NATIONAL COMPETITION POLICY REVIEW OF VICTORIA1S PLANNING AND ENVIRONMENT ACT 1987 AND ASSOCIATED SUBORDINATE INSTRUMENTS FINAL REPORT I toli F R A S T R U C T U R E TABLE OF CONTENTS 1. 2. INTRO DUCTION BACKGROUND AND REVIEW METHODOLOGy 2.1 2.2 3. 4. Competition Principles Agreement Role of Case Studies 1 2 2 4 5 14 14 21 25 . OVERVIEW OF VICTORIAN PLANNING AND ENVIRONMENT LEGiSLATION PLANNING LEGISLATION OBJECTiVES 4.1 4.2 Clarifying The Objectives Of The Legislation The Extent To Which The Legislation Addresses Market Failure 5. RESTRICTIONS ON COMPETITION 5.1 5.2 5.3 Identification of ReJeyant Markets r L 25 26 45 47 47 48 51 53 56 58 60 61 63 65 67 67 67 74 74 80 85 92 Provisions of the Legislation That Restrict Competition Identification of Affected Parties 6. ASSESS AND BALANCE COSTS AND BENEFITS ASSOCIATED WITH RESTRICTIONS ON COMPETITION 6.1 6.2 6.3 6 J. Introduction Identifying costs, benefits and transfers Restrictions on entry or exit of firms into or aut of markets i={estrictions which advantage some businesses over others Restrictions of prices or production levels Restrictions on quality or location of goods and services Restrictions on advertising and promotional activities Restrictions of price and type of input used in production processes Imposition of significant transactions costs an businesses or households Concluding remarks 6.5 6.6 6.7 6.8 6.9 6.10 7. POTENTIALLY LESS RESTRICTIVE ALTERNATIVES 7.1 7.2 Guiding principles Suggested less restrictive alternatives 8. CASE STUDIES 8.1 8.2 8.3 8.4 Case Study 1 - State Planning Policy For Economic Development: Business Case Study 2 - Local Planning Policy: Development On Highways, Main Roads And Tourist Routes Case Study 3 - Section 173 Agreements Case Study 4 - Particular Provision: Home Occupation 8.5 Case Study 5 - Existing Use Rights 97 APPENDIX 1 APPENDIX 2 f RBL:Final P&E NCP Review Report Jan 2C01(consullantsreport) .doc EXECUTIVE SUMMARY Introduction This Report has been produced following a review undertaken by Deacons and Tasman Economics, on behalf of the Victorian Minister for Planning, of the Victorian Planning and Environment Act 1987 and its subordinate legislation ("Victorian Planning Legislation"), in light of the commitment of the Victorian Government made unde r the Competition Principles Agreement ("CPA") to ensure that provisions of its legislation do not restrict competition unless it can be demonstrated that: • the benefits of the restrictions to the community as a whole outweigh the costs; and the objectives of the legislation can only be achieved by restricting competition. • Deacons, in conjunction with Tasman Economics, undertook a Model 2 ("semi~ public") review of Victorian Plannillfg Legislation based on the Victorian Government Guidelines for the Review of Legislative Restrictions on Competition. The review process involved notification to the public of the review, and the receipt and consideration of submissions by interested parties. Objectives Of Victorian Planning Legislation In essence, the Victorian Planning Legislation aims to: • • • • • • promote fairness and sustainability in decision-making: protect the natural and built environment from over-exploitation; prevent detriment to the community's amenity and safe environments resulting from the development and use of land; preserve places of significance to the community frorr. harm; ensure that community infrastructure is provided in an orderly and properly coordinated fashion; and make net community benefit a basic planning principle. How Does The Legislation Restrict Competition? Victorian Planning Legislation may restrict competition bo th in the market for the use and development of Victorian land, and the markets for the provision of the range of goods and services which may be produced or provided using land situated in Victoria. This encompasses most businesses based in V'ctoria, Because the Victorian Planning Legislation can affect the degree of competition in a wide range of product markets, the review includes five Case Studies highlighting elements of the Legislation , to allow a closer examinatior. 'Jf the impact of restrictions on competition on the Victorian community. Victorian Planning Legislation restricts competition in a var iety of ways. For instance, it can: • restrict entry of firms into markets (eg through zoning , overlays and activity centres policy); RBL:Final P&E NCP Review Report Jan 2001(consultantsreport) .doc • advantage some businesses over others (eg through permits or existing use rights and by granting a monopoly right for Responsible Authorities and Planning Authorities to undertake functions that may be efficiently provided by others); restrict prices or production levels (eg through Section 173 Agreements and Home Occupation Particular Provisions); restrict quality or location of goods and services (eg through building and site development standards and zoning); restrict the price and/or type of input used in production, including land (eg through zoning controls and Freeway Service Centre controls); restrict advertising and promotional activities (eg by regulating the size of certain classes of sign); and impose transactions costs on businesses or households (eg through fees; cost in terms of time to prepare and process applications, objections and appeals; cost to hear appeals; and rnonitorlng and enforcement costs). • • • • • Identifying Costs And Benefits Associated With Restrictions On Competition Recommendation 1: It is recommended that the Victorian Government develop and maintain a database providing information in relation to the number of planning scheme amendments/planning permit applications by type, number of objections by type, number of appeals by type and number of successful appeals by type. It is considered that the systematic collection of this information would greatly assist future analysis of the performance of the Victorian Planning System. The review adopts a qualitative cost benefit analysis methodology to identify a number of potentially high cost system level restrictions on competition arising from the Victorian Planning Legislation and its administration. Costs and benefits considered in the review are broadly defined and go beyond financial flows. Costs take into account the value of opportunities foregone by the community. A lack of data made it impossible to undertake a quantified cost benefit assessment of these restrictions. However, costs associated with restrictions of competition contained in planning legislation may include: . • • cost to administer, monitor and enforce the particular- restrict ion (not the cost to administer, monitor and enforce the planning system as a Whole); loss of techn ical or allocative efficiency. Technical inefficiency indicates that a business does not produce the maximum possible output from a given set of inputs. Allocative inefficiency indicates that a business is not using inputs in the proportions or combinations that allow it to rninirr.se costs. These types of inefficiency can arise when a restriction prevents a business from achieving economies of scale, adopting new technology or prccuction methods or adopting a quality standard which lowers production costs, lr.troducinq a new product or service, expanding into a new market, or producing an optimal level of output; compliance costs borne by land-owners, developers, businesses and sometimes households; higher prices for goods and services (borne by consumers) in final product markets, for instance if producers cannot minimise unit production costs as a • • RBL:Final P&E NCP ReView Report Jan 200t (consultantsrscorn.doc result of the restriction , or obtain market power from the restriction and restrict output to push prices up; • • • reduction in number of suppliers of a good or service or in product or service quality; lack of diversity in land developments; and reduced incentive for product or process innovation (eg development of pollution control technologies if producers rely on buffers in planning schemes). Benefits associated with restrictions on competition contained in planning legislation include: • • reduction in negative externalities such as environmental damage and visual, noise, air or water pollution, or a reduction in health or safety risk or crime; achievement of positive externalities such as conservation or improvement of environmental quality, improved landscape, conservation of culturally significant buildings and sites, creation of effective networks, or a health and safety benefit; guaranteed or greater provision of public gOods (eg public open space, parklands, roadside vegetation, bridges, most roads, drainage systems, public toilets, pavement and some community infrastructure such as public sporting complexes); ensuring that land is used for its most productive purpose: greater certainty for landowners andlor investors; increased efficiency in the provision and utilisation of infrastructure; public amenity through orderly development; and irnprcved access to markets . In this review, distributional effects (ie transfers) are not treated in the same way as allocative effects (ie costs and benefits). Examples of transfers that are common in the case of planning legislation include changes in land values (eg due to zoning) and changes in the profits of businesses. They are treated differently because usually one party gains at another's expense. • • • • • Balancing Costs And Benefits Associated With Restrictions On Competition It is difficult to be definitive about whether costs will outweigh benefits because the answer will vary on a case by case basis, depending on the product markets affected. Notwithstanding this, it is possible to identify some situations where the costs associated with a legislated restriction may outweigh public benefits. For instance, where: • Responsible Authorities are granted a monopoly right to undertake an administrative function even though there are other parties in the community who are able to provide the same service at lower cost; • zoning controls prevent land from being put to a ~c(e productive use that is valued more highly by the community; • zoning and overlay controls do not closely reflect externalities (eg minimum floor space provisions); • activity centre provisions allow landowners to acquire market power by constraining the supply of land available for retail activities; RBL :Final P&E NCP Review Report Jan 2001(consultantsreport).doc • • • Home Occupation restrictions prevent the sale of goods sourced elsewhere, even if the sale of such goods would not impose negative externalities on adjacent land uses; Section 173 Agreements, that are not transparent, are not used as a mechanism of last resort, particularly those that prescribe the way in which a business may price or produce its goods or services; and development contributions plans and Section 173 Agreements are used to collect revenue to fund the provision of public goods if the tax or rate system is a more efficient revenue collection mechanism Recommendation 2: Government should scrutinise the above listed provisions in the Legislation and give careful consideration to either removing the restriction or modifying it to lessen its restrictiveness. In some cases there is a net cost associated with the lack of enforcement of legislative provisions. For example, provisions to deter objections to planning applications on purely economic grounds are rarely enforced. The solution is not to remove such:provisions, but to encourage greater use of them by Responsible Authorities and the Tribunal. Plain Er.glish guide lines to educate prospective objectors could also assist to reduce the r.umber of objections of this kind. Even if restrictions have a net public benefit this dces not mean they should automatically be retained. Under the guiding principles cf the CPA, if on balance it is likely that there is a net benefit associated with a restriction , further assessment is required to determine if the objective could be achieved by a less restrictive means, before policymakers should decide to retain a restriction. Potential For Less Restrictive Alternatives There are a number of amendments that could be rade to either the Victorian Planning Legislation itself or its implementation in pracrce so that Government can achieve legislative objectives at lower cost to the comr.:unity. These are outlined below. Recommendation 3: Planning specific National Competition Policy ("NCP") guidelines and workshops be implemented to assist Planning and Responsible Authorities to ensure that the public benefit associated with any policy or other intervention outweighs costs. If guidelines and workshops of this kind are not effective, insert into the Act an overarching public benefit test. To minimise the probability that decisions made by Planning and Responsib le Autho rities are inconsistent with NCP princip les and object ives (eg do not satisfy the two part competition test), the Department of lntrastructcra should develop guidelines to assist Planning and Responsible Authorities to implerent planning policy in a less restrictive way . These guidelines would relate NCP pnrclples and objectives to the Victorian Planning System, to provide guidance tc Planning Authorities and Responsible Authorities on the operation of market competition and its benefits for the community. They would provide an educative set of principles to guide decisionmakers to use high cost planning restrictions as a matter of last resort, and only where the benefits of such restrictions are likely to outweigh costs. These guidelines could also assist Planning and Responsible Authorities to improve the consistency of planning decisions. . RBLFinal P&E NCP Review Report Jan 2001(consullantsreport).doc It is recommended that regular workshops be held for Planning Authorities and Respons ible Authorities , and that a "hot line" be set up to assist decision makers in assessing the economic impact of proposals, without confusing the concept with the impact of competition on the viability of competitors. If guidelines and education of this kind are not effective in facilitating outcomes that are in the net pub lic benefit, it is recommended that there be introduced into the Legislation an overarching net public benefit requirement. This could be included as a new objective in Section 4(1) of the Act, or by amending the wording of the last objective (balance the present and future interests of all Victorians) . In addition, the requirement to have regard to net community benefit could be included in Section 12 (duties and powers of Planning Authorities) and in Section 60 (matters to be taken into account in considering permit applications) of the Act. A compulsory test of this kind is likely to increase administration costs for Planning and Responsible Authorities and applicants, so it may be prudent to establish what can be accomplished through guidelines and education prior to legislative change. Recommendation 4: Amend Section 60 to make it consistent with other parts of the Act. Consideration should be given amending Section 60 of the Act to make it consistent with Section 848(1 )(b) of the Act. which requires a Tribunal, in determining an application for review, to have regard to the objectives of planning in Victoria specified in Section 4(1). Consideration should also be given to amending Section 60(1 )(b) of the Act to make it mandatory for a Responsible Authority to consider significant social and economic effects of a use or development for which the application is made, jf the circumstances appear to so require. At the moment, the language of the Act may be interpreted as being permissive only. The words "appear to" should also be deleted as they allow for subjectivity and inconsistency of approach. Recommendation 5: Where it is cost effective to do so, use performance based overlays and particular provisions in preference to potentially costly prescriptive criteria. This review recommends that the Victorian Government endeavour to make overlays and particular provisions more "periormance based" to allow the legislation to better target activities which generate negative externalities and not be inflexible so as to penalise businesses that do not generate negative externalities. Planning legislation in Victoria contains a number of prescriptive limits on floor size, sign size, number of occupants etc. It is possible that the objectives underlying these prescriptive limits may be met at lower cost using periormance criteria that focus on, for example. safety or traffic congestion. Periormance criteria should generally be preferred provided that any additional administration and monitoring cost associated with periormance criteria (as opposed to prescriptive criteria) - and it is not clear that there will be any additional cost - are outweighed by the benefits associated with allowing businesses that do not generate negative externalities to operate without restriction. The adoption of this recommendation could be facilitated through the planning specific NCP guidelines discussed under Recommendation 3 . Recommendation 6: Reduce costs associated with restrictions on competition under activity centre controls. The review recommends that the Victorian Government reduce costs associated with restrictions on competition due to activity centre controls by: to r " RBLFinal P&E NCP Review Report Jan 2001(consultanlsreport) .doc • ensuring that the size of each activity centre area is sufficient to reduce risk of landlords attaining monopoly power in the Land Use Market as this can stifle competition and innovation much more than if each activity centre is of sufficient size to allow strong rivalry; ensuring that the list of policy exceptions is reviewed and updated regularly to match consumer preferences; and considering inserting another exception allowing retail businesses to locate outside activity centres provided they are prepared to pay for any negative externalities they generate (valued appropriately). • • Recommendation 7: Improve consistency of planning decisions concerning planning scheme amendments and permit applications. This review recommends that the Victorian Government encourage greater consistency in planning scheme amendments and permit application decisions. This could be facilitated through the use of planning specific NCP guidelines discussed under Recommendation 3. The gUidelines should highlight the potential for adverse impact on competition if a Respon~Jble Authority is i~consistent in: , • the level of detail it requires in respect of a permit application; • • • • its approach to notification of permit applications; the time which it takes to handle planning permit appcations: the matters which it takes into account in considerir.g whether or not to grant a permit; and determining what conditions it imposes in connection with a permit. The guidelines should also highlight the need for ?Ianning Authorities to be consistent in their approach to notification of planning sc'- Higher prices in Final Product Market; and Lower quantity/less of a range of quality of good(s) or service than would otherwise have been produced by prospective applicant. • • Additional time spent by consumers to travel to nearest alternative service provider. Cost associated with administration, monitoring and enforcement of restriction . .3. Note : Italics denote a reference to a transfer. 6.4 Restrictions which advantage some businesses over others There are many provisions under the Legislaticr. that potentially advantage some businesses over others (see discussion in Section 5.2(2»). Usually it is not clear which businesses are advantaged and which are disadvantaged by a restriction from the wording of the Legislation as it provides a set of rules which, when implemented , can affect parties differently. Advantaged parties may include incumbent businesses, businesses located in certain areas, businesses supplying certain goods or services, businesses that operate in a certain way (eg businesses operated trom home) , parties who entered into R8L:Final P&E NCP Review Report Jan 2001(consuttantsreporn. doc 54 planning agreements and/or are subject to development contributions plans, or businesses who applied for a permit earlier rather than later. Disadvantaged parties may include new entrants, businesses located in certain areas, businesses supplying certain goods or services, businesses that operate in a certain way, parties who undertake development after a development contributions plan takes effect, or businesses who are not among the first to apply for a particular permit. As outlined in Section 5.2(2), there are numerous examples of this type of restriction in the legislation. For example: • Existing use rights advantage a business by allowing it to continue a particular land use when the same use would otherwise be prohibited by legislation. These firms receive an advantage over firms that do not have existing use rights and are currently involved in the same activity or seeking to undertake that activity; Under the SPPF, the seven principles of land use and development planning may favour particular forms of land use and restrict the amount of land available to new entrants seeking to operate in certain Final Product Markets. For example, the settlement policy provides for concentration of suburban retail, commercial, administrative, health, education, entertainment and cultural development around activity centres with integrated transport nodes. This disadvantages any business that would prefer to locate outside activity centres; Under the LPPF policy relating to subdivisions, a person who proposes to subdivide land may be required to contribute an amount for public open space even though an incumbent competitor may not; INhere a permit is granted to one applicant, but denied to another even though there is no difference between two business activities in terms of generation of externality or contribution towards a public good; and Where the Responsible Authority is granted a monopoly right to undertake various administrative functions even though there are other parties in the community who may be able to provide the same service at lower cost. • • • • It is difficult to generalise about the nature of costs and benefits associated with restrictions that discriminate between firms because they vary according to the nature of the discrimination and the characteristics of the market in which these firms participate. Nevertheless, Table 2 seeks to summarise the types of costs and benefits that could apply in such cases. Typically, advantaged parties benefit through higher profits or land values than they would otherwise have experienced if tr.ere were no restriction. If the restriction secures their tenure, they will also benefit from a reduction in risk (and hence financing costs) which may reduce production casts. Advantaged parties generally are able to achieve these benefits in return for an additional (though usually minor) cost to prepare their application to become an advantaged party under the restriction. In some cases, for example existing use rights, advantaged parties are spared even this cost. Disadvantaged parties tend to receive no benefit from such a restriction. They incur a range of costs, including costs to object to a planning RBL:Final P&E NCP Review Report Jan 2001(consultantsrepcrtj.doc 55 application. They may also suffer a loss in technical or allocative efficiency as a result of the restriction if it prevents them from achieving economies of scale, adopting best practice production methods or technologies or producing as much output as they prefer , or if it forces them to locate in a higher cost area. The community may gain considerably from restrictions that advantage some businesses over others, but they may equally incur significant costs. Provided the restriction substantially reduces a major negative externality, brings about the generation of a major positive externality, or ensures the provision of a highly valued public good, the benefit side of the equation may be substantial and sufficient to outweigh costs provided that the restriction: • does not significantly reduce the degree of rivalry between firms in either the Land Use Market or Final Product Markets so that advantaged parties do not dominate their market; does not significantly increase production costs for disadvantaged firms and lead to higher price~ in Final Product Markets; and is not too costly to administer and enforce. • • In some cases it is difficult to understand how c. restriction that advantages one business over another is necessary to achieve the community benefits listed in Table 2. An example is where legislation provides a monopoly right to a Responsible Authority to provide services that may be performed just as well by another party. In principle, other parties could be accredited to undertake some functions ihereby removing the rronopoly advantage held by the incumbent. Table 2: Summary cost benefit matrix for restrictions which advantage some businesses over others a. IAdvantaqed party Benefit Disadvantaqed cartv Nil Rest of the cornmunitv • Profit associated with advantage. Increase in value of land owned by advantaged party. Reduces risk by securing tenure (eg in the case of a pla nning permit) which leads to lower production costs. • • • • Increased provision of a public good (eg public open space). Ensured generation of positive externality (eg improved environmental quality or health and safety benefit) . Potential for reduction of negative externality (eg noise or air pollution, traffic congestion). Reduction in travel and search costs (eo when activities I I I• • R8L :Final P&E NCP Review Report Jan 2001(consuttantsreportl .doc 56 Advantaqed party Advantaoeo party Cost Disadvantaqed party Disadvantaced party Rest of the community centrally located). Rest of the community • Additional cost to prepare application due to restriction. • • Profit foregone as a result of relative disadvantage. Decrease in value of land owned by disadvantaged party. Loss of efficiency due to increase in or production compliance costs (eg if restriction forces business to locate in a : higher cost area). • • Higher prices in Final Product Markets due to higher input or compliance costs (only if disadvantaged firm is able to pass on higher costs to customers). Cost to government to administer and enforce restriction. Time spent by Tribunal to deal with disputes associated with restriction (ie over and above level of dispute that would occur in absence of restriction), • • a. Note: Italics deno te a reference to :l transfer. 