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Priority Infrastructure PlanEconomic Impact StudyBrief 2: Balance between recurrent and up-frontuser charges

Commissioned report for Gold Coast City Council

Final Report – November 2010

Priority Infrastructure Plan Economic Impact Study

Commissioned report for Gold Coast City Council PricewaterhouseCoopers |

Contents

Disclaimer 2

Executive summary 3

Task 1 – Current infrastructure user chargesinfrastructure policies 8

Task 2 – Locational signalling with up-front usercharges 15

Task 3 – Council and up-front infrastructure charges 20

Task 4 – Potential to expand alternative user chargingtechniques 25

References 29

Appendix A: Response to Joint Industry Group comments onDraft Report 30


Commissioned report for Gold Coast City Council PricewaterhouseCoopers | 2

Disclaimer

This Report has been prepared by PricewaterhouseCoopers Australia (PwC) at the request of the GoldCoast City Council in our capacity as advisors in accordance with the Terms of Reference and theTerms and Conditions contained in the contract between Gold Coast City Council and PwC.

This document is not intended to be utilised or relied upon by any persons other than the Gold CoastCity Council, nor to be used for any purpose other than that articulated in the Terms of Reference.Accordingly, PwC accept no responsibility in any way whatsoever for the use of this report by any otherpersons or for any other purpose.

The information, statements, statistics and commentary (together the “Information”) contained in thisreport have been prepared by PwC from publicly available material and from material provided by theGold Coast City Council. PwC have not sought any independent confirmation of the reliability, accuracyor completeness of this information. It should not be construed that PwC has carried out any form ofaudit of the information which has been relied upon.

Accordingly, whilst the statements made in this report are given in good faith, PwC accept noresponsibility for any errors in the information provided by the Gold Coast City Council or other partiesnor the effect of any such errors on our analysis, suggestions or report.



Executive summary

This report has been prepared as part of an overall engagement with Gold Coast City Council (Council)comprising of eight briefs. These briefs are:

Balance between user pays and community pays

Balance between recurrent and up-front user charges

Calculation of infrastructure charges

Administration of infrastructure charges

Economic impacts of infrastructure charges subsidies

Comparative impact of subsidising the land development sector

Optimal application of subsidies

Audit of project feasibilities

The objective of this brief is to identify the potential, on economic efficiency grounds, to reduce up-frontinfrastructure charges within the region in favour of alternative user charging regimes, including specialrate schemes and recurrent user pricing.

Council has outlined the following tasks as providing the framework for defining the objective of thisbrief.

Task 1 – Document Council’s user pays infrastructure policies (for capital costs), setting these out foreach infrastructure category identified from the PIP.

Task 2 – Undertake a review of the literature to identify the circumstances under which up-frontcharging for infrastructure might be warranted on efficiency grounds, having regard toquestions of locational signalling.

Task 3 – Identify for each PIP category in turn whether the reliance on up-front infrastructure charges isexcessive and likely to lead to inefficient outcomes in terms of settlement patterns and theoverall quantum of housing produced in Gold Coast City.

Task 4 – Assess the practical potential to expand the application of alternative user chargingtechniques, where infrastructure charges are shown to be inefficient.

For this review we have applied the following definitions:

Council’s infrastructure charges are an up-front charging mechanism, although Council can varythe timing of the charges in relation to the phases of a typical development, the charges are stilleffectively up-front.

Recurrent charges are charges that are on-going in nature. Council has several special chargesthat are recurrent in nature and also the general rates that are also recurrent. It is inherent thatthe occupier of the property incurs the cost of these charges, thereby implying a user element tothe charges. For this report, the focus of recurrent user charges is based on these types ofcharges that are on-going and recurrent in nature.



This review is of the different mechanisms that can be used to raise infrastructure funding, it does notconsider the quantum of these charges or the infrastructure funding requirements. These latter issuesare the subject of other briefs.

In developing this report, it is assumed the reader is familiar with our accompanying report for Brief 1 ofthe engagement – Balance between user pays and community pays.

Task findings

Task 1 – Document Council’s user pays infrastructure policies (for capital costs), setting these out foreach infrastructure category identified from the PIP.

In considering this task, an analysis of Council’s Priority Infrastructure Plan (PIP) and InfrastructureCharges Schedule (ICS), policy position papers, community budget report, revenue statement,resolution of rates and charges, and other publically available information has been undertaken.

The information obtained through the analysis is used to inform latter tasks of the brief. The keyobservations from the analysis include:

Each infrastructure network in the PIP has a varying number of sub-categories under whichcharges are determined

The infrastructure charges are catchment-based with varying numbers of catchments acrosseach infrastructure network

Each network incorporates spare capacity into the charge, however it is incorporated in differentways

Some of the infrastructure networks use different time horizons to determine the infrastructurecharges

Some networks had significant variations in charges across catchments, while other networkshad relatively little variation, and

There is significant variation in the level of charges between councils.

Task 2 – Undertake a review of the literature to identify the circumstances under which up-frontcharging for infrastructure might be warranted on efficiency grounds, having regard toquestions of locational signalling.

Efficiency has been defined as the impact that a charging mechanism has on developer/consumerbehaviour. If applying different mechanisms does not result in different behaviour then there are noefficiency improvements, simply distributional issues of revenue recovery.

There are a number of issues that should be considered when Council determines whether to apply anup-front or recurrent charging mechanism. In determining the impacts on efficiency, it is important toconsider whether the charge would impact people’s decision-making behaviour. These issues are:

Locational signalling

Who pays?

Ability to pay



Practicality of paying the charge

Housing affordability, and

Cross-subsidies.

It was evident from the literature review that the main determinants of the efficiency of a chargingmechanism are if cross subsidies could be removed and locational signalling can be achieved. Foreach of the other issues there is no real impact on efficiency between the choice of up-front or recurrentcharging mechanisms.

This type of circumstance would arise where there is considerable cost differential in areas within theregion. This way, an appropriate location pricing signal can be provided to developers about the costsinvolved in developing certain areas over others, and developers can use this enhanced costinformation in their decision-making process.

Task 3 – Identify for each PIP category in turn whether the reliance on up-front infrastructure charges isexcessive and likely to lead to inefficient outcomes in terms of settlement patterns and theoverall quantum of housing produced in Gold Coast City.

Excessive reliance and inefficient outcomes are not necessarily synonymous outcomes. There may bea heavy reliance on infrastructure charges, however this may actually be an efficient outcome given thecircumstances. Similarly, there may not be an over-reliance on up-front charges, but an inefficientoutcome may result. Efficiency is a function of choosing the right approach and people’s decision-making behaviour being influenced by the charging mechanism in place.

The primary focus of this task is on whether there is an excessive reliance on infrastructure chargerevenue that may lead to inefficient outcomes. If Council’s revenue was predominantly driven byinfrastructure charges, it could lead to inefficient Council decisions as they would have much greaterimpacts on Council revenue.

Infrastructure charges are not the predominant source of revenue for Council. Indeed comparisons withBrisbane City Council and Sunshine Coast Regional Council, as well as New South Wales andVictorian large councils, suggests that Council’s ratio of infrastructure charge revenue as a proportion oftotal revenue is not out of the ordinary and therefore unlikely to be excessive. However, there arecircumstances other than revenue over-reliance that may make up-front charging inappropriate, suchas community perceptions and revenue certainty.

The use of catchments in determining charges can impact on settlement patterns within the region. Thesmaller the catchment areas are, the more closely these costs will accurately reflect the costs ofdeveloping within that area, thereby reducing cross-subsidies. While this will reduce cross-subsidies, italso increases the administrative complexity and hence administrative cost. Similarly, infrastructurecharges that are common across the Gold Coast (i.e. water category 1) are not impacting on settlementpatterns therefore are unlikely to be strongly influencing efficiency outcomes.

Due to the significant number of factors that can influence the development and demand for housing, itis difficult to determine the impact that infrastructure charges alone have on the quantum of housing inthe region. Key complicating factors include:

Market forces – prices that can be charged for developments is dependent on the market forces of thehousing market,1

1Chan, C., Forwood, D., Roper, H., and Sayers, C. 2009, Public Infrastructure Financing: An International

Perspective, Productivity Commission Staff Working Paper, March 2009, p.128-9.



Affordability – a greater use of infrastructure charges is unlikely to have a substantial impact on housingaffordability2, and

Rental market – higher infrastructure charges do not impact on rental prices as owners require anappropriate return on their total investment (which includes general rates paid on the property).

