Australia: Fixing Queensland's broken economic model: planning and funding of development infrastructure is key

Last Updated: 14 October 2014
Article by Ian Wright

In brief - Future reform of Queensland's infrastructure planning and funding framework depends on heeding mistakes of the past

The Newman government's infrastructure planning and funding framework for development infrastructure has not resolved the policy issues identified by the Queensland Commission of Audit. A lack of integration, inequity and economic inefficiency remain. To assist in rebooting its economic model, Queensland's policy goal should be to revive its construction and property development sector.

To plan for the future we need to learn from the past

Queenslanders understand that the planning and funding of development infrastructure is critical to the design and construction of the places where we live, work and play.

This is particularly the case in south-east Queensland (SEQ) and regional cities and towns that are experiencing significant population growth and increasing demands for development infrastructure.

However, the current state of policy and practice in Queensland proves that the German Philosopher, Georg Hegel, was right when he said: "Peoples and governments have never learned anything from history or acted on principles deducible from it".

In this article, my premise is that you have to understand the past to know the present and to plan for the future.

I will provide some broad policy recommendations for the future reform of the framework for the planning and funding of development infrastructure in the context of the development of urban and regional areas of Queensland over the next 20 years.

In doing so, I will discuss how Queensland's economic model has been broken by those who were not aware of the lessons of the past and have gambled with the long-term economic future of the state for short-term economic gain.

Economic model uses mining royalties to fund lower taxes and charges

Queensland's current economic model was established in the 1970s by the Bjelke-Peterson Coalition government. The model was based on the simple principle of lower taxes and charges being funded by mining royalties (See RBS Morgans report Queensland a "two speed economy" by Michael Knox, 27 March 2012.)

The economic model involved five elements:

  • Mining royalties were distributed to the regions and cities and towns as state government grants for development infrastructure.
  • Local governments used state government grants together with rates revenue to build development infrastructure for future development.
  • Local governments levied future development with infrastructure charges to recover the rates revenue expended by local governments in building development infrastructure but not the state government grants.
  • The resulting cheap residential land and lower taxes attracted population growth resulting in Queensland experiencing an 88% increase in population over 20 years compared to the 50% Australian average.
  • Many of the new Queenslanders brought retirement savings and set up small businesses which drove growth in urban and regional areas of Queensland.

(See All Boom, No Benefit? Why Queensland needs a real economic strategy, Laura Eadie and Michael Hayman, page 19.)

At its core, Queensland's economic model involved the use of state revenue from mining royalties to subsidise urban development and population growth in Queensland's regions.

The Beattie and Bligh state Labor governments subsequently used the economic model to fund increased expenditure on education and health services to address Queensland's lower productivity in the 1990s and, in the case of the Bligh government, to reflect the ideological position of the left faction of the Labor party.

This increased expenditure on education and health services (as opposed to economic infrastructure) was predicated on rising mining royalties, in particular from coal mining in Queensland's regions.

Mining royalties reduced by GFC and federal taxes

By 2009, the Queensland economic model was coming under significant challenge from the global financial crisis (GFC) which significantly reduced coal prices and exports. In addition, Federal Labor government taxes, such as the mining and carbon taxes, created significant uncertainty in mining investment, particularly in coal in Queensland.

The resulting damage to the Queensland budget, in terms of reduced revenue from mining royalties, was in the order of $400 million by 2011 and 2012 (see Table 1).

Table 1: Queensland's mining royalty gap – 2008 to 2012

Year Budget coal royalties
($ million)
Actual coal royalties
($ million)
Gap
($ million)
2008 1,020 1,035 15
2009 3,213 3,103 -110
2010 1,433 1,786 353
2011 2,766 2,357 -409
2012 2,755 2,386 -369

(Source: All Boom, No Benefit? Why Queensland needs a real economic strategy, Laura Eadie and Michael Hayman, page 35.)

Bligh government responds to impending fiscal crisis

The Bligh government was confronted with increasing spending on education and health services with increasing deficits. Its policy response to the impending fiscal crisis was fourfold:

  • the privatisation of state government assets
  • the cutting of state government grants to local governments to fund development infrastructure. For example, the average annual subsidy was reduced from $480 million in the period from 2002 to 2010 to $225 million in the period from 2011 to 2013 (see Submission – Discussion paper: Infrastructure planning and charging framework review, page iii).
  • the empowering of local governments to levy infrastructure charges under priority infrastructure plans from developers to recover the abolished capital subsidy program of the state government. In effect, the state government's subsidy of up to 50% for development infrastructure was passed on to developers.
  • the resulting significant increases in infrastructure charges, when combined with suppressed housing demand and reduced financing in the context of the GFC, adversely impacted on development feasibility and housing affordability. This resulted in the introduction of capped infrastructure charges and capped water charges for SEQ water businesses.

