An economic fix for planning scandals

Posted February 21, 2020

  • Local government
  • State government
SGS Economics and Planning Marcus Spiller Affordable Housing

The planning scandal uncovered by Victoria’s Independent Broad-based Anti-corruption Commission (IBAC) in the City of Casey, one of Melbourne’s burgeoning suburban growth areas, is truly a slow-motion car crash. It features alleged bribery, bureaucratic intrigue, professional behaviour of dubious ethical standards and compromised local democracy.

As important as it is to deal with the symptoms of corruption in planning through better monitoring of development approvals and the officials who transact them, public policy must address the driver of this corruption – the easy money to be made from persuading planning authorities to grant discretionary approvals or change the zoning of land.

The planning regulation honey pot

Planning regulations represent one of Australia’s largest and most enduring honey pots for ‘rent seekers’. These are those who would want to make money without creating commensurate value for customers and the community.

When additional development rights are assigned to a particular piece of land through the planning process, by rezoning from lower order uses like farmland or industrial to higher order uses like residential or mixed use development, its value will typically rise, substantially. The same uplift in land value will occur when a proponent successfully argues for additional height or intensity of development on their land.

Access to these additional development rights does not come automatically with the ownership of land. The owner of farmland has no innate right to have it rezoned to higher value uses, nor does a proponent have the right for approval of additional storeys on their planned apartment or commercial building. Whether access to these additional development rights is granted is entirely a matter of public decision resolved on town planning merits. These include the suitability of the land in question for the proposed development, compliance with amenity standards, the quality of design and the adequacy of contributions to supporting infrastructure.

Through the creation of town planning controls, development rights are reserved by the State. In this sense, they are analogous to other resources which are attached to real estate but are not owned by the land titleholder, for example, minerals which may lay below the surface or the water that falls onto the land from the sky. Like these other publicly reserved resources, the State is, in principle, entitled to charge a fee for access to development rights, but for the most part in Australia, it doesn’t. In these circumstances, the value of the rights defaults to the landowner creating a windfall when favourable planning approvals are achieved. Hence the corruption honey pot.

The value of development rights is given by the difference between the market price for a finished development and the costs of bringing it to market including design, approvals, construction, charges for off-site infrastructure provision, marketing and a margin for reasonable profit. This difference is known in the trade as the ‘residual land value (RLV)’. It is the maximum price that a bona fide developer would pay for a piece of land to enable them to complete their project with a fair return given the risk they are taking on. If land is awarded additional development rights through the planning process, the aggregate market value of the finished product on the land will go up pulling up the RLV after accounting for production costs.

In a situation where there is no charge for access to development rights, there is a lot of money to be made in arguing for the granting of discretionary changes in zoning or development limits, whether these arguments are made by corrupt or legitimate agents in the planning process.

The Altona North example

Acting entirely with integrity, the Victorian Government in August 2018 approved the rezoning of 67 hectares of industrial land in Altona North in Melbourne’s western suburbs to enable a high intensity development of mainly residential uses. The RLV of the land under its original industrial zoning was estimated by EY at approximately $210 million in early 2018 when formal deliberations about changing the planning scheme to facilitate mixed use were underway. This would have been the highest price that developers of factories and the like would pay for sites in the area. The RLV of the land under its proposed new zoning was estimated by EY at $600 million. The increase of $390 million was the direct result of the granting of additional development rights.

This estimated uplift due to rezoning was net of all estimated development costs, including development contributions for open space, roads, drains and other infrastructure to service the mixed use vision for the former industrial land. As part of the planning process, the Victorian Planning Authority and the Hobsons Bay City Council negotiated an additional development contribution – for affordable housing – presumably with the aim of sharing some of the rezoning uplift with the community at large. The deal required developers of the rezoned land to offer 5 per cent of any dwellings they constructed at a 25 per cent discount to the Council or registered affordable housing agencies. At the median apartment price at the time, and given the cap of 3,000 dwellings across the rezoned precinct, the value of this affordable housing obligation amounted to less than $20 million. This means that of the total uplift from the granting of additional development rights about $20 million went to the community and $370 million was captured by private landowners.

A 50/50 split a fairer deal

A 50/50 split, with the community gaining $195 million in the form of improved parkland, more recreation facilities, affordable housing and other amenities would have been a fairer deal.

Although confirmed by the rezoning, a significant proportion of the $370 million pocketed by private landowners in Altona North would have been banked prior to that decision. Some landowners would have grabbed their spoils and departed the scene when the precinct in question was being contemplated publicly for rezoning but formal rezoning proceedings had not yet commenced. Such public contemplation stretched over many years, so there were plenty of opportunities for landowners to on-sell to other investors who were ready to pay a premium for the chance to bag the value of additional development rights through rezoning.

Charging a fee for access to additional development rights granted through the planning process would dampen tendencies towards corruption in the administration of the system and mitigate wasteful rent seeking behaviour right along the chain of property transactions culminating in rezoning and the like. It would also generate substantial revenue for the provision of much needed infrastructure to support growth and consolidation of our cities. Provided the fee leaves enough on the table for landowners so that they remain motivated to release their sites to bona fide developers, there would be no distortion in the development process. We would still get the same houses, factories, shops and so on that we would have got without the fee, except that some of the value uplift from the development approvals will have been shared with the community rather than being entirely privately captured.

Housing prices would not be affected by these access fees as bona fide developers are price takers not price makers in the market. They would factor any fee into their bid price for land thereby passing the charge back to land sellers.

Charging for access to development rights can be applied readily

Charging a fee for access to additional development rights can be applied readily and efficiently. As the community would only be seeking a ‘reasonable’ share of the uplift in value generated from planning decisions, there is no pressing need for precision in the measurement of individual value movements. Rather these values can be approximated and codified based on typical RLVs per square metre of floor area for each suburb and land use. These codified access fees could be applied to big developments – such as the Altona North example – and small developments alike. This already happens in the ACT.

The precedent for charging access fee for development rights already exists in Victoria. It’s called the Growth Area Infrastructure Charge (GAIC) and affects land which is being rezoned from rural to urban uses. The problem is that it only applies to a handful of growth area municipalities on the fringes of Melbourne and it is set at a very low-value capture rate, down around 15 per cent. Upping the rate and making the GAIC universally applicable would be a fillip for sustainable city development while mitigating corruption debacles such that currently unfolding in Casey.

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