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Shifting the Dial: 5 year productivity review

Chapter 4: Better functioning towns and cities

Benefits assessment:  About $29 billion increase in GDP in the long-term
Better functioning towns and cities: What matters?

Problems

Solutions

Benefits

Public Infrastructure

  • Inadequate attention to planning
  • Continuing likelihood of poor investment decisions
  • Subject proposed projects and alternatives to benefit-cost evaluations and public scrutiny
  • Greater inclination to invest according to likely returns, rather than high-visibility, high-cost projects
  • Implement recommendations from 2014 Commission inquiry as a priority
  • Significant project savings, lower taxes and/or debt
  • Greater contribution to economic growth
  • Greater capacity for society to earn a return on investment

Road Funding and Investment

  • Congestion ever increasing
  • An increasingly unsustainable funding base
  • Establish Road Funds in each State and Territory to collect hypothecated road-related charges
  • Determine spending in accordance with road users’ preferences
  • Set the plan to move over the medium term from the current array of road charges to increasing use of direct pricing
  • Conduct road user charging pilots, starting with new road additions in major capitals
  • Road service provision that meets needs and demands of users
  • Greater confidence in investment selection leads to greater confidence in use of pricing instruments
  • Establishes a sustainable funding base

Planning and land use policies

  • Planning and zoning systems highly prescriptive and complex
  • Misalignment in State and Local level planning
  • Apply competition policy principles to land use policies
  • Ban regulations that favour particular operators or set proximity restrictions
  • Adopt known best-practice development assessment model
  • States engage genuinely with, and set clear parameters for, councils on planning strategies
  • Encourage business investment, employment and competition
  • Reduce costs and complexities of development processes

Access to housing

  • Stamp duties on property transfers discourage people from moving and lead to less productive use of land
  • Transition from stamp duties on properties to a broad-based tax based on unimproved land values
  • Increase intra- and inter-city labour mobility
  • Improve housing choice over the longer term

4.1 The importance of large towns and cities

Australia’s cities and large towns (areas with populations greater than 100 000; hereafter called ‘cities’) have come to account for an overwhelming majority of where people live and work. Unsurprisingly, cities account for most of the country’s output. About 80 per cent of Australia’s GDP is produced in cities, and 40 per cent in Australia’s two largest, Sydney and Melbourne (DIRD 2015). Capital cities represent over two-thirds of total employment and accounted for 80 per cent of employment growth in 2015-16 (figure 4.1).

Figure 4.1 The contribution of cities to growth

  • Contributions to total employment growth by decade

    This figure displays the contribution that capital cities make to employment growth in each state, compared to the contribution from non capital areas, for the periods 2000 to 2009, and 2010 to 2017. The figure shows that capital cities drive the majority of employment growth in each state, and that the largest capital cities (Sydney and Melbourne) generated the most employment growth. The data for the Australian Capital Territory and the Northern Territory measure the whole territory, and do not split out the capital city contribution.

    Source: (ABS 2017a) Cat. no. 6291.0.55.001 – Data Cube LM1 - Labour force status by Age, Greater Capital City and Rest of State (ASGS), Marital status and Sex, February 1978 onwards.

Cities are discrete units in some ways that are important to reform, for example better regulation, or infrastructure; and a focus on them as economic units can allow a clearer pathway to enhancing productivity. Their efficient functioning is important also for smaller towns, including as sources of demand and points of export for many of the goods produced by them.

In 2015, Melbourne grew by more people every 5 days than Hobart added in the entire year

Australia’s cities have become more important over time as centres of jobs and populations, reflecting in significant part changes in Australia’s comparative economic advantages. Today, the largest cities are dominated by service industries, including professional (such as legal and medical), business and financial services. Population growth trends strongly suggest this will persist.

In 2015, Melbourne grew by more people every five days than Hobart added in the entire year. On current trends, it is projected that over 80 per cent of Australia’s population growth to 2050 will occur in the capital cities. In aggregate, 10.8 million additional people are projected to live in Australia’s capital cities by that year, compared with 2.4 million more people in non-capital city areas (ABS 2013b). The growth of service sectors in particular is anticipated to continue, and with it the prominence of cities (box 4.1). Service sectors are generally labour-intensive, and the large pools of labour and concentrations of knowledge in cities effectively make cities a source of natural advantage (Baldwin 2016; Ellison and Glaeser 1999).

Despite the possibilities offered by communications technologies to further reduce physical proximity as a factor in being able to undertake work, it is far from certain that they will diminish the importance of proximity in ‘doing business’, with human contact and informal opportunities to learn remaining important.

Notably, the first companies to limit employees’ access to remote working arrangements and insist on physical proximity between staff were technology companies themselves (Daley 2016).

Box 4.1 Services sector businesses are attracted to cities

  • As growth in cities drives improvements in residents’ average wealth, cities overall tend to become more dominated by services sectors, reflecting that consumers spend a larger share of nominal income on services (relative to goods) as they become wealthier. It also reflects the ongoing industrialisation of emerging economies, where labour costs in tradeable goods manufacturing generally remain low relative to advanced countries like Australia, leading to a shift in such activity to those economies.

    Agglomeration economies increase the returns to businesses from physical proximity to each other and to suppliers. Services industries, in addition to generally requiring less land and other physical capital to operate, also benefit from locating close to each other, and having access to the pools of highly skilled labour that cities tend to provide on account of their size. The presence of such industries, and the higher wages they tend to pay, often provides an incentive for skilled workers elsewhere to relocate to cities. This can add to population growth pressures over time but, managed well, contribute to cities’ growth potential.

    Sources: Connolly and Lewis (2010); Ellison and Glaeser (1999); Greenstone, Hornbeck and Moretti (2010).

What is desired of cities from a productivity perspective?

Views on how well cities are functioning will inevitably reflect personal preferences. Survey indicators of their good functioning usually include access to housing in the forms and locations desired; good mobility; a sense of safety on the part of those who live and visit; thriving businesses that provide good employment opportunities; access to quality services, and an environment that reflects appreciation for the social, environmental and aesthetic importance of urban design.

In a dynamic sense, thriving cities would grow while retaining these features. Lately, this quality is being referred to as a city’s ‘resilience’, meaning its ability to withstand and respond to chronic stresses (such as congestion, threats to public safety, and natural resource scarcity) and acute shocks including disease outbreaks or terrorist attacks.

Conversely, features that usually signal poor functioning include sustained overcrowding, transport congestion leading to significant wasted time and costs, high levels of social unrest and crime, large-scale homelessness and large, entrenched, disparities in opportunity that can contribute to widening dispersions in income and social tensions.

From a productivity perspective, many aspects of cities that affect how they function overlap with those that also matter for people to be healthy, for labour markets to provide long-term opportunities for all workers, for markets to work efficiently, and for services to be delivered where needed and of the required quality.

Cities are, however, distinguished by their spatial and geographic dimensions and their high concentrations of people, which mean that policies affecting the availability and use of space, organisation of activity and the pace and distribution of population growth have a particular impact on outcomes.

Policies that particularly matter

Policies that particularly matter in this context include:

  • migration settings, with the bulk of temporary immigrants living in cities for educational and work purposes, and the significant majority of permanent migrants settling in capital cities (PC 2016f). Immigration drove 60 per cent of national population growth over the past decade
  • those that determine or significantly influence how land is used, where and how people can undertake activity, and ease of movement — whether this is people, inputs (resources) or final goods and services.

The latter includes land use and planning policies, which:

  • determine where homes, businesses and structures for major facilitative services such as telecommunications and transport can be located, their allowable types and densities, and hence a large part of the potential benefit from using the land
  • seek to regulate movement and the use of shared or public spaces. Well-targeted policies can promote agglomeration economies and help minimise or manage frictions associated with concentrations of activity. Controls over noise and traffic, for example, are now ubiquitous where firms and people cluster. More flexible zoning designations supporting complementary land uses can enable the better sharing of facilities, suppliers and customers; matching of labour to firms; and opportunities for the diffusion of knowledge. How well urban costs and benefits are managed are systemically related to productivity and earnings
  • affect the capacity of cities to absorb population growth; a function of the capacity of existing infrastructure, housing and services, and the flexibility of policy settings that apply in these areas to provide for growth
  • through their influence on the availability of amenities and quality of the built and natural environments, help create a sense of belonging and local identity for residents, as well as attracting skilled people to cities. Improvements in Melbourne’s city design to make streets and public places more people-friendly and ‘green’, for example, led to a substantial increase in pedestrian traffic throughout the day. Development of businesses that open at night along its CBD laneways reduced social ills (crime, and simply the feeling of being unsafe). Melbourne has been named the most liveable city in the world multiple times in the past 10 years (EIU 2016).

