Managing Development Contributions

Tabled: 18 March 2020

Audit overview

Victoria’s growing population is placing pressure on its infrastructure. Development contributions can help the state government and local councils meet infrastructure needs within their budgets.

Development contributions are payments or in-kind works, facilities or services that developers and landowners provide towards the supply of infrastructure. Councils and the state use several tools to collect development contributions. The state government oversees all these tools.

In this audit, we assessed how well Victoria’s development contributions are delivering required infrastructure for growing communities. We examined three programs and one other legal instrument:

 

Program/Instrument

Purpose

Growth Areas Infrastructure Contribution (GAIC) (since 2010)

Allows the state government to obtain funds from developers to help deliver state infrastructure in Melbourne’s fringe suburbs. It funds community and public transport infrastructure.

Development Contributions Plan (DCP) (since 1995)

Allows any council to obtain funds from developers to help deliver local infrastructure. It commonly funds community and transport infrastructure, such as roads.

Infrastructure Contributions Plan (ICP) (since 2015)

Allows seven councils in defined growth areas to obtain funds from developers to help deliver local infrastructure. It funds the same infrastructure as the DCP program.

The program is still being implemented. The state government plans to expand it to more councils.

Voluntary agreements/ section 173 agreements (VA/s173)

Section 173 of the Planning and Environment Act 1987 (the Act) allows councils to enter a voluntary agreement with a developer on a project by project basis.

While DCPs can deliver significant financial benefits over their life span, they can take a long time to set up and place a high administrative and cost burden on councils. Recognising this, in 2015, the government introduced the ICP program as a simpler and cheaper tool.

We examined the roles of the following agencies and councils in delivering and using these tools:

 

State agencies

Councils

Department of Environment, Land, Water and Planning (DELWP)

Cardinia Shire Council (Cardinia)

Victorian Planning Authority (VPA)

Golden Plains Shire Council (Golden Plains)

State Revenue Office (SRO)

Melton City Council (Melton)

 

City of Whitehorse (Whitehorse)

Conclusion

Victoria’s development contributions are not delivering the infrastructure needed by growing communities to support their quality of life.

This is largely because state agencies have not managed development contributions tools strategically to maximise their value and impact. Instead, they manage the tools in isolation, with overlapping roles and no overarching strategy, goals or plan to drive and measure their collective success.

The state-managed GAIC program is inefficient and lacks strategic effect because project funding decisions are split between two disconnected processes. This limits DELWP’s ability to direct GAIC project funding towards the areas of greatest benefit and perform financial management of GAIC trusts.

The ICP program’s implementation is delayed. DELWP and VPA’s effort to implement the ICP program has reduced its focus on addressing the existing issues with the DCP program, which remains unnecessarily complex, costly and time-consuming for councils to use.

For many councils, VA/s173 agreements are the only realistic option to collect contributions for infrastructure. However, these one-off agreements are not designed specifically for development contributions and are unsuitable for supporting infrastructure delivery at the scale offered by the DCP and ICP programs.

Findings

Lack of overarching strategy and coordination

State agencies have implemented development contribution tools over several decades with little consideration of how they interact, or their collective aims and impact. As a result, Victoria now has a patchwork of overlapping tools that operate in isolation. Until there is an overarching strategy or management structure to guide and coordinate development contributions tools, state agency management will remain inefficient and not fully consider how contributions could best meet community needs.

Within the individual tools, different state departments and councils are responsible for different program components. For example, four state agencies each manage elements of GAIC, meaning no one agency has a complete view of revenue collection, project assessment or stakeholder engagement. Further, DELWP and the VPA are responsible for implementing ICPs in different areas, which makes it harder to resolve issues associated with the program’s delayed implementation.

The split responsibilities mean councils often do not receive clear and consistent advice about available tools. Our survey of councils found that only seven out of 65 councils agreed that they have received the necessary state advice to make an informed decision about taking part in the DCP and ICP programs.

Lack of program-specific goals and evaluation

Individual development contributions programs also lack overarching goals and evaluation:

  • Neither the GAIC nor DCP programs have established clear objectives to measure success against. As a result, DELWP has not meaningfully evaluated their impacts on infrastructure delivery.
  • While the ICP program has more clearly established goals, there is no evaluation framework in place to reliably measure success against these.

These gaps prevent DELWP from understanding the impact of the programs and bring into question its commitment to improving performance.

The Victorian Government’s outcomes architecture provides a suitable foundation for establishing a development contributions evaluation framework.