Task 4 – Assess the practical potential to expand the application of alternative user chargingtechniques, where infrastructure charges are shown to be inefficient.

In considering Council’s situation, if the infrastructure charge for a network across catchments isrelatively similar, it would be unlikely that the infrastructure charge would be influencing decision-making behaviour. In these circumstances, the up-front infrastructure charges would be deriving few, ifany, efficiency benefits and would therefore have no efficiency rationale for being recovered throughup-front infrastructure charges. These costs could be recovered through recurrent charges with onlylimited impact on the efficiency of outcomes, at least from the perspective of development decisionswithin Council’s jurisdiction.

Based on the information presented in Task 2, the following infrastructure network charges do not varygreatly across catchments:

Water category 1 (only two distinct charges)

Wastewater category 1 (only two distinct charges)

Wastewater category 3 (majority of charges are similar)

Roads (both local and state controlled roads), and

Recreational asset.

Council could therefore explore the possibility of recovering the costs of this infrastructure throughrecurrent charging mechanisms as there is little locational signalling being achieved through thesecharges within the region.

For the efficient funding of infrastructure, Council could still consider an alternative approach toinfrastructure charges that attempts to still achieve the benefits of the infrastructure charges mechanismis to derive a recurrent rates approach that differentiates based on location, thereby providing the samelocational signalling that infrastructure charges do. If an approach such as this is adopted, Councilshould note that the strength of the locational signalling is not expected to be as strong as that with up-front infrastructure charges. This is largely due to the disconnect between when the investment decisionis made and the recurrent charge incurred.

If Council were to consider the implementation of such an alternative charging mechanism, there are anumber of issues that would need to be considered.

Legal implications

Practical issues

Equity issues

Commercial issues

2Productivity Commission 2004, First Home Ownership, Report no. 28, Melbourne, p165.



Business Impact Assessment

Transitional issues

Given the expected considerable increase in the costs of implementing such a charging mechanismand the minor benefits that may be achieved, on face value it appears that an investigation into thealternative approach is not likely to result in a change to Council’s charging mechanism.

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Task 1 – Current infrastructure user chargesinfrastructure policies

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4

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Document GCCC’s user pays infrastructure policies (for capital costs), setting these out for eachinfrastructure category identified from the PIP.

riority Infrastructure Plan Economic Impact Study

ommissioned report for Gold Coast City Council PricewaterhouseCoopers | 8

Brief 1, we explained that infrastructure charges are used to recover the cost of water, wastewater,tormwater, transport and recreational assets. We also explained that they are apportioned based on aatchment basis, whereby Council allocate the costs of trunk infrastructure based on the users whoenefit from it. However, the question remains as to whether Council should recover these costsrough up-front or recurring payments.

o undertake this task, we have looked at the following documents:

The Priority Infrastructure Plan (PIP) and Infrastructure Charges Schedule (ICS) contained inthe Gold Coast Planning Scheme 03.3

A collection of policy position papers with respect to the ICE project. Specifically, positionpapers CP03, CP05, CP09, CP13, CP15, CP16, CP17, CP21A and CP21B.

2010-11 community budget report.4

Special rates levied for the 2010-11 financial year contained in Council’s 2010-11 revenuestatement and resolution of rates and charges.5

Water and wastewater charges for the 2010-11 financial year contained in Council’s 2010-11resolution of water and wastewater charges.6

General information that is publically available.

ouncil’s infrastructure charges

he infrastructure charge is, in general, applied as an up-front charge to developers when a lot orroperty is developed.7 Although there are conditions for the structuring of infrastructure payments viafrastructure agreements so that it does not have to be paid in a single amount, it must be recoveredefore the development is occupied and used. 8

ouncil’s PIP outlines a number of areas that are excluded from infrastructure charges. These areaselate to separate legislation and are found at Part 10 – Schedules, Division 2 – Separate Developmentegislation of the PIP. These areas are excluded for a variety of reasons, however it should be notedat these exclusion areas can impact on the effectiveness of price signals through the charges.

Queensland Government, Priority infrastructure plans and infrastructure charges schedules, Statutory Guideline 01/09Gold Coast City Council, ‘Community Budget Report 2010-11, adopted 21 June 2010’

Gold Coast City Council, Revenue Statement and Resolution of Rates and Charges 2010-11, adopted 21 June 2010Gold Coast City Council, Resolution of Water and Wastewater Charges 2010-11, adopted 21 June 2010Gold Coast City Council ‘Gold Coast Planning Scheme 03, Part 8 Infrastructure, Division 1 Priority Infrastructure Plan, p.102Gold Coast City Council ‘Gold Coast Planning Scheme 03, Part 8 Infrastructure, Division 1 Priority Infrastructure Plan, p.102



Using information from the PIP and the ICS, Table 1 compares the different components and keyfeatures of each infrastructure network. This information is considered when examining whether torecover costs using an up-front or recurrent charging mechanism.



Table 1 – How infrastructure charges are estimated9

Infrastructure type Infrastructure sub-category Relevant Infrastructure Demand unit Recurring/Up-frontUp-front

Number ofcatchments

Apportionment

Water

Category 1 – Bulk watersupply

Bulk water supply, bulkdistribution assets, and local

trunk distribution assets.ET

1Up-frontUp-front

1

Existing spare capacity + present valueof costs to service to 2056 for each

catchment relevant to the development.

Category 2 – Bulk waterdistribution

8

Category 3 – Local trunkdistribution

18

Wastewater

Category 1 – Treatment andstorage

Treatment, storage andrelease components, bulkwater distribution and local

trunk distribution assets

ET Up-frontUp-front

2

Existing spare capacity + present valueof costs to service to 2056 for each

catchment relevant to the development.Category 2 – Major distribution 6

Category 3 – Local trunkinfrastructure

26

StormwaterStormwater quality Stormwater pipes and

culverts, manholes,headwalls, etc

Impervioushectares

Up-frontUp-front 92Existing spare capacity + present value

of costs to service to 2056 for eachcatchment relevant to the development.Stormwater quantity

Transport

Local trunk roads Local and local function ofstate controlled arterial, sub-arterial and distributor roads

Daily trips1

Up-frontUp-front 13Existing spare capacity + present value

of costs to service to 2021 for eachcatchment relevant to the development.

Local function of statecontrolled roads

Recreational

Local portion of recreationalassets Recreational and sport

parks, community facilitiesand outdoor recreational

areas

ET Up-frontUp-front

47

Catchment’s allocation of existing sparecapacity + present value of costs toservice to 2021 for each catchment

relevant to the development.

Citywide portion of recreationalassets

1

Catchment’s allocation of existing sparecapacity + present value of costs toservice to 2021 for each catchment

relevant to the development.

9Gold Coast City Council, Gold Coast Planning Scheme 03, Division 2 Infrastructure Charges Schedule



Comparison across networks

The following figures compare the different infrastructure network components of infrastructure charges across the different catchment areas. Theinformation used for these figures is from the infrastructure charges schedule applicable from 28 July 2010 to 27 October 2010. This informationassists in considering the questions of recurrent or up-front charging in later tasks.

As can be seen from these figures, there can be considerable variation of the charges within Council depending on the location – i.e. the catchmentarea. Similarly there is considerable variation between councils, as can be seen from Figures 12 to Figure 15.

Figure 1 – Per ET charge for category 1 water supplyinfrastructure

Note: The spike in charge areas 2 and 8 is because their

costs are allocated using a different pool of assets

compared to areas 1, 3, 4, 5, 6 and 7.