Queensland's economic model broken

The Bligh government's policy responses had the effect of breaking the Queensland economic model in five respects.

  • State government per capita investment in development infrastructure dropped significantly below that of other Australian states (see Table 2).

Table 2: Per capita investment in development infrastructure

State Investment per capita ($)
New South Wales 76.35
Victoria 9.25
Queensland 3.95

(Source: Local Government Association of Queensland, Submission – Discussion paper: Infrastructure planning and charging framework review, page iii)

  • The abolition of the capital subsidy program, capping of infrastructure charges and reduced income from SEQ water businesses is estimated to have reduced local government revenues by $800 million a year (See Submission – Discussion paper: Infrastructure planning and charging framework review, page iii)
  • The capping of infrastructure charges created a funding gap, particularly for high-growth local governments, which is estimated by the Local Government Association of Queensland (LGAQ) to be some $480 million annually. This has caused local governments to:
  • Capped charges were utilised unwisely by some local governments, particularly in rural and regional areas, to increase their infrastructure charges beyond the short-term marginal cost of the provision of that infrastructure. In effect, capped charges functioned as a tax on development.
  • The political fallout of privatisation brought down the Bligh government in March 2012, while the combination of local taxation increases and reduced economic activity in the construction and property development sector brought down 44 mayors in the April 2012 elections – the largest turnover in local political leaders since World War II. (See Submission – Discussion paper: Infrastructure planning and charging framework review, page 2.)

Newman government confronted by significant challenges

The Newman LNP government, which replaced the Bligh government at the March 2012 election, confronted five significant challenges:

  • Queensland did not have an integrated state and local government infrastructure planning model.
  • Queensland did not have an infrastructure funding model which was financially sustainable for local governments or financially feasible for property developers.
  • The residential property industry was stagnant as a result of poor public policy.
  • The Queensland economic model was broken.
  • Queensland's fiscal position was unsustainable and urgent budget consolidation was required.

Queensland Commission of Audit recommends fiscal consolidation, reducing the role of government and long-term financial planning

The Newman government's Queensland Commission of Audit (QCA) made three fundamental recommendations (See Queensland Commission of Audit's 2013 Final Report):

  1. Fiscal consolidation – to be achieved by reducing expenditure (some $5.5 billion in the 2012/2013 budget) and reducing debt (by some $25 - $30 billion) to regain the state's AAA credit rating.
  2. Reducing the role of government – to be achieved by privatising government assets and providing for greater private sector delivery of public services.
  3. Long-term financial planning – to be achieved by improved budget, cash and asset management practices underpinned by an InterGenerational Report for the state with a 40-year perspective and 10-year State Infrastructure Plan.

The QCA also noted, in the context of its recommendation for a 10-year State Infrastructure Plan, that while there have been previous attempts at longer-term strategic plans and infrastructure plans, their usefulness has been significantly diminished by the lack of any serious assessment of available financial capacity (See Queensland Commission of Audit's 2013 Final Report, pp. 1-17).

Therefore, it was critical that the Newman government's ultimate policy response on the funding of development infrastructure did not result in the infrastructure planning framework being divorced from the cost of the development infrastructure and the available financial capacity of local governments to fund that infrastructure.

Newman government considers four infrastructure charges

The Newman government considered four broad options on the funding of development infrastructure:

  • Planned charges – Infrastructure charges which reflect the planned cost of the trunk infrastructure to be provided by local government.
  • Maximum capped charges – Infrastructure charges which remain capped in accordance with the policy position of the former Bligh government.
  • Reduced capped charges – Infrastructure charges based on a reduced maximum cap of 25%.
  • Planned charges for reduced development infrastructure – Infrastructure charges which reflect the planned cost of a reduced scope of development infrastructure to be provided by local government.

The LGAQ estimated that those policy options involving less than the planned charge would cause an annualised funding gap of between $480 million to $1 billion for Queensland local governments. The Newman government did not accept this. (See Submission – Discussion paper: Infrastructure planning and charging framework review, page 10).

The LGAQ also noted that the funding of this gap would either increase local government borrowings and as a result state government borrowings, which would make it more difficult to regain the state's AAA credit rating, or it would increase local government rates by between $571 to $768 per rateable property (see Table 3) ( Submission – Discussion paper: Infrastructure planning and charging framework review, page 10).