Other policy areas brought closely into focus include those relating to the provision and management of public infrastructure and tax settings, such as stamp duty on property transfers, both of which affect the cost of transactions and moving.

As such, distinct policy goals with respect to city productivity include:

  • ensuring the efficient allocation and use of land
  • minimising (or managing) the frictions associated with population growth and concentrations of people and activity.

How are Australia’s cities functioning?

The subjective weights people place on different aspects of cities belie simple or singular judgements on city functioning. And some aspects of efficiency (for example, the degree of congestion) are more observable than others (such as the opportunity cost of alternative land uses). Nevertheless, a picture can be discerned through surveys and some indicators.

On the positive side, indicators show that Australia performs highly with respect to many measurable indicators of wellbeing (OECD 2016b). In built environments, air quality, energy and water efficiency have all improved over time (ABS 2010; Australian Government 2016d, 2016e).

The volume and rate of individual crime types has fluctuated over the past few years but, overall, crime rates have been decreasing (AIC 2015). While the experience of jurisdictions differs (with, for example, the number of property crimes increasing in 2015 in some jurisdictions), there has been little change in the national offender rate since 2008-09 (ABS 2017c).

Australia also performs well on measures of social cohesion. Domestic surveys suggest that the satisfaction that Australians feel with their lives has generally been maintained over time, reflecting a range of factors including trust, safety, health and a sense of community (ABS 2014). Several of Australia’s major capital cities (Sydney, Melbourne, Adelaide and Perth) also compare favourably to most other cities around the world in terms of safety, health care, educational resources, and the environment( The Economist 2016).

Nonetheless, there are signs of growing stress. Congestion on roads and other facilities has grown significantly over time and given the above trends will continue to do so unless new solutions are found for reducing these costs (ACIL Allen 2014; Harper et al. 2015; IV 2016a). The growing avoidable social costs of congestion for Australia’s eight capital cities were estimated at about $18.7 billion in 2014-15, and are estimated to rise to at least $31.4 billion by 2030.

On land use and planning systems, there has been some progress on new housing supply after an extended period of slow growth, especially in New South Wales and Victoria. This should help to reduce supply-side pressures on housing prices. There is evidence, however, that new housing stock is not meeting the preferences of workers and prospective purchasers.

Most States and Territories have made progress toward implementing best practice (risk-based) development assessment processes, but few in reforming their zoning systems, with change slow and reflecting seemingly little appreciation of the impact that poor zoning regulations can have on incremental business investment.

Capital cities are the dominant location of small businesses in most industries (that is, other than in agriculture and mining (ABS 2013a)), which by their nature have the least ability to cope with irrational impediments to investment. Most often, large property developments are the focus of attention. But across hundreds of thousands small businesses, poor quality urban regulations stifle diversification by and competition between businesses, and increase the costs and complexity of development.

Poor zoning regulations hurt business investment

Access to suitable housing and increases in distances travelled to jobs is a problem in several capital cities. About 60 per cent of net employment growth between 2006 and 2011 was within 10 kilometres of the CBDs of the largest five capital cities, but net population growth located in the same area was approximately half this amount.

In Sydney, the majority of jobs that can be reached in 45 minutes by car are located in the inner city whereas on the city fringes this is the case for fewer than 20 per cent of jobs. Similarly for Melbourne, residents living in the inner city can reach more than half the jobs within a 60 minute public transport trip but residents living in outer urban areas, such as those in the western-suburbs and around Dandenong, can access fewer than one in ten of those jobs (Kelly and Donegan 2014).

Many of these problems have been known for a considerable time. Left unaddressed, the efficiency of cities and their liveability are likely to deteriorate.

4.2 Policy focus

This chapter focuses on:

  • improvements in public infrastructure provision and use, and particularly on roads, the most prevalent and widely used form of transport
  • planning and land use policies
  • conveyance duties on property, which discourage people from moving to their desired locations and the freeing up of properties for more valued uses.

Firstly, however, we comment on policy responsibility for cities, an area where all levels of government are at work and clarity on the roles of each would be beneficial.

4.3 Many hands are at work in cities policy

State and Local Governments generally lead the policy and program delivery activity in cities. As such, any cities agenda needs to be jointly accepted and understood with these levels of government, or its impact will be lessened by the absence. State and Territory Governments (and, on delegation, Local Governments) control land use, other than on limited parcels of Commonwealth land such as airports or defence facilities. And the networks of roads and public transport are their responsibility both legally and in a long-term investment sense.

Cities have been regarded by the Australian Government occasionally as a matter of national interest and subject to forms of targeted intervention (largely via funding) since 1991 (under the Building Better Cities Program ). Yet it has quietly and with comparatively limited analytical attention continuously influenced urban development for decades through its funding contributions to land transport infrastructure; aviation and airport regulation; interstate rail freight; public housing development; and migration policies (which have affected population growth).

The Australian Government’s most recent targeted intervention program, the Smart Cities Plan , indicates an intention to intervene beyond the usual process of providing (tied) grants. Funding will be regarded as ‘investments’ that may require policy and regulatory reform as a condition of funding; funding may be offered to help meet a range of policy objectives, such as affordable housing and urban renewal; and the Australian Government will seek to work in more formal partnerships with other governments and parties on projects (PM&C 2016).

The Australian Government’s latest plan acknowledges that all levels of government involved have a stake in spending decisions, and collaboration is required if projects are to be successful. As yet in its infancy, it is not clear how governance arrangements will, in practice, work.

Where the Australian Government provides funding for areas that are the core responsibilities of other governments, it should ensure that both planning and accountability meet the standards regularly sought, but often not delivered in areas of major infrastructure investment.

As chapters 5 and 6 note, interventions still only sometimes feature both effective benefit/cost analysis driving project selection, and clarity about who is accountable in the event that significant risk events occur. Moreover, where the Australian Government seeks to compel policy changes, this should be on matters such as ensuring the quality of decisions or the consistency of policies where their effects cross borders.

These general better practice pieces of advice aside, there are three evident areas where jointly governments can improve productivity in cities and towns.

4.4 Public infrastructure

The governance arrangements for determining infrastructure investment priorities in Australia are crucial in determining whether taxpayer funds are well spent, and ensuring investments lead to actual improvements in the quality of people’s lives. Large, long-lived new infrastructure developments invariably detract from measured productivity in the short term, and rely on the prudence of investment decisions and the efficient use of assets to ultimately lead to an increase in productivity.

The 2014 Commission Inquiry on Public Infrastructure observed a number of serious shortcomings in decision-making, particularly on electricity, water and telecommunications infrastructure.

These included: the existence of inadequate incentives and accountabilities for ensuring that projects are properly analysed; decisions being driven by political or other considerations rather than by economic and social merit; and the existence of incentives for preferred projects to be selected at an early stage and maintained even if new information show them to be deficient.

It recommended an overhaul of the processes used in the development and assessment of infrastructure investments, highlighting in particular the need for:

  • sound cost–benefit studies for large projects and public consultation on proposals (noting that a cost-benefit study is not a yes/no decision-making document, as is sometimes misrepresented. It is instead an essential information source for those who are paying — usually taxpayers — and those who are deciding)
  • more involvement in resource allocation processes by those who pay
  • ex-post evaluation of project outcomes
  • better long-term planning to avoid developments encroaching on transport routes and subsequent selection of sub-optimal routes or expensive alternatives.

This focus has broad support from the private sector, academia and at bureaucratic level. Despite this, the bigger the intervention, the less likely it is to reflect these desirable characteristics.