The Victorian Government’s outcomes architecture provides framework for measuring the outcomes of government activity.

GAIC funding is not strategic

GAIC projects are funded through one of two processes:

  • DELWP chairs an interdepartmental panel that assesses funding proposals from agencies based on the eligibility requirements of the Act and the GAIC application guidelines.
  • The government is increasingly using GAIC to fund projects through the state budget process. This made up 61 per cent of GAIC allocations during 2018–19 and 2019–20 ($276.3 million).

Although DELWP is the policy owner and financial manager of GAIC, it has no direct influence over allocations made through the state budget process. This means that DELWP cannot take an overarching strategic approach to selecting GAIC projects in areas of greatest need and benefit.

The split in project funding methods also makes it harder for DELWP to address the GAIC program’s emerging financial risks. Developers can defer their GAIC payments, which makes it difficult to reliably predict future revenue levels. Despite this uncertainty, the state has committed more GAIC funds to projects than the total revenue collected to date. DELWP needs to carefully manage GAIC’s two trusts to ensure that they do not become overdrawn.

DELWP is working with the Department of Treasury and Finance (DTF) and other departments to identify reforms to the way it collects and allocates GAIC funds. This provides an ideal opportunity to better coordinate project funding decisions and manage financial risks.

DCP barriers and risks to council participation

The DCP program carries significant barriers and risks for councils. Only 24 councils collected contributions through a DCP in 2017–18 or 2018–19, despite all 79 being able to create one. Issues include the:

  • cost of developing a DCP
  • time it takes to develop and have a DCP ministerially approved
  • complexity of DCPs and the expertise required to manage them effectively
  • financial risks of entering into a DCP. For example, a DCP locks in councils to deliver infrastructure projects, even if development does not proceed and the council cannot collect levies.

These barriers and risks mean that some councils do not want to participate, leaving them without a formal program to obtain development contributions and therefore missing opportunities to fund community infrastructure in this way. DELWP has not advised the government about ways to address this.

Councils' approaches to development contributions

Each audited council uses the various development contributions tools differently according to the advice they have received and each tool’s availability, features and risks. This has led to a range of outcomes and risks for councils:

  • Cardinia and Melton use both the DCP and ICP programs, which they support with VA/s173s. DCPs have previously exposed these councils to financial risks, but they advised us that they have since improved their practice. Both councils could strengthen their approaches by further documenting internal processes for managing development contributions to ensure consistency in their practices.
  • Golden Plains uses VA/s173s to obtain development contributions. It has a policy on how much it charges developers in its VA/s173s. While this approach has supported infrastructure delivery to date, the contribution rates it chose is not commensurate with the funding required for its emerging infrastructure needs.
  • Whitehorse does not have a DCP, despite significant population growth in Box Hill. While Whitehorse advised us that it is working to inform its decision on a solution, it has missed out on contributions from the significant development that has occurred in Box Hill. We estimate Whitehorse could have raised approximately $4.16 million across 2016–17 and 2017–18 through a DCP in Box Hill.

Limited DCP and VA/s173 policy advice and transparency

DELWP has not updated the DCP and VA/s173 policy advice to councils since 2007. Reviewing and updating these documents would help councils use the tools and disseminate better practice across the sector.

DELWP improved the transparency of the DCP program in 2016–17 by requiring councils to report on their current usage of DCPs. However, given the program’s extensive history, asking councils to provide historical information would give even more transparency to the public.

Councils’ use of VA/s173s lacks transparency because there is no publicly available information about their usage. It is not possible to know or compare how councils use this tool, or its impacts on development, council revenue and infrastructure delivery.

Delays in ICP implementation mean its future success is uncertain

The incomplete rollout of the ICP program has prevented the state and councils from achieving the program’s proposed benefits. These benefits include providing a development contributions tool that is simpler and easier to use than the DCP program.

The delay is due to DELWP and VPA still determining how they will implement the program, as well as work associated with changes to the Act in 2018 that allowed developers to contribute land through an ICP. It is still not known which councils will gain access to the program, when it will happen and how the program will apply levies. This uncertainty affects councils’ ability to make informed decisions about their approach to development contributions.

If the ICP program is to be effective, its objectives must be evidence-based and its design must support their achievement. Instead, there are gaps in the evidence DELWP and VPA used to develop the ICP program. For example, the program includes measures to reduce ‘gold plating’—delivering community infrastructure that is beyond a basic and essential standard. However, there is a lack of evidence verifying and quantifying the extent of gold plating in Victoria.

