Four ways to clean up corruption in land rezoning

Cross-posted from The Conversation:

One routine governance decision prone to corruption is the zoning of our cities. Land zoning rules supposedly ensure complementary uses are co-located while conflicting uses are not. For instance, zoning ensures chemical plants are not built next to schools and electricity grids are planned for areas with future population pockets.

But zoning also determines the value of land, meaning that changes to zoning can provide windfall gains to some landowners, providing the incentive for collusion between politicians and landowners about which areas are favourably rezoned.

An important economic question therefore, is whether there is systematic favouritism in rezoning decisions and, if so, what can we do about it?

Answering the favouritism question is quite tricky, requiring the statistical quantification of gains from rezoning decisions along with the probabilities of rezoning success arising from relationships, donations, and lobbying.

This is exactly what we did in our recent study.

We used a sample of planning decisions made by one State authority in Queensland, the Urban Land Development Authority (ULDA), which took planning powers away from local councils in a number of areas which it rezoned between 2008-2012. The ULDA was no stranger to accusations of bias, with the Local Government Association of Queensland arguing the government is “playing politics and favouring developers”.

To establish how well-connected landowners were, we trawled through a wide range of data on political donations, lobbyists and their clients, industry groups memberships, politicians and their former employers, relationships of ULDA board members, and landowner’s corporate records, to construct a relationship network.

Our main finding is that well-connected landowners owned 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that these decisions were primarily driven by the relationship networks of the landowners, rather than technical assessments of the efficiency urban expansion locations. The peculiar shape of the rezoned areas, which conflicts with other State and local plans, is further evidence against a technical determination of the rezoned areas.

We also compiled historical sales data to estimate that these rezoning decisions increased the value of the rezoned land by $710 million, with well-connected landowners capturing $410 million of these gains at the expense of the public at large who could have instead sold those additional development rights.

The data tell quite a story. Connected property developers bought land unsuitable for development on the urban fringe, then lobbied State politicians and bureaucrats through their relationship networks to rezone areas where they owned properties, wrong-footing both councils and other property developers, in a process taking seven years on average.

Political favours were found to be more about being part of the entrenched well-connected political class, whose tight-knit mutual relationships support implicit favouritism, than about visible activities such as making political donations.

With such knowledge at hand, the question for reformers is how this game of favour exchange be disrupted.

One way to disrupt the game is with cooling-off periods for politicians and bureaucrats involved in key decisions. While Queensland has a nominal cooling off period for politicians to be professional lobbyists, the narrow scope of this regulation means that directly working for developers or industry groups falls outside this regulation.

It is too easy to exchange favours with a revolving door swinging so openly, and where politicians can immediately be repaid for favours. The two-year cooling off periods ensuring auditor independence in corporate finance could easily be adopted more widely in the political environment. Such a plan is currently being debated in Germany.

A second disruption is to take away the honeypot. Rezoning decisions can provide billions in windfall gains. Pricing these new property rights will ensure the gains are captured by the public and not the landowner with the right political connections.

Rights to additional development density can be sold in local auctions. For example, a decision can be made for only one of a menu of possible rezoning decisions to go ahead, with landowners in the different areas required to bid against the other areas to get the one they want.

Such an auction needs to have competing feasible rezoning plans drafted, which in the case of the ULDA could have included both the original state plans, the various updated plans, and their final zoning locations. To get the outcome the connected property developers got, they would have had to bid up the price of that particular rezoning plan against landowners of other regions, thereby transferring much of the windfall gain to the community.

Auctions are just one example of an explicit market for development rights, which could also include rights to various other development exemptions or variations for existing properties. The basic idea is always to create a situation where different potential buyers can compete for scarce rights. Secondary markets in such development rights can then also improve efficiency by allowing others to buy the rights in order to preserve the area for its current use.

Another option is a betterment tax, briefly considered by the Henry Tax Review, whereby rezoning triggers a fee that amounts to the value gain from rezoning, payable by the landowner at the time they choose to develop or sell the land.

Outside of pricing, democratic processes such as local referenda on urban expansion locations would enabling countervailing community interests to be part of the decision. More direct community involvement would thus erode the entrenched political duopoly that currently dominates the dirty system.

Article by Paul Frijters, Professor of Economics at The University of Queensland, and Cameron Murray, Economist at The University of Queensland

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  1. “whereby rezoning triggers a fee that amounts to the value gain from rezoning, payable by the landowner at the time they choose to develop or sell the land.”