Progress has been limited overall

Since 2014, the Australian Government has made several changes to the governance arrangements and tasks expected from Infrastructure Australia, notably requiring 5-yearly audits of Australia’s asset base and the development of a 15-year infrastructure plan to identify investment priorities. It has also tried several models for engaging with States and Territories on infrastructure investment. The latest model is City Deals under the auspices of the Smart Cities Plan. As yet, it is too early to assess the effectiveness of this initiative.

There have also been some changes to governance and institutional arrangements at the State level. For example, Infrastructure Victoria (IV) was established in 2015 following the termination of the East West Link project (box 4.2). IV’s key tasks include preparation of a 30-year infrastructure strategy for Victoria, providing advice to the Victorian Government on infrastructure matters, and publishing relevant research.

Despite these changes, there have been continuing instances of poor, very costly, decisions. Observers have noted that the current WestConnex (Sydney) and West Gate Tunnel (Melbourne) projects have cost estimates significantly lower than experience would indicate. The difference in cost estimates between the median and ‘worst case’ scenarios for both WestConnex and West Gate Tunnel projects was 6 per cent whereas the average actual difference across all projects completed in the past 15 years was 26 per cent (Grattan Institute 2016). Providing reliable cost estimates is crucial in the project selection process.

On corridor preservation, the Australian Logistics Council has expressed concern about the degree of urban encroachment on transport corridors and thus on future freight supply capacity (ALC, sub 18). Overall, there has been little change in infrastructure planning, management and governance arrangements, and hence the underlying concerns raised in relation to the quality of infrastructure decisions in the 2014 report remain.

Despite these changes, there have been continuing instances of poor, very costly, infrastructure investment decisions

Adopt known good practice – and past lessons

In the current environment of low interest rates, below-trend economic growth and low levels of public debt by international standards, there have been calls to increase infrastructure investment (Lowe 2017).

Popular commentary can take this to apply to any and all infrastructure. That would be unwise. Spending simply to boost measured economic output without regard to infrastructure’s likely economic returns should be resisted. Infrastructure investment is inherently a ‘micro’ choice that should be based on whether it is the best solution to address a local problem (such as to provide additional or better quality services, or reduce congestion).

With rapidly growing populations in some of our major cities, it is particularly important that infrastructure projects be selected carefully and built efficiently, mindful of their long-lived nature and how they can shape the development of cities (in particular, through shaping the options available for the use of land near transport services or corridors).

The Commission’s 2014 recommendations regarding the governance arrangements over infrastructure projects are still valid and applicable to all governments. The example of the East West Link, which involved substantial waste of taxpayer funds, further highlights the problems that arise from unilateral decision-making regardless of costs or benefits. Governments should not lock in contracts to bind future governments unless there are considerable savings in doing so, that are assured to offset any risks. And conversely, governments should not cancel a project without devising an exit strategy that minimises resulting costs.

Box 4.2 East West Link

  • The East West Link project was one of the largest transport infrastructure projects proposed in Australia. The project was to be an 18 kilometre cross city road including tunnels connecting Melbourne’s Eastern Freeway to CityLink (stage 1), and the Port of Melbourne precinct to the Western Ring Road at Sunshine West (stage 2). The estimated total cost of the East West Link, had it proceeded to completion, was in excess of $22.8 billion in nominal terms.

    The initial business case indicated that stage 1 of the project would generate costs that exceed benefits. The Victorian Government nevertheless signed a contract appointing the private contractor, East West Connect, to finance, design, construct, operate and maintain stage 1 just prior to the caretaker period leading into the November 2014 Victorian state election. This followed an indication by the then Opposition that it would not proceed with the project if it formed Government.

    The newly elected Victorian Government reached an agreement with East West Connect to terminate the project. The costs to Victorian taxpayers of terminating the project were in excess of $1.1 billion.

    The Victorian Auditor General cited a lack of transparency of the business case for the overall project and the decision to prioritise stage 1 as a driver behind the significant wasted expenditure. In response to this finding, the Victorian Parliament passed legislation establishing Infrastructure Victoria in September 2015. The Victorian Government indicated that Infrastructure Victoria would take the short-term politics out of infrastructure planning and ensure that Victoria’s infrastructure needs are identified and prioritised based on objective, transparent and evidence-based analysis.

    The problem of the poor connection between Melbourne’s Eastern Freeway and City Link has since been identified by Infrastructure Australia in its February 2017 Infrastructure Priority List as a “high priority initiative” given this corridor had the highest cost of congestion in Melbourne in 2011.

    Sources: Victorian Auditor-General (2015); Infrastructure Australia (2017, 2015).

A 10% reduction in the cost of delivering infrastructure would save $2.9 billion a year

Transparency on project proposals is critical to allow analysis of the assumptions and methodology used by those who are not proponents or otherwise having a large stake invested (financially or politically) in a particular project.

The potential benefits from better decision-making are substantial. The Grattan Institute suggests that, over the past 15 years, approximately 30 per cent of transport infrastructure projects valued over $20 million were announced before a funding commitment had been made (Terrill 2016). These projects accounted for about three-quarters of the total value of cost overruns. Overall, governments spent $28 billion more on transport infrastructure than announced. Based on current levels of investment, a 10 per cent reduction in the cost of delivering infrastructure would amount to an annual saving of approximately $2.9 billion.

Recommendation 4.1 Improve governance arrangements for public infrastructure

HOW TO DO IT
  • It is essential that governments ensure that proposed projects are subject to benefit-cost evaluations, and that these as well as evaluations of alternative proposals for meeting objectives are available for public scrutiny before decisions are made.
  • The institutional and governance recommendations of the Productivity Commission’s 2014 Public Infrastructure Inquiry remain valid and should be implemented by all governments as a priority. The 2014 Report has a dedicated chapter on how to do it.

4.5 Transport

Roads, railways (passenger and freight) and public transport are all crucial to the day-to-day functioning of cities. They facilitate commercial operations, enable people’s daily access to work, and with growth in online trade, are an increasingly important component of freight supply chains to consumers. An efficient transport system is also essential for urban and regional access to social services and amenities.

Growing populations will place pressure on already strained transport systems. The overall freight task in Australia is projected to increase by 26 per cent within a decade from 2015, and 86 per cent by 2031, much of which will comprise deliveries utilising roads within capital cities.

Yet available choices for new investments are constrained by the increasingly limited availability of unutilised land. Costs of new transport structures have risen accordingly, with new developments (for example WestConnex) requiring land reclamation, costly compensation arrangements, or otherwise more expensive alternatives (such as tunnels).

In this context, a key policy challenge is to improve transport efficiency within existing constraints. More efficient utilisation of existing transport infrastructure and better integration of transport services, where possible, is needed. The planning and delivery of public transport services has some desirable characteristics in an urban context that road planning lacks. Unlike roads, most public transport is provided on a fee-for-service basis, which allows some cost recovery (helping to ensure their sustainability) and better management of demand (for example, through peak and off-peak prices).

Without policy change, the avoidable social costs of congestion are expected to rise to at least $31.4 billion by 2030

The regime of heavy vehicle charging is also moving, albeit slowly, toward being cost reflective, ensuring that users pay for the relatively greater wear and tear they impose on roads, and incentivising the development of more efficient delivery modes. Freight movements in cities are the subject of some coordinated planning: for example with the Moorebank Intermodal Terminal Precinct in Sydney, which is adjacent to a dedicated rail freight line, and the M5 and M7 motorways.

On roads, the emphasis toward efficiency and demand responsiveness has, by comparison, been on technology. For example, there has been greater use of integrated traffic management systems to manage demand and traffic flows.

Many Australians remain dissatisfied with transport services. However, concern about public transport services has significantly declined and public transport is regarded optimistically as a source of future improvement in local transport services. The opposite is true for roads (box 4.3). The avoidable social costs of congestion for Australia’s capital cities have risen significantly over time, estimated at $5.7 billion in 1990, $9.3 billion in 2000 and double that at $18.7 billion in 2015.

Box 4.3 Motorists’ perceptions of roads and road quality

  • The Australian Automobile Association’s 2016 Motoring and Mobility Report, which involved surveying representative focus groups and online polling of 3,700 Australians, found that road congestion, road and transport funding, and the state of road conditions was a major concern of those surveyed. Those surveyed also reported that the state of roads had deteriorated over the past year. About 77 per cent considered that congestion had worsened and 67 per cent expected that it would worsen further in the coming year.