6.5 Restrictions of prices or production levels Except for some Section 173 Agreements, no provistons of the Act and accompanying Regulations directly restrict prices for goods and services in Final Product Markets. Section 173 Agreements can impose various conditions, including limiting the flexibility of businesses to price efficiently and even directing them to charge a particular price. For example, in the past Section 173 Agreements have sometimes specified the maximum price that a car park operator can charge for car parking. They have also been used to perm it access to facilities on the condition that a party does not charge others for that right. Other types of restriction can indirectly raise prices in Final Product Markets by affecting the cost structure of businesses I eg by making inputs more expensive, forcing businesses to adopt inefficient methods of production, or by imposing substantial transaction costs), however these types of restrictions are generally treated under other headings in this Section. Zones, overlays, Particular Provisions and Section 173 Agreements can restrict production levels by limiting the size of the operation, restricting hours of trading or operation, or limiting the products a firm may produce or trade. For example, as discussed in Section 5.2(3), Home Occupation provisions limit the scale of operation, hours of trading or the products a firm RBL :Final P&E NCP ReVIew Report Jan 2C01(consultantsreport) .doc 57 may produce. Sometimes, the Legislation does not prevent businesses from operating in a market, but forces them to apply for a permit if their operations exceed a specified level of production. For example, zoning controls require a permit for Bed and Breakfast businesses that seek to accommodate more than six persons and unless one car parking space is provided for each two persons. Many provisions in the Legislation that directly limited the number of firms in a market have been removed. For instance, in the past applications for liquor licences, convenience stores and residential unit developments were subject to a "saturation" test. If it was considered that the market was saturated with these types of businesses, applications were denied. The only remaining "saturation' clause in current planning controls concerns brothels, however this restriction is contained in the Prostitution Control Act 1994, and only in planning legislation by cross reference. Table 3 below summarises costs and benefits commonly associated with these types of restriction. The costs and benefits associated with Section 173 Agreements are consideredrmore fully in Sec~on 8.3(4). I • Generally, by limiting the flexibility of businesses to price efficiently, pricing restrictions such as those contained in some Section 173 Agreements may make certain goods and services more affordab le. However, they rarely target low income consumers directly and tenc to be very costly to the community in terms of efficiency. Restrictions on hours of operation, scale of operat ion and products or services delivered can also be very costly to the comrnur' lty. For example, they may prevent businesses from improving efficiency by ir.creasing scale of operation or :JY extend ing operating hours. They also may inadvertently prevent businesses from innovating new products or precesses or exploiting the full advantage of new, cost saving technolog ies. In many cases, it is likely that the economy-wide costs associated with these types of restrictions will outweigh the benefits. This is particularly the case where the negative externalities they seek to overcome are not substantial. It may be possible to achieve the regulatory objective at a lower cost by regulating outcomes rather than inputs or outputs such as floor area, trading hours, products and services. Table 3: Summary cost benefit f s pro d uClon eve 1 a. matrix for restrictions of prices or IApplicant Benefit Rest of :he community • Nil I • Hect.ction of a negative externahty (in the case of restr'ctions on production leve :5). Increased affordability of certain goods and services in the interests of social equity (eg affordable car parking space or free community facilities under S173 Agreements}. I I • R8L:Final P&E NCP RevIew Report Jan 2COI (consultanlsreport).doc 58 Applicant Cost Rest of the community • Reduction in profit by precluding firm from pricing to fully recover costs (in the case a! pricing restrictions) . • • Higher prices if production restriction prevents producers from operating efficiently. Reduction in consumer choice of supplier or product quality. Fewer new products and services offered. Cost to monitor and enforce restriction. Loss of allocative efficiency in the economy if resources transferred from more productive uses to applicant's activity due to underpricing. - • Loss of allocative efficiency by preventing firms from minimising production costs (eg by achieving efficient scale of operation or operating for optimal number of hours each day in the case of production restrictions). Stifles innovation of new products and production processes and uptake of new r technologies . r • • • • a. Note: Italics denote a reference to a transfer. 6.6 Restrictions on quality or location of goods and services As noted in Section 5.2(4), the Legislation can restrict the quality of land through the imposition of bUilding and site development standards. Often such restrictions are made in the interests of public health and safety or protection of the environment. They may also be justified on the grounds that they overcome persistent information asymmetry croblerns. That is, through standards consumers who may otherwise find :-, difficult to determine the quality of a building can be given some reassurance by the knowledge that the building complies with independently determir.ad criteria. One example of this is the mandatory application of the Good Design Guide to certain classes of residential development, such as units. Members of the local community who might otherwise find it difficult to determ ine appropriate standards, can infer that a bUilding is of "appropriate" quality if they know it complies with prescribed criteria. Zoning restricts the locational decisions of businesses all the time. Often they prevent businesses from locating in their preferred location. For example, under planning schemes, heavy industrial activities usually cannot locate in residential or commercial areas. Similarly, uses that are considered highly industrial in nature such as broiler farms are not permitted to locate in industrial zones. However, zoning does not only restrict the locational decisions of firms engaged in high polluting activir.es. For example, schemes inhibit some businesses (eg bulky goods businesses) from locating in low cost industrial zones by prescribing a minimum floor a...5a which is more than such businesses normally require. Table 4 below summarises costs and benefits associated with restrictions on quality or location of goods and services. Zoning and plann ing policy can force businesses to locate in higher cost locations. When business activities do not generate significant negative externalities it is difficult to understand the objective of this type of restriction in a market failure context. Unless R8L:Final P&E NCP Review Report Jan 2001(consultantsreportj .doc 59 planning controls protect the community from a significant negative externality (such as pollution, traffic congestion, environmental damage, or a health and safety risk) or overcome a persistent information problem about land or building quality, it is highly likely that the costs associated with such a restriction will outweigh the benefits, This means that there is likely to be a net public benefit from the restriction of noisy, polluting heavy industrial bus inesses to industrial zones. There may also be a net public benefit from excluding business activities that are associated with heavy traffic congestion from residential areas. However, in situations where a business does not impose a significant negative externality (eg bulky goods bus inesses), it is highly unlikely that costs will outweigh benef its. Table 4: Summary cost benefit matrix for restrictions on quality or location o f QOOd san d services 11 ' Applicant Benefit Rest of the community • Reduced liability for damages claim (in case of restrictions on quality). ,c • I , i Reduced risk of negative externality being imposed on .other land uses (eg pollution , traffic congestion, health and safety risk , crime, environmental damage). RedLced information asymmetry (for restrictions on quality of land or buildings). Ach ievement of economies of scale in the use of core infrastructure (for restrictions on loca rcn ). Pote.ulal for strategic alliances, networks and clusters among comp lementary firms (in the case of restrictions on location). Higher prices in Final Product Markets due to higher production costs. Heduction in efficiency if land is not put to most productive use due :0 location restriction. May crowd out commercial initiatives leading to higher qua i'ry outcomes. Impede product differentiation in the Land Use Market (eg by pre venting unique quality developments) . Additional travel time for consumers to access good or service (in the case of location restrictions) . i • • I I I I • I Cost I· • Additional development, construction, or site costs to comply with restriction. Increase in production costs (ie loss of allocative efficiency) if business is forced to locate in a more expensive location than it would prefer. Reduction in profit due to complience cost and/or higher operating costs. • • • • i • I • RBL :Final P&E NCP Re'llew Report Jan 200 1(ccnsultantsrepc rtr.dcc 60 Applicant Rest of the commun ity l - Reduct ion in number of suppliers of good or service. Monitoring and enforcement costs associated with restriction. Ia. 1 ! I Note: Italics denote a reference to a transfer. 6.7 Restrictions on advertising and promotional activities Section 5.2(5) outlines current limitations on the type and form of advertising permitted. Various provisions restrict how products and services may be promoted. The legislation has moved away from costly input controls towards outcome or performance criteria, which significantly lessens the economic cost of such restrictions. For instance, current arrangements require advertising signs to meet local planning policy objectives in respect of visual amenity, character, effectiveness of signs and road safety. They do not specify the material that m8;Y be presented on signs. However, the Particular Provision (Clause 52.05) irr planning schemes regulates the size of certain classes of sign, and imposes expiry dates for permits for signs. A summary of costs and benefits associated with current restrictions on advertising and promotional activities is presented in Table 5 below. It is likely that the benefits associated with performance based restrictions are likely to outweigh the costs, provided the performance criteria are consistently applied across all businesses. It is less clear that benefits are likely to outweigh costs in the case of Particu lar Provisions that regulate the size cf certain types of sign. Prescriptive regulation of this type can be mere costly than performance based criteria (eg requiring that the size does r.ot impair visual amenity or road safety) except where: • the cost to administer and enforce performance criteria is greater than the cost to administer and enforce prescriptive criteria; and this increased administration and enforcement cost outweighs any benefit firms may obtain (eg by reducing production costs) by moving to performance based criteria . - Some advertising restrictions may seem to advantage incumbents over newcomers to the extent that existing use rights were enjoyed by businesses displaying lawful signs when a scheme was introduced, but newcomers are requ ired to obtain a (time limited) permit. While newcomers incur a cost associated with applying for a permit that incumbents did not, this cost usually is not significant assuming the matter is not taken on appeal. The benefits of existing use rights in this context are likely to outweigh the cost, since it provides a mechanism for minimising administration costs by obviating the need for Councils to process a large number of applications from applicants that are known to comply with the performance criteria. . RBL:F inal P&E NCP Review Report Jan 2C01(consultantsreport) .doc 61 Table 5: ~ I Summary cost benefit matrix for restrictions on advertising and promo rlana r ac ti of IVI res I I j Applicant Rest of the community IBenefit i i Nil i i i • • I Protection of visual amenity (ie prevents congestion of signage and use of offensive material). Enhanced road safety. Reduced administration cost. May inhibit desirable innovative approaches to advertising. Cost to monitor and Part icular Provisions. •" i I Cost • Additional cost to prepare comply with signage to performance criteria or size restrictions. r • • • enforce 6.8 Restrictions of price and type of input used in production processes Victorian Planning Legislation tends to restrict tr.e land available for certain uses. This can have a large economy wide impac:, since land is an important input to the production of most goods and services in Final Product Markets. If zoning controls do not closely reflect externalities, there is a strong risk that they may cause less efficient patterns of land use than would otherwise prevail. One example of where zoning controls c: not reflect concerns about externalities is Restricted Retail provisions that stipulate minimum floor space. Such a restriction does not appear necessary to ;: "e'/ent a negative externality from be ing generated. The benefits associated "".::1 such provisions are likely to be non-existent or negligible, whereas the cost ::J the applicant and the rest of the community may be considerable depending on the nature and extent of the market. As discussed in Section 6.6, when e. zoning law is used to force a business to locate in a non-preferred area, .: increases unit production costs. This increase often is passed on to consumers in the form of higher pr ices and may reduce consumer access to some goods and services. To the extent that these final goods and services are inputs to other production processes, the inefficiency created by the ini::al restriction is multiplied throughout the economy. The Legislation can also restrict the freedom Ci ousinesses to choose an opt imal combination of inputs. Examples of this are restrictions on what may be included in Freeway Service Centre Controls under Clause 52.28 of new planning schemes and restriction on area for gar:ng machines in hotels and other premises under Clause 52.30-1 . This can cause allocative inefficiency by inflating unit production costs if such restricticr does not allow businesses to achieve an efficient scale of operations. Another way the Legislation can restrict ccmpetition is by requ iring businesses to contribute towards the cost of providing non-rival and nonexcludable public goods . This adds to unit production costs of affected firms. They become disadvantaged relative to competitors in other parts of Victoria, other jurisdictions in Australia or competitors based overseas who are not levied in the same way . Raising revenue to fund public goods in this way may RBL:Final P&E NC? RevIew Report Jan 2001(consultancsreport).doc 62 have appeal on equity grounds if households are considered less able to afford such an impost than business. However, there is potential for political interference to discriminate between firms in terms of whether they incur a levy and the quantum of the levy to create the kind of restrictions on competition discussed in Section 6.4. If provisions requiring contributions towards the provision of public goods are not applied consistently and transparently to all potential beneficiaries of the public good, including all businesses and all households, there is significant potential for the economy-wide costs to outweigh benefits. If development contributions plans (or similar requirements under Section 173 Agreements) did not exist, governments would raise funding to provide public goods through the tax system or through the levying of rates or special charges to households and businesses. Thus, in order for development contributions plans to provide a net benefit to the Victorian public, the community-wide cost of raising revenue through contributions plans must be lower than the cost to raise tax or rate revenue. Generalised costs and benefits of restrictions on pricing or use of inputs to production processes are summarised in Tab"le 6 below. Table 6: Summary cost benefit matrix for restrictions on pricing or use of Inputs use d l pro d uc rIon processes In Applicant Benefit Rest of the community Nil • Reduces negative externalities such as pollution, environmental degradation and congestion. oark 'ands, public open space and some public infrastructure. • Provision of public good such as Cost • Higher unit production costs due to higher cost of land. • Imposes costs on businesses and households that do not generate negative externality. In the case of development contributions, contributing businesses cross-subsidise non- contributing beneficiaries of public good who are able to free ride. Potential for political interierence to create restrictions that advantage some firms over others (see Section 6.4). May stifle commercial incentive to reduce negative externalities (if regulation permits a tolerable level of externality, firms have no incentive to reduce negative externalities below this threshold). • • , • RBL :Final P&E NCP Review Report Jan 200 1{consultantsreport).doc 63 6.9 Imposition of significant transaction costs on businesses or households This restriction relates to the additional transaction costs imposed on parties to enter the Land Use Market and continually comply with planning legislation relative to the transaction costs that would apply in the absence of such legislation. These transaction costs are incurred not only by applicants, but also by parties making objections, governments and taxpayers who fund the hearing and appeals system. Typical plann ing related transaction costs include: • fees paid by applicants and other users of the planning system. (Note, the requirement to pay a fee is not of itself a restriction on competition if the fee schedule is consistently applied, and fees reflect efficient cost to administer or enforce planning laws); time taken by applicants and others to prepare applications, objections and appeals; time taken by State qnd local governments to process applications , objections and appeals;' cost to amend planning unwarranted delays; scheme, including cost associated with • • • • • monitoring and enforcement costs; and time taken to process appeals. Table 7 below summarises costs and benefits commonly associated with restr'ctlons created by high transaction costs. If total transaction costs are sufficiently high, they may deter businesses ar.d households from lodging applications, making objections or appealing decisions when they otherwise would. This can limit the effectiveness and efficiency of the planning system. Where transactions costs are high (in absolute terms and relative to other jurisdictions), there is a risk that planning administration arrangements will deter applicants altogether. Businesses may locate in a jurisdiction where transactions costs are lower. Some parties may go ahead with their proposed land use without seeking planning approval. This is more likely to occur where it is difficult or costly for authorities to moni tor and enforce compliance with planning and environment legislation (eg small or incremental variations in existing land uses). This reduces the effectiveness of planning and environment legislation. Transaction costs are inevitable, however they are more likely to be in the net public interest if: • • • cost recovery is consistent with the principle of "user pays" ; authorities seek to recover only efficient admin istration costs from users; arrangements create a system for appeals and objections that is cheaper to use and operate than the Court system that would otherwise deal with planning appeals and objections; ABL:Final P&E NC? Review Report Jan 2001(ccnsultantsreportj .doc 64 • the scope for litigation is kept to a minimum, without reducing the individual's common law rights; and arrangements made to restrict the ability of parties to lodge vexat ious objections and appeals (usually by competing businesses or frivolous litigants) are utilised. • Based on submissions to this review , it appears that there currently is potential on economic grounds for potential rivals to lodge frivolous or vexatious complaints without presenting clear evidence. While there is provision in the Legislation for costs and damages to be awarded against rivals if they lodge a frivolous or vexatious complaint, in practice this is very rarely enforced. Rival firms can object to a planning application simply because it may reduce their own profit. This is not consistent with competition policy principles and objectives and adds considerably to transactions costs borne by applicants. These transactions costs could be reduced if the Planning Authority or Responsible Authority published guidelines for anyone seeking to object to a planning application on economic grounds. These guidelines should explain ~what are acceptable grounds for objection (ie grounds most likely to be consistent with a net public interest) and grounds that are unacceptable (eg reduction of rival's prof it). This recommendation is discussed further in Section 7. Table 7: Summary of costs and benefits of restriction due to imposition of srsmTlean t t ransae f Ion cos t s on b usmesses or house h0 Id s Applicant Benefit Rest of the community • Lower cost to appeal decision by avoiding tribunal and courts . • Lower cost to administer and/or enforce planning legislation. Hedi.ction in use of Tribunal time :0 process disputes. Increased compliance of planning scheme with competition policy principles and obiectives. Increased risk of noncompliance with planning legislation by businesses and households, requiring additional monitoring and enforcement. Redcced number of suppliers in Fina : Product Market if transaction costs are significant enoi.ch to deter entry. Higher prices for goods and services in Final Product Market. I I • • I Cost • • Increases in unit cost of production. Additional cost to prepare applications, respond to objections or appeal. • I I I • I I I I • RBL:Final P&E NCP Rev iew Report Jan 2C01(consullantsreport) .doc 65 6.10 Concluding remarks Where a net benefit case for retaining a restriction cannot be established, the CPA to which the Victorian Government is a signatory, recommends that the restriction should be removed from legislation. At a system level it is not possible to definitely identify restrictions involving a net cost to the community. However, it is highly likely that there may be a net cost associated with some provisions of the Victorian Planning Legislation if they are implemented in a particular way. For instance, in situations where: • Responsible Authorities are granted a monopoly right to undertake an administrative function even though there are other parties in the community who are able to provide the same service at lower cost ; zoning controls prevent land from being put to a more productive use that is valued more highly by the community; zoning controls do not closely reflect externalities (eg minimum floor space provisions); r F activity centre provisions allow landowners to acquire market power by constraining the supply of land available for retail activities; Home Occupation restrictions prevent the sale of goods sourced elsewhere, even if the sale of such goods would not impose negative externalities on adjacent land uses; Sect ion 173 Agreements, that are not transparent, are not used as a mechanism of last resort, particularly those tha: prescribe the way in which a business may price or produce its goods or services: and development contributions plans and Section 173 Agreements are used to collect revenue to fund the provision of pub lic goods if the tax or rale system is a more efficient revenue collection mechanism. • • • • • • Government should scrutinise these provisions in the Legislation and give careful consideration to either removing the restriction or modifying it to lessen its restrictiveness . In some cases there is a net cost associated with the lack of enforcement of legislative provisions. For example, provisions to deter frivolous or vexatious objections to planning applications on economic grounds are rarely called on. The solution is not to remove such provisions, bur :0 encourage greater use of them by Responsible Authorities and the Tribuna l. Plain English guidelines to educa te prospective objectors could also assis: to reduce the number of objections on frivolous or vexatious grounds . Even if restrictions considered in this Section have a net public benefit, this does not mean they should automatically be retained. Under the gUiding principles of the CPA, if on balance it is likely that there is a net benefit associated with a restriction, further assessment is required to determine if the objective could be achieved by a less restrictive means before policymakers should decide to retain a restriction. That is, a restriction should only be retained if: RBL:Final P&E NCP Review Report Jan 2001(cansullantsreport) .doc 66 • th ere are net public benefits to the commun ity from retaining the restriction; and less rest rictive alternative means to achieve the legislative objective cannot be found. • This second aspect of the public interest test is considered in Section 7. r RBL :Final P&E NCP Review Report Jan 2001(consuttantsreportl.doc 67 7. 