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Urban Taskforce | Policy Agenda

Fact sheet: Anti-competitive rules in the planning system

27 February 2011

Planning laws restrict the supply of development sites. The more potential development sites means more competition amongst land-owners.


Planning laws also block new retailers based on the fears of their competitors.


Reducing the number of developable sites

The planning system restricts competition amongst property owners willing to sell their land for development by limiting the supply of appropriately zoned land.

 

It is well understood in the urban development industry that, (for example) in Sydney, there is a very clear shortage of land zoned for high density residential uses (in the inner and middle ring suburbs), for single-home residential development (fringe suburbs) and for retail uses. There can also be shortfalls in land zoned for high intensity employment uses, particularly business parks where office, retail and bulky goods premises are permitted. On the other hand there is an oversupply of industrial land in some locations (such as South Sydney).

 

Planning authorities often fail to realise how limited the supply of land is even without their zoning and strategic policy restrictions.

 

One issue that naturally limits the availability of land is fractured ownership. Where the ownership of land is fractured into a number of small parcels it may be very difficult and expensive to undertake the complex negotiations and resources required to assemble the land into a site large enough to support a major development.

 

During protracted negotiations of this kind, the developer faces significant interest (or opportunity) costs to finance the expenditure necessary to keep the project on-foot while practiced negotiations continue. I is very difficult, if not impossible, to attract equity capital to a proposed development site where the ownership has not been unified.

 

In any given region of a metropolitan area, even without zoning restrictions, there are likely to be few suitable sites ripe for large scale residential, retail or commercial development. This in itself will give property owners significant market power when negotiating with developers. However, when strategic policies and zoning controls sterilise the majority of the few viable sites, the very small number of property owners remaining are in possession of greatly increased market power.

 

Hence zoning and strategic policy restrictions reduce competition amongst property owners, and therefore increase the price of land available for large development projects. The higher the price, the greater the likelihood that developers will either be forced to pay more than they should for a site or that the transaction will simply not proceed because the project would not be viable.

 

The common refrain from planning authorities whenever this issue is raised is that the developer simply needs to ˜cop a haircut and get on with development at a lower margin. This perspective is deeply flawed. Modern capital is very mobile. It flows to wherever it gets the best return.

 

A local developer will not be able to secure capital for, say, a NSW development if he/she cannot offer the rate of return that is available for investments of a similar risk profile in other states or countries. In order to ensure that a market rate of return is still achieved, a developer will need to increase the price paid by the ultimate purchaser of the developed land.

 

One reason that Australia has missed out on so much development in recent years is that the ultimate purchaser of developed land is often not able to afford to cover the cost of zoning-induced land price inflation. For example, the buying power of home owners is dictated by interest rates and their borrowing capacity (which is a function of their income and bank credit policies). There is a clear ceiling to how much they can pay for a new home.

 

In metropolitan areas home prices consistently track the borrowing capacity of purchasers because the supply of new homes is so poorly relative to underlying demand. Essentially, people are paying as much as they can afford to for new homes.

 

Directly preventing landlords from competing for tenants

The planning system restricts competition amongst the owners of commercial and retail land for tenants. It does this by expressly requiring new development proposals for commercial offices, retail facilities and entertainment facilities to demonstrate that they will not impact on the market share of incumbent players.

The stated reason for restrictions of this kind is to force development into locations where infrastructure is underutilised (a centre). In short, if you locate your new development in a centre, there will be no need to prove your development will not steal someone elses business. On the other hand, if your business is not in a centre you may still proceed with the development, but only if you can show (through an economic consultants report) that your development will not detract from the existing trade of incumbent businesses in a centre.

 

Such measures are contrary to the public interest for three key reasons.

 

Firstly, banning a development in one locality does not necessarily mean the development will proceed in the planning authoritys preferred location. Often there will be sound commercial reasons why the developer has decided not to develop on the land nominated by the planning authority. This could be the price demanded by the property owner, but also could be due to factors such as the existing levels of road congestion, travel time for the likely customer base, car parking limitations, lack of pedestrian traffic, etc. Important projects, and therefore economic and social benefits, are likely to be lost to the community as a whole.

 

Secondly, action of this kind by a planning authority confers excessive market power on landholders in the authoritys preferred location. With few or no landholders competing against each other, landholders do not need to price their land competitively to attract a development proposal. They are also more likely to let a developer walk away when they believe the planning system will prohibit the same development happening anywhere else within the local region.