Further, elements of the program’s design do not clearly support the achievement of its objectives. For example, early ICPs have followed some of the same complex set-up processes experienced in the DCP program. This is at odds with the ICP program’s objective of simplifying a contribution plan’s development.

Unaddressed DCP issues

DELWP, VPA and councils understand the barriers to, and risks of, the DCP program. However, DELWP has no plans to address these barriers and risks due to the focus on implementing the ICP program.

The delayed rollout of the ICP program further complicates this situation. It remains unclear whether the ICP program will eventually replace the DCP program in all local government areas (LGA), or just in some. Even with greater certainty about future coverage, the continued delays with the ICP program’s rollout mean that most councils can only access the flawed DCP program.

Recommendations

We recommend that the Department of Environment, Land, Water and Planning, in consultation with the Victorian Planning Authority, the State Revenue Office and councils:

1. create an overarching development contributions framework that establishes:

  • a strategic direction for development contributions, including outcomes and targets for infrastructure delivery and supporting growth
  • clear and holistic accountability and governance arrangements for development contributions at a system-level
  • a central source of development contributions advice and guidance, including for voluntary agreements made through section 173 of the Planning and Environment Act 1987
  • the development contributions tools available for each council and the relationships between them (see Sections 2.2 and 2.3).

2. develop a plan for monitoring, evaluating and reporting on the outcomes achieved by development contributions at a state and council level, using the Victorian Government’s outcomes architecture (see Sections 2.4 and 2.5).

We recommend that that the Department of Environment, Land, Water and Planning and the Victorian Planning Authority, in consultation with councils:

3. complete outstanding work to implement the Infrastructure Contributions Plan program, including:

  • defining Strategic Development Areas and Regional Greenfield Growth areas
  • recommending to government when the program should expand into Strategic Development Areas and Regional Greenfield Growth areas
  • recommending to government which parts of Victoria should be included in these categories, using evidence-based eligibility criteria
  • recommending to government how to calculate levies for Infrastructure Contributions Plans in new areas
  • keeping all councils informed about implementation progress and decisions made (see Sections 4.2 and 4.3).

We recommend that the Department of Environment, Land, Water and Planning, in consultation with the Victorian Planning Authority:

4. improve the Development Contributions Plan program by:

  • identifying and reducing the time, cost and administrative burdens associated with developing Development Contributions Plans based on council feedback and the objectives of the Infrastructure Contributions Plan program
  • building councils’ capacity to develop and implement Development Contributions Plans through updated written guidance and ongoing support that caters to their council type (see Sections 2.3 and 3.2).

5. investigate the extent to which councils deliver infrastructure through Infrastructure Contributions Plans and Development Contributions Plans that is beyond a ‘basic and essential’ standard and use this information to assess whether restrictions on community infrastructure need revision (see Section 4.2).

We recommend that the Department of Environment, Land, Water and Planning:

6. identifies and advises government on potential reforms to the Growth Area Infrastructure Contribution program, including:

  • providing overarching financial management of Growth Area Infrastructure Contribution trusts that prevents overdrawing funds to finance projects
  • providing overarching, strategic selection and assessment of Growth Area Infrastructure Contribution projects that meets the program’s eligibility requirements and community infrastructure needs
  • seeking greater council input to selecting Growth Area Infrastructure Contribution-funded projects (see Sections 2.4, 3.3 and 3.4).

Responses to recommendations

We have consulted with DELWP, VPA, SRO, Cardinia, Golden Plains, Melton and Whitehorse and we considered their views when reaching our audit conclusions. As required by the Audit Act 1994, we gave a draft copy of this report to those agencies and asked for their submissions or comments. We also provided a copy of the report to the Department of Premier and Cabinet.

The following is a summary of those responses. We include the full responses in Appendix A:

  • DELWP supports the report’s findings and recommendations, and plans to establish a dedicated development contributions unit.
  • VPA accepts the report’s recommendations directed to it and notes that it has already commenced work to address them.
  • SRO accepts all recommendations and notes its commitment to administering GAIC in partnership with relevant stakeholders.
  • Cardinia accepts all recommendations and notes its ongoing work to improve the way it manages development contributions.
  • Melton supports the report’s conclusions and recommendations. It also notes its concerns with GAIC project allocation processes, DCP cash flow issues and the implementation of the ICP program.
  • Whitehorse accepts all recommendations, but does not support the report’s analysis of its approach to managing development contributions.
  • Golden Plains did not comment on the draft report.

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