    Motorists’ perceptions on the state of roads and road congestion appear to have deteriorated since the last survey in 2013. The Royal Automobile Association of South Australia’s travel time surveys also highlight worsening congestion along major road transport corridors.

    Market research conducted by the Royal Automobile Club of Victoria has previously found that motorists consider that congestion on Melbourne’s roads is getting worse. In 2014, 88 per cent of survey respondents said they believed congestion was worse than it was five years ago, with most of those saying it was much worse. This was up from 83 per cent in 2006.

    Australians appear pessimistic about the prospect of any change. The Institute of Transport and Logistics Studies 2017 Transport Opinion Survey found that Australians have become less confident over time about prospects for improvement in transport services. Their highest priorities for improvements were public transport, followed by roads. But whereas Australians are optimistic that public transport improvements will lead to better local transport services, roads are anticipated to be the main reason for their worsening.

    Sources: AAA (2013, 2016); ITLS (2017); RAA (2016); RACV (2017).

In part, transport network inefficiencies reflect that the approach to regulation and reform of transport services in Australia has largely focused on individual modes, and each are at different stages. Misaligned investment choices between roads and public transport and poor public transport investment decisions by governments in the past have reduced growth in public transport capacity relative to demand (ARA 2014; IA 2015; Kelly and Donegan 2015). Despite improvements in public transport planning demand for many services continues to outstrip capacity, particularly at peak hours.

There is room to improve other transport modes in Australia. But roads deserve special attention. Of all publicly funded transport infrastructure in cities, roads are the most prevalent and widely used, yet most susceptible to poor decision-making and inefficient usage patterns. Road investment and planning lags significantly behind other modes, with minimal links between existing charges and the services users receive, the quality and availability of services and road user preferences, and the costs and funding of service provision and prices. We focus on roads for these reasons. But the improvements outlined in this review will, over time, help clarify policy choices on how best to improve the efficiency of transport networks as a whole, and better meet the needs, and inform the choices, of users.

The need for road funding and investment reform

Roads are the single largest item of infrastructure spending for governments. In 2014-15, $24.2 billion was spent on road investment and maintenance. Expenditure has risen by an average of 4.6 per cent per year over the decade to 2014-15.

Motorists pay for road use through a range of fees and charges levied by the Australian and State and Territory Governments (table 4.1). Together, these fees and charges amount to an average of over $1 300 per vehicle per annum. Most of the revenue from these charges is pooled into governments’ general (consolidated) funds, from which expenditure on roads (and other public services) is allocated through budget processes.

The indirect nature of raising revenue for roads means that there is no guarantee that investments are being made in areas that will provide the greatest value to road users. This is compounded by incomplete data, particularly at the Local Government level. Planning and management arrangements that do not directly consider road users’ preferences and the absence of explicit prices for road services to inform choices on alternative investments and road use are also to blame.

Table 4.1 Annual road fees and charges levied by governmentsa,b,c.
Per vehicle, average annual estimates

Charge type

Indicative cost ($2015-16)

Fuel excise (Australian Government)

607

Registration fees (State and Territory government)

270

License fees (State and Territory government)

22

Stamp duty (State and Territory government)

139

Other taxes (State and Territory and Australian Government)c

296

Total fees and charges

1 334

a Excludes all personal costs of vehicle ownership, including fuel costs, depreciation and maintenance costs, non-compulsory insurance policies and other costs. b Updated to $2015-16 using the consumer price index. c Includes Luxury Car Tax, Fringe Benefits Tax, and smaller discretionary items.

Sources: Originally from Infrastructure Australia’s Australian Infrastructure Plan (2016), sourced from (BITRE 2014) Yearbook 2014: Australian Infrastructure Statistical Report .

Prominent, and not infrequent, instances of poor decision-making on major projects have raised serious questions about project selection and delivery.

Surveys gauging user perception of transport quality and issues suggest that the substantial investments in new capacity that have been made in recent years may have provided some relief, but also induced greater use of roads. Governments have recognised the need for changes to road regulation but there has been, overall, little progress.

Technology now exists that could readily address the lack of price signals for road investment and complement other revenue sources. But the willingness to trial such developments requires a catalyst.

The most immediate driver of change is the continuing slowing of growth in road-related revenues, which will put pressure on current road supply models — since demand for (and the cost of) improvements shows no such slowing.

The willingness to trial such developments in road technology requires a catalyst

Road funding arrangements are unstable

Up until now, road-related fees and charges have generated sufficient revenues to meet road spending needs (figure 4.2). Looking forward, however, this will not be the case.

Figure 4.2 Road-related revenues are in structural declinea,b

  • Road revenues and expenditure to GDP

    This figure shows total annual government road related revenue, expenditure, and the difference between the two as a proportion of gross domestic product from 2003 04 to 2014 15. The figure shows that revenue has historically exceeded expenditure, but revenue has also been falling over the 11 years to 2014 15. Revenue and expenditure levels are now very close, although revenue still slightly exceeds the latter.

    a Aggregated over all levels of government. b Includes work done for and by the public sector, but excludes that done by the private sector for the private sector.

    Source: BITRE (2016) Australian Infrastructure Statistics Yearbook 2016 .

It is projected that road-related revenues will fall in real terms relative to demand for road services (even under conservative assumptions about population growth). In particular, fuel tax revenues (the largest single road-related charge, accounting for about 45 per cent of total road-related charges in 2015-16) have declined and are projected to continue to fall in real terms due to the improved fuel efficiency of cars, changes in travel preferences of commuters, e-commerce and the anticipated shift toward electric vehicles (which use no fuel, or little in the case of hybrids) — all of which reduce average fuel consumption.

At the same time, automated vehicles and new technologies enabling more convenient ride-sharing are revolutionising transport. Though nascent in Australia, they have the potential to substantially improve overall network efficiency, and individuals’ mobility. However, this greater access is likely to reduce the marginal cost of trips for many people and, in doing so, may induce higher average demand (Schaller 2017), which could increase travel times (even if speeds improve on certain parts of the network). To the extent that newer and automated vehicles are electric (or hybrid electric) powered, an increase in their use will exacerbate funding pressures.

These trends imply a need to move to a form of funding road expenditure that is responsive to road user demand (rather than simply predictive of it), does not discriminate by vehicle type, and is directly related to actual road usage. The present system displays few of these features.

We need a form of funding roads that is responsive to road demand rather than simply predictive of it

At best, the current funding and spending model implies a diversion of funds from other areas of the budget to meet road needs, or greater debt or increases in taxes. Or all three, perhaps tempered by an undesirable reduction in road quality standards.

Spending is vulnerable to poor decision-making

All levels of government are involved in funding roads, with the Australian Government providing funds to other levels of government. While all levels of government have their own project assessment and selection policies, there is no nationally consistent framework for determining expenditure priorities. As a result, what roads get funded by different levels of government, and the standards such projects need to meet, are constantly shifting (SP 9).

Spending decisions are not directly and systematically informed by users’ preferences, whether on the quality or availability of services, willingness to pay or the relative merits of competing priorities.

Little information is provided to users in order to better manage demand and more efficiently use existing assets.

In many other markets (even other public transport markets), these functions are fulfilled by prices, allowing consumers to recognise the options — a choice between long-term cost increases from major new supply or a shift to variable prices depending on usage, for example — and road providers to reflect these in policy and spending decisions. Governments instead largely assume an inexorable increase in demand, with investments not sufficiently informed by what more efficient use of road assets might imply for new investments.

As discussed in the section on infrastructure above, the accountability mechanisms for ensuring that the projects with the highest net benefits are chosen are relatively weak. With no consistent framework for allocating grants, projects made possible through such funding can be particularly subject to the political imperatives of the day, rather than determined by either the performance of roads against consistently assessed need or consistently developed service standards. In some grants programs, formulas for determining horizontal equalisation are used to proxy for demand, while in other (typically larger) programs, not even an inadequate proxy is evident.

In this context, road expenditure decisions can be reactive to perceived need, subject to political suasion, and may not be exposed to adequate evaluation.