 

They will have the view that it is only a matter of time until the need for the given development (such as a supermarket) is so great, that a developer will have to pay the inflated prices the landholder is seeking. Even if this turns out to be true the community will lose out on social and economic benefits while the development is delayed. Ultimately the customers of a delayed shopping centre will also end up paying more at the cash register in order to pay back the inflated price charged by the landholder.

 

Thirdly, while the planning authority may feel that infrastructure is being underutilised at their preferred development location, this does not mean that infrastructure is being fully utilised at the developers preferred location. In any event, one of the reasons it is attractive to develop outside the existing network of major centres, is that the roads at many of these locations are already heavily congested.

 

Directly preventing businesses from competing with each other
In a market economy consumers should be in charge. That means they ultimately decide whether or not new retail facilities are necessary, not government planners.

 

Businesses seeking to establish themselves in a new location may be denied the opportunity to directly compete with other businesses for unnecessary restrictive centres policy listed above, or other restrictions included in a statutory plan.

 

There is clearly a negative perception in the community on the degree of retail competition in Australia. Choice conducted a survey of more than 1,000 consumers in February 2008 64 per cent of consumers said there was not enough price competition for groceries.

 

The established centres so favoured by the planning rules are already generally each dominated by an existing shopping centre landlord.

 

Smaller chains cannot compete or increase market share because they just cannot get into major shopping centres. Smaller chains are prevented from opening down the road because of "centres policy" planning laws that concentrate on major shopping centres in select areas, banning or limiting competitors in surrounding suburbs.

 

By setting a limited number of shopping centres as the gateway to new major chain supermarkets, the overall access of the community to major chain supermarkets is reduced.

 

The Bureau of Infrastructure, Transport and Regional Economics (BTRE) carried out an Australia-wide study in which it collected over 80,000 prices in 132 locations, from major cities to the most remote areas. The outcome of the study was detailed in the Bureaus submission to the ACCCs grocery prices inquiry. The Bureau looked at grocery prices in places that werent within easy reach of a major chain supermarket. This is not small group - in fact half of non-metropolitan Australians are in this situation.

 

These consumers were found to pay an average 20 per cent premium in prices, although once adjustments are made for differences in the size of the local populations, the price premium paid by consumers without ready access to a major chain supermarket was 17 per cent.

 

The Economist Intelligence Unit cost of living survey found that, in 2007, prices in Sydney for food staples were on average 22 per cent higher in mid-priced stores than in large format stores. For household and personal care products the prices were even higher - between 33 and 39 per cent more expensive on average.

 

The evidence clearly shows that large format chain stores are delivering groceries to Australian households cheaper than smaller independent stores. This should not come as a surprise. Large format chain stores have the benefit of scale in their supply chain, with an increased ability to negotiate on behalf of their customers, with international food manufactures. They have the capacity to run a just-in-time distribution operation with high frequency delivery of packaged and fresh food to supermarkets, reducing the need for storing merchandise on site and increasing the likelihood that the full range of products will be available. A larger floor space means that the cost of many fixed overheads is defrayed over a greater sales volume.

 

The BTREs study did find that independent stores appear to compete with the major chains on price in some locations, but more often competed on other factors, such as variety, opening times and service. Chances are, if consumers are paying too much for groceries, it is because of a lack of large format grocery stores, rather than the presence of one.

 

This creates an artificial need for less cost-competitive stores to meet the zoning-induced gap. Ironically, those very same stores (small format retailing) are often able to avoid the zoning and development assessment restrictions that large format stores face.

 

If Australian households are to have access to lower cost groceries we must question any regulation which might limit or prevent new large format stores. We must also question any regulation that might hinder efforts by new-entrant grocery chains to set up large format stores in competition with the dominant players.

 

The ACCC has been told that Coles is merely a tenant at 97 per cent of its supermarkets and Woolworths is a tenant at 98 per cent of its stores. In his evidence before the ACCC Grocery prices inquiry, John Schroder, chief executive officer of major shopping centre owner Stockland Retail said that in the middle of dense urban Sydney .... where there is an under-supply of supermarkets ... we'll drive up the rent. In fact, in some cases, depending on what the research tells us, we'll almost bid the space out.

 

As this evidence suggests when the planning system constrains supermarket sites it is handing increased market power to a limited number of land owners. Consumers will bear the burden of increased rent through the prices they pay.

 

The planning system is not just limiting the growth of existing supermarket chains. It also limits potential for new entrant retailers to establish themselves in the market. There are three basic strategies that can be used for a foreign retailer to enter a new domestic market:
¢ an investment strategy where a foreign company buys all or part of an existing retail chain;
¢ a multinational strategy where a company develops new outlets through a fully or part owned affiliate, which adapt their operation to the local market; and
¢ a global strategy where the foreign company reproduces its home market outlets in the new market.