These outcomes are neither financially nor politically sustainable.

Table 3: Financial impacts of Newman government's reform options

Infrastructure charges Funding gap (NPV total) Annualised funding gap
(NPV total)
Annualised cost per property
Maximum capped charge $10 billion $481 million $359
Reduced capped charge (25%) $16.4 billion $759 million $571
Planned charge for reduced development infrastructure $22 billion $1 billion $768

(Source: Local Government Association of Queensland, Submission - Discussion paper: Infrastructure planning and charging framework review, page 10.)

Introduction of framework for local government offsets and refunds

The Newman government implemented its policy position in relation to the review of Queensland's infrastructure planning and funding system on 4 July 2014 through amendments to the Sustainable Planning Act 2009.

Its policy response was to retain the Bligh government's infrastructure planning and funding frameworks for development infrastructure and to introduce a framework for local government offsets and refunds for the provision of trunk infrastructure by developers:

  • Infrastructure planning framework – The infrastructure planning framework of the Bligh government involving a priority infrastructure plan which identifies a priority infrastructure area, planning assumptions and plans for trunk infrastructure was retained; albeit the priority infrastructure plan has been renamed as a local government infrastructure plan.
  • Infrastructure funding framework – The maximum capped charges framework of the Bligh government was also retained.
  • Offsets and refunds framework – A framework was introduced in relation to the provision of development infrastructure by developers under which developers can offset the cost of land and work contributions for trunk infrastructure against infrastructure charges and seek a refund from a local government where the value of the offsets exceeds the infrastructure charges.

Policy position improved but enduring policy issues remain

While the Newman government's introduction of an offset and refunds framework represents a net improvement on the Bligh government's policy position, its adoption of the Bligh government's policy position for infrastructure planning and funding gives rise to continuing issues in terms of a lack of integration, inequity and economic inefficiency.

Framework fails to integrate infrastructure and land use planning with infrastructure funding

The basic policy objective of any infrastructure planning and funding framework must be to integrate land use, infrastructure and funding such that infrastructure is funded in a manner that enables it to be constructed prior to, or current with, development. This will ensure that existing infrastructure networks are not overwhelmed by new demand.

The primary goal of an infrastructure charge is to recover costs for the provision of infrastructure by a local government. The infrastructure funding framework does not achieve this.

The LGAQ has estimated that the maximum capped framework results in an estimated shortfall between infrastructure charges and the cost of providing development infrastructure to future development of a minimum of $480 million annually (See Submission – Discussion paper: Infrastructure planning and charging framework review, page 10.)

By imposing capped infrastructure charges, the infrastructure funding framework has, in essence, prioritised accountability (in particular certainty) over cost recovery.

However, neither the Bligh nor Newman governments have released a cost-benefit analysis to establish that the benefits arising from certainty exceed the $480 million annual costs for foregone infrastructure charges, as well as the unquantified costs of social inequity and economic inefficiency associated with the infrastructure funding framework.

Therefore, the infrastructure funding framework does not integrate infrastructure and land use planning with infrastructure funding.

Framework fails to encourage equity horizontally and vertically

The government's policy response does not expressly or impliedly encourage the provision of infrastructure and serviced land in a manner which achieves or encourages equity.

In particular, the infrastructure funding framework does not encourage:

  • Horizontal equity – Those persons that benefit from development infrastructure should be the persons that pay for the infrastructure (benefits principle). This clearly is not the case, given that capped infrastructure charges are calculated by means of an average cost approach rather than a marginal cost approach.
  • Vertical equity – Those persons that have the greater ability to pay should contribute more towards the cost of providing development infrastructure than do those who have a lesser ability to pay (liability-to-pay principle).

Framework encourages inequity between developers and landowners

In particular, the infrastructure funding framework encourages:

  • Inequity between developers – The developers of low-cost development fronts (generally infill development undertaken by smaller entrepreneurial developers) will subsidise higher-cost development fronts (generally greenfield or brownfield development undertaken by larger institutional developers).
  • Inequity between landowners – The landowners of lower-cost development fronts (generally in infill locations) will subsidise the landowners of higher-cost development fronts (generally in greenfield or brownfield locations).

The infrastructure funding framework, encouraging as it does horizontal and vertical inequities, is likely to give rise to further issues of political unacceptability from landowners, smaller entrepreneurial developers and local governments.

Framework encourages urban and regional settlement patterns which are not economically efficient

The infrastructure funding framework, to the extent that it does not provide for full cost recovery, does not encourage the provision of development infrastructure and serviced land which is economically efficient.