Toward better meeting road users’ needs

If the stresses noted above are to be managed, there should be a shift in policy focus towards consumer-oriented and directed services. Key features of a better system for road funding and delivery therefore include:

  • investment and maintenance decisions on roads being informed by users’ preferences, and pricing that makes transparent the costs of providing services and allows the development of sensible alternatives for meeting service goals
  • users’ choices between modes, and on the use of roads, being guided by prices that help to allocate finite capacity, resulting in more efficient utilisation of the transport network
  • public confidence in the price-setting process through independent vetting of the prudence and efficiency of proposed expenditure, and the quality of services actually provided (such that, for cost recovery purposes, prices only reflect the efficiently incurred costs of providing services that are valued by users)
  • stable and adequate funding for road services, which also implies a shift to user charges and away from a predominately tax-driven model
  • clear accountability for decisions and outcomes, facilitated through improved institutional frameworks that embody community consultation and transparency on service costs and quality.

The value of more efficient use of the road network alone is estimated to be equivalent to approximately 0.7 per cent of GDP in the long run, or a permanent increase to the level of annual GDP of approximately $20 billion.

Over 20 years, the net present value of these GDP gains is $63.7 billion, or $4.5 billion in annuity value terms (taking into account a likely phased introduction of reforms). On top of this, there would be allocative efficiency benefits from the closer matching of services to those actually preferred by road users, and reduction of inefficiencies associated with poor project design and delivery (SP 9).

The role of pricing

Cost-reflective pricing is a key mechanism for disciplining expenditure and, particularly in cities, ensuring the more efficient use of scarce capacity. The lack of cost recovery from users of roads creates uncertainty on funding, and provides a weaker onus on the part of governments to justify to users what, and how, services are delivered.

The situation with roads stands in stark contrast to the provision of other government services, such as electricity, urban water and even other public transport services (buses and passenger rail) where, although arrangements are imperfect:

  • the more transparent linking of services and costs that accompanies pricing places more pressure on regulators and road managers to seek efficient methods of regulation and service delivery, and to better tailor services to customer preferences
  • prices help users to choose between different transport and or utility service options, where available, and/or to manage their demand and associated costs (for example, through peak and off-peak pricing or other differentiated tariff structures)
  • demand management through pricing helps or provides scope to improve the efficiency of asset/network utilisation
  • recovery of costs directly from users reduces the taxation burden on those who do not directly or primarily benefit from relevant regulation and services.

In Australia, charging for road use has been narrowly limited to toll roads and notional heavy vehicle charges, neither of which meet the primary purpose of a price, which is to create a known cost of use that allows alternatives for meeting service goals to develop and more informed choices to be made. While there are a few differential pricing arrangements on some toll roads (for example the Sydney Harbour Bridge and Harbour Tunnel), poor design of toll road contracts, including mis-allocations of risk and rewards, have failed to deliver value for money in several cases (SP 9).

There is broad consensus on the merits of moving from the current set of disparate charges on motorists to direct pricing as an objective of road regulation (for example, AAA 2008, Harper et al. 2015, Henry et al. 2009, IA 2016, IV 2016b) (box 4.4).

From a policy respective, cost-reflective user pricing should ultimately apply across all types of road users. Road reform efforts in Australia to date have focused on heavy vehicles, reflecting that their size and weight impose proportionately larger costs on the network. This represents at best only a partial market solution for what is a network-wide problem — congestion in cities and large urban centres is predominantly a byproduct of light vehicle use, for which no cost-reflective prices exist.

And the looming pressure on fuel excise as a source of revenue is primarily a shift that involves private cars. The solution — if taxpayers in general are not to pay more — must involve pricing the movements of light vehicles as well as heavy vehicles.

Box 4.4 Some benefits of direct road user pricing

  • Many motorists are not aware of any link between the taxes and charges they pay for use of the road network and how road services are provided. As part of its Melbourne Road Usage Study, Transurban found that 88 per cent of survey respondents had little or no knowledge about the primary road-related charges in Australia, such as fuel excise.

    More direct and transparent charging for light vehicle use could yield significant benefits. Analysis by Infrastructure Victoria suggests that by 2030, congestion will cost every Melbourne resident an extra $1 700 per year, or $7 each working day, but that better charging for roads could cut travel times on congested roads at peak hour by up to a third; and that if traffic was reduced by just 5 per cent during the morning peak hour, conditions on roads would be equivalent to school holiday road conditions every day of the week.

    Sources: IV (2016a); Transurban (2016).

Current technologies (of which viable examples have been demonstrated, and are presently being further developed in Australia) make it eminently plausible to create a system of funding roads that is directly linked to demand.

If implemented, this should replace current road charges like fuel excise and registration fees, that is, charges should be pooled and hypothecated, so that users who are paying directly can be assured that indeed they are paying for improved road network services and not some other function of government.

Governments will need to determine how mechanisms are designed to account for distributional issues, such as the impacts of pricing on rural and remote roads. As for other areas of government services, subsidies may be the practical tool; and for road users in such districts, the signs of change between today’s system and the future under direct pricing may be very few indeed. In an economic sense, however, the benefit would accrue from making funding requirements and competing alternatives clearer.

Moving toward implementing pricing of roads in urban areas and key network links requires major changes in the institutional and governance arrangements for roads.

These are crucial to giving motorists confidence that new methods of charging, and infrastructure decisions made using that funding, are designed to reflect user choice and preferences. The Commission notes that the Australian Government has recently committed to further investigate this issue, in particular to undertake a study into road reform through Infrastructure Australia beginning later in 2017 (Australian Government 2017a).6

Conducting trials in major capitals that utilise the opening of new (unpriced) additions to the system and testing behaviour under different pricing regimes (for example, refunding users’ excise while measuring their use of new infrastructure with a charge and netting off the outcome over a sustained period) would be a significant advance in knowledge and awareness.

Initial steps along the reform pathway

There are things governments can do in the short term that will help improve governance and provide discernible benefits to road users. Many of these steps are needed as technical preconditions to user pays road pricing, but are beneficial in their own right.

  • Take steps to better understand and measure the road asset base, especially at the local level. The task of measuring the asset base should include identification of roads that should, in fact, be priced, roads that might be subject to community service obligations (CSOs), as well as clarifying the standards that apply to roads.
  • Ensure independent appraisal of major road expenditure proposals by formally allocating an assessment role to existing independent economic regulators or advisers.
  • Hypothecate road-related funds to roads expenditure by creating a separately budgeted Road Fund for each State and Territory (States are the legal custodians of roads). Hypothecating funds would create a nexus between the current indirect charges paid by drivers and spending decisions, and provide network operators with a predictable revenue profile, which should help the planning of investments. It will also make more transparent any gaps between revenue raised and the expenditure implied by current service availability and quality.
  • Over time, the indirect charges hypothecated to Road Funds should be replaced by direct charges.
  • Authorities should restructure governance arrangements to ensure that representatives of those who pay for roads — that is, users — contribute to project selection and funding decisions. Processes to appoint such representatives should be independent of government. The Commission envisages that appointees will have both the right mix of technical skills and community interests to effectively gauge and promote users’ preferences.
  • Authorities should also allow for road investment or maintenance desired by communities that are willing to pay for it. Recent road and transport funding decisions by governments highlight missed opportunities to employ pricing as a practical funding method for infrastructure clearly desired by the community (SP 9).

Recommendation 4.2  Short-term reforms to improve road provision

Several steps can and should be undertaken by State and Territory Governments in the short term to improve the quality and value for money from road services, and as preconditions for a subsequent move to road pricing.

HOW TO DO IT

Actionable reforms include:

  • restructuring governance arrangements to: i) ensure that representatives of those who pay for roads — that is, users — contribute to project selection and funding decisions, and ii) provide for independent appraisal of all major road expenditure proposals
  • measuring the road asset base and identifying roads that should, in fact, be priced, as well as clarifying the standards that should apply to roads
  • hypothecating road-related fees and charges to roads expenditure so that charges paid by drivers for using roads are linked to spending on roads.
How a road fund model could work in a phased reform process

Reform to the governance of road funding is critical in conveying to road users that new charges they pay are being spent on providing road services they desire. The model of ring-fenced, single-purpose Road Funds proposed in the Commission’s Public Infrastructure inquiry (2014d) remains desirable in this context. Road Funds would provide a collection point for all road-related revenues, ensure the linking of road user preferences with investment, maintenance and financing decisions, and provide for transparent processes for selecting projects. How Road Funds would interact with independent project assessors/price regulators is discussed in SP 9.