7.1 POTENTIALLY LESS RESTRICTIVE ALTERNATIVES Guiding principles As noted in previous Sections, the guiding principle in undertaking legislative reviews involves two elements. First , the benefits of legislative restrictions on competition must outweigh the costs. Second, the objectives of the legislation must only be ach ievable by restricting competition . Thus, even if current arrangements are justified in terms of net benefit, this is not sufficient by itself to conclude that the restriction is in the public interest. It also must be shown that the objectives of the legislation can only be achieved by restricting competition. In practice, this is taken to mean that reviewers should investigate whether there are net benefits from establishing alternative arrangements, taking into account the practicality of such alternative arrangements. . When considering the potentlal for less restrictive alternatives it is important to refer to the objectives of the legislation. In essence, the Victorian Plann ing Leg islation aims to: • • • • • • promote fairness and sustainability in decisicn-rnaklnq; protect the natural and built environment from over-exploitation; prevent detriment to the pleasant, efficient and safe environments for the community resulting from the development and use of land; preserve places of heritage and other significance to the community from harm ; ensure that community infrastructure is provided in an orderly and properly co-ordinated fashion; and make net community benefit a basic planning principle. Any less restr ictive alternatives must still assist Government to achieve these objectives . In this Section, we suggest some less restrictive alternatives that may achieve those objectives at lower cost. In most cases, the suggested alternatives are less costly because they seek to target more directly the nature and source of underlying market failure. 7.2 Suggested less restrictive alternatives Currently, many of the restrictions on competition occur under provisrons where Planning Authorities and Responsible Authorities have a degree of discretion. To minimise the probability that decisions made by these authorities are incons istent with competition policy principles and objectives (eg do not satis fy the two part competition test), the Department of Infrastructure could consider developing guidelines to assist Plann ing and Responsible Authorities to implement planning policy in a less restrictive way. These gUidelines would inform Planning Authorities and Responsible Authorities of the objectives which are the basis of NCP and provide guidance on the operation of market competition and its benefits for the community. They would provide an educative set of principles to guide decision-makers to use high cost restrictions as a matter of last resort, and only where the RBL:Final P&E NCP Review Report Jan 2001(consultan tsrepon).doc 68 benefits of such restrictions are likely to outweigh costs. These guidelines would also assist Planning Authorities and Responsible Authorities to improve the consistency of planning decisions. The suggested guidelines could be included in the current revision of the document entitled "Victoria's Planning System" which is directed to all persons involved in the planning process, or could be a stand-alone document to influence decision making under the Act and planning schemes by both Planning Authorities and Responsible Authorities. Having regard to the fact that planning officers would generally be unfamiliar with competition policy principles and objectives (and some of the technical expressions used), it is also recommended that regular workshops be held for Planning Authorities and Responsible Authorities, and a "hot line" set up to assist decision makers in assessing the economic impact of proposals, without confusing the concept with the impact of competition on the viability of competitors. If guidelines and education of this kind ? re not effective in facilitating outcomes that are in the n'et public benefit; it is recommend that there be introduced into the Legislation an overarching net community benefit requirement. To this end, this requirement could be included as a new Objective in Section 4(1) of the Act, or by amending the wording of the last Objective (balance the present and future interests of all Victorians). Further, the requirement to have regard to net community benefit could be included in Sections 12 (duties and powers of Planning Authorities) and 60 (matters to be taken into account by Responsible Authorities in considering permit applications) of the Act. Since a compulsory test of this kind may increase administration costs for Planning Authorities and Responsible Authorities, it may be prudent to establish what can be accorplished through guidelines and education prior to legislative change. In any case, consideration should be given to amending Section 60 of the Act to require a Responsible Authority to have regard to the Objectives of Planning in Section 4(1) of the Act when determining a planning permit application. This would make Section 60 consistent with Section 848(1 )(b) of the Act, which requires a Tribunal, in determining an application for review, to have regard to the Objectives of Planning in Victoria. Consideration should also be given to amending Section 60(1)(b) of the Act to make it mandatory for a Responsible Authority to consider significant social and economic effects of a use or development for which the application is made if the circumstances appear to so require. At the moment, the language of the Act may be interpreted as being permissive only. The words "appear to" should also be deleted, as they allow for subjectivity and inconsistency of approach. 7.2.1 Restrictions on entry or exit of firms into or out of markets To make current arrangements that restrict entry or exit of firms less restrictive, and hence, Jess costly to the commun ity, the Department could consider: • making planning controls more "performance based" to allow the Legis lation to bettertarqet activities which generate negative externalities ABL:Final P&E NCP Review Report Jan 2001{consullantsreport).doc 69 and not be inflexible so as to penalise businesses that do not generate negative externalities. Periormance criteria should generally be preferred provided that any additional administration and monitoring cost associated with periormance criteria (as opposed to prescriptive criteria) - and it is not clear that there will be any additional cost - are outweighed by the benefits associated with allowing businesses that do not generate negative externalities to operate without restriction. For example, there may be circumstances in which a convenience shop with a floor area greater than 80 square metres may not adversely impact upon neighbourhood character or cause traffic and like problems. A more periormance based provision would allow a development of this kind if it could be demonstrated that the benefit to the community of the development outweighs its costs. • the Government can do a lot to minimise costs associated with restrictions due to activity centre controls. Although policy normally has a facilitatory rather than regulatory function, current SPPF policy for activity centres is given great weight in proceedings before the Tribunal and independent Panels. That policy already recognises three exceptions to activity centres policy (ie new developments, new convenience shopping, trade related bus inesses that support industry with adequate on-site car parking.) Options to further reduce costs associated with restrictions on competition due to activity centre controls include: ensuring that the restriction does not allow landlords to acquire monopoly power in the Land Use Market, for example by ensuring that the size of each activity centre area is sufficient to allow several land owners to compete within an activity centre. If landlords are allowed to develop monopoly market power under this restriction, it is likely to stifle competition and innovation in both the Land Use Market and Final Product Markets; ensuring that the list of policy exceptions is reviewed and updated regularly to match consumer preferences; and considering inserting another exception allowing retail businesses to locate outside activity centres provided they are prepared to pay for any negative externalities they generate (valued appropriately). 7.2.2 Restrictions which advantage some businesses over others To make current arrangements that advantage some businesses over others less restrictive, and hence, less costly to the community, the Department could consider: • encouraging greater consistency in planning scheme amendments and in respect of permit applications. This could be facilitated through the use of guidelines discussed in the introduction tc this Section 7.2. The guidelines could highlight the potential for adve rse impact on competition if a Responsible Authority is inconsistent: in the level of detail it requires in respect 0; a perm it application; in its approach to notification of permit applications in terms of both whether to notify at all, and the extent of notification required; in the time which it takes to handle planning permit applications (prescribed time limits are not effective in this regard because the only remedy for non-compliance with them is an appeal to the Tribunal, and -, RBL:FinaJP&E NC? Review Report Jan 2001 (consullanlsreport).doc 70 applicants are reluctant to pursue this given that the appeal process itself would entail substantial further delay); in the matters which it takes into account in considering whether or not to grant a permit; and in determining what conditions it imposes in connection with a permit. The guidelines could also highlight the need for Planning Authorities to be consistent in their approach to notification of planning scheme amendments, given the uncerta inty of the words "materially affected by the amendment', They could emphasise the need to achieve consistency in the manner in which similar applications are notified, particularly with regard to the criteria which are applied by a Planning Authority in determining whether or not a person is materially affected by a proposed amendment. There are a number of decisions of the Tribunal which could be used to provide examples of situations which do, and do not, give rise to a "material affect". The guidelines could also : require that a Planning Authority (and a Responsible Authority) document, and make- publicly availab le, its decision as to the extent of notification, having regard to those criteria; and stress the importance of taking into account NCP principles and objectives - particularly the principles that benefits should outweigh costs, and that the objective of the provision cannot be achieved in a less costly way - in considering exceptions to the application of policies, zones, overlays and particular provisions. • ensuring that SPPF and LPPF exceptions to policy, which potentially advantage certain businesses over others , are reviewed periodically as to thei r impact. For example, the current exceptions to the requirement in ~ he State Planning Policy For Economic Devs'cprnent: Business (clause 17.02) that commercial facilities be located in existing or planned activity centres should be periodically reviewed. amending Section 96(1) and (2) of the Act, which address permit requirements of land owned by Responsible Authorities, to either remove the exception allowing planning schemes to exempt land use or development by Responsible Authorities (or persons using land owned or occupied by Responsible Authorities) from the Ministerial permit process, or narrow the application of the exemption by amending .Clause 67 in the VPPs. This would limit the possibility of restriction on competition as a result of Responsible Authorities being able to by-pass the Ministerial permit process in relation to their use or develcpment of land. minimising the potential for alternative use rights under Clause 63.08 of new planning schemes to continue indefinitely in circumstances where the likely benefits flowing from the alternative use will not outweigh the costs, and the alternative use generates a major negative externality. The Department should consider amending Ciause 63.08 to include a requirement that all permits for alternative uses contain a condition so that the use may be reviewed after a period sufficient to allow a business to generate a normal rate of return. In this way, businesses that generated a major negative externality could have their alternative use right terminated in future. This could restore their incentive to avoid generating negative externalities. Care would need to be taken that this sunset clause did not remove all certainty for the business in question. This could be achieved by ensuring that alternative use rights were only terminated if the business • • RBl:Final P&E NCP Review Report Jan 2001(consullantsreport) .doc 71 activity were found to generate a major negative externality upon the community. 7.2.3 Restrictions of prices or production levels To make current arrangements that restrict prices or production levels less restrictive, and hence, less costly to the community, the Department could consider: • as discussed in Section 7.2.5, amending the Act to prevent Section 173 Agreements from imposing price controls. As is discussed in Section 6, controls of this kind can impose a high cost on the community. amending Home Occupation provisions to allow exemptions from limits placed on operating hours, floor area and products that may not be sold where the applicant can demonstrate that the activity does not impose significant negative externalities (eg traffic congestion, noise or visual pollution) on the community. good~ • 7.2.4 Restrictions on quality or location of To make current arranqernents that restrict '~ uality or location of goods and services less restrictive, and hence, less costly to the community, the Department could consider: • issuing the guidelines discussed in the introduction to this Section 7.2 with a view to ensuring that zones, overlays and Particular Provisions which impose restrictions of this kind are as performance based as is practicable. minimising costs associated with restrictions c:..:e to activity centre controls contained in the SPPF by implementing the measures referred to in Section 7.2.1 above, namely: ensuring that the size of each activity centre area is sufficient to minimise the risk of a landlord developing ~onopoly market power; regularly reviewing and updating exceptions to the activity centre policy; and considering an additional exception which allows a retail business to locate outside an activity centre if it is prepared to pay for any negative externalities generated. • issuing the guidelines referred to in Section 7.2.2 with a view to achieving greater consistency in planning scheme amendments and permit application decisions. amending the Home Occupation provisions as recommended in Section 7.2.3 to accommodate exemptions from operating and other limits if it can be demonstrated that their activity does not .rnpose significant negative externalities on the community. and services • • 7.2.5 Restrictions of price and type 01 input used in production processes To make current arrangements that restrict price and type of input used in production processes less restrictive, and hence, less costly to the community, the Department could consider: amending the Act so that Responsible Authorities may only use Section 173 Agreements as a last resort, and accordingly must demonstrate that A8L:Final P&E NCP Review Re~ort Jan 2001(consultantsrepc rt).doc 72 the purpose towards which the agreement is directed cannot be achieved by another means, for example, through appropriately worded permit conditions; amending Section 62(6) of the Act to prevent the imposition of permit conditions requiring Section 173 Agreements for provision of services or facilities in relation to land development in circumstances where an approved development contributions plan covers the subject land. Development contribution plans are less likely to restrict competition to the extent that they are more transparent and equitable in the determination of the circumstances in which a levy is imposed, and the quantum of the levy imposed. Capacity for voluntary Section 173 Agreements should be retained, however; amending Section 177(1) of the Act so as to require a Responsible Authority to include a "sunset" provision in every Section 173 Agreement, to ensure that the agreement does not have a life beyond achievement of its intended purpose. Alternatively, amending the Act to require periodic review of Section 173 Agreements and fq.t their complete or partial repeal if it is demonstrated thattheir purpose has been satisfied; amending the Act to require that any objectors to a planning permit application or submitters in respect of a site-specific planning scheme amendment that imposes a requirement for a Section 173 Agreement are consulted in respect of the contents of that Agreement prior to execution; amending the Act to prohibit Section 173 Agreements from imposing price controls; and the Department of Infrastructure, issL:ing educative guidelines to Responsible Authorities as to appropriate use of Section 173 Agreements. This is considered particularly necessary if the words "any matter incidental' are to be retained in Section 174(2)(d). This could be included in the guidelines discussed in the introduction to Section 7.2. These recommendations are made having regard to the strong potential for lack of transparency in the development of Section 173 Agreements, the high transactions costs they generate, and the fact that they can. operate and run with the land for longer than necessary to achieve their objective. 7.2.6 Restrictions on advertising and promotional activities To make current arrangements that restrict advertising and promotional activities less restrictive, and hence, less costly to the community, the Department could consider: • removing input controls such as size limits ar.d maximum time limits on permits for signage, and opting instead for performance criteria wherever practicable. significant transactions costs on businesses or t~rough - 7.2.7 Imposition of households To make current arrangements that impose significant transactions costs on businesses or households less restrictive, and hence, less costly to the community, the Department could consider: RBL:Final P&E NCP Review Report Jan 2001(cansultantsreport).dcc 73 • introducing greater transparency in processes concerning Ministerial intervention by way of exempting a Planning Authority from notification of amendments, expediting planning scheme amendments and call-in of permit applications. The need for greater transparency in these areas was highlighted by the Auditor-General Report. A Practice Note has since been issued which should address this issue. No further recommendation is made at this stage. taking steps which are directed towards reducing the opportunity for economic objection. Given the reluctance of Responsible Authorities to apply Section 57{2A) of the Act, which permits them to refuse to consider an objection if its primary purpose is to protect the economic interests of a party, and reluctance of the Tribunal to award costs or damages against a frivolous or vexatious objector, it is recommended that the Department consider: issuing guidelines which educate Responsible Authorities and parties seeking to lodge an objection as to what amounts to an appropriate economic objection, and what hearing ought to be given to prospective commercial objectors prior to rejecting.:their objection; amending Section 57{2A) to overcome a Supreme Court ruling that commercial objectors must be given the opportunity of a hearing prior to rejecting their submissions; amending the Act so that a provision similar to Section 57{2A) also applies to enable a Planning Authority to reject similar "economic objector" submissions in relation to a planning scheme amendment; and taking steps to raise the awareness of riesponsible Authorities and objectors of the requirement under the Act that objectors must demonstrate how they would be affected (;} the grant of a permit. This could be done in the guidelines recommended in the introduction to this Section 7.2, or, if guidelines prove ineffective, by amending the Planning and Environment Regulations 1988 to introduce a pro-forma objection form that includes a requirement that the objector state how the grant of a permit would aHect them. The same ought be considered in respect of submissions in relation to planning scheme amendments. • through the Department, implementing a review of the essentially administrative functions performed by Planning and Responsible Authorities, including the preparation of planning scheme amendments and the issue of certificates of compliance, with a view to assessing which if any of those functions may be performed by other entities. • RBL :Final P&E NCP Review Report Jan 2001(cansullantsraport).doc 74 a. 8.1 CASE STUDIES Case Study 1 - State Planning Policy For Economic Development: Business (1) Background The State Planning Policy for Econom ic Development: Business (Clause 17.02) in new planning schemes requires that commercial facilities be located in existing or planned activity centres unless they constitute new free-standing centres in significant emerging residential areas, improve accessibility to or provide convenience shopping ancillary to existing commercial centres, or equate to factory outlets. The policy also requires that cinema-based entertainment facilities should