Developer contributions - How should we pay for new local infrastructure?

Developer contributions offer councils and state governments another avenue, beyond rates, to fund local infrastructure. Developer contributions are payments made by developers towards costs associated with essential infrastructure, such as water and drainage, so new homes are habitable and connected to existing transport hubs. These contributions are often considered as part of a suite of broader (value capture) regulations that help determine who pays for what in the development process.

Although developer contributions may (in theory) help ensure developers factor in and contribute to the cost of new infrastructure around housing developments, these contributions are typically complex to estimate and costly to administer. If developer contributions are unpredictable, poorly scoped or administered inefficiently, they have the potential to impede new housing supply and unnecessarily increase the cost of new housing.

It is therefore of concern that the application, scope and administration of developer contributions is a relatively opaque area of public policy, with little detailed and comparable information available in most states and territories regarding their use.

This report compares developer contribution policies across states and territories, including looking at the scope, costs, timeliness and transparency of these policies across different jurisdictions. It also explores the views of key stakeholders – industry, local government and state planning authorities – who raise a number of issues that require new consideration.

Given developer contributions are an increasingly significant component of new housing construction costs, further research is warranted to assess the unintended impacts of high and poorly functioning developer contribution systems and their implications for new home buyers.

Executive Summary

Over recent decades, increasing expectations of good quality local amenity combined with rapid population growth have left local governments struggling to keep up with the demand for public infrastructure and services. This has led to increased use of developer contributions, shifting the cost burden of local infrastructure from state governments and local councils to end users.

Developer contributions are meant to operate like a user-pays model of delivering new local infrastructure because (in theory) the levies paid by developers help deliver housing-essential infrastructure that is valued and paid for by the new home buyer. In practice, “nexus” developer contribution charges (that is, charges that pay for new essential infrastructure directly tied to new housing) are complex and difficult to calculate.

There is no publicly available aggregated data on developer contributions across most states and territories. This makes it difficult to assess how developer contributions have increased over time and how they differ across jurisdictions, impeding proper policy evaluation. Some states, like NSW, require modest standardised reporting, which is due to be enhanced with recently agreed reforms. Others, like SA and Tasmania, have minimal public reporting requirements.

Developer contributions have broadened in scope, from funding basic essential infrastructure (e.g. water and drainage) where there is a clearer nexus to new housing, to broader social infrastructure (e.g. community and recreation centres). In states like NSW, VIC and QLD, developer contributions now help to fund the costs of new schools and hospitals – areas traditionally funded by state budgets.

Of the Sydney Councils analysed by NHFIC, on average nearly two-thirds and up to 88% of all funds raised by developer contributions between 2017 and 2020 were earmarked for social infrastructure, with around one-third, on average, earmarked for essential infrastructure with a stronger nexus to new housing developments.

Funding a much wider array of social infrastructure through developer contributions deliver broader community benefits but confer fewer clear, direct and immediate private benefits to new home buyers. This means developer contributions increasingly act like a tax on new housing, which can impede new housing supply and reduce housing affordability for buyers and renters.

When it comes to implementation, one of the greatest criticisms from industry stakeholders is that developer contributions can be highly variable and unpredictable. This can increase unanticipated costs for developers throughout the development process, which affects margins and can impede new housing supply.

Indicative case studies sourced by NHFIC show that developer contributions can amount to between: $25,000 to $85,000 per dwelling in NSW; $37,000 to $77,000 per dwelling in VIC; and $29,000 to $42,000 per dwelling in QLD. This means developer contributions can typically amount to around 8% to 11% of total construction costs, making it a substantial contribution to the cost of building a new home.

An aversion to debt and municipal rate caps, particularly in NSW and VIC, constrain local governments’ ability to fund good-quality local infrastructure. This puts more pressure on the developer contribution system to raise revenue. Artificial funding constraints and debt aversion can raise the cost of delivering new local infrastructure as councils forgo borrowing at relatively low rates.

Much of the initial basic essential infrastructure required for new housing developments can be used by future developers in the area, which means developers often can’t capture the full benefits of their investments. Improved policy coordination and optimising risk/cost sharing arrangements between councils and developers is likely to help increase new housing supply.