principles of Policy and finance states:

Public infrastructure can be defined as facilities which are necessary for the functioning of the economy and society.  These are thus not an end in themselves, but a means of supporting a nation’s economic and social activity, and include facilities which are ancillary to these functions.

  • “economic” infrastructure, such as transportation facilities and utility networks (for water, sewage, electricity, etc) i.e, infrastructure considered essential for day-to-day economic activity; and
  • “social” infrastructure such as schools, hospital, libraries, prisons, etc., i.e infrastructure considered essential for the structure of society. (E.R Yescombe 2007 p1)

I concur with Yescombes definition of different types of infrastructure and from the above definition this report is clearly deals with economic infrastructure.

Common examples of PPPs are prisons in various states of America which are often built and managed by the private sector.  In America PPPs also included urban renewal and educational programmes.

The current National lead government has indicated that they are interested in these type of PPPs.  This type of PPPs is attractive to the private sector as there is an obvious stream of income which would quickly pay back the capital investment.  In addition to this because a private sector company would be managing prisons they would be looking to cut costs to maximise profit, this would also be attractive to a certain percentage of the public.

PPPS are an attractive and alternative method of funding public infrastructure however the challenge is how to frame PPPs regarding economic infrastructure to the private sector.  This is a challenge as roads and stormwater truck lines do not typically generate income and do not require management therefore it’s unlikely the private sector would be interesting in PPPs economic infrastructure.

I am of the opinion that PPPs are an attractive and useful tool to fund public infrastructure.  They come with benefits such as increased competition from the private sector to provide infrastructure, lower operation cost, value for money defined as the effective use of public funds on a capital project can come from private sector innovations and skills in asset design, construction techniques and operational practices and transferring risk from the public to the private sector.  However there are risks associated with PPPs:

  • Changing political climate toward the provision of public services by the private sector.
  • Environmental risk, because of adverse environmental impacts caused by private sector cutting costs.
  • Incompetence of the private sector.
  • Financial sources to private sector not leading.
  • Principle aim for the private sector is to achieve value-for-money in the services provided which might mean lower quality of works and breaching of contractual obligations.  Lewis, K and Grimsey D, (2002)

PPPs in New Zealand should be explored for major economic infrastructure works such as highways, urban renewal and water, stormwater and wastewater treatment plants, as New Zealand cities are small meaning it may not be economically worth the private sector providing public infrastructure.  I believe PPPs would be more beneficial for the management of public infrastructure instead of the building of them.

Conclusion

            This report has explored three types of public policy documents which purposes are to generate revenue for local authorities to fund public infrastructure.  I have given two New Zealand policy documents and one Australian document.  I have summarized each policy then used the method of comparative institutional analysis to compare each policy to another. I chose this method because it would expose potential strengths and weaknesses in each policy, as well as providing alternative methods of funding infrastructure it provides different principles and purposes of collecting, for example population growth LGA 2002, environmental effects RMA 1991 and support development EPAA 1979.

I acknowledge that there are limitations by comparing an Australian model of collecting development contributions however I do not believe they will be drastically different as Australian attracts similar developments to New Zealand and has similar environmental policies.  I believe the only major differences which would have an impact on my findings are different taxes.

The LGA 2002 and RMA 1991 are still effective tools for funding public infrastructure as they can be linked to environmental effects and growth which are major factors within New Zealand current planning systems and deeply rooted in local government’s purposes.  As discussed in this report these methods generate significant amounts of revenue to fund public infrastructure and I recommend they still be used however, I recommend they be amended to be more equitable towards developers as they because developers are funding major infrastructure projects which will benefit populations outside their developments, also to gain more transparency and be in line with T.A.F.M all councils using the LGA 2002 to fund developments should have one national methodology of calculating development contributions.

Other recommendation to be in line with T.A.F.M and to be equitable to developers, include financial and development contributions being capped at a maximum rate or percentage. Not only will this create certainly for councils revenues which will help with creating LTP and developers would be able to plan their developments accordingly

In certain instances Public Private Partnership’s infrastructure funding should be explored but I believe it is unlikely to be a main funding source due to the relatively small sizes of New Zealand’s cities, meaning it would not be economically practicable for the private sector.  Public Private Partnerships in New Zealand are better suited for the management of public infrastructure rather than them providing the infrastructure.

Australians funding model is in accordance with T.A.F.M however will not generate the same revenue as LGA 2002 or RMA 1991.

  • LGA 2002 and RMA 1991 should take the following aspect of the Australian funding model.
    • Capped Development Contributions.
    • Development plan highlighting infrastructure within DC catchment areas be created.
    • Single methodology for all councils to calculated development contributions.
    • More user pays based charges to minimise the waste of resources
Posted in Posts | Comments Off on Comparative Institutional Analysis “problems” does New Zealand’s current public policy deal with funding issues effectively, is there a better way moving forward.

Taxing Growth & Development – Development & financial contributions

Posted in Posts | Comments Off on