be located within or on the periphery of existing or planned activity centres where they should be as-of-right use, but not otherwise . There is no defini~n of activity c~ntre in the planning scheme . Cinema-based entertainment facility is defined as: U . Land used to provide screen based entertainment or information to the public, in association with the provision of meals or sporting, amusement, entertainment, leisure or retail facilities." The policy was derived from Clauses 14-..:!. and 14-5 of the Regional Section of "old format" Metropolitan Planning Schemes and has been modified following reports of Advisory Ccmmittees appointed under section 151(1) of the Act. Given this his::rJ and the reliance placed upon the policy by existing retail operators in establishing themselves in existing centres, they draw heavily upor. it in objecting to proposals for new retail and cinema-based facilities which do not appear to comply. (2) ObjectivelMarket Failure which is addressed The objective of the Business activity centre policy is to encourage developments which meet the comr.:unity's needs for retail, entertainment. office and other commercial services and provide net community benefit in relation to accessibility, efficient infrastructure use and aggregation and sustainability of commercial facilities. It is directed towards achieving a number of tr:e Objectives of Planning in Victoria described in Section 4.1 including: • providing for the orderly, economic and sustainable use and development of land; and enabling the provision and co-ordination of public facilities for the benefit of the community • The policy seeks to address market failure by preventing negative externalities that may flow from unregulated developments such as RBL :Final P&E NCP Review Report Jan 2C01(consultantsreport) .doc 75 inconvenience to the community due to fragmentation of retail facilities; and increased demand for car-based shopping trips. The policy seeks to facilitate the efficient provision of quasi public goods (such as street lighting, bridges, roads, pavement) by assisting the attainment of economies of scale. The policy also seeks to attain economies of scale in retailing to facilitate efficient provision of community facilities, such as child care facilities, which might not be provided otherwise. The policy also seeks to address information asymmetry by providing clear directions as to suitable places to site retail and entertainment facilities. (3) Identification Of Any Restriction on Competition The Business policy restricts or potentially restricts competition in the Land Use Market by: • discriminating irf favour of certain land owners over others in respect of the uses to which land may be put; limiting the land available to prospective purchasers of land/developers of land seeking to undertake the development of a commercial facility or cinema based entertainment facility; discrim inating in favour of purchasers of land which seek to undertake a development which fits wit hin the three exceptions to the policy that a commercial facility should be located in existing or planned activity centres, namely: • • > new free-standing commercial developments in new residential areas which have extensive potential for population growth or will accommodate facilities that improve the overall level of accessibility for the community, particularly by public transport; new convenience shopping facili ties to provide for the needs of the local population in new residential areas and within, or immediately adjacent to, existing commercial centres; outlets of trade related goods or services directly serving or ancillary to industry and which have adequate on-site carparking; and > > • impacting upon the price of land .vhich would otherwise be determined by the market. Land withi:-: existing or planned activity centres is likely to have a higher value :;,an land situated outside it. In the context of Final Product Markets, the Business policy is likely to restrict competition in the following ways: • by creating a barrier to entry for potential new competitors. This will occur directly to the extent that the policy tends to limit the land which is available for the development of commercial facilities and RBL:Final P&E NCP Review Report Jan 2001(consultantsreport).doc 76 cinema complexes, by requiring that subject to certain exceptions those facilities be located in existing or planned activity centres. Barriers to entry also arise to the extent that a prospective new entrant is unable to locate its business at its preferred location or, due to unavailability of a site within an activity centre. at all or incurs significant entry costs in seeking planning approval to develop a facility which does not comply with the policy; • by restricting the location of commercial facilities and cinema complexes to the extent that they are required to be located within existing or planned activity centres. This restricts consumer choice; by increasing the cost of land as an input into the production process. To the extent that the Business policy tends to increase the value of land which is located within an existing or planned activity centre. and requires new entrants to locate a commercial facility or cinema complex in that planned or eXisting activity centre, it is likely to increase the establishment and operating costs (eg. Rental) of the business, which ~in turn may impact upon the competitiveness I'of the business.' and result in higher prices to consumers; and by discriminating in favour of certain businesses over others. The policy will tend to advantage incumbent competitors in Final Product Markets over prospective new entrants seeking to establish a commercial facility or cinema complex for the reasons identified in the preceding three paragraphs. It may also advantage those businesses which are new entrants which are included in new convenience shopping facilities or new free-standing commercial developments and, as a result, are able to take advantage of the exceptions to the requirement that commercial facilities be located within an existing or planned activity centre. • • (4) Cost/Benefit Analysis Costs and benefits associated with restrictions posed by activity centre arrangements are summarised in Table 8 below. Businesses have a market incentive to locate where 't hey can be near complementary activities and supporting infrastructure. By co-locating with other retailers, businesses can attract more customers than if they were free standing. Similarly, if they locate close to a transport hub they can maximise their accessibility to consumers. It does not require a legislated restriction to capture these economies. However, there is no market incentive for businesses to take into account the negative externalities they impose on others or the implications of their location for the provision of public goods . This means that their location decisions are not likely to take into account: • the ability of State and local governments to achieve sufficient economies of scale in provision and use of infrastructure, including public transport and car parking; the increased dependence on car based shopping trips due to fragmentation and associated traffic congestion problems; • R8l:Final P&E NCP Review Report Jan 2001(consultantsreport) .doc 77 • • any lack of sense of community due to fragmentation of commun ity facilities; and any reduction in environmental amenity when development is not orderly (ie centralised). Some market intervention appears warranted to overcome these market failures. In particular, the inability to achieve economies of scale in the provision and use of infrastructure could potentially impose a major cost on taxpayers (who tend to fund public infrastructure) as well as consumers and the general public (who bear the inconvenience of inefficient transport and related infrastructure). However, the current activity centres policy is highly restrictive. It leads to higher production costs for businesses who prefer not to locate in activity centres and may entail higher production costs for incumbents if the restriction gives activity centre landlords market power. This means higher prices and less choice of supplier for consumers . Restricting location may also stifle innovation among retail businesses in approaches to marketing, or even the development of new products. This is particularly th1e case if the restriction grants monopoly power to landlords who insist on uniform marketing and may even place limits on the types of goods or services that may be sold. Also there is potential for "government failure". That is, just as markets fail to achieve outcomes that are in the community's best interest, so too can governments. Activity centre policies can fail to serve the community's best interest when: • Governments choose the wrong location to site an activity centre, for example by siting it in an area where another land use would generate higher returns. This reduces allocative efficiency in the economy by reducing the productivity of land; the number or size of activity centres is not sufficient to match demand for retail space. This would allow landowners to monopoly price - rents would be higher, unit costs higher and prices in final goods market would be higher. Some businesses may be forced out of the market (or deterred from entering) leading to less consumer choice. As well as monopoly pricing, landlords with market power may also regulate products and rnarketinq and stifle innovation. They may force retailers to conform with uniform marketing policies of shopping centre management leading to lack of diversity in shopping experience, particularly when the same management operates other shopping centres in the region; and the exemptions listed in the Legislation - currently, there are three: new developments; new convenience shops ; and trade related businesses that support industry with adequate on-site car parking - do not match community preferences . • • It is difficult to generalise across all activity centres to definitively balance costs and benefits of restrictio ns posed by activity centre controls. Submissions to this review do not provide much gUidance in this regard. All submissions referring to activity centre legislation came from incumbents who may have a vested interest in maintaining the restriction to protect their profits. No submissions were received from businesses that preferred not to locate in an activity centre and so did not enter the market. R8L :Final P&E NCP Review Report Jan 2001(consultanlsreport).doc 78 (5) Conclusion/Recommendation Generally, activity centres may confer a net public benefit if governments are ensuring that: • • supply of activity centre space matches demand; that monopoly power does not develop among activity centre landlords; and exemptions closely reflect community preferences. • However, if any of these conditions is violated, the restriction may confer a net public cost. Notwithstanding this it may be possible to achieve the objective at lower cost, for example by: • ensuring the legislation does not.allow landlords to dominate the Land Use Markef by ensuring thatthe size of each activity centre is sufficient to allow sufficient rivalry between landlords ; regularly reviewing exemptions and updating them to reflect community preferences; and inserting another exception allowing retail businesses to locate outside activity centres if they are prepared to pay for any negative externalities they generate (valued on an appropriate basis). • • RBL :Final P&E NCP Review Report Jan 2001(consultantsreport).doc 79 Table 8' Allecled party Cost benefit matrix for restrictions associated wilh activity centres « a. CosI due 10 resuicuon Benehl due 10restnctlon Description Order magnitude or oescnphon Businesses forced 10 locate Wllhlll adlvlly centre which preter 10 tecate uul "IJu Nil Order maorutuda 01 Pro/rl/uregoll8 by /lo//ocaling Ifl pre/erred area . Ihgher urut procucuon costs because business must pay higher lIll11111 acllvlly centre relauve to then prererred locanon Higher un,l production costs II landlord has market power due 10 resuicnon anll is able to prevent a urrn from markellng Iheir product, suppl ying certain goods and services, selling Irading hours , etc as 1I111y preler. Moderale Moderale . Businesses Ihal would locale III acllVlly centre even II not reuuired to do SO goods aud supplying BUSInesses services other than thuse permuteu in acnvuv centres who would I,rulur to locate m activity centre Nil Nil Sillies mcenuve 10innovate Ihrough business localion. Nil Moderale Profil foregone because business not allowed 10 locale in actiVIty centro. Unil production costs higher because business rot able 10 locale III prelerred location lie acuvuv central " Moderale Businesses already located III .lCllVlty centres ProMs proleelell tJecause po/elltial rivals ut» not lJlJtside aetlVlly cenu» wnete rents ard cheaper. iJb/~ tu lu.. ate : Hlgller unit proouc non costs because businesses pay hrgher rent than illhey located ouistde aCliyity centre May sune innovation in retainnn Consumers (Ie shoppers, IIIOvle \Juers) Time saying due 10 co -tocauon 01 retau nutlets MIIKlI Consumer surplus reduced because some consumers preler 10 sbop outsice acuvuy centres 10 avoid crowding Higher pnees'due 10 higher unu producuon costs Minor Moderale Moderale Tax payers -- ----- _. .. car Ma/or Moderale llenuced choice 01 supplier 01 particular goods and services IJCt:.1U~t: latllt avatlJllililY Is constramec Permits emcteru provision and use or pubuc transport, pilrklno and outer mtrastructure General public Public arnenuy 1I11OUOll centralisauon oJ reran ouuets (,e seen as orderly oevetoomenn Loss or diYersily in shopping experience (eg shoppmg strips outside acnvuv centres). ModeralB landowners vatue 01land on wlllell actwily centres are vased mC(tJiJSd~ ' Land values in adjacent areas lIlay decline dUB to increased congesliOll. This will aJrBady be tectoreti into land prices if lanll purchasers knew that aclivily centre or proposed actrVlty centre was located neartJyat lime 01fJurr:llase. d Note: Italics denote a teteronco 10 a Iransfer. 80 8.2 Case Study 2 - Local Planning Policy: Development On Highways, Main Roads And Tourist Routes (1) Background A Local Policy in the Mornington Peninsula Planning Scheme entitled "Development on Highways, Main Roads and Tourist Routes" (Clause 22.06) ("Local Policy") provides that highway service facilities should be limited as far as possible to existing service nodes and that applications for new development sites on main roads must demonstrate a significant limitation in the current level of service. It also provides that commercial and industrial proposals should be directed to township locations. Before deciding applications to use or develop land adjoining a highway, major road or tourist route, the Responsible Authority must consider Decision Guidelines which include visual, traffic and "commercial intrusion" factors. The profile of the Mornington Peninsula in the Mornington Peninsula Municipal Strategic Statement (Clause 21.02) notes that the rate of car ownership among households is 93% compared with a Melbourne average of 87%. The Peninsula is characterised by a distinctive settlement pattern based on more than 20 townsh ips with relatively clear boundaries and individual character, and is Victoria's most visited destination for informal recreation. The Mornington Peninsula Strategic Framework Plan (Clause 21.04) includes the following strategic directions: • defining township growth boundaries as a method of focusing future development; recognising and protecting strategic landscape areas between and around townships due to their strong influence on the Peninsula's sense of place; maintaining rural areas for their environmental, recreational and agricultural values; and landscapel • • • supporting the maintenance and development of the arterial road network as a key economic and recreational resource. Under the Commercial Activities Centres heading (Clause 21.07-3), the Mornington Peninsula Municipal Strategic Statement notes that commercial expansion on main roads outside town centres may reduce the range of goods available, in turn reducing benefit to shoppers in terms of a compact centre providing a wide range of goods and shopping convenience . It is said that concentration of commercial activity in the townships will attract critical mass to attract other kinds of investment and generate multiplier effects and that, while the strategy may be contested with arguments about flexibility and increased competition and levels of service, it is considered that a strategy of consolidation is more sustainable and equitable and will result in net community benefits. 81 "Key Issues" under Clause 21.07-3 include: • provision for further retail and commercial development on the Peninsula should prov ide for net community benefit, involving a balance between opportunities for competition and support for existing public and private investment; a strategy of consolidating new retail and commercial activity within existing town centres and in support of the existing commercial hierarchy is considered to best achieve long term community benefit, and will reinforce the overall strategic framework plan for the Peninsula; and pressure for retail development outside of the main town centres, on main highways or fringe sites, based on gaining greater exposure, would adversely affect the viability of planned town centres. • • (2) Objective/Market F,ailure Which Is Addressed r . The Local Policy is directed towards achieving the Objective of Planning in Victoria described in Section 4.1 of securing a pleasant, efficient and safe living and recreational environment. It protects highways, main roads and tourist routes from inappropriate commercial and industrial intrusion, maintains visual outlook and visual sequences from such roads, prevent commercial strip development and meet safety, convenience and aesthetic standards for such roads and their environs. It refers to the need to preserve the "townships" character of the Peninsula and prevent "significant neqativs impact that is disproportionate to the improved level of community service". The Local Policy seeks to address the negative externalities associated with commercial and industrial use and development on important roads, such as unsightly visual clutter, loss of use of rural landscape, detriment to "gateway" character at entry points to townships and traffic hazards, that would result in an unregulated environment. (3) Identification of Any Restriction On Competition The Local Policy potentially restricts competition in the Land Use Market in the following ways: • by limiting the land available to prospective developers of services businesses, by requiring them to locate those services businesses within existing service nodes unless they can demonstrate that there is a significant limitation in the current level of service which they are seeking to provide so as to justify the situation of their business on land outside an existing service node; and by increasing the cost of land. Land located within an existing service node will tend to have a higher value than Rural Zone land lying outside it, insofar as the former land is more likely to be approved for a service development. '. • RBL:Final P&E NCP Reo/iew Report Jan 2C01(consultantsrepon) .doc 82 The Local Policy is likely to restrict competition in Final Product Markets in the following ways: • by restricting the entry of potential new competitors into Final Product Markets. To the extent that the Policy has the effect of limiting the locations adjoining highways at which new entrants may establish competing businesses, it creates a barrier to entry. It may also restrict market entry by a prospective new entrant to the extent that it gives rise to compliance costs in respect of a proposed new service development. For example , a prospective new entrant may seek through the permit application process to locate outside of an existing service node, arguing that there exists a significant limitation in the current level of service . In so doing, the prospective entrant must confront the expense and delay typically associated with the planning permit application process; by providing advantages in favour of certain businesses over others. As well as advantaging incumbent competitors in Final Product Markets in the manner identified in the preceding paragraph, the Local Policy expressly favours commercial and industrial uses and developments which can be demonstrated to be required either to service the rural area or as being associated with major recreational facilities. Those developments are more likely to be approved to be located on land adjoining highways, main roads and tourist routes, as opposed to being located in alternative areas such as business areas or industrial areas within existing townships; by increasing the price of final goods and services. To the extent that the Local Policy has the eftec: of requiring new service developments or commercial and industrial use or developments to be located within existing service nodes or business areas/industrial areas within existing townships, rather than on rural land adjoining highways, it may require competitors to incur higher land acquisition or lease costs. These costs are likely to be passed on to consumers by way of higher prices for goods or services; by restricting the location of business or industry which produces final goods and services to existing service nodes or business areas/industrial areas within existir:g townsh ips. This may inconvenience consumers of those goods or services; and by restricting the ability of producers ci final goods and services to situate their businesses in a locaticn which will enhance their ability to advertise their goods and services through their visible presence to the motoring public or by use of appropriate signage on land adjoining highways, main roads and tourist routes. • • • • (4) Cost/Benefit Analysis The costs and benefits associated with restrictions on development on highways, main roads and tourist routes are summarised in Table 9 below. RBL:Final P&E NCP Revie w Report Jan 2Q01 (consull antsreport).doc 83 Under the current restriction, development on land within the Rural zone adjoining highways, main roads and tourist routes is not allowed unless: • • there is a significant limitation in the current level of service; or the business is required either to service the rural area or is associated with a major recreational facility . This restriction imposes costs on businesses that would prefer to site in such locations but are unable to. For instance, they may have to pay higher rents for premises in service nodes relative to premises sited in a Rural zone. Some businesses seeking to provide a product or service, or use a method of production, that is unique to location near a highway (eg convenience products or fast service methods) may not enter the market if location within existing service nodes does not allow them to sufficiently differentiate their product. Tourists and other, travellers may .prefer that certain goods and services (eg petr ot. food, drinks, tourist information services) are conveniently located beside highways, main roads and tourist routes to minimise travel delays. The restriction imposes additional travel costs (including time delays, petrol and vehicle wear and tear costs) by forcing tourists and travellers to divert to the nearest service node.. There are potentially many benefits associated with a restriction on development on highways, main roads and tourist routes. For instance, consumers may benefit by savirg time and transport costs when businesses and shops are co-located within service nodes. Motorists using highways may benefit frorr a reduction in journey time because significant highway development may require a reduction in speed limits to maintain the level of rcad safety, with increased unrestricted access to and from the highv,ay. This saving is likely to be particularly significant if the highway is a major transport link. Tourists derive enjoyment from the maintenance of green belts along tourist drives. Indeed, this may assist some regions to differentiate themselves from others and attract tourists to the area, which could benefit local businesses. In this way the restriction may promote regional development. It can also do this by encouraging travellers to divert to existing service nodes and purchase goods and services from local businesses and businesses employing local people. This may enable some communities to maintain the critical mass to retain valuable community services such as schools, medical and banking facilities. Generally. the benefits associated with th.s restriction are likely to be maximised if the restriction applies to reads that serve primarily as either a tourist route (where visual amenity is highly valued) or a main arterial route (where the road traffic authority has a responsibility to maintain a high average travelling speed). R8L:Final P&E NCP ReView Report Jan 2001 (consultanlsreport).doc 84 (5) .Co ncl usion/Recommendat ion It is difficult to definitively balance costs and benefits associated with this restriction as they will vary on a case by case basis, depending on: • the volume of traffic that uses the highway, major road or tourist route in question; the value that the general public and tourists to the area place on the preservation of green belts along such roads; the nature and extent of services offered within existing service nodes; the location of the nearest alternative service node; and the extent to which communities rely on passing traffic to maintain the viability of community services: r • • • • • Notwithstanding this, provided the restriction is not used to protect incumbent businesses at any cost, it may confer a net community benef it. Costs associated with the restriction may be minimised by : • allowing businesses providing essential services to travellers to locate on highways (eg petrol station, shops selling food and drink, tourist information centres) provided the benefit to travellers outweighs any accompanying reducticn in green belt amenity or traffic speed; and ensuring that there are sufficient exis::ng service nodes and that each node is of sufficient size to acccmmodate demand for new business space. • RBL :Final P&E NCP Review Report Jan 2C01(consultantsreport).doc 85 Table 9 Affected party c --- --- - tb -. fit ----- - - - - L - - - -I PI -------y Pol'- . 