 

Town planning constraints have been identified in the academic literature as being a key factor in the selection of a market entry mode strategy. Where there are flexible planning controls and a ready supply of land, a company is more likely to want to grow through the expansion of new stores. If there is strong control over development and/or a difficult land market, the company is more likely to expand through the purchase of an existing retailer.

Case studies are available to illustrate how restrictive centres policy has prevented new entrant retailers from establishing new competing businesses in the United Kingdom and Western Europe and instead forcing them to enter new national markets by acquiring existing businesses.

 


The acquisition of an existing retailer by a foreign company, in itself, does nothing to increase the number of stores competing in the Australian economy. Town planning policies should not act as a barrier preventing new retailers from setting up locally.

 

Regulatory risk as a barrier to entry
In the planning system, the numerous planning schemes, development codes, strategic policies, development assessment policies, contributions plans, ministerial directions and levy determinations that can all profoundly affect development potential are amended on an almost daily basis, often with no regard to the investment decisions developers have already made in reliance on the existing rules.

 

Several years will usually pass from the point of acquiring an interest in a potential development site to the final sale of the developed product to the customer. The fluid and ever widening legislative environment has deprived the development industry of any protection from more onerous obligations once they have irrevocably committed to a development site. In fact diligent developers must now factor in an unusually high risk premium for developing NSW because of this uncertainty.

 

Quite aside from the risks of the law being changed, the application of the law as it stands is a highly subjective and politicised process that can be extremely unpredictable. A decision-maker who wants to refuse development consent is literally blessed with an unending array of rules, policies, strategies and ordinances which can be relied upon to justify a no.

 

A decision-maker who is minded to approve a development must navigate a complex and internecine maze of conflicting, overlapping, vague and rambling documents.

 

This situation has become so serious, that commonly understood concepts of property no longer clearly apply, such as:
¢ the right to own land without uncompensated expropriation by the state;
¢ the right to develop land in accordance with its existing uses;
¢ the right to develop land in accordance with its zoning; and
¢ the right to be free from arbitrary, unreviewable, (and even retrospective) levies.

 

Sovereign risk is a very real issue when dealing with planning issues. This has reduced the volume of development activity and the supply of developed product. It reduces competition amongst landlords (because they do not need to be concerned about the risk of new significant product becoming available) and amongst businesses whose format is dependent on new purpose-built facilities.

 

Nonetheless, it is important to distinguish regulatory risk from market risk. The planning system should seek to minimise the former, but avoid tampering with the latter. That is, the planning system should seek to provide certainty to the private sector by having clear rules, simple processes, swift processing times and low predictable costs. It should not be the role of the planning system to provide certainty to investors in one location, by giving them assurance that they will be protected from competition in other nearby locations. Planning systems should reduce regulatory risk, but not market risk.

 

Regretfully, rules are often put in place in the planning system to protect sections of the private sector from market risks. All this will do is provide certainty for oligopolistic landlords and provide few options for those seeking to satisfy unmet market demand. Reformed planning systems should focus on minimising unnecessary regulatory risks.

 

Competitive neutrality

Competition between different businesses developing or marketing like-for-like products is affected by the failure to respect the principles of competitive neutrality.

 

As a result there is a reduced willingness for private capital to develop certain activities (such as affordable housing) unless it is in a joint venture agreement with agencies/entities that benefit from favourable regulatory treatment. The financial, political, technical and other limitations on organisations that are able to benefit from the planning systems favourable treatment represent a break on the ability of private enterprise to participate in affected segments of the development market. The perception that the principles of competitive neutrality will be further eroded also acts as a disincentive to invest in other areas of development in NSW.

 

The presence of government owned development companies, competing against private developers, creates a perception, if not reality, that private developers will be treated less favourably by regulators than a government owned developer. The risk of government owned developers developing homes for private sale at less than commercial internal rates of return also create disincentives for private sector developers to become active in market segments where government owned developers have a strong presence.

 

Government-owned property developers have a role to play, where a market is not established and there are barriers preventing a private market from becoming established without government involvement. In other circumstances, the involvement of a government-owned property developer will adversely affect private sector participation in the market sector under question.

 

However, the existence of barriers, created by the government itself (for example high development levies and poor quality/ uncertain regulation), do not justify the presence of a government-owned developer acting in competition with private sector developers.

 

More information

 

For more information (and source details) please read our fact sheet:

 

 

Fact Sheet: Anti-competitive rules in the planning system



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