Given the current thinking on heavy vehicle reform through COAG, there is merit in designing the initial structure of Road Funds alongside reforms to heavy vehicle charging mechanisms, and limiting the remit of the Road Funds to heavy vehicle revenue collection and related expenditure initially. This sequences heavy vehicle with broader road transport reform, and simplifies the initial design of Road Funds by limiting their role to State and Territory expenditures on arterials.

Each State and Territory’s Road Fund should be designed with a view to full network coverage. In order to align funding with expenditures across the full network, the revenue feeding into Road Funds should expand over time to include revenues from light vehicle users. This would see States’ management of revenue sources more appropriately reflect expenditure requirements and the needs of their communities (with a role for Local Governments in determining investment needs).

In the period of transition to direct user charging, there is a facilitative role for the Australian Government to provide assurances on funding adequacy (for example, a ‘no disadvantage’ rule) as the composition of road-related revenues evolves (discussed further in SP 9).

Recommendation 4.3  Establish road funds

State and Territory Governments should establish Road Funds to hypothecate road-related revenues to expenditures. Initially designing Road Funds on the basis of heavy vehicle revenues and expenditures will help to sequence heavy vehicle and broader road transport market reform objectives and facilitate compositional shifts to new road funding sources over time.

Engaging the community through pilots

Pilots in the United States and Australia show that trials of user charging technology, despite being limited in their ability to replicate real world conditions, can be effective means of raising awareness among the community of road funding challenges, understanding needs and preferences of road users, and testing different technology and charging solutions for how to deal with these needs (SP 9).

However, the public sector has not made any serious effort in Australia to trial charging. While ever this is left to the private sector to carry the burden of investigation, two problems emerge:

  • it may seem to motorists to be about toll roads, which is not the objective
  • it will potentially not address public interest issues, which will be crucial to any actual introduction.

Pilots are thereby a useful mechanism for State and Territory Governments to engender community support for change. A further useful result of pilots would be replicable and scalable technology solutions for road user charging. Given that some major roads cross borders, the high desirability of seamless charging mechanisms across those borders, and the necessity of coordinated reform (to the extent that national taxes are replaced with road prices) the Australian Government also has an interest in advancing reform and could potentially assist the States and Territories to establish and run pilots.

Recommendation 4.4  Road user charging pilots

To communicate the need for road funding reform to the community, State and Territory Governments should consider the use of road user charging pilot programs, as has been successful in overseas jurisdictions.

HOW TO DO IT

Conducting trials in major capitals that utilise the opening of new (unpriced) additions to the system and testing behaviour under different pricing regimes (for example, refunding users’ excise while measuring their use of new infrastructure with a charge and netting off the outcome over a sustained period) would be a significant advance in knowledge and awareness.

4.6 Realising the productive potential of urban land

Many State and Territory Governments have made good progress in planning reform over the past five years, and are continuing to pursue changes (SP 10).

Notably, the Victorian Government reformed its residential, industrial and commercial zoning regulations in 2014 to reduce the number of restrictions and the degree of prescription on the intensity of land uses allowed in each zone type. The Victorian Government further amended its residential zone regulation in March 2017 to reduce restrictions on the height and density of developments.

The Queensland Government has legislated to ensure better alignment of local development plans with state objectives. It has also streamlined its development assessment (DA) processes and, in 2013, created the State Assessment and Referral Agency (SARA), a single lodgement point for when the state has jurisdiction as either the assessment manager or referral agency for development applications.

The NSW Government has established a clearer and more integrated hierarchy of state, regional and district plans for the Greater Sydney region, with clearer links to local planning controls. In addition, the Government has simplified the planning system by reducing the number of State planning instruments and reduced red tape on development approvals for low impact residential buildings.

The above and other measures were instituted following failure by the NSW Government to achieve legislative passage of a package of major reforms in 2013. The Government has recently proposed further legislative changes, including to require decision-makers to give reasons for their decisions, and further improve the coherence and transparency of state and local-level planning. But this package does not include some key 2013 reforms, including to overly restrictive zoning regulations.

Both the Tasmanian and South Australian governments are embarking on broader reforms of their planning systems.

Tasmania is aiming to replace its 29 interim planning schemes with a statewide planning scheme that will include a set of planning rules (including zoning and land use codes) from which councils must choose to reflect the objectives of their community. The intention is that local variations will only be allowed to reflect unique local circumstances.

The South Australian Government is seeking to overhaul its planning system over the next five years. A key aim is to replace its 1 500 plus zones and myriad council plans with a more consistent and succinct set of development rules that, among other things, orientate regulatory effort to areas of greater risk.

The Western Australian Government introduced standard ‘deemed provisions’ in 2015, which set uniform processes for structure plans (plans to coordinate the future subdivision and zoning of land) and local development plans, as well as DAs undertaken at the local level. Prior to this, each local planning scheme included its own procedures and processes, resulting in up to 150 different variations.

The Commission’s stock-take of progress on reform indicates that the following areas remain priorities across jurisdictions:

  • reducing the number and complexity of restrictions on land use created by prescriptive zoning systems
  • better planning and provision for growth
  • the need to continue moves towards a risk-based approach to assessment of development proposals.

These are considered below along with reforms to stamp duties on property transfers.

Urban planning responsibilities

Responsibility for urban planning rests with the States, Territories and Local Governments. States are generally responsible for:

  • releasing land for new developments
  • strategic plans for metropolitan areas or regional areas
  • overarching planning and development policies, such as the broad objectives of and purposes for land use (whether residential, business, recreational or other), with which State or local approval authorities must comply.

Local Governments have responsibility for developing and implementing land use plans at the local level, with local plans expected to be consistent with metropolitan strategic plans and applicable State planning policies. Local Governments process the vast majority of development proposals.

Reducing land use restrictions

The majority of development and land use activities (that is, not State-significant developments) is carried out under authority of local planning instruments that list the types of development that are allowed in each zone of a Local Government area. State legislation sets out the types of allowable zones (whether residential, business, rural, environmental protection or other), objectives for activity within those zones, and the specific types of developments that may be carried out in accordance with the purpose of those categories of activity.

A longstanding concern is the multiplicity of zone categories and degree of prescription on allowable activities within those categories. For example, New South Wales has eight types of business zone categories, each specifying the types of developments that may be undertaken with the consent of the relevant Local Government. Local Governments use these zoning categories to develop specific plans for their areas, which usually include additional specific types of developments that require consent. Local Governments may further specify development parameters, such as building height restrictions and floor to space ratios, guided by high-level standards set by the state government.

Even the smallest jurisdictions, Tasmania and the ACT, have 5 to 6 types of commercial zones, with each having 23 zone types in total. Western Australia has 20 zone categories, five of which pertain to commercial uses. Victoria, following its 2014 reforms, stands apart from other jurisdictions in having fewer business zones (just two), with more broadly stated allowable uses. Within metropolitan Melbourne, authorities may no longer impose floor space limits in commercial zones.

For development proponents, the prescriptiveness and differences in treatment of land uses at the local level can lead to different treatment of the same types of land use across council areas and discourage investment. The large format retail industry, which sells bulky goods, noted that in New South Wales:

LFR uses generally fall under the land use definitions for ‘Bulky Goods Premises’, ‘Hardware and Building Supplies’ and ‘Garden Centres’. There is often subjective and varying treatment of these land use definitions in Local Environmental Plans, creating uncertainty as to whether particular developments would qualify as a LFR use… The lack of flexibility is emphasised by the fact that the definition for ‘Bulky Goods Premises’ requires LFR operations to involve the sale of bulky goods that require large area for handling, display or storage and direct vehicle access for customer loading purposes. All other Australian jurisdictions only require either ‘arm’ of the definition to be satisfied … (LFRA 2015, pp. 11–12)

By creating barriers to entry and diversification, zoning classes and the prescriptiveness of permitted land uses can also limit investment, new employment, and productivity improvements in, and competition between, businesses.

Tasmania’s and South Australia’s reforms are seeking to reduce the degree of local variations. At the time of writing, the new regimes had not yet been tested on this element.