1 - D trix f --- --- --Benefit Descnpuon ---- - - - - - - -- t --- hiah ---- ----of -l -- - - - - - . - - d d Cost a -Busmesses already located eXisting service nodes witlun Order rnar,nitude Description Order mannuude of Increased profll ,f tosuicuon helps 10 allr.Jcr mota rOllll:./S 10 service node , Increased profit If resuicnon reduces number of cOfllvolltors , Reeluclion in profit If restriction prevenls businesses from proVldmg services /0 passing tounsts' who do not wish 10 tnven from their journey into exisling service nodes. . Businesses lhal preler 10 locale along hIghway (Ie new and those already In service nodes) Nil Higher productions costs as unable to sile in cost minimising location. Slilles innovation 01 new products, production pro ce sses or marketing methods Ihat may have em erged II 11Igilway development was allowed, " Moderale Moderale Owners of land on wlilch ex,sLJng service nodes sited Owners or land nexl 10 highways Consumers Value of land probably Itigher Ulan If busioesse« Wt,lrt,l iJble to tocete along highways to take advantage of lower land values. NIl Tune and travel costs saved due 10co-locauon or uusmesses willlin service nodes . Improved visual ameruty along highways, rnaut luuusl routes ._. -_.and MInor Nil Value of land next to highway lower than it would otherwise be if it could be used for commercts: or industrial purposes . Sl10llS Less choice 01supplier locauon, HiCJher nnces if restncuon leads to hiCJher oroduction costs . Minor 10uIIsI5 roatl~ and _.-------- ._----- . Other motorists using 11IUhw.lys 10 Moderale M with the plarmino scheme. Section 173 Agreements are particularly valuable in circumstances where a proposed use mayor may not give rise to the need for future works such as traffic signals and the nature, extent and timing of such works is uncertain . Section 174 of the Act provides that Agreements may provide for "any matter incidental' to a range of planning functions. In practice, Section 173 Agreements may place more onerous restrictions upon the use and development of land than those available under the planning scheme. For example, Agreements have crovldsd that land may not be used for a purpose for which permiss ion is available under the planning scheme, that a party may not exercise statutory rights of objection to a planning application for other land or complain about activities on other land, and that exis~ing use rights must be surrendered. A more dubious example of the use of a Section 173 Agreement by a Responsible Authority is an Agreement which specifies the basis on which the Responsible Authority will in future exercise its discretion in relation to an application for permit . Section 173 Agreements frequently relate to: • • • provision of dedicated carparking spaces; provision of carparking land under licence: contribution to infrastructure with rs=·..,; nd as and when other development occurs; bonds for contingency works; contribution to community facilities and works not immediately connected with the subject land; gifts of land to Council; • • • 87 • creating obligations to build within building envelopes shown on plans of subdivision; staging of development and ancillary works; height and scale limitations on future buildings; measures required by utility organisations; future maintenance of site features, like landscaping; performance measures to the satisfaction of Councilor other public authorities; requirements that are too detailed to specify in permit conditions; site-specific undertakings given to obtain a planning scheme amendment. r • • • • • • • . Agreements relating J development of land over which Council has ownership or control or as part of a joint venture arrangement are common . There is no third party invo lvement in the process of establishing a Section 173 Agreement, and notice and objection procedures similar to those relating to planning scheme amendments and permit applications are not available. (2) tothe ~ Objective/Market Failure Which Is Addressed The objective of the provisions relating to Section 173 Agreements is to attain desirable planning outcomes where such outcomes are not available by more conventional means, such as planning permit conditions. For example, Section 62 (6) cf the Act prohibits a permit condition from requiring payment of an amount for public services or facilities unless that condition is imposed in accordance with a Development Contributions Plan or Section 173 Agreement. Similarly, a new development may be likely to, but will not necessarily, generate traffic congestion so as to give rise to a need for traffic signals. A permit condition which required traffic signals if the development proposal generates traHic congestion may 1:8 challenged on the ground of uncertainty and, for this reason , a Responsible Authority may seek to address the issue through a Section 173 Agreement. Section 173 Agreements are often emp loyed where a Responsible Au thority determines that a proposed usc ;5 not amenable to permit conditions because the impact of the proposed use is difficult to determine in advance. Section 173 Aqreernents also address impacts which result from intensification of uses and ancillary activities over which no planning control is available because of arguments that they amount to a "natural progression" of a permitted use. Section 173 Agreements may be used to either derive funds or directly provide for public goods, such as parks, landscape features, and pavement. Often they are used to mandate the provision of RBl:Final P&E NCP Review Report Jan 2e01 (consultantsreport).doc 88 infrastructure such as sporting facilities which are not public goods in nature but used by the community. Often these obligations are the "price" of favourable consideration of an application, in circumstances where such provision may not be demanded under planning controls. In summary, the Objectives of Planning in Victoria referred to in Section 4.1 which Section 173 Agreements are commonly used to achieve include: • to provide for the economic and sustainable use and development of land; to provide for and co-ordinate development infrastructure and community infrastructure for the benefit of the community; and to secure a pleasant, efficient and safe working, living and recreational environment. • • (3) Identification of An'1 Restriction On/Completion I . A Section 173 Agreement which restricts or regulates the use or development of land, or imposes conditions subject to which the land may be used or developed for specified purposes. potentially restricts competition in the Land Use Market as follows: • by discriminating against land owners and developers which own or have rights in relation to land which is the subject of a restrictive Section 173 Agreement, as aqainst other land owners. For example , those conditions may effectively prevent or restrict the use or development which may be mace in relation to the land or increase the cost of that use or deveiopment as a result of the imposition of conditions which must be complied with; and by imposing significant compliance ccsts on owners of land or developers, to the extent that they are required to negotiate a Section 173 Agreement with a Responsible Authority. For example, this process may require the owner of the land to incur legal expenses . • Section 173 Agreements potentially restrict competition in Final Product Markets in the following ways: • by restricting market entry of prospective market entrants, to the extent that the prohibitions or restriccons relating to the land in effect limit land available to new r:-arket entrants to establish potentially competing businesses. A rec:uirement that a prospective new entrant negotiate a Section 173 Agreement as part of the process of obtaining planning perrniss.on further creates a barrier to entry for new competitors to the extent that it is likely to increase the compliance costs of entry, including legal costs associated with negotiating the Section 173 Agreement; to the extent that a competitor in a Final Product Market occupies or uses land which is the subject of a Section 173 Agreement, with its attached restrictions, that competitor may be disadvantaged in • R8L:FinaJ P&E NCP Review Report Jan 2001(consultanlSreport).doc 89 relation to other competitors in the market, who are not subject to such agreements. For example, the Section 173 Agreement may impose additional establishment or operating costs on the competitor which, as a result, leave that competitor at a competitive disadvantage; and • to the extent that a Section 173 Agreement imposes initial compliance and establishment costs, and/or ongoing operational costs on a business, it will tend to increase the cost of production of the good or service produced by that business, which costs will be passed on to consumers in the form of higher prices. (4) Cost/Benefit Analysis It is impossible to be definitive about the costs and benefits associated with restrictions imposed by Section 173 Agreements because the nature and extent of the restrictions vary under individual agreements and also because the parties affected by such agreements are involved in a diversa.ranqe of activities and Final Product Markets. /" . However, potentially, Section 173 Agreements are highly restrictive and very costly. To begin with, they can impose significant compliance costs on land owners and on businesses occupying or using land that is subject to an Agreement. Sometimes compliance costs are ongoing and borne by all future land owners and businesses occupying or using that land. Provisions that do not clearly specify future obligations create uncertainty that increases financing costs for developers. These costs may be passed on to consumers in Final Product Markets if the degree of competition permits. To ths extent that Section 173 Agreements prevent businesses from setting efficient prices, output, and quality or using the most efficient production processes, they can inflate production costs and make it difficult for such businesses to compete against rivals, including rivals in other states and overseas, who are not burdened by such arrangements. Where such agreements are onerous they may limit the number of new developments and, hence, number of businesses competing in Final Product Markets. Section 173 Agreements also impose costs by removing low cost appeal options that are available elsewhere in the planning system. Landowners can only appeal Section 173 agreements to the Tribunal to a limited extent. Many disputes would have to go through expensive court processes. The Agreements are also likely to involve a considerable monitoring and enforcement cost to ensure that future owners of the land abide by and comp ly with the restriction even though they were not party to the original Agreement. Responsible Authorities have a large degree of discretion in imposing Section 173 Agreements and, because normal avenues of third party appeal and public consultation do not apply. there is great potential for Responsible Authorities to impose excessive obligations on developers in a manner which is not transparent, without repercussion. RBL:Final P&E NCP Review Report Jan 2eOl (consullamsreport).doc 90 Consequently, it is likely that some Section 173 Agreements may impose considerable costs on businesses and consumers. The primary benefit derived from many section 173 Agreements is a contribution towards the provision of non-rival , non-excludable public goods such as parklands, bridges, public toilets, public drink fountains, most roads and pavement. Some Section 173 Agreements seek contributions toward the provision of quasi public goods, ie goods that are only non-rival and non-excludable up to a point, such as community sporting facilities. However, as discussed in Section 7, there may be less restrictive ways to provide such public goods. Many Section 173 Agreements relate to the provision of infrastructure that is not public good in nature, for example car parking. In such cases. Section 173 Agreements provide a mechanism for implementing user pays or coordinating the provision of infrastructure among the beneficiaries of that infrastructure. However, they do not address a form of market failure. Again, it is likely that there are more efficient means to implement user pay s, for example by targeting the beneficiaries of suctf intrastructure services more directly. Some Section 173 Agreements seek to minimise the incidence of negative externalities, for example by imposing performance measures, mandating future maintenance of site features, or height and scale limitations on future buildings, and by facilitating coordination between infrastructure service providers . However, these Agreements are not an ideal means to minimise the incidence of negative externalities because they attach to land irrespective of the use to which that land is put, and they often remain as a permanent fixture on title. Usually externalities are generated by parties that occupy or use the land, not necessarily the land owner. A more effective means of addressing externality concerns would be to directly target activities that generate negative externalities. (5) Conclusion/Recommendation In many cases it is highly likely that the costs associated with Section 173 Agreements will outweigh the benefits. Even in individual situations where benefits may outweigh costs, often there is a less restrictive way to achieve these objectives using more conventional planning processes. There is no justification for eliminating rights of third party appeal and responsibility to undertake public consultation that apply elsewhere in the planning system. This review recommends that Section 621.5 ) of the Act be amended to prevent the imposition of permit conditicns requiring Section 173 Agreements for provision of services or ;acilities in relation to land development in circumstances where an approved development contribution plan covers the subject land. Development contribution plans generally are preferred to Section 173 Agreements because they are less likely to restrict competition in that they are more transparent, and more consistent in the determination of the circumstances in which a levy is imposed and the quantum of the levy. Notwithstanding this, capacity for voluntary agreement by the landowner for provision of services and facil ities ought to be retained. RBL :Final P&E NCP Review Report Jan 2001(consultantsreport).doc 91 Irrespective of whether the Act is amended in this way or not, a number of legislative changes could be made to reduce the costs associated with Section 173 Agreements. For instance, this review recommends: • amending the Act to prohibit Section 173 Agreements from imposing price controls as these can be particularly restrictive and costly; amending Section 177(1) of the Act to require a Responsible Authority to include a sunset provision in every Section 173 Agreement to ensure that it does not have a life beyond the achievement of its intended objective. While there is scope for Ministerial consent or agreement between the parties to that effect in Section 177(2), this can be difficult to achieve in practice . Alternatively, wording could be inserted in Section 177(1) requiring periodic review of Section 173 Agreements and for their complete or partial repeal if it is demonstrated that their purpose has been r • satisfied; I' • • amending the Act to require that any objectors to a planning permit application or submitters in respect of a site-specific planning scheme amendment that imposes a requirement for a Section 173 Agreement are consulted in respect of the contents of the Agreement prior to execution; and that the Department of Infrastructure issue educative guidelines to Responsible Authorities as to appropriate use of Section 173 Agreements. This is considered particularly necessary if the words "any matter incidental" are to be retained in Section 174(2)(d). • R8L :Final P&E NCP Review Repon Jan 2001(consultantsraportj.doc 92 . -_.- . _. c - -- f f Description s 173 A BenelH a Cost Order magnitude Allected party 01 Description -_. _ Owner 01 land Agreemenl subject 10 5173 Order maonilude of Lowor purcllilse price for lund duo to tustuetions imposed by 5173 Agreemenl Lower sale price for land due to restrictions imposed by 5173 Agreement Cost 10comply with provisions of 5173 Agreement Minor to Major Minor . Businesses occupying or using land subject La5173 agreemenl Nil Additional costs borne due 10 lack of normal planning svstern anneals mechanism. Higher financing cosl due 10 uncertainty about fuLure Iiabillly created by some 5173 agreements. Cost 10comply with provisions 015173 Agreement "i '"j Moderale Minor to Major Minor moderate 10 Additional Iransaction costs due 10 lack 01 normal plannino system appeals mechanism. BUSinesses that may occupy or use land subtect to 5173 Agreement in future Nil Ongoing compliance cost Increased unll production cos Is II 5173 Agreement IImlls fleXibility 01 businesses 10 sel prices, level of production or producllon melhod as Lhey prefer. · ·f • ., Minor 10 Maior Modarate Major Minor Moderate Minor moderate Minor moderate 10 -- .. - .- - -- - - ._ Minor Moderate to Addilional costs borne due to lack of normal planning svstem appeals mechanism. Higher p rices dUB 10 compliance costs and inllaled unit production costs Less choice 01 supplier il 5173 Agreements dater new entry. 10 Consumers of prooucts produced by businesses occupying or using land subject to S173 Agreemenls Accossibility to business may be improved (eg better parking lacilities), depending on iha nalure of lhe 8173 Agreement to to General public May obtain contribuLlon towards provision 01 public goods, quasi public goods and other inlraslructure. Visual amenity of sile may be improved. depending on natura 01 S173 Aoreernent, Minor to Major Minor moderate 10 Taxpayers a Businesses fund infraslruclure and public goods rather Monitoring and enforcement costs. Moderate then texoevess. Note : Italics denote a ioiorenco 10 a transfer. 93 8.4 Case Study 4 - Particular Provision: Home Occupation (1) Background Uses which would ordinarily fall within defined categories such as Office, Manufacturing Sales, Medical Centre and Hairdresser in the planning scheme and be subject to varying control within respective zones are given as-of-right status in all zones (save Business 4 where a permit is required) if they fall within the definition "Home Occupation " in Clause 74 of all new planning schemes, and if they also meet Clause 52.11 requirements. The definition is: "An occupation carried on in a dwelling or on the land around a dwelling, by a resident of the dwelling. It may include a use defined elsewhere, but not a Brothel'. Clause 52.11-1 applies a number of requirements to Home Occupation that limit the scale and intensity of the use and apply local character and amenity standards. A permit maybe granted for a limited variation of these requirements. (2) Objective/Market Failure Which Is Addressed Certain municipalities are experiencing rapid growth in home-based business. For example, there are 5,000 businesses trading in Manningham and approximately one half of these are home-based. In Knox, home-based businesses account for approximately 26% of all bus inesses in the municipality, and the promotion of opportun ity for such business is planning scheme pc l'cy, Both Counc ils have published a Home Based Business Strategy. The objective of having a special Home Occupation category of use is facilitation of small home-based business enterprises, in recognition of emerging new business/employment trends , demographic change and tech nological advances. Th is special treatment addresses a marke t failure in respect of negative externalities flowing from travel between place of residence and place of work - usually during peak times - including increased energy consumption, greenhouse gas emissions, air pollution and noise. It also addresses government failure . That is, in the absence of such provisions, the development of home based businesses may be thwarted or prohibited by existing plann ir.g laws. These provisions potentially assist the legislation to be mere responsive to emerging markets in the new economy. The conditions of operation included in the Home Occupation Particular Provision are directed towards achieving the Objectives of Planning in Victoria identified in Section 4.1 of: • providing for the fair and orderly use and development of land; and 94 • securing a pleasant, efficient and safe working, recreational environment for all Victorians. living and In particular, it is designed to ensure that the amenity of the neighbourhood is not adversely affected by an occupation conducted in or from a dwelling. The market failure addressed is negative externalities such as noise, parking problems, air emissions, loss of residential character and aesthetic enjoyment and stresses upon public infrastructure, that would result in an unregulated environment. (3) Identification of Any Restriction On Competition The Home Occupation Particular Provision potentially impacts upon competition in the Land Use Market as follows; • although the effect of the inclusion of a home occupation (an occupation carried on in a dwe!ling, or on the land around a dwelling, by a resident of the dwelling (but excluding a brothel)) in Section 1 of most zones will tend to increase competition in the Land Use Market to the extent that it increases the range of activities which potentially may be carried on from that land, the Particular Provision relating to home occupation in effect limits the range of commercial activities which may be conducted as a home occupation by prescribing a range of conditions which the home occupation must meet (for example, maximum floor area, limited retail activity, no display of goods manufactured, serviced or repaired so that they are visible from outside the site, the occupation must not adversely a~ect the amenity of the neighbourhood in terms of hours of operation, electrical interference, parking and storage of chemlcals, gases and other hazardous materials); and the requirement that a home occupation comply with the conditions set out in the Particular Provision either expressly or effectively prevents certain commercial activities from being carried out as a home occupation without a permit or at all, or limits the attractiveness of doing so, which in turn will impact upon the value of the relevant land. • The Home Occupation Particular Provisior.s will restrict competition in Final Product Markets in the following ways: • the range of restrictions imposed upon a home occupation discriminate against a home occuparon in favour of competing businesses which are not carried on as a home occupation (refer to the restrictions listed above under the first dot point above under the heading "Land Use Market"); the conditions set out in the Particular Provision effectively create