Developers are poised to take a judicial review against Auckland Council over its proposed eye-watering hike of up to 400 per cent in development contributions (DC) .

Under the council’s Draft Contribution Policy, released late last year, projects that would cost $30 million today are inflated to a 30-year price of $250 million and developers will be paying these charges on all new consents from next month.

Last year the average Auckland development contribution (DC) was about $50,000. Over the next decade, the council is aiming to invest $93.3 billion in infrastructure related to growth. To fund this and extend estimates for 30 years’ of infrastructure, the council is proposing to lift DCs from $20,000 to $50,000 per lot or household equivalent unit (HUE). Investment priority areas including Tamaki, Mt Roskill and parts of central Auckland, could see DCs rise as high as $119,000 per lot or HUE.

Subdivision Advocacy NZ (SANZ) spokeswoman Kirsty Merriman is leading a campaign with prominent property accountant Matthew Gilligan of GRA (Gilligan Rowe & Associates) to get the council to re-examine its modelling for the DCs.

Preliminary advice obtained by SANZ, from barrister Andrew Barker KC, backs up its claims the proposed DC charges could be illegal. He noted the financial modelling errors aren’t policy decisions, but factual errors that render the DC increases unreasonable.

Barker says calculating DCs based on nominal future infrastructure costs without accounting for the difference between the date of payment today and the date the cost is incurred, 30 years or more later, is a “reviewable error of law or an unreasonable decision by the council”.

Auckland Council financial strategy general manager Michael Burns says while staff are looking at issues with the contribution policy brought up in submissions to the draft plan, it disagrees with SANZ and Barker’s assessment.

“The draft policy and modelling is a robust large piece of policy work and has been subject to external technical and legal review,” he says. It also doesn’t agree there is any error of law in the policy.

“If the council does not make and implement changes, SANZ will launch a judicial review,” Merriman says.

The lobby group says the key problems with the contribution policy include failure to discount future revenue to present value-inflating costs, excessive project add-ons and contingencies, such as traffic management at 13 per cent or 20 per cent, and contingencies of 50-70 per cent, when the industry standard is 10-20 per cent, and unrealistic housing growth forecasts.

Two of the biggest areas of concern are the over-estimation of contingencies and the escalation of costs without the discounting or opposite treatment of the revenue stream, Merriman says.

Under section 111 of the Local Government Act, the council is required to follow generally accepted accounting practices and the treatment of costs and revenue must be the same.

“It clearly and most obviously is not doing so. The council’s procurement system is broken. It is not pricing work correctly. It is spending multiples more than the private sector because staff are estimating, and using expensive estimates at that.

“By the time those costs have been escalated into the future, they become a gross, egregious, nasty cost.

“It doesn’t only affect developers but ratepayers and tax-payers also,” Merriman says.

For example, a Mangere footpath renewal is 85 per cent ratepayer funded. Along with higher-than-private-sector overheads, a 70 per cent contingency is applied, it is delayed for 10 years, the capital expenditure is inflated, and the original $66 million dollar project turns into a $265 million dollar development, she says.

A more horrendous calculation error showed up in official information Merriman applied for on an $800 million Tamaki greenfield scale stormwater project covering Point England, Glen Innes and Panmure.

In meetings, council staff presented an alternative private $2 billion solution.

Merriman pointed out to council staff they had double-counted the project’s ground coverage and that brought the cost back to $1 billion. A cost approach for the supply and installation of materials for the project had also been applied at five times the value a private developer would pay and the remaining $1 billion was trimmed back to $200 million.

“I was heard, a confidential meeting was held, and council staff have now gone back to the drawing board to fix the mistakes.

“Asking developers to pay today the costs of 20, 30, 55 years inflated is not reasonable. The law is clear – you can’t do that.”

Another housing crisis looming

By far the biggest effect of the increases will be on affordable houses as DCs make up the bigger portion of their costs, SANZ says.

In its contribution policy, the council claims the DCs will have no impact on house prices. In a surprising statement it says high DCs do not influence housing costs because developers do not pass these fees onto buyers; instead, the market determines prices.

An incredulous Gilligan says this is “nonsense” dished up by the council’s favoured economic advisers.

“Of the nine economic reports on DCs, six did not agree with this assertion. The council only referenced the three that agreed in its study on the issue. And in 2013 the council received advice from the Internal Affairs Department, clearly saying development contributions do affect houses prices.”

The relationship between DCs and housing prices is fundamentally tied to economic principles of viability, supply, and demand.

Gilligan says the council is cherry-picking economic advice and analysis to justify increased DCs, which are a taxation on developers and home builders, and is boosting policies that will contribute to the next housing crisis. “A significant increase in DCs directly impacts project feasibility by eroding developers’ profit margins. As a result, supply diminishes. Developers halt construction and landbank their assets, waiting for more favourable conditions.”

He says in short, supply crashes, and demand continues to build. Values get pushed up as a result, and it’s not until house prices increase that construction becomes viable, and so the end purchaser pays the higher DCs through resulting house price inflation.

Unclear approach

In his advice to SANZ, Barker says it appears the council has used contingency and growth figures, land acquisition costs, projected dates for infrastructure development and the like in its calculations, which are not supported by industry practice or the council’s practice in other areas.

“It is unclear why the council has taken the approach of maximising the amount of DCs to be paid by current developers.

“If it is to achieve a purpose other than a fair and equitable contribution to infrastructure costs, then it would be exercising its powers for an improper purpose and the policy would be subject to review on this ground also.”

Barker’s advice also points out the council’s growth projections appear to have been manipulated to shift the burden to greenfield developments.

Merriman says an important note in his advice is the policy appears to be aimed at creating a generous and immediate revenue stream that the council can apply as it likes.

System needs disassembling

While SANZ is not opposed to DCs and sees them as necessary to pay for infrastructure, Merriman says increases need to be honest, not inflated estimates.

She says they should stay at the existing level until the government’s new system of levies kicks in, or a commissioner can review the system to make sure the council’s funding models and allocations are fair.

“The whole system for growth contributions and infrastructure needs to be disassembled and put back together with an open and transparent procurement team.

“DC costs could fall if council procurement was better. Maybe it could be made private, managed or quoted at the time to get a far more accurate figure.”

Burns says the council has undertaken a thorough consultation process on the Development Contributions Policy, as a complex but significant piece of policy that affects Aucklanders.

A development contributions scheme looks at the total cost of growth infrastructure and allocates that cost across the total development that it enables. In large-scale development areas, such as Drury, Tamaki or Whenuapai, often the infrastructure will take decades to complete.

“The policy ensures the cost of new infrastructure is fairly shared between developers and ratepayers. Without this policy, ratepayers would cover the full cost of growth-related infrastructure.”

Dividing the total cost by the total development gives the development contribution charge, Burns says.

The majority of councils in New Zealand set this as a simple flat charge, but there is an option to have indexed or annually increasing pricing.

“A number of submissions on the draft policy raised the pricing approach, which staff have considered and will provide advice on options to the governing body, including indexed or annually increasing pricing,” he says.

“Staff are also focusing in particular on some changes to underlying financials; options for infrastructure investment; and flat vs indexed pricing.”

Changes have already been made to the draft policy and it was debated and voted on by the council’s governing policy at the end of last month. The new policy will come into effect this month.