Zoning systems should be re-oriented to promote overall community interests

The need for restrictions, and the benefits and costs they create, should, as for other policy areas, be evaluated taking into account the interests of the community as a whole.

Sound regulatory design would also suggest that zoning frameworks should provide as much flexibility as possible in how land is used. This would allow new and innovative firms to enter local markets and existing firms to expand, as well as providing greater flexibility to adjust to changing business activities and community preferences. It would enable genuinely incompatible land uses to remain separated, but provide scope for complementary uses to develop and compete. As the NSW Government has noted, it would also minimise the need for spot rezoning, which would in turn reduce costs, delays and investment uncertainty (NSW Government 2013).

The orientation of planning systems towards controlling specific types of development means that greater regulatory prescription is required to recognise new business or community activities, and is the only means by which Local Governments can give effect to specific objectives for their areas. The logic of current systems is thus one of increasing regulation over time, with the potential for inconsistent or perverse outcomes inherent given the scope for fine distinctions to be made between types of developments based on particular councils’ preferences.

Policy settings that have particularly egregious impacts on competition include the creation and enforcement of activity centres and regulations that require consent authorities to consider the commercial impacts and viability of established businesses when assessing development proposals. Provisions that explicitly or implicitly favour particular operators or set proximity restrictions between businesses should be eliminated nationwide. These policies are at odds with competition policy and used to protect shops and shopping centres in designated areas from competition.

Estimates indicate that the potential benefits of reducing the prescriptiveness of zoning systems are significant. In a 2013 report commissioned by the NSW Government, the CIE estimated the economic value inhibited by land use restrictions for Sydney could be in the order of $8 billion to $16 billion, which in annualised terms is equivalent to $665 million to $1.3 billion per year.7

Recommendation 4.5  Apply competition principles to land use policies

There should be national agreement to apply competition policy principles to land use regulation and policies.

There should be a particular ban on regulation that explicitly or implicitly favours particular operators and sets proximity restrictions.

Planning and provision for growth

There are concerns about misalignment of State and Local Government planning strategies. Scope for misalignment arises from several sources, including disagreements between levels of government on visions for urban areas, particularly how they might accommodate population growth; the scope and sometimes the necessity for interpreting how State strategic plans and statutory planning requirements are to be applied at the local level; and the discretion and authority of Local Governments to determine local land uses in accordance with their particular preferences (box 4.5).

A common cause of tension between State and Local Governments is housing policy. For example, the Victorian Auditor General recently found that a number of Local Governments had prohibited medium-density housing development in areas that the 2013 State Planning Policy Framework had designated as permitting. Local Governments have also created 153 local variations to the new residential zones introduced in 2013, resulting in local schemes being inconsistent with the objectives of the state planning policies and adding unnecessary complexity in planning schemes. The Auditor General has suggested that the State Government needs to provide more guidance and training to Local Governments to support its reforms.

Victoria is not alone. More generally, State and Territory planning policies should provide formal guidance on how Local Government strategies should be developed, including specification of policy priorities, preferred methods for achieving them, and that make clear the relevance of State/Territory planning policies to which local councils must have regard. Guidance should also include a clear hierarchy for state and local plans.

This would help to ensure that State policy goals and standards are delivered, reduce the time and the degree of contention involved in setting local plans, and provide greater regulatory certainty to development proponents. The provision of formal guidance by States on their strategic plans and application of planning policies would also help to ensure accountability for decisions at each level of government.

Box 4.5 Impediments to coherent State and local  development strategies

  • Community consultation on planning strategies is perceived as cursory in many jurisdictions. As an example, Local Government representatives in South Australia considered that the 30 Year Plan for Greater Adelaide ‘was launched on a public that had missed the start of the conversation and was expected to take a leap of faith to board the urban renewal train.’ (Kelly and Donegan 2015, p. 139).

    An example of good practice at the local level is Western Australia’s establishment of an advisory group representing residents, business owners and environmental groups to provide input on road extensions proposed in the State’s Scarborough Master Plan (WAMRA 2016).

    Recent work by the Commission into transitioning regional economies (2017d) suggests that more successful communities are led by individuals who take an active role in identifying strategies for how to best facilitate development. Local leadership was exemplified in the case of Stawell (Victoria), where the Local Government took a lead role in seeking ways to redevelop and repurpose a gold mine for use as an underground physics laboratory. By engaging the community and working in partnership with the Victorian and Australian Governments, Stawell was able to find a new source of economic growth that built on its existing strengths and resources.

    Councils in several jurisdictions (including, Tasmania, Western Australia and Victoria) consider that States do not provide sufficient clarity and directions in their strategic plans, necessitating excessive assessment efforts to meet requirements, which nevertheless do not guarantee they are connected to strategic and regional priorities.

    Industry groups and other observers have also raised the need for clearer direction from most States and Territories on the application of planning instruments, noting that the necessity for interpretation is a source of avoidable variation in local planning rules.

    Sources: EDO Qld (2017); PC (2017d); PCA (2015).

Provisioning for new growth areas

Adequately planning and providing for both new growth and infill development areas depends on, among other things, the efficient provision of public infrastructure services, particularly transport, which provides connections to established employment, education and health services and retail opportunities.

Provisioning for diverse land uses and for public amenities, including public recreational and ‘green’ space, helps make those areas desirable places to live. Provisioning is also important given that these features are often hard to retrofit due to costs associated with demolition, buy back of land to meet public open space obligations, and interruptions to economic activity and mobility.

Most jurisdictions have developer contributions systems to help fund and deliver infrastructure. There is scope for greater use of market testing of infrastructure costs to help ensure that charges levied on developers are efficient (SP 10).

Recommendation 4.6  Better provision for growth

HOW TO DO IT

Take steps to improve consultation and planning processes, as outlined in Conclusion 10.2 of Supporting Paper 10. This includes:

  • State, Territory and Local Governments genuinely engaging with the community on alternatives for meeting development goals
  • State and Territory Governments providing formal guidance on how Local Government planning strategies should be developed and on the application of overarching planning policies
  • State, Territory and Local Governments ensuring adequate provision in growth strategies for infrastructure and public amenities (such as ‘green’ space) given the difficulty of retro-fitting these features.

Streamlining development assessment systems

The leading practice model for DAs is track-based assessments developed by the Development Assessment Forum (DAF) in 2005. The model categorises development proposals into assessment ‘tracks’ and hence subjects them to varying degrees of scrutiny corresponding to the level of impact or risk posed.

All jurisdictions have made progress in streamlining DA processes in line with the model (SP 10). A 2015 report by the Property Council of Australia (PCA) ranked the Northern Territory and the ACT as particularly well-performing jurisdictions in terms of their track assessment frameworks.

There is nevertheless room for further progress in most jurisdictions.

A common theme across jurisdictions is that, where streamlined track assessments exist, approval times vary between local councils. A 2016 study suggests that for large or high-value residential projects, where the State planning department is responsible for assessing the DA, there are more speedy response times than where councils make the decision. For example, in Victoria, the Minister for Planning is responsible for assessing large-scale projects in the City of Melbourne with a floor space exceeding 25 000 square meters, which has partly contributed to strong growth in inner city apartments. In Brisbane, it is a large Local Government — the Brisbane City Council — that generally has assessment responsibilities for development within the central business district, and its application of a code assessment framework to large developments has contributed to apartment growth in Brisbane. In contrast, in areas where the DA process is handled by local councils, with their own specific overlays and zoning restrictions (such as in inner and middle suburbs of Sydney and Melbourne), the approval process is often slower and housing supply takes longer to adjust.

In its 2013 White Paper on planning reforms, the NSW Government proposed that 80 per cent of all DAs should be subject to the fast-tracked approval pathways of either complying developments (proposals deemed low impact that can be approved upon satisfaction of set criteria, such as property extensions up to two storeys) or code assessment (other proposals that could also be approved through set criteria).

Following the failure of reforms to pass the NSW Parliament, the NSW Government has decided to not pursue code assessment as a pathway and instead committed to ongoing improvement of the complying development track. In 2011-12, the proportion of complying developments as a proportion of all DAs was 23 per cent. In 2014-15, this was 32 per cent. A report commissioned by the NSW Government estimated that the original reforms would be worth between $358 million and $550 million per year in reduced risks associated with developments and avoided costs of delay and documentation.