a barrier to entry for smaller competitors into existing markets - while on the one hand the conferral of as of right status to home occupations under most zones encourages market entry of home occupations with potentially low entry and establishment costs, the • RBL:Final P&E NCP Review Report Jan 2C01(consultanlsreport).doc 95 conditions imposed by the Particular Provision relating to home occupation counteract that position by imposing a range of operational limitations which may dissuade a potential entrant from entry; • • by limiting the types of activity which a home occupation may engage in and, in particular, by restricting retail activity; by restricting market conduct of home occupations by limiting hours of operation of the home occupation and, by imposing a maximum gross floor area, restricting the scale of the operation; • by restricting the location of producers of certain final goods and services. For example, the particular provision relating to home occupation restricts retail activities as a home occupation. The effect of this restriction is to make it difficult to establish a conventional retail business within land which is zoned as Residential; and I- • by restricting tHe ability of home occupations to advertise and promote their activities. For example, the requirement that no goods manufactured, serviced or repaired may be displayed so that they are visible from outside the site. To the extent that a home occupation is in a category 4-sensitive area, it is likely to be subject to the further limitation that the total advertising area of a home occupation sign must not exceed O.2sqm unless a permit permitting a variation is obtained. Typically, home occupation signs cannot be flood lit, internally illuminated or reflective. ( -"} Cost/Benefit Analysis The Home Occupation category of use enables small businesses to be home based to exploit new trends in technology and work preferences. This confers a significant benefit to the ccr.:munity. To the extent that the Legislation allows home based work, it prevents the planning system from stifling innovative approaches to conducting business. By allowing home based work, the Legislation facilitates growth in the number and type of small businesses . It enables businesses to begin on a small scale from a home base with low overheads. Consumers stand to benefit from a larger number of sellers who are able to pass on lower overheads in the form of lower prices. Taxpayers stand to benefit from Home Occupation provisions because in many cases they obviate the need for permits and hence reduce administration costs. Thus, although Home Occupation controls entail some monitoring and enforcement expense, the Legislation lowers administration costs to Government and also reduces transactior.s costs for parties seeking to undertake home based work. Home Occupation provisions regulate the nature and extent of home based work activities to minimise negative externalities that might be associated with home based work that may arise in an unregulated environment. The restrictions on competition that result from these provisions are likely to confer a moderate benefit to the community. For instance, they can help to prevent noise, traffic congestion and RBLFinal P&E NCP Review Report Jan 2001(consultantsreportj .doc 96 parking problems, loss of residential character , air pollution and visual pollution . However, in some cases the restrictions created by these provisions may impose a significant cost on businesses and consumers by preventing home based businesses from minimising unit production costs. This may be more likely to occur where the restrictions are not directly linked to a form of negative externality . For instance, the nature and extent of negative externalities generated by a business often is not directly correlated to the floor area it utilises. By regulating outcomes or performance (ie in terms of noise levels, traffic congest ion, etc), the controls may target particular forms of externality more directly. Generally, performance criteria of this kind should be preferred as long as any additional cost that may be associated with the administration and enforcement of performance criteria (as opposed to prescriptive criteria) is outweighed by the benefits that accrue by not restricting businesses that do not generate negative externalities. r (5) Concl usion/Recorrimendaticn On balance, it is likely that the benefit associated with Home Occupation provisions outweigh the costs. However, Government may be able to take action to reduce the cost side of the equation. For instance, this review recommends amending Home Occupation provisions to allow exemptions from limits placed on operating hours, floor area and products that may not be sold where the applicant can demonstrate that the activity does not impose significant negative external ities (such as traffic congestion, r.oise or visual pollution) on the community . R8L:Fina l P&E NCP Review Report Jan 2001(consultanlsreport) .doc 97 Table 11: Allected party Cost benefit matrix for Home Occupation Particular Provision -I a. Cosl Benefit Descriphon - -Party seeking 10 undertake houtu based acuvluas Order maqnitude Modoralo of Description Higher unu production costs if business is unable 10 achieve economies of scale in produclion due 10 maximum 1I00r area and hours of operalion provisions. Higher unH produclion costs If business is unable 10 achieve economies of scope due to limits on relail activity. Higher unit production costs due to restrictions on display of cioods. Order rnaonttude Moderale of . Lowor cost structure of horne based bUSlllOSS means more small businesses are able 10 enter Final Product Markels. Moderate Minor Potanua! cornpautors commercial zones based III Sume businesses may be able to lowor unH production costs by making use of Horne Occupation laws (eg rather than expand into more cosily commercial zone space). Reduction in Iransactions costs as no requirement to obtain a permit. except for certaIn conunercral activities. Minor Moderate to Profits may. be tower if they compete with home based opemiors willI lower cost structures. Consumers Increase in the number of suppliers ollerlll\) a rallUll of price and qualily combinations. Moderale --I axpayars -------- --- Mouerale Moderale - May pay higher prices for goods and services supplied by horne based businesses if such businesses are unable 10 minimise production costs due to restrictions created by Particular Provisions. Moniloring and onlorcoment costs, Minor Moderale to tlavlIlg to adminislralion by ollllllllaLlnu 1I1lJ uued 10 outain a permil, except for certain commercial activities. Avoidance 01 parking, noise and high tralfic congestion problems in residenlial zones due 10 horne bused businesses. Preservalion of neighbourhood. residenlial character MlIlor General public Nil of the Moderate Moderate Preservation of visual amenity and air qualily due 10 reslrlctions on storage of chemicals, gases and other hazardous materials. a Note: Italics denole a rotoronce to a transfer. 98 8.5 Case Study 5 - Existing Use Rights (1) Background Section 6(3) of the Act confers existing use right status on any land use which commences "lawfully" (ie, in accordance with planning controls if any - current at the relevant time) prior to any planning scheme change which otherwise would require a permit for, or prohibit, such uses . Existing use rights may arise from the fact that the use was in existence prior to any relevant planning scheme control coming into effect or, altematively, from a permit being granted for the use prior to a change in the planning scheme that would prevent the issue of such a permit. The provisions of Clause 63 of new planning schemes amplify existing use rights. Clause r 63.11 effectively allows an "unlawful" use to continue legitimatelyrif its establishment has not been detected by the Responsible Authority within 15 years. Existing use rights run with the subject land and are a tradeable commodity. Clause 63.08 goes further than the protection given under the Act and allows the grant of a permit for an alternative prohibited use if the Responsible Authority considers that the replacement use is less detrimental to the amenity of the area than a current use which is in a prohibited class, but enjoys existing use rights. In a recent case before the Tribunal relating to a circumstance in which the Responsible Authority had granted a permit for a replacement use, it was established that the replacement use had in fact proved to be more detrimental post-establishment than the Responsible Authority had anticipated. Nonetheless, the permit was upheld. The Tribunal and the Courts have ruled that existing use rights may intensify and change with time, provided that the fundamental "purpose" is still served. (2) Objective/Market Failure Which Is Addressed Existing use rights allow the continuation of existing uses when new legislation is introduced. They are directed towards achieving the Objective of Planning in Victoria described in Section 4.1 of providing for the fair, orderly, economic and sustainable use and development of land. They are a means by which Responsibie Authorities can rrururmse their own administration costs and the transactions costs they impose on others when new legislation is introduced, because they make it unnecessary for incumbents to reapply to undertake their current activity. They also provide a degree of certainty for incumbents that a legislative addition or amendment will not undermine their investment. The objective of atlowing the Responsible Authority to consider an application for permit for an alternative "less detrimental" use under Clause 63.08 is to bring the use closer to conformity with the planning scheme and, in a market failure context, to lessen the negative 99 externalities which may otherwise flow from the permitted existing use, such as unsightly premises, noise, air emissions and parking problems. In its consideration of an application for a permit in respect of a replacement use, an opportunity is created for the Responsib le Authority to impose permit conditions which deal with hours of operat ion; car parking; delivery vehicles; lighting; signage; amenity matters like noise, smoke and litter; and, in some cases (eg redevelopment of a shopping centre). the delivery of public goods like public open space, improvement to local infrastructure and community facilities. (3) Identification of Any Restriction On Competition Existing use rights restrict competition in the Land Use Market in the following way: • land owners/developers which own or occupy land which has the benefit of an existing-use right will be advantaged over other land owners. to the extent that they are: in a position to engage in a use or development" which would tie otherwise restricted by the Legislation . The recognition of existing use rights by the Act and planning schemes will tend to restrict competition in Final Product Markets in the following ways : • by discriminating in favour of an incumbent competitor in a Final Product Market over both eXisting and potential new competitors, to the extent that the incumbent competitor is able to engage in a use or development of land which wc '. .: ld otherwise be prohibited by the Legislation; and the fact that an incumbent competitor ~as the benefit of an existing use right may operate as a barrier to entry to new market entrants. For example. although a prospective new entrant may not be prohibited outright from engaging in the same use or development as a competitor who has the benefit of an existing use right, if the prospective new entrant requires a permit, and accordingly is exposed to compliance costs and delay associated with that process, it may be dissuaded from entry. • (4) Cost/Benefit Analysis Existing use rights potentially confer sicniticant benefits to several parties within the community. For instar.ce , the investment certainty created by an existing use right can reduce the risk associated with site or business development and, hence, can reduce financing costs. By granting a business greater freedom to choose their preferred method of production, existing use rights also can lead to lower unit production costs in some situations. Importantly, Responsible Authorities and, ultimately, taxpayers benefit from significant savings in administration, monitoring and enforcement costs because activities deemed lawful before a change in planning law are allowed to continue without reapplication. RBL:Final P&E NCP Review Report Jan 2001(consultantsreportj.doc 100 Existing use rights also can impose costs on the community. They can impose minor to moderate costs on consumers if they deter the entry of new businesses into Final Product Markets. However, the most significant cost is likely to be borne by the general public in situations where the existing use right allows businesses to generate a higher level of negative externality that would otherwise be permitted by planning laws. If the planning system had always been effective at regulating activities that generate negative externalities this may not be a problem. However, if the system was not previously effective in this regard, there is a risk that existing use rights could perpetrate the long term generation of moderate to major negative externalities and provide a disincentive for businesses to adopt technologies and production methods that minimise these externalities. There is some scope under existing use right provisions for the impact of negative externalities to be reduced over time through the issue of less detrimental use permits under alternative use provisions. r ~ Although the process of seeking a perm it under the alternative use provisions must be initiated by the land owner/business, often they are in effect obliged to initiate the process due to, for example, the redundancy of their current use (eg derelect service station). (5) Conclusion/Recommendation While the nature and extent of benefits and costs will vary on a case by case basis, on balance it is likely that the benefits associated with existing use rights will outweigh the costs , except perhaps where they allow a major negative externality (eg hea lth or safety risk, or pollution of air, land or waterways) to continue at a level higher than would otherwise be permitted under planning controls. Governments can reduce the potential for this situation to occur by giving careful consideration to the issue of all permits for alternative use rights. One option to make alternative uses potentially less restrictive is to set a sunset clause by way of permit condition in all permits issued under Clause 63.08 in new planning schemes. This would allow alternative uses to be reviewed after a period sufficient to allow a business to generate a normal rate of return (eg 10 to 20 years, depending on the business activity). In this way, bus inesses that generated a major negative externality could have their alternative use right terminated in future. This could restore their incentive to avoid generating negative externalities. Care would need to be taken that this sunset clause did not remove all certainty for the business in question. This could be achieved by ensuring that alternative use rights were only terminated if a business activity is found to generate a major negative externality upon the community. RBL: FinaJ P&E NCP Review Report Jan 2001 {consultanlsreport).doc 101 Tabl 12 c - -- tb -- -- - fit -- ---------- t. f --- -------- or _~ _ _ . ht T _ a Benclil Altected party 0 ._ ~ -- .. -.._-_._- -Order of Description Cost Order maqnitude of Description _ . maqnillldc For owners 01land IIlat is nol subject 10existing use right, value ot land decreases relative 10land subjecllo exisling use dglll. Moderate Land owners For owners of land sUbjecl 10 exiSling use ti!!hl, vaiue 01 land Increases ralalive 10land not subjtJclto existlll!! use rigllt . Certainty created by existing use right leads to lower financing cost than otherwise. Lower unll producllon costs due 10 increased flexibility in production or markeling method conferred by existing USB righl. Businesses that occupy land subjecl to existing use right Higher profit il business is able 10 capture mstke: sfrare lrom rivals with Ir/gher cos, structures because they do not have an existina use dght. Businesses that compete in the same market as businesses that benefit from an existing use right or would like to compete but planning laws prevent them lrom doinn so. Taxpayers - Moderate "; .... Loss 01prolil as competilors with existing use rights may be able to capture grealer market share, with lower unit production costs. --Savings in administration, monltonnq and entorcement costs as activities deemed lawful belore a chamje in p_l il n n~l n la~.am allo~£lQ.lo ~ qr! li! llI lJ Moderate r· -- _ . --Reduced number or suppliers II exisling use righl delers entry 01businesses into markel. Businesses thai would not otherwise be allowed 10 generate negative externalities are allowed to continue 10 do so. Minor ModeratB 10 Consumers General public Minor 10Maior a. Note: Italics denote a reference 10 a transfer. 102 APPENDIX 1 VICTORIAN DEPARTMENT OF INFRASTRUCTURE DISCUSSION PAPER I' I' 103 TABLE OF CONTENTS 1. 2. 2.1 2.2 2.3 2.4 INTRODUCTION GENERAL PRINCIPLES National Competition Policy Market failures Rationale for planning legislation Impact of planning legislation on competition VICTORIA'S PLANNING LEGISLATION Planning and Environment Act 1987 10 Planning and Environment Regulations 1998 Planning and Environment (Fees) Regulations 1998 r' 12 Planning Schemes ' State Planning Policy Framework Local Planning Policy Framework Zones and overlays Particular provisions POTENTIAL RESTRICTIONS ON COMPETITION Methodology Levels of restrictions Restrictions from policies Restrict ions from specifio controls Restrict ions from administering planning system Decision making processes Planning permit conditions SUBMISSION DETAILS 3. 3.1 3.2 3.3 3.4 3.4.1 3.4.2 3.4.3 3.4.4 4. 4.1 4.2 4.3 4.4 4.5 4.5.1 4.5.2 5. APPENDIX - TERMS OF REFERENCE RBL:Final P&E NCP RevIBw Report Jan 2001 (consultantsreportl .doc 104 PLANNING AND ENVIRONMENT ACT NCP REVIEW DISCUSSION PAPER 1. Introduction As a signatory to the Competition Principles Agreement (CPA) 1995, the Victorian Government has made a commitment to review all existing legislation under the following guiding principle: Legislation (including Acts, enactments, Ordinances or regulations) should not restrict competition unless it can be demonstrated that: • the benefits of the restriction to the community as a whole outweigh the costs; and • the objectives of the legislation can only be achieved by restricting competition.' In June 1996, the Victorian Government published a timetable for reviewing legislation in accordance with the agreement. The timetable included the Planning and Environment Act 1987, the Planning and Environment Regulations 1988 and the Planning and Environment (Fees! Requletlons 1988 and planning schemes. The Planning and Environment Regulations 1988 and the Planning and Environment (Fees) Regulations 1988 have since been revoked by the Planning and Environment Regulations 19981988 and the Planning and Environment (Fees) Regulations 1998 respectively. Hence the review will consider the new Regulations made in 1998. The terms of reference for the review are attached at Appendix 1. The main tasks are to: > assess the objectives of the legislation and its subordinate instruments in relation to National Competition Policy; > identify the nature of restrictions on competition; > analyse the likely effect of the restrictions on cornpetitlon and on the economy in general; > assess and balance the costs and benefits of the restrictions; > consider alternative means of achieving the same result, including using nonlegislative means; and > assess the findings of: • the December 1999 report of the Victorian Auditor-General (Performance Audit No.62), titled Land Use and Development in Victoria - the State's Planning System; . • the NCP reviews of planning legislation undertaken in other States, particularly South Australia and Queensland; and • planning reforms currently underway in Victoria. The review will identify potential restrictions on competiticn arising from: >- the State Planning Policy Framework (SPPF); >- the Municipal Strategic Statements (MSS) and local policies in the new planning schemes; >- the application of the zones, overlays and particular provisions; and > the administration of the schemes by way of decis ions on permit applications, consideration of requests for scheme amendments, and the use of other instruments such as section 173 agreements . I Clause 5 (1) of the Competition Principles Agreement signed by the Australian Commonwealth, State and Territory Governments on 11 April 1995. . R8LFinal P&E NCP Review Report Jan 2.001 (consullanlsreport).doc 105 Without limiting the scope of the review's recommendations , the review will consider means of reforming restrictions on competition where the costs to the community exceed the benefits, including: » amending the State Planning Policy Framework; :;. amending the municipal planning schemes (including the MSS and local policies in the new planning schemes); » providing advice on the application of the Victoria Planning Provisions, decisionmaking in respect of permit applications and scheme amendments, and the use of other instruments such as section 173 agreements; and amending the Act and Regulations if the preceding measures are deemed not likely to remove the restrictions. Public comment will be sought as part of the review process. This discussion paper has been prepared to assist people wishing to make a submission on the review. The Government welcomes submissions to this review from community groups and interested parties. Submissions should relate to the pbjectives, role arid impact of the planning and environment legislation as it relates to the impact on competition. Submissions need not be limited to the issues canvassed in the discussion paper, but they should be relevant to the terms of reference for the review. It would be helpful if submissions commented on community benefits and costs associated with any restriction on competition and put forward alternative ways of dealing with the issue. It would also be desirable if submissions take into account what effect the new planning schemes will have on any restriction that may have arisen from earlier planning schemes. Section 2 of this paper discusses National Competition Policy (NCP) principles and the need for planning legislation in terms of market failures. It also discusses the relationship between planning and NCP objectives. Section 3 describes Victoria 's legislation, which comprises the Act, regulations and planning schemes. Section 4 outlines potential restrictions on competition arising from the implementation and administration of the legislat ion. It describes how case studies will be used to illustrate the community costs and benefits associated with restrictions on competition . RBL:Final P&E NCP Review Report Jan 2001(consvltantsreportj .doc 106 2. General principles 2.1 National Competition Policy All Australian governments have made a commitment to adopt a consistent national approach to fostering greater economic efficiency and improving the overall competitiveness of the Australian economy. Reviewing existing legislation to remove unwarranted restrictions on competition is a key component of NCP reforms. The underlying rationale is that the free operation of competitive markets will promote community welfare by ensuring that: resources flow to the production of those goods and services for which consumers are most willing to pay; best use is made of the community's scarce resources by forcing out all but the most efficient/lowest cost suppliers of a given standard of good or service; and technological innovation is fostered as producers vie for custom through the development of new or improved qaality products. ;r Many regulations have evolved in the past to serve broad public policy objectives, including protection of the consumer, the environment or the wider public from unscrupulous. unsafe or environmentally destructive practices, processes or products. The guiding legislative principle established under the Competition Principles Agreement does not imply that competition objectives should take precedence over these important public policy objectives. However, the form which regulation takes often creates unwarranted barriers to entry to relevant markets, limiting consumer choice, stifling innovation and generating monopoly rents for existing producers which result in higher prices to consumers. There are a number