    Should be the cornerstone of raising funds for improved amenity.

    It’s fair, equal and only takes from unearned gain, so of course it wont happen.

    • I couldn’t agree more! However I discussed this at work though, and almost to a man they thought it was unfair to take the winfall gain from a landowner. Its all about perspective – they accused me mockingly of being a communist!

  2. Instead of competitively “auctioning development rights” to pieces of land, an even better suggestion came from Tim Leunig (UK) in a paper entitled “In my back yard: unlocking the planning system”.

    The land owners within a given distance of the existing zoned fringe need to put in a tender for the price they are prepared to sell their land at. The LOWEST tenders get the development rights.

    The risk of being greedy and not getting development rights in successive tender rounds, should be the likelihood of compulsory acquisition of one’s land because of it being “leftover” with development all around it, it might be perfect for parks, reserves, schools, and other public needs.

    • As in was reading the article and earlier comments I thought it would be a good idea to get landowners “in zone” to tender a percentage of the rezoning gain they would be willing to give away. Best bid gets rezoned, others don’t. Your suggestion is more direct and probably better.

  3. Or better still – don’t have prohibitions on development at all, and allow the private sector the powers to finance their own infrastructure, form municipalities, and levy local taxes to pay for the infrastructure. Everywhere such a system is in existence, “urban” land values are truly anchored in true rural values, plus “differentially derived” economic rent.

    Rationing the total supply of land for a particular use, results in economic rent in that land being “monopolistically” derived.

  4. An auction of development rights?

    One might even think about applying the concept of an auction to the rights to export certain mineral resources – say iron ore. Still time for Joe Hockey and the junior miners to get together and talk sense and put in place a National Export Volume Auction for Iron Ore.

    But I digress….

    An auction of development rights (perhaps with some of the proceeds remitted to the existing owner to soften the blow of a windfall gone walkabout) makes sense as it would force people to bid for the value of a rezoning but Phil touches on what would be the simplest biggest improvement of all. Reduce restrictions on land use change across the board.

    Alternatively if that is too much ‘freedom’ for freedom suspicious people like Australians simply invert the current concept of “no development without permission” to “any development unless prohibited”.

    That would allow select parcels of farmland, national parks, market gardens, heritage sites, parks, heavy industry, road and transport and other utility reservations to be preserved for eternity (or some approximation to it) by specific prohibition on change of use.

    The remaining land in all its farmland glory can then be developed organically as the needs of society and development require with the usage of land changing as the owners of the land desire.

    With an appropriate across the board land tax to fund the infrastructure required to support improvements to the value of land, land that increases in value will contribute to the cost of the infrastructure and amenity that increased its value. Who knows may be landowners may start to see land tax as an investment in their future wealth.

    People who prefer to avoid tax will just move to low value land beneath the land tax threshold.

    Sure some Greenies might freak out at that being an encouragement for people to use ‘personal mobility’ to access their more remote homes but they can fight that battle with fat taxes on petrol if that is their desire. Of course the rise of electric cars and motorbikes raises the question whether a fatwa on private mobility is really relevant anymore.

    If people prefer to avoid congestion on the roads they are always free to live in apartments and medium density close to heavy rail hubs.

    Let the horses choose their courses.

    • Talking about distant commuting, how green is it for people to be commuting up to two hours each way from satellite towns, ie central coast to Sydney, because they are priced out of the city in which they work?

  5. Given how bad Sydney’s road system is I for one am glad it was all properly planned God only knows what sort of a mess it’d be if people could just build houses anywhere they felt like without paying any kickbacks…that’s unAustralian

    • Interestingly, Bob, the very bright Alain Bertaud suggests that the most “correct” role for urban planning, is to set aside rights of way for grid networks of roads, arterials and highways well in advance of growth.

      A UN Habitat Report on street intensity by city is very interesting – it found that some of the densest, built-up modern cities had the MOST surface space as streets. It suggested that inadequate space set aside as streets acts as a significant brake on a city’s potential. It singled out Auckland NZ as a particularly bad example of a city under-provided with surface area as streets – as little as 1/3 that of Manhattan, Tokyo, Hong Kong, Amsterdam and Toronto. This has consequences for those who are expecting Auckland to build “up” to cope with growth!

      Part of the story is that you can’t repurpose street space you don’t have – for trams, pedestrian-only areas, bicycle paths, wider footpaths, etc.