Source: Water supply network infrastructure charge rates

under PIP

Figure 2 - Per ET charge for category 2 water supplyinfrastructure

Source: Water supply network infrastructure charge rates

under PIP

Figure 3 - Per ET charge for category 3 water supplyinfrastructure

Source: Water supply network infrastructure charge rates under

PIP

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

$P

rice

pe

rET

0

1,000

2,000

3,000

4,000

5,000

$P

rice

pe

rET

0

2,000

4,000

6,000

8,000

10,000

$P

rice

pe

rET



Figure 4 – Per ET charge for category 1 wastewaterinfrastructure

Source: Wastewater network infrastructure charge rates

under PIP

Figure 5 – Per ET charge for category 2wastewater infrastructure

Source: Wastewater network infrastructure charge

rates under PIP

Figure 6 – Per ET charge for category 3 wastewaterinfrastructure

Source: Wastewater network infrastructure charge rates under PIP

Figure 7 – Per daily trip charge for local trunk roads

Source: Transport network infrastructure charge rates under PIP

Figure 8 – Per daily trip charge for the local function of state controlled roads

Source: Transport network infrastructure charge rates under PIP

4,720

4,740

4,760

4,780

4,800

4,820

4,840

4,860

$P

rice

pe

rET

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

$P

rice

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rET

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

$P

rice

pe

rET

0

200

400

600

800

1000

$P

rice

pe

rd

aily

trip

0

100

200

300

400

500

600

700

$P

rice

pe

rd

aily

trip



Figure 9 – Per impervious hectare charge for stormwater quality assets

Source: Stormwater network infrastructure charge rates under PIP

Figure 10- Per impervious hectare charge for stormwater quantity assets

Source: Stormwater network infrastructure charge rates under PIP

Figure 11 – Per ET charge for recreational assets

Source: Recreation network infrastructure charge rates under PIP

0

5,000

10,000

15,000

20,000

$P

rice

pe

rIm

pe

rvio

us

he

ctar

e

0

100,000

200,000

300,000

400,000

500,000

600,000

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rvio

us

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e

0.00

2,000.00

4,000.00

6,000.00

8,000.00

$P

rice

pe

rET



The following figures represent a comparison across different councils within Queensland. There are a considerable number of variations that canoccur between councils in determining infrastructure charges, and therefore more information is required to provide a more thorough comparison.

Figure 12 – Comparison of infrastructure charges – Reconfiguration of a lot

Source: AEC Group, Economic impact of infrastructure charges – Toowoomba Regional

Council, Oct 2009.

Figure 13 - Comparison of infrastructure charges – Residential lot

Source: AEC Group, op. cit.

Figure 14 – Comparison of Infrastructure charges – 1,000 sqm retail

Source: AEC Group, op. cit.

Figure 15 – Comparison of infrastructure charges – 5,000 sqm industrial

Source: AEC Group, op.cit.

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Gold Coast Brisbane Ipswich Logan MaroochyShire

Toowoomba

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$0$100,000$200,000$300,000$400,000$500,000$600,000$700,000$800,000$900,000

$1,000,000



Task 2 – Locational signalling with up-front usercharges

Introduction

In addressing this task, the literature review outlines some of the issues to be considered whendeciding on which charging mechanism is to be used. Based on the analysis of these issues, weprovide a description of appropriate circumstances for up-front charging mechanisms.

In conducting the literature review the following sources were the primary sources of information for thereview:

Productivity Commission – Public Infrastructure Financing: An International Perspective

Productivity Commission – Assessing Local Government Revenue Raising Capacity

Allens Consulting Group – Funding Urban Public Infrastructure – Approaches Compared

Access Economics – Financing Infrastructure for Residential Development – A Report forHousing Industry Association Limited

In terms of defining the efficiency grounds by which this task has been assessed, a mechanism’sefficiency is based on the impact that it has on developer/consumer behaviour. If applying differentmechanisms does not result in different behaviour, then there are no efficiency improvements, simplydistributional issues of revenue recovery.

This task considers a number of issues that Council should consider when deciding between chargingmechanisms. Finally, it identifies circumstances under which up-front charging would be consideredmore appropriate.

Issues to consider in determining between up-front and recurrent chargingmechanisms

There are a number of issues that should be considered when Council determines whether to apply anup-front or recurrent charging mechanism. In determining the impacts on efficiency, it is important toconsider whether the charge would impact people’s decision-making behaviour.

The following considers each of these issues individually and is followed by a comparison of each of theissues from an up-front or recurrent charging mechanism point of view.

Undertake a review of the literature to identify the circumstances under which up-front chargingfor infrastructure might be warranted on efficiency grounds, having regard to questions oflocational signalling.



Locational signalling

Locational signalling is one aspect that can impact on decision-making behaviour and therefore providean efficiency benefit through the application of an up-front infrastructure charge mechanism.

The use of infrastructure charges can influence the allocation of resources in urban infrastructurethrough “discouraging development in locations where service provision would be expensive by makingthe developers responsible for those costs. Developers have a strong incentive to focus upon lowercost areas.”10

Providing locational signals within the region to developers is important in giving the developers (andconsumers) an accurate reflection of the costs involved in developing within a certain area. Withoutproviding these signals, certain locations would be cross-subsidising other locations within the region. Italso provides developers with more information with regard to the infrastructure within the area.

At present, the calculation of rates is based on the average of unimproved value of properties and thetype of property being charged. Council does not apply differential general rates based on differentialinfrastructure costs for areas within Council’s boundaries.

Who pays?

Although the legal incidence of infrastructure charges falls on the developer, the most likely result inpractice is that the charges are passed forward as higher prices for serviced land. Neutze, cited by theAllen Consulting Group, highlighted that the only situation where developer charges would be passedback to the developers (or owners of the raw, or undeveloped, land) is where initial demand fordeveloped land is slack relative to supply.11

This may result in a drop in market prices for types of developments that were constructed at a timewhen market prices were higher. This would result in developers incurring the cost of infrastructurecharges as they are unable to pass the infrastructure charge on to consumers.

Access Economics also noted that the situation where the developer charges would be passed backwould only be a limited short-term phenomenon, or else the sustained lower returns on capital for thedevelopers would result in a change in the market.12

Ability to pay

In terms of equity effects on consumers, developer charges tend to be regressive in nature. This stemsfrom the fact that charges are typically the same whether a new commercial or residential property ispriced at $150,000 or $500,000. The fee therefore implies a large percentage increase in the sale priceof lower-priced property than of higher-priced property where the properties have the same demandcharacteristics.13

Practicality of paying the charge

It has generally been accepted that for long-lived capital assets, it makes sense to smooth the impact ofup-front capital costs.14 However it is important to determine how these charges are actually paid for bythe end consumer.

10 The Allen Consulting Group, 2003, Funding Urban Public Infrastructure – Approaches Compared, Melbourne, p. 63.11 Ibid. p65.12 Access Economics, 2003, Financing Infrastructure for Residential Development – Report for Housing Industry Association Limited,p35.13 The Allen Consulting Group, op. cit. p66.14 Access Economics, op. cit. p36.



In a practical sense, to the extent that urban infrastructure funded by infrastructure charges provides adirect private benefit to the owner of the new home in a development, then there may only be a limitedargument against up-front charges. Many purchasers will finance a larger mortgage than wouldotherwise be the case as a result of the additional charge, and effectively spread the additional costover time through higher mortgage repayments.15 This approach effectively turns the up-front chargeinto a recurrent charge (for the life of the mortgage).

This then impacts on affordability at the margin for new home owners (for a higher borrowing amount)and impacts negatively on the consumption decision to purchase the home.

Housing affordability

The Productivity Commission noted that infrastructure charges might increase up-front housing costs,but they also can lower future user charges – reducing the strain upon disposable income. How thisaffects individual home buyers’ access to finance depends on the borrowing criteria applied by lendinginstitutions.16 However it should be noted that there will always be consumers at the margin no matterwhat happens with housing prices and therefore changes in infrastructure charging policies would notimpact this.

The Productivity Commission also concluded in its First Home Ownership report that the greater use ofup-front infrastructure contributions is:

… unlikely to have any substantial effect on housing affordability, irrespective ofwhether infrastructure was previously subsidised17

NSW Government has recently introduced reforms to local development contributions whereby a cap of$20,000 is placed on development contributions per dwelling or lot for all residential developments. TheNSW Premier stated that these reforms were “necessary to increase housing affordability and kick starthousing construction''.18 NSW councils however, have noted that no evidence was provided by NSWGovernment that this reform will improve housing affordability or that the threshold of the cap isappropriate.19

Cross-subsidies

As highlighted in Brief 1, infrastructure charges can also have the effect of removing cross-subsidisationthat exists where infrastructure costs are spread across the community (through rates), thus loweringthe cost of home ownership for existing home owners and purchasers.20

Appropriate circumstances for up-front charging

In determining the most appropriate circumstances for up-front charging, we have undertaken anassessment of the impact of up-front and recurrent charging mechanisms on the issues outlined above.The assessment has compared up-front against recurrent because if it is not funded under oneapproach, it will be funded through the other mechanism. Therefore in order to determine what anappropriate circumstance is for up-front charging, the circumstance should lead to greater efficiencyand better outcomes than applying recurrent charges.

