Local Government Magazine

The cost of growth

The cost of growth - Featured Image - Local Government - December 2017

Morrison Low recently completed a study on the cost of growth at a number of local authorities. Consultant Stuart Cross (pictured) summarises some of the findings and challenges councils to talk more with their communities about the direct and indirect benefits of growth.

Not all costs that are caused by growth can be recovered from development contributions. Of particular significance are the major infrastructure projects that have a wider benefit to existing ratepayers (such as the bus lane in Neil Construction Ltd v North Shore City Council [2001] 3 NZLR 533).

Stuart Cross
Stuart Cross

The portion of these costs that are not recoverable from development contributions is often significant, and this portion is unlikely to ever be paid for by growth (whether through additional rates revenue or development contributions).
It is quite simple to rationalise that in an example like this the costs are not just “costs of growth”, as there is a wider benefit to existing ratepayers.
However, in many cases, this infrastructure may not have otherwise been constructed, or there may not have been a need for it.
In these circumstances, it can be hard for an existing ratepayer base to understand why they need to shoulder a large portion of the costs of that infrastructure, particularly if the benefits are hard to identify.
We often talk about growth as being beneficial to communities; it is something that is often sought, and is used by some as an indicator of a successful and prosperous city.
But the benefits of growth are often broad, poorly defined, and are not always immediately obvious. The benefits of growth for the region may include improvements to service provision, increased employment opportunities, and a higher standard of living.
Too often, however, councils lack a full understanding of what these economic benefits are, and they fail to communicate these benefits to their communities.
For local authorities, a major benefit from growth is the additional rating revenue that comes with new houses and businesses.
In our work looking at growth councils throughout New Zealand, feedback was consistent that the additional rates revenue from growth in the rating base had already been allocated in long-term plans – that is, it is required to enable delivery of services and infrastructure that council has included in the long-term plan.
While this revenue isn’t free (that is, there must be an underlying funding requirement for it), growth in the rating base enables councils to keep rates rises to an affordable level, while providing a consistent, or improved, level of service.
Without growth, rates would have to rise at a rate that is unacceptable to local communities, or alternatively, levels of service may have to drop, and some investment in infrastructure may be delayed.
Currently, the costs of growth that cannot be funded from development contributions are being paid by ratepayers over time, and are usually financed with external borrowings in the short term.
There is little transparency about who is bearing what costs, or what ratepayers are getting in return.
We believe that if communities understood the direct and indirect benefits of growth, they would have a bigger appetite to pay for it.
That is, if communities understood that growth would result in the library being able to stay open seven days a week, or the local road having fewer potholes, then they may be prepared to pay their share.
This has certainly been the experience of many councils in New South Wales when they have sought a rates rise above the State government-imposed rates peg.
Holding conversations with communities about both the costs and the benefits of growth seems obvious but it’s not something we see occurring enough.
Auckland’s interim transport levy is a good example where ratepayers generally accepted that they needed to pay additional rates for a fixed period of time in order to reap certain benefits and fix problems.
Perhaps a similar approach could be adopted more broadly for an ‘interim growth charge’ to address specific needs; debt reduction, specific pieces of district-wide infrastructure or demands for service provision.
Justifying the charge would lead to transparency around the costs and benefits associated with growth and who would be bearing those costs and reaping the benefits. That would require engaging the community in a very different conversation.
It would also allow the council to begin a new phase of asset management with a clean slate, unburdened by the decisions of the past.

• Stuart Cross is a consultant at Morrison Low. s.cross@morrisonlow.com

This article was first published in the December 2017 issue of NZ Local Government Magazine.

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