Principles for Setting Developer’s Contributions for Urban Water Infrastructure

This report was produced for the Urban Water Research Association of Australia, a now discontinued research program.

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Report no. UWRAA 103

March 1996

Synopsis

The study has developed a set of guidelines for determining the level and structure of developer charges in Australia which take into account the multiplicity of objectives that water utilities face. These guidelines are applicable to water utilities with differing institutional arrangements and varying catchment characteristics.

The recommended principles have been summarised in terms of a financial model that recognises system components, the asset value and timing of construction. It also contains mechanisms for allocating hydraulic infrastructure costs to customers, while recognising all potential revenue and expenditure streams.

The guidelines for setting developer charges are summarised below.

Role of Upfront (Developer) Charges
Coverage of Developer Charges
The costs of water supply headworks, such as dams, groundwater extraction bores or treatment facilities should be excluded from the calculation of developer charges.

The major role of developer contributions is to recover the initial capital costs of providing hydraulic infrastructure services to new developments. It is inappropriate to recover maintenance and asset replacement expenditures from developer charges, given the uncertainties about the timing and amount of these costs (see 4.5).

Calculating the Cost of Hydraulic Infrastructure
Past and Future Costs

In order to reflect the economic costs of hydraulic infrastructure services to new customers, the capital cost of hydraulic infrastructure should be calculated on the basis of all expenditures (both past and future) incurred in providing services to new customers.

Inclusion of the Time Value of Money into Developer Charges
Water utilities shouldincorporate the time value of money into their calculation of developercharges.

Allocating the Costs of Unplanned Excess Capacity
Water utilities should not attempt to recover more than the infrastructure is worth. In some cases, this maybe less than the initial capital cost of the hydraulic infrastructure. If the provision of uneconomic infrastructure resulted from misplaced planning forecasts, these costs should be borne by the utility.

Asset Valuation Issues
Over-valuation of the assets of the water utility will raise the level of developer charges and increase the cost of development. This will tend to result in a marginal reduction inactivity in the development industry.

Community Service Obligations (CSO’s)

If water utilities are unable to obtain funding from governments for CSOs, the assets required to meet the CSO should be written down to a level required to reflect the income earning potential of that asset(s).

Determining the Level of Cost Recovery
Financial Modelling Approach
In order to avoid the ‘doubledipping’ of customers, water utilities should undertake a comprehensivefinancial assessment of new development in order to ensure that the presentvalues of all revenues (ie developer and recurrent charges) obtained from thecustomers in new developments is matched to the costs that they impose on thehydraulic system (see 7.2).

Who Should Pay Developer Charges in the First Instance
There are good efficiency and equity arguments for levying capital charges at each stage of the land development process. Recovering capital charges from landowners may ensure that intergenerational inequities are minimised, whereas charges at the sub-division and building stage are consistent with the ‘user-pays’ principle (see 7.3).

Differential Developer Charges
Location Based
In general, developer charges should be structured to reflect locational differences in the cost of supplying hydraulic infrastructure.

Urban Consolidation
Developer charges levied on re-development or infill development should pay a charge below that of Greenfield sites if any of the following considerations are important:

· Established areas have considerable excess capacity;

· Possibilities for the re-development are plentiful;and,

· Developer contributions in excess of the incremental costs of re-development greatly affect the re-development of established sites.(see 7.4.3)

Out-of-Sequence Development
Premature development imposes additional real resource costs on the water utility, and may cause the utility to reject investments on projects which provide a more immediate and less risky return. Water utilities should ensure that developers of non-contiguous development (“non-frontal” and“ pioneer”) should fund the full cost of providing all the infrastructure, including that which is in excess of developer’s immediate requirements (see7.4.4).

Land Area
Water utilities should use developer charges to provide incentives for more compact development.

Up-sizing
The most equitable approach to the allocation of the costs is to set them on the basis of the benefits that developers receive froma particular investment.

Accounting For DeveloperCharges
Treating Developer Charges as Income
The income received from developer charges should be included as income in the financial statements of the water utility.

Depreciation Charges
Hydraulic infrastructure either provided or funded by developers should be included in the asset base of the water utility for depreciation purposes.

Rate of Return Calculations

Developer ‘provided’ and ‘funded’ infrastructure should be excluded from the value of the water utility’s asset stock when making rate of return calculations.

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