17 October 2016

The Turnbull Government needs to incentivise State Governments to collaborate, to achieve its cities agenda

The Turnbull Government has declared its intention to focus on making our cities work better, by its "Smart Cities Plan".
Australia Real Estate and Construction
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The concept of using City Deals as a mechanism for collaborating with State and Local Governments on reforms that will help achieve the Turnbull Government's cities agenda has much to commend it.

The Turnbull Government has declared its intention to focus on making our cities work better. This makes good sense, as our cities are the engine room of our economic growth. While our mining and agricultural industries generate a large portion of our exports, almost 80% of our economic activity, and 75% of our jobs, occur in our cities. Our future national prosperity will largely turn the effectiveness of our cities in bringing people together and moving people and goods where they need to go.

The Turnbull Government declared its cities agenda with much fanfare in April, with the launch of its "Smart Cities Plan". You might recall the concept of the 30 minute city - one in which all residents can access employment, schools, shopping, services and recreational facilities within 30 minute of home. The plan also borrowed the UK concept of "city deals", as a mechanism for governments, industry and communities to plan and prioritise government investment in cities, and talked of the establishment of an infrastructure financing unit within the Commonwealth Government to "create integrated project teams with the private sector and key agencies to develop innovative financing solutions".

The difficulty the Turnbull Government faces is that it doesn't control the planning and development of our cities. These responsibilities fall on our State and Local Governments. Accordingly, the ability of the Turnbull Government to "fix" or even "influence" the planning, development and operation of the roads, railways, public transport, water, electricity, ports, airports, hospitals, schools, courts, prisons, stadiums, entertainment precincts and other infrastructure needed for efficient, productive, livable cities is limited. Accordingly, it is no surprise that the Turnbull Government's progress in implementing its cities agenda has been underwhelming.

But there is a solution.

Around the same time as the Smart Cities policy was launched, Infrastructure Australia, the Federal Government's infrastructure policy advisory body, published an update of its Australian Infrastructure Plan. Instead of detailing a long list of priority projects for Federal politicians to consider funding, Infrastructure Australia declared its primary interest was in wide-ranging reforms to the way we invest in, deliver and use our infrastructure. Indeed, it called its plan a "reform document".

However, Infrastructure Australia recognised the difficulties that the Federal Government would face in achieving meaningful reforms to the ways we invest in, deliver and use our infrastructure because it is our State, Territory and Local Governments that control the planning, delivery, use and regulation of most infrastructure. Accordingly, Infrastructure Australia recommended that the Federal Government encourage the other levels of government to play nicely by making Federal funding for a project contingent on the other government delivering required reforms. After all, he who pays the piper, can call the tune.

There is precedent for this approach. For example, the Federal Government's recent Asset Recycling Initiative encouraged some State Governments to privatise some publicly owned infrastructure, with its offer to top up the sale proceeds by an additional 15% if the proceeds were invested in new, productive infrastructure. While the initiative didn't work in every State and Territory, it did assist the reform process in some. Indeed, the Federal Government claims it delivered more than $23 billion in state infrastructure investment for just a few billion of federal payments. So it is somewhat surprising that the initiative has ended.

The Federal Government also "encouraged" State and Territory Governments to achieve significant competition policy reforms in the 1990s using similar strategies. So the strategy has good form.

Returning to the cities agenda, while the City Deal grants that were announced during the election campaign in relation to regional sports stadiums were uninspiring, the concept of using City Deals as a mechanism for collaborating with State and Local Governments on reforms that will help achieve the Turnbull Government's cities agenda has much to commend it.

For example, the Turnbull Government is keen to see value capture mechanisms employed to ensure that landowners who receive windfall gains from the development of publicly funded rail infrastructure help pay for the infrastructure that creates the additional value. The additional land value which is created by new infrastructure is often a function of permitted land uses and densities within walking distance of the railway stations, which are controlled by State and Local Government planning and development laws. A City Deal is a mechanism by which:

  • governments at all relevant levels can plan and prioritise the infrastructure and other investments that will grow a city's economy;
  • the local and state governments can commit to planning and zoning decisions that will enable meaningful value capture to occur;
  • in return, the Commonwealth can commit to provide the 'seed' funding, which when combined with the funding raised from value capture, will pay for the construction of the infrastructure.

And this is just the start. Cleverer minds than mine will come up with many more ways by which additional value (funding) can be created by using a City Deal to create win-win outcomes that incentivise all levels of government to take the (sometimes personally painful) steps needed to maximise the outcomes for all.

So what are we waiting for?


Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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