of general principles that apply in NC,:> reviews: There must be a presumption against statutory interventicn and the onus of proof should be on the proponent of intervention. The direct costs of the regulation should be borne by the immediate beneficiaries of the regulation. Co-regulation, self regulation and codes of conduct are ail valuable regulatory mechanisms but potentially subject to capture. There are regulations with minimal statutory support which are very targeted and cost effective. Information is important and ordinary market mechanisms should generally not be inhibited, subject to active enforcement of the ordinary fair trading and other law. The Competition Principles Agreement lists a wide range of matters which can be taken into account when reviewing restrictions on competition. These matters include: government legislation and policies relating to ecolcqlcally sustainable development; social welfare and equity considerations, including community service obligations; government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity; economic and regional development including employment and investment growth; the interest of consumers generally or a class of consumers; the competitiveness of Australian business; and RBL:Final P&E NCP Review Report Jan 2001(consultantsreport).doc 107 the efficient allocation of resources." Market failures 2.2 The gUidelines state that the need for regulations should be assessed according to the extent to which they address market failures and improve upon the outcomes of an unfettered market. Moreover, the type of regulation which imposes the least costly solution should be sought. The presence of market failures is the principal rationale for government intervention in a market economy. Although open and unrestricted competition is generally seen as an efficient means of allocating the community's resources, markets do not always provide the best possible economic and social outcomes. Nor are the conditions always present for competition to thrive. Markets may fail to operate competitively or efficiently because of the occurrence of public goods. externalities, natural monopolies and information asymmetries. Of these. externalities and public goods are particularly relevant to planning legislation. Externa lities arise where an activity results in spillover benefits or costs to third parties . For example an industrial discharge into river is a negative externality, since it imposes costs on other users of the river. If these spillover costs are not borne by the factory, there is little market incentive for the factory to reduce the negative externality. Government may have to take steps to reduce the incidence of such negative externalities (eg, by imposing requlation in the case of waste discharges). a Conversely, an activity may result in positive benefits for third parties for which the initiator receives no compensation. For example establishing a native timber plantation on cleared aqrfcultural land can provide positive externalities in terms of enhancing the landscape, reducing erosion, protecting water quality in streams and reducing potential salinity problems. The plantation owner does not normally receive financial rewards for the spillover benefits. Where the costs and benefits of actions are purely pr ivate (ie do not affect third parties), the market mechanism can deliver an efficient allocation of resources. However, where there are additional social costs and benefits which are not taken into account, markets may not allocate resources efficiently. Public goods are also important considerations in planning legislation. Public goods occur when the supplier is unable to economically exc lude or technically prevent those who do not pay for the good from enjoying its ber.efit. It is unlikely that public goods would be provided at the socially desired level if governments did not intervene in the market to secure their provision. 2.3 Rationale for planning legislation A case for planning legislation can be demonstrated by :he market failures from the unrestricted use and development of land. In the absence of planning legislation, land deve lopment could result in many negative externalities. A few examples are: effects on public health and safety when housing is too close to hazardous industry; 2 Competition Principles Agreem ent Clause 1(3) RBL:Final P&E NCP Review Report Jan ZeOl(consultantsreport).doc 108 noise, water and air pollution from industry affecting more sensitive land uses in surrounding areas; car parking generated by commercial development spilling into residential areas; loss of amenity where a building prevents natural light or unreasonably imposes on the privacy available to a neighbouring property; aesthetic or visual amenity problems, where the design or look of a building imposes costs on those in surrounding areas (possibly reflected in lower property values for surrounding areas). Positive externalities from some forms of land use or development control are also possible. For example people in surrounding areas may benefit from: conserving historical buildings in an area; applying urban design principles in commercial areas; retaining vegetation or providing landscaping on development sites. Some desirable community assets, such as public open space, protected floodways and quality urban design may have public good characteristics. Normally these would be under-provided by markets in the absence .of planning legislation. r History provides insights into the need for government intervention in land use and development because of market failures. Planning legislation has evolved to supplement the common law, largely because of the high transaction costs and the difficulties ordinary people had in taking private court action in order to resolve externality problems. Australian planning law originally derived from concepts established in England during the early part of this century. The UK Government's role in town and country planning developed from concerns about public health and housing policies. Together with the increase in medical knowledge , the realisation that overcrowded insanitary urban areas resulted in an economic cost (which had to be borne at least in part by the local ratepayers) and the fear of social unrest, this new urban growth eventually resulted in an appreciation of the necessity for interfering with market forces and private property rights in the interest of social well-being. 3 The UK Housing, Town Planning, Etc., Act 1909 empowered local authorities to make a ''town planning scheme ....as respects any land which is in course of development or appears likely to be used for bUilding purposes, with the general object of securing proper sanitary conditions, amenity and conven ience in connection with the laying out and use of the land, and of any neighbouring lands". The 1909 Act went beyond addressing public health issues in planning by including in the legislative purpose the principles of "amenity and ccnvenience". It is at this point that planning comes to assume its rnulti-rcnctlonal role. No longer concerned with fitting the largest number of people into the smallest possible space with the least possibility of ill health, it becomes concerned with highways, recreational areas, smoke abatement, water and air pollution, advertisement control, road safety regulations, the preservation of woodland areas, "beauty 3 Cullingworth, Barry J and ~adln. V incent. Town and Country Planning in Britain, 11th Ed ., 1994, p.I. RBL:Fi nal P&E NCP Review Report Jan 2001(consultantsreport).doc 109 spots", and historic buildings, house cesigns, commuting patterns. local transport, and a host of other aspects of human activity.~ The above historical references highlight the potential for market failures from unregulated development that are still relevant today. Planning legislation contributes to achieving a range of social, economic and environmental objectives that are recognised in the Competition Principles Agreement. in particular: implementing policies relating to ecologically sustainable development (eg by controlling the removal of native vegetation); social welfare and equity considerations (eg by promoting activity centres in locations which are accessible to people without a car); the efficient allocation of resources (eg by coordinating infrastructure provision with new residential subdivision). In summary, the rationale for planning Iegislation.is th a t it: • directly addresses the negatlve-extemalities arising fr om the unrestricted use and developmen t of land; • reinforces the positive externalities from land use and development; I. assists the provision of desirable public goods; • delivers a large and diverse range of economic, social and environmental benefits for the community. Impact of planning legislation on competition Although market failures provide a sound case for planning legislation. there are clearly limits on the extent to which intervention in a market economy can be justified in the public interest. Some landmark cases in the administration of Victorian planning legislation demonstrate that the legislation sr.ould not be used to stifle competition. In 1982 in the case of Shell Comoanv of Austra lia Ltd & Others v. City of Frankston & Another the Planning Appeals Board" stated: "Town planning is not concerned with general economic regulation or rationalisation of product markets, rather it is concerned with the pattern of land use and with promoting consistency between various lar-d uses. Town planning provides a fetter on our free enterprise market system, but is not designed to replace that system with a form of centralised economic decision making. Moreover, competition is an essential ingredient of the market system. consequently, the principle of "need" should not be used 2S a planning tool to stifle competition ..." 2.4 In 1987 in the case of Vernia Pty Ltd & Others v. C:'I of South Melbourne the Administrative Appeals Tribunal (AAT) said: "...1 have reached the conclusion that the intention of ~he Act is not to stifle competition. In other words it is not meant to operate in si.ch a way as to prevent a business commencing in an area even if that commencement was to make another ~ Pooley, Beverley I., The Evolution of British Planning Legislation, 198:;, p.S. j The Planning Appeals Board and the Administrative Appeals Tribunal were the bodies established under earlier legislation to decide appeals on planning legislation in Victoria. This role is now undertaken by the Victorian Civil and Administrative Tribunal. RBL:Final P&E NCP Review Report Jan 2001(consullantsreport}.doc 110 business of a similar nature unviable. I consider that it would have to find that the proposed use would have some eHect on the broader community rather than on a mere competitor. In this appeal, I was unable to conclude that the proposed use would have the eHect of forcing the cessation of any other similar business. Even if I had been able to reach such a conclusion, 1do not believe there would have been any adverse effect on the broader community and that the only eHect would have been on the competitor whose business ceased to operate." In 1990 in the case of Cardran Ply Ltd & Another v City of Springvale the AAT stated: "Moreover (council) failed to establish any convincing nexus between his argument and community benefit. It was simply contended that, if one enterprise failed, the community would suHer detriment. This quite ignores the fact that Australian society has its very foundations in entrepreneurial activity which goes beyond mere price competition. Non-price competition, for example, the range of goods to be sold, their quality, even courtesy of service are all factors which play an important role in consumer decision making. It is highly arguable and, indeed, the tribunal believes more likely than not, that competition between similar outlets results in a net community benefit" The general principle that emerge~ from the above ~ases is that a potential adverse impact on a competitor is not a relevant factor in deciding applications for planning permits, unless there is likely to be an overall adverse impact on the community. National competition policy is generally compatible with the objectives of planning legislation. In the context of this review, national competition policy is primarily concerned with ensuring that the objectives of planning are delivered in an efficient manner and that any restriction on competition is necessary and in the public interest. RBL:Final P&E NCP Review Report Jan 2001{consultanlsreport).doc 111 3. 3.1 Victoria's planning legislation Planning and Environment Act 1987 The Planning and Environment Act 1987 (the Act) establishes the legislative framework for regulating the use and development of land in Victoria in order to achieve broad social, economic and environmental objectives. The primary objectives of the Act are set out in section 4(1) as follows : (a) to provide for the fair, orderly. economic and sustainable use and development of land; to provide for the protection of natural and man-made resources and the maintenance of ecological processes and genetic diversity; to secure a pleasant, efficient and safe working, living and recreational environment for all Victorians and visitors to Victoria; to conserve and enhance those buildings, areas or other places which are of scientific, aesthetic, architectural or historical interest, or otherwise of special cultural value; to protect public utilities and other assets and enable the orderly provision and coordination of public utilities and other facilities for the benefit of the community; . to facilitate development in accordance with the objectives set out in paragraphs (a). (b), (c), (d) and (e); to balance the present and future interests of all V'ctorians. r (b) (c) . .1. (d) (e) (f) (g) Section 4(2) of the Act provides further elaboration on :hese primary objectives by enunciating the "objectives of the planning framework established by this Act". Those objectives are: (a) to ensure sound . strategic planning and coord inated action at State, regional and municipal levels; to establish a system of planning schemes based on mun icipal districts to be the principal way of setting out objectives , policies and controls for the use , development and protection of land; to enable land use and development planning and policy to be easily integrated with environmental, social, economic, conservation and resource management polic ies at State, regional and municipal levels; to ensure that the effects on the environment are cons idered and provide for explicit consideration of social and economic effects when decisions are made about the use and development of land; to facilitate development which achieves the objectives of planning in Victoria and planning objectives set up in planning schemes; (b) (c) (d) (e) RBL:F inal P&E NCP Review Report Jan 2.001 (consultants report).doc 112 (f) to provide for a single authority to issue permits for land use or development and related matters, and to coordinate the issue of permits with related approvals; to encourage the achievement of planning objectives through positive actions by responsible authorities and planning authorities; to establish a clear procedure for amending planning schemes, with appropriate public participation in decision making; to ensure that those affected by proposals for the use. development or protection of land or changes in planning policy or requirements receive appropriate notice; to provide an accessible process for just and timely review of decisions without unnecessary formality; (g) (h) (i) (j) (k) to provide for effective enforcement procedures to achieve compliance with planning schemes. permits anef.agreements; . (I) to provide for compensation when land is set aside for public purposes and in other circumstances. Under the Act, planning schemes are the main subordinate instruments for regulating land use in order to achieve the legislative objectives. The schemes contain zones which set out: the uses and developments which do not require a planning permit; those which are permitted, with or without conditions; and those which are prohibited on land. The Act sets out procedures for obtaining a planning permit for the development of land, where this is required by the relevant planning scheme. The "responsible authority" (usually the municipal council) must consider a wide range of criteria in deciding the application and can impose any conditions it thinks fit on the planning permit (subject to section 62 of the Act). There are provisions for the applicant and third parties to apply to the Victorian Civil and Administrative Tribunal (VCAT) for a review the responsible authority's decision. The Act also includes provisions for the Minister to call in and decide the application, and any app lications to VCAT, under certain circumstances. If a proposed use of land is prohibited under the relevant planning scheme, the scheme must be amended before the use can commence. The Act empowers "planning authorities" (usually the municipal councilor Minister) to prepare an amendment to the scheme . The Act outlines the procedures to be followed in preparing and exhibiting the amendment and considering public submissions. Where there are object ions which cannot be accommodated by modifying the amendment, the planning authority can abandon the amendment or request that the Minister appoint an independent panel to consider the submissions. The planning authority must consider the panel's report and other matters before seeking the Minister's approval of the amendment to the planning scheme. 3.2 Planning and Environment Regulations 1998 These regulations prescribe: the manner and form of giving notice; RBL:Final P&E NCP Review Report Jan 2001(consullan lsreport) .doc 113 methods of serving notices or other documents; times for doing anything required; regions; forms; information to be included in any applicat ions, notices, permits and requests; the manner of keeping a register of permit applications; ensuring information is made available by responsible authorities; verification of information given to a responsible authority; the penalty for offences; and particulars of a planning infringement notice. 3.3 Planning and Environment (Fees) Regulations 1998 These regulations prescribe fees for: determining whether anything has been done to the satisfaction of a responsible authority or a referral authority; considering applications for permits; amendments to planning schemes; and planning certificates. r r The regulations also empower a responsible authority, a planning authority or the Minister to waive or rebate the payment of a fee in specified circumstances. A regulatory impact statement is currently being prepares for new fees regulations. The statement will separately consider NCP issues in :;,e process of making new regulations. 3.4 Planning Schemes . A planning scheme for an area must seek to further tr-e objectives of planning in Victoria, and it may make provisions which relates to the u~e, development, protection or conservation of any land in the area . The Department of Infrastructure and munic ipal counc i.s are involved in a major planning reform program to replace earlier planning schemes with new schemes prepared in accordance Part 1A of the Planning and Environment Act 1987. The intention is to replace the myriad of existing prescriptive controls with standard performance-based zones and' overlays. A key feature is the strong emphasis on strategic planning and policy to form the basis for the imp lementation of the specific controls. Each new planning scheme must contain: the state planning policy framework (SPPF); a local planning policy framework (LPPF); zone and overlay provisions; particular provisions; general provisions; and definitions. Apart from the LPPF, all the above components of the planning scheme must be drawn from the Victoria Planning Provisions. 3.4 .1 State planning policy framework The State Planning Policy Framework (SPPF) sets out the matters of state policy which planning authorities and responsible authorities are to take into account and give effect to in planning and administering their respective areas. "It is the Victorian RBL :Final P&E NCP Review Report Jan 2001(consultantsreport).doc 114 Government's expectation that those authorities will endeavour to integrate the range of policies relevant to be determined and balance conflicting objectives in favour of net community benefit and sustainable development"," The SPPF contains seven general principles which describe the factors that influence good dec ision making in land use and development planning: Settlement (Planning is to anticipate and respond to the needs of existing and future communities through provision of zoned and serviced land for housing, employment, recreation and open space, commercial and community facilities and infrastructure.); Environment (Planning is to contribute to the protection of air, land and water quality and the conservation of natural ecosystems, resources, energy and cultural heritage.); Management of resources: (Planning is to assist in the conservation and wise use of natural resources including energy, water, land, flora, fauna and minerals to support both environmental quality and sustainable development over the long term through judicious decisions on the location, pattern and timing of development.) Infrastructure: (Planning for development of urban physical and community infrastructure should enable it to be-provided in a way that is efficient, equitable, accessible and timely.) r . Economic well being. (Planning is to contribute to the economic well-being of communities and the State as a whole by supporting and fostering economic growth and development by providing land, facilitating decisions, and resolving land use conflicts, so that each district may build on its strengths and achieve its economic potential.) Social needs: (Planning is to recognise social needs by providing land for a range of accessible community resources, such as affordable housing, places of employment, open space, and education, cultural, health and community support (mental, aged, disabled, youth and family services) facilities.); Regional cooperation: (Municipal planning authorities are -soutred to identify the potential for regional impacts in their decision-making and co-ordinate strategic planning with their neighbours and other public bodies to achieve sustainable development and effective and efficient use of resources. ) Under each of these principles, the SPPF contains a range of specific policies in clauses 14 to 19. Planning and responsible authorities must consider the overarching and interlocking principles and the specific policies. 3.4.2 Local planning policy framework The Local Planning Policy Framework (LPPF) sets a local and regional strategic policy context for the application of land use and development controls in a municipality. It comprises the municipal strategic statement (MSS) and specific local policies. Each council must prepare an MSS for its municipality and review it regularly. Generally, the role of the MSS is to provide a vision for the future development of a municipality and to express overall strategic directions. The MSS should be a clear, concise statement of the key strategic land use and development issues and directions for the municipality, as set out in section 12A of the Act. Local policies focus on specific areas or issues . Their purpose is to set out the basis on which responsible authorities will exercise their discretionary decision making under the scheme. 3.4.3 6 Zones and overlays Victoria Planning Provisipns, section 11. RBL..:Final P&E NCP Review Report Jan 2001 (consultantsreport}.doc 115 The VPPs contain 25 standard zones which can be used in the new planning schemes, covering residential, industrial, business , rural and other uses. The first purpose of every zone is to implement the State Planning Policy Framework (SPPF) and the local planning framework. The controls over the use of land in each zone are divided into three sections: Section 1 sets out uses that do not require a permit, though condit ions may be attached. A use in section 2 requires a permit and may require conditions to be met. Section 3 uses are prohibited. The VPPs also contain 19 standard overlays that can be used in planning schemes. An overlay generally applies to a single issue and is concerned with controlling development on land rather than the use of land. An overlay indicates when a permit is required for development for a particular reason. The matters addressed by overlays include environmental significance, landscape significance, heritage, erosion, salinity, flooding, wildfire, land contamination, airport environs and design and development. r • An overlay contains specific objectives and the decision guidelines by which permit applications are to be assessed. Schedules attached to overlays can include specific requirements relating to matters relevant to the overlay. For example, a schedule to the design and development overlay could specify the design or built form of any new development, including building setbacks, building height or landscaping. 