Even though land prices in Australian capital cities have been sluggish over recent years, there is no doubt that inner city areas have skyrocketed in value over recent decades. This has placed sustained pressure on some land uses, as re-zonings supporting urban renewal and intensification have been adopted.
From an economic perspective, this is in line with increasing the productivity of land use, as the highest and best uses of land outcompete less productive land uses; lifting aggregate welfare levels. There is, of course, an important proviso to accepting this general rule of welfare maximisation – the existence of externalities - impacts that are not included in market prices.
Externalities relate to economic, social and environmental impacts and explain why we have things in the inner city that don’t pay for themselves – things like public parks, schools, hospitals, cultural venues, roads, public transport systems, etc. Land use planners and governments are always attempting to balance “highest and best use” with “broader social’’ outcomes, as they strive to create productive, sustainable and liveable places, communities and economies.
Our recent work for a local government in an inner city area quantified the costs and externalities associated with the location of ‘maintenance depots’. We were surprised by the sheer scale of these items, particularly transport costs, and how quickly they accumulated.
Based on our analysis, we recommended that the council should:
- Retain its existing depot for as long as possible, even though it’s right in the middle of an urban renewal precinct; and
- Purchase additional land so maintenance contractors can be accommodated within or close to the municipality, even though prices are exorbitant; reflecting the ongoing need for maintenance services and adverse transport impacts that would be avoided.
These recommendations were in stark contrast to the actions of many other inner city councils, who have largely left providing contractor maintenance depot facilities to the vagaries of the private market.
By taking this position these councils have unwittingly exposed themselves to:
- Escalating maintenance service costs
- Compromised maintenance outcomes - if their constrained budgets cannot cover these escalating costs; and potentially
- Reduced competition levels for future tenders of maintenance services - if maintenance contractors cannot secure sites within viable distances from the municipality.
Predicting the future always requires speculation. In performing our analysis, we tested the following scenarios, which were scoped up with our local government clients:
- Scenario 1: Both maintenance contractors (open space + civil assets) continue to be accommodated on their current sites within the municipality.
- Scenario 2: The open space contractor is forced to relocate but the civil assets contractor retains its current site within the municipality.
- Scenario 3: Both the open space and maintenance contractors are forced to relocate, as they lose access to their current sites.
Two factors drove the costs associated with each scenario: the “timing” of any forced relocation and the “location” of available sites for accommodating maintenance contractors.
Given the tightness of the land market and the ongoing urban renewal pressures that exist in inner city areas, we made sure that any future contractor depot sites would be located in designated industrial areas that would not be compromised in future. Our GIS mapping of the metropolis highlighted that catchments of within 10 minutes, 45 minutes and 60 minutes of the municipality would cover all plausible outcomes in terms of future site availability.
Moreover, because maintenance contracts are let over the medium term (generally 7 years), we assumed that a relocation would be forced at least once during our 20 year period of analysis. We assumed that this relocation would be forced in either Year 7 or Year 14 of the analysis. This accords with the conventional practice of maintenance contractors, who lease depot sites for the period of their service contract, recognising that:
- Contractors cannot hold onto depots outside of their contract periods, reflecting the risk of contract loss to competitors at contract expiry, and
- Contractors cannot secure lease terms for anything longer than the medium term, as landowners wish to preserve their inner city redevelopment options.
Our financial analysis explored the costs to council linked with contractors:
- Securing sufficient land to accommodate depot facilities
- Performing capital works to construct modest depot facilities
- Moving to/from the depot while delivering its contracted services on a daily basis.
Our economic analysis added some externalities to the above costs, including the amenity impacts experienced by the neighbours of depots and the environmental impacts generated by the contractors’ transport movements.
Interestingly, the transport costs (excluding environmental externalities) accounted for more than three-quarters of total costs in all the scenarios tested. This is before any impacts linked with future road pricing or regulation come into play.
Most importantly, the costs of not securing depot sites within close proximity to the municipality ranged between $20 million and $60 million - depending on when the forced relocation occurred (i.e. 7 or 14 years) and how far-flung available depot sites might be in the future (45mins to 60 mins travel time; not far in kilometres in peak travel periods).
These costs outweigh the market price of the depot site, which if realised through sale, would be a short term bonus for council. If council rightly takes a longer term perspective, the costs avoided by retaining the contractors’ depot will provide much more value for the community.
While the costs of securing land for depots in the inner city area are exorbitant, the future transport costs avoided outweigh these land costs considerably.
These transport costs are passed straight back to council in contract service pricing and, if they eventuate, they will place real pressure on the quality of municipal maintenance. In a heavily constrained funding environment, councils will not be able to absorb these costs and will be forced to scale back maintenance services; compromising liveability outcomes.
There is only one way to secure land for the long term. It means acquiring it and protecting its viability; meaning that some urban renewal aspirations might need to be partially curtailed.
Finally, if councils don’t own depot sites that can accommodate their preferred maintenance contractors, then future competition levels during contract bidding may be compromised. Without access to viable sites, contractors may be implicitly excluded from bidding.