In particular, it does not encourage:

  • Productive efficiency – The total average cost for development infrastructure and serviced land should be minimised by developing land where the total environmental, social and financial cost of providing additional development infrastructure and serviced land is the lowest. In general terms, this is likely to be in locations near serviced land.
  • Allocative efficiency – The price for development infrastructure and serviced land should accordingly reflect the costs incurred in its provision and should not be distorted by taxes, subsidies or other measures. Therefore, the price for development infrastructure should reflect its marginal cost; that is the cost of increasing the capacity of development infrastructure to produce one more unit of service to satisfy demand, rather than its average cost.
  • Dynamic efficiency – The development infrastructure and serviced land to be provided in the short term should also impose the least cost over the long term, while providing the maximum amount of choice for development.

(See Industry Commission's Taxation and Financial Policy Impacts of Urban Settlement Volume 1: Report, page 102)

The infrastructure funding framework encourages urban and regional settlement patterns which are not economically efficient. They are likely to result in dead weight losses that will impose long-term financial costs on state and local governments, smaller entrepreneurial developers and some landowners.

Policy goal should be to reboot the Queensland economic model through revived construction and property development sector

While Queensland's recent political history teaches us that good policy is good politics and that bad policy is disasterous to politicians, mistakes of the past continue to be repeated.

I believe our policy goal should be the rebooting of the Queensland economic model through a revived construction and property development sector. Four policies could be implemented to assist with the achievement of that goal:

  1. Adopt an integrated infrastructure planning model – As recommended by the QCA, a 10-year State Infrastructure Plan linked to the financial capacity of the state to fund state infrastructure should be complemented by a 10-year Local Infrastructure Plan which is also linked to the financial capacity of local governments to fund development infrastructure.
  2. Adopt an integrated infrastructure funding model which is based on these principles:
    • Development outside of the priority infrastructure area or in the priority infrastructure area but inconsistent with the planning assumptions of a local government infrastructure plan, should be subject to conditions of a development approval requiring development charges, i.e. financial contributions for a local government's additional trunk infrastructure costs.
    • Infrastructure charges should be linked to the funding of essential development infrastructure - water supply, sewerage, transport and local parks - with community benefit infrastructure such as district and regional sport, recreational and community facilities being funded through local government rates.

    Infrastructure charges should be calculated on the short-run marginal cost that is the incremental cost of the provision of additional development infrastructure to fund future development (See Productivity Commission of Australia's Public Infrastructure report, page 143).

    • Infrastructure charges can be capped by the state government to achieve state economic objectives, e.g. the promotion of the construction and property development sector, or state social objectives, e.g. housing affordability.
    • State government subsidies through capped infrastructure charges should be funded by the state government through compensatory grants to local governments or, as in the case of New South Wales, through a Priority Infrastructure Fund which is used to fund local development infrastructure. (See Productivity Commission of Australia's Public Infrastructure report, page 170.)
  1. Adopt local government budgets which are based on:
    • A conservative capital works program which is limited to only essential trunk development infrastructure and the provision of trunk development infrastructure at a lower standard of service.
    • Increased revenue from rates and charges involving:
      • A review of the differential general rating system to remove cross subsidies.
      • Separate rates and charges to fund community benefit infrastructure such as the environment, parkland, open space, community facilities, pedestrian and bikeways, and other local government facilities such as emergency services.
  1. Adopt policies to fund trunk infrastructure through property development projects – A local government could review its land holdings to identify land in proximity to proposed development infrastructure which could be developed by the local government or a third party on behalf of the local government to fund the development infrastructure.

Future reform of the framework is inevitable but we must heed the lessons of the past

The Newman government's infrastructure planning and funding framework for development infrastructure, while an improvement on that of the Bligh government, has not resolved the policy issues identified by the QCA. The effect is that enduring policy issues of a lack of integration, inequity and economic inefficiency remain.

As the Prime Minister Tony Abbott recently said during his address to the World Economic Forum in Davos, Switzerland, "You can't spend what you haven't got. No country has ever taxed or subsidised its way to prosperity. You don't address debt and deficit with yet more debt and deficit".

It is very unlikely that we have heard the end of infrastructure planning and funding reform in Queensland. Future reform of the infrastructure planning and funding framework for development infrastructure is inevitable.

If we are to reboot Queensland's economic model, future reform of the framework for the planning and funding of development infrastructure should heed the warning of Georg Hegel, so that we are not destined to repeat the mistakes of the past.

Ian Wright
Infrastructure planning
CBP Lawyers

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