3.4.4 Particular provisions Particular provisions apply to specified categories of use and development and other additional matters. They include: advertising signs, :::ar parking, mining, home occupation, native vegetation, telecommunications facilities, gaming, licensed premises and freeway service centres, wherever these uses may seek to locate across the State 4. Potential restrictions on competition 4.1 Methodology The guidelines describe a step-by-step approach to revieWing legislation in accordance with national competition policy. There are four basic steps: Step 1 Describe the industry and existing legislative framework. (This step requires a description of the market and its geographic and fur.ctional dimens ions.) Step 2 Identify the restrictions on competition. (The restrictions can arise from: barriers to market entry; increased costs of doing business; limits on the number of industry participants or locations; restrictions on business structure, form or ownership; prescriptive regulation of product or service standards.) Step 3 Show that the restriction is necessary to the objective. (This requires a statement on how the restriction on competition is necessary in terms of market failures and the consideration of alternatives.) Step 4 Assess the costs and benefits to the community of the restriction. (This assessment must not only economic costs and benefits but also social, environmental, public health and consumer safety considerations. The guidelines RBL.:Final P&E NCP Review Report Jan 2001(consullantsreport).doc 116 quantitative analyses, but recognise that a more qualitative approach may be more practical in some cases.) One of the challenges in undertaking the NCP review of the planning legislation is to identify the markets affected by the legislation. The planning schemes made under the Act regulate the use and development of all land in Victoria, except that in Commonwealth ownership. Accordingly the legislation potentially has some form of direct or indirect effect on all commercial activities in the State. At the system level, it is possible to describe the community costs and benefits of planning legislation. For example the community benefits of planning legislation include: > >>- :> reducing externalities from adjoining incompatible land use; providing certainty for landowners and investors; ensuring that public goods such as open space are provided; enhancing efficiency of the provision and utilisation of infrastructure; ;;> conserving the environment and socially valuable buildings and sites. /" . The community costs include: r > >> :> the costs incurred in administering the planning system; increasing product costs if producers cannot use their preferred locations; lower incentives for technical innovation pollution control if producers rely on buffers in planning schemes; effects on equity when zoning provides windfalls for some property owners while others have lower land values. :> compliance costs incurred by land-owners and developers; It is not poss ible to make definitive conclusions about tre balance of the community costs and benefits at the general system level because of the difficulty in defining a distinct market and undertaking a meaningful costlbenefi: analysis. It could be argued that the planning legislation coulc restrict competition in any market under one of the following scenarios: > A zone prevents a particular parcel of land from being used for a specific commercial purpose, and there are no alternative sites available'for that purpose in the relevant market. :> A planning permit application for developing land for a commercial purpose is rejected; alternatively a planning permit is granted, however the conditions in the permit impose significant additional costs, or operatir.g restrictions, on the applicant making it difficult to compete with established operators in the market. > The process involved in amending the scheme or dscidlnq appeals on a permit application leads to protracted delays, and the "window of opportunity" is lost for successful market entry. In all these situations there could be valid reasons (taking into account the balance of social, economic and environmental factors) for an outcome which effectively prevents a commercial venture from proceeding. In order to apply the NCP methodology outlined in the guidelines, it is necessary to examine specific cases and the particular markets that are affected in such cases. RBL:Final P&E NCP Review Report Jan 2001(consultanlsreportj.doc 117 In this review, it is proposed to conduct case studies which will illustrate the balance of costs and benefits at various levels of potential restriction in the planning system. This work will then form the basis for deriving general principles for ensuring that the implementation and administration of the planning legislation complies with national competition policy. 4.2 Levels of restrictions In this review, potential restrictions will be considered at three levels: ;;. policy level, where the state and local planning policies require deliberate lntervention in the market; >- specific control level, where zones, overlays and particular provisions are used in new planning schemes to achieve the policy objectives, or where section 173 agreements are used to control the use and development of land; :> administrative level, where the decisions affect the ability of companies to enter a market or to be able to compete effectively. 4.3 Restrictions from policies :: : Policies in the SPPF and LPPF have two effects which are relevant to competition. Firstly, they provide the basis for specific controls in the planning schemes, hence they directly influence the extent and location of land zoned for particular uses in a municipality, eg the size and location of business and industrial zones. Secondly the policies must be considered when a proponent requests an amendment to a planning scheme or submits a planning permit application. Some policies in the SPPF which could lead to restrictions on competition in specific markets are: > Metropolitan development (clause 14.02 in SPPF) Activity centres (clause 17.01) :> Business (clause 17.02) >- Industry (clause 17.03) > Agriculture (clause 17.05) :> Ports (clause 18.05) The metropolitan development policy provides that outward metropolitan growth must be confined to designated areas in accordance with Minister's Directions . Consolidation of residential and employment activities is encouraged within existing urban areas and designated growth areas. The objective of the activity centres policy is to encourage the concentration of major retail, commercial, administrative, entertainment and cultural developments into activity centres (including strip shopping centres). The objective of business policy is to encourage de', elopments which meet the community's needs for retail entertainment, office and c.ner commercial selVices. It provides that a five year time limit for commencement should be attached to the planning approval for all shopping centres or expansions of over 1,000 square metres in floor space. It provides further that cinema based entertainment facilities should be located within or on the periphery of existing or planned activity centres and should not require a permit for use in activity centre zones . Such facilities are not encouraged on free-standing sites distanced form activity centres. >- RBL:Final P&E NCP Review Report Jan 2001(ccnsultantsreport).doc 118 The industry policy provides that industrial activity in industrial zones should be protected from the encroachment of unplanned commercial, residential and other sensitive uses which would adversely affect industrial viability. It provides that responsible authorities should not approve non-industrial land uses which will prejudice the availability of land for future industrial requirements in industrial zones. The agricultural policy provides that permanent removal of high quality productive agricultural land from the State's agricultural base must not be undertaken without consideration of its economic importance for the agricultural production and processing sectors. Planning should support effective agricultural production and processing infrastructure, rural industry and farm-related retailing and assist genuine farming enterprises to adjust flexibly to market changes . The ports policy provides that the land resources adjacent to ports should be protected to preserve their value for uses which depend on or gain significant economic advantage from proximity to the ports' particular shipping operations. The above policies in the SPPF seek to achieve planning objectives concerning the economic use and development of'iand and the provision for orderly development. The State policies are also reflected in local policies, a number of which potentially restrict competition by specifying, in more detail, how those policies are to be effected at the local level. It could be argued that planning policies can provide a framework within which competition can take place by clearly specifying the boundaries of acceptable practice and facilitating appropriate development. Where the policies apply equally to both incumbent firms and potential entrants, they are unlikely to restrict competition. However if the effect of a policy is to prevent the entry of a new competitor into a market then the policy effectively results in a restriction in competition . For this reason it is important to carefully examine the manner in which policies are implemented in the planning schemes. The review will examine a number of new planning schemes to ascertain whether the implementation of policies in the new planning schemes are the direct cause of restrictions on competition. Case studies will be undertaken to demonstrate the benefits and costs associated with any restrictions arising. It is intended to examine case studies involving the activity centre, business and industry policies. Submissions are invited on how particular policies are restricting competition through their implementation in planning schemes. 4.4 Restrictions from specific controls The specific controls in new planning schemes comprise the zones, overlays and particular provisions which are taken from the VPPs and applied to land in a municipa lity . Zoning is the main means by which land use is controlled. The problem zoning For example, seeks to address is that some land uses are incompatible. manufacturing industry which is noisy and emits odour may be incompatible with housing, a hospital or school. Zoning is integral to achieving the objectives of fair and orderly development of land, and securing a pleasant and safe working , living and recreational environment. RBL:Final P&E NCP Review Report Jan 2001(consultantsreport).doc 11 9 Zoning has a number of efficiency and equity effects as a form of land use requtation :" >>- » The creation of zones can increase efficiency where incompatible land uses result in externalities (eg. factory emissions) being imposed on some parties by others, and zoning is able to prevent such incompatible uses being located too close to each other. The use of zoning can reduce efficiency where firms are restricted from using preferred locations (eg. where to site a factory), imposing higher costs on that firm and all of its outputs. Zoning affects equity where externalities become capitalised into land prices (eg. land surrounding a polluting factory will be relatively cheaper than similar land with no factory) . Similarly, changes to zoning which allow for greater density of housing will commonly benefit that landowner who takes advantage of these changes (who receives a higher price for his land), but cause detriment to surrounding landowners (who may experience greater congestion, less parking or less light than before). Overlays place controls on the development of land, affecting subdivisions, buildings and works. An overlay is shown orfthe planning scheme map and applies in addition to the provisions of the zone. The overlays generally address directly environmental and conservation objectives including sustainable use, protection of natural resources , safety and cultural issues. Particular provisions apply in addition to any zone or overlay. They apply to a specific category of use and development such as gaming, licensed premises, freeway service centres, convenience food shops in residential areas, and to the preservation of native vegetation. They set out specific conditions in relation to them, including permit requirements. An important aspect of the specific controls is the extent to which they are performance-based rather than prescriptive. One of the main objectives in the planning reform process has been to allow more discretion in what uses are permissible. rather than prohibited, in zones. In general performance-based provisions will reduce undue impacts on competition and efficiency where explicit objectives are sought to be achieved by the controls and to underpin and justify decisions made. The overlays and particular provisions are intended to deal directly with market failures. Submissions are invited on the extent to which zones, overlays and particular provisions in ne w planning schemes result in restrictions that cannot be justified in the public inter est. It would be desirable if submissions suggested suitable alternatives which are less restrictive and effecti vely address market failures. Apart from the specific controls in new planning schemes, agreements made under section 173 of the Act can also be used to regulate the use and development of land. An agreement may provide for anyone or more of the following matters: 7 Fischel, W, in "Introduction: Four Maxims for Research on Land-Use Controls", Land Economics, Vol. 66, No.3, August 1990, concludes that zoning confers benefits on some and costs on others, but it is impractical to systematically attempt to weigh them. . RBL:Final P&E NCP Review Report Jan 2C01(consultantsreport).doc 120 (a) the prohibition, restriction or regulation of the use or development of the land; (b) the conditions subject to which the land may be used or developed for specified purposes; (c) any matter intended to achieve or advance (i) the objectives of planning in Victoria; or (ii) the objectives of the planning scheme or any amendment to the planning scheme of which notice has been given under section 19; (d) any matter incidental to anyone or more of the above matters. It has been claimed that section 173 agreements can be used to control the size, conduct and pricing structure of a market. For example, section 173 agreements struck for car parks can be used to control the quantity of short-term and long-term parking available in an area and to regulate the pricing structure. As part of the review, a case study will be undertaken on the use of section 173 agreements to restrict competition in a market. Submissions are invited on examples of where section 173 agreements have resulted in a restriction on competition. Information on the benefits and costs of the restrictions would be r ," desirable. 4.5 Restrictions from administering planning system 4.5.1 Decision making processes The Act sets out processes for amending planning schemes and for considering permit applications, which include giving notice requirements and considering submissions and appeals . It has been claimed that these processes "can impose significant additional costs through delays in decision making as well as direct costs"." In 1990 the then Ministry for Planning and Environment produced guidelines 9 to help decision-makers and others involved in the planning process in considering the environmental, social and economic impacts of proposals. The emphasis is on community rather than individual social effects. The planning guidelines note that one of the biggest challenges for authorities when considering effects can be the question of commercial objection. They indicate that matters of private economic competition cannot be regarded as relevant planning considerations. Economic effects on competing commercial interests are considered to be relevant only if there is a prospect of a resultant overall adverse effect on the extent and adequacy of facilities available to the local community. While the Act seeks to prevent vexatious objections and appeals by allowing for costs and damages to be awarded, this does not appear to provide a sufficient disincentive to commercial objectors seeking to block tr.e entry of a competitor to a market. Often commercial objectors will dress econcmic concerns in legitimate planning cloth ing, which makes detection of the true lnterr difflcult.'? 4.5.2 3 Planning permit conditions Retailing Victoria , the Report of the Retail Development Policy Review Panel. May 1996. p. 9. Social, Economic and Environmental Effects, Guidelines for Dealing with Planning Permits and Amendments, Ministry for Planning and Environment. February 1990. 10 Yen Binli HIla v City of Yarra and Allor 1995110030. 9 RBL:Final P&E NCP Review Report Jan 2001(consultantsreport) .doc 121 Section 62 of any condition be included . condition that the Act requires a responsible authority to include in a planning permit which the planning scheme or a relevant referral authority requires to It also provides that "the responsible authority may include any other it thinks fit". Permit conditions can include a condition that the owner of the land enter into an agreement with the responsible authority under section 173 within a specified period or before the use or development or a specified part of it starts. As part of the review, case studies will be undertaken on the planning permit decisions on a variety of commercial projects to identify any restrictions on competition, conduct a costlbenefit analysis of such restrictions and consider alternative less restrictive approaches. The review will use the case studies to recommend appropriate corrective action to ensure that decisions are consistent with NCP principles. Submissions are invited on examples of where the decision making process and permit conditions have resulted in a restriction on competition. Information on the benefits and costs of the restrictions would be desirable. /' . RBL:Final P&E NCP Review Report Jan 2001(consullantsrepOrtj .doc 122 5. Submission details The closing date for submissions is 6 October 2000. Submissions may be made by mail, fax or email, addressed to the attention of: Ms Eileen Cleary Corporate Planning Department of Infrastructure Level 14, Nauru House 80 Collins Street Melbourne Vic 3000 Phone: (03) 9655 6066 Fax: (03) 9655 6752 Email: eileen.c1eary@doLvic.gov.au r Any queries relating to the review should be directed to the above contact. Copies of the Guidelines for the Review of Legislative Restrictions on Competition are available from: • the Internet at: http.//www.vic.gov.au/nco/default.htmf • Information Victoria, 356 Collins Street, Melbourne 3000 Phone: 1300 366 356 Copies of the Planning and Environment Act and ~h e Regulations, as well the Victoria Planning Provisions, are available from : • Information Victoria, 356 Collins Street, Melbccrne 3000 Phone: 1300 366 356 RBl :Fin al P&E NC P Review Report Jan 2001(consullantsreport).doc 123 APPENDIX 1 NATIONAL COMPETITION POLICY Review of the Planning and Environment Act 1987, its Regulations and Planning Schemes TERMS OF REFERENCE In the context of the National Competition Policy (NCP), the Minister for Planning has commissioned a review of the Planning and Environment Act 1987 and its subordinate instruments, to be conducted in accordance with the Victorian Government Timetable for the Review and Reform of Legislation that Restricts Competition. r r Background As part of their commitment to the National Competition Policy, the Council of Australian Governments (COAG) is signatory to three inter-governmental agreements. One of these agreements is the 1995 Competition Principles Agreement, which requires the review and, where appropriate, reform of all legislative restrictions on competition by the year 2000. This agreement constitutes a commitment to achieve a consistent national approach to fostering greater economic efficiency, and improving the overall effectiveness of the Australian economy. The agreements are linked by the guiding legislative prrnciple that legislation should not restrict competition unless it can be demonstrated that firstly, the benefits of the restriction to the community as a whole outweigh the costs and secondly, that the objectives of the legislation can only be achieved by restricting competition. Scope The review of the Planning and Environment Act will: >- assess the objectives of the legislation and its subo rdinate instruments in relation to Nat ional Competition Policy ; > identify the nature of restrictions on competition; > analyse the likely effect of the restrictions on competition and on the economy in general; > assess and balance the costs and benefits of the restrictions; > consider aJternative means of achievinq the same result, including using nonlegislative means; and > assess the findings of: • the December 1999 report of the Victorian Au ditor-General (Performance Aud it No.52), titled Land Use and Development in Victoria - the State 's Planning System; • the NCP reviews of planning legislation undertaken in other States, particularly South Australia and Queensland; and • planning reforms currently underway in Victoria. RBL :Final P&E NCP Review Report Jan 2001(consullanlsreport).doc 124 The review will examine the Victoria Planning Provisions (VPPs), a representative sample of new planning schemes using the VPPs, and the administration of new planning schemes in terms of National Competition Policy principles. » The review will identify potential restrictions on competition arising from: the State Planning Policy Framework (SPPF); >- the Municipal Strategic Statements (MSS) and local policies in the new planning schemes; » the app lication of the zones. overlays and particular provisions; and >- the administration of the schemes by way of decisions on permit applications , consideration of requests for scheme amendments, and the use of other instruments such as section 173 agreements. The review will consider the following means of reforming restrictions on competition where the costs to the community exceed the benefits: >- amending the State Planning Policy Framework; >- amending the municipal planning schemes (including the MSS and local policies in the new planning schemes); , ;;> providing advice on the application of the Victoria Planning Provisions, decisionmaking in respect of permit applications and scheme amendments, and the use of other instruments such as section 173 agreements; and >- amend ing the Act and Regulations if the preceding measures are deemed not likely to remove the restrictions. Review Arrangements The review is to be conducted in accordance with the Guidelines for the Review of Legislative Restrictions on Competition (Model 2 - semi public). NOTE: THE CLOSING DATE FOR THE COMMENTS [S 6 OCTOBER 2000 SUBMISSION OF RBL:Final P&E NCP Review Report Jan 2001 (consuJtanlsreport) .doc APPENDIX 2 LIST OF SUBMISSIONS RECEIVED 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11 . 12. 13. 14. Submission from Janelle House. Letter from City of Greater Geelong . Submission by The Lend Lease Group, prepared by F R Perry & Associates Pty Ltd. Submission by City of Manningham. Submission by The Gandel Group Pty Ltd. Submission by Queensland Investment Corporation. Submission by The Institution of Surveyors Victoria. Submission by the Australian Competition and Consumer Commission . Submission by the Shopping Centre Council of Australia (with two Attachments comprising report entitled "Victorian Shopping Centre Industry" prepared by Jebb Hollarrd Dimasi (January 2000) and report entitled "Shopping Centres: The Changing Face of the Community" prepared by Dangar Research Group (April 2000). Submission by the Mornington Peninsula Shire Council. Submission by William Albon. Submission by Housing Industry Association. Submission by Environmental Resources Management Australia Pty Ltd on behalf of Centro Properties Group. Submission by AMP Henderson Global Investors Limited.