31 August 2007

RELATED expertise

Housing affordability is a key policy concern of governments. In Canberra, concerns about affordability are not confined to home buyers or tenants. Similar concerns are shared by commercial property developers, land owners and tenants. A critical element in achieving better affordability, for any of these groups in the community, is land supply. A second critical element is effective competition in the market place.

In these circumstances an agency such as the ACT’s Land Development Agency (“LDA”) finds itself in a difficult position.

This Property Reporter highlights the contradictory demands placed on the LDA, and questions its role in the effective operation of the land sale market in the ACT.

Regulatory functions of ACTPLA, and land sales by the LDA            

The LDA and the Planning and Land Authority (“PLA”) are the two peak land control agencies in the ACT. The PLA’s role is to exercise regulatory functions that include determining the land planning strategy for the ACT and its administration and development.

The LDA is the “corporatised” portion of the ACT’s land control. Its functions include the development of land, and carrying out works for the development and enhancement of land and strategic or complex urban development projects. Its stated aims include setting output to meet demand, in order to maximise returns to government; achieving an equilibrium of supply and demand; building its corporate property development knowledge, including by engaging in and learning from joint ventures; and maximising profit.

The LDA was introduced alongside the PLA to establish a more robust and independent system of land planning on the one hand, and land development on the other. It was claimed this would enable the ACT to reap better financial and social returns from the development of its assets, without the desire for increased profitability driving planning.

Competitive neutrality              

The separation of regulatory and corporate functions is also required by the ACT government’s obligations of “competitive neutrality” under a series of competition policy agreements entered into between the Federal, State and Territory governments in 1995. Competitive neutrality essentially requires that government instrumentalities comply with the same regulations and conditions that apply to private business when competing against them. The principles are aimed at achieving the efficient allocation of resources, and allowing economic and regional development including employment and investment growth.

The objective is to promote efficient competition between public and private business so that the fact of public sector ownership does not confer an advantage. Although the issue most obviously arises in respect of the application of taxes and in tendering processes, competitive neutrality has broader application.

The requirement of competitive neutrality arose alongside increased reliance on market-based mechanisms and competition in the public sector to improve efficiency and competitiveness, something that featured heavily in the government’s justification for the establishment of the LDA.

How can the LDA be competitively neutral?               

We think that the LDA cannot help but offend the principles of competitive neutrality, and in so doing it may well be fuelling increased costs rather than reducing them. In a small place such as Canberra this will create tension between the LDA on the one hand, and developers and landowners on the other. In competition terms, the LDA has a substantial degree of power in the relevant market, and how it uses that power affects all other market players.

The LDA has conflicting aims of maximizing profitability and regulating the supply of land so that it meets demand. It enjoys a natural monopoly over new Crown grants. Although supposedly the function of PLA, the LDA has taken on the function of monitoring and reviewing the land sales program against market conditions to ensure that its aims are met. Maximising profitability might sway the LDA towards commercial activities which restrict supply, whether in absolute terms or by its timing and business practices. The LDA is active in Canberra’s office market, yet it is reported that there is a vacancy rate of less than 2% in that market. This suggests that there is a lack of equilibrium in the market, from which the LDA itself benefits.

Competitive impacts, transparency and commerciality             

Recently the LDA sold a prime development block in the city area with a pre-commitment lease to a government tenant in place, thereby radically increasing the value of the Crown lease grant and, accordingly, the return to the government through the LDA. Thus, rather than simply managing land sales at the first point of distribution, we see the capacity and intent of the LDA to intrude further along the supply chain, in this case by securing a tenant itself and profiting from that circumstance. Whilst the added value is a good thing from the point of view of the return on that land, it must be asked whether such behaviour by the LDA is competitively neutral, and what wider effects this might have on the market.

One concern of developers who missed out on securing that tenant might include the degree to which the LDA was better placed to know about and to deal with another government agency as a prospective tenant. Another might be the LDA’s ability to tailor the not-yet issued Crown lease of the land to accommodate tenant requirements (purposes, gross floor area), when private developers have no similar flexibility, or at least no immediate flexibility, to do the same thing. Private developers might also inquire about the true level of risk shouldered by the LDA (as a government agency with some ability to control outcomes) or whether normal risks were offloaded to others.

There is no evidence available to us to indicate that the LDA had an advantage over private developers in the circumstances of that case: nor is there any evidence to the contrary. Details about the transaction are sketchy. However the concerns of private developers and landowners can only have been heightened by a lack of transparency: the release of the land concerned took place under cover of a tender document for a land release linked with the Gungahlin Town Centre, which is nowhere near the city, many months beforehand, and without the eventual property address indicated anywhere in that tender.

Furthermore, if the LDA is going to move along the land distribution chain, private developers and landowners might be justified in asking whether the LDA is competing with them on the same terms. The LDA treats land as inventory valued at a transfer cost of nil. Private companies have acquisition and borrowing costs, and carry significant risk. Their company assets are often used as security, and their directors are often called upon to provide guarantees. They cannot move as quickly or as cheaply as the LDA in adjust ing Crown lease rights to match purchaser and tenant requirements. There is no indication in the LDA’s accounts that it pays tax on its returns other than GST, and such returns have been reported at between 50% and 60% in recent years.

It is also apparent that the LDA is actively competing with private industry to attract skills and experience in the industry, which may indicate the degree to which the LDA wants to compete “head-to-head” with private companies in the land supply chain.

The LDA is just doing its job         

Land supply is a major issue across Australia, but the ACT is in a special position. The government can’t blame the LDA for adding to affordability concerns, or for actively competing in the market on unequal terms. The LDA’s objective of maximising profitability, set by the government, was always going to lead to these types of problems.

The government has mooted the reservation of one third of land grants for direct release, bypassing the LDA. This seems to recognize that there is a problem, and questions the public role of the LDA as a land supply and delivery agency as presently constituted.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2007