While the ongoing reforms to the planning systems in Western Australia and South Australia have identified the need to establish further track-based development assessment paths, these reforms are yet to be implemented.

Recommendation 4.7  Implement best practice in development assessment

State and Territory Governments should implement known best practice in development assessment processes, as embodied in the model developed by the Development Assessment Forum.

Stamp duties prevent mobility and efficient use of the housing stock

Stamp duties on residential property add to the price of houses, and can discourage people from moving to locations that may be closer to preferred jobs, family networks and schools (PC 2014c). This can result in increased commuting times and costs (Henry et al. 2009) and the potential effects on mobility become more accentuated the greater are the frictions of moving between work and home. Stamp duties on commercial property further discourage businesses from investing in existing land and capital, and stamp duties on residential property can discourage people from downsizing and encourage over-investment in upgrading property. All of these factors result in the retention of land for relatively unproductive purposes.

In Sydney, stamp duty on residential property for the median house and unit price as of May 2017 of $1 198 650 and $762 590 was $51 419 and $29 807 respectively.8 This represents 4.3 per cent and 3.9 per cent of the purchase price, respectively.

The impacts of these costs on community welfare are significant. A recent Treasury working paper estimated that each additional dollar collected by way of stamp duties on residential property reduces the living standards of Australian households by 72 cents in the long run due to the lower investment and mobility effects.

The ACT Government has moved away from stamp duties to taxes based on land value. Specifically, it is phasing out stamp duties over a 20 year period, and replacing these with higher general rates for residents and commercial properties (box 4.6). As yet, other jurisdictions have not done so.

Stamp duties increase the cost
of buying a house and can discourage people from
moving to locations that may be closer to preferred jobs

Box 4.6 Phasing out stamp duty in the ACT

  • Stamp duty on conveyances have been progressively reduced since June 2012, with the aim of phasing out the duty completely over a 20 year period. Since the reform program started, duty on a $500 000 property has been cut by 34 per cent. The Territory’s 2016-17 budget estimates that, by 2020-21 (the half-way point of the tax reform program), duty on a $500 000 house will have been cut by 51 per cent.

    To replace the loss of stamp duty revenue, the ACT Government increased general rates for both the residential and commercial sectors. Average general rates have increased by about $452 compared with what they would have in the absence of reform. In addition, residential land tax (on investment properties) has been made more progressive. The ACT Government estimated that land tax rates would decrease by an average of $208 for 76 per cent of properties, while 12 per cent would incur an increase of $602.

    To address welfare impacts from the new system, the general rates rebate for eligible recipients was increased from $481 to $565, and the eligibility criteria for deferring general rates was expanded to include people aged over 65, and land values above $390 000. As at 2017, eligible households receive up to 50 per cent rebate on general rates up to a maximum of $700. Households who were eligible for the general rates concession rebate on 30 June 1997 are eligible for the uncapped general rates concession, up to the value of the concession received in 2015-16.

    Sources: ACT Government (2017); ACT Revenue Office (2017); ACT Government (2012).

A shift to taxes based on land value

Taxes based on land values avoid the imposition of penalties for moving, and the inequity of tax burdens falling disproportionately on those who choose to move, whether for work or lifestyle reasons. Tax revenue is also more stable because it is not as exposed to the volatility of the housing market.

The Grattan Institute estimates that shifting from stamp duties in all States to a broad-based land tax could add $9 billion annually to GDP. The majority of benefits would accrue directly to those jurisdictions in the form of more productive use of land and the workforce.

A shift to broad-based land taxes may detrimentally affect owner-occupier households with low incomes, such as many retirees, who may have less flexibility to move and limited capacity to pay taxes from current income. Ensuring that such groups are not unduly disadvantaged by the new system is an important reform design consideration. In addition, the aim of this policy change is not to increase tax revenue per se (although revenue may increase over time from a more stable tax base), so tax rates should seek at least revenue neutrality. Following the example of the ACT, transition over several years would help adjustment.

State Governments and the Northern Territory Government would need to use an alternative to rates-based reform. Unlike the ACT, rates revenues accrue to Local Governments. Moving from stamp duties to taxes on the unimproved value of land for all properties (similar to rating systems) would seem to be a sound option. Indicative calculations suggest that a switch from stamp duties to land taxes based on an assumption of revenue neutrality would result in low land tax rates (box 4.7).

Options for addressing welfare impacts include concessional rates for tax, the deferment of tax for eligible landholders or help via the income support system. Western Australia, for example, offers eligible seniors (those holding a government pensioner or senior card) a 50 per cent rebate on council rates. State-based deferral arrangements also exist for seniors paying Local Government rates in South Australia, Western Australia and general rates in the ACT.

Unintended effects from concessional or deferment arrangements such as restrictions on working hours, which may create labour market distortions, would also need to be considered in the design of deferment policies and setting of eligibility criteria. These matters are further discussed in SP 10.

In summary, key elements of reform would include:

  • Replacement of stamp duties on property transfers with a broadly-based tax based on land values. The shift to a broad base is essential to ensure that revenue is raised efficiently and the tax burden is not disproportionately imposed on a few groups.
  • Provision for tax deferral for certain low income groups, so that taxes do not force people with less capacity to move. These include people such as owner-occupier retirees, who may be attached to the family home and their community.
  • Deferred taxes would be paid from estate at death or on the sale of the property (whichever comes first).
  • Low interest rates on deferment of taxes, for example bond rates, consistent with the policy objective of deferment.

Box 4.7 Broad-based land tax rate

  • The 2011 NSW Financial Audit proposed two alternative methods for transitioning from transfer duty to a land tax. The first scheme proposed a transition from transfer duty to an annual Stamp Duty Replacement Tax (SDRT) levied on the value of all land. The report proposed rates of the annual SDRT of 0.75 per cent of the unimproved land value of properties with land value less than $775 per square metre and a marginal rate of 1 per cent on land value above this threshold. These rates were estimated to ensure the present value of SDRT payments would equate to the transfer duty that would otherwise have been paid.

    The other approach proposed a transition away from transfer duty to SDRT on all properties at a low rate, with gradual increments over time. This is similar to the ACT’s scheme. The main advantage of this approach is that budget neutrality can be maintained.

    A 2015 report by the Grattan Institute suggested that replacing stamp duties with a levy on unimproved land values would be about 0.4 per cent of unimproved values of all land using Valuer-General valuations.

    These reports confirm the Commission’s analysis, which suggests a switch from stamp duties to land taxes based on an assumption of revenue neutrality would result in generally low land tax rates.

    Sources: NSW Financial Audit (2011); Daley and Coates (2015).

Depending on the sequence and pace of States undertaking reforms, the Commonwealth may need to be involved in facilitation, among other things to ensure that the Commonwealth Grants Commission’s horizontal fiscal equalisation (HFE) process does not provide disincentives to improve the efficiency of State taxes in this way. The Productivity Commission’s report into HFE, which will be produced in draft October 2017, will look at the incentives the current system creates for undertaking such reforms.

Recommendation 4.8 Remove stamp duties and implement transition to land tax

State and Territory Governments should move from stamp duties on residential and commercial properties to a broad-based land tax on the unimproved value of land.

HOW TO DO IT

Phase out stamp duties on residential and commercial property transfers and replace them with a broad-based tax based on unimproved land value.

Transition over several years to aid adjustment.

A shift to land-based taxes should include provision for low income households to defer property taxes and fund them from their estate at death or on the sale of the asset (whichever comes first), with low interest rates applying to debts.


Footnote

  1. The Australian Government has also indicated a commitment to regional and urban rail investment in the 2017-18 Budget, as well as an independent inquiry to inform a national freight and supply chain strategy. Locate Footnote 6 above
  2. Annualised for a period of 30 years at a real discount rate of 7 per cent. This reflects estimates of land value premiums and how quickly these premiums are reduced as land is rezoned. Locate Footnote 7 above
  3. Stamp duty on residential property assumes the purchaser is not a first home buyer, who may be exempt, or a ‘foreign purchaser’, who faces a different rate. Locate Footnote 8 above

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