15 Access Economics, op. cit. p37.16 Chan, C., op. cit. p.131.17 Productivity Commission 2004, op. cit. p165.18 Seymour, E., State Government caps developer contributions, The Queanbeyan Age, 16 July 2010.http://www.queanbeyanage.com.au/news/local/news/general/state-government-caps-developer-contributions/1887622.aspx (accessedon 4 October 2010).19 Note by the Lord Mayor, Cap on development contributions to $20,000 per dwelling or lot, City of Sydney.http://www.cityofsydney.nsw.gov.au/council/documents/meetings/2010/Council/210610/100621_COUNCIL_ITEM31.pdf (accessed on 4October 2010).20 Chan, C, op. cit. p131.



Table 2: Comparison of issues based on using up-front and recurrent charging mechanisms

Up-front charges Recurrent charges

Locational signalling Current up-front charging mechanismachieves locational signalling throughdifferent charging areas (catchments).

Current approach to recurrent ratesdoes not provide locational signallinghowever recurrent charging couldachieve a degree of locationalsignalling.

Who pays? In most cases the up-front charges arepassed on by developers to theproperty/household owner within theprice of the development.

The recurrent charges such as generalrates are paid for by theproperty/household owner.

Ability to pay Up-front charging mechanism does nothave an equity adjustment. Thequantum of the charge is not impactedby the value of the development.

Recurrent charges use house valuesto determine users’ ability to pay.There are issues in using this as anequity adjustment factor.

Practicality of paying Property/household owners willgenerally take out a higher mortgageto cover the cost of the charge,thereby paying the charge on arecurrent basis through mortgagerepayments.

Recurrent charges are paid for out ofproperty/household owners’disposable income.

House affordability Up-front charges do not have asubstantial effect on housingaffordability as any increase in up-frontcharging is off-set by a reduction onthe strain on disposable income.

Recurrent charges do not have amaterial impact on housingaffordability.

Cross subsidies The current up-front chargingmechanism removes some cross-subsidies through the use ofcatchment areas.

There are inherent cross-subsidieswithin the current recurrent chargingmechanism.

In considering these issues, it is apparent that there are only two issues that could have a materialimpact on efficiency depending on the mechanism in place – locational signalling and cross subsidies.For each of the other issues there is no real impact on efficiency between the choice of up-front orrecurrent charging mechanisms.

Council’s current approach to applying infrastructure charges achieves a level of location signallingthrough the use of catchment areas resulting in different charging rates for different locations. With theminor exception of some special rates, Council does not currently have a recurrent chargingmechanism that can achieve the locational signalling of the up-front charging mechanism.

The use of up-front charging in this type of circumstance would be considered efficient wheredevelopers’ behaviour is altered. If by implementing up-front charges, Council is able to direct moredevelopment to the lower cost areas, then the charging mechanism would be deriving an efficientoutcome.

Similarly, the use of catchments for the up-front infrastructure charging mechanisms can extract someof the inherent cross subsidies that arise through the use of averages in deriving charges.

The recurrent general rates that Council applies are based on averaged unimproved values ofproperties within Council’s region. These rates are imposed on all property owners within the regionand are currently differentiated by some aspects such as the use of the property.

Under the current scenario, these rates do not differentiate by location, or catchment, and thereforethere is a degree of averaging that occurs during their derivation which leads to cross-subsidies within



the region. This averaging and the cross-subsidies result in no locational signalling through differentialprices based on location.

Therefore an appropriate circumstance under which up-front charging would be warranted on efficiencygrounds would be where there is potential for locational signalling and the removal of cross subsidies.These circumstances are most likely to influence the behaviour of people within the region.

This type of circumstance would arise where there is considerable cost differential in areas within theregion. This way, an appropriate locational pricing signal can be provided to developers about the costsinvolved in certain areas over other areas and they can use this enhanced cost information in theirdecision-making process.

Locational signalling with general rates

Council does not currently differentiate its recurrent general rates by location and therefore nolocational signalling of areas within the region is achieved through this charging mechanism. Thisdifferentiation of general rates is considered in more detail in Task 4.

At present, it is not known whether this approach would send locational signals as strong as the up-front infrastructure charges. It may be that the locational signals are weaker under this approach due tothe disconnect between the decision making of the purchase and when the cost is then incurred by theowner. This disconnect could lead to investment decisions that do not factor in the locational signallingas effectively as the current up-front charging mechanism.



Task 3 – Council and up-front infrastructure charges

Excessive reliance on up-front charges

Excessive reliance and inefficient outcomes are not necessarily synonymous outcomes. There may bea heavy reliance on infrastructure charges, however this may actually be an efficient outcome given thecircumstances. Similarly, there may not be an over-reliance on up-front charges, but an inefficientoutcome may result.

As discussed in the previous section, efficiency is a function of choosing the right approach andpeople’s decision-making behaviour being influenced by the charging mechanism in place.

The primary focus of this task is on whether there is an excessive reliance on infrastructure chargerevenue that may lead to inefficient outcomes. If Council’s revenue was predominantly driven byinfrastructure charges, it could lead to inefficient Council decisions as they would have much greaterimpacts on Council revenue. The following provides some analysis of Council’s revenue breakdownwith that of other councils and jurisdictions to determine how Council compares.

Infrastructure charges as a portion of Council’s revenue

In considering Council’s specific circumstances it is important to determine what proportion of totalrevenue is derived through infrastructure charges. Review of revenue sources across Council suggeststhe proportion of Council’s revenue derived through infrastructure charges is not the predominantsource of revenue, with the general rates and utility charges revenue being the predominant source.

In order to provide a reasonable comparison between Council and other similar councils, thecontributions and donations element of total revenue has been considered. It should be noted that thismay contain other revenue not directly related to infrastructure charges, however it is the closestcategory for comparison for these purposes. As can be seen from the figure below, there has beenconsiderable variation across councils of the proportion of developer contributions revenue.

Identify for each PIP category in turn whether the reliance on up-front Infrastructure Charges isexcessive and likely to lead to inefficient outcomes in terms of settlement patterns and the overallquantum of housing produced in Gold Coast City.



Figure 16 – ‘Contributions and Donations’ as a proportion of Total Revenue

Source: Annual Reports of Gold Coast City Council, Brisbane City Council and Sunshine Coast Regional Council.

Note: Sunshine Coast Regional Council was formed on 14 March 2008 and therefore only one year of data is available.

At no point over the last five years has the contributions and donations component been the mostpredominant element in Council’s total revenue. The most predominant element in total revenue overthe last five years has been general rates and utility charges.

A higher level of development contributions could be a result of different development profiles; GoldCoast could have a higher revenue share from contributions precisely because of a greater amount ofdevelopment compared to other councils. Figure 16 provides an example of the vulnerability of theinfrastructure charges revenue to economic cycles. The proportion of infrastructure charges for Councilrises during good investment periods, and falls during not so good periods.

In looking at other jurisdictions, the Productivity Commission produced information based on thedevelopment contributions received by New South Wales and Victorian local governments in 2005-06.This is represented in Table 3 below.

This analysis shows that larger councils tend to have higher proportions of revenue coming frominfrastructure charges. There is also a considerable range between the council categories (2.4 – 25.7per cent) showing that the approach for infrastructure charges is not a ‘one-size-fits-all’ approach.

0%

5%

10%

15%

20%

25%

30%

35%

2004-05 2005-06 2006-07 2007-08 2008-09

Gold Coast Brisbane Logan Ipswich Sunshine Coast



Table 3: Comparison of other jurisdictions in 2005/06 ($m)

Contributions received

Total Revenue Cash In-Kind Total Percentage

NSW

10 Largest 1,609.2 85.7 11.3 97.0 6.0%

Other 5,663.3 125.3 10.1 135.5 2.4%

All Councils 7,272.4 211.0 21.5 232.5 3.2%

VIC

10 Largest 1,228.4 29.1 287.2 316.3 25.7%

Other 3,880.2 34.7 77.3 138.2 3.6%

All Councils 5,108.7 63.8 364.5 454.4 8.9%

Source: Chan, C., Forwood, D., Roper, H., and Sayers, C. 2009, Public Infrastructure Financing: An International

Perspective, Productivity Commission Staff Working Paper, March 2009, p.117

Infrastructure charges are not the predominant source of revenue for Council. Indeed comparisons withBrisbane City Council and Sunshine Coast Regional Council, as well as New South Wales andVictorian large councils, suggests that Council’s ratio of infrastructure charge revenue as a proportion oftotal revenue is not out of the ordinary and therefore unlikely to be excessive. However, there arecircumstances other than revenue over-reliance that may make up-front charging inappropriate.

Issues to be considered when implementing up-front charging

There are circumstances external to the development of the charges that may make up-front charginginappropriate, such as community perceptions and revenue certainty.

Community perceptions

While the use of different mechanisms would not impact the decision-making of an informed investor,there are a number of cases where the investor may not be as informed as they should be (or wouldlike to be).

Due to the significant nature of up-front infrastructure charges, there may be some sections of thedevelopment industry, or community, that see these costs as too high and believe that they are notreceiving value for money.

If there is a perception that Council recovers too much revenue from up-front charges and that this isimpacting on development in the region, Council has two options:

Change the perception within the region by providing greater transparency and increasedinformation, or

Accept the perception and undertake a change to move to a lesser reliance on up-frontcharges.

The first option would require Council to be more pro-active in ensuring the community and thedevelopment industry is aware of the infrastructure that these charges are funding. By making thecommunity more aware of the infrastructure that is being provided, they may be more willing to acceptthese charges as being value for money.



Alternatively, if Council does not believe it would be able to change these perceptions it could recovermore of these costs from recurrent charges to alleviate some of the community’s concerns. If Councilwas to adopt this approach, it would need to be transparent about which infrastructure costs were beingmoved to the recurrent charging mechanism in order to ensure that the integrity of the chargingmechanisms is maintained.

Revenue certainty

The application of an up-front charging mechanism leads to a greater degree of revenue uncertainty forCouncil. This mechanism relies on development activity to occur and therefore Council only receivesrevenue when development actually occurs.

In addition to this, infrastructure charges represent a source of finance that is generally likely to move inline with the demand for added infrastructure. Conversely however, they are less available when theproperty and construction cycles are in a downturn phase.21

In contrast, recurrent charging mechanisms have a much more stable consumer base. Therefore therevenue generated from these charges would be expected to be much more stable and certain innature.

We have not assessed Council’s financial position but would expect that a Council of its size is unlikelyto be experiencing issues associated with fluctuating infrastructure charge receipts.

Impact on settlement patterns

One of the primary impactors on settlement patterns within the use of infrastructure charges is thederivation of catchment areas.

The smaller the catchment areas are, the more closely these costs will accurately reflect the costsinvolved in developing within that area. This will provide better pricing signals to developers (andconsumers) and would remove some of the cross-subsidisation that occurs in using catchment areas todefine users.

In contrast to this, the larger the size of the catchment, the greater the degree of averaging across theconsumer base within the catchment area. Furthermore, the greater the degree of averaging, theweaker the pricing signals become and the greater the likelihood of cross-subsidies.

While the greater the number of catchments reduces the level of cross-subsidisation within the region, italso increases the administrative complexity, and hence administrative cost. Therefore infrastructurecharges that are common across the Gold Coast (i.e. water category 1) are not impacting on settlementpatterns and could be considered by Council for recurrent charging.

Impact on housing in the region

Due to the significant number of factors that can influence the development and demand for housing, itis difficult to determine the impact that infrastructure charges themselves can have on the quantum ofhousing in the region. Therefore our analysis has focused on the issues regarding the housing marketthat could stem from infrastructure charges that have been raised in other studies.

21 The Allen Consulting Group, op. cit. p68.



Market forces

The Productivity Commission was of the view that the actual impact on demand from any attempt bydevelopers to pass on increased infrastructure charges to higher house prices will be heavilydependent on local supply and demand elasticities.22

Due to the market determining the property prices, there is no guarantee that a decrease ininfrastructure charges would actually lead to a fall in property prices within the region.

Therefore it is important to acknowledge that developers are constrained by the market forcessurrounding the housing market. If there are issues with the demand side of the market (i.e. economicproblems within the region) developers will not be able to sell the developments at an appropriate price.If this situation eventuates, it is not necessarily the fault of infrastructure charges that are impacting ondevelopment or the quantum of housing within the region.

Affordability

The Local Government Association of Queensland undertook a survey of South East Queenslandhouseholds and focus groups in 2008 which resulted in 90 per cent of respondents being of the viewthat any reduction in developer charges would increase developer profit margins rather than be passedon to purchasers of property. The respondents also suggested that replacing infrastructure charges withhigher general rates would have no positive impact on housing affordability.23

Furthermore, the Productivity Commission’s report into first home ownership indicated that the cost ofinfrastructure charges will be offset by a reduction in the price of raw, or undeveloped, land.Conversely, any benefits from discounted infrastructure charges would be largely captured by ownersof raw, or undeveloped, land or by developers rather than house purchasers or house owners.24

As outlined in section 3, the Productivity Commission’s report into first home ownership found that agreater use of infrastructure charges is unlikely to have a substantial impact on housing affordability. 25

There is an issue with regard to the charges potentially having an impact on the ‘marginal investor’possibly being unable to obtain finance, however there will always be a ‘marginal investor’ and the useof infrastructure charge mechanisms will not impact this.

Impact on rental market

The Allen Consulting Group stated that increased house prices that stem from the use of developercharges raise the hurdle for rent to be paid by renters to tenants.26 However this does not take intoaccount the higher general rates that would be experienced by purchasers if infrastructure chargeswere not in place. Instead of the higher rents being required to cover the potentially higher capital costs,it would be required to cover the higher general rates being placed on the owner.

Therefore either charge that is in place, if they are recovering the same costs, will have the sameimpact on rental prices as owners will still require an appropriate return on their total investment.

22 Chan, C, op. cit. pp128-9.23 AEC Group, 2009, Economic Impact of Infrastructure Charges: Toowoomba Regional Council, Brisbane, p6.24 Productivity Commission 2004, op. cit. pp164-5.25 Productivity Commission 2004, op. cit. p16526 The Allen Consulting Group, op. cit. p66.

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Task 4 – Potential to expand alternative user chargingtechniques

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Assess the practical potential to expand the application of alternative user charging techniqueswhere Infrastructure Charges are shown to be inefficient.

riority Infrastructure Plan Economic Impact Study

ommissioned report for Gold Coast City Council PricewaterhouseCoopers | 25

defining an alternative charging technique the assessment considered up-front infrastructure chargesersus recurrent general rates. The review did not consider certain types of charges such as Specialharges, as these charges do not change the substance of the up-front versus recurrentonsiderations. This assessment therefore primarily relates around the potential to expand the recurrentharges component of infrastructure funding.

addressing this task, it is important to consider the term ‘inefficient’ and what it means in this context.s outlined in the previous task, inefficient infrastructure charges imply that the charges are notfluencing developer or consumer behaviour. If these charges are not influencing developmentecisions and behaviours, they are simply a form of revenue recovery with no efficiency benefit.

lternative user charging

infrastructure charges are not driving the outcomes that they are designed to (changing consumerehaviour), then alternative mechanisms need to be investigated. However, analysis is required toetermine whether in fact the infrastructure charges are producing an efficient outcome or not, and theossible effects of changing the charging mechanism.

ne of the issues confronting Council is that if higher infrastructure charges are discouragingevelopment within a high infrastructure cost location. This resulting lack of development may not bealatable to Council, however it is arguable that the downturn in development is efficient given theigher infrastructure cost location.

the charges have been calculated appropriately and developers are changing their behaviour within apecific region in response to these charges, then it could be argued that these charges are efficientnd in fact operating in the manner they are set out to.

owever, if it is determined that the locational signalling or the behaviour of industry is not efficientiven Council’s circumstances, then it would be appropriate for Council to consider an alternativeharging mechanism.

n alternative approach that attempts to still achieve the benefits of the infrastructure chargingechanism is to derive a recurrent general rates approach that differentiates based on location, thereby

roviding the same locational signalling that infrastructure charges do. If an approach such as this isdopted, Council should note that the strength of the locational signalling is not expected to be astrong as that with up-front infrastructure charges. This is largely due to the disconnect between whene investment decision is made and the recurrent charge is then incurred. Some potential investorsay not acknowledge the locational signalling or change their behaviour because of the differential

ate.



Impact for Council

In considering Council’s situation, if the infrastructure charge for network components acrosscatchments is relatively similar, it would be unlikely that the infrastructure charge would be influencingdecision-making behaviour. In these circumstances, the up-front infrastructure charges would bederiving no efficiency benefits and would therefore have no clear rationale for applying up-frontinfrastructure charges. Therefore these charges could be recovered through recurrent charges with noimpact on the efficiency of the recovery mechanisms.

Based on the information presented in Task 2, the following infrastructure network charges do not varygreatly across catchments:

Water category 1 (only two distinct charges)

Wastewater category 1 (only two distinct charges)

Wastewater category 3 (majority of charges are similar)

Roads (both local and state controlled roads), and

Recreational asset.

Council could therefore explore the possibility of recovering the costs of this infrastructure throughrecurrent charging mechanisms as there is no locational signalling that is being achieved through thesecharges within the region.

The remainder of this section considers the implications of using such an alternative chargingmechanism.

Implications of using alternative mechanism

If Council were to consider the implementation of such an alternative charging mechanism, there are anumber of issues that would need to be considered.

Legal implications

If Council were to implement a general rates mechanism that is differentiated based on location, itwould need to consider any potential legal or statutory requirements which may prevent Council fromdoing so.

Council currently applies differential rates through its ‘Resolution of Rates and Charges’ – thisdifferential is based on the type of land/development, not the location of the land. Council states thatthis differential rates system is based on providing equity through recognising capacity to pay, level ofservices required, use of the property and the final impact on ratepayers.27 Council also applies ‘SpecialRates’ which are recurrent in nature and only apply to certain areas within Council. These special ratesare designed to recover the costs of specific projects within certain areas, and therefore the costs areonly recovered from those within these areas.

Practical issues

Council would face a number of practical issues in implementing such an alternative chargingmechanism. Issues such as catchment areas, systems support and communication would impact onCouncils decision-making process.

27 Gold Coast City Council, Revenue Statement and Resolution of Rates and Charges 2010-11, June 2010, p. 4.



The development of catchment areas is an important practical consideration when seeking toimplement a general rates mechanism that would achieve locational signalling. Under the currentinfrastructure charges mechanism there are different catchment areas for each different network. Thisreflects the different cost structures and physical nature of the different infrastructure networks involved.

If Council were to implement a locational general rates mechanism, in order to keep it simple Councilmay only have one set of catchments for the entire mechanism. This would likely lead to anamalgamation of some catchment areas and a higher degree of averaging of costs, thereby resulting inmore cross-subsidies than under the infrastructure charges mechanism.

With the additional complexity in calculating the general rates, it would be expected that additionalsystems support would be required. This increase in systems support would be needed for theadditional information required in the calculation process as well as the administration side of things.

With a change in charging mechanism such as that outlined, a communication strategy would beneeded to ensure that all customers and industry understood the new approach and how it impactedeach of them. This increased communication would also lead to greater transparency in the chargesthat are being imposed by Council which should lead to more acceptance of these types of chargeswithin the industry.

Equity issues

If Council was to look at expanding alternative charging techniques, and therefore subsequentlyreducing the level of infrastructure charges within the region, Council would need to be cognisant of theinequitable effects this would have on recent property purchasers within the region.

If infrastructure charges were to be replaced with increased general rates, this would impact someonethat bought last year, at higher cost with the infrastructure charge embedded in the purchase price, andnow pays again through the special rate. Conversely, developers who purchased undeveloped, or raw,land at a lower price, get a further benefit by potentially having a lower infrastructure charge to pass onto consumers.

Commercial issues

One of the primary financial considerations for Council in applying this type of general rate mechanismis the difference in the timing of cash flows that will result from the change in approach. Council shouldbe aware of the impacts that this would have on Councils financial position, especially in the short-term.

In addition to the change in cash flow profile, as noted earlier in the report, revenue streams are morevulnerable under infrastructure charges than under a recurrent general rates approach.

The different charging mechanisms can result in different risk profiles for Council. In applying an up-front charging mechanism, Council will bear some commercial risk that the demand will not meetexpectations and therefore they will under-recover its infrastructure costs for the spare capacitycomponent of its existing infrastructure.

Alternatively, developers bear the risk that the future infrastructure that they are funding will not beprovided. Developers are taking on the risk of providing funds for infrastructure that is planned on notbeing constructed or undertaken for potentially many years into the future.

With regard to recurrent charging mechanisms, Council bears some risk in terms of the outlaying orborrowing of significant capital to fund the infrastructure and recovering the costs over a longer periodof time through rates.



Business Impact Assessment

In most cases, where changes such as this are implemented, a Business Impact Assessment of theproposed change is required prior to implementation. These assessments require a Cost-BenefitAnalysis of the proposed change to ensure that the potential benefits from the change outweigh thelikely costs.

Transitional issues

With a potential change such as this, it is unknown what impact this differential general ratesmechanism will have on the market.

Developers need to understand the price that they consider the development is worth in the marketprior to undertaking the development. However if there was a change to the way that rates were appliedto property owners there will be uncertainty in the market in the short-term.

This is primarily a transitional issue as the impact is unknown. Over time as more information becomesavailable, developers will be able to better understand the impact of the differential general rates.

Conclusion

Given the expected considerable increase in the costs of implementing such a charging mechanismand the minor benefits that may be achieved, on face value it appears that an investigation into thealternative approach is not likely to result in a change to Council’s charging mechanism.

If Council placed more importance on other non-financial factors, such as social or communityperceptions, then it would need to ensure that these other factors outweigh the expected additionalcosts from the alternative approach.

If Council is concerned with the level of up-front charges, it could explore the possibility of recoveringthe costs of certain infrastructure networks that do not achieve locational signalling through recurrentcharging mechanisms. If the infrastructure charges are not achieving locational signalling for certainaspects of infrastructure networks, then changing the funding mechanism to a recurrent nature will notimpact on the efficiency of Council’s infrastructure funding mechanisms.



References

Access Economics, 2003, Financing Infrastructure for Residential Development – Report for HousingIndustry Association Limited.

AEC Group, 2009, Economic Impact of Infrastructure Charges: Toowoomba Regional Council,Brisbane.

The Allen Consulting Group, 2003, Funding Urban Public Infrastructure – Approaches Compared,Melbourne.

Chan, C., Forwood, D., Roper, H., and Sayers, C. 2009, Public Infrastructure Financing: AnInternational Perspective, Productivity Commission Staff Working Paper, March 2009.

Gold Coast City Council, ‘Community Budget Report 2010-11, adopted 21 June 2010’

Gold Coast City Council, Gold Coast Planning Scheme 03, Division 2 Infrastructure Charges Schedule

Gold Coast City Council ‘Gold Coast Planning Scheme 03, Part 8 Infrastructure, Division 1 PriorityInfrastructure Plan’

Gold Coast City Council, Resolution of Water and Wastewater Charges 2010-11, adopted 21 June2010

Gold Coast City Council, Revenue Statement and Resolution of Rates and Charges 2010-11, adopted21 June 2010

Note by the Lord Mayor, Cap on development contributions to $20,000 per dwelling or lot, City ofSydney.http://www.cityofsydney.nsw.gov.au/council/documents/meetings/2010/Council/210610/100621_COUNCIL_ITEM31.pdf (accessed on 4 October 2010).

Productivity Commission 2004, First Home Ownership, Report no. 28, Melbourne.

Queensland Government, Priority infrastructure plans and infrastructure charges schedules, StatutoryGuideline 01/09

Seymour, E., State Government caps developer contributions, The Queanbeyan Age, 16 July 2010.http://www.queanbeyanage.com.au/news/local/news/general/state-government-caps-developer-contributions/1887622.aspx (accessed on 4 October 2010).



Appendix A: Response to Joint Industry Group comments on Draft Report

The Joint Industry Group provided comments in response to the Draft Report for Brief 2. These comments have been grouped into the followingcategories: outside the scope of all Briefs; outside the scope of Brief 2; and where a response is required.

JIG Comment PwC Response

The following comments are outside the scope of all project briefs

Page 5 – Task 3 – concerns are raised that this task is restrictedonly to housing. Where does the brief or the draft report intend toaddress the potential for inefficient outcomes in relation to nonresidential, employment creating development such as offices, retailand industrial development? The joint industry group hasconsistently brought to Council’s attention that excessive charges onnon residential development are inhibiting employment creatingopportunities and are undermining Council’s own economicdevelopment strategy. While housing is important, the futuredemand for housing is dependent on employment, which isdependent of new non residential developments within the City. Canthis issue be addressed within this report?

We agree that the impact on the non-residential sector is important,however the scope of this task requests PwC to address the impactsof up-front charging on settlement patterns and overall quantum ofhousing produced in the Gold Coast City. Non-residentialdevelopment is not within the scope of this task.

Page 6 under task 4 – recognition is again required that not allparts of the City are subject to PIP charges. A review ofdevelopment activity inside and outside of these areas, i.e. Robinaand Varsity Lakes for example, could lead to conclusions as towhether the infrastructure charges are influencing decision makingbehaviour. We believe this task should be part of this project.

Theoretically you would expect development to move to areas withlower infrastructure charges. However a detailed investigation intothe extent that development patterns are influenced by theexistence, or level, of infrastructure charges is not within the scopeof this project.

In general it is evident to the joint industry group that development istargeting areas which are subject to no PIP charges. How can thisreport either prove or disprove this observation?

The identifications of the various catchments does not demonstrate The PIP outlines 92 different catchments for the stormwater



or prove that Council is actually collecting , accounting for andexpending the collected funds on a ‘catchment by catchment’ basisin accordance with the PIP methodology. We are aware that this isnot occurring for the stormwater PIP charges. Is it occurring for anyof the other charging categories? An investigation of this issueshould form part of this report.

network, and therefore 92 different infrastructure charges.

The observations of the JIG raise questions as to whether Council’smanagement of funds is consistent with the intent of the PIP. Theguidance material in relation to expenditure of funds is focussed on“networks” not catchments. Without detailed examination of the“stormwater network” and Council’s management of funds wecannot comment on these observations..

The issue of whether funds received under the PIP are being spentconsistent with the intent of the PIP and its guidance material isoutside the scope of this brief and other briefs for this project.

With regard to stormwater catchments identified on Page 12, thevarious charges in each catchment vary significantly, but areirrelevant because Council pool the collected funds centrally tospend wherever they deem a need to be within the City. We wouldexpect an examination of this issue to be an important part of thisreport.

Page 16 – discussion on Cross Subsidies – this again assumes thatinfrastructure charges are collected and spent on a catchment basis.Is this actually occurring at GCCC? If not, the PIP charges alsorepresent a cross subsidy.

Page 17 Table 2 – The table assumes that PIP charges arecollected and spent in the catchment in which the developmentoccurs, and also assumes that the charges themselves do notrender the development economically unviable. Can this be noted?

Under ‘Cross Subsidies’ this again assumes that Council are indeedcollecting and spending PIP revenue on a catchment basis.Evidence to date suggests that they are not. Can this be confirmed?

Page 22- 2nd last paragraph – Again this assumes that Council areactually collecting and spending PIP charges on a ‘catchment bycatchment’ basis. Is this actually occurring?

Page 24 – last paragraph - this statement is entirely reliant on theassumption that Council collect and spend the PIP revenue in the



same catchment. Do they?

Page 24 – Alternate User Charging – 2nd paragraph – thisparagraph requires further explanation. How can it be efficient forCouncil to set charges at a level which is so high that it discouragesdevelopment, bearing in mind the employment, future rating revenueand application revenue benefits associated with new development?It is assumed that the higher charging areas of the City correlate tothe areas where the cost of providing the infrastructure is higher,however this would only be the case if Council is collecting,accounting for, and spending the PIP revenue in the catchmentwithin which the development is occurring. We don’t believe this isthe case and seek PWC to investigate this issue as part of thisreport.

This brief is considering the use of recurrent or up-front chargingmechanisms, the level of infrastructure charges is not the focus ofthis brief. The economic impact of infrastructure charges will beconsidered in brief 5.

Please see the comment above with regards to catchment fundcollection and catchment spending.

Page 13 – Figures 12-15 – What is clear is that the charges of theGCCC are significantly higher than its adjacent competitors. It isexpected that this form the basis of further investigation by PWC.

The purpose of this Brief is to consider the balance between up-frontand recurrent charges. It is not within the scope of the project toconsider the relativities of Council’s infrastructure charges comparedto other councils.

Page 17 – 4th last paragraph – What if the low cost areas areoutsides Council’s jurisdiction, i.e. Tweed, Logan or Ipswich LGAs?How is it more efficient for Council to provide an incentive fordevelopment to move outside Council’s jurisdiction? What are theresultant impacts on employment, rating revenue and applicationsourced revenue for GCCC?

For this report, efficiency has been defined as the impact that acharging mechanism has on developer/consumer behaviour. Ifapplying different mechanisms does not result in different behaviourthen there are no efficiency improvements, simply distributionalissues of cost recovery.

This definition of efficiency assumes that the approach andimplementation of infrastructure charging policies is appliedconsistently across councils. If this is not the case then there is likelyto be distortions in the market.

The economic impact of the level of infrastructure charges will beconsidered in Brief 5.

Page 19 – Task 3 – We are concerned that this task is only The economic impact of subsidising the land development sector will



restricted to housing. Where are employment generatingdevelopments intended to be addressed in the report?

be considered in Brief 6.

Page 22 – Impact on settlement patterns – we believe this could beretitled ‘impact on investment patterns’ to recognise that the effect isnot just restricted to residential development, but also affects nonresidential development.

The task requests PwC to consider settlement patterns on housing,therefore we have titled it as such.

Outside scope of this Brief, but will be considered in later Briefs

Page 23, Market Forces – We generally agree with this section, butnote that excessively high charges will prevent the development(both residential and non residential) from occurring in the firstplace. There is evidence that this is occurring within the City,particularly for non residential development. This issue needs to beinvestigated in future stages of this report.

This issue of the impact of high charges will be considered in Brief 8.

Alternate user charging – paragraph 3 – For this statement to becorrect, Council must have a deliberate policy or intent to specificallydirect development investment into Robina, Varsity Lakes and theother areas of the city which are not subject to PIP charges. It mustalso have the intent of encouraging development to establish inother nearby jurisdictions which are substantially cheaper, i.e.Tweed, Logan and Ipswich, and forego the resultant ongoingemployment benefit and rating revenue. In other words Councilwould rather not have the development, because the costs ofproviding the associated infrastructure are higher than the economicbenefits associated with the development itself. To do so would becompletely at odds with Council’s own economic developmentstrategy. We think the answer is that the charges have not beencalculated appropriately.

The calculation of the charges will be considered in Brief 3.

Page 21 - last paragraph – this is correct provided that the PIP Project feasibility is considered in Brief 8. The economic impact



charges do not render development economically unviable.Increasing community awareness will not restore economic viabilityto projects. If they are unviable they will not occur, or alternately willmove to a jurisdiction where they are viable. The impact of highcharges on overall employment in the economy should however bepart of any community awareness in terms of moving towards alesser reliance on up front charges. Ratepayers may be willing toaccept higher rates if they understand that less employment will becreated with higher infrastructure charges. While ratepayers don’tlike paying higher rates, they generally have a greater dislike of highunemployment, particularly if they are 1 of the 7 in the constructionand development industry within the City who are directly affected.

resulting from this is considered in Brief 5.

Page 22 – ‘Revenue Certainty’ first paragraph – this is the point thatis consistent missed by Council and the community in the debateover infrastructure charges. We believe it is worth reiterating thispoint throughout this report in the relevant places – if developmentcharges are so high as to render development unviable, thedevelopment does not occur and no charges are collected. Inaddition no employment is created and no additional rate revenue iscollected. Council’s stated economic development objectives arealso not met. The same issue applies to the collection of cigarettetaxes and the recent mining super profits tax. The employment andrating revenue implications of unsustainably high infrastructurecharges should be addressed in this report.

Page 22 – First paragraph – there is no commentary aboutpotential increase in revenue by reducing charges and making theGold Coast a more conducive location to invest. This should beaddressed in the report.

Economic impact is considered in Briefs 5 and 6.

These comments fall under the scope of this Brief and require a response

Page 5 – Paragraph 2 – There is a significant cost differential inareas within the region. Varsity Lakes, Robina and other areas are

We have adjusted the report to reference the list of areas that areexcluded from infrastructure charges. The list of exclusion areas can



not subject to PIP charges, whilst the charges levied in adjoiningLGAs are generally significantly lower than in GCCC.

be found at Part 10 – Schedules, Division 2 – SeparateDevelopment Legislation of the PIP. This reference has been madeclear on page 8 of the Brief 2 report.

Page 20 of the Brief 2 report has been amended to reflect thatCouncil is the only LGA with an approved PIP.

Page 8 – this section makes some valuable comparisons betweenthe charging rates applicable within various catchments in the Cityfor each infrastructure type. It again however needs to beacknowledged that some, often quite large areas within thesecatchments are not subject to PIP charges, i.e. Robina and VarsityLakes. In those instances we believe it is worth describing thoseareas as separate catchments.

Page 16 – Housing Affordability – Further explanation is soughtregarding how infrastructure charges can lower future user charges.

Re the productivity commission comments, further explanation isalso sought regarding how infrastructure charges are unlikely tohave any substantial effect on housing affordability, if those costswill be passed on by the developer to the purchaser? What isconsidered to be a ‘substantial effect’?

The total cost of infrastructure is recovered by Council through eitherup-front or recurrent charges. Therefore the greater the recovery ofcosts through up-front charges, the lower the recovery requiredthrough recurrent charges. Similarly, the lower the up-front charges,the higher the recurrent charges will need to be to recover the truecost of the infrastructure.

With regard to the PC comments, the imposition of higherinfrastructure charges will lead to higher capital costs (either throughpayments to developers or through the capitalisation of the charge inthe price) but a higher disposable income after the transaction. Incontrast, lower infrastructure charges will have lower capital costs,but will lead to users having lower disposable income through theneed for higher recurrent charges. Therefore the use of eithermechanism should not have a material impact on affordability.

Under ‘who pays?’ in retail, office and industrial circumstances,won’t the charges also be passed onto the lessees of commercialproperties who will then in turn pass the charges onto consumers inthe form of higher prices? Ultimately this could create a situationwhere new development in Greenfield areas results in PIP chargesbeing passed onto consumers, where pre- existing development ordevelopment is areas not subject to PIP charges do not. Can thisissue be acknowledged?

The process of determining consumer prices in situations whereinput costs increase is not as simple as passing through the costs toend user prices. Ultimately the market determines end user prices,and this process considers a range of factors. It is unlikely thatfurther examination of whether input cost increases would result in aproportionate price increase would provide any further clarity as towhether upfront or recurring charges are more efficient.



Page 20 – Figure 16 – Logan and Ipswich Council’s to be includedin graphical comparison

The graph on page 21 has been updated to include information onLogan and Ipswich councils.

Page 20 – Paragraph 1 – commentary about the significantreduction of contributions and donations as a proportion of revenue(i.e. 30% in 2006-2007 down to 13% in 2008/2009)

The purpose of the graph is to determine if there is a significantreliance on infrastructure charges, not to commentate on the year toyear changes and the variables that may have influenced this.

Page 20 - last paragraph.- If larger Council’s tend to have higherproportions of revenue coming from infrastructure charges, why, ifBrisbane City Council is more than twice the size of GCCC, is BCCcollecting between half and one third of the infrastructure proportionthat GCCC is collecting?

Could the Gold Coast situation be due to the high proportionalreliance on development and construction in the overall economy?– 1 in 7 people are directly employed in these industries, the highestproportion in Australia. This issue has a large influence on howhigher PIP charges may affect the economy as a whole; more sothan in areas which have a more balanced economy. Perhaps BCCcollects a lesser proportion of revenue from infrastructure charges,contrary to the Productivity Commission’s findings, because it has amore balanced economy which is less dependent on developmentand construction. If correct, this demonstrates that GCCC have farmore to lose if the PIP charging methodology is wrong, andexcessive charges are forcing development into cheaperneighbouring jurisdictions. The report should address this issue.

The statement regarding the large councils is in reference to thetable with information on Victorian and New South Wales councils.There will always be exceptions to the rule. In comparison, BrisbaneCity Council is higher than the large councils from NSW.

Page 23, Affordability – the LGAQ report is considered to be of norelevance to this study. If people were surveyed in the 14th centuryabout whether they thought the world was flat or round, and theyindicated that it was flat, it doesn’t change the fact that it is round.What is PWC’s view on whether replacing infrastructure chargeswith higher general rates would or wouldn’t have an impact onhousing affordability?

This issue is assessed in the housing affordability section of Brief 2.



Page 23 paragraph 2 under ‘affordability’. If infrastructurecharges are offset by a reduction in the price of raw or undevelopedland, won’t this negatively impact on Council’s rates revenue, as thisis based on Unimproved Capital Value (UCV)? Lower land valuesequal less general rates for the LGA. Wouldn’t Council be better offfinancially to retain high land values and hence higher ratingrevenue, and correspondingly reduce infrastructure charges, giventhat charges represent only 25% or so of the total Council revenue?

This brief does not consider the financial operation of Council.General rates, like infrastructure charges, are a function of theCouncil’s required revenue to fund services. Currently thedistribution of these rates is based on the UCV.

Page 23, Impact on Rental Market – While this point focuses onthe residential rental market, clearly infrastructure charges also havean impact on the commercial rental market which needs to beaddressed in this report.

With respect to the residential rental market, we would assume thatsupply and demand would be the greatest determinant of rents.Infrastructure charges applied at an excessive level, particularlyrelative to adjoining jurisdictions which do not have high charges,would be an influencing factor regarding the supply of propertiesavailable for rental. If the supply is reduced due to uncompetitivecharging regimes, then rental prices could be expected tosignificantly increase.

With respect to commercial rents, the current situation is thatexisting non residential premises have not been subjected to PIPcharges whilst new premises have. New premises are typicallylocated on the urban periphery, whilst new inner city developmentswill be able to claim credits for existing older development to bedemolished to make way for the new development, while newGreenfield development has no access to such credits. As aconsequence, assuming the charges are not so great as to makethe development unviable in the first instance, the infrastructurecharges will be passed on to the ultimate lessee of the premises.The lessee would then, we assume, have to pass the higher costsonto the end purchasers of goods and services, i.e. the general

The focus of this task is to consider the impact on housing.

This Brief and other Briefs do not consider the changes betweenpast, present and future charging policies.

Charging policies for brownfield and greenfield developments, aswell as the market prices for goods and services is outside thescope of this brief and the other briefs for this project. .



public. As most of the new residents in new Greenfielddevelopments are first home buyers and/or those in lower socioeconomic groups, those with the least ability to pay could be payingmore for their goods and services to pay for the higher lease costsassociated with the PIP charges being applied to new developmentsin Greenfield areas. Meanwhile no such charges apply in theestablished inner urban areas and hence do not have to be passedonto the consumer. Is this something PWC can investigate orcomment on as part of this project?

Page 25 - first paragraph - Again this part of the report needs toconsider that;

- There are large areas of the City which are not subject toPIP charges.

- It has not been proven that Council are actually collectingPIP revenue collected within a catchment, in that samecatchment, in fact there is clear evidence that this is notoccurring.

- Adjacent LGA jurisdictions have significantly lowercharges than GCCC.

- Credits are applicable to new development in theestablished parts of the City which are not available to newdevelopments in Greenfield locations.

As a consequence there can be a significant variation in the chargeswhich need to be paid by new development within the City based onboth locational and pre existing development circumstances. Thesefactors need to be investigated as part of this report.

These issues have been addressed in previous comments.

- Reference to the exclusion areas has been made in thereport

- An analysis of the spending of the infrastructure charges isnot part of this Brief or any other Brief for this project.

- Other councils are required to abide by the same guidanceas Council. If other councils are not recovering the full costof the services, this creates distortion for the market.

- The issue of credits is not part of this Brief or any otherBrief.

Page 25 - 2nd last paragraph - It is worth noting that ‘capacity topay’ is a factor in determining the level of rating through Council’s‘Resolution of Rates and Charges’. Along the same lines, why isn’t‘capacity to pay’ a factor in determining an appropriate level ofinfrastructure charging for new development? Determining anappropriate level of infrastructure charging which does not render

In the PIP, there are no explicit considerations for affordability.

Section 1.2.12 of the PIP ICS Guidelines state that the desiredstandard of service should be set with consideration of a number offactors, one of which is affordability.



desirable development economically unviable, and advancesCouncil’s economic development objectives is a key outcome of thisreport being conducted by PWC.

The economic impact of infrastructure charges will be addressed inBriefs 5 and 6.

Page 27 – Paragraph 1 - Are there some comments to be madeabout the fact that a Business Impact Assessment on PIP shouldhave been undertaken before its implementation to determine whatthe impact was going to be?

The focus of the brief is on the balance between up-front andrecurrent charges. Whether or not Council undertook a BusinessImpact Assessment prior to implementing the PIP is not one of thetasks required of the Brief.



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Priority Infrastructure Plan Economic Impact Study · Priority Infrastructure Plan Economic Impact Study ... such errors on our analysis, suggestions